The accompanying notes are an integral part of these condensed consolidated financial statements.
7
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
N
ote 1. Basis of Presentation
Nature of Business
NCS Multistage Holdings, Inc., through its wholly owned subsidiaries and subsidiaries for which we have a controlling voting interest (collectively referred to as the “Company,” “NCS,” “we” or “us”), is primarily engaged in providing engineered products and support services for oil and natural gas well completions and field
development
strategies. We offer our products and services primarily to exploration and production companies for use in onshore wells. We operate through service facilities principally located in Houston, Midland and Corpus Christi, Texas; Tulsa and Oklahoma City, Oklahoma; and Calgary, Red Deer, Grande Prairie and Estevan, Canada. We changed our name from Pioneer Super Holdings, Inc. to NCS Multistage Holdings, Inc. on
December
13, 2016.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), issued by the Securities Exchange Commission (“SEC”) and have not been audited by our independent registered public accounting firm. The Condensed Consolidated Balance Sheet at
December
31, 2016
is derived from our audited financial statements. However, certain information and footnote disclosures required by GAAP for complete annual financial statements have been omitted or condensed as permitted by the rules and regulations of the SEC, and, therefore, these interim financial statements should be read in conjunction with our audited financial statements included in the prospectus, dated
April
27, 2017 (the “Prospectus”), filed by us with the SEC on
May
1, 2017 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”). In the opinion of management, these condensed consolidated financial statements, which have been prepared pursuant to the rules of the SEC and GAAP for interim financial reporting, reflect all adjustments, which consisted only of normal recurring adjustments that were necessary for a fair statement of the interim periods presented. The results of operations for interim periods are not necessarily indicative of those for a full year. All intercompany accounts and transactions have been eliminated for purposes of preparing these condensed consolidated financial statements.
Initial Public Offering
On
April
13, 2017, in connection with the initial public offering of shares of our common stock (“IPO”), our board of directors and stockholders approved an amendment to the amended and restated certificate of incorporation effecting a
3.00
for 1.00 stock split of our issued and outstanding shares of common stock. The stock split was implemented on
April
13, 2017 and the par value of the common and preferred stock was not adjusted as a result of the stock split. All other common stock share amounts disclosed in this Form 10-Q have been adjusted to reflect this stock split for all periods presented.
On
May
3, 2017, we completed the initial public offering of
9.5
million
shares of our common stock,
$0.01
par value, at a price to the public of
$17.00
per share pursuant to a Registration Statement on Form S-1, as amended (File No. 333-216580) (the “Registration Statement”). The underwriters exercised their option to purchase an additional
1.425
million
shares of our common stock from certain selling stockholders and the closing of the over-allotment option occurred on
May
3, 2017 concurrently with the closing of the IPO. We received
$148.9
million
in net proceeds after deducting underwriting discounts and commissions and other offering expenses of
$12.6
million
. We used a portion of the net proceeds from the IPO to repay our indebtedness under our
Prior Senior Secured Credit Facilities
(see “Note 7.
De
bt”).
After the repayment of indebtedness under our Prior Senior Secured Credit Facilities, we used the remaining net proceeds from the IPO to acquire
Spectrum Tracer Services, LLC, an Oklahoma limited liability company (“Spectrum”), on
August
31, 2017
. In addition, in connection with the IPO, our certificate of incorporation was amended and restated to increase our authorized capital stock to consist of
225.0
million
shares of common stock, par value $0.01 per share, and
10.0
million
shares of preferred stock, par value
$0.01
per share.
Summary of New Significant Accounting Policies
Business combinations
Business combinations are accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“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
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 related to the acquisition, other than those associated with the issuance of debt or equity securities, that we incur in connection with a business combination 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.
Share-Based Compensation
We account for our stock-based compensation awards in accordance with ASC Topic 718,
Compensation
—
S
tock Compensation
(“ASC 718”). 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. Fair value of the share-based compensation was measured using the fair value of the common stock for restricted stock units and the Black-Scholes model for options.
We
also
have an
e
mployee
stock p
urchase
p
lan, which allows eligible employees to purchase shares of our common stock. The purchase price of the stock will be 85% of the lower of the stock price at the beginning or end of the plan period. The fair value of the employees’ purchase rights under the
e
mployee
stock p
urchase
p
lan will be estimated using the Black-Scholes model.
The Black-Scholes model for both options and the shares purchased under the e
mployee
stock p
urchase
p
lan
requires assumptions and estimates for inputs, especially the estimate of volatility, that affect the resultant values and hence the amount of compensation expense recognized. Prior to our IPO, we were a private company. Therefore, we estimated our expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expect to continue to do so until such time
as we have adequate historical data regarding the volatility of our own traded stock price.
Recent Accounting Pronouncements
Pronouncements Adopted in 2017
In
May 201
7, the
Financial Accounting Standards Board (“FASB”)
issued
ASU
No. 2017-09,
Scope of Modification Accounting (Topic 718)
,
which clarifies when to account for a change to the terms and conditions of a share-based payment award as a modification. Under the new guidance, an entity should apply modification accounting unless the modified award has the same fair value, vesting conditions, and classification of equity or liability as the original award. We have elected to early adopt this ASU in the second quarter
of 2017. The adoption of this ASU had no material impact on our consolidated financial statements.
In
January 201
7, the
FASB
issued ASU No. 2017-04,
Simplifying the Accounting for Goodwill Impairment (Topic 350).
This new standard simplifies the test for goodwill impairment. In the original guidance, an entity is required to perform additional analysis in Step 2, which measures a goodwill impairment loss by comparing the implied fair value of a report unit’s goodwill with the carrying amount of that goodwill. The FASB simplifies the subsequent measurement of goodwill by eliminating Step 2. Instead, under the amendments in this update, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount with excess carrying value over the fair value recognized as a loss on impairment. In addition, income tax effects from any tax deductible goodwill should be considered in measuring the goodwill impairment loss, if applicable. The amendments in this update are effective for public companies for annual or interim goodwill impairment tests in fiscal years beginning after
December
15, 2020, with early adoption permitted.
We elected to adopt the guidance in ASU 2017-04 effective
April
1,
201
7, and as a result, will apply the new guidance to our annual goodwill impairment tests performed as of
December
31,
201
7.
In
March 201
6, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting (Topic 718)
, to simplify the accounting for share-based payment transactions, including accounting for forfeitures, excess tax benefit/expense, and tax withholding requirements. The guidance is effective for fiscal years, and interim periods within those years, beginning after
December
31,
201
6. We adopted this guidance on
January
1, 2017 and have elected to recognize actual forfeitures when they occur. The adoption did not have a material impact on our consolidated financial statements.
In
November 201
5, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes (Topic 740)
. This standard requires all deferred taxes, along with any related valuation allowance, to be presented as a noncurrent deferred asset or liability. The guidance is effective for fiscal years beginning after
December
15, 2016, and includes interim periods within those fiscal
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
years. Early adoption is permitted and the guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively by reclassifying the comparative balance sheet. We adopted this ASU in the first quarter of 2017 on a prospective basis.
Pronouncements Not Yet Effective
In
January 201
7, the FASB issued ASU 2017-01,
Clarifying the Definition of a Business (Topic 805)
, to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. For public entities, this guidance will be effective for annual periods beginning after
December
15,
201
7, including interim periods within those periods, and is not expected to have a material impact on our consolidated financial statements.
In
August 201
6, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments (Topic 230)
. The objective of the guidance is to reduce the existing diversity in practice related to the presentation and classification of certain cash receipts and cash payments. The guidance addresses eight specific cash flow issues including but not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and proceeds from the settlement of corporate-owned life insurance policies. For public entities, the guidance is effective for financial statements issued for fiscal years beginning after
December
15, 2017, including interim periods within those fiscal years and is retrospective for all periods presented. Early adoption is permitted including for interim periods. We are evaluating the provisions of this new accounting guidance, including which period to adopt, and have not determined what impact the adoption will have on our consolidated statements of cash flows
.
In
February 201
6, the FASB issued ASU No. 2016-02,
Leases
(Topic 842)
, which replaces the existing guidance in ASC 840,
Leases
. ASC 842 requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new lease standard does not substantially change lessor accounting. The new standard is effective for interim and annual reporting periods beginning after
December
15, 2018, with early adoption permitted. We are currently evaluating the impact of the adoption of this guidance.
In
May 201
4, the FASB issued ASU No. 2014-09
,
Revenue from Contracts with Customers (Topic 606)
. The new standard is effective for annual reporting periods beginning after
December
15, 2017 and early adoption is permitted, however, not before fiscal years beginning after
December
15, 2016. Subsequent to ASU 2014-09’s issuance, Topic 606 was amended for FASB updates that changed the effective date as well as addressed certain aspects regarding new revenue standards. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which entities expect to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. The guidance permits the use of either a full retrospective or modified retrospective transition method. We are assessing the impacts of the new standard on our revenues and financial statement disclosures. We put in place a team during the second quarter of 2017, including a third-party consultant, to develop and carry out our implementation plan. The team has reviewed our revenue streams, compared our historical accounting policies and practices to the new accounting guidance and continues to finalize our application of the new standard. Following the acquisition
s
of Spectrum
and Repeat Precision, LLC (“Repeat Precision”)
, we are incorporating an analysis of their revenue streams and accounting policies into our implementation plan.
Note 2. Acquisition
s
Spectrum Tracer Services
On
August
31, 2017, we acquired
100%
of the equity interests in Spectrum in exchange for approximately $83
million
, subject to certain adjustments, which was comprised of (i) approximately $76
million
in cash and (ii)
0.4
million
shares of our common stock using a fair market value of
$19.42
per share. The cash portion
was funded with available cash and borrowings under our New Senior Secured Credit Facility.
We believe
Spectrum’s tracer diagnostics services will strengthen our ability to provide our customers with actionable data and analysis to optimize oil and natural gas well completions and field development strategies.
The acquisition of Spectrum includes an earn-out provision that could provide up to
$12.5
million
in ad
ditional cash consideration to Spectrum’s former unitholders if Spectrum’s
actual gross profit during the earn-out period that commence
d
on October 1, 2017 and ends on
December
31, 2018 is greater than the earn-out threshold. The fair value of the earn-out recognized on the acquisition date was
$0.4
million
and is included in long-term liabilities on the balance sheet. We estimated the fair value of the earn-out using a Black-Scholes closed form option pricing model. The earn-out is subject to re-measurement each reporting period using Level 3 inputs until the full amount of the liability has been satisfied. Subsequent changes in the fair value of the liability are reflected in our
Table of Contents
NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
condensed consolidated statements of operations as a change in fair value of contingent consideration. As of
September
30, 2017, the earn-out had a value of $
0.3
million
. During the three and nine months ended
September
30, 2017, we recognized $
(9)
thousand
as
a
change in fair value of contingent consideration
in the condensed consolidated statements of
operations
related to the change in fair value of the
Spectrum
earn-out. The
cash
payment, if any, is expected to be paid during the second quarter of 2019.
Spectrum contributed revenues of
$3.1
million
and net income of
$0.8
million
to the Company for the period from
September
1,
201
7 to
September
30,
201
7. The following unaudited pro forma summary presents our
select financial
information as if the acquisition had occurred on
January
1, 2016. The below information reflects pro forma adjustments based on available information and certain assumptions we believe are reasonable, including: (i) adjustments related to the depreciation and amortization of the fair value of acquired intangibles and fixed assets, (ii) removal of the historical interest expense of Spectrum as well as the addition of the interest expense of the borrowings
under our Senior Secured Credit Facility in connection with the acquisition
, (iii) tax effect related to historical U.S. operations and the aforementioned pro forma adjustments, (iv)
adjustments related to the number of shares of our common stock outstanding to reflect the 0.4 million shares issued in connection with the acquisition
and (v) accounting policy conformity changes.
In addition, acquisition related costs were excluded from the unaudited pro forma financial information. The pro forma condensed combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Spectrum acquisition taken place on
January
1, 2016; furthermore, the financial information is not intended to be a projection of future results. The following table summarizes our selected financial information on a pro forma basis (in
thousands
, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
|
$
|
61,516
|
|
$
|
34,510
|
|
$
|
170,294
|
|
$
|
77,148
|
Net income (loss) attributable to
NCS Multistage Holdings, Inc.
|
|
$
|
1,971
|
|
$
|
857
|
|
$
|
5,625
|
|
$
|
(17,369)
|
Diluted earnings (loss) per share
|
|
$
|
0.04
|
|
$
|
0.02
|
|
$
|
0.13
|
|
$
|
(0.51)
|
The purchase price is allocated to the estimated fair value of assets acquired and liabilities assumed
as of the acquisition date.
G
oodwill is
calculated
as
the excess
of the
consideration transferred over the fair value of the
net assets recognized.
The assets and liabilities of Spectrum have been measured based on various preliminary estimates using assumptions that we believe are reasonable based on information that is currently available.
The purchase price allocation is preliminary and adjustments to provisional amounts may occur as we continue to analyze information. We have recognized $40.3
million
of goodwill as a result of the transaction of which approximately
$6
million
will be non-deductible for tax purposes. Additional changes to the purchase price allocation may result in a corresponding change to goodwill in the period of the change, however, we do not expect such adjustments to materially change the purchase price allocation.
We also incurred acquisition costs of
$0.7
million
and
$0.8
million
during the
nine months ended
September
30, 2017 and 2016
, respectively, which were included in general and administrative expense on our condensed consolidated statements of operations.
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the consideration and the assets acquired at the Spectrum closing date (in
thousands
):
|
|
|
|
Consideration
|
|
|
|
Cash consideration
|
|
$
|
76,258
|
Equity consideration
|
|
|
6,907
|
Earn-out liability recognized
|
|
|
352
|
Total consideration
|
|
$
|
83,517
|
Preliminary purchase price allocation
|
|
|
|
Cash
|
|
$
|
1,326
|
Accounts receivable
|
|
|
4,648
|
Inventories
|
|
|
3,661
|
Other current assets
|
|
|
211
|
Property and equipment
|
|
|
4,725
|
Intangible assets
|
|
|
31,900
|
Other long-term assets
|
|
|
10
|
Total identifiable assets acquired
|
|
|
46,481
|
Accounts payable—trade
|
|
|
459
|
Accrued expenses
|
|
|
420
|
Income taxes payable
|
|
|
222
|
Other current liabilities
|
|
|
44
|
Deferred tax liability
|
|
|
956
|
Other long-term liabilities
|
|
|
1,191
|
Total liabilities assumed
|
|
|
3,292
|
Net identifiable assets acquired
|
|
|
43,189
|
Goodwill
|
|
|
40,328
|
Net assets acquired
|
|
$
|
83,517
|
The amount allocated to intangible assets was attributed to the following categories (in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
|
|
|
Fair Value
|
|
|
Lives (Years)
|
Technology
|
|
$
|
5,600
|
|
|
16
|
Trademark
|
|
|
1,600
|
|
|
10
|
Customer relationships
|
|
|
24,700
|
|
|
21
|
Total intangible assets
|
|
$
|
31,900
|
|
|
|
These intangible assets are amortized on a straight-line basis, which is presented in amortization in our condensed consolidated statements of operations.
Amortization expense for the intangible assets for the Spectrum acquisition was $
0.1
million
for the three and
nine
months ended
September
30, 2017
.
Repeat Precision
On
February
1, 2017, we acquired a
50%
interest in Repeat Precision for $6
.0
million
. Historically, the business has been a supplier to NCS. Our strategic purchase of 50% of this business ensures that we have continued access to these services and allows us greater control of the allocation of their capacity, ensuring that we can scale their operations together with ours. In addition, Repeat
Precision
also markets certain completion products on a wholesale basis, providing an additional revenue opportunity.
Concurrent with entering into the transaction, the previous owner of the 50% interest repaid a
$1.0
million
promissory note to us. We also recorded an earn-out as a contingent adjustment to the
p
urchase price in the amount of
$7.0
million
, which is included in other long-term liabilities on the balance sheet. We estimated the fair value of the earn-out using a Monte Carlo simulation on the acquisition date. The earn-out equity value was based on 2018 EBITDA, multiplied by three, which was then reduced by debt and increased by cash. The earn-out equity value was then discounted at the adjusted cost of equity. The earn-out is subject to re-measurement each reporting period using Level 3 inputs until the full amount of the liability has been satisfied. Subsequent changes in the fair value of the liability are reflected in our condensed consolidated statements of operations as a change in fair value of contingent consideration. As of
September
30, 2017
, the earn-out had a value of
$7.6
million
. During the
three and nine months ended
September
30, 2017
, we recognized
$(0.2)
million
and
$0.6
million
, respectively, as
a
change in fair value of contingent consideration
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NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
in the condensed consolidated statements of
operations
related to the change in fair value of the earn-out. The
cash
payment, if any, is expected to be paid during the first quarter of 2019 and will not exceed
$10.0
million
.
As NCS has the controlling voting interest in the joint venture, we accounted for the acquisition as a business combination and
have
included Repeat
Precision
in our consolidated financial statements from the acquisition date. As a result, the other
party’s ownership percentage is
presented separately as a non-controlling interest.
The purchase price is allocated to the fair value of assets acquired and liabilities assumed
as of the acquisition date
and goodwill is recognized for the excess consideration transferred over the fair value of the net assets. The purchase price allocation is preliminary and adjustments to
the working capital
provisional amounts may continue to occur as we analyze information. We have recognized $15.2
million
of goodwill as a result of the transaction and expect the full amount to be deductible for tax purposes. Additional changes to the purchase price allocation may result in a corresponding change to goodwill in the period of the change, however, we do not expect such adjustments to materially change the purchase price allocation.
We also incurred acquisition costs of
$0.3
million
during the first quarter of 2017, which were included in general and administrative expense on our condensed consolidated statements of operations.
The following table summarizes the consideration and the assets acquired at the Repeat
Precision
closing date (in
thousands
):
|
|
|
|
Consideration
|
|
|
|
Cash paid by NCS
|
|
$
|
5,996
|
Earn-out liability recognized
|
|
|
6,958
|
Total consideration
|
|
$
|
12,954
|
Preliminary purchase price allocation
|
|
|
|
Other net assets
|
|
$
|
174
|
Inventory
|
|
|
662
|
Property and equipment
|
|
|
5,750
|
Intangible assets
|
|
|
4,100
|
Goodwill
|
|
|
15,222
|
Total assets acquired
|
|
$
|
25,908
|
Less: non-controlling interest
|
|
|
(12,954)
|
Net assets acquired
|
|
$
|
12,954
|
The unaudited pro forma operating results pursuant to ASC 805 related to the Repeat
Precision
acquisition have been excluded due to immateriality.
In connection with the Repeat
Precision
acquisition, we acquired intangible assets in the amount of
$4.1
million
related to customer relationships. The intangible assets are amortized over their estimated
ten
year useful lives. Amortization expense for the intangible assets for the Repeat
Precision
acquisition was
$0.1
million
and
$0.3
million
for the
three and nine months ended
September
30, 2017
.
Note 3. Inventories
Inventories
consist of the following as of
September
30, 2017
and
December
31, 2016
(in
thousands
):
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
2017
|
|
2016
|
Raw materials
|
|
$
|
2,594
|
|
$
|
695
|
Work in process
|
|
|
1,130
|
|
|
688
|
Finished goods
|
|
|
31,805
|
|
|
15,634
|
|
|
$
|
35,529
|
|
$
|
17,017
|
|
|
|
|
|
|
|
Table of Contents
NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Property and Equipment
Property
and equipment by major asset class consist of the following as of
September
30, 2017
and
December
31, 2016
(in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
2017
|
|
2016
|
Land
|
|
$
|
2,181
|
|
$
|
2,026
|
Building and improvements
|
|
|
4,970
|
|
|
4,517
|
Machinery and equipment
|
|
|
13,079
|
|
|
1,983
|
Computers and software
|
|
|
1,940
|
|
|
1,345
|
Furniture and fixtures
|
|
|
883
|
|
|
916
|
Vehicles
|
|
|
5,298
|
|
|
2,475
|
Service equipment
|
|
|
449
|
|
|
1,964
|
|
|
|
28,800
|
|
|
15,226
|
Less: Accumulated depreciation and amortization
|
|
|
(6,149)
|
|
|
(5,763)
|
|
|
|
22,651
|
|
|
9,463
|
Construction in progress
|
|
|
1,255
|
|
|
296
|
Property and equipment, net
|
|
$
|
23,906
|
|
$
|
9,759
|
Note 5. Goodwill and Identifiable Intangibles
Changes
in
the carrying amount of goodwill are as follows (in
thousands
):
|
|
|
|
|
|
|
|
At
December
31, 2016
|
|
$
|
122,077
|
Acquisitions
|
|
|
55,550
|
Currency translation adjustment
|
|
|
7,712
|
At
September
30, 2017
|
|
$
|
185,339
|
Identifiable
intangibles by major asset class consist of the following
(in
thousands
)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2017
|
|
|
Estimated
|
|
Gross
|
|
|
|
|
|
|
|
|
Useful
|
|
Carrying
|
|
Accumulated
|
|
Net
|
|
|
Lives (Years)
|
|
Amount
|
|
Amortization
|
|
Balance
|
Technology
|
|
14
-
16
|
|
$
|
152,133
|
|
$
|
(50,298)
|
|
$
|
101,835
|
Trademark
|
|
5
-
10
|
|
|
2,593
|
|
|
(968)
|
|
|
1,625
|
In-process research and development
|
|
5
|
|
|
38,049
|
|
|
(36,551)
|
|
|
1,498
|
Customer relationships
|
|
10
-
21
|
|
|
41,145
|
|
|
(4,315)
|
|
|
36,830
|
Noncompete agreements
|
|
5
|
|
|
29,888
|
|
|
(28,710)
|
|
|
1,178
|
Total identifiable intangibles
|
|
|
|
$
|
263,808
|
|
$
|
(120,842)
|
|
$
|
142,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
Estimated
|
|
Gross
|
|
|
|
|
|
|
|
|
Useful
|
|
Carrying
|
|
Accumulated
|
|
Net
|
|
|
Lives (Years)
|
|
Amount
|
|
Amortization
|
|
Balance
|
Technology
|
|
14
|
|
$
|
138,026
|
|
$
|
(39,956)
|
|
$
|
98,070
|
Trademark
|
|
5
|
|
|
936
|
|
|
(759)
|
|
|
177
|
In-process research and development
|
|
5
|
|
|
35,306
|
|
|
(28,621)
|
|
|
6,685
|
Customer relationships
|
|
15
|
|
|
11,577
|
|
|
(3,128)
|
|
|
8,449
|
Noncompete agreements
|
|
5
|
|
|
28,065
|
|
|
(22,749)
|
|
|
5,316
|
Total identifiable intangibles
|
|
|
|
$
|
213,910
|
|
$
|
(95,213)
|
|
$
|
118,697
|
Table of Contents
NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Accrued Expenses
Accrued
expenses consist of the following as of
September
30, 2017
and
December
31, 2016
(in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
2017
|
|
2016
|
Accrued payroll
|
|
$
|
5,880
|
|
$
|
850
|
Property and franchise taxes accrual
|
|
|
322
|
|
|
322
|
Accrual related to public offering
|
|
|
—
|
|
|
1,153
|
Accrued acquisition related costs
|
|
|
486
|
|
|
618
|
Accrued other miscellaneous liabilities
|
|
|
686
|
|
|
347
|
|
|
$
|
7,374
|
|
$
|
3,290
|
Note 7.
Debt
Our long-term debt is as follows (in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
December
31,
|
|
|
2017
|
|
2016
|
Term loan under Prior Senior Secured Credit Facilities
|
|
$
|
—
|
|
$
|
90,836
|
Senior secured revolving credit facility
|
|
|
20,000
|
|
|
—
|
Promissory note
|
|
|
2,880
|
|
|
—
|
Equipment notes
|
|
|
1,375
|
|
|
—
|
Total
|
|
|
24,255
|
|
|
90,836
|
Less debt issuance costs
|
|
|
—
|
|
|
1,670
|
Total debt, net
|
|
|
24,255
|
|
|
89,166
|
Less: current portion
|
|
|
(3,204)
|
|
|
(772)
|
Long-term debt
|
|
$
|
21,051
|
|
$
|
88,394
|
The estimated fair value of total debt for the periods ended
September
30, 2017
and
December
31, 2016
was
$
24
.
2
million
and
$92.8
million
, respectively. The carrying value of the
senior secured revolving credit facility
as of
September
3
0, 2017 approximated
the fair value
of debt as it can be paid at any time
. The fair value was estimated using Level 2 inputs by calculating the sum of the discounted future interest and principal payments through the date of maturity
.
Below is a description of our prior and new credit agreements and other financing arrangements.
Prior Senior Secured Credit Facilities
Effective
August
7, 2014, we entered into a credit agreement
(the “Prior Credit Agreement”)
with a group of financial institutions which was denominated in Canadian dollars (“CAD”) and allowed for a term loan of up to
$197.6
million
CAD (
$180.0
million
USD), and a
$38.4
million
CAD (
$35.0
million
USD) revolving line of credit of which
$5.0
million
CAD was available for letters of credit and
$5.0
million
CAD was available for swingline loans (together, the “Credit Facility”). We entered into Amendment No. 1, effective
April
15, 2015, and Amendment No. 2, effective
December
22, 2015, which modified the original credit agreement governing the Credit Facility. The modifications changed various defined terms as well as the covenants. These amendments also revised the revolving credit commitment to
$27.8
million
CAD (
$20.0
million
USD) and evidenced the prepayment of the Term Loan in an amount of
$55.8
million
CAD.
The term loan accrued interest at the adjusted base rate or Canadian base rate plus an applicable margin, as defined in the credit agreement governing the Credit Facility, with quarterly interest payments. The term loan was collateralized by certain assets of the Company and guaranteed by certain wholly owned subsidiaries of the Company. The interest on the term loan was payable in quarterly installments. All unpaid principal and interest was scheduled to mature on
August
7, 2019
. As of
December
31, 2016
, the term loan had an outstanding balance of $90.8
million
. We incurred interest expense of
$1.
4
million
for the three months ended
September
30, 2016
and
$1.7
million
and
$
3
.
9
million
for the
nine
months ended
September
30, 2017
and
2016
, respectively.
No
interest expense was recognized for the three months ended
September
30, 2017
.
The revolving line of credit was collateralized by certain assets of the Company and guaranteed by certain wholly owned subsidiaries of the Company. Interest on the revolving line of credit was payable quarterly at the adjusted base rate or Canadian base rate plus an applicable margin, as defined in the agreement governing the Credit Facility.
Table of Contents
NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Direct costs incurred in connection with the term loan were capitalized and amortized over the term of the debt using the effective interest method. Net fees attributable to the lenders of
$1.7
million
were presented as a discount to the carrying value of debt as of
December
31,
201
6. As a result of the payment of the loan in full on
May
4, 2017, we wrote off the remainder of the deferred loan costs of
$1.4
million
as a component of interest expense
, net
in the
condensed
consolidated statement
s
of operations during the second quarter of 2017.
In
February 201
7, to ensure compliance with non-financial covenants per the Credit Facility, we made a
$3.0
million
term loan prepayment. On
May
4, 2017, the term loan was paid in full and terminated using a portion of the proceeds from our IPO and we also entered into a new Amended and Restated Credit Agreement (the “Credit Agreement”).
New Senior Secured Credit Facilit
y
On
May
4, 2017, we entered into an Amended and Restated Credit Agreement with Pioneer Investment, Inc., as borrower (the “U.S.
Borrower
”), NCS Multistage Inc., as borrower (the “Canadian Borrower”), Pioneer Intermediate, Inc. (together with the Company, the “Parent Guarantors”) and the lenders party thereto, Wells Fargo Bank, National Association as administrative agent in respect of the U.S. Facility (as defined below) and Wells Fargo Bank, National Association, Canadian Branch, as administrative agent in respect of the Canadian Facility (as defined below) (the senior secured revolving credit facilities provided thereunder, the “New Senior Secured Credit Facility”).
The Credit Agreement amended and restated the Prior Credit Agreement in its entirety.
The New Senior Secured Credit Facility will mature on
May
4, 2020
.
The New Senior Secured Credit Facility consists of a (i) senior secured revolving credit facility in an aggregate principal amount of
$25.0
million
made available to the U.S. Borrower (the “U.S. Facility”), of which up to
$5.0
million
may be made available for letters of credit and up to
$5.0
million
may be made available for swingline loans and (ii) senior secured revolving credit facility in an aggregate principal amount of
$25.0
million
made available to the Canadian Borrower (the “Canadian Facility”).
We entered into Amendment No. 1
to the Credit Agreement
on
August
31, 2017. The Amendment increased the loan commitment available to
$50.0
million
from $25.0
million
under the U.S. Facility. The loan commitment available under the Canadian Facility remained at $25.0
million
.
At
September
30, 2017
, we had
$20.0
million
in
outstanding indebtedness under the
U.S.
Facility.
We incurred interest
expense
related to the New Senior Secured Credit Facility
of
$0.1
million
for the three and nine months ended
September
30, 2017.
Borrowings under the U.S. Facility may be made in U.S. dollars, Canadian dollars or Euros and bear interest at a rate
equal to the
Adjusted
Base Rate or Eurocurrency Rate
(each as defined in the Credit Agreement)
, in each case, plus an applicable interest margin as set forth in the
Credit Agreement
. Borrowings under the Canadian Facility may be made in U.S. dollars or Canadian dollars and bear interest at the Canadian (Cdn) Base Rate, Canadian (U.S.) Base Rate, Eurocurrency Rate or Discount Rate
(each as defined in the Credit Agreement)
, in each case, plus an applicable interest margin as set forth in the
Credit Agreement
. The Adjusted Base Rate, Canadian (U
.
S
.
) Base Rate and Canadian (Cdn) Base Rate applicable margin will be between
2.25%
and
3.00%
and Eurocurrency Rate applicable margin will be between
3.25%
and
4.00%
, in each case, depending on our leverage ratio.
The applicable interest rate at
September
30, 2017 was
5.50%
.
The obligations of the U.S. Borrower under the U.S. Facility
are
guaranteed by the Parent Guarantors and each of the other existing and future direct and indirect restricted subsidiaries of the Company organized under the laws of the United States (subject to certain exceptions) and
are
secured by substantially all of the assets of the Parent Guarantors, the U.S. Borrower and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. The obligations of the Canadian Borrower under the Canadian Facility
are
guaranteed by the Parent Guarantors, the U.S. Borrower and each of the future direct and indirect restricted subsidiaries of the Company organized under the laws of the United States and Canada (subject to certain exceptions) and
are
secured by substantially all of the assets of the Parent Guarantors, the U.S. Borrower, the Canadian Borrower and such subsidiary guarantors,
if any,
in each case, subject to certain exceptions and permitted liens.
The
Credit Agreement
contains financial covenants that require (i) commencing with the fiscal quarter ending
June
30, 2017, compliance with a leverage ratio test set at (A)
3.00
to 1.00 as of the last day of each fiscal quarter ending prior to
March
31, 2018 and (B)
2.50
to 1.00 as of the last day of each fiscal quarter ending on or after
March
31, 2018, (ii) commencing with the fiscal quarter ending
June
30, 2017, compliance with an interest coverage ratio test set at
2.75
to 1.00 as of the last day of each fiscal quarter, (iii) if the leverage ratio as of the end of any fiscal quarter is greater than
2.00
to 1.00 and the amount outstanding under the Canadian Facility at any time during such fiscal quarter was greater than $0, compliance as of the end of such fiscal quarter with a Canadian asset coverage ratio test set at
1.00
to 1.00 and (iv) if the leverage ratio as of the end of any fiscal quarter is greater than 2.00 to 1.00 and the amount outstanding under the U.S. Facility at any time during such fiscal quarter was greater than $0, compliance as of the
Table of Contents
NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
end of such fiscal quarter with a U.S. asset coverage ratio test set at
1.00
to 1.00. 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.
As of
September
30, 2017
, we were in compliance with these covenants. The
Credit Agreement
also includes customary events of default for facilities of this type (with customary grace periods, as applicable). If an event of default occurs, the lenders under each of the U.S. Facility and the Canadian Facility 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 under each of the U.S. Facility and the Canadian Facility also have the right upon an event of default thereunder to terminate any commitments they have to provide further borrowings under such facility. Further, following an event of default under each of the U.S. Facility and the Canadian Facility, the lenders thereunder will have the right to proceed against the collateral granted to them to secure such facility.
Direct costs of
$
1
.
0
million
were incurred in connection with the New Senior Secured Credit Facility. The costs were capitalized as an asset as the
y represent the benefit of being able to access capital over the contractual term
. The costs are being amortized over the term of the credit facilities using the
straight-line
method. Amortization expense of the deferred financing charges of
$
71
thousand
and
$
0.1
million
, respectively,
were included in interest expense
, net
for the
three and nine months ended
September
30, 2017
.
Promissory Note
In connection with the acquisition
, Repeat
Precision
entered into a promissory note with Security State Bank & Trust, Fredericksburg on
February
27, 2017, for an aggregate borrowing capacity of
$3.8
million
. The promissory note is secured against equipment, inventory and receivables. It bears interest at a variable interest rate
based on prime plus
1%
and matures on
February
27, 2018
. Any principal amount not paid by the maturity date bears interest at the lesser of the maximum rate allowed per law or
18%
per annum. As of
September
30, 2017
, the outstanding balance on the promissory note was
$
2
.
9
million
.
Equipment Notes
In
February 201
7, Repeat
Precision
entered into an equipment note in the amount of
$0.8
million
with Security State Bank & Trust, Fredericksburg also in connection with the acquisition. The equipment note bears interest at prime plus
1%
, matures on
February
27, 2021
and is collateralized by certain property.
Any principal amount not paid by the maturity date bears interest at the lesser of the maximum rate allowed per law or
18%
per annum.
As of
September
30, 2017
, the outstanding balance on the equipment note was
$0.
6
million
.
In
April 201
7, Repeat
Precision
entered into another equipment note in the amount of
$0.8
million
with Security State Bank & Trust, Fredericksburg. The equipment note bears interest at prime plus
1%
, matures on
December
21, 2018
and is collateralized by certain property. Any principal amount not paid by the maturity date bears interest at the lesser of the maximum rate allowed per law or
18%
per annum. As of
September
30, 2017
, the outstanding balance on the equipment note was
$0.
7
million
.
Note 8. 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, product liability and employee matters.
Our management currently does not expect that the results of any of these legal proceedings, either individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows.
On
March
3, 2017, we received
$0.9
million
resulting from an arbitration case that was decided in our favor in
February 201
7. This was recorded as other income
(expense)
, net
in our condensed consolidated statement
s
of operations for the
nine months ended
September
30, 2017
.
Note 9. Stockholders’ Equity
As disclosed in “Note 1
.
Basis of Presentation”, on
April
13, 2017 our board of directors and stockholders approved an amendment to the amended and restated certificate of incorporation effecting a
3.00
for 1.00 stock split of our issued and outstanding shares of common stock. The stock split was implemented on
April
13, 2017. The par value of the common and preferred stock was
Table of Contents
NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
not adjusted as a result of the stock split. All other issued and outstanding shares and per share amounts included in the accompanying financial statements have been adjusted to reflect this stock split for all periods presented.
On
April
27, 2017, our certificate of incorporation was amended and restated and the number of shares of common stock authorized to be issued by the Company was increased from
54.0
million
to
225.0
million
and the number of our authorized shares of preferred stock was increased from
one
share to
10.0
million
shares. As of
September
30, 2017
and
December
31, 2016
,
one
share of preferred stock, designated
as the “Special Voting Share” in our
amended and
restated
certificate of incorporation, was issued and
outstanding
.
The holders of common stock are entitled to one vote for each share of common stock held.
The holder of the Special Voting Share shall be entitled to vote on all matters that a holder of common stock is entitled to vote on and shall be entitled to cast a number of votes equal to the number of exchangeable shares of NCS Multistage, Inc. (“NCS Canada”), a subsidiary of the Company, then outstanding that are not owned by us, multiplied by the exchange ratio (as defined in the articles of incorporation of NCS Canada). In connection with our stock split, the exchange ratio was adjusted to three from one. As of
December
31, 2016
, the number of shares of common stock issuable for the exchangeable shares totaled
1,819,247
and was held by the preferred stockholder. On
May
3,
201
7, the preferred stockholder sold shares of our common stock in our initial public offering, which reduced the number of shares of common stock issuable for the exchangeable shares. As of
September
30, 2017
, the number of shares of common stock issuable for the exchangeable shares totaled
1,769,247
.
The exchangeable shares are convertible upon demand at the stock price on the conversion date.
The holders of common stock are entitled to receive dividends as declared from time-to-time by our board of directors. The holder of the Special Voting Share is not entitled to receive dividends.
No
dividends were declared during the periods ended
September
30, 2017
or
December
31, 2016
.
Note 10. Share-
Based
Compensation
Liquidity Awards
In connection with the IPO, certain options that were to vest only in connection with a change of control (the “Liquidity Awards”) were amended to provide that such awards will vest in
three
equal installments on each of the first three anniversaries of the consummation of our IPO, which occurred on
May
3, 2017, subject to certain requirements including, as applicable, the recipient’s continued employment on the vesting date. The Liquidity Awards are still subject to accelerated vesting upon a company sale
, as defined in our 2012 Equity Incentive Plan
.
As a result of the modification, we estimated the fair value of the Liquidity Awards on
April
27, 2017, the amendment date, using the Black-Scholes option-pricing model, which required estimates of key assumptions based on both historical information and management judgment regarding market factors and trends. The weighted average assumptions used to estimate the fair value of the Liquidity Awards were as follows:
|
|
|
Expected volatility
|
44.4
|
%
|
Average risk free interest rate
|
1.7
|
%
|
Expected term (in years)
|
4.6
|
|
Expected dividends
|
0.0
|
%
|
As of
April
27, 2017, the total unamortized compensation expense was valued at
$17.2
million
compared to
$10.1
million
at
December
31, 2016. The unamortized compensation expense of the Liquidity Awards is being recognized over a period of
three
years from the date of the modification.
The total share-based compensation expense for all awards was
$2.1
million
and
$0.3
million
for the
three months ended
September
30, 2017 and 2016
, respectively, and
$3.9
million
and
$1.0
million
for the
nine months ended
September
30, 2017 and 2016
, respectively.
Employee Stock Purchase Plan
On
August
3,
201
7, our board of directors adopted the Company’s Employee Stock Purchase Plan (the “U.S. ESPP”) and an employee stock purchase plan specifically applicable to non-U.S. employees on substantially the same terms as the ESPP (the “Non-U.S. ESPP” and together with the U.S. ESPP, the “ESPP”). There are an aggregate of
2.0
million
shares of our common stock reserved for issuance and sale pursuant to the ESPP. The first offering period under our ESPP beg
an
on October
16,
201
7 and ends on
December
31, 2018.
We believe f
uture offering periods will span a calendar year. The ESPP allows eligible employees to contribute, subject to any other plan limitations, up to
18%
of their base salary, up to a maximum of
$25
thousand
per calendar year
Table of Contents
NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(
$50
thousand
for the first offering period), toward the purchase of our common stock at a discounted price. The purchase price of the shares on each purchase date is equal to
85%
of the lower of the fair market value of our common stock on the first and last trading days of each offering period. The U.S. ESPP is designed to be qualified under Section 423 of the Internal Revenue Code.
Note 11. Income Taxes
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions
including
, but not limited to, the expected operating income (or loss) for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired or additional information is obtained. The computation of the annual effective rate would include applicable modifications, which were projected for the year, such as certain book expenses not deductible for tax, the domestic manufacturing deduction, tax credits and foreign deemed dividends.
We recorded a tax expense (benefit) of
$0.8
million
and
$(0.8)
million
for the
three months ended
September
30, 2017 and 2016
, respectively. For the
three months ended
September
30, 2017 and 2016
, our effective tax rates were
18.0%
and
(74.6)%
, respectively. For the
nine months ended
September
30, 2017 and 2016
, we recorded a tax expense (benefit) of
$2.0
million
and
$(7.9)
million
, respectively. The effective tax rates for the
nine months ended
September
30, 2017 and 2016
were
28.2%
and
(31.8)%
, respectively. The primary difference in these effective tax rates was due to the effect of not providing U.S. income taxes on the undistributed earnings of foreign subsidiaries because we intend to permanently reinvest such earnings outside the U.S.
D
uring the first quarter of 2017
, w
e changed our assertion
to state
that undistributed foreign earnings are indefinitely or permanently reinvested as a result of cash proceeds received from the IPO during
May 201
7, a portion of which was used to pay off existing debt. Our effective tax rate for the
nine months ended
September
30,
201
7 was also impacted by a
$0.6
million
tax expense recorded for provision to return estimates of prior year tax returns.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The impact
of an uncertain income tax position on the income tax returns must be recognized at the largest amount that is more-likely-than-not to be
required
to be recognized upon audit by the relevant taxing authority. This standard also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition issues with respect to tax positions. We include interest and penalties as a component of other income (expense), net in the condensed consolidated statements of operations and recognized
$2
thousand
and
$0.1
million
for the
nine months ended
September
30, 2017 and 2016
, respectively
.
Table of Contents
NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Earnings (Loss) Per Common Share
The following table presents the reconciliation of the numerator and denominator for calculating earnings (loss) per common share from net income (loss) (
in
thousands
, except per share data)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator—Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,541
|
|
$
|
(280)
|
|
$
|
5,144
|
|
$
|
(16,997)
|
Less: income attributable to participating shares
|
|
|
138
|
|
|
—
|
|
|
224
|
|
|
—
|
Less: income (loss) attributable to non-controlling interest
|
|
|
155
|
|
|
—
|
|
|
(301)
|
|
|
—
|
Net income (loss) attributable to
NCS Multistage Holdings, Inc.––Basic
|
|
$
|
3,248
|
|
$
|
(280)
|
|
|
5,221
|
|
|
(16,997)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator—Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,541
|
|
$
|
(280)
|
|
$
|
5,144
|
|
$
|
(16,997)
|
Less: loss (income) attributable to non-controlling interest
|
|
|
155
|
|
|
—
|
|
|
(301)
|
|
|
—
|
Net income (loss) attributable to
NCS Multistage Holdings, Inc.––Diluted
|
|
$
|
3,386
|
|
$
|
(280)
|
|
$
|
5,445
|
|
$
|
(16,997)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares
|
|
|
43,676
|
|
|
34,005
|
|
|
39,329
|
|
|
34,008
|
Exchangeable shares for common stock
|
|
|
1,769
|
|
|
—
|
|
|
1,792
|
|
|
—
|
Dilutive effect of other equity awards
|
|
|
1,674
|
|
|
—
|
|
|
1,416
|
|
|
—
|
Diluted weighted average number of shares
|
|
|
47,119
|
|
|
34,005
|
|
|
42,537
|
|
|
34,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.07
|
|
$
|
(0.01)
|
|
$
|
0.13
|
|
$
|
(0.50)
|
Diluted
|
|
$
|
0.07
|
|
$
|
(0.01)
|
|
$
|
0.13
|
|
$
|
(0.50)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities excluded as anti-dilutive
|
|
|
-
|
|
|
2,561
|
|
|
-
|
|
|
2,526
|
Note 13. Related Party Transactions
As of
December
31, 2016
, we held a long-term note receivable in the amount of
$0.8
million
due from a related party. During the first quarter of 2017, the long-term note receivable was paid in full. We also purchased services and grease from a related party in the
amount
of
$21
thousand
and
$49
thousand
for the
nine months ended
September
30, 2017 and 2016
, respectively. We had
no
purchases from a related party for the
three months ended
September
30, 2017
and 2016.
On
May
3,
201
7, the preferred stockholder, a related party, sold
50,000
shares of our common stock in our initial public offering. See “Note 9.
Stockholders’
Equity.”
Note 14. Segment and Geographic Information
We have determined that we operate in
one
reportable segment that has been identified based on how our chief operating decision maker manages our business.
Item 2. Mana
gement’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion and analysis of the financial condition and results of our operations should be read together with our financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and our audited financial statements and the related notes thereto included in our final prospectus (the “Prospectus”), dated
April
27, 2017, filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the “Securities Act”), which is deemed to be part of the Company’s Registration Statement on Form S-1 (File No. 333-216580), as amended, as well as the section of the Prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” On
May
3, 2017, the Company completed the initial public offering (the “IPO”) of shares of common stock, par value $0.01 per share, of the Company
, at a price to the public of $17.00
per share.
On
May
3,
2017, certain selling stockholders identified in the Prospectus completed the sale of
1.425
million
shares of our common stock, par value $0.01 per share, to the underwriters in the initial public offering at the initial public offering price less the underwriting discount pursuant to the full exercise of the over
-
allotment option granted to the underwriters in connection with the Company’s initial public offering.
As used in this Quarterly Report, except where the context otherwise requires or where otherwise indicated, the terms “Company,” “NCS,” “we,” “our” and “us” refer to NCS Multistage Holdings, Inc.
This discussion and analysis contains 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 “Risk Factors.” Our actual results may differ materially from those contained in or implied by these forward-looking statements.
Overview
We are a leading provider of highly engineered products and support services that facilitate the optimization of oil and natural gas well completions and field development strategies. We provide our products and services primarily to exploration and production (“E&P”) companies for use in onshore wells, predominantly wells that have been drilled with horizontal laterals in unconventional 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 Argentina, China and Russia. We have provided our products and services to various customers, including leading large independent oil and natural gas companies and major oil companies.
Our primary offering is our Multistage Unlimited family of completion 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 Multistage Unlimited products and services are typically utilized in cemented wellbores and enable our customers to precisely place stimulation treatments in a more controlled and repeatable manner as compared with traditional completion techniques. Our Multistage Unlimited products and services
are utilized
in conjunction with third-party providers of pressure pumping, coiled tubing and other services.
In addition to our Multistage Unlimited family of completion products and services, we sell other products including our AirLock casing buoyancy system and liner hanger systems.
We also provide
well completion diagnostics and reservoir characterization
services that utilize
downhole chemical and radioactive tracer
s through Spectrum Tracer Services (“Spectrum”) and
engineering
consulting
services through Anderson Thompson Reservoir Strategies.
Industry Trends Affecting our Results of Operations
Oil and Natural Gas Drilling and Completion Activity
Our products and services are primarily sold to North American E&P companies and sales of our products and services depend upon oil and natural gas drilling and production activity in North America. Oil and natural gas drilling and production activity is directly related to oil and natural gas prices.
Over the past several years, North American E&P companies have been able to reduce their cost structures in response to lower oil and natural gas prices and have also utilized technologies, including ours, to increase efficiency and improve well performance. After a period of declining drilling and completion activity from late 2014 through early 2016, North American E&P companies began to increase activity levels beginning in the second quarter of 2016, as evidenced by increasing rig counts in the U.S. and Canada. The average U.S. land rig count improved from 461 in the third quarter of 2016 to 927 in the third quarter of 2017, while the average rig count in Canada increased from 119 in the third quarter of 2016 to 207 in the third quarter of 2017. Over this time, the demand for our products and services has also increased.
Oil and natural gas prices remain volatile, with WTI crude oil pricing falling to below $43 per barrel in
June 201
7 before recovering to approximately $50 per barrel by the end of
September 201
7. Natural gas pricing has been more stable over the period, remaining close to $3.00 per mmBtu.
Realized natural gas pric
es for Canadian E&P customers are
typically at a disco
unt to U.S. Henry Hub pricing.
Spot pricing for Canadian natural gas at the AECO hub has been volatile since mid-2017, with wider-than-normal discounts to Henry Hub pricing resulting from infrastructure bottlenecks and elevated local storage levels. Some Canadian E&P customers have reacted to the lower prices by shutting in a portion of their natural gas production,
negatively
impacting their cash flows
and planned capital spending and drilling activity
.
Sustained declines in commodity prices, combined with potential increases in the cost of drilling and completing wells resulting from high utilization in certain oilfield services categories could lead North American E&P companies to reduce drilling and completion activity, which could negatively impact our business.
Listed below are recent crude oil and natural gas pricing trends, as provide
d
by the Energy Information Administration (
“
EIA
”
) of the U.S. Department of Energy:
|
|
|
|
|
|
|
|
|
|
|
|
Average Price
|
Quarter Ended
|
|
WTI Crude
(per bbl)
|
|
Brent Crude
(per bbl)
|
|
Henry Hub Natural Gas
(per mmBtu)
|
9/30/2016
|
|
$
|
44.85
|
|
$
|
45.80
|
|
$
|
2.88
|
12/31/2016
|
|
|
49.14
|
|
|
49.11
|
|
|
3.04
|
3/31/2017
|
|
|
51.62
|
|
|
53.59
|
|
|
3.02
|
6/30/2017
|
|
|
48.10
|
|
|
49.55
|
|
|
3.08
|
9/30/2017
|
|
|
48.15
|
|
|
52.10
|
|
|
2.95
|
Listed below are the average number of operating onshore rigs in the U.S. and in Canada per quarter since the
third
quarter of 2016, as provided by Baker Hughes, a GE company:
|
|
|
|
|
|
|
|
|
Average Drilling Rig Count
|
Quarter Ended
|
|
U.S. Land
|
|
Canada Land
|
|
North America Land
|
9/30/2016
|
|
461
|
|
119
|
|
580
|
12/31/2016
|
|
567
|
|
180
|
|
747
|
3/31/2017
|
|
722
|
|
294
|
|
1,016
|
6/30/2017
|
|
874
|
|
116
|
|
990
|
9/30/2017
|
|
927
|
|
207
|
|
1,134
|
A
substantial portion of our business is subject to quarterly variability. 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 drill sites and road bans that curtail drilling and completion activity.
W
e typically experience higher activity levels in
Canada in
the first quarter and fourth quarter of each year, as our customers take advantage of the winter freeze to gain access to remote drilling and production areas.
Contrary to the typical season trend, the Canadian rig count has declined since the end of the third quarter in 2017 and we expect that the average Canadian rig count in the fourth quarter of 2017 will be lower than that in the third quarter, especially in Saskatchewan, where we have significant operations. We believe this reduction in drilling activity is a result of low recent spot natural gas prices, certain customers having exhausted their 2017 capital budgets prior to year-end and typical reductions in activity driven by holidays in the fourth quarter. If it persists, the reduction in Canadian drilling activity is expected to have a negative impact on the revenue we generate from our Canadian operations in the fourth quarter.
Increasing Adoption of Pinpoint Stimulation
Traditional well completion techniques, including plug and perf and ball drop, currently account for the majority of unconventional well completions in North America. We believe that pinpoint stimulation provides substantial benefits compared to these traditional well completion techniques and that pinpoint stimulation has become increasingly utilized by operators in North America, particularly in Canada. Our ability to grow our market share, as evidenced by the percentage of horizontal wells in North America completed using our products and services, will depend in large part on the industry’s continued adoption of pinpoint stimulation to complete wells.
Increasing Well Complexity and Focus on Completion Optimization
In recent years, E&P companies have drilled longer horizontal wells and completed more hydraulic fracturing stages per well to maximize the volume of hydrocarbon recoveries per well. This trend towards more complex wells has resulted in us selling more sleeves per well on average, which increases our revenue opportunity per well completion. Additionally, E&P companies have become increasingly focused on well
productivity through optimization of completion designs and we believe this trend
may
further the
adoption of pinpoint stimulation, and in turn, increase the
opportunity for
sale
s
of our products and services if
our customers observe
operational benefits and long-term production results
from the application of pinpoint stimulation.
This trend towards more complex well completions has also resulted in increased use of tracer diagnostic services, which can be utilized to assess the effectiveness of various well completion techniques in support of completion optimization efforts.
How We Generate Revenues
We derive
the majority of our revenues f
rom the sale of our Multistage Unlimited products and the provision of related services. The
remainder
of our revenues are generated from sales of our AirLock casing buoyancy system, our liner hanger systems and services provided by Spectrum and
Anderson Thompson Reservoir Strategies
. Our joint venture, Repeat Precision, LLC, or Repeat, generates revenue through the provision of third-party manufacturing services and the sale of composite bridge plugs.
Product
sales represented
70.4%
and
74.5%
of our revenue for the
three months ended
September
30, 2017 and 2016
, respectively, and
75.5%
and
75.0%
for the
nine months ended
September
30, 2017 and 2016
, respectively. We offer two primary models of sliding sleeves: our MultiCycle sliding sleeves and our GripShift sliding sleeves. Our MultiCycle sliding sleeves are sold at a higher price per sleeve as compared to our GripShift sliding sleeves, reflecting the additional features they incorporate. Most of our sales are on a just-in-time basis, as specified in individual purchase orders, with a fixed price for our sliding sleeves. We occasionally supply our customers with large orders that may be filled on negotiated terms. Services represented
29.6%
and
25.5%
of our revenues for the
three months ended
September
30, 2017 and 2016
, respectively, and
24.5%
and
25.0%
for the
nine months ended
September
30, 2017 and 2016
, respectively. Services include our tool charges and associated services
related to our Multistage Unlimited offering and our tracer diagnostics services
(which are classified together as “services” in our financial results). Services are provided at agreed rates we charge to our customers for the provision of our downhole frac isolation assembly, our personnel
and for the provision of tracer diagnostic services
.
During periods of low drilling and well completion activity we will, in certain instances, lower the prices of our products and services. Our revenues are also impacted by well complexity, with wells with more stages resulting in longer jobs and increased revenue attributable to selling more sliding sleeves and the provision of our services.
For the
three months ended
September
30, 2017 and 2016
, approximately
72%
and
69%
, respectively, of our revenues were derived from sales in Canada and were denominated in Canadian dollars.
For the
nine months ended
September
30, 2017 and 2016
, approximately
65%
and
72%
, respectively, of our revenues were attributable to our Canadian sales.
Because our Canadian contracts are typically invoiced in Canadian dollars, the effects of foreign currency fluctuations are regularly monitored.
Although most of our sales are to North American E&P companies, we do have sales to customers outside of North America and expect sales to international customers to increase over time. These international sales are typically made to our local operating partners on a free on board basis with a point of sale in the United States. Some of the locations in which we have operating partners or sales representatives include Argentina, China, Russia and the Middle East. Our operating partners and representatives do not have authority to contractually bind our company, but market our products in their respective territories as part of their product or service
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 manufacturing of components used in our products and costs related to our employees that perform quality control analysis, assemble and test our products. During the first quarter of 2017, we entered into our joint venture, Repeat Precision, which we believe will allow us to reduce our costs for certain product categories. 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 and revaluation or scrap related to our existing inventory and costs related to the chemicals and laboratory analysis associated with our tracer diagnostic services.
Our selling, general and administrative (“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 all of our general operating costs. These general operating costs include, but are not limited to: rent and occupancy for our facilities, information technology infrastructure, software licensing, advertising and marketing, third party research and development, risk insurance and professional service fees for audit, legal and other consulting services.
As a result of being a public company
, our legal, accounting and other expenses have increased and will further increase for costs associated with our compliance with the Sarbanes-Oxley Act.
The percentage of our costs, defined as cost of sales, excluding depreciation and amortization, and including SG&A, denominated in Canadian dollars for the
three months ended
September
30, 2017 and 2016
, was approximately 32
%
and 31
%
, respectively. The percentage of our costs, defined as cost of sales, excluding depreciation and amortization, and including SG&A, denominated in Canadian dollars for the
nine months ended
September
30, 2017 and 2016
, was approximately 31
%
and 35
%
, respectively.
Results of Operations
We made
acquisition
s
in the first quarter
and third quarter
of 2017. For additional information abou
t these
acquisition
s
, see
“Note. 2 Acquisitions”
in
our unaudited condensed consolidated financial statements
.
Due to th
ese
acquisition
s
, our results of operations for the 2017 period
s
presented may not be comparable to historical results of operations for the 2016 periods.
The following table summarizes our revenues and exp
enses for the periods indicated (in
thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
39,391
|
|
$
|
21,346
|
|
$
|
114,362
|
|
$
|
47,305
|
Services
|
|
|
16,566
|
|
|
7,304
|
|
|
37,088
|
|
|
15,733
|
Total revenues
|
|
|
55,957
|
|
|
28,650
|
|
|
151,450
|
|
|
63,038
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sales, exclusive of depreciation
and amortization expense shown below
|
|
|
19,326
|
|
|
11,013
|
|
|
59,774
|
|
|
25,498
|
Cost of services, exclusive of depreciation
and amortization expense shown below
|
|
|
6,632
|
|
|
3,700
|
|
|
14,423
|
|
|
8,399
|
Total cost of sales, exclusive of depreciation
and amortization expense shown below
|
|
|
25,958
|
|
|
14,713
|
|
|
74,197
|
|
|
33,897
|
Selling, general and administrative expenses
|
|
|
17,637
|
|
|
8,491
|
|
|
46,572
|
|
|
25,363
|
Depreciation
|
|
|
812
|
|
|
433
|
|
|
2,054
|
|
|
1,335
|
Amortization
|
|
|
6,486
|
|
|
6,030
|
|
|
18,481
|
|
|
17,893
|
Change in fair value of contingent consideration
|
|
|
(182)
|
|
|
—
|
|
|
585
|
|
|
—
|
Income (loss) from operations
|
|
|
5,246
|
|
|
(1,017)
|
|
|
9,561
|
|
|
(15,450)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(235)
|
|
|
(1,682)
|
|
|
(3,751)
|
|
|
(4,739)
|
Other income (expense), net
|
|
|
94
|
|
|
(18)
|
|
|
1,132
|
|
|
(29)
|
Foreign currency exchange (loss) gain
|
|
|
(787)
|
|
|
1,615
|
|
|
224
|
|
|
(4,714)
|
Total other expense
|
|
|
(928)
|
|
|
(85)
|
|
|
(2,395)
|
|
|
(9,482)
|
Income (loss) before income tax
|
|
|
4,318
|
|
|
(1,102)
|
|
|
7,166
|
|
|
(24,932)
|
Income tax expense (benefit)
|
|
|
777
|
|
|
(822)
|
|
|
2,022
|
|
|
(7,935)
|
Net income (loss)
|
|
|
3,541
|
|
|
(280)
|
|
|
5,144
|
|
|
(16,997)
|
Net income (loss) attributable to non-controlling interest
|
|
|
155
|
|
|
—
|
|
|
(301)
|
|
|
—
|
Net income (loss) attributable to
NCS Multistage Holdings, Inc.
|
|
$
|
3,386
|
|
$
|
(280)
|
|
$
|
5,445
|
|
$
|
(16,997)
|
Three Months Ended
September
30, 2017
compared to Three Months Ended
September
30, 2016
Revenues
Revenues were
$56.0
million
for the three months ended
September
30, 2017
as compared to
$28.7
million
for the three months ended
September
30, 2016
. This
increase
was primarily
attributable to an increase in the volume
of sales
of our completions products and services
d
ue to higher
customer
drilling and well completion activity as a result of an improved commodity price environment in the
third
quarter of 2017 as compared to the
third
quarter of 2016
, as well as the contributions from Repeat Precision and one month of revenue from the recent acquisition of Spectrum
. Product sales for the three months ended
September
30, 2017
were
$39.4
million
as compared to
$21.3
million
for the three months ended
September
30, 2016
. Our service revenue was
$16.6
million
for the three months ended
September
30, 2017
as compared to
$7.3
million
for the three months ended
September
30, 2016
.
Cost of sales
Cost of sales was
$26.0
million
, or
46.4%
of revenues, for the three months ended
September
30, 2017
as compared to
$14.7
million
, or
51.4%
of revenues, for the three months ended
September
30, 2016
. The
increase
in cost of sales was primarily a result of
a higher number of wells completed
and
a higher volume of product sales
in addition to the inclusion of Repeat Precision and
one month of operations from Spectrum
. Cost of sales were a lower percentage of revenues due to the higher volume of well completions and sliding sleeve and AirLock sales, resulting in greater absorption of fixed costs.
Selling, general and administrative expenses
Selling, general and administrative expenses were
$17.6
million
for the three months ended
September
30, 2017
as compared to
$8.5
million
for the three months ended
September
30, 2016
. The
increase
was the direct result
of headcount additions in all functional areas. In addition, there were significant additional expenses incurred
as a result of subsequent costs related to operating as a public company after our
initial public offering
, expenses related to the Spectrum acquisition,
the addition of Repeat Precision and one month of operations from Spectrum and an increase in share-based compensation related to amendments to our Liquidity Awards.
Depreciation
Depreciation was $0.8
million
for the three months ended
September
30, 2017 as compared to $0.4
million
for the three months ended
September
30, 2016. The increase is attributable to a higher level of property and equipment, primarily related to our acquisitions.
Amortization
Amortization was $6.5
million
for the three months ended
September
30, 2017 as compared to $6.0
million
for the three months ended
September
30, 2016. The majority of the increase in amortization was due to the increase in the exchange rate between the Canadian dollar and the U.S. dollar and amortization associated with an increase in amortizable intangible assets related to our acquisitions.
Change in fair value of contingent consideration
Change in fair value of contingent consideration
was
$(0.2)
million
for the three months ended
September
30, 2017
due to the
$0.
2
million
de
crease in the fair value o
f the earn-outs associated with our
acquisition
s
.
The primary reason for the decrease in the fair value of the earn-outs was an increase in the discount rate utilized in the fair value calculation.
Interest expense,
net
Interest expense
, net was
$0.2
million
for the three months
ended
September
30, 2017
as compared to
$1.7
million
for the three months ended
September
30, 2016
. The decrease in interest expense, net was
primarily a
result
of lower interest expense due to
paying our term loan in full
in
May 201
7
by using a portion of the proceeds from our IPO. This decrease was partially offset by higher interest expense due to borrowing $20.0
million
under our New Senior Secured Credit Facility in
August 201
7.
Foreign currency exchange
gain
(loss)
Foreign currency exchange
loss
was
$(0.8)
million
for the three months ended
September
30, 2017
as compared to a
gain
of
$1.6
million
for the three months ended
September
30, 2016
.
The change was primarily due to the impact of the foreign currency denominated debt and movement in the
foreign currency exchange rates between the periods
.
Income tax
expense
(
benefi
t)
Income tax
expense
(benefit)
was
$0.8
million
for the three months ended
September
30, 2017
as compared to
$(0.8)
million
for the three months ended
September
30, 2016
.
For the three months ended
September
30, 2017
and
2016
, our effective income tax rates were
18.0%
and
(74.6)%
, respectively.
The
primary
difference in these effective tax rates w
as
due to the effect of not providing U.S. income taxes on the undistributed earnings of foreign subsidiaries because we intend to permanently reinvest such earnings outside the U.S.
During the first quarter of 2017, w
e
changed
our assertion
to state
that undistributed foreign earnings are indefinitely or perm
anently reinvested
as a result of cash proceeds received from the IPO during
May 201
7, a portion of which was used to pay off existing debt.
As a result of the geographic mix of earnings and losses, including discrete tax items, our tax rate has been and will continue to be volatile until the market stabilizes.
Nine Months
Ended
September
30, 2017
compared to
Nine Months
Ended
September
30, 2016
Revenues
Revenues were
$151.5
million
for the
nine
months ended
September
30, 2017
as compared to
$63.0
million
for the
nine
months ended
September
30, 2016
. This
increase
was primarily
attributable to an increase in volume of
sales of
our completions products and services due to higher drilling and well completion activity as a result of an improved commodity price environment
in the
nine
months
of 2017 as compared to the
nine
months
of 2016
as well as the contribution of Repeat Precision and one month of revenue from the recent acquisition of Spectrum
. Product sales for the
nine months ended
September
30, 2017
were
$114.4
million
, as compared to
$47.3
million
for the
nine months ended
September
30, 2016
. Our service revenue was
$37.1
million
for the
nine
months ended
September
30, 2017
as compared to
$15.7
million
for the
nine
months ended
September
30, 2016
.
Cost of sales
Cost of sales was
$74.2
million
, or
49.0%
of revenues, for the
nine
months ended
September
30, 2017
as compared to
$33.9
million
, or
53.8%
of revenues, for the
nine
months ended
September
30, 2016
. The
increase
in cost of sales was primarily a result
of a higher number of wells completed
and
a higher volume of product sales
as well as the effect of Repeat Precision and one month of cost of sales from the recent acquisition of Spectrum
. Cost of sales were a lower percentage of revenues due to the higher volume of well completions and sliding sleeve and AirLock sales, resulting in greater absorption of fixed costs.
Selling, general and administrative expenses
Selling, general and administrative expenses were
$46.6
million
for the
nine
months ended
September
30, 2017
as compared to
$25.4
million
for the
nine
months ended
September
30, 2016
. The
increase
was
the
direct result of
headcount additions in all functional areas. In addition, there were significant
non-capitalizable
additional expenses incurred related to our initial public offering process
of $2.3
million
,
subsequent costs related to
operating
a
s
a
public company
,
expenses related to the acquisitions, eight months of operations of Repeat Precision, one month of operations of Spectrum and an increase in share-based compensation related to amendments to our Liquidity Awards.
Depreciation
Depreciation was $2.1
million
for the nine months ended
September
30, 2017 as compared to $1.3
million
for the nine months ended
September
30, 2016. The increase is attributable to a higher level of property and equipment, primarily related to our acquisitions.
Amortization
Amortization was $18.5
million
for the nine months ended
September
30, 2017 as compared to $17.9
million
for the nine months ended
September
30, 2016. The majority of the increase in amortization was due to the increase in the exchange rate between the Canadian dollar and the U.S. dollar and amortization associated with an increase in amortizable intangible assets related to our acquisitions.
Change in fair value of contingent consideration
Change in fair value of contingent consideration
was
$0.6
million
for the
nine months ended
September
30, 2017
due to the
$0.
6
million
increase in the fair value of t
he earn-outs associated with our
acquisition
s
.
Interest expense,
net
Interest expense
, net was
$3.8
million
for the
nine
months ended
September
30, 2017
as compared to
$4.7
million
for the
nine
months ended
September
30, 2016
. The decrease in interest expense, net was
primarily a
result of
lower interest expense due to
paying our term loan in full
in
May 201
7 by using a portion of the proceeds from our IPO. The decrease was partially offset by
the write-off of the remaining loan fees of $1.4
million
associated with the prepayment of the term loan
and higher interest expense due to borrowing $20.0
million
under our New Senior Secured Credit Facility in
August 201
7.
Other income
(expense)
, net
Other
income
(expense)
, net was
$1.1
million
for the
nine
months ended
September
30, 2017
as compared to
$(29)
thousand
for the
nine
months ended
September
30, 2016
. O
ther income (expense)
, net
was higher primarily due to the receipt of $0.9
million
from an arbitration case that was decided in our favor in
February 201
7
.
Foreign currency exchange
gain
(loss)
Foreign currency exchange gain was
$0.2
million
for the
nine
months ended
September
30, 2017
as compared to a loss of
$(4.7)
million
for the
nine
months ended
September
30, 2016
. The change was
primarily
due to the impact of the retirement of our foreign currency denominated debt and
changes in
the foreign currency exchange rates between the periods
.
Income tax expense (benefit)
Income tax expense
(benefit)
was
$2.0
million
for the
nine
months ended
September
30, 2017
as compared to
a
benefit of
$(7.9)
million
for the
nine
months ended
September
30, 2016
. For the
nine
months ended
September
30, 2017
and
2016
,
our effective income tax rates were
28.2%
and
(31.8)%
, respectively.
The
primary
difference in these effective tax rates w
as
due to the effect of not providing U.S. income taxes on the undistributed earnings of foreign subsidiaries because we intend to permanently reinvest such earnings outside the U.S.
During the first quarter of 2017, w
e
changed
our assertion
to state
that undistributed foreign earnings are indefinitely or perm
anently reinvested
as a result of cash proceeds received from the IPO during
May 201
7, a portion of which was used to pay off existing debt.
Our effective tax rate for the nine months ended
September
30, 2017 was also impacted by a $0.6
million
tax expense recorded for provision to return estimates of prior year tax returns.
As a result of the geographic mix of earnings and losses, including discrete tax items, our tax rate has been and will continue to be volatile until the market stabilizes.
Liquidity and Capital Resources
Our primary sources of liquidity are our existing cash and cash equivalents, cash provided by operating activities and borrowings under our New Senior Secured Credit Facilit
y
.
On
August
31, 2017, we entered into an amendment to increase our loan commitment available to the U.S. Borrower from $25.0
million
to $50.0
million
.
As of
September
30, 2017
, we had cash and cash equivalents of
$20.2
million
and availability under the New Senior Secured Credit Facility of
$55.0
million
. Our total indebtedness was $
24.3
million
as of
September
30, 2017
.
Our principal liquidity needs have been, and are expected to continue to be, capital expenditures, working capital, debt service and potential mergers and acquisitions. On
February
1, 2017, we contributed $
6.0
million
in exchange for a 50% interest in a joint venture,
Repeat Precision,
which was funded from available cash. Concurrent with entering into the joint venture, we made a $3.0
million
Prior Term Loan prepayment, also funded from available cash, and the previous owner of the 50% interest repaid in full a $1.0
million
promissory note to us.
On
August
31, 2017, we acquired 100% of the equity interests in Spectrum in exchange for approximately $83
million
,
subject to certain adjustments,
which was comprised of approximately $76
million
in cash and 0.4
million
shares of common stock. The cash portion was funded with available cash and borrowings under our New Senior Secured Credit Facility. Also, in connection with both the Repeat Precision and Spectrum acquisitions, we may need to pay the respective sellers additional consideration as part of an earn-out upon meeting certain specified targets. See “Note 2. Acquisitions”
in
our unaudited condensed consolidated financial statements
.
On
May
3, 2017, we completed our initial public offering of 9.5
million
shares of our common stock at a price to the public of $17.00 per share. The underwriters exercised their option to purchase an additional 1.425
million
shares of our common stock from certain selling stockholders and the closing of the over-allotment option occurred on
May
3, 2017 concurrently with the closing of the IPO. We received
$148.
9
million
in net proceeds after deducting underwriting discounts and commissions and
other
offering expenses. We used a portion of the net proceeds from the IPO to repay our
remaining
indebtedness under our
Prior Term Loan
and
use
d
the remaining net proceeds
to acquire Spectrum on
August
31, 2017.
Our capital expenditures for the
nine months ended
September
30, 2017 and 2016
were $
5.3
million
and $
0.4
million
, respectively.
We plan to incur $
6.5
million
to $8.
5
million
in capital expenditures in 2017
, which includes, capital expenditures related to Spectrum’s operations and our estimated 2017 spending for our research and development facility described below
.
We expect to make investments in our
owned facility in Canada to create a research and development facility for product development as well as to
further
demonstrate the capabilities and benefits of our products to our customers.
We estimate total spending for the project to be approximately $11
million
CAD, which we expect to incur over the remainder of 2017 and 2018.
We believe our cash on hand, cash flows from operations and potential borrowings under our New Senior Secured Credit Facilit
y
, will be sufficient to fund our capital expenditure and liquidity requirements for the next twelve months.
We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of additional indebtedness, the proceeds of equity issuances, or a combination thereof. We cannot assure you that we will be able to obtain this additional liquidity on reasonable terms, or at all. Our liquidity and our ability to meet our obligations and fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial and other factors
that are beyond our control. Accordingly, we cannot assure you 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 additional equity to finance such acquisitions, which could result in additional expenses or dilution.
Cash Flows
The following table provides a summary of cash flows from operating, investing and financing activities
(in
thousands
)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September
30,
|
|
|
2017
|
|
2016
|
Net cash provided by operating activities
|
|
$
|
2,869
|
|
$
|
7,136
|
Net cash used in investing activities
|
|
|
(85,079)
|
|
|
(1,203)
|
Net cash provided by (used in) financing activities
|
|
|
84,137
|
|
|
(73)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
20
|
|
|
679
|
Net change in cash and cash equivalents
|
|
$
|
1,947
|
|
$
|
6,539
|
Operating Activities
Net cash provided by operating activities was
$2.9
million
and
$7.1
million
for the
nine
months ended
September
30, 2017
and
2016
, respectively.
The decrease in 2017 was primarily related to increases in accounts receivable and inventories. The decrease was partially offset by increases in income taxes payable and higher net income, net of the foreign exchange (gain) loss on financing items, as a result of increased business activity.
Investing Activities
Net cash used in investing activities was
$85.1
million
and
$1.2
million
for the
nine
months ended
September
30, 2017
and
2016
, respectively. The increase in cash used in investing activities during the
nine
months ended
September
30, 2017
as compared to the
nine
months ended
September
30, 2016
primarily was due to the
$80.9
million
funding of two acquisitions. See “Note 2. Acquisitions”
in
our unaudited condensed consolidated financial statements
. We also incurred an additional $4.9
million
of capital expenditures for the nine months ended
September
30, 2017 in comparison to the same period in 2016.
The increase was
partially offset by
a
$1.0
million
note receivable re
payment
during the nine months ended
September
3
0,
201
7
.
Financing Activities
The net cash
provided by f
inancing activities for the
nine
months ended
September
30, 2017
was
$84.1
million
as compared to net cash
used in
financing activities of
$(0.1)
million
for the
nine
months ended
September
30, 2016
. The cash
provided by
financing activities for the
nine
months ended
September
30, 2017
primarily related to
net proceeds of $148.9
million
from our IPO after deducting
underwriting discounts and commissions and
other
offering expenses
. Additionally, we borrowed $20.0 under our New Senior Secured Credit Facility. The increases were partially offset by
$
89.1
million
of note repayments
of the Prior Term Loan under our
Prior
Senior Secured Credit
Facilities.
Financing Arrangements
Prior Senior Secured Credit Facilities
On
August
7, 2014, Pioneer Investment, Inc. (the “Borrower”) and Pioneer Intermediate, Inc. (the “Parent Borrower”), each of our wholly owned subsidiaries along with certain of their subsidiaries entered into
that certain Credit Agreement (the “Prior Credit Agreement,” and the facilities thereunder, the “
Prior Senior Secured Credit Facilities
”)
. The Prior Senior Secured Credit Facilities consisted of a term loan in the original principal amount of $
197.6
million
CAD (the “Prior Term Loan”) and a $27.8
million
CAD revolving credit facility (the “Prior Revolving Credit Facility”), of which $5.0
million
CAD was available for letters of credit and $5.0
million
CAD
was
available for swingline loans.
In connection with the IPO, we repaid all outstanding indebtedness under the Prior Term Loan.
See “Note 7.
Debt
” to our unaudited condensed consolidated financial statements for additional details of our Prior Senior Secured Credit Facilities.
New Senior Secured Credit Facility
On
May
4, 2017
,
we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with
Pioneer Investment, Inc.
,
as borrower (the “U
.
S
.
Borrower”), NCS Multistage Inc.,
as borrower (
the “Canadian Borrower”), Pioneer Intermediate, Inc.
(
together with the Company,
the “Parent Guarantor
s
”) and
the
lenders party thereto, Wells Fargo Bank, National Association as administrative agent in respect of the U.S. Facility (as defined below) and Wells Fargo Bank, National Association, Canadian Branch as administrative agent in respect of the Canadian Facility (as defined below) (the senior secured revolving credit facilities provided thereunder, the “New Senior Secured Credit Facilit
y
”).
The Credit Agreement amended and restated the Prior Credit Agreement in its entirety. The New Senior Secured Credit Facility will mature on
May
4, 2020.
The New Senior Secured Credit Facilit
y
originally
consist
ed
of a (i) senior secured revolving credit facility in an aggregate principal amount of $25.0
million
made available to the
U.S.
Borrower (the “U.S. Facility”), of which up to $5.0
million
may be made available for letters of credit and up to $5.0
million
may be made available for swingline loans and (ii) senior secured revolving credit facility in an aggregate principal amount of $25.0
million
made available to the Canadian Borrower (the “Canadian Facility”).
We entered into Amendment No. 1 to the Credit Agreement on
August
31, 2017 (the “Amendment”). The Amendment increased the loan commitment available to $50.0
million
from $25.0
million
under the U.S. Facility. The loan commitment available under the Canadian Facility remained at $25.0
million
. At
September
30, 2017
, we had $20.0
million
in outstanding indebtedness under the U.S. Facility.
Borrowings under the U.S. Facility may be made in U.S. dollars, Canadian dollars or Euros and bear interest at a rate equal to the Adjusted Base Rate or Eurocurrency Rate (each as defined in the Credit Agreement), in each case, plus an applicable interest margin as set forth in the Credit Agreement. Borrowings under the Canadian Facility may be made in U.S. dollars or Canadian dollars and
b
ear interest at the Canadian (Cdn) Base Rate, Canadian (U
.
S
.
) Base Rate
, Eurocurrency Rate
or Discount Rate (each as defined in the Credit Agreement), in each case, plus an applicable interest margin as set forth in the Credit Agreement.
The Adjusted Base Rate, Canadian (U.S.) Base Rate and Canadian (Cdn) Base Rate applicable margin will be between 2.25% and 3.00% and Eurocurrency Rate applicable margin will be between 3.25% and 4.00%, in each case, depending on our leverage ratio. The applicable interest rate at
September
30, 2017 was 5.50%.
The obligations of the U
.
S
.
Borrower under the U.S. Facility
are
guaranteed by the Parent Guarantors and each of the
other
existing and future direct and indirect restricted subsidiaries of the
Company
organized under the laws of the U
nited States
(subject to certain exceptions) and
are
secured by substantially all of the assets of the Parent Guarantors, the U
.
S
.
Borrower and such
other
subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. The obligations of the Canadian Borrower under the Canadian Facility
are
guaranteed by the Parent Guarantors, the U
.
S
.
Borrower and each of the future direct and indirect restricted subsidiaries of the
Company organized under the laws of the United States and Canada
(subject to certain exceptions) and
are
secured by substantially all of the assets of the Parent Guarantors, the U
.
S
.
Borrower, the Canadian Borrower and such subsidiary guarantors, if any, in each case, subject to certain exceptions and permitted liens.
The Credit Agreement contains financial covenants that require (i) commencing with the fiscal quarter ending
June
30, 2017, compliance with a leverage ratio test set at (A) 3.00 to 1.00 as of the last day of each fiscal quarter ending prior to
March
31, 2018 and (B) 2.50 to 1.00 as of the last day of each fiscal quarter ending on or after
March
31, 2018, (ii) commencing with the fiscal quarter ending
June
30, 2017, compliance with an interest coverage ratio test set at 2.75 to 1.00 as of the last day of each fiscal quarter, (iii) if the leverage ratio as of the end of any fiscal quarter is greater than 2.00 to 1.00 and the amount outstanding under the Canadian Facility at any time during such fiscal quarter was greater than $0, compliance as of the end
of such fiscal quarter
with a Canadian asset coverage ratio test set at 1.00 to 1.00 and (iv) if the leverage ratio as of the end of any fiscal quarter is greater than 2.00 to 1.00 and the amount outstanding under the U.S. Facility at any time during such fiscal quarter was greater than $0, compliance
as of the end of such fiscal quarter
with a U.S. asset coverage ratio test set at 1.00 to 1.00.
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.
As of
September
30, 2017
, we were in compliance with these covenants.
The Credit Agreement also includes customary events of default for facilities of this type (with customary grace periods, as applicable).
If an
event of default
occurs, the lenders under
each of the U.S. Facility and the Canadian Facility
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 under
each of the
U.S. Facility and the Canadian Facility
also have the right upon an event of default thereunder to terminate any commitments they have to provide further borrowings
under such facility
. Further, following an event of default under
each of the U.S. Facility and the Canadian Facility
, the lenders thereunder will have the right to proceed against the collateral granted to them to secure
such
facility
. If the debt under the New Senior Secured Credit Facilit
y
were to be accelerated, our assets may not be sufficient to repay in full that debt or any other debt that may become due as a result of that acceleration
.
Common Stock Offering
On
May
3, 2017
, we sold 9.5
million
shares of our common stock in a public offering at a price to the public of $
17.00
per share. We used the proceeds of $
148.9
million
, net of underwriting discounts
and other offering expenses
,
to repay indebtedness under our
Prior
Senior Secured Credit Facilities
.
After the repayment of indebtedness under our Prior Senior Secured Credit Facilities
, we
use
d
the remaining net proceeds
to acquire Spectrum on
August
31, 2017
. In addition,
o
n
May
3
, 2017, certain selling stockholders identified in the Prospectus sold
1.425
million
of their shares of our common stock in a public offering pursuant to the full exercise of
the over
-
allotment option granted to the underwriters in connection with the offering.
We
did
not receive any proceeds from the sale of shares by the selling stockholders.
Contractual Obligations
Except for the repayment of all outstanding indebtedness under the Prior Term Loan
, our borrowings under the New Senior Secured Credit Facility and the earn-outs for the acquisitions as discussed in “Note 2. Acquisitions”
in
our unaudited condensed consolidated financial statements
, there have been no material changes in our contractual obligations and commitments disclosed in the Prospectus
.
Off-Balance Sheet Arrangements
We have no off-balance sheet financing arrangements.
Critical Accounting Policies
Except for the new significant accounting policies as disclosed under
“Note 1. Basis of Presentation”
to our unaudited condensed consolidated financial statements
, there are no other material changes to our critical accounting policies
from those
included
in the Prospectus.
Recently Issued Accounting Pronouncements
See “Note 1. Basis of Presentation”
to our unaudited condensed consolidated financial statements
for discussion of the accounting pronouncements we recently adopted and the accounting pronouncements recently issued by the Financial Accounting Standards Board.
Jumpstart Our Business Act of 2012
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the earlier of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenue of at least $1.0
70
billion
, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0
million
as of the last business day of our most recently completed second fiscal quarter, and (2) the date on whic
h we have issued more than $1.0
billion
in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report contains forward-looking statements. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods, or by the inclusion of forecasts or projections. Examples of forward-looking statements include, but are not limited to, statements we make regarding the outlook for our future business and financial performance
.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause our actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:
|
·
|
|
declines in the level of oil and natural gas exploration and production activity within Canada and the United States;
|
|
·
|
|
oil and natural gas price fluctuations;
|
|
·
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loss of significant customers;
|
|
·
|
|
inability to successfully implement our strategy of increasing sales of products and services into the United States;
|
|
·
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|
significant competition for our products and services;
|
|
·
|
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our inability to successfully develop and implement new technologies, products and services;
|
|
·
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our inability to protect and maintain critical intellectual property assets;
|
|
·
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currency exchange rate fluctuations;
|
|
·
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impact of severe weather conditions;
|
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·
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restrictions on the availability of our customers to obtain water essential to the drilling and hydraulic fracturing processes;
|
|
·
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our failure to identify and consummate potential acquisitions;
|
|
·
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our
inability
to
integrate or realize the expected benefits from
acquisitions;
|
|
·
|
|
our inability to meet regulatory requirements for use of certain chemicals by our recently acquired tracer diagnostics business;
|
|
·
|
|
our inability to accurately predict customer demand;
|
|
·
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losses and liabilities from uninsured or underinsured drilling and operating activities;
|
|
·
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|
changes in legislation or regulation governing the oil and natural gas industry, including restrictions on emissions of GHGs;
|
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·
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failure to comply with federal, state and local and non-U.S. laws and other regulations
, including environmental regulations
;
|
|
·
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loss of our information and computer systems;
|
|
·
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system interruptions or failures, including cyber-security breaches, identity theft or other disruptions that could compromise our information;
|
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·
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our failure to establish and maintain effective internal control over financial reporting;
|
|
·
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our success in attracting and retaining qualified employees and key personnel; and
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·
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our inability to satisfy technical requirements and other specifications under contracts and contract tenders.
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For the reasons described above, as well as factors identified in “Item 1A. Risk Factors” in this Quarterly Report and the section of the Prospectus entitled “Risk Factors,” we caution you against relying on any forward-looking statements. Any forward-looking statement made by us in this
Quarterly Report on Form 10-Q
speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
Item 3. Qu
alitative and Quantitative Disclosures About Market Risk
Except as set forth below, there have been no material changes to our quantitative and qualitative disclosures about market risk compared to the quantitative and qualitative disclosure about market risk described in the Prospectus.
Foreign Currency Exchange Rate Risk
A substantial amount of our revenues are 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 U.S. dollars. The revenues attributable to our operations in Canada were
approximately
72%
and
69%
during the
three months ended
September
30, 2017
and
2016
, respectively, and were
approximately
65%
and
72%
for the
nine
months ended
September
30, 2017
and
2016
, respectively. W
e indirectly hedged our exposure to adverse changes in foreign currency exchange rates by having our Prior Senior Secured Credit Facilities denominated in Canadian dollars, which allowed us to have a significant amount of our fixed costs related to interest and principal payments denominated in Canadian dollars.
On
May
4, 2017
, we repaid the
Prior
Term Loan under our Prior Senior Secured Credit Facilities in full and entered into a New Senior Secured Facility, which include
d
a U.S. Facility and a Canadian Facility. We also may use foreign currency forward exchange contracts to hedge our future exposure to the Canadian dollar.
Interest Rate Risk
We were exposed to interest rate risk through our Prior Revolving Credit Facility and the Prior Term Loan under our Prior Senior Secured Credit Facilities. We repaid the Prior Term Loan under our Prior Senior Secured Credit Facilities
on
May
4, 2017
and entered into our New Senior Secured Credit Facility
, which is also subject to variable interest rates
.
The New Senior Secured Credit Facility consists of a
U.S. Facility and a Canadian Facility.
As of
September
30, 2017
, we had
$20.0 in
outstanding
indebtedness
under our
U.S. Facility.
Borrowings under the U.S. Facility may be made in U.S. dollars, Canadian dollars or Euros and will bear interest at a rate equal to the Adjusted
Base
Rate or Eurocurrency Rate (each as defined in the Credit Agreement), in each case, plus an applicable interest margin. Borrowings under the Canadian Facility may be made in U.S. dollars or Canadian dollars and will bear interest at the Canadian (Cdn) Base Rate, Canadian (U.S.) Base Rate, Eurocurrency Rate or Discount Rate (each as defined in the Credit Agreement), in each case, plus an applicable interest margin as set forth in the Credit Agreement.
The Adjusted Base Rate, Canadian (U.S.) Base Rate and Canadian (Cdn) Base Rate applicable margin will be between 2.25% and 3.00% and Eurocurrency Rate
applicable margin will be between 3.25% and 4.00%, in each case, depending on our leverage ratio.
The applicable interest rate at
September
30, 2017 was 5.50%.
Based on our outstanding debt as of
September
30,
201
7, and assuming that
it
remain
s
the same, the annualized effect of a one percentage point change in variable interest rates would have an annualized pre-tax impact on our earnings and cash flows of approximately $0.2
million
.
Item 4. Co
ntrols and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial
Officer
, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”))
as of the end of the period covered by this report.
D
isclosure controls and procedures
are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclos
ure.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
not
effective as of such date
due to the material weakness described below.
Material Weakness in Internal Control over Financial Reporting
In connection with the audit of our financial statements for the years ended
December
31, 2016 and 2015, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.
We determined that we did not design or maintain an effective control environment with a sufficient number of trained professionals with the appropriate level of accounting knowledge and experience to properly analyze, record and disclose accounting matters commensurate with our financial reporting requirements. This material weakness contributed to the following material weaknesses in our internal control over financial reporting:
|
·
|
|
We did not design and maintain sufficient
formal accounting policies and controls over income taxes. Specifically, we did not have controls designed to address the accuracy of income tax expense (benefit) and related consolidated balance sheet accounts, including deferred income taxes, as well as adequate procedures and controls to review the work of external experts engaged to assist in income tax matters related to our tax structure or to monitor the presentation and
disclosure
of income taxes.
|
|
·
|
|
We did not design
and maintain sufficient formal accounting policies and controls over the presentation of the statement of cash flows. Specifically, we did not have controls designed to properly classify cash flows related to our foreign
exchange
gains (losses) associated with our foreign denominated debt and deferred financing costs related to our extinguishment of debt.
|
|
·
|
|
We did not design and
maintain adequate controls to address segregation of duties related to journal entries and account
reconciliations
as certain accounting personnel have the ability to prepare and post journal entries, as well as reconcile accounts, without an independent review by someone other than the preparer. Specifically, our internal controls were not designed or operating effectively to evidence that journal entries were appropriately recorded or were properly reviewed for validity, accuracy and completeness
.
|
These material weaknesses resulted in the need to correct material misstatements in our consolidated financial statements for the years ended
December
31, 2014 and 2015 prior to their issuance. Each of the material weaknesses described above or any newly identified material weakness could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that would not be prevented or detected.
We have begun to remediate and plan to further remediate these material weaknesses primarily by implementing additional review procedures within the accounting and finance department, hiring additional staff and, if appropriate, engaging external accounting experts with the appropriate knowledge to supplement our internal resources in our computation and review processes. These actions and planned actions are subject to ongoing management review and the oversight of our board of directors. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the control deficiencies that led to our material weaknesses in our internal control over financial reporting or to avoid potential future material weaknesses. In addition, neither our management nor an independent registered public accounting firm has ever performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act, additional material weaknesses may have been identified. If we are unable to successfully remediate our existing or any future material weakness in our internal control over financial reporting, or identify any additional material weaknesses that may exist, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, we may be unable to prevent fraud, investors may lose confidence in our financial reporting,
and our stock price may decline as a result. Additionally, our reporting obligations as a public company could place a strain on our management, operational and financial resources and systems for the foreseeable future and may cause us to fail to timely achieve and maintain the adequacy of our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
We completed the acquisition of Spectrum Tracer Services, LLC on
August
31, 2017 and Repeat Precision, LLC on
February
1,
201
7, and we are integrating each into our internal control framework. This integration may lead to changes in our controls in future periods, but management does not expect these changes to materially affect our internal control over financial reporting
.
PA
RT II. OTHER INFORMATION
Ite
m 1. Legal Proceedings
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, product liability and employee matters.
Our management currently does not expect that the results of any of these legal proceedings, either individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows.
It
em 1A.
Risk Factors
There have been no material changes from the risk factors disclosed in the Prospectus
, except as set forth below:
We may not be able to meet applicable regulatory requirements for
our
use of certain chemicals by our recently acquired tracer
diagnostics
business
, and, even if requirements are met, complying on an ongoing basis with the numerous regulatory requirements will be time-consuming and costly.
The chemicals that we use in our recently acquired tracer
diagnostics
business may be subject to government regulation in our target markets. In the United States, the Environmental Protection Agency (the “EPA”) administers the Toxic Substances Control Act (the “TSCA”) which regulates the commercial registration, distribution, and use of many chemicals, including the chemicals we use in our tracer
diagnostics
business. Before we can manufacture or distribute significant volumes of a chemical, we need to determine whether that chemical is listed in the TSCA inventory. If the substance is listed, then manufacture or distribution can commence immediately. If not, then we must file a Pre-Manufacture Notice (“PMN”) with the EPA for review. Certain categories of chemical substances may be exempt from a full PMN review, including chemical substances that qualify for a Low Volume Exemption
(“LVE”)
. We have filed PMNs for certain chemicals, and have sought for and obtained
LVEs
for other chemicals, that we use in our tracer
diagnostics
business, and we may file additional PMNs or seek additional
LVE
s in the future. We may not be able to expediently receive approval from the EPA to list such chemicals on the TSCA inventory, resulting in delays in our ability to manufacture such chemicals, or significant increases in testing requirements.
In addition, even once we have a consent order from the EPA allowing us to manufacture PMN substances for our tracer
diagnostics
business, we remain subject to numerous regulatory requirements, including, as applicable, volume limitations that may impede us from producing sufficient quantities of such chemicals. Similar programs exist in most, if not all, of the countries in which we may seek to produce, import or use certain chemicals in our tracer
diagnostics
business, including compliance with regulations imposed in Canada by the Environment and Climate Change Canada/Health Canada. We cannot assure you that we will be able to obtain necessary approvals in a timely manner or at all. If we do not meet applicable regulatory requirements in a particular country for some chemicals, then we may not be able to commercialize those chemicals or tracers in such country, and our business
could
be adversely affected. Changes in regulatory requirements, laws and policies, or evolving interpretations of existing regulatory requirements, laws and policies, may result in increased compliance costs, delays, capital expenditures and other financial obligations that could adversely affect our business or financial results.
It
em 2. Unregistered Sales of Equity
Securities and Use of Proceeds
On
May
3, 2017, we completed our IPO of
9.5
million
shares of common stock at a price to the public of $
17.00
per share. In addition,
on
May
3
, 2017, certain selling stockholders identified in the Prospectus sold
1.425
million
of their shares of our common stock pursuant to the full exercise of the over
-
allotment option granted to the underwriters in
connection with the offering. W
e
did
not receive any proceeds from the sale of shares by the selling stockholders. The offer and sale of all the shares
of common stock
in the IPO were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No.
333-216580), which
was declared effective by the SEC on
April
27,
201
7. Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc. and Wells Fargo Securities, LLC acted as the representatives of the underwriter
s. We raised $
148.9
million
in net proceeds from the offering, after deducting underwriting discounts of $
10.1
million
and other offering expenses of $
2.5
million
.
All of the foregoing expenses were
direct or indirect payments to
persons other than (i) our directors, officers or any of their associates; (ii) persons owning 10% or more of our common stock; or (iii) our affiliates.
We used a portion of the net proceeds from the IPO to repay our indebtedness under our Prior Senior Secured Credit Facilities
.
After the repayment of indebtedness under our Prior Senior Secured Credit Facilities, we use
d
the remaining net proceeds from the IPO
to acquire Spectrum
on
August
31, 2017
.
On
August
31, 2017, in connection with the acquisition of Spectrum, we issued
0.4
million
shares of common stock of the Company, par value $0.01 per shar
e, to certain unitholders of Spectrum that elected to receive a portion of the consideration payable in equity. This issuance
was made in reliance upon an exemption from the registration requirements of the Securities Act
,
pursuant to Section 4(a)(2).
We did not pay or give, directly or indirectly, any commission or other remuneration, including underwriting
discounts or commissions, in connection with any of the issuances of securities listed above. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. All recipients had adequate access, through their employment or other relationship with us or through other access to information provided by us, to information about us. The sales of these securities were made without any general solicitation or advertising.
Item
6
.
Exhib
its
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|
|
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
2.1
|
|
Agreement and Plan of Merger by and among Spectrum Tracer Services, LLC, NCS Multistage Holdings, Inc., Pioneer Investment, Inc., Spartan Merger Sub, LLC and STSR LLC, dated as of
August
30, 2017 (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on
August
30, 2017).
|
|
10.1
|
|
NCS Multistage Holdings, Inc. Employee Stock Purchase Plan for U.S. Employees (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (File No. 333-220165) filed on
August
25, 2017).
|
|
10.2
|
|
NCS Multistage Holdings, Inc. Employee Stock Purchase Plan for Non-U.S. Employees (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (File No. 333-220165) filed on
August
25, 2017).
|
|
10.3
|
|
Contribution Agreement by and among NCS Multistage Holdings, Inc. and certain unitholders of Spectrum Tracer Services, LLC, as identified therein, dated as of
August
31, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on
September
1, 2017).
|
|
10.4
|
|
Amendment No. 1 to Amended and Restated Credit Agreement, dated as of
August
31, 2017, by and among NCS Multistage Holdings, Inc., Pioneer Intermediate, Inc., Pioneer Investment, Inc., as US Borrower, NCS Multistage Inc., as Canadian Borrower, Wells Fargo Bank, National Association, as US Administrative Agent, Issuing Lender and Swing Line Lender, Wells Fargo Bank, National Association, Canadian Branch, as Canadian Administrative Agent and the Lenders party thereto as Lenders (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on
September
1, 2017).
|
|
10.5
|
|
Amended and Restated Employment Agreement between NCS Multistage Holdings, Inc. and Robert Nipper, dated as of
August
3, 2017 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on
August
9, 2017).
|
|
10.6
|
|
Amended and Restated Employment Agreement between NCS Multistage Holdings, Inc. and Tim Willems, dated as of
August
3, 2017 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on
August
9, 2017).
|
|
10.7
|
|
Employment Agreement between NCS Multistage Holdings, Inc. and Ryan Hummer, dated as of
August
3, 2017 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on
August
9, 2017).
|
|
10.8
|
|
Amended and Restated Employment Agreement between NCS Multistage Holdings, Inc. and Wade Bitter, dated as of
August
3, 2017 (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on
August
9, 2017).
|
|
10.9
|
|
Form of Stock Option Award Agreement under the 2017 Equity Incentive Plan for executive officers (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed on
August
9, 2017).
|
|
10.10
|
|
Form of Restricted Stock Unit Award Agreement under the 2017 Equity Incentive Plan for executive officers (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed on
August
9, 2017).
|
*
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
*
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
**
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
**
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
***
|
101.INS
|
|
XBRL Instance Document
|
***
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
***
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
***
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
***
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
***
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
|
|
|
|
*
|
Filed herewith.
|
**
|
Furnished herewith.
|
***
|
Submitted electronically with this Report.
|
SIGN
ATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the und
ersigned thereunto duly authorized.
|
|
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Date:
November
14
, 2017
|
|
NCS Multistage Holdings, Inc.
|
|
|
|
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|
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By:
|
/s/ Robert Nipper
|
|
|
|
Robert Nipper
|
|
|
|
Chief Executive Officer
|
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|
|
|
|
|
(Principal Executive Officer and Authorized
|
|
|
|
Signatory)
|