0001692427-18-000048.txt : 20181107 0001692427-18-000048.hdr.sgml : 20181107 20181107163443 ACCESSION NUMBER: 0001692427-18-000048 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 71 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181107 DATE AS OF CHANGE: 20181107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NCS Multistage Holdings, Inc. CENTRAL INDEX KEY: 0001692427 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 461527455 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38071 FILM NUMBER: 181166825 BUSINESS ADDRESS: STREET 1: 19450 STATE HIGHWAY 249 STREET 2: SUITE 200 CITY: HOUSTON STATE: TX ZIP: 77070 BUSINESS PHONE: 281-453-2222 MAIL ADDRESS: STREET 1: 19450 STATE HIGHWAY 249 STREET 2: SUITE 200 CITY: HOUSTON STATE: TX ZIP: 77070 10-Q 1 ncsm-20180930x10q.htm 10-Q 20180930 10-Q Q3

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2018

OR

Transition Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the transition period from   ______  to  ______

Commission file number: 001-38071



NCS Multistage Holdings, Inc.

(Exact name of registrant as specified in its charter)



 

 

 

 



Delaware

 

46-1527455

 



(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification number)

 



 

 

 

 



19450 State Highway 249, Suite 200

 

 

 



Houston, Texas

 

77070

 



(Address of principal executive offices)

 

(Zip Code)

 



Registrant’s telephone number, including area code: (281) 453-2222

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 

 

 

 

 



Large accelerated filer

Accelerated filer

 



Non-accelerated filer

 

Smaller reporting company

 



 

 

Emerging growth company

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes    No 

As of November 5, 2018, there were 45,010,626 shares of common stock outstanding.



 



 


 

 

 

Table of Contents    

 

TABLE OF CONTENTS





 

 

 

 

 

 

 

 

 



 

Page

PART I. FINANCIAL INFORMATION



 

 

Item 1.

Financial Statements (Unaudited)

 



Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

3



Condensed Consolidated Statements of Income 

 



for the Three and Nine Months Ended September 30, 2018 and 2017

4



Condensed Consolidated Statements of Comprehensive Income

 



for the Three and Nine Months Ended September 30, 2018 and 2017

5



Condensed Consolidated Statements of Stockholders’ Equity

 



for the Nine Months Ended September 30, 2018 and 2017

6



Condensed Consolidated Statements of Cash Flows

 



for the Nine Months Ended September 30, 2018 and 2017

7



Notes to Unaudited Condensed Consolidated Financial Statements

8



 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36



 

 

Item 4.

Controls and Procedures

36



 

 

PART II. OTHER INFORMATION



 

 

Item 1.

Legal Proceedings

37 



 

 

Item 1A.

Risk Factors

37 



 

 

Item 6.

Exhibits 

39 



 

 

Signatures

40 









 



 

 

2


 

 

 

Table of Contents    

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  Financial Statements

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)











 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2018

 

2017

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

27,440 

 

$

33,809 

Accounts receivable—trade, net

 

 

58,002 

 

 

47,880 

Inventories

 

 

32,493 

 

 

33,135 

Prepaid expenses and other current assets

 

 

3,759 

 

 

1,616 

Other current receivables

 

 

4,827 

 

 

1,369 

Total current assets

 

 

126,521 

 

 

117,809 

Noncurrent assets

 

 

 

 

 

 

Property and equipment, net

 

 

29,509 

 

 

23,651 

Goodwill

 

 

181,500 

 

 

184,478 

Identifiable intangibles, net

 

 

126,853 

 

 

136,412 

Deposits and other assets

 

 

1,393 

 

 

1,563 

Total noncurrent assets

 

 

339,255 

 

 

346,104 

Total assets

 

$

465,776 

 

$

463,913 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable—trade

 

$

12,921 

 

$

7,448 

Accrued expenses

 

 

4,225 

 

 

6,673 

Income taxes payable

 

 

119 

 

 

10,561 

Current contingent consideration

 

 

9,830 

 

 

 —

Other current liabilities

 

 

2,921 

 

 

1,673 

Current maturities of long-term debt

 

 

2,530 

 

 

5,334 

Total current liabilities

 

 

32,546 

 

 

31,689 

Noncurrent liabilities

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

23,052 

 

 

21,702 

Noncurrent contingent consideration

 

 

 —

 

 

12,835 

Other long-term liabilities

 

 

1,232 

 

 

4,513 

Deferred income taxes, net

 

 

20,912 

 

 

24,183 

Total noncurrent liabilities

 

 

45,196 

 

 

63,233 

Total liabilities

 

 

77,742 

 

 

94,922 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, one share issued and outstanding at

 

 

 

 

 

 

September 30, 2018 and December 31, 2017, respectively

 

 

 —

 

 

 —

Common stock, $0.01 par value, 225,000,000 shares authorized, 45,038,934 shares issued

 

 

 

 

 

 

and 45,010,626 shares outstanding at September 30, 2018 and 43,931,484 shares issued

 

 

 

 

 

 

and 43,913,136 shares outstanding at December 31, 2017

 

 

450 

 

 

439 

Additional paid-in capital

 

 

408,613 

 

 

399,426 

Accumulated other comprehensive loss

 

 

(73,260)

 

 

(66,707)

Retained earnings

 

 

37,359 

 

 

23,864 

Treasury stock, at cost; 28,308 shares at September 30, 2018 and 18,348 shares

 

 

 

 

 

 

at December 31, 2017

 

 

(337)

 

 

(175)

Total stockholders’ equity

 

 

372,825 

 

 

356,847 

Non-controlling interest

 

 

15,209 

 

 

12,144 

Total equity

 

 

388,034 

 

 

368,991 

Total liabilities and stockholders' equity

 

$

465,776 

 

$

463,913 



 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 


 

 

 

Table of Contents    

 

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

44,633 

 

$

39,391 

 

$

122,514 

 

$

114,362 

Services

 

 

18,058 

 

 

16,566 

 

 

54,261 

 

 

37,088 

Total revenues

 

 

62,691 

 

 

55,957 

 

 

176,775 

 

 

151,450 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sales, exclusive of depreciation
    and amortization expense shown below

 

 

20,275 

 

 

19,326 

 

 

57,600 

 

 

59,774 

Cost of services, exclusive of depreciation
    and amortization expense shown below

 

 

8,542 

 

 

6,632 

 

 

24,721 

 

 

14,423 

Total cost of sales, exclusive of depreciation
    and amortization expense shown below

 

 

28,817 

 

 

25,958 

 

 

82,321 

 

 

74,197 

Selling, general and administrative expenses

 

 

19,356 

 

 

17,637 

 

 

62,508 

 

 

46,572 

Depreciation

 

 

1,174 

 

 

812 

 

 

3,429 

 

 

2,054 

Amortization

 

 

3,255 

 

 

6,486 

 

 

9,859 

 

 

18,481 

Change in fair value of contingent consideration

 

 

(1,865)

 

 

(182)

 

 

(3,005)

 

 

585 

Income from operations

 

 

11,954 

 

 

5,246 

 

 

21,663 

 

 

9,561 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(317)

 

 

(235)

 

 

(1,382)

 

 

(3,751)

Other income, net

 

 

28 

 

 

94 

 

 

68 

 

 

1,132 

Foreign currency exchange (loss) gain

 

 

(688)

 

 

(787)

 

 

(399)

 

 

224 

Total other expense

 

 

(977)

 

 

(928)

 

 

(1,713)

 

 

(2,395)

Income before income tax

 

 

10,977 

 

 

4,318 

 

 

19,950 

 

 

7,166 

Income tax expense

 

 

3,211 

 

 

777 

 

 

3,137 

 

 

2,022 

Net income

 

 

7,766 

 

 

3,541 

 

 

16,813 

 

 

5,144 

Net income (loss) attributable to non-controlling interest

 

 

1,443 

 

 

155 

 

 

3,565 

 

 

(301)

Net income attributable to
    NCS Multistage Holdings, Inc.

 

$

6,323 

 

$

3,386 

 

$

13,248 

 

$

5,445 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share attributable to
    NCS Multistage Holdings, Inc.

 

$

0.14 

 

$

0.07 

 

$

0.29 

 

$

0.13 

Diluted earnings per common share attributable to
    NCS Multistage Holdings, Inc.

 

$

0.13 

 

$

0.07 

 

$

0.28 

 

$

0.13 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44,943 

 

 

43,676 

 

 

44,660 

 

 

39,329 

Diluted

 

 

47,404 

 

 

47,119 

 

 

47,254 

 

 

42,537 



 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 


 

 

 

Table of Contents    

 

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Net income

 

$

7,766 

 

$

3,541 

 

$

16,813 

 

$

5,144 

Foreign currency translation adjustments, net of tax of $0

 

 

4,371 

 

 

9,504 

 

 

(6,553)

 

 

17,097 

Comprehensive income

 

 

12,137 

 

 

13,045 

 

 

10,260 

 

 

22,241 

Less: Comprehensive income (loss) attributable to non-controlling interest

 

 

1,443 

 

 

155 

 

 

3,565 

 

 

(301)

Comprehensive income attributable to NCS Multistage Holdings, Inc.

 

$

10,694 

 

$

12,890 

 

$

6,695 

 

$

22,542 



 



 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

 


 

 

 

Table of Contents    

 

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine Months Ended September 30, 2017



 

Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Accumulated
Other
Comprehensive

 

Retained

 

Treasury Stock

 

Non-controlling

 

Total

Stockholders'



 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

(Loss) Income

 

Earnings

 

Shares

 

Amount

 

Interest

 

Equity

Balances as of

 December 31, 2016

 

 

$

 —

 

34,024,326 

 

$

340 

 

$

237,566 

 

$

(82,015)

 

$

21,762 

 

(18,348)

 

$

(175)

 

$

 —

 

$

177,478 

Acquisition

 

 —

 

 

 —

 

355,658 

 

 

 

 

6,903 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

12,954 

 

 

19,861 

Share-based

  compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,889 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

3,889 

Net income (loss)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,445 

 

 —

 

 

 —

 

 

(301)

 

 

5,144 

Issuance of common

  stock upon IPO, net

  of offering costs

 

 —

 

 

 —

 

9,550,000 

 

 

95 

 

 

148,841 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

148,936 

Currency translation

  adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

17,097 

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

17,097 

Balances as of

  September 30, 2017

 

 

$

 —

 

43,929,984 

 

$

439 

 

$

397,199 

 

$

(64,918)

 

$

27,207 

 

(18,348)

 

$

(175)

 

$

12,653 

 

$

372,405 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine Months Ended September 30, 2018



 

Preferred Stock

 

Common Stock

 

Additional
Paid-In

 

Accumulated
Other
Comprehensive

 

Retained

 

Treasury Stock

 

Non-controlling

 

Total

Stockholders'



 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Loss

 

Earnings

 

Shares

 

Amount

 

Interest

 

Equity

Balances as of

  December 31, 2017

 

 

$

 —

 

43,931,484 

 

$

439 

 

$

399,426 

 

$

(66,707)

 

$

23,864 

 

(18,348)

 

$

(175)

 

$

12,144 

 

$

368,991 

Adoption of ASC 606

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

247 

 

 —

 

 

 —

 

 

 —

 

 

247 

Share-based

  compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

8,197 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

8,197 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,248 

 

 —

 

 

 —

 

 

3,565 

 

 

16,813 

Distribution to

  noncontrolling

  interest

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(500)

 

 

(500)

Exercise of stock

  options

 

 —

 

 

 —

 

628,417 

 

 

 

 

994 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,001 

Vesting of restricted

  stock

 

 —

 

 

 —

 

36,721 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Shares withheld

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(9,960)

 

 

(162)

 

 

 —

 

 

(162)

Cemblend exchangeable

  shares

 

 —

 

 

 —

 

442,312 

 

 

 

 

(4)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

Currency translation

  adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(6,553)

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(6,553)

Balances as of

  September 30, 2018

 

 

$

 —

 

45,038,934 

 

$

450 

 

$

408,613 

 

$

(73,260)

 

$

37,359 

 

(28,308)

 

$

(337)

 

$

15,209 

 

$

388,034 



 



 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6

 


 

 

 

Table of Contents    

 

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)





 

 

 

 

 

 



 

Nine Months Ended



 

September 30,



 

2018

 

2017

Cash flows from operating activities

 

 

 

Net income

 

$

16,813 

 

$

5,144 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

13,288 

 

 

20,535 

Amortization of deferred loan cost

 

 

251 

 

 

360 

Share-based compensation

 

 

8,197 

 

 

3,889 

Provision for inventory obsolescence

 

 

1,219 

 

 

 —

Deferred income tax benefit

 

 

(2,148)

 

 

(12,902)

Gain on sale of property and equipment

 

 

(39)

 

 

(40)

Foreign exchange gain on financing item

 

 

 —

 

 

(1,760)

Write-off of deferred loan costs

 

 

 —

 

 

1,422 

Change in fair value of contingent consideration

 

 

(3,005)

 

 

585 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable—trade

 

 

(10,787)

 

 

(16,101)

Inventories

 

 

(1,529)

 

 

(12,690)

Prepaid expenses and other assets

 

 

(2,237)

 

 

(169)

Accounts payable—trade

 

 

6,959 

 

 

(983)

Accrued expenses

 

 

(2,371)

 

 

3,531 

Other liabilities

 

 

816 

 

 

129 

Income taxes receivable/payable

 

 

(17,812)

 

 

11,919 

Net cash provided by operating activities

 

 

7,615 

 

 

2,869 

Cash flows from investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(7,352)

 

 

(5,332)

Purchase and development of software and technology

 

 

(2,588)

 

 

 —

Proceeds from sales of property and equipment

 

 

298 

 

 

181 

Proceeds from short-term note receivable

 

 

 —

 

 

1,000 

Acquisition of business, net of cash acquired

 

 

 —

 

 

(80,928)

Net cash used in investing activities

 

 

(9,642)

 

 

(85,079)

Cash flows from financing activities

 

 

 

 

 

 

Equipment note borrowings

 

 

1,001 

 

 

1,533 

Payments on equipment note and capital leases

 

 

(1,437)

 

 

(158)

Promissory note borrowings

 

 

5,053 

 

 

6,541 

Payments on promissory note

 

 

(8,366)

 

 

(3,661)

Line of credit borrowings

 

 

 —

 

 

20,000 

Payment of deferred loan cost related to senior secured credit facility

 

 

 —

 

 

(971)

Payments related to public offering

 

 

 —

 

 

(2,178)

Proceeds from related party note receivable

 

 

 —

 

 

752 

Repayment of term note

 

 

 —

 

 

(89,077)

Proceeds from issuance of common stock, net of offering costs

 

 

 —

 

 

151,356 

Proceeds from the exercise of options for common stock

 

 

1,001 

 

 

 —

Treasury shares withheld

 

 

(161)

 

 

 —

Distribution to noncontrolling interest

 

 

(500)

 

 

 —

Net cash (used in) provided by financing activities

 

 

(3,409)

 

 

84,137 

Effect of exchange rate changes on cash and cash equivalents

 

 

(933)

 

 

20 

Net change in cash and cash equivalents

 

 

(6,369)

 

 

1,947 

Cash and cash equivalents beginning of period

 

 

33,809 

 

 

18,275 

Cash and cash equivalents end of period

 

$

27,440 

 

$

20,222 

Supplemental cash flow information

 

 

 

 

 

 

Cash paid for income taxes (net of refunds)

 

$

22,922 

 

$

3,350 

Noncash investing and financing activities

 

 

 

 

 

 

Issuance of common stock for business acquisition

 

$

 —

 

$

6,907 

Assets obtained by entering into capital leases

 

$

2,433 

 

$

459 

















 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

NCS MULTISTAGE HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 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.



Basis of Presentation



Our accompanying unaudited condensed consolidated financial statements 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 8 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, 2017 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 our Annual Report on Form 10-K filed with the SEC on March 9, 2018. 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.



Summary of New Significant Accounting Policy



Intangible Assets



Certain costs incurred in the development of internal-use software applications are capitalized and costs incurred outside of the software application development stage are expensed as incurred. The amounts capitalized are included in intangibles, categorized as internally developed software, and will be amortized on a straight-line basis over the estimated useful life of the software, which is five years. We will begin to amortize internal-use software when it is ready for its intended use.



Recent Accounting Pronouncements



Pronouncements Adopted in 2018



In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). The ASU is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718 to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU is for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606, Revenue from Contracts with Customers. We elected to early adopt this ASU effective April 1, 2018. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements.



In January 2017, 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 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. We adopted ASU 2017-01 effective January 1, 2018, which did not have a material impact on our condensed consolidated financial statements.



In August 2016, 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

 

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NCS MULTISTAGE HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 adopted ASU 2016-15 effective January 1, 2018, which did not have a material impact on our condensed consolidated financial statements.



In May 2014, 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 supersedes existing revenue recognition guidance and requires 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. On January 1, 2018, we adopted ASU 2014-09 and its related amendments (collectively known as Accounting Standards Codification “ASC 606”), using the modified retrospective method. We have concluded that the adoption of this ASU did not have a material impact on our condensed consolidated financial statements. See “Note 2. Revenue” for the required disclosures related to the impact of adopting this standard.



Pronouncements Not Yet Effective



In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). The ASU aligns the requirements to capitalize implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements to capitalize implementation costs incurred to develop or obtain internal-use software. For public entities, this guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact of the adoption of this guidance. 



In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The ASU modifies, removes and adds certain disclosure requirements on fair value measurements. For public entities, this guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted for all amendments. Further, entities may early adopt eliminated or modified disclosure requirements and delay the adoption of all new disclosure requirements until the effective date. We are currently evaluating the impact of the adoption of this guidance. 



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which replaces the existing guidance in ASC 840, Leases. Under ASC 842, lessees will need to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new lease standard also changes the definition of a lease and requires expanded quantitative and qualitative disclosures for both lessees and lessors. Topic 842 was subsequently amended to address certain aspects regarding the new lease standard in addition to offering a new transition method, whereby comparative periods presented in the financial statements in the period of adoption do not need to be restated. Entities are required to adopt ASC 842 using a modified retrospective transition method. Certain practical expedients can be applied. The new standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We plan to adopt ASC 842 effective January 1, 2019 and are currently assessing the impact of the adoption. During the second quarter of 2018, we put in place a team, including a third-party consultant, to execute the transition efforts related to the new guidance. We compiled an initial inventory of lease contracts and initiated lease contract reviews. We continue to take steps to update the lease contract inventory and will proceed through our plan for calculations needed for the balance sheet and income statement as well as evaluate additional changes to our business processes and internal controls. While we cannot currently estimate the quantitative effect that ASC 842 will have on our condensed consolidated financial statements, the adoption of ASC 842 will increase our asset and liability balances on the condensed consolidated balance sheets due to the required recognition of right-of-use assets and corresponding lease liabilities for most lease obligations that are currently classified as operating leases. We also plan to utilize the FASB package of three practical expedients under ASC 842-10-65-1(f).

 

Note 2.  Revenues



On January 1, 2018, we adopted ASC 606 and elected to use the modified retrospective method for all contracts not completed as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition. In accordance with ASC 606, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services if certain criteria are met.



 

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NCS MULTISTAGE HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Financial Statement Impact of Adopting ASC 606



The cumulative effect of the changes made to our condensed consolidated balance sheet at January 1, 2018 for the adoption of ASC 606 using the modified retrospective method was as follows (in thousands):



[







 

 

 

 

 

 

 

 

 

 



 

 

Balance at

 

Adjustments

 

 

 



 

 

December 31,

 

due to

 

Balance at



 

 

2017

 

ASC 606

 

January 1, 2018

Assets

 

 

 

 

 

 

 

 

 

 

Accounts receivable—trade, net

 

 

$

47,880 

 

$

313 

 

$

48,193 



 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Income taxes payable

 

 

$

10,561 

 

$

66 

 

$

10,627 



 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

$

23,864 

 

$

247 

 

$

24,111 



The following tables compare the reported condensed consolidated balance sheet as of September 30, 2018 and statements of income for the three and nine months ended September 30, 2018, to the balances without the adoption of ASC 606 (in thousands):







 

 

 

 

 

 

 

 

 

 



 

 

As of September 30, 2018



 

 

 

 

Balances

 

Effect of



 

 

 

 

without Adoption

 

Change



 

 

As Reported

 

of ASC 606

 

Higher/(Lower)

Balance Sheet

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Accounts receivable—trade, net

 

 

$

58,002 

 

$

57,766 

 

$

236 



 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Income taxes payable

 

 

$

119 

 

$

69 

 

$

50 



 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

$

37,359 

 

$

37,173 

 

$

186 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018



 

 

 

 

Balances

 

 

 

 

 

Balances

 

 



 

 

 

 

without Adoption

 

Effect of Change

 

 

 

without Adoption

 

Effect of Change



 

 

As Reported

 

of ASC 606

 

Higher/(Lower)

 

As Reported

 

of ASC 606

 

Higher/(Lower)

Income Statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Services

 

 

$

18,058 

 

$

17,981 

 

$

77 

 

$

54,261 

 

$

54,338 

 

$

(77)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

$

3,211 

 

$

3,195 

 

$

16 

 

$

3,137 

 

$

3,153 

 

$

(16)

Net income

 

 

$

7,766 

 

$

7,705 

 

$

61 

 

$

16,813 

 

$

16,874 

 

$

(61)

Net income attributable to NCS Multistage Holdings, Inc.

 

 

$

6,323 

 

$

6,262 

 

$

61 

 

$

13,248 

 

$

13,309 

 

$

(61)



Revenue Recognition



We derive our revenues primarily from highly engineered products and support services. Revenues are based upon a purchase order, contract or other persuasive evidence of an arrangement with the customer that includes a fixed or determinable price, provided that collectability is reasonably assured, but such arrangements do not generally include right of return or other similar provisions or other significant post-delivery obligations. Sales and value added taxes that we collect concurrent with revenue-producing activities are excluded from revenue. We determine revenue recognition through the following steps: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price and (v) satisfy the performance obligation.

 

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NCS MULTISTAGE HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 



On occasion, we issue credits to our customers that are related specifically to the performance of our products or the services we provide, with such credits reducing the amount of revenue for that sale or job. Such credits are infrequent, situation-specific and cannot be estimated in advance. 



The payment terms and conditions in our customer contracts vary. We do not have contracts that contain a financing component and do not accept noncash consideration from customers.



NCS has elected to recognize shipping and handling costs when the control of the product transfers to the customer. These costs are included in cost of sales in our condensed consolidated statements of income. 



Product Sales Revenues



For product sale arrangements that are standard inventory products or modified inventory products with an alternative use, revenue is recognized at a point in time when control transfers. Control generally transfers upon shipment or delivery, and delivery is based on the customer instructions. Customers may also request bill and hold arrangements in writing. Once we have completed the bill and hold order, the products are segregated from the rest of inventory in the warehouse. The transaction price for product sales having a performance obligation is the price per unit times the unit quantity ordered and shipped to the customer or consumed at the well site.



Services Revenue



For service arrangements that do not have a contract provision with a right to a payment for services up to the date of termination, revenue is recognized when the job has been completed, which usually includes a customer signature or acknowledgement and when there are no additional services or future obligations required by us. The transaction price is determined by the contract unit day rate times the cumulative number of days of service provided upon the completion of the service and upon customer acceptance.



For service arrangements that do have a contract provision with a right to payment for services up to the date of termination, revenue is recognized over time using a unit rate (labor and materials) output method that corresponds to the value we would receive upon termination of the contract at a reporting period. In applying the output method at the end of a quarter, we check that there is no material work in progress that is not in the measurement of the output. The transaction price for the period end is determined by the contract unit rate times the cumulative number of units earned up to the reporting period less any revenue recognized in prior periods.



 

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NCS MULTISTAGE HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Disaggregation of Revenue



We sell our products and services primarily in North America and in selected international markets. Revenue by geography is attributed based on the current billing address of the customer. The following table depicts the disaggregation of revenue by geographic region (in thousands):







 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2018

United States

 

 

 

 

 

 

Product sales

 

$

18,125 

 

$

48,011 

Services

 

 

8,157 

 

 

27,976 

Total United States

 

 

26,282 

 

 

75,987 

Canada

 

 

 

 

 

 

Product sales

 

 

21,215 

 

 

67,653 

Services

 

 

7,958 

 

 

22,567 

Total Canada

 

 

29,173 

 

 

90,220 

Other Countries

 

 

 

 

 

 

Product sales

 

 

5,293 

 

 

6,850 

Services

 

 

1,943 

 

 

3,718 

Total Other Countries

 

 

7,236 

 

 

10,568 

Total

 

 

 

 

 

 

Product sales

 

 

44,633 

 

 

122,514 

Services

 

 

18,058 

 

 

54,261 

Total

 

$

62,691 

 

$

176,775 



Contract Balances



When the timing of the delivery of products and provision of services is different from the timing of the customer payments, we recognize either a contract asset (performance precedes contractual due date in connection with estimates of variable consideration) or a contract liability (customer payment precedes performance) on our condensed consolidated balance sheet. The following table includes the contract assets and liabilities as of September 30, 2018 and January 1, 2018 (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

Contract Assets

 

Contract Liabilities



 

Current

 

Non-Current

 

Current

 

Non-Current

Balance at January 1, 2018

 

$

 —

 

$

 —

 

$

170 

 

$

 —

Additions

 

 

 —

 

 

 —

 

 

372 

 

 

 —

Revenue recognized

 

 

 —

 

 

 —

 

 

(221)

 

 

 —

Balance at September 30, 2018

 

$

 —

 

$

 —

 

$

321 

 

$

 —



Our contract liability as of September 30, 2018 is included in current liabilities on our condensed consolidated balance sheet. Our performance obligations for our product and service revenues are usually satisfied before the customer’s payment although prepayments may occasionally be required for international sales.  



Contracts with Multiple Performance Obligations



Greater than 99% of our product and service revenues are considered a single performance obligation. Our self-service product line, which is less than one percent of our revenue for the three and nine months ended September 30, 2018, is made up of two performance obligations: (i) the delivery of tracer materials to a customer well site and (ii) the creation of diagnostic reports ordered by customers when we do not perform an integrated service. For these contracts, we do not allocate the transaction price as the individual performance obligations are sold at standalone prices in the customer order. The transaction prices for our self-service product line that have two performance obligations are (i) the price per unit times the quantity of tracer materials and (ii) prices charged for diagnostic reports ordered by and delivered to the customer.



 

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NCS MULTISTAGE HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Practical Expedients and Exemptions



We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.



We do not disclose the value of unsatisfied performance obligations when the related contract has a duration of one year or less or we recognize revenue equal to what we have the right to invoice when that amount corresponds directly with the value to the customer of our performance to date. 

 

Note 3.  Acquisitions



Spectrum Tracer Services



On August 31, 2017, we acquired 100% of the equity interests in Spectrum Tracer Services, LLC (“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 Senior Secured Credit Facility (as defined below). We believe Spectrum’s tracer diagnostics services offering strengthens 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 additional cash consideration to Spectrum’s former unitholders if Spectrum’s actual gross profit during the earn-out period that commenced 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. We estimated the fair value of the earn-out using a risk-neutral option pricing analysis within a Monte Carlo simulation framework. The earn-out is subject to re-measurement each reporting period using Level 3 inputs until it has been paid. Subsequent changes in the fair value of the liability are reflected in our condensed consolidated statements of income as a change in fair value of contingent consideration. As of September 30, 2018, the earn-out had no value. As of December 31, 2017, the earn-out had a value of $3.4 million and was included in noncurrent contingent consideration on the condensed consolidated balance sheet. We recognized a benefit of $(2.0) million and $(9) thousand during the three months ended September 30, 2018 and 2017, respectively, and  $(3.4) million and $(9) thousand for the nine months ended September 30, 2018 and 2017, respectively, as a change in fair value of contingent consideration expense in the condensed consolidated statements of income related to the fair value adjustment of the Spectrum earn-out. The cash payment, if any, is expected to be paid during the second quarter of 2019.



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. 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 unaudited selected financial information on a pro forma basis (in thousands, except per share data):







 

 

 

 

 

 



 

Pro Forma (Unaudited)



 

Three Months Ended

 

Nine Months Ended



 

September 30, 2017

 

September 30, 2017

Revenue

 

$

61,516 

 

$

170,294 

Net income attributable to NCS Multistage Holdings, Inc.

 

$

1,971 

 

$

5,625 



The purchase price is allocated to the estimated fair value of assets acquired and liabilities assumed as of the acquisition date. Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets recognized. By combining Spectrum’s tracer diagnostics services offering with our existing portfolio of completions products and services, we believe we have an opportunity to increase our revenue through the cross-selling of tracer diagnostics services to current NCS customers and to sell NCS’s completions products and services to current Spectrum customers. This expected synergy gives rise to goodwill being recorded as part of the purchase price of Spectrum. The purchase price allocation was finalized during the third quarter of 2018. We have recognized $40.2 million of goodwill as a result of the transaction of which approximately $6 million, including deferred taxes, will be

 

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NCS MULTISTAGE HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

non-deductible for tax purposes. We also incurred acquisition costs of $0.7 million related to this acquisition during the nine months ended September 30, 2017, which was included in general and administrative expense on our condensed consolidated statements of income.



The following table summarizes the consideration and the assets acquired at the Spectrum closing date (in thousands):







 

 

 

Consideration

 

 

 

Cash consideration

 

$

76,485 

Equity consideration

 

 

6,907 

Earn-out liability recognized

 

 

352 

Total consideration

 

$

83,744 

Preliminary purchase price allocation

 

 

 

Cash

 

$

1,326 

Accounts receivable

 

 

4,648 

Inventories

 

 

3,761 

Other current assets

 

 

480 

Property and equipment

 

 

4,725 

Intangible assets

 

 

31,900 

Other long-term assets

 

 

26 

Total identifiable assets acquired

 

 

46,866 

Accounts payable—trade

 

 

454 

Accrued expenses

 

 

436 

Income taxes payable

 

 

228 

Other current liabilities

 

 

44 

Deferred tax liability

 

 

1,010 

Other long-term liabilities

 

 

1,191 

Total liabilities assumed

 

 

3,363 

Net identifiable assets acquired

 

 

43,503 

Goodwill

 

 

40,241 

Net assets acquired

 

$

83,744 



The amount allocated to intangible assets was attributed to the following categories (in thousands):







 

 

 

 

 

 



 

 

 

 

 

Estimated Useful



 

Fair Value

 

 

Lives (Years)

Technology

 

$

5,600 

 

 

16

Trademarks

 

 

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 income.  Amortization expense for the intangible assets for the Spectrum acquisition was $0.4 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively, and $1.3 million and $0.1 million for the nine months ended September 30, 2018 and 2017, respectively.



Repeat Precision



On February 1, 2017, we acquired a 50% interest in Repeat Precision for $6.0 million. Historically, the business had 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 composite frac plugs and related products, providing