UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 8-K/A

CURRENT REPORT



Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



August 31, 2017

Date of Report (Date of earliest event reported)



NCS Multistage Holdings, Inc.

(Exact name of Registrant as specified in its charter)





19450 State Highway 249, Suite 200

Houston, Texas 77070

(Address of principal executive offices) (Zip code)



(281) 453-2222

(Registrant’s telephone number, including area code)



Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:





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Introductory Note



As previously reported on a Current Report on Form 8-K originally filed by NCS Multistage Holdings, Inc. (the “Company”) on September 1, 2017 (the “Original Form 8-K”), pursuant to that certain Agreement and Plan of Merger, dated as of August 30, 2017 (the “Merger Agreement”), by and among Spectrum Tracer Services, LLC, an Oklahoma limited liability company (“Spectrum”), the Company, Pioneer Investment, Inc., a Delaware corporation and indirect wholly owned subsidiary of the Company (“Pioneer Investment”), Spartan Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of Pioneer Investment (“Merger Sub”) and STSR LLC, an Oklahoma limited liability company, solely in its capacity as the Representative (as defined in the Merger Agreement), the Company acquired Spectrum through the merger of Merger Sub with and into Spectrum, with Spectrum continuing as the surviving entity and an indirect wholly owned subsidiary of the Company (the “Merger”).



This amendment to the Original Form 8-K (this “Form 8-K/A”) is being filed by the Company solely to amend and supplement Item 9.01 of the Original Form 8-K to provide financial statements and pro forma financial information required by Item 9.01 (a) and (b) of Form 8-K, which were not previously filed with the Original Form 8-K. Any information required to be set forth in the Original Form 8-K which is not being amended or supplemented pursuant to this Form 8-K/A is hereby incorporated by reference. Except as set forth herein, no modifications have been made to the information contained in the Original Form 8-K and the Company has not updated any information contained therein to reflect events that have occurred since the date of the Original Form 8-K. Accordingly, this Form 8-K/A should be read in conjunction with the Original Form 8-K.





(a) Financial statements of businesses acquired.



Audited consolidated financial statements of Spectrum as of December 31, 2016 and for the year then ended and unaudited consolidated financial statements of Spectrum as of June 30, 2017 and for the six months ended June 30, 2017 and 2016 are attached hereto and filed as Exhibit 99.1 and 99.2, respectively, and incorporated by reference herein.



(b) Pro forma financial information.



Unaudited pro forma condensed combined financial information of the Company as of and for the six months ended June 30, 2017 and for the year ended December 31, 2016 is attached hereto and filed as Exhibit 99.3 and incorporated by reference herein. Such unaudited pro forma consolidated financial information is not necessarily indicative of the operating results and financial position that would have been achieved if the Merger had been in effect on the dates indicated or that may be achieved for future periods, and should be read in conjunction with the financial statements of the Company and Spectrum.



(d) Exhibits.





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SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.







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EXHIBIT INDEX





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CONSENT OF INDEPENDENT AUDITOR





We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-217516 and No. 333-220165) of NCS Multistage Holdings, Inc. of our report dated November 13, 2017, relating to the consolidated financial statements of Spectrum Tracer Services, LLC, appearing in this Current Report on Form 8-K/A of NCS Multistage Holdings, Inc.



/s/ HoganTaylor LLP



Tulsa, Oklahoma

November 13, 2017







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SPECTRUM TRACER SERVICES, LLC



CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2016



WITH



INDEPENDENT AUDITOR'S REPORT









 

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CONTENTS











 

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INDEPENDENT AUDITOR'S REPORT







To the Board of Directors

Spectrum Tracer Services, LLC and Subsidiaries



Report on the Financial Statements



We have audited the accompanying consolidated financial statements of Spectrum Tracer Services, LLC and its subsidiaries which comprise the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income and comprehensive income, changes in members' equity,  and cash flows for the year then ended and the related notes to the consolidated financial statements. 



Management's Responsibility for the Financial Statements



Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the consolidated financial statements that is free from material misstatement, whether due to fraud or error.



Auditor's Responsibility 



Our responsibility is to express an opinion on these consolidated financial statements based on our audit.  We conducted our audit in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.



An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.   The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.  Accordingly, we express no such opinion.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.



We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.



Opinion 



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spectrum Tracer Services, LLC and its subsidiaries as of December 31, 2016,  and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.



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Emphasis of Matter



As discussed in Note 11 to the financial statements, the 2016 financial statements have been restated to correct a misstatement. Our opinion is not modified with respect to this matter.





/s/ HoganTaylor LLP



Tulsa, Oklahoma

November 13, 2017

 

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SPECTRUM TRACER SERVICES, LLC



CONSOLIDATED BALANCE SHEET



December 31, 2016











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SPECTRUM TRACER SERVICES, LLC



CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME



Year ended December 31, 2016











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SPECTRUM TRACER SERVICES, LLC



CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY



Year ended December 31, 2016 









 

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SPECTRUM TRACER SERVICES, LLC



CONSOLIDATED STATEMENT OF CASH FLOWS



Year ended December 31, 2016 







 

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SPECTRUM TRACER SERVICES, LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



December 31, 2016 





Note 1 – Organization, Business and Summary of Significant Accounting Policies



Organization and business



Spectrum Tracer Services, LLC,  (the Company) an Oklahoma limited liability company (LLC), is in the business of producing radioactive, chemical and oil soluble tracers and providing tracing services used by oil and gas operators to determine hydraulic fracture efficiencies and reservoir diagnostics.  As an LLC, members are not personally liable for any debts, liabilities or obligations of the Company beyond their equity in the Company.  The Company will continue in existence until it is liquidated or dissolved in accordance with the Operating Agreement and the State of Oklahoma Limited Liability Company Act.  Spectrum Tracer Services, LLC operates in Oklahoma, Texas, West Virginia, Montana and Canada.



On August 30, 2017, the Company entered into an agreement with NCS Multistage Holdings, Inc. (NCS), a publicly traded company, whereby NCS acquired 100% of the equity interests in the Company in exchange for $83 million, which was comprised of (i) $76 million in cash and (ii) 0.4 million shares of common stock of NCS, which shares were issued to certain unitholders of the Company who elected to receive a portion of the consideration payable to them in equity.   The cash consideration is subject to certain adjustments, including an earn-out that would permit up to an additional $12.5 million in consideration if certain financial performance measures related to the Company’s operations are achieved, working capital adjustments and reimbursement by NCS for specified capital expenditures.  This transaction closed on August 31, 2017.



Consolidation



The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, STS Logistics and Analytics, LLC, STS Holdings, Inc. and STS Tracer Services, Ltd., a Canadian subsidiary.  All material intercompany transactions have been eliminated in consolidation.



Use of estimates



The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.



Accounts receivable



Accounts receivable are recorded at the invoiced amount and do not bear interest.  Accounts receivable are uncollateralized customer obligations due under normal trade terms, requiring payment within 30 days from the invoice date.  The carrying amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects management's best estimate of the amounts that may not be collected.  Management individually reviews all balances which exceed 90 days from invoice date and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.  Management provides for probable uncollectible amounts through a charge to earnings and a credit to the valuation

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allowance based on its assessment of the current status of the individual accounts.    Balances which are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance.  At December 31, 2016, the allowance for doubtful accounts was $11,102.  



Inventories



Inventories are stated at the lower of cost (determined using the average cost of inventory) or market (net realizable value).



Revenue recognition



Revenue, net of discounts, is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collection is reasonably assured.  Revenue recognized is net of discounts of $45,051,451 at December 31, 2016.



Properties and equipment



Depreciation of properties and equipment, which includes amortization of assets under capital leases, is provided for financial reporting purposes using the straight-line method over the following estimated useful lives:







Foreign currency translation



STS Tracer Services, Ltd., a foreign subsidiary, uses Spectrum Tracer Services, LLC’s local currency, the U.S. Dollar, as its reporting currency.  Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise.  Subsequent changes in exchange rates result in transaction gains and losses which are reflected as other comprehensive income within Members' equity.



Unit-based compensation



The Company recognizes compensation expense on a straight-line basis for unit appreciation rights awarded with time-based service conditions (see Note 6).  The Company measures its liability awards based on the award's intrinsic value remeasured at each reporting date until date of settlement.



Income taxes



As a limited liability company, the Company's  U.S. federal taxable income or loss is allocated to its members in accordance with their respective percentage ownership.  Therefore, no provision or liability for U.S. federal income taxes has been included in the accompanying consolidated balance sheets.  The Company is subject to income taxes in certain states which do not recognize LLCs as disregarded entities.  Foreign income tax expense relates to the Company's operations in Canada.



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Subsequent events



Management has evaluated subsequent events through November 13, 2017, the date the consolidated financial statements were available to be issued.





Note 2 – Inventories



Inventories consist of the following at December 31:









Note 3 – Properties and Equipment



Properties and equipment, including assets under capital leases, consist of the following at December 31:









Note 4 – Revolving Line of Credit and Notes Payable



In April 2016, the Company entered into a nonrevolving line of credit and term loan agreement with a bank for up to $4,000,000, due April 2020.  The Company received an advance of $2,000,000 under this agreement during 2016.  The note requires monthly payments of $45,836 at a fixed interest rate of 4.75%.  The note is collateralized by substantially all the assets of the Company as well as personal guarantees of certain members.  The balance as of December 31, 2016 is $1,691,242.



The Company has a $1,000,000 revolving line of credit with a bank, which matures in May 2017.  Borrowings bear interest at a variable interest rate, are collateralized by the Company's accounts receivable, and are guaranteed by the subsidiaries of Spectrum Tracer Services, LLC and the majority owners of the Company.  The line of credit agreement contains various affirmative and negative covenants, which, among other things, requires the Company maintain a minimum tangible net worth and limits the incurrence of debt.  The Company did not have any borrowings during 2016.



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The Company financed the purchase of annual insurance policies totaling $243,243 at a fixed rate of 4.55% during the year ended December 31, 2016.  Principal and interest are payable in three quarterly installments in the amount of $56,560 beginning in August 2016.  The balance as of December 31, 2016 is $55,494.



In 2016, the Company adopted Accounting Standards Update (ASU) 2015-03, Interest – Imputation of Interest.  ASU 2015-03 is intended to simplify the presentation of debt issuance costs.  Debt issuance costs related to a recognized debt liability are presented on the balance sheet as a direct deduction from the debt liability to be amortized over the term of the associated loan.  The Company had approximately $10,000 in debt issuance costs related to its term loan in 2016.



Long-term notes payable maturities are as follows:









Note 5 – Members' Equity



The Company has a total of 2,583.33 units outstanding to its members at December 31, 2016, and each Member receives units in proportion to the cash and estimated fair value of property or services contributed.



Contributions



In accordance with the Operating Agreement, additional cash contributions can be required at the discretion of the Manager.  With the exception of certain members who contributed property or loan guarantees, members would be required to contribute an amount equal to their pro rata share of units they own applied to the amount of the capital call.



Allocations and distributions



Allocations of operating profits to the members are determined on the basis of whether the allocation occurs during one of the following phases:  Before Payout, After Payout or Earn-out.



Cash available for distributions is determined by a majority vote of the Board of Directors and distributed to the members on the basis of whether such distribution occurs Before Payout, After Payout or during Earn-out.



The Company distributed $1,524,846 to its members in 2016.





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Note 6 – Unit Appreciation Rights Plan



The Company has established a Unit Appreciation Rights Plan (the Plan).  Under the Plan, Unit Appreciation Rights (Rights) may be granted by the Board of Directors to key employees.  Each Right entitles a participant to the excess of fair value of one Company membership unit (Unit) on the exercise date over the fair value of the Unit on the grant date.  The determination of fair value is made at the sole discretion of the Board of Directors.



Rights may be exercised upon the sale of all or substantially all of the assets or Units of the Company (Triggering Event).  Participants vest in one-third of the Rights after five years of employment; one-third after ten years of employment; and one-third after 15 years of employment.  Rights vest immediately upon the occurrence of a Triggering Event during the participant's employment.  Due to the nature of rights-based transactions, the Rights are accounted for as liability awards and unit appreciation for each Right awarded are charged to expense over the vesting period.



In February 2013, the Board of Directors granted Rights as follows:





The fair value of a Unit was determined by the Board of Directors to be $5,000 on the grant date.  The Company was in the Earn-out Phase II at December 31, 2015.  The accumulated intrinsic value of the Rights expensed at December 31, 2016, is reflected as deferred compensation of $644,940.



In March 2014, the Company granted 129.16 Rights to an employee.  The Rights were awarded ratably over a 12-month period beginning April 30, 2014.  The fair value of a Unit was determined by the Board of Directors to be $13,548 on the grant date.  The accumulated intrinsic value of the Rights expensed at December 31, 2016, is reflected as deferred compensation of $139,213.



As of December 31, 2016, there was $4,496,579 of unrecognized compensation expense related to the Plan.  The sale of the Company on August 30, 2017 (See Note 1) was a Triggering Event resulting in immediate vesting of all outstanding Rights and recognition of the remaining compensation expense subsequent to period end. 





Note 7 – Leasing Arrangements



The Company leases office space, as well as certain vehicles and equipment.  Many of these leases include renewal options.



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Future minimum lease payments under operating leases at December 31 are as follows:









The Company leases certain vehicles under capital leases with various expiration dates from April 2017 to November 2018.  Monthly payments are due in amounts ranging from $1,027 to $1,320, including interest at rates ranging from 6.25% to 6.95%.  At December 31, 2016, assets under capital leases amounted to $1,093,919,  net of accumulated depreciation of $418,443.



The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments at December 31, 2016:











Note 8 – Legal Matters



The Company and certain members of the Company were defendants in a lawsuit filed by a member's former employer alleging misappropriation of trade secrets for the alleged theft of customer lists and certain software related to fracking services.  The legal proceedings concluded in April 2016.  The final judgment against the Company of $915,000 was accrued at December 31, 2015, and paid during the year ended December 31, 2016.



During 2015, the Company entered into a confidential settlement agreement relating to alleged violations of the Fair Labor Standards Act for $875,000.  This amount was accrued at December 31, 2015 and paid during the year ended December 31, 2016.





Note 9 – Concentration of Risk



The Company conducts business primarily with customers who rely on the oil and natural gas exploration and production industry and could therefore be materially affected by economic fluctuations in the supply, demand and price of oil and natural gas.



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The Company maintains cash balances that typically exceed Federal Deposit Insurance Corporation limits.





Note 10 – Contingencies



The Company voluntarily disclosed to the Environmental Protection Agency (EPA) that it was not in compliance with the Toxic Substances Control Act.  The EPA is currently conducting an examination and the potential exists for fines.  The amount of the fines cannot be reasonably estimated yet; however, the Company does not believe it will be material.  The examination was concluded in the first half of 2017.





Note 11 – Restatement



The consolidated balance sheet as of December 31, 2016, and consolidated statements of income and comprehensive income, changes in members' equity and cash flows were restated to record the cost of inventory held at district site locations.



As of December 31, 2016, inventories, total current assets, total assets, members' equity and total liabilities and members' equity increased by $923,509 from amounts previously reported.  For the year ended December 31, 2016, cost of revenues and total costs and expenses decreased by $41,160, while, income from operations, income before taxes and net income increased by $41,160 from amounts previously reported.



For the year ended December 31, 2015, net income increased by $370,375 from amounts previously reported.

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SPECTRUM TRACER SERVICES, LLC



CONSOLIDATED FINANCIAL STATEMENTS



JUNE 30, 2017

(Unaudited)









 

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CONTENTS











 

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SPECTRUM TRACER SERVICES, LLC



CONSOLIDATED BALANCE SHEETS













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SPECTRUM TRACER SERVICES, LLC



CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



Six months ending June 30, 2017 and 2016

(Unaudited)











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SPECTRUM TRACER SERVICES, LLC



CONSOLIDATED STATEMENTS OF CASH FLOWS



Six months ending June 30, 2017 and 2016

(Unaudited)











 

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SPECTRUM TRACER SERVICES, LLC



NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS







Note 1 – Organization, Business and Summary of Significant Accounting Policies



Organization and business



Spectrum Tracer Services, LLC, (the Company) an Oklahoma limited liability company (LLC), is in the business of producing radioactive, chemical and oil soluble tracers and providing tracing services used by oil and gas operators to determine hydraulic fracture efficiencies and reservoir diagnostics.  As an LLC, members are not personally liable for any debts, liabilities or obligations of the Company beyond their equity in the Company.  The Company will continue in existence until it is liquidated or dissolved in accordance with the Operating Agreement and the State of Oklahoma Limited Liability Company Act.  Spectrum Tracer Services, LLC operates in Oklahoma, Texas, West Virginia, Montana and Canada.



On August 30, 2017, the Company entered into an agreement with NCS Multistage Holdings, Inc. (NCS), a publicly traded company, whereby NCS acquired 100% of the equity interests in the Company in exchange for $83 million, which was comprised of (i) $76 million in cash and (ii) 0.4 million shares of common stock of NCS, which shares were issued to certain unitholders of the Company who elected to receive a portion of the consideration payable to them in equity.   The cash consideration is subject to certain adjustments, including an earn-out that would permit up to an additional $12.5 million in consideration if certain financial performance measures related to the Company’s operations are achieved, working capital adjustments and reimbursement by NCS for specified capital expenditures.  This transaction closed on August 31, 2017.



Consolidation



The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, STS Logistics and Analytics, LLC, STS Holdings, Inc. and STS Tracer Services, Ltd., a Canadian subsidiary.  All material intercompany transactions have been eliminated in consolidation.



Basis of presentation



The accompanying interim financial statements for the six months ended June 30, 2017 and 2016 are unaudited.  The unaudited interim financial statements were prepared on the same basis as the audited financial statements for the year ended December 31, 2016.  In the opinion of management, the unaudited interim financial statements reflect all the adjustments necessary, which consist of normal recurring adjustments, to state fairly the interim financial statements for the six-month periods ended June 30, 2017 and 2016.  The financial statements for the interim periods ended June 30, 2017 and 2016 are not necessarily indicative of results that may be expected for the year ended December 31, 2017, or any future periods.



Use of estimates



The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

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Note 2 – Inventories



Inventories at June 30, 2017 and December 31, 2016, were as follows:









Note 3 – Properties and Equipment



Properties and equipment, including assets under capital leases, at June 30, 2017 and December 31, 2016 were as follows:









Note 4 – Revolving Line of Credit and Notes Payable



In April 2016, the Company entered into a nonrevolving line of credit and term loan agreement with a bank for up to $4,000,000, due April 2020.  The Company received an advance of $2,000,000 under this agreement during 2016.  The note requires monthly payments of $45,836 at a fixed interest rate of 4.75%.  The note is collateralized by substantially all the assets of the Company as well as personal guarantees of certain members.  The balance was $1,455,091 and $1,691,242 at June 30, 2017 and December 31, 2016, respectively.



The Company had a $1,000,000 revolving line of credit with a bank, which matured in May 2017.  The Company did not have any borrowings on this line of credit during 2017 or 2016.



The Company financed the purchase of annual insurance policies totaling $166,482 at a fixed rate of 4.55% during the six-month period ended June 30, 2016.  Principal and interest are payable in three quarterly installments in the amount of $56,560 beginning in August 2016.  The balance was $55,560 at December 31, 2016, and was repaid in full prior to June 30, 2017.





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Note 5 – Members' Equity



The Company has a total of 2,583.33 units outstanding to its members at June 30, 2017 and 2016, and each Member receives units in proportion to the cash and estimated fair value of property or services contributed.



Contributions



In accordance with the Operating Agreement, additional cash contributions can be required at the discretion of the Manager.  With the exception of certain members who contributed property or loan guarantees, members would be required to contribute an amount equal to their pro rata share of units they own applied to the amount of the capital call.



Allocations and distributions



Allocations of operating profits to the members are determined on the basis of whether the allocation occurs during one of the following phases:  Before Payout, After Payout or Earn-out.



Cash available for distributions is determined by a majority vote of the Board of Directors and distributed to the members on the basis of whether such distribution occurs Before Payout, After Payout or during Earn-out.



The Company distributed $515,800 and $432,701 to its members during the six-month periods ending June 30, 2017 and 2016, respectively.





Note 6 – Unit Appreciation Rights Plan



The Company has established a Unit Appreciation Rights Plan (the Plan).  Under the Plan, Unit Appreciation Rights (Rights) may be granted by the Board of Directors to key employees.  Each Right entitles a participant to the excess of fair value of one Company membership unit (Unit) on the exercise date over the fair value of the Unit on the grant date.  The determination of fair value is made at the sole discretion of the Board of Directors.



Rights may be exercised upon the sale of all or substantially all of the assets or Units of the Company (Triggering Event).  Participants vest in one-third of the Rights after five years of employment; one-third after ten years of employment; and one-third after 15 years of employment.  Rights vest immediately upon the occurrence of a Triggering Event during the participant's employment.  Due to the nature of rights-based transactions, the Rights are accounted for as liability awards and unit appreciation for each Right awarded is charged to expense over the vesting period.



In February 2013, the Board of Directors granted Rights as follows:





The fair value of a Unit was determined by the Board of Directors to be $5,000 on the grant date.  The Company was in the Earn-out Phase II at December 31, 2015.  The accumulated intrinsic value of the Rights expensed at June 30, 2017 and December 31, 2016, is reflected as deferred compensation of $751,359 and $644,940, respectively.

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In March 2014, the Company granted 129.16 Rights to an employee.  The Rights were awarded ratably over a 12-month period beginning April 30, 2014.  The fair value of a Unit was determined by the Board of Directors to be $13,548 on the grant date.  The accumulated intrinsic value of the Rights expensed at June 30, 2017 and December 31, 2016, is reflected as deferred compensation of $313,227 and $139,213, respectively.



As of June 30, 2017, there was $4,216,145 of unrecognized compensation expense related to the Plan.  The sale of the Company on August 30, 2017 (See Note 1) was a Triggering Event resulting in immediate vesting of all outstanding Rights and recognition of the remaining compensation expense subsequent to period end. 





Note 7 – Leasing Arrangements



The Company leases office space, as well a certain vehicles and equipment.  Many of these leases include renewal options. 



The Company leases certain vehicles under capital leases with various expiration dates from September 2017 to June 2019.  Monthly payments are due in amounts ranging from $839 to $1,308, including interest at rates ranging from 5.36% to 7.34%.  At June 30, 2017 and December 31, 2016, assets under capital leases amounted to $1,167,144 and $1,093,919, respectively, net of accumulated depreciation of $489,180 and $418,443, respectively. 



The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum lease payments at June 30, 2017:









Note 8 – Legal Matters



The Company and certain members of the Company were defendants in a lawsuit filed by a member's former employer alleging misappropriation of trade secrets for the alleged theft of customer lists and certain software related to fracking services.  The legal proceedings concluded in April 2016.  The final judgment against the Company of $915,000 was accrued at December 31, 2015, and paid during the six-month period ended June 30, 2016.



During 2015, the Company entered into a confidential settlement agreement relating to alleged violations of the Fair Labor Standards Act for $875,000.  This amount was accrued at December 31, 2015 and paid during the year ended December 31, 2016.





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Note 9 – New and Recently Adopted Accounting Pronouncements



In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires inventory measured using all methods other than the last-in, first-out (LIFO) or retail methods to be measured at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 became effective for the Company on January 1, 2017. Adoption of ASU 2015-11 did not have a material impact on the Company’s financial position, results of operations and cash flows.

 

In 2016, the Company adopted Accounting Standards Update (ASU) 2015-03, Interest – Imputation of Interest.  ASU 2015-03 is intended to simplify the presentation of debt issuance costs.  Debt issuance costs related to a recognized debt liability are presented on the balance sheet as a direct deduction from the debt liability to be amortized over the term of the associated loan.  The Company had approximately $10,000 in debt issuance costs related to its term loan in 2016.  Unamortized debt issuance costs were $7,309 and $9,888 at June 30, 2017 and 2016, respectively.



In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for public companies for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Management is currently assessing the impact ASU 2016-16 will have on the Company’s financial position and results of operations.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for public companies for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. Management is currently assessing the impact ASU 2016-15 will have on the Company, but it is not expected to have a material impact on the Company’s cash flows.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet but did not make significant changes to the effects of lessee accounting on the statement of operations or statement of cash flows. ASU 2016-02 is effective for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Management is currently assessing the impact ASU 2016-02 will have on the Company’s financial position.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard under U.S. GAAP under which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 and all subsequently issued clarifying ASUs will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method upon adoption. Management intends to adopt ASU 2014-09 on January 1, 2018, using the modified retrospective method of adoption. Management is assessing the impacts of the new standard on the Company’s revenues and financial statement disclosures. Management put in place a team during the

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second quarter of 2017, including a third-party consultant, to develop and carry out the Company’s implementation plan. The team has reviewed the Company’s revenue streams, compared the Company’s historical accounting policies and practices to the new accounting guidance and continues to finalize the Company’s application of the new standard.



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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2017 and for the year ended December 31, 2016 combines the historical consolidated statements of operation for NCS Multistage Holdings, Inc. (“NCS”) and Spectrum Tracer Services, LLC (“Spectrum”), giving effect to the acquisition of Spectrum and related financing as if it had occurred on January 1, 2016. The unaudited pro forma condensed combined balance sheet as of June 30, 2017 combines the historical consolidated balance sheets of NCS and Spectrum, giving effect to the acquisition of Spectrum and related financing as if it had occurred on June 30, 2017. The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the acquisition of Spectrum, (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. 

The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed financial information was based on and should be read in conjunction with the consolidated financial information of NCS and Spectrum. The NCS consolidated financial information has been filed separately by NCS with the United States Securities and Exchange Commission (the “SEC”). The Spectrum consolidated financial information has been filed as Exhibits 99.1 and 99.2 to NCS’s Current Report on Form 8-K.

The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. Such pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the acquisition and related financing been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company.

The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting under U.S. generally accepted accounting principles and the regulations of the SEC. The acquisition accounting is dependent upon certain valuations of the acquired assets and liabilities and is assumed preliminary as management is still reviewing the acquired assets and liabilities’ existence, characteristics and assumptions. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing these unaudited pro forma condensed combined financial statements in accordance with the rules and regulation of the SEC. Differences between these preliminary estimates and the final acquisition accounting will occur, and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position.

The unaudited pro forma condensed combined financial information does not reflect any potential impact of any revenue enhancements, synergies, operating efficiencies or cost savings that may be achieved or any integration costs that do not have a continuing impact.

 

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NCS MULTISTAGE HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF JUNE 30, 2017

(In thousands)





 

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NCS MULTISTAGE HOLDINGS, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2017

(In thousands, except per share data)