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Table of Contents

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 June 30, 2024

 

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)

 
     
 

19350 State Highway 249, Suite 600

   
 

Houston, Texas

 

77070

 
 

(Address of principal executive offices)

 

(Zip Code)

 

 

Registrants telephone number, including area code: (281) 453-2222

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

NCSM

Nasdaq Capital Market

 

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 July 30, 2024, there were 2,502,680 shares of common stock outstanding.

 

 

 

TABLE OF CONTENTS

 

   

Page

PART I. FINANCIAL INFORMATION

     

Item 1.

Financial Statements (Unaudited)

 
 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Comprehensive Loss

5

 

Condensed Consolidated Statements of Stockholders’ Equity

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

     

Item 2.

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

17

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

     

Item 4.

Controls and Procedures

30

     

PART II. OTHER INFORMATION

     

Item 1.

Legal Proceedings

31

     

Item 1A.

Risk Factors

31

     
Item 5. Other Information 31
     

Item 6.

Exhibits

32

     

Signatures

 

33

 

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1.  Financial Statements

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

  

June 30,

  

December 31,

 
  

2024

  

2023

 

Assets

        

Current assets

        

Cash and cash equivalents

 $18,614  $16,720 

Accounts receivable—trade, net

  24,505   23,981 

Inventories, net

  41,563   41,612 

Prepaid expenses and other current assets

  3,206   1,862 

Other current receivables

  3,958   4,042 

Insurance receivable

     15,000 

Total current assets

  91,846   103,217 

Noncurrent assets

        

Property and equipment, net

  23,147   23,336 

Goodwill

  15,222   15,222 

Identifiable intangibles, net

  4,073   4,407 

Operating lease assets

  4,056   4,847 

Deposits and other assets

  823   937 

Deferred income taxes, net

  198   66 

Total noncurrent assets

  47,519   48,815 

Total assets

 $139,365  $152,032 

Liabilities and Stockholders’ Equity

        

Current liabilities

        

Accounts payable—trade

 $7,567  $6,227 

Accrued expenses

  5,406   3,702 

Income taxes payable

  736   364 

Operating lease liabilities

  1,471   1,583 

Accrual for legal contingencies

     15,000 

Current maturities of long-term debt

  2,074   1,812 

Other current liabilities

  2,679   3,370 

Total current liabilities

  19,933   32,058 

Noncurrent liabilities

        

Long-term debt, less current maturities

  6,828   6,344 

Operating lease liabilities, long-term

  2,994   3,775 

Other long-term liabilities

  199   213 

Deferred income taxes, net

  372   249 

Total noncurrent liabilities

  10,393   10,581 

Total liabilities

  30,326   42,639 

Commitments and contingencies (Note 10)

          

Stockholders’ equity

        

Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued and outstanding at June 30, 2024 and December 31, 2023

      

Common stock, $0.01 par value, 11,250,000 shares authorized, 2,557,482 shares issued and 2,502,564 shares outstanding at June 30, 2024 and 2,482,796 shares issued and 2,443,744 shares outstanding at December 31, 2023

  26   25 

Additional paid-in capital

  446,070   444,638 

Accumulated other comprehensive loss

  (86,516)  (85,752)

Retained deficit

  (266,642)  (265,617)

Treasury stock, at cost, 54,918 shares at June 30, 2024 and 39,052 shares at December 31, 2023

  (1,913)  (1,676)

Total stockholders' equity

  91,025   91,618 

Non-controlling interest

  18,014   17,775 

Total equity

  109,039   109,393 

Total liabilities and stockholders' equity

 $139,365  $152,032 

 

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

 

 

 

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2024

   

2023

   

2024

   

2023

 

Revenues

                               

Product sales

  $ 19,022     $ 17,433     $ 50,780     $ 48,863  

Services

    10,668       7,958       22,768       20,082  

Total revenues

    29,690       25,391       73,548       68,945  

Cost of sales

                               

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

    12,209       11,994       31,901       30,827  

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

    5,510       4,935       12,105       11,115  

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

    17,719       16,929       44,006       41,942  

Selling, general and administrative expenses

    14,820       14,477       28,650       30,628  

Depreciation

    1,134       948       2,207       1,891  

Amortization

    167       167       334       334  

Loss from operations

    (4,150 )     (7,130 )     (1,649 )     (5,850 )

Other income (expense)

                               

Interest expense, net

    (115 )     (211 )     (215 )     (420 )

Provision for litigation, net of recoveries

          (24,886 )           (42,400 )

Other income, net

    2,203       1,478       3,340       1,770  

Foreign currency exchange (loss) gain

    (507 )     23       (1,005 )     78  

Total other income (expense)

    1,581       (23,596 )     2,120       (40,972 )

(Loss) income before income tax

    (2,569 )     (30,726 )     471       (46,822 )

Income tax expense

    270       1,350       757       250  

Net loss

    (2,839 )     (32,076 )     (286 )     (47,072 )

Net income attributable to non-controlling interest

    256       155       739       128  

Net loss attributable to NCS Multistage Holdings, Inc.

  $ (3,095 )   $ (32,231 )   $ (1,025 )   $ (47,200 )

Loss per common share

                               

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

  $ (1.21 )   $ (13.02 )   $ (0.41 )   $ (19.16 )

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

  $ (1.21 )   $ (13.02 )   $ (0.41 )   $ (19.16 )

Weighted average common shares outstanding

                               

Basic

    2,548       2,476       2,528       2,464  

Diluted

    2,548       2,476       2,528       2,464  

 

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

 

 

 

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2024

  

2023

  

2024

  

2023

 

Net loss

 $(2,839) $(32,076) $(286) $(47,072)

Foreign currency translation adjustments, net of tax of $0

  (268)  442   (764)  343 

Comprehensive loss

  (3,107)  (31,634)  (1,050)  (46,729)

Less: Comprehensive income attributable to non-controlling interest

  256   155   739   128 

Comprehensive loss attributable to NCS Multistage Holdings, Inc.

 $(3,363) $(31,789) $(1,789) $(46,857)

 

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

 

 

 

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands, except share data)

(Unaudited)

 

   

Three and Six Months Ended June 30, 2024

 
   

Preferred Stock

   

Common Stock

   

Additional
Paid-In

   

Accumulated
Other
Comprehensive

   

Retained

   

Treasury Stock

   

Non-controlling

   

Total
Stockholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Loss

   

Deficit

   

Shares

   

Amount

   

Interest

   

Equity

 

Balances as of December 31, 2023

        $       2,482,796     $ 25     $ 444,638     $ (85,752 )   $ (265,617 )     (39,052 )   $ (1,676 )   $ 17,775     $ 109,393  

Share-based compensation

                            766                                     766  

Net income

                                        2,070                   483       2,553  

Distribution to noncontrolling interest

                                                          (500 )     (500 )

Vesting of restricted stock

                57,830                                                  

Shares withheld

                                              (15,866 )     (237 )           (237 )

Currency translation adjustment

                                  (496 )                             (496 )

Balances as of March 31, 2024

        $       2,540,626     $ 25     $ 445,404     $ (86,248 )   $ (263,547 )     (54,918 )   $ (1,913 )   $ 17,758     $ 111,479  

Share-based compensation

                            667                                     667  

Net (loss) income

                                        (3,095 )                 256       (2,839 )

Release of restricted stock

                16,856       1       (1 )                                    

Currency translation adjustment

                                  (268 )                             (268 )

Balances as of June 30, 2024

        $       2,557,482     $ 26     $ 446,070     $ (86,516 )   $ (266,642 )     (54,918 )   $ (1,913 )   $ 18,014     $ 109,039  

 

   

Three and Six Months Ended June 30, 2023

 
   

Preferred Stock

   

Common Stock

   

Additional
Paid-In

   

Accumulated
Other
Comprehensive

   

Retained

   

Treasury Stock

   

Non-controlling

   

Total
Stockholders'

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Loss

   

Deficit

   

Shares

   

Amount

   

Interest

   

Equity

 

Balances as of December 31, 2022

        $       2,434,809     $ 24     $ 440,475     $ (85,617 )   $ (262,464 )     (26,335 )   $ (1,389 )   $ 18,233     $ 109,262  

Share-based compensation

                            913                                     913  

Net loss

                                        (14,969 )                 (27 )     (14,996 )

Vesting of restricted stock

                41,489       1       (1 )                                    

Shares withheld

                                              (11,086 )     (264 )           (264 )

Currency translation adjustment

                                  (99 )                             (99 )

Balances as of March 31, 2023

        $       2,476,298     $ 25     $ 441,387     $ (85,716 )   $ (277,433 )     (37,421 )   $ (1,653 )   $ 18,206     $ 94,816  

Share-based compensation

                            1,044                                     1,044  

Net (loss) income

                                        (32,231 )                 155       (32,076 )

Currency translation adjustment

                                  442                               442  

Balances as of June 30, 2023

        $       2,476,298     $ 25     $ 442,431     $ (85,274 )   $ (309,664 )     (37,421 )   $ (1,653 )   $ 18,361     $ 64,226  

 

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

 

 

 

NCS MULTISTAGE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Six Months Ended

 
   

June 30,

 
   

2024

   

2023

 

Cash flows from operating activities

               

Net loss

  $ (286 )   $ (47,072 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    2,541       2,225  

Amortization of deferred loan costs

    103       102  

Share-based compensation

    2,062       2,542  

Provision for inventory obsolescence

    679       245  

Deferred income tax expense

    21       57  

Gain on sale of property and equipment

    (340 )     (333 )

(Recovery of) provision for credit losses

    (5 )     58  

Provision for litigation, net of recoveries

          42,400  

Net foreign currency unrealized loss (gain)

    956       (279 )

Proceeds from note receivable

    61       271  

Changes in operating assets and liabilities:

               

Accounts receivable—trade

    (1,024 )     5,759  

Inventories, net

    (1,501 )     (5,907 )

Prepaid expenses and other assets

    (619 )     552  

Accounts payable—trade

    1,353       545  

Accrued expenses

    1,761       (4 )

Other liabilities

    (2,092 )     (2,078 )

Income taxes receivable/payable

    429       (125 )

Net cash provided by (used in) operating activities

    4,099       (1,042 )

Cash flows from investing activities

               

Purchases of property and equipment

    (633 )     (1,151 )

Purchase and development of software and technology

    (53 )     (167 )

Proceeds from sales of property and equipment

    293       340  

Net cash used in investing activities

    (393 )     (978 )

Cash flows from financing activities

               

Payments on finance leases

    (932 )     (743 )

Line of credit borrowings

    2,974       8,397  

Payments of line of credit borrowings

    (2,974 )     (7,663 )

Treasury shares withheld

    (237 )     (264 )

Distribution to noncontrolling interest

    (500 )      

Net cash used in financing activities

    (1,669 )     (273 )

Effect of exchange rate changes on cash and cash equivalents

    (143 )     (195 )

Net change in cash and cash equivalents

    1,894       (2,488 )

Cash and cash equivalents beginning of period

    16,720       16,234  

Cash and cash equivalents end of period

  $ 18,614     $ 13,746  

Noncash investing and financing activities

               

Assets obtained in exchange for new finance lease liabilities

  $ 1,821     $ 845  

Assets obtained in exchange for new operating lease liabilities

  $     $ 1,789  

 

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

 

 
7

NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

 

Note 1.  Basis of Presentation

 

Nature of Business

 

NCS Multistage Holdings, Inc., a Delaware corporation, through its wholly owned subsidiaries and subsidiaries for which it has a controlling voting interest (collectively referred to as the “Company,” “NCS,” “we,” “our” and “us”), is primarily engaged in providing engineered products and support services for oil and natural gas well construction, well completions and field development strategies. We offer our products and services primarily to exploration and production companies for use both in onshore and offshore wells. We operate through service facilities principally located in Houston and Odessa, Texas; Tulsa, Oklahoma; Calgary, Red Deer, Grande Prairie and Estevan, Canada; Neuquén, Argentina and Stavanger, Norway.

 

Basis of Presentation

 

Our accompanying 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, issued by the Securities Exchange Commission (“SEC”) and have not been audited by our independent registered public accounting firm. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with our financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023 (“Annual Report”). We consolidate Repeat Precision, LLC and its subsidiary (“Repeat Precision”), a 50% owned entity, with operations in the United States and Mexico, because NCS has a controlling voting interest. The other party’s ownership is presented separately as a non-controlling interest. In the opinion of management, these condensed consolidated financial statements reflect all normal, recurring adjustments 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. In addition, certain reclassifications of prior period balances have been made to conform to the current period presentation. The reclassifications had no effect on the previously reported net loss.

 

Significant Accounting Policies

 

Our significant accounting policies are described in “Note 2. Summary of Significant Accounting Policies” in our Annual Report.

 

Recent Accounting Pronouncements

 

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU improves income tax disclosures including a requirement for specific categories in the effective tax rate reconciliation, additional information for reconciling items that meet a quantitative threshold, certain disclosures pertaining to income taxes paid (net of refunds received) and amendments to other disclosure requirements. The new standard is effective for fiscal years beginning after December 15, 2024 and should be applied prospectively although retrospective application is permitted. Early adoption is also permitted for financial statements that have not yet been issued. We are currently evaluating the impact of the adoption of this guidance.

 

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU improves reportable segment disclosure requirements on an annual and interim basis and includes requirements for entities with a single reportable segment. The improvements include disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), the title and position of the CODM and an explanation of how the CODM uses the reported measure of segment profit or loss in assessing performance and allocating resources, as well as other disclosure requirements. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and should be applied retrospectively. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance.

 

8

NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

Note 2.  Segment and Geographic Information

 

We have determined that we operate in one reportable segment that has been identified based on how our chief operating decision maker manages our business. 

 

We aggregate revenue for presentation based on qualitative factors including the nature of the products and services, the nature and commonality of production processes, a shared customer base primarily in North America, the scope of geographic operations and a common industry and regulatory environment. However, we present revenue on a geographic basis, segregated between product sale and service revenues.

 

The following table summarizes revenue by geographic area attributed based on the current billing address of the customer (in thousands):

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2024

 

2023

 

2024

 

2023

United States

           

Product sales

$8,550 $6,942 $16,317 $15,002

Services

 3,241  2,440  5,485  5,699

Total United States

 11,791  9,382  21,802  20,701

Canada

           

Product sales

 8,263  9,970  30,938  32,531

Services

 3,795  4,351  12,789  12,461

Total Canada

 12,058  14,321  43,727  44,992

Other Countries

           

Product sales

 2,209  521  3,525  1,330

Services

 3,632  1,167  4,494  1,922

Total other countries

 5,841  1,688  8,019  3,252

Total

           

Product sales

 19,022  17,433  50,780  48,863

Services

 10,668  7,958  22,768  20,082

Total revenues

$29,690 $25,391 $73,548 $68,945

 

 

Note 3.  Revenues

 

Disaggregation of Revenue

 

We sell our products and services primarily in North America and in selected international markets. See above "Note 2. Segment and Geographic Information" for our disaggregated revenue by geographic area.

 

Contract Balances

 

If the timing of the delivery of products and provision of services is different from the timing of the customer payments, we recognize either a contract asset (performance precedes contractual due date in connection with estimates of variable consideration) or a contract liability (customer payment precedes performance) on our condensed consolidated balance sheet.

 

The following table presents the current contract liabilities as of  June 30, 2024 and  December 31, 2023 (in thousands):

 

Balance at December 31, 2023

 $460 

Additions

  106 

Revenue recognized

  (515)

Balance at June 30, 2024

 $51 

 

We currently do not have any contract assets or non-current contract liabilities. Our contract liability as of June 30, 2024 and  December 31, 2023 is included in other current liabilities on the condensed consolidated balance sheets. Our performance obligations for our product and services revenues are typically satisfied before the customer’s payment; however, prepayments may occasionally be required. Revenue recognized from the contract liability balance was $0.2 million and $0.5 million for the three and six months ended June 30, 2024, respectively. There was no revenue recognized from the contract liability balance for the three and six months ended June 30, 2023.

 

Practical Expedient

 

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

 

9

NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  
 

Note 4.  Inventories, net

 

Inventories consist of the following as of June 30, 2024 and  December 31, 2023 (in thousands):

 

  

June 30,

  

December 31,

 
  

2024

  

2023

 

Raw materials

 $2,193  $2,395 

Work in process

  293   559 

Finished goods

  39,077   38,658 

Total inventories, net

 $41,563  $41,612 

  

 

Note 5.  Other Current Receivables

 

Other current receivables consist of the following as of June 30, 2024 and  December 31, 2023 (in thousands):

 

  

June 30,

  

December 31,

 
  

2024

  

2023

 

Current income tax receivables

 $1,353  $1,418 

Employee receivables

  195   249 

Other receivables

  2,410   2,375 

Total other current receivables

 $3,958  $4,042 

 

Employee receivables primarily consist of amounts paid by us for foreign withholding tax paid on behalf of employees working on international assignments, which is expected to be reimbursed to us by the employees when refunded as foreign tax credits on their home-country tax returns. As of  June 30, 2024 and  December 31, 2023, a component of the other receivables balance is $1.1 million and $1.2 million, respectively, related to a company-owned life insurance policy associated with a non-qualified deferred compensation plan which was terminated in late 2023. We expect to utilize the proceeds from the liquidation of the insurance policy to fund the disbursements to settle liabilities under the terminated plan by the end of 2024. The associated liability of $1.1 million and $1.2 million, respectively, is included in other current liabilities on the accompanying condensed consolidated balance sheets as of  June 30, 2024 and December 31, 2023. In addition, the other receivables balance at  June 30, 2024 includes $0.7 million associated with a technical services and assistance agreement with our partner in Oman, and a corresponding balance at  December 31, 2023 of $0.9 million, net of withholding tax, which was collected in June 2024.

 

Note 6.  Property and Equipment

 

Property and equipment by major asset class consist of the following as of June 30, 2024 and  December 31, 2023 (in thousands): 

 

  

June 30,

  

December 31,

 
  

2024

  

2023

 

Land

 $1,579  $1,630 

Building and improvements

  7,388   7,742 

Machinery and equipment

  19,607   19,378 

Computers and software

  2,627   2,408 

Furniture and fixtures

  641   722 

Vehicles

  253   265 

Right of use assets - finance leases

  13,951   12,709 

Service equipment

  57   57 
   46,103   44,911 

Less: Accumulated depreciation and amortization

  (23,155)  (21,912)
   22,948   22,999 

Construction in progress

  199   337 

Property and equipment, net

 $23,147  $23,336 

 

10

NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

The following table presents the depreciation expense associated with the respective income statement line items for the three and six months ended June 30, 2024 and 2023 (in thousands):

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2024

  

2023

  

2024

  

2023

 

Cost of sales

                

Cost of product sales

 $459  $382  $927  $744 

Cost of services

  194   145   342   299 

Selling, general and administrative expenses

  481   421   938   848 

Total depreciation

 $1,134  $948  $2,207  $1,891 

 

We evaluate our property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. We determined there were no triggering events that indicated potential impairment of our property and equipment for the three and six months ended June 30, 2024 and 2023, and accordingly no impairment loss has been recorded.

 

 

Note 7.  Goodwill and Identifiable Intangibles

 

The carrying amount of goodwill is summarized as follows (in thousands):

 

  

June 30,

  

December 31,

 
  

2024

  

2023

 

Gross value

 $177,162  $177,162 

Accumulated impairment

  (161,940)  (161,940)

Net

 $15,222  $15,222 

 

We perform an annual impairment analysis of goodwill as of December 31, or whenever there is a triggering event that indicates an impairment loss may have been incurred. As of June 30, 2024 and 2023, we did not identify any triggering events for Repeat Precision, our only reportable unit with goodwill, that would indicate potential impairment. Therefore, no goodwill impairment has been recorded for the three and six months ended June 30, 2024 and 2023.

 

Identifiable intangibles by major asset class consist of the following (in thousands):

 

   

June 30, 2024

 
 

Estimated

 

Gross

         
 

Useful

 

Carrying

  

Accumulated

  

Net

 
 

Lives (Years)

 

Amount

  

Amortization

  

Balance

 

Technology

1 - 20

 $3,958  $(992) $2,966 

Customer relationships

10

  4,100   (3,041)  1,059 

Total amortizable intangible assets

   8,058   (4,033)  4,025 

Technology - not subject to amortization

Indefinite

  48      48 

Total identifiable intangibles

 $8,106  $(4,033) $4,073 

 

   

December 31, 2023

 
 

Estimated

 

Gross

         
 

Useful

 

Carrying

  

Accumulated

  

Net

 
 

Lives (Years)

 

Amount

  

Amortization

  

Balance

 

Technology

1 - 20

 $3,958  $(863) $3,095 

Customer relationships

10

  4,100   (2,836)  1,264 

Total amortizable intangible assets

   8,058   (3,699)  4,359 

Technology - not subject to amortization

Indefinite

  48      48 

Total identifiable intangibles

 $8,106  $(3,699) $4,407 

 

11

NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

Total amortization expense, which is associated with selling, general and administrative expenses on the condensed consolidated statements of operations, was $0.2 million for each of the three months ended June 30, 2024 and 2023 and $0.3 million for each of the six months ended June 30, 2024 and 2023, respectively.

 

Identifiable intangibles are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. As of June 30, 2024 and 2023, we evaluated potential triggering events and determined that there were no triggering events which indicated potential impairment of our intangibles, which are substantially related to our Repeat Precision asset group. Therefore, we did not record any impairment charges related to our identifiable intangibles for the three and six months ended June 30, 2024 and 2023.

 

 

Note 8.  Accrued Expenses

 

Accrued expenses consist of the following as of June 30, 2024 and  December 31, 2023 (in thousands):

 

  

June 30,

  

December 31,

 
  

2024

  

2023

 

Accrued payroll and bonus

 $4,319  $2,255 

Property and franchise taxes accrual

  199   251 

Severance and other termination benefits

  120   436 

Accrued other miscellaneous liabilities

  768   760 

Total accrued expenses

 $5,406  $3,702 

 

As previously disclosed in our Annual Report, we implemented certain restructuring efforts during 2023 to streamline our tracer diagnostics operations in the United States, consolidate Repeat Precision facilities in Mexico, and eliminate redundancies in the structure of certain U.S. and international operations management and support functions. In addition, in July 2023, an executive officer and NCS agreed that he would leave his position. In connection with these restructuring efforts, we incurred severance and other charges of $1.9 million in 2023, a portion of which was associated with the acceleration of non-cash share-based compensation. Of this amount, we paid $1.1 million in 2023 and $0.4 million for the six months ended  June 30, 2024, with a remaining severance and other termination benefits accrual associated with these restructuring efforts of less than $0.1 million. Incremental severance expense of $0.1 million was incurred during the second quarter of 2024 associated with other terminations. The total liability for severance and other termination benefits of $0.1 million as of June 30, 2024, was fully paid in  July 2024.

 

In June 2024, we entered into a sublease agreement as the lessor of a portion of the space associated with a U.S. facility closed during our 2023 restructuring efforts. This sublease covers the remaining 28-month lease term. We will apply the sublease rental income to offset the operating lease expense associated with this facility.  

 

Note 9.  Debt

 

Our long-term debt consists of the following as of June 30, 2024 and  December 31, 2023 (in thousands):

 

  

June 30,

  

December 31,

 
  

2024

  

2023

 

ABL Facility

 $  $ 

Repeat Precision Promissory Note

      

Finance leases

  8,902   8,156 

Total debt

  8,902   8,156 

Less: current portion

  (2,074)  (1,812)

Long-term debt

 $6,828  $6,344 

 

The estimated fair value of total debt as of June 30, 2024 and  December 31, 2023 was $7.8 million and $7.1 million, respectively. The fair value of the finance leases was estimated using Level 2 inputs by calculating the sum of the discounted future interest and principal payments at our incremental borrowing rate through the date of maturity.

 

12

NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 

Below is a description of our financing arrangements.

 

ABL Facility

 

On May 3, 2022, we entered into a secured asset-based revolving credit facility (the “ABL Facility”) under which credit availability is subject to a borrowing base calculation. The ABL Facility is governed by the Credit Agreement dated as of May 3, 2022, by and between NCS Multistage Holdings, Inc. (“NCSH”), Pioneer Investment, Inc. (“Pioneer”), NCS Multistage, LLC, NCS Multistage Inc. (“NCS Canada”), the other loan parties thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent and as a lender under the facility provided therein (the “Credit Agreement”). Concurrent with the entry into our Credit Agreement on May 3, 2022, our prior ABL facility was terminated. On April 16, 2024, we amended the Credit Agreement to modify the benchmark that may be used for loans in Canadian dollars in connection with the cessation of the CDOR Rate and transition to the CORRA Rate.

 

The ABL Facility consists of a revolving credit facility in an aggregate principal amount of $35.0 million made available to borrowers, of which up to $10.0 million may be made in Canadian dollars and $7.5 million may be made available for letters of credit. Total borrowings available to the borrowers under the ABL Facility may be limited subject to a borrowing base calculated on the sum of cash in a specified pledged account, eligible accounts receivables and eligible inventory, provided it does not include the assets of Repeat Precision. Our available borrowing base under the ABL Facility as of  June 30, 2024 was $14.4 million. The ABL Facility will mature on May 3, 2027. As of June 30, 2024 and  December 31, 2023, we had no outstanding indebtedness under the ABL Facility.

 

Borrowings under the ABL Facility may be made in U.S. dollars with interest calculated using either the “ABR”, the “Adjusted Daily Simple SOFR” or the “Adjusted Term SOFR Rate”, and in Canadian dollars with interest calculated using the “Canadian Prime Rate” or the “Adjusted Term CORRA Rate” (each as defined in the amended and restated Credit Agreement). Borrowings bear interest plus a margin that varies depending on our leverage ratio as follows: (i) for ABR based loans, between 1.40% and 2.40%, and (ii) for Adjusted Daily Simple SOFR, Adjusted Term SOFR Rate, Canadian Prime Rate, and Adjusted Term CORRA Rate, between 2.40% and 3.40%. We must also pay a commitment fee calculated at 0.25% to 0.50% per annum, based on unused commitments. The applicable interest rate at June 30, 2024 was 7.7%. We incurred interest expense related to the ABL Facility, including commitment fees, of $0.1 million for each of the three and six months ended June 30, 2024 and 2023, respectively.

 

The obligations of the borrowers under the ABL Facility are guaranteed by NCSH and each of our U.S. and Canadian subsidiaries (other than Repeat Precision), as well as each of our future direct and indirect subsidiaries organized under the laws of the United States or Canada (subject to certain exceptions), and are secured by substantially all of the assets of NCSH and its subsidiaries, in each case, subject to certain exceptions and permitted liens.

 

The Credit Agreement requires, as a condition to borrowing, that available cash on hand after borrowings does not exceed $10.0 million. The Credit Agreement also requires us to (i) maintain, for quarters during which liquidity is less than 20% of the aggregate revolving commitments, a fixed charge coverage ratio of at least 1.0 to 1.0 and (ii) to prepay advances to the extent that the outstanding loans and letter of credit amounts exceed the most recently calculated borrowing base. As of June 30, 2024, we were in compliance with these financial covenants. The Credit Agreement also contains customary affirmative and negative covenants, including, among other things, restrictions on the creation of liens, the incurrence of indebtedness, investments, dividends and other restricted payments, dispositions and transactions with affiliates.

 

The Credit Agreement includes customary events of default for facilities of this type (with customary materiality thresholds and grace periods, as applicable). If an event of default occurs, the lenders party to the Credit Agreement may elect (after the expiration of any applicable notice or grace periods) to declare all outstanding borrowings under such facility, together with accrued and unpaid interest and other amounts payable thereunder, to be immediately due and payable. The lenders party to the Credit Agreement also have the right upon an event of default thereunder to terminate any commitments to provide further borrowings, or to provide additional financing in excess of the borrowing base limit, or to proceed against the collateral securing the ABL Facility.

 

We capitalized direct costs of $1.0 million in connection with the Credit Agreement, and less than $0.1 million associated with the April 2024 amendment, each of which is being amortized over the remaining term of the ABL Facility using the straight-line method. Amortization of the deferred financing charges of $0.1 million for each of the three and six months ended June 30, 2024 and 2023, respectively, was included in interest expense, net.

 

Repeat Precision Promissory Note

 

On February 16, 2018, Repeat Precision entered into a promissory note with Security State Bank & Trust, Fredericksburg (the “Repeat Precision Promissory Note”). The Repeat Precision Promissory Note had been renewed several times. In May 2024, the Repeat Precision Promissory Note was again renewed with a reduced aggregate borrowing capacity of $2.5 million. The Repeat Precision Promissory Note is scheduled to mature on May 10, 2025 and bears interest at a variable interest rate based on prime plus 1.00%. The applicable interest rate at June 30, 2024 was 9.5%. The Repeat Precision Promissory Note is collateralized by certain equipment, inventory and receivables of Repeat Precision. Total borrowings may be limited subject to a borrowing base calculation, which includes a portion of Repeat Precision’s eligible receivables, inventory and equipment. As of June 30, 2024 and December 31, 2023, there was no outstanding indebtedness under the promissory note. Repeat Precision’s indebtedness is guaranteed by Repeat Precision and is not guaranteed by any other NCS entity.

 

Finance Leases 

 

We lease assets under finance lease arrangements including an office and laboratory in Tulsa, Oklahoma, as well as facilities in Odessa, Texas, and certain operating equipment and software. We also maintain a vehicle leasing arrangement with a fleet management company through which we lease light vehicles and trucks that meet the finance lease criteria.

 

13

NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

Note 10.  Commitments and Contingencies 

 

Litigation 

 

In the ordinary course of our business, from time to time, we have various claims, lawsuits and administrative proceedings that are pending or threatened with respect to commercial, intellectual property and employee matters.

 

Texas Matter

 

NCS was a defendant in a lawsuit in the District Court of Winkler County, Texas (the “Texas Matter”) that was settled in December 2023, where the insurance carrier agreed to pay the mutually-agreed settlement amounts to the plaintiff in settlement of all liabilities, resulting in no cash payments by NCS. The lawsuit was filed in September 2019 by plaintiffs Boyd & McWilliams Energy Group, Inc. et. al. claiming damage to their wells in 2018 resulting from an alleged product defect related to components provided by a third-party supplier. In May 2023, a jury awarded damages against us to the plaintiff, and a judgment was rendered, above our initial expectations from the jury verdict, awarding the plaintiff total damages of $42.5 million. During 2023, we accrued $40.8 million which included this judgment amount and estimated court costs, less $2.0 million previously paid to the plaintiff by our insurance carrier. During the fourth quarter of 2023, in connection with entering into a settlement agreement, we reversed the accrual for this legal contingency of $40.8 million. As of December 31, 2023, because we had entered into a settlement agreement where the insurance carrier agreed to pay all amounts due to the plaintiff in early 2024, we recorded an insurance receivable for expected but unpaid insurance recoveries and a remaining provision for legal contingencies of $15.0 million. The settlement was fully paid by the insurance carrier in January 2024.

 

Wyoming Matter

 

 NCS was a defendant in a lawsuit in a state district court in Wyoming, which settled in August 2023 (the “Wyoming Matter”). The claim related to an alleged service issue by our personnel during completions operations. The parties agreed to a settlement that included a payment to the plaintiff of $2.0 million, which was paid on NCS’s behalf under a policy of insurance and NCS received $0.6 million as reimbursement of unpaid invoices from the plaintiff. 

 

As of June 30, 2023, we accrued a provision for the Wyoming Matter of $1.7 million which represented our best estimate of loss at the time, within the range of possible outcomes. In the third quarter of 2023, we reversed this provision for the Wyoming Matter as it was settled and paid by our insurance company.

 

Canada Patent Matters

 

●  On July 24, 2018, we filed a patent infringement lawsuit seeking unspecified damages against Kobold Corporation, Kobold Completions Inc. and 2039974 Alberta Ltd. (“Kobold”) in the Federal Court of Canada (“Canada Court”), alleging that Kobold’s fracturing tools and methods infringe on several of our Canadian patents. On July 12, 2019, Kobold filed a counterclaim seeking unspecified damages alleging that our fracturing tools and methods infringe on their patent. The patent infringement litigation against Kobold and their counterclaim was heard in early 2022.

 

On October 10, 2023, the judge rendered a decision against us holding that our asserted patents are invalid and that we are infringing the Kobold asserted patent. The Canada Court ordered us to pay Kobold approximately $1.8 million ($2.5 million in Canadian dollars) in costs and disbursements, including taxes payable thereon, and granted an injunction prohibiting us from any further infringement of the specified patent. We paid this amount to Kobold in November 2023. 

 

We believe that applicable law supports strong grounds to appeal the decision by the Canada Court as well as to reduce the costs award significantly. We have appealed the judgment and believe we have strong arguments that may lead to a reversal of substantial portions of the decision, although a loss may be reasonably possible. We expect the appeal to be heard by late 2024, and a decision granted by mid-2025. If we do not prevail in the appeal phase, the damages portion would then be decided by the Canada Court and we do not know what damages, if any, will be awarded to Kobold. We would expect any damages awarded to be more modest because of the relative ease and minimal cost in implementing changes to our product to comply with the injunction, with such changes resulting in no significant commercial impact to date. In July 2024, Kobold filed a motion with the Canada Court regarding the scope of the injunction. If the Canada Court agrees with Kobold, it may impose a fine or other remedy against the Company. 

 

●  On April 6, 2020, Kobold filed a separate patent infringement lawsuit seeking unspecified damages against us in the Canada Court, alleging that our fracturing tools infringe on their Canadian patents. We believe we have strong arguments of invalidity and non-infringement in this matter. This patent infringement litigation has not yet been assigned a trial date.

 

Other Patent Matters

 

In connection with our patent infringement jury verdict against Nine Energy Services, Inc. (“Nine”), in January 2022 in the Western District of Texas, Waco Division (“Waco District Court”) the jury awarded NCS approximately $0.5 million in damages for Nine’s infringement of U.S. Patent No. 10,465,445 (“the ’445 Patent”). In addition, in August 2022 in connection with the patent infringement jury verdict against TCO AS, the jury awarded NCS approximately $1.9 million in damages for TCO AS’s infringement of the ’445 Patent. At a hearing for the Nine and TCO cases, in December 2022 and May 2024, respectively, the Waco District Court announced it would be awarding supplemental damages, interest, and costs and ordered Nine and TCO to pay an ongoing royalty for the sale of infringing casing flotation devices for the life of the ’445 Patent. Both cases remain subject to appeal and, therefore, we have not recorded any potential gain contingencies associated with these matters in the accompanying condensed consolidated statements of operations.

 

In accordance with GAAP, we accrue for contingencies where the occurrence of a material loss is probable and can be reasonably estimated. Our legal contingencies may increase or decrease, on a matter-by-matter basis, to account for future developments. Although the outcome of any legal proceeding cannot be predicted with any certainty, our assessment of the likely outcome of litigation matters is based on our judgment of a number of factors, including experience with similar matters, past history, precedents, relevant financial information and other evidence and facts specific to each matter.

 

14

NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

Note 11.  Share-Based Compensation

 

During the six months ended June 30, 2024, we granted 24,366 equity-classified restricted stock units (“RSUs”) with a weighted average grant date fair value of $15.35 to the nonemployee members of the Board of Directors. The RSUs granted to the members of our Board of Directors generally vest on the one year anniversary of the grant date and either settle at vesting or, if the director has elected to defer the RSUs, within thirty days following the earlier of the termination of the director’s service for any reason or a change of control.

 

During the six months ended June 30, 2024, we granted 202,225 equivalent stock units, or cash-settled, liability-classified RSUs (“ESUs”), with a weighted average grant date fair value of $15.35. When ESUs are granted to employees, they are valued at fair value, which we measure at the closing price of our common stock on the date of grant. Since ESUs will be settled in cash, we record a liability, which is remeasured each reporting period at fair value based upon the closing price of our common stock until the awards are settled. The ESUs generally vest and settle over a period of three equal annual installments beginning on or around the anniversary of the date of grant. The cash settled for any ESU will not exceed the maximum payout established by our Compensation, Nominating and Governance Committee of the Board of Directors.

 

In addition, during the six months ended June 30, 2024, we granted 56,157 performance stock unit awards (“PSUs”), which have a performance period from January 1, 2024 to December 31, 2026. The PSUs grant date fair value of $15.27 was measured using a Monte Carlo simulation. The number of PSUs ultimately issued under the program is dependent upon our total shareholder return relative to a performance peer group (“relative TSR”) over the three year performance period. Each PSU associated with the March 2024 award will settle for between zero and 1.25 shares of our common stock in the first quarter of 2027. The threshold performance level (25th percentile relative TSR) earns 50% of the target PSUs, the mid-point performance level (50th percentile relative TSR) earns 100% of the target PSUs and the maximum performance level (75th percentile relative TSR) or greater earns 125% of the target PSUs.

 

Total share-based compensation expense for all awards was $1.2 million for each of the three months ended June 30, 2024 and 2023, and $2.1 million and $2.5 million for the six months ended June 30, 2024 and 2023, respectively.

 

 

Note 12.  Income Taxes 

 

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income (or loss) for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired or additional information is obtained. The computation of the annual estimated effective tax rate includes applicable modifications, which were projected for the year, such as certain book expenses not deductible for tax, tax credits and foreign deemed dividends.

 

Our effective tax rate (“ETR”) from continuing operations was (10.5%) and (4.4%) for the three months ended June 30, 2024 and 2023, respectively, and 160.7% and (0.5%) for the six months ended June 30, 2024 and 2023, respectively. The income tax expense for the three and six months ended June 30, 2024 and 2023 primarily relates to results generated by our United States, Canada, and certain other foreign businesses. The income tax provision for both the three and six months ended June 30, 2024 and 2023 does not include effects of losses within the United States, Canada, or other jurisdictions, from which we cannot currently benefit. In addition, for both the three and six months ended June 30, 2024 and 2023 the income tax provision includes effects of changes in valuation allowances established against our previously recognized deferred tax assets, including against net operating loss carryforwards, in the United States, Canada, or other jurisdictions. For both the three and six months ended June 30, 2024 and 2023, due to the impact of the valuation allowances on tax expense, significant variations exist in the customary relationship between income tax expense and pretax accounting income.

 

15

NCS MULTISTAGE HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 

Note 13.  Loss Per Common Share

 

The following table presents the reconciliation of the numerator and denominator for calculating loss per common share (in thousands, except per share data):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2024

   

2023

   

2024

   

2023

 

Numerator

                               

Net loss

  $ (2,839 )   $ (32,076 )   $ (286 )   $ (47,072 )

Less: income attributable to non-controlling interest

    256       155       739       128  

Net loss attributable to NCS Multistage Holdings, Inc.

  $ (3,095 )   $ (32,231 )   $ (1,025 )   $ (47,200 )
                                 

Denominator

                               

Basic weighted average number of shares

    2,548       2,476       2,528       2,464  

Dilutive effect of stock options, RSUs and PSUs

                       

Diluted weighted average number of shares

    2,548       2,476       2,528       2,464  
                                 

Loss per common share

                               

Basic

  $ (1.21 )   $ (13.02 )   $ (0.41 )   $ (19.16 )

Diluted

  $ (1.21 )   $ (13.02 )   $ (0.41 )   $ (19.16 )
                                 

Potentially dilutive securities excluded as anti-dilutive

    144       155       138       145  

 

 

 

   

 

Item 2.  Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (Quarterly Report) and with our audited financial statements and the related notes thereto included in our Annual Report on Form 10-K (“Annual Report”), filed with the Securities and Exchange Commission (the SEC). This discussion and analysis contains forward-looking statements regarding the industry outlook, estimates and assumptions concerning events and financial and industry trends that may affect our future results of operations or financial condition and other non-historical statements. These forward-looking statements are subject to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in “—Cautionary Note Regarding Forward-Looking Statements and Risk Factors. Our actual results may differ materially from those contained in or implied by these forward-looking statements. As used in this Quarterly Report, except where the context otherwise requires or where otherwise indicated, the terms Company, NCS, we, our and us refer to NCS Multistage Holdings, Inc.

 

Overview and Outlook

 

We are a leading provider of highly engineered products and support services that facilitate the optimization of oil and natural gas well construction, well completions and field development strategies. We provide our products and services primarily to exploration and production (“E&P”) companies for use in onshore and offshore wells, predominantly wells that have been drilled with horizontal laterals in both unconventional and conventional oil and natural gas formations. Our products and services are utilized in oil and natural gas basins throughout North America and in selected international markets, including the North Sea, the Middle East, Argentina and China. We provide our products and services to various customers, including leading large independent oil and natural gas companies and major oil companies.

 

Our primary offering is our fracturing systems products and services, which enable efficient pinpoint stimulation: the process of individually stimulating each entry point into a formation targeted by an oil or natural gas well. Our fracturing systems products and services can be used in both cemented and open-hole wellbores and enable our customers to precisely place stimulation treatments in a more controlled and repeatable manner as compared with traditional completion techniques. Our fracturing systems products and services are utilized in conjunction with third-party providers of pressure pumping, coiled tubing and other services. As an extension of fracturing systems, we offer enhanced recovery systems, which enable our customers to inject water, other fluids, or gases in a controlled manner with the objective of increasing the number of hydrocarbons produced from their assets.

 

We own a 50% interest in Repeat Precision, LLC (“Repeat Precision”), which sells composite frac plugs, perforating guns and related products. We provide tracer diagnostics services for well completion and reservoir characterization that utilize downhole chemical and radioactive tracers. We sell products for well construction, including casing buoyancy systems, liner hanger systems and toe initiation sleeves. We operate in one reportable segment that has been identified based on how our chief operating decision maker manages our business.

 

Our products and services are primarily sold to North American E&P companies and our ability to generate revenues from our products and services depends upon oil and natural gas drilling and completion activity in North America. Oil and natural gas drilling and completion activity is directly influenced by oil and natural gas prices.

 

Based on E&P company activity to date and expected capital budgets for the remainder of 2024, as well as industry reports, we believe that annual average industry drilling and completion activity in Canada will be approximately flat or slightly higher compared to 2023. However, potential fresh water rationing in certain regions in Canada due to recent drought conditions could reduce completions activity. In the United States, we expect a decline in activity by 5% to 10% on average compared to 2023 due in part to reduced natural gas prices and E&P consolidation. International industry activity is expected to improve by approximately 5% on average in 2024 as compared to 2023.

 

Oil and natural gas prices were volatile in 2023, and this volatility continued into 2024 due to unrest associated with the ongoing war between Russia and Ukraine and the Israeli-Hamas conflict. If the Israeli-Hamas conflict further escalates in the Middle East, it could result in further commodity price volatility. To mitigate the impact of uncertain economic conditions on the oil market, certain countries continue to extend voluntary crude oil output cuts and maintain spare capacity, enabling the producers to adjust production levels relatively quickly. See further discussion below on oil and natural gas pricing.

 

We continue to face intense competitive pressure across all of our product and services offerings, which has and may continue to have a negative impact on market share and operating margins for certain product lines. Furthermore, this competitive pressure constrains our ability to raise prices in an inflationary environment, which was more pronounced in early to mid-2023 but has since partially improved.

 

Over the past two years, we have experienced modest supply chain disruptions and higher prices for certain raw materials, including steel and chemicals, as well as purchased components and outsourced services. This cost inflation persisted throughout 2022, continued into 2023, then moderated somewhat in 2024. Prices for steel have declined from their highs as U.S. rig counts have decreased. While we have endeavored to increase customer prices to defray our higher raw material and component costs, these price increases have not always fully offset our higher input costs. We also experienced tight labor conditions starting in 2022, which has led to increased employee turnover, delays in filling open positions and labor cost inflation, which impacted both our cost of sales and selling, general and administrative (“SG&A”) expenses and resulted in higher salaries, hourly pay rates and benefit costs. However, labor cost inflation, while still elevated, began to decrease during the latter part of 2023.

 

To counter inflationary pressures on the economy, central banks, including the U.S. Federal Reserve, increased reference interest rates several times between March 2022 and July 2023, actions typically expected to increase borrowing costs and restrain economic activity. In June 2024, the U.S. Federal Reserve did not increase the benchmark interest rate, which remains unchanged in 2024 to date, amid signs of more persistent inflation and strong economic growth. While the U.S. Federal Reserve has not changed the benchmark interest rate recently and rate cuts are possible later in 2024, unfavorable inflation data could delay any action.

 

 

Market Conditions

 

Oil and Natural Gas Drilling and Completion Activity

 

While oil and natural gas prices remain volatile, the average WTI crude oil pricing increased in the second quarter of 2024 as compared to the first quarter of 2024. During the second quarter of 2024, members of OPEC and certain other countries, including Russia (informally known as “OPEC+”), agreed to extend additional crude oil production cuts of 2.2 MMBBL/D until the end of September 2024 as well as prolonged other production cuts until the end of 2025. Since 2022, OPEC + has implemented various production cuts to address the uncertain outlook in the global economic and oil markets.

 

Natural gas pricing continues to be volatile and has decreased for the second quarter of 2024 to an average of $2.07 per MMBtu compared to an average of $2.15 per MMBtu for the first quarter of 2024. Realized natural gas prices for Canadian E&P customers are typically at a discount to U.S. Henry Hub pricing. The natural gas price declines in 2024 are due to a mild winter and continued high surplus levels in natural gas storage, negatively impacting drilling and completion activity in certain regions, particularly in the United States. 

 

Sustained significant declines in commodity prices, or sustained periods when the local pricing received in regional markets is below benchmark pricing, known in the industry as high differentials, would be expected to lead North American E&P companies to reduce drilling and completion activity, which could negatively impact our business.

 

Listed and depicted below are recent crude oil and natural gas pricing trends, as provided by the Energy Information Administration (“EIA”) of the U.S. Department of Energy:

 

   

Average Price

 

Quarter Ended

 

WTI Crude (per Bbl)

   

Brent Crude (per Bbl)

   

Henry Hub Natural Gas (per MMBtu)

 

6/30/2023

  $ 73.54     $ 77.99     $ 2.16  

9/30/2023

    82.25       86.65       2.59  

12/31/2023

    78.53       84.01       2.74  

3/31/2024

    77.50       82.92       2.15  

6/30/2024

    81.81       84.68       2.07  

 

 
https://cdn.kscope.io/a7782dd3e518f487a1f509151ff819f3-crudeq2.jpg

 

https://cdn.kscope.io/a7782dd3e518f487a1f509151ff819f3-hubq2.jpg
 

 

Listed and depicted below are the average number of operating onshore rigs in the United States and in Canada per quarter since the second quarter of 2023, as provided by Baker Hughes Company. The quarterly changes, particularly for the second quarter Canadian land rig count, can be partially attributed to seasonality of activity in that market:

 

   

Average Drilling Rig Count

 

Quarter Ended

 

U.S. Land

   

Canada Land

   

North America Land

 

6/30/2023

    699       116       815  

9/30/2023

    630       187       817  

12/31/2023

    601       180       781  

3/31/2024

    602       208       810  

6/30/2024