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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

Commission File Number: 001-38091

 

NATIONAL ENERGY SERVICES REUNITED CORP.

(Exact name of Registrant as specified in its charter)

 

Not Applicable

(Translation of registrant’s name into English)

 

777 Post Oak Blvd., Suite 730

Houston, Texas 77056

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F ☒ Form 40-F ☐

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): Yes ☐ No ☒

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): Yes ☐ No ☒

 

 

 

 

 

 

INCORPORATION BY REFERENCE

 

The information contained in this report on Form 6-K shall be deemed incorporated by reference into the registration statements on Form F-3 (Registration Numbers 333-233422, 333-229801, and 333-226194) and Form S-8 (Registration Number 333-226813) of National Energy Services Reunited Corp. (including any prospectuses forming a part of such registration statements) and to be a part thereof from the date on which this report on Form 6-K is filed, to the extent not superseded by documents or reports subsequently filed or furnished.

 

 

 

 

TABLE OF CONTENTS

 

FINANCIAL INFORMATION AND CURRENCY OF FINANCIAL STATEMENTS 3
PART I – FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 4
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS 4
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS 5
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME 6
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS SHAREHOLDERS’ EQUITY 7
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS 8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS 9
1. DESCRIPTION OF BUSINESS 9
2. BASIS OF PRESENTATION 9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 10
4. REVENUE 12
5. BUSINESS COMBINATIONS 12
6. ACCOUNTS RECEIVABLE 15
7. SERVICE INVENTORIES 16
8. PROPERTY, PLANT, & EQUIPMENT 16
9. GOODWILL AND INTANGIBLE ASSETS 17
10. DEBT 18
11. FAIR VALUE ACCOUNTING 20
12. EMPLOYEE BENEFITS 20
13. SHARE-BASED COMPENSATION EXPENSE 21
14. COMMITMENTS AND CONTINGENCIES 22
15. EQUITY 23
16. EARNINGS PER SHARE 24
17. INCOME TAXES 26
18. RELATED PARTY TRANSACTIONS 26
19. REPORTABLE SEGMENTS 27
Cautionary Note Regarding Forward-Looking Statements 29
ITEM 2. OPERATING AND FINANCIAL REVIEW 30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 41
ITEM 4. INTERNAL CONTROLS AND PROCEDURES 42
PART II - OTHER INFORMATION 43
Item 1. Legal Proceedings. 43
Item 1A. Risk Factors. 43

 

2

 

 

FINANCIAL INFORMATION AND CURRENCY OF FINANCIAL STATEMENTS

 

The unaudited condensed consolidated interim financial statements included in Part 1, Item 1, “Financial Statements (Unaudited)” of this Periodic Report have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Unless otherwise indicated, all references in this Periodic Report to “dollars,” “$,” or “US$” are to U.S. dollars, which is the reporting currency of the condensed consolidated interim financial statements.

 

3

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In US$ thousands, except share data)

 

    September 30, 2020     December 31, 2019  
             
Assets                
Current assets                
Cash and cash equivalents   $ 50,487     $ 73,201  
Accounts receivable, net    

128,719

      98,799  
Unbilled revenue    

155,935

      76,347  
Service inventories, net    

94,415

      78,841  
Prepaid assets    

8,267

      9,590  
Retention withholdings    

27,089

      40,970  
Other receivables    

19,381

      14,019  
Other current assets    

5,522

      11,442  
Total current assets    

489,815

      403,209  
Non-current assets              
Property, plant and equipment, net    

458,505

      419,307  
Intangible assets, net    

115,198

      122,714  
Goodwill    

596,857

      574,764  
Other assets    

3,069

      2,370  
Total assets   $

1,663,444

    $ 1,522,364  
                 
Liabilities and equity                
Liabilities                
Accounts payable  

147,268

    65,704  
Accrued expenses    

51,591

      69,137  
Current installments of long-term debt    

43,750

      15,000  
Short-term borrowings    

36,392

      37,963  
Income taxes payable    

9,336

      7,542  
Other taxes payable    

11,466

      7,189  
Other current liabilities    

37,685

      25,601  
Total current liabilities    

337,488

      228,136  
                 
Long-term debt    

319,738

      330,564  
Deferred tax liabilities    

22,885

      26,217  
Employee benefit liabilities    

19,438

      16,745  
Other liabilities    

37,924

      34,230  
Total liabilities    

737,473

      635,892  
                 
Commitments and contingencies (Note 14)     -       -  
                 
Equity                
Preferred shares, no par value; unlimited shares authorized; none issued and outstanding at September 30, 2020 and December 31, 2019, respectively     -       -  
Common stock, no par value; unlimited shares authorized; 87,777,553 and 87,187,289 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively    

801,545

      801,545  
Additional paid in capital    

23,076

      17,237  
Retained earnings    

101,230

      67,661  
Accumulated other comprehensive income    

64

      29  
Total shareholders’ equity    

925,915

      886,472  
Non-controlling interests    

56

      -  
Total equity    

925,971

      886,472  
Total liabilities and equity   $

1,663,444

    $ 1,522,364  

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

4

 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS

(In US$ thousands, except share data and per share amounts)

 

    September 30,
2020 		    September 30,
2019 		    September 30,
2020 		    September 30,
2019 		 
    Quarter ended     Year-to-date period ended  
Description   September 30,
2020 		    September 30,
2019 		    September 30,
2020 		    September 30,
2019 		 
                         
Revenues   $ 218,423     $ 161,606     $ 620,971     $ 473,209  
Cost of services     (177,953 )     (121,326)     (500,566 )     (352,716)
Gross profit     40,470       40,280       120,405       120,493  
Selling, general and administrative expenses     (17,449 )     (16,485)     (53,190 )     (46,592)
Amortization     (4,034 )     (4,033)     (11,855 )     (12,036)
Operating income     18,987       19,762       55,360       61,865  
Interest expense, net     (3,793 )     (5,011)     (12,468 )     (14,691)
Other income / (expense), net     37     (130)     (383 )     (629)
Income before income tax     15,231       14,621       42,509       46,545  
Income tax expense     (3,565 )     (3,511)     (8,940 )     (10,905)
Net income     11,666       11,110       33,569       35,640  
Net income / (loss) attributable to non-controlling interests     -       -       -       -  
Net income attributable to shareholders   $ 11,666     $ 11,110     $ 33,569     $ 35,640  
                                 
Weighted average shares outstanding:                                
Basic     89,876,456       87,024,655       88,452,027       86,938,883  
Diluted     89,876,456       87,024,655       88,452,027       86,938,883  
                                 
Net earnings per share (Note 16):                                
Basic   $ 0.13     $ 0.13     $ 0.38     $ 0.40  
Diluted   $ 0.13     $ 0.13     $ 0.38     $ 0.40  

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

5

 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(In US$ thousands)

 

    September 30,
2020 		    September 30,
2019 		    September 30,
2020 		    September 30,
2019 		 
    Quarter ended     Year-to-date period ended  
Description   September 30,
2020 		    September 30,
2019 		    September 30,
2020 		    September 30,
2019 		 
                         
Net income   $ 11,666     $ 11,110     $ 33,569     $ 35,640  
Other comprehensive income, net of tax                                
Foreign currency translation adjustments     -       -       35       (19 )
Total Comprehensive Income, net of tax     11,666       11,110       33,604       35,621  
Comprehensive income attributable to non-controlling interest     -       -       -       -  
Comprehensive income attributable to shareholders   $ 11,666     $ 11,110     $ 33,604     $ 35,621  

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

6

 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF SHAREHOLDERS’ EQUITY

(In US$ thousands, except share data)

 

    Ordinary Shares     Ordinary Amount     Paid In Capital     Accumulated     Retained Earnings     Total  Company     Non controlling     Total Stockholders  
                      Accumulated           Total              
         

Additional

   

Other

       

Company

    Non-    

Total

 
  Ordinary Shares     Paid In     Comprehensive     Retained     Shareholders’     controlling     Shareholders’  
Description   Shares     Amount     Capital     Income     Earnings     Equity     Interests     Equity  
Balance at June 30, 2020     87,495,221     $ 801,545     $ 20,999     $ 64     $ 89,564     $ 912,172     $ 59     $ 912,231  
Share-based compensation expense     -       -       2,082                       -       -      

2,082

                    -      

2,082

 
Vesting of restricted share units     282,332       -       -       -       -       -       -       -  
Other     -       -       (5 )      -       -       (5 )      (3 )      (8 )
Net income     -       -       -       -      

11,666

     

11,666

      -      

11,666

 
Balance at September 30, 2020     87,777,553     $ 801,545     $

23,076

    $ 64     $ 101,230     $ 925,915     $ 56     $ 925,971  

 

    Ordinary Shares     Ordinary Amount     Paid In Capital     Accumulated     Retained Earnings     Total  Company     Non controlling     Total Stockholders  
                      Accumulated         Total             

 

 

                Additional     Other         Company     Non-     Total  
    Ordinary Shares     Paid In     Comprehensive     Retained     Shareholders’     controlling     Shareholders’  
Description   Shares     Amount     Capital     Income     Earnings     Equity     Interests     Equity  
                                                 
Balance at June 30, 2019     86,896,779     $ 801,545     $ 13,698     $ 29     $ 52,827     $ 868,099     $ -     $ 868,099  
Stock-based compensation expense     -       -       1,944                -       -       1,944              -       1,944  
Vesting of restricted share units     250,310       -       -       -       -       -       -       -  
Other     -       -       (1 )     -       -       (1 )     -       (1 )
Net income from July 1, 2019 to September 30, 2019     -       -       -       -       11,110       11,110       -       11,110

 

 

Balance at September 30, 2019     87,147,089     $ 801,545     $ 15,641     $ 29     $ 63,937     $ 881,152     $ -     $ 881,152  

 

    Ordinary Shares     Ordinary Amount     Paid In Capital     Accumulated     Retained Earnings     Total  Company     Non controlling     Total Stockholders  
                                                 
                      Accumulated           Total            
         

Additional

   

Other

       

Company

    Non-    

Total

 
  Ordinary Shares     Paid In     Comprehensive     Retained     Shareholders’     controlling     Shareholders’  
Description   Shares     Amount     Capital     Income     Earnings     Equity     Interests     Equity  
                                                 
Balance at December 31, 2019     87,187,289     $ 801,545     $ 17,237     $ 29     $ 67,661     $ 886,472     $ -     $ 886,472  
Share-based compensation expense     -       -      

5,842

                     -       -      

5,842

                            -      

5,842

 
Vesting of restricted share units     590,264       -       -       -       -       -       -       -  
Other     -       -       (3 )      35       -       32       56       88  
Net income     -       -       -       -      

33,569

     

33,569

      -      

33,569

 
Balance at September 30, 2020     87,777,553     $ 801,545     $ 23,076     $ 64     $

101,230

    $ 925,915     $ 56     $ 925,971  

 

    Ordinary Shares     Ordinary Amount     Paid In Capital     Accumulated     Retained Earnings     Total  Company     Non controlling     Total Stockholders  
                                                 
                      Accumulated         Total               
                Additional     Other         Company     Non-     Total   
    Ordinary Shares     Paid In     Comprehensive     Retained     Shareholders’     controlling     Shareholders’  
Description   Shares     Amount     Capital     Income     Earnings     Equity     Interests     Equity  
                                                 
Balance at December 31, 2018     85,562,769       801,545       1,034       48       28,297       830,924       67       830,991  
Share-based
compensation expense 		    -       -       4,057             -       -       4,057       -       4,057  
Vesting of restricted share units     250,310       -       -       -       -       -       -       -  
Other     33,796       -       3       (19 )     -       (16 )     -       (16 )
Acquisition of non-controlling interest during the period     -       -       67       -       -       67       (67 )     -  
NPS equity earn-out     1,300,214       -       10,480       -       -       10,480       -       10,480  
Net income from January 1, 2019 to September 30, 2019     -       -       -       -       35,640       35,640       -       35,640  
Balance at September 30, 2019     87,147,089       801,545       15,641       29       63,937       881,152       -       881,152  

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

7

 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(In US$ thousands)

 

    Year-to-date
period ended
September 30,
2020 		    Year-to-date
period ended
September 30,
2019 		 
             
Cash flows from operating activities:                
Net income   $ 33,569     $ 35,640  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     91,783       59,728  
Share-based compensation expense     5,842       4,057  
Loss (Gain) on disposal of assets     688       (399 )
Non-cash interest expense     (118 )     1,361  
Deferred tax expense (benefit)     (3,332 )     (1,733 )
Allowance for (reversal of) doubtful receivables     (97 )     920  
Provision for obsolete service inventories     821       932  
Other operating activities, net     (184 )     (100 )
Changes in operating assets and liabilities:                
(Increase) in accounts receivable     (13,223 )     (46,523 )
(Increase) in inventories     (10,755 )     (15,123 )
Decrease (increase) in prepaid assets     2,002       (3,825 )
(Increase) in other current assets     (57,400 )     (5,537 )
(Increase) decrease in other long-term assets and liabilities     (5,746 )     5,403  
Increase in accounts payable and accrued expenses     40,970       23,971  
(Decrease) in other current liabilities     1,234     (13,482 )
Net cash provided by operating activities     86,054       45,290  
                 
Cash flows from investing activities:                
Capital expenditures     (75,448 )     (90,164 )
Proceeds from disposal of assets     1,490       1,125  
Acquisition of business, net of cash acquired (Note 5)     (11,260 )     -  
Other investing activities     (628 )     (932 )
Net cash used in investing activities     (85,846 )     (89,971 )
                 
Cash flows from financing activities:                
Proceeds from long-term debt     15,000       365,000  
Repayments of long-term debt     (18,472 )     (285,048 )
Net change in overdraft facilities     -       (7,050 )
Proceeds from short-term borrowings     14,928       39,941  
Repayments of short-term borrowings     (15,829 )     (44,250 )
Payments on capital leases     (15,679 )     -  
Payments on seller-provided financing for capital expenditures     (2,905 )     -  
Other financing activities, net     -       (5,703 )
Net cash (used in) provided by financing activities     (22,957 )     62,890  
                 
Effect of exchange rate changes on cash     35       (19 )
Net (decrease) increase in cash     (22,714 )     18,190  
Cash and cash equivalents, beginning of period     73,201       24,892  
Cash and cash equivalents, end of period   $ 50,487     $ 43,082  
                 
Supplemental disclosure of cash flow information (also refer Note 3):                
Interest paid     10,152       13,396  
Income taxes paid     12,642       16,583  

 

The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.

 

8

 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 

1. DESCRIPTION OF BUSINESS

 

National Energy Services Reunited Corp. (“NESR,” the “Company,” “we,” “our,” “us” or similar terms), a British Virgin Islands corporation headquartered in Houston, Texas, is one of the largest oilfield services providers in the Middle East North Africa (“MENA”) region.

 

Formed in January 2017, NESR started as a special purpose acquisition company (“SPAC”) designed to invest in the oilfield services space globally. NESR filed a registration statement for its initial public offering in May 2017. In November 2017, NESR announced the acquisition of two oilfield services companies in the MENA region: NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES” and, together with NPS, the “Subsidiaries”). The formation of NESR as an operating entity was completed on June 7, 2018, after the transactions were approved by the U.S. Securities and Exchange Commission (“SEC”) and NESR shareholders. On June 1, 2020, NESR further expanded its footprint within the MENA region by acquiring Sahara Petroleum Services Company S.A.E. (“SAPESCO”).

 

NESR’s revenues are primarily derived by providing production services (“Production Services”) such as hydraulic fracturing, cementing, coiled tubing, filtration, completions, stimulation, pumping and nitrogen services. NESR also provides drilling and evaluation services (“Drilling and Evaluation Services”) such as drilling downhole tools, directional drilling, fishing tools, testing services, wireline, slickline, fluids and rig services. NESR has significant operations throughout the MENA region including Saudi Arabia, Oman, Qatar, Iraq, Algeria, United Arab Emirates, Egypt and Kuwait.

 

2. BASIS OF PRESENTATION

 

The accompanying condensed consolidated interim financial statements of the Company have been prepared in accordance with U.S. GAAP for interim financial reporting purposes. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 20-F for the year ended December 31, 2019.

 

Emerging growth company

 

The Company is an “emerging growth company,” as defined in Section 2(a) of the U.S. Securities Act of 1933 as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.

 

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make a comparison of the Company’s condensed consolidated interim financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

 

9

 

 

Use of estimates

 

The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP 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 condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s significant estimates include estimates made towards the purchase price allocation for the acquisition of SAPESCO, the allowance for doubtful accounts, evaluation for impairment of property, plant and equipment, evaluation for impairment of goodwill and intangible assets, estimated useful life of property, plant, and equipment and intangible assets, provision for inventories obsolescence, recoverability of unbilled revenue, provision for unrecognized tax benefits, recoverability of deferred taxes and contingencies and actuarial assumptions in employee benefit plans.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the condensed consolidated interim financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from the estimates.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Supplemental cash flow information

 

Non-cash transactions for the year-to-date period ended September 30, 2020 were as follows:

 

  ●

Purchases of property, plant, and equipment in Accounts payable, Accrued expenses and Short-term borrowings at September 30, 2020 of $25.6 million (inclusive of seller-provided installment financing balances described below), $0.3 million, and $23.0 million, respectively, are not included under “Capital expenditures” within the Condensed Consolidated Statement of Cash Flows.

     
  ● Capital lease obligations of $24.5 million classified as a short-term obligation within Other current liabilities and $3.8 million classified as a long-term obligation within Other liabilities, are not included under “Payments on capital leases” within the Condensed Consolidated Statement of Cash Flows.
     
  ● Purchases of property, plant, and equipment using seller-provided installment financing of $3.0 million included in Other current liabilities and $0.7 million in Other liabilities are not included under “Payments on seller-provided financing for capital expenditures” within the Condensed Consolidated Statement of Cash Flows. Additionally, purchases of property, plant, and equipment using seller-provided installment financing of $11.5 million included in Accounts Payable are not included under “Payments on seller-provided financing for capital expenditures” within the Condensed Consolidated Statement of Cash Flows.
     
  ● Obligations of $7.3 million and $18.4 million classified in Other current liabilities and Other liabilities, respectively, related to the future payments of cash and shares for the purchase of SAPESCO (Note 5), are not included under “Acquisition of business, net of cash acquired” within the Condensed Consolidated Statement of Cash Flows.

 

Non-cash transactions for the year-to-date period ended September 30, 2019 were as follows:

 

  ● Purchases of property, plant, and equipment in accounts payable and short-term debt at September 30, 2019 of $28.3 million and $22.6 million, respectively, are not included under “Capital expenditures” within the Condensed Consolidated Statement of Cash Flows.

 

10

 

 

Recently issued accounting standards not yet adopted

 

The SEC permits qualifying Emerging Growth Companies (“EGC”) to defer the adoption of accounting standards updates until the time when a private company would adopt such standards. The Company continues to qualify as an EGC as of September 30, 2020.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases,” a new standard on accounting for leases. This update increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In June 2020, the FASB Issued ASU No. 2020-05, “Accounting Standards Update 2020-05—Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities.” ASU No. 2020-05 deferred the Company’s adoption of ASU 2016-02, as amended, to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the provisions of ASU 2016-02 and related interpretive amendments (ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842,” ASU 2018-10, “Codification Improvements to Topic 842, Leases,” ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” ASU 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” and ASU 2019-01, “Leases (Topic 842): Codification Improvements,” inclusive) and assessing the impact, if any, on its condensed consolidated interim financial statements and related disclosures.

 

All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.

 

 

11

 

 

4. REVENUE

 

Disaggregation of revenue

 

There is significant homogeneity amongst the Company’s revenue-generating activities. In all service lines, the Company provides a “suite of services” to fulfill a customer purchase/service order, encompassing personnel, use of Company equipment, and supplies required to perform the services. Over 98% of the Company’s revenue is from the MENA region with the majority sourced from governmental customers, predominantly in Oman and Saudi Arabia. Information regularly reviewed by the chief operating decision maker (“CODM”) for evaluating the financial performance of operating segments is focused on the timing of when the services are performed during a well’s lifecycle. Production Services are services performed during the production stage of a well’s lifecycle. Drilling and Evaluation Services are services performed during the pre-production stages of a well’s lifecycle.

 

Based on these considerations, the following table provides disaggregated revenue data by the phase in a well’s lifecycle during which revenue has been recorded (in US$ thousands):

 

 

    Quarter ended     Year-to-date period ended  
Revenue by Phase in Well’s Lifecycle:   September 30,
2020 		    September 30,
2019 		    September 30,
2020 		    September 30,
2019 		 
Production Services   $ 148,292     $ 97,160     $ 420,516     $ 284,631  
Drilling and Evaluation Services     70,131       64,446       200,455       188,578  
Total revenue by phase in well’s life cycle   $ 218,423     $ 161,606     $ 620,971     $ 473,209  

 

 

5. BUSINESS COMBINATION

 

In June of 2020, NESR executed the Deed of Amendment (“Deed of Amendment”) to the Agreement dated February 13, 2020 related to the sale and purchase of 99.7% of SAPESCO (collectively with the Deed of Amendment, the “Sale & Purchase Agreement”). The executed Deed of Amendment gives NESR control over SAPESCO effective from June 1, 2020. Accordingly, the accounting of the acquisition has been carried out effective June 1, 2020. Formal closing and legal transfer of $15 million of cash and deferred cash consideration was completed in the third quarter of 2020 upon final regulatory approvals and completion of normal closing requirements, which were temporarily delayed as a result of the global COVID-19 pandemic. The Company paid the remaining deferred cash consideration balance of $2 million in October of 2020, and expects to issue 2,237,000 NESR ordinary shares to the SAPESCO selling shareholders during the fourth quarter of 2020.

 

Description of the SAPESCO Transaction

 

Under the terms of the Sale & Purchase Agreement, NESR acquired 99.7% of the issued and outstanding shares of SAPESCO in a cash and stock transaction (the “Business Combination”) which comprised of $11.0 million to be paid at closing, an additional $6.0 million to be paid in three equal installments by October 5, 2020, for total cash consideration of $17.0 million, and the issuance of 2,237,000 NESR shares based on a $10.00 per share conversion rate.

 

The Sale & Purchase Agreement contains earn-out mechanisms that enable the sellers to receive additional consideration after the closing of the Business Combination as follows:

 

● Cash Earn-Out (“Cash Earn-Out”) of up to $6.9 million in cash based on collection of certain receivables;
   
● Additional Earn-Out Shares (“Additional Earn-Out Shares”) based on the collection of certain receivables and only to the extent that NESR’s average share price during the fourth quarter of 2020 is less than $9 per share; and
   
● Customer Receivables Earn-Out Shares (“Customer Receivables Earn-Out Shares”) based on the collection of certain long-dated and/or doubtful receivables for two years subsequent to the Closing Date, to be settled at the NESR Additional Share Price (“NESR Additional Share Price”) which is derived from taking the average of the price of the Company’s shares (“NESR Shares”) during each calendar quarter within the 12 months after the Closing Date and applying the average price in each quarter to the long-dated and doubtful receivables collected during the relevant quarter, provided that if such price is: (a) less than $10, the NESR Additional Share Price shall be $10 or (b) greater than $11.70, the NESR Additional Share Price shall be $11.70.

 

Collectively, the Cash Earn-Out and Additional Earn-Out Shares were fair valued at $11.7 million. The long-dated and doubtful receivables and corresponding Customer Receivables Earn-Out Shares contingency were fair valued at $0.

 

12

 

 

Financing of Business Combination

 

Consideration for the Business Combination was funded through the following sources and transactions:

 

● cash and cash equivalents of $11.0 million;
   
● deferred consideration of $6.0 million, $2.0 million of which was unpaid as of September 30, 2020 and reflected in Other current liabilities in the Condensed Consolidated Balance Sheet;
   
● the issuance of 2,237,000 NESR ordinary shares to the SAPESCO selling shareholders in exchange for their SAPESCO shares, presented in Other liabilities in the Condensed Consolidated Balance Sheet as of September 30, 2020.

 

The following summarizes the preliminary consideration to purchase 99.7% of the issued and outstanding equity interests of SAPESCO:

 

 

    SAPESCO  
    Value (In US$
thousands) 		    Shares  
             
Cash consideration   $ 16,958          
Total consideration – cash     16,958          
                 
NESR ordinary share consideration     12,013       2,237,000  
Total consideration – equity (1)     12,013       2,237,000  
                 
Estimated earn-out mechanisms     11,678       - (2)
                 
Preliminary consideration   $ 40,649       2,237,000  

 

(1) The fair value of NESR ordinary shares was determined based upon the $5.37 per share closing price of NESR ordinary shares on June 1, 2020, the acquisition date of the Business Combination. Control was transferred by agreement with the selling shareholders of SAPESCO.
(2) The quantity of Additional Earn-Out Shares will not be known until the fourth quarter of 2020 when this contingency is resolved. A liability totaling $6.4 million has been recorded in Other liabilities pending the outcome of this contingency. As the Company is contractually obligated to settle this contingency in shares, we believe that presentation as a non-current liability best matches the contingency with the long-term nature of equity financing.

 

Accounting treatment

 

The Business Combination is accounted for under ASC 805, Business Combinations (“ASC 805”). Pursuant to ASC 805, NESR has been determined to be the accounting acquirer. SAPESCO constitutes a business, with inputs, processes, and outputs. Accordingly, the acquisition of SAPESCO constitutes the acquisition of a business for purposes of ASC 805, and due to the change in control of SAPESCO was accounted for using the acquisition method. NESR recorded the fair value of assets acquired and liabilities assumed from SAPESCO.

 

The allocation of the consideration to the tangible and intangible assets acquired and liabilities assumed, is based on various estimates. As of September 30, 2020, management was (1) finalizing fair value of purchase consideration, (2) completing physical verifications and obsolescence assessments for Service inventories and Property, plant and equipment, (3) evaluating the fair value of Service inventories, Property, plant and equipment, and Intangible assets, (4) completing valuation procedures for certain current assets and liabilities, (5) accounting for income taxes, and (6) concluding valuation procedures for Employee benefit liabilities and equipment capital leases recorded in Other liabilities. As such, to the extent of these estimates, the purchase price allocation is preliminary. Management expects that these values will be finalized by the fourth quarter of 2020. Any adjustments will be recognized in the reporting period in which the adjustment amounts are determined.

 

13

 

 

The following table summarizes the preliminary allocation of the purchase price allocation (in US$ thousands):

 

Allocation of consideration

         
Cash and cash equivalents   $ 3,740  
Accounts receivable, net     16,557  
Unbilled revenue     6,125  
Service inventories     5,641  
Prepaid assets     679  
Retention withholdings     279  
Other current assets     552  
Property, plant and equipment     33,787  
Intangible assets     4,220  
Other assets     200  
Total identifiable assets acquired     71,780  
         
Accounts payable     11,985  
Accrued expenses     6,620  
Current installments of long-term debt     5,400  
Short-term borrowings     5,692  
Income taxes payable     313  
Other taxes payable     3,110  
Other current liabilities     782  
Long-term debt     15,572  
Employee benefit liabilities     922  
Other liabilities     2,772  
Noncontrolling interests     56  
Net identifiable liabilities acquired     53,224  
Total fair value of net assets acquired     18,556  
Goodwill     22,093  
Preliminary consideration   $ 40,649  

 

In the quarter ended September 30, 2020, the Company updated its valuation of certain identifiable assets and liabilities as of June 1, 2020. These measurement period changes resulted in an increase of $1.2 million to goodwill as compared to the amounts recorded as of June 1, 2020. Measurement period adjustments included a reduction in the value of property, plant, and equipment of $0.4 million, an increase in accrued expenses of $0.2 million, and an increase in other taxes payable of $0.6 million. The impact of these adjustments on the quarter and year-to-date periods ended September 30, 2020 was not material to the condensed consolidated interim financial statements.

 

Intangible assets

 

Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805.

 

The preliminary allocation to intangible assets is as follows (in US$ thousands):

 

 

    Fair Value      
    Total     Useful Life
    (In US$ thousands)      
Customer contracts   $ 3,770     8 years
Trademarks and trade names     450     2 years
Total intangible assets   $ 4,220      

 

Goodwill

 

As of September 30, 2020, $22.1 million has been allocated to goodwill. Goodwill represents the excess of the gross consideration transferred over the fair value of the underlying net tangible and identifiable definite-lived intangible assets acquired. The goodwill is not amortizable for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of the strong market positions and the assembled workforces.

 

In accordance with FASB ASC Topic 350, Goodwill and Other Intangible Assets, goodwill will not be amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. In the event management determines that the value of goodwill has become impaired, an accounting charge for the amount of impairment during the period in which the determination is made may be recognized.

 

14

 

 

Transaction costs

 

The Company incurred $1.0 million in advisory, legal, accounting, and management fees through September 30, 2020, which includes the amounts the Company had spent prior to the acquisition date of the Business Combination. These costs are recorded in selling, general and administrative expenses in the Condensed Consolidated Interim Statements of Operations in connection with the Business Combination. Transaction costs are reported as a cash outflow from operating activities by the Company.

 

Unaudited pro-forma information

 

The following table summarizes the supplemental consolidated results of the Company on an unaudited pro forma basis, as if the Business Combination had been consummated on January 1, 2019 for the quarter and year-to-date periods ended September 30, 2020 and September 30, 2019, respectively (in US$ thousands):

 

 

    Quarter ended     Year-to-date period ended  
    September 30,
2020 		    September 30,
2019 		    September 30,
2020 		    September 30,
2019 		 
                         
Revenues   $ 218,423     $      175,464     $         639,667     $       523,405  
Net income     12,264       12,710       31,448       47,796  

 

These pro forma results were based on estimates and assumptions, which the Company believes are reasonable. They are not the results that would have been realized had the Company been a combined company during the periods presented and are not necessarily indicative of consolidated results of operations in future periods. SAPESCO’s results for the periods presented include significant charges for restructuring and related activities that may not have been incurred had the Company been a combined company during the periods presented. The pro-forma results include adjustments primarily related to purchase accounting adjustments. Acquisition costs and other non-recurring charges incurred in connection with the Business Combination are included in the earliest period presented.

 

SAPESCO revenue of $11.2 million and $15.1 million, respectively, and net income (loss) of $(0.1) million and $0.0 (zero) million, respectively, are included in the consolidated statement of operations during the quarter and year-to-date periods ended September 30, 2020.

 

6. ACCOUNTS RECEIVABLE

 

The following table summarizes the accounts receivable of the Company as of the period end dates set forth below (in US$ thousands):

 

 

    September 30, 2020     December 31, 2019  
Trade receivables   $ 130,714     $ 100,642  
Less: allowance for doubtful accounts     (1,995 )     (1,843 )
Total   $ 128,719     $ 98,799  

 

 

15

 

 

Trade receivables relate to the sale of services, for which credit is extended based on our evaluation of the customer’s creditworthiness. The gross contractual amounts of trade receivables at September 30, 2020 and December 31, 2019 were $130.7 million and $100.6 million, respectively. Movement in the allowance for doubtful accounts is as follows (in US$ thousands):

 

 

    Quarter ended     Year-to-date period ended  
    September 30,
2020 		    September 30,
2019 		    September 30,
2020 		    September 30,
2019 		 
                         
Allowance for doubtful accounts at beginning of period   $ (2,365 )   $ (450 )   $ (1,843 )   $ (693 )
(Increase) decrease to allowance for the year     233     (575 )     259       (1,051 )
(Recovery) write-off of doubtful accounts     182       -       343       719  
Non-cash reclass of allowance for doubtful accounts between unbilled revenue and accounts receivable     (45 )     -       (754 )     -  
Allowance for doubtful accounts at end of period   $ (1,995 )   $ (1,025 )   $ (1,995 )   $ (1,025 )

 

 

7. SERVICE INVENTORIES

 

The following table summarizes the service inventories for the periods as set forth below (in US$ thousands):

 

 

 

    September 30,     December 31,  
    2020     2019  
             
Spare parts   $ 52,327     $ 39,428  
Chemicals     27,224       22,852  
Raw materials     507       2,441  
Consumables     16,955       15,897  
Total     97,013       80,618  
Less: allowance for obsolete and slow-moving inventories     (2,598 )     (1,777 )
Total   $ 94,415     $ 78,841  

 

8. PROPERTY, PLANT, & EQUIPMENT

 

Property, plant and equipment, net of accumulated depreciation, of the Company consists of the following as of the period end dates set forth below (in US$ thousands):

 

 

    Estimated Useful
Lives (in years) 		  September 30,
2020 		    December 31,
2019 		 
Buildings and leasehold improvements   5 to 25   $ 40,020     $ 36,853  
Oilfield equipment   3 to 15     524,808       411,984  
Furniture and fixtures   5     2,279       3,720  
Office equipment and tools   3 to 6     39,808       35,991  
Vehicles and cranes   5 to 8     7,832       12,292  
Less: Accumulated depreciation         (170,063 )     (104,689 )
Land         5,104       5,104  
Capital work in progress         8,717       18,052  
Total       $ 458,505     $ 419,307  

 

16

 

 

The Company recorded depreciation expense of $28.0 million, $17.2 million, $79.8 million and $47.7 million for the quarter ended September 30, 2020, the quarter ended September 30, 2019, the year-to-date period ended September 30, 2020, and the year-to-date period ended September 30, 2019, respectively, in the Condensed Consolidated Interim Statement of Operations.

 

9. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

Changes in the carrying amount of goodwill of the Company between December 31, 2019 and September 30, 2020 are as follows (in US$ thousands):

 

    Production
Services 		    Drilling and
Evaluation
Services 		    Goodwill  
Balance as of December 31, 2019   $ 419,646     $ 155,118     $ 574,764  
SAPESCO Business Combination     11,046       11,047       22,093  
Balance as of September 30, 2020   $ 430,692     $ 166,165     $ 596,857  

 

Intangible assets subject to amortization, net

 

The following is the weighted average amortization period for intangible assets of the Company subject to amortization (in years):

 

    Amortization  
Customer contracts     9.9  
Trademarks and trade names     7.9  
Total intangible assets     9.6  

 

The details of our intangible assets subject to amortization are set forth below (in US$ thousands):

 

    September 30, 2020     December 31, 2019  
    Gross
carrying
amount 		    Accumulated
amortization 		    Net
carrying
amount 		    Gross
carrying
amount 		    Accumulated
amortization 		    Net
carrying
amount 		 
                                     
Customer contracts   $ 125,270     $ (28,352 )   $ 96,918     $ 121,500     $ (19,239 )   $ 102,261  
Trademarks and trade names     25,950       (7,670 )     18,280       25,500       (5,047 )     20,453  
Total intangible assets   $ 151,220     $ (36,022 )   $ 115,198     $ 147,000     $ (24,286 )   $ 122,714  

 

 

17

 

 

10. DEBT

 

Long-term debt

 

The Company’s long-term debt obligations consist of the following (in US$ thousands):

 

    September 30,
2020 		    December 31,
2019 		 
             
Secured Term Loan   $ 292,500     $ 300,000  
Secured Revolving Credit Facility     65,000       50,000  
CIB Long-Term Debt     10,000       -  
Less: unamortized debt issuance costs     (4,012 )     (4,436 )
Total loans and borrowings     363,488       345,564  
Less: current portion of long-term debt     (43,750 )     (15,000 )
Long-term debt, net of unamortized debt issuance costs and excluding current installments   $ 319,738     $ 330,564  

 

Secured Facilities Agreement

 

On May 5, 2019, the Company entered into a $450.0 million term loan, revolving credit, and working capital facilities agreement (the “Secured Facilities Agreement”) with Arab Petroleum Investments Corporation (“APICORP”) – Bahrain Banking Branch, HSBC Bank Middle East Limited (“HSBC”), Mashreqbank PSC and Saudi British Bank acting as initial mandated lead arrangers and bookrunners, Mashreqbank PSC acting as global agent, APICORP and Mashreqbank PSC acting as security agents, NPS Bahrain for Oil & Gas Wells Services WLL (“NPS Bahrain”) and its Kuwait branch, Gulf Energy SAOC and National Petroleum Technology Company as borrowers, and HSBC, Mashreqbank PSC, APICORP and Saudi British Bank, as the “Lenders.” On May 23, 2019 and June 20, 2019, the Company entered into $35.0 million and $40.0 million Incremental Facilities Agreements, respectively, increasing the size of the Secured Facilities Agreement to $485.0 million and $525.0 million, respectively. During the year-to-date period ended September 30, 2020, the Secured Facilities Agreement was reduced to $508.8 million primarily as a result of the non-renewal of a project-specific letter of credit and the payment of the first installment of the long-term loan. There were no changes to the size of the Secured Facilities Agreement subsequent to September 30, 2020.

 

The $508.8 million Secured Facilities Agreement consists of a $292.5 million term loan due 2025 (the “Term Loan” or “Secured Term Loan”), a $65.0 million revolving credit facility due 2023 (“RCF” or “Secured Revolving Credit Facility”), and a $151.3 million working capital facility. Borrowings under the Term Loan and RCF incur interest at the rate of three-month LIBOR plus 2.4% to 2.7% per annum, varying based on the Company’s Net Debt / EBITDA ratio as defined in the Secured Facilities Agreement. As of September 30, 2020, and December 31, 2019, this resulted in an interest rate of 2.9% and 4.3%, respectively. As of September 30, 2020, and December 31, 2019, the Company had drawn $292.5 million and $300.0 million, respectively, of the Term Loan and $65.0 million and $50.0 million, respectively, of the RCF.

 

The RCF was obtained for general corporate and working capital purposes including capital expenditure related requirements and acquisitions (including transaction related expenses). The RCF requires the payment of a commitment fee each quarter. The commitment fee is computed at the rate of 0.60% per annum based on the average daily amount by which the borrowing base exceeds the outstanding borrowings during each quarter. Under the terms of the RCF, the final settlement is due by May 6, 2023. The Company is required to repay the amount of any principal balance outstanding together with any unpaid accumulated interest at three-month LIBOR plus 2.4% to 2.7% per annum, varying based on the Company’s Net Debt / EBITDA ratio as defined in the Secured Facilities Agreement. The Company is permitted to make any prepayment under this RCF in multiples of $5.0 million during this 4-year period up to May 6, 2023. Any unutilized balances from the RCF can be drawn down again during the 4-year tenure at the same terms. As of September 30, 2020, and December 31, 2019, the Company had $0.0 (zero) million million and $15.0 million, respectively, available to be drawn under the RCF.

 

The Secured Facilities Agreement also includes a working capital facility of $151.3 million for issuance of letters of guarantee and letters of credit and refinancing letters of credit over a period of one year, which carries an interest rate equal to three-month U.S. Dollar LIBOR for the applicable interest period, plus a margin of 1.00% to 1.25% per annum. As of September 30, 2020, and December 31, 2019, the Company had utilized $112.4 million and $134.2 million, respectively, under this working capital facility and the balance of $38.9 million and $25.8 million, respectively, was available to the Company.

 

The Company has also retained legacy bilateral working capital facilities from HSBC totaling $24.6 million and $30.4 million at September 30, 2020 and December 31, 2019, respectively, in Qatar ($10.6 million at September 30, 2020, $16.4 million at December 31, 2019), in the UAE ($13.9 million at both September 30, 2020 and December 31, 2019) and in Kuwait ($0.1 million at both September 30, 2020 and December 31, 2019). As of September 30, 2020 and December 31, 2019, the Company had utilized $19.0 million and $24.1 million, respectively, under this working capital facility and the balance of $5.6 million and $6.3 million, respectively, was available to the Company.

 

18

 

 

Utilization of the working capital facilities under both the legacy arrangement and Secured Facilities Agreement comprises letters of credit issued to vendors, guarantees issued to customers, vendors, and others, and short-term borrowings used to settle letters of credit. Once a letter of credit is presented for payment by the vendor, the Company at its election can settle the letter of credit from available cash or leverage short-term borrowings that will be repaid quarterly over a one-year period. Until a letter of credit is presented for payment by the vendor, it is disclosed as an off-balance sheet obligation. For additional discussion of outstanding letters of credit and guarantees, see Note 14, Commitments and Contingencies.

 

The Secured Facilities Agreement includes covenants that specify maximum leverage (Net Debt / EBITDA) up to 3.50, minimum debt service coverage ratio (Cash Flow / Debt Service) of at least 1.25, and interest coverage (EBITDA / Interest) of at least 4.00. The Company was in compliance with all financial covenants as of both September 30, 2020 and December 31, 2019.

 

CIB Long-Term Debt

 

As part of the SAPESCO transaction, the Company assumed a $21.0 million debt obligation with Commercial International Bank (collectively, “CIB Long-Term Debt”). Under the terms of its arrangement with CIB, the Company repaid approximately $11.0 million of this balance during the third quarter of 2020 with the remaining $10.0 million due on August 15, 2021. Borrowings under the CIB Long-Term Debt incur interest at 2% per annum over 6 months LIBOR (to be settled on quarterly basis) plus 50 basis points per annum. As of September 30, 2020, this resulted in an interest rate of 2.25%. The CIB Long-Term Debt (collectively with the CIB Short-Term Debt, discussed below) includes covenants that specify maximum leverage (Total Liabilities / Equity) up to 1.3, minimum debt service coverage ratio ((Cash operating profits after tax + depreciation - annual maintenance for equipment)/(Financial payments + profit sharing for the same period)) of at least 1, and minimum current rate (Current Assets / Current Liabilities) of at least 1.00. The Company was in compliance with all financial covenants as of September 30, 2020.

 

Short-term debt

 

The Company’s short-term debt obligations consist of the following (in US$ thousands):

 

    September 30,
2020 		    December 31,
2019 		 
             
CIB Short-Term Debt   $

2,614

    $ -  
ABK Short-Term Debt    

3,042

      -  
Other short-term borrowings     30,736       37,963  
Short-term debt, excluding current installments of long-term debt   $ 36,392     $ 37,963  

 

 

Short-term borrowings primarily consist of financing for capital equipment and inventory purchases.

 

CIB Short-Term Debt

 

As part of the SAPESCO transaction, the Company assumed a $2.6 million debt obligation with Commercial International Bank (collectively, “CIB Short-Term Debt”) for working capital and overdraft purposes. The CIB Short-Term Debt facilities include a $1.5 million U.S. Dollar time loan facility, a E£2 million Egyptian Pound time loan facility, and a E£10 million Egyptian pound time loan overdraft facility, and $13.8 million U.S. dollars in letters of guarantee. Each CIB Short-Term Debt borrowing matures three months from the date of borrowing with the latest maturity date for amounts outstanding as of September 30, 2020 being January 2, 2021.

 

The U.S. Dollar time loan facility accrues interest at 2.25% per annum over 3 months LIBOR plus 50 basis points per annum of the Highest Monthly Debit Balance (“HMDB”) commission. The Egyptian Pound time loan and overdraft facilities accrue interest at 0.75% per annum over Corridor Offer Rate plus 50 basis points per annum, HMDB commission.

 

As of September 30, 2020, the CIB Short-Term Debt resulted in an interest rate of 2.5% and 11.7%, respectively, for the U.S. Dollar and Egyptian Pound denominated facilities. As of September 30, 2020, the Company had utilized $1.4 million of the U.S. Dollar time loan facility, E£2.0 million of the Egyptian Pound time loan facility, and E£9.2 million of the Egyptian pound time loan overdraft facility, and $8.5 million in letters of guarantee, with the balances of $0.1 million, E£0.0 (zero) million, and E£0.8 million, and $5.3 million, respectively, available to the Company.

 

ABK Short-Term Debt

 

As part of the SAPESCO transaction, the Company assumed a $3.1 million debt obligation with Al Ahli Bank of Kuwait (collectively, “ABK Short-Term Debt”) for working capital and overdraft purposes. Each ABK Short-Term Debt borrowing matures nine months from the date of borrowing with the latest maturity date for amounts outstanding as of September 30, 2020 being April 28, 2021. The ABK Short-Term Debt facilities include a $3.2 million U.S. Dollar time loan facility and $0.2 million U.S. dollars in letters of guarantee. The ABK Short-Term Debt accrues interest at 1.65% per annum over Corridor Offer Rate. As of September 30, 2020, this resulted in an interest rate of 11.47%. As of September 30, 2020, the Company had utilized E£47.8 million of the ABK Short-Term Debt facility and E£2.2 million in letters of guarantee with E£0.0 (zero) and E£0.0 (zero) million, respectively, available to the Company. There are no financial covenants associated with the ABK Short-Term Debt.

 

Other debt information

 

Scheduled principal payments of long-term debt for periods subsequent to September 30, 2020 are as follows (in US$ thousands):

 

    -  
2020   $ 7,500  
2021    

47,500

 
2022    

45,000

 
2023    

110,000

 
2024    

45,000

 
2025    

112,500

 
Thereafter     -  
Total   $

367,500

 

 

As part of the SAPESCO transaction, the Company also assumed other working capital facilities totaling $0.6 million with one bank. The facilities are used for letters of guarantee. As of September 30, 2020, the Company has utilized $0.6 million of these facilities with $0.0 (zero) million available.

 

19

 

 

11. FAIR VALUE ACCOUNTING

 

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable, capital leases and loans and borrowings. The fair value of the Company’s financial instruments approximates the carrying amounts represented in the accompanying Condensed Consolidated Balance Sheets, primarily due to their short-term nature. The fair value of the Company’s long-term borrowings also approximates the carrying amounts as these loans are carrying interest at the market rate.

 

12. EMPLOYEE BENEFITS

 

Defined benefit plan

 

The Company provides defined benefit plan of severance pay to eligible employees. The severance pay plan provides for a lump sum payment to employees on separation (retirement, resignation, death while in employment or on termination of employment) of an amount based upon the employees last drawn salary and length of service, subject to the completion of minimum service period (1-2 years) and taking into account the provisions of local applicable law or as per employee contract. The Company records annual amounts relating to these long-term employee benefits based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, assumed rates of return, compensation increases and turnover rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications to those assumptions is recorded in the Condensed Consolidated Interim Statement of Operations. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions. The net periodic costs are recognized as employees render the services necessary to earn these benefits.

 

The Components of net period benefit cost were as follows (in US$ thousands):

 

      1       2       3       4  
    Quarter ended     Year-to-date period ended  
    September 30,
2020 		    September 30,
2019 		    September 30,
2020 		    September 30,
2019 		 
                         
Service cost   $ 855     $ 815     $

2,755

    $ 2,255  
Interest cost    

214

      375      

689

      551  
Other     -       22       -       77  
Net cost   $

1,069

    $ 1,212     $

3,444

    $ 2,883  

 

The Company made employer contributions (direct payment of benefits) to its defined benefit plan of $0.1 million, $0.5 million, $0.1 million and $1.6 million for the quarter ended September 30, 2020, the quarter ended September 30, 2019, the year-to-date period ended September 30, 2020, and the year-to-date period ended September 30, 2019, respectively. The plan of the Company is unfunded.

 

Defined contribution plan

 

The Company also provides a defined contribution retirement plan and occupational hazard insurance for Omani employees. Contributions to a defined contribution retirement plan and occupational hazard insurance for Omani employees in accordance with the Omani Social Insurances Law are recognized as an expense in the Condensed Consolidated Interim Statement of Operations as incurred. Total contributions were of $0.8 million, $0.8 million, $2.4 million and $2.4 million for the quarter ended September 30, 2020, the quarter ended September 30, 2019, the year-to-date period ended September 30, 2020, and the year-to-date period ended September 30, 2019, respectively. The plan of the Company is unfunded.

 

20

 

 

13. SHARE-BASED COMPENSATION EXPENSE

 

In 2018, the NESR shareholders approved the 2018 Long Term Incentive Plan (the “LTIP”). A total of 5,000,000 ordinary shares are reserved for issuance under the LTIP. Grants to members of the Company’s Board of Directors are time-based and vest ratably over a 1-year period. Grants to the Company employees are time-based and vest ratably over a 3-year period.

 

The purpose of the LTIP is to enhance NESR’s ability to attract, retain and motivate persons who make (or are expected to make) important contributions to NESR by providing these individuals with equity ownership opportunities. The Company intends to use time-based restricted stock unit awards to reward long-term performance of the executive officers. The Company believes that providing a meaningful portion of the total compensation package in the form of share-based awards will align the incentives of its executive officers with the interests of its shareholders and serve to motivate and retain the individual executive officers.

 

The following tables set forth the LTIP activity for the periods indicated (in US$ thousands, except share and per share amounts):

 

 

    Quarter ended  
    September 30, 2020     September 30, 2019  
    Number of
Restricted
Shares 		    Weighted
Average
Value per
Share 		    Number of
Restricted
Shares 		    Weighted
Average
Value per
Share 		 
Unvested at Beginning of Period     2,244,662     $ 7.72       1,600,200     $ 10.59  
Granted     39,000     $ 8.46       214,000     $ 7.60  
Vested and issued     (282,332 )   $ 9.98       (250,310 )   $ 10.32  
Forfeited     (12,001 )   $ 8.60       (11,000 )   $ 10.36  
Unvested at End of Period     1,989,329     $ 7.41       1,552,890     $ 10.22  

 

    Year-to-date period ended  
    September 30, 2020     September 30, 2019  
    Number of Restricted Shares     Weighted Average
Value
per Share 		    Number of Restricted Shares     Weighted Average
Value
per Share 		 
Unvested at Beginning of Period     1,502,590     $ 10.25       725,200     $ 10.94  
Granted     1,119,905     $ 5.16       1,184,000     $ 9.86  
Vested and issued     (590,264 )   $ 10.18       (250,310 )   $ 10.32  
Forfeited     (43,002 )   $ 9.74       (106,000 )   $ 10.87  
Unvested at End of Period     1,989,329     $ 7.41       1,552,890     $ 10.22  

 

At September 30, 2020 and December 31, 2019, the Company had unrecognized compensation expense of $11.2 million and $11.7 million, respectively, related to unvested LTIP to be recognized on a straight-line basis over a weighted average remaining period of 1.76 years and 2.0 years, respectively. Share-based compensation expense has been recorded in the Condensed Consolidated Interim Statement of Operations as follows (in US$ thousands):

 

 

    Quarter ended     Year-to-date period ended  
    September 30,
2020 		    September 30,
2019 		    September 30,
2020 		    September 30,
2019 		 
                         
Cost of Services   $             938     $ 758     $        2,604     $ 1,814  
Selling, general and administrative expenses     1,141       1,187       3,237       2,243  
Net cost   $ 2,079     $ 1,945     $ 5,841     $ 4,057  

 

21

 

 

14. COMMITMENTS AND CONTINGENCIES

 

Capital expenditure commitments

 

The Company was committed to incur capital expenditures of $19.6 and $22.1 million at September 30, 2020, and December 31, 2019, respectively. Commitments outstanding as of September 30, 2020, are expected to be settled during 2020 and 2021.

 

Capital lease commitments

 

The Company leases certain hydraulic fracturing equipment under capital leases that expire between 2021 and 2023. The leases have terms ranging from 24-36 months and imputed interest rates between 4.3%-6.5% per annum. As of September 30, 2020, and December 31, 2019, the total recorded liability for these capital leases was $28.3 million and $33.7 million, respectively, with $24.5 million and $20.5 million, respectively, classified as a short-term obligation within Other current liabilities account and $3.8 million and $13.1 million, respectively, classified as long-term obligations within Other liabilities account in the Condensed Consolidated Balance Sheets. Total interest expense incurred on these capital leases was $0.4 million, $0.0 (zero) million, $1.2 million and $0.0 (zero) million for the quarter ended September 30, 2020, the quarter ended September 30, 2019, the year-to-date period ended September 30, 2020, and the year-to-date period ended September 30, 2019, respectively, in the Condensed Consolidated Interim Statement of Operations. Depreciation of assets held under these capital leases is included within depreciation expense.

 

The Company also leases certain equipment in Egypt under capital leases that expire between 2020 and 2024. As of September 30, 2020, and December 31, 2019, the total recorded liability for these capital leases was $3.2 million and $0.0 (zero) million, respectively, with $0.7 million and $0.0 (zero) million, respectively, classified as a short-term obligation within Other current liabilities account and $2.5 million and $0.0 (zero) million, respectively, classified as a long-term obligations within Other liabilities account in the Condensed Consolidated Balance Sheets. Total interest expense incurred on capital leases of $0.2 million, $0.0 (zero) million, $0.2 million and $0.0 (zero) million for the quarter ended September 30, 2020, the quarter ended September 30, 2019, the year-to-date period ended September 30, 2020, and the year-to-date period ended September 30, 2019, respectively, in the Condensed Consolidated Interim Statement of Operations. Depreciation of assets held under these capital leases is included within depreciation expense.

 

Future minimum lease payments and future interest payments under non-cancellable equipment capital leases at September 30, 2020 and December 31, 2019, are payable as follows (in US$ thousands):

 

 

    As of September 30, 2020   As of December 31, 2019
   

Future

Minimum

Lease

Payments

   

Future

Interest

Payments

  Total
Payments 		     

Future

Minimum

Lease

Payments

 

Future

Interest

Payments

    Total
Payments
2020   $ 11,306   $ 968   $ 12,274     $ 22,930   $ 1,070   $ 24,000
2021     14,694     1,006     15,700       10,743     1,257     12,000
2022     3,234     452     3,686       -     -     -
2023     1,808     174     1,982       -     -     -
2024     437     21     458       -     -     -
2025     -     -     -       -     -     -
Thereafter     -     -     -       -     -     -
Total   $ 31,479   $ 2,621   $ 34,100     $ 33,673   $ 2,327   $ 36,000

 

Operating lease commitments

 

Future minimum lease commitments under non-cancellable operating leases with initial or remaining terms of one year or more at September 30, 2020 and December 31, 2019, respectively, are payable as follows (in US$ thousands):

 

    September 30,
2020 		    December 31,
2019 		 
2020   $           12,515     $ 23,201  
2021    

22,760

      18,560  
2022    

2,756

      2,780  
2023    

2,019

      2,291  
2024    

2,003

      2,292  
2025    

1,355

      2,296  
Thereafter    

3,413

      1,629  
Total   $

46,821

    $ 53,049  

 

The Company recorded rental expense of $34.9 million, $24.5 million, $103.8 million and $80.9 million for the quarter ended September 30, 2020, the quarter ended September 30, 2019, the year-to-date period ended September 30, 2020, and the year-to-date period ended September 30, 2019, respectively, in the Condensed Consolidated Interim Statement of Operations.

 

22

 

 

Other commitments

 

The Company purchases certain property, plant, and equipment using seller-provided installment financing with payment terms extending to 24 months. The amounts due to the vendors at September 30, 2020, and December 31, 2019, were $15.2 million and $6.0 million, respectively. As of September 30, 2020, the Company recorded $11.5 million, $3.0 million, and $0.7 million in Accounts payable, Other current liabilities, and Other liabilities, respectively, in the Condensed Consolidated Balance Sheet, for amounts due using seller-provided installment financing. As of December 31, 2019, the Company recorded $0.0 (zero), $3.0 million, and $3.0 million in Accounts payable, Other current liabilities, and Other liabilities, respectively, in the Condensed Consolidated Balance Sheet, for amounts due using seller-provided installment financing.

 

The Company has outstanding letters of credit amounting to $9.2 million and $21.2 million as of September 30, 2020, and December 31, 2019, respectively.

 

In the normal course of business with customers, vendors and others, the Company has entered into off-balance sheet arrangements, such as surety bonds for performance, and other bank issued guarantees which totaled $100.7 million and $99.1 million as of September 30, 2020, and December 31, 2019, respectively. The Company has also entered into cash margin guarantees totaling $5.0 million and $5.8 million at September 30, 2020, and December 31, 2019, respectively. A liability is accrued when a loss is both probable and can be reasonably estimated. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on the Company’s condensed consolidated interim financial statements.

 

As of September 30, 2020, and September 30, 2019, the Company had liabilities of $4.0 million and $6.7 million, respectively, on the Condensed Consolidated Balance Sheet included in the line item “Other liabilities,” reflecting various liabilities associated with the 2014 acquisition of NPS Bahrain by NPS Holdings Limited.

 

Legal proceedings

 

The Company is involved in certain legal proceedings which arise in the ordinary course of business and the outcomes of which are currently subject to uncertainties and therefore the probability of a loss, if any, being sustained and an estimate of the amount of any loss are difficult to ascertain. Consequently, it is not possible to make a reasonable estimate of the expected financial effect, if any, that will result from ultimate resolution of these disputes. The Company is contesting these claims/disputes and the Company’s management currently believes that provision against these potential claims is not required as the ultimate outcome of these disputes would not have a material impact on the Company’s business, financial condition or results of operations.

 

15. EQUITY

 

The Company is authorized to issue an unlimited number of ordinary shares, no par value, and preferred shares, no par value. The Company’s ordinary shares are entitled to one vote for each share. As of September 30, 2020, there were 87,495,221 ordinary shares outstanding, 22,921,700 public warrants and 12,618,680 private warrants. Each warrant entitles the registered holder to purchase one-half of one ordinary share at a price of $5.75 per half share at any time. The warrants must be exercised for whole ordinary shares. The warrants expire on June 6, 2023. The private warrants are identical to the public warrants except that such warrants are exercisable for cash (even if a registration statement covering the ordinary shares issuable upon exercise of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable so long as they are still held by the initial purchasers or their affiliates. No public warrants are exercisable for cash unless there is an effective and current registration statement covering the ordinary shares issuable upon exercise of the warrants and a current prospectus relating to such ordinary shares.

 

The Company is authorized to issue an unlimited number of preferred shares divided into five classes with designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. As of September 30, 2020, or December 31, 2019, there were no preferred shares issued or outstanding.

 

In February 2019, pursuant to the NPS Stock Purchase Agreement, the Company issued 1,300,214 NESR ordinary shares to satisfy its obligation in connection with the NPS Equity Stock Earn-Out, a contingent consideration obligation arising from its acquisition of NPS in 2018.

 

In connection with the acquisition of SAPESCO (Note 5), the Company expects to issue 2,237,000 NESR ordinary shares to the SAPESCO selling shareholders during the fourth quarter of 2020.

 

23

 

 

16. EARNINGS PER SHARE

 

Basic earnings per common share was computed using the two-class method by dividing basic net income attributable to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per common share was computed using the two-class method by dividing diluted net income attributable to common shareholders by the weighted-average number of common shares outstanding plus dilutive common equivalent shares. Dilutive common equivalent shares include all in-the-money outstanding contracts to issue common shares as if they were exercised or converted.

 

The following tables provide a reconciliation of the data used in the calculation of basic and diluted ordinary shares outstanding for the period (in US$ thousands except shares and per share amounts).

 

 

Date   Transaction Detail   Change in Shares     Quarter ended September 30, 2020
Weighted Average
Ordinary Shares
Outstanding 		 
June 30, 2020   Beginning Balance           87,495,221  
June 1, 2020   Shares to be issued in SAPESCO transaction (Note 5) (1)    

2,237,000

     

2,237,000

 
August 14, 2020   Vesting of restricted share units     282,332       144,235  
September 30, 2020   Ending Balance           89,876,456  

 

(1) Contingently issuable shares are included in basic EPS only when there is no circumstance under which those shares would not be issued; as such 2,237,000 shares expected to be issued in the fourth quarter of 2020 pursuant to the Sale & Purchase Agreement for SAPESCO have been included in basic earnings per share since June 1, 2020.

 

Date   Transaction Detail   Change in Shares     Quarter ended September 30, 2019
Weighted Average
Ordinary Shares
Outstanding 		 
June 30, 2019   Beginning Balance             86,896,779  
August 14, 2019   Vesting of restricted share units     250,310       127,876  
September 30, 2019   Ending Balance             87,024,655  

 

Date   Transaction Detail   Change in Shares     Year-to-date period ended September 30, 2020
Weighted Average
Ordinary Shares
Outstanding 		 
December 31, 2019   Beginning Balance             87,187,289  
March 18, 2020   Restricted stock vesting     307,932       220,273  
June 1, 2020   Shares to be issued in SAPESCO transaction (Note 5) (1)     2,237,000       996,036  
August 14, 2020   Restricted stock vesting    

282,332

     

48,429

 
September 30, 2020   Ending Balance             88,452,027  

 

(1) Contingently issuable shares are included in basic EPS only when there is no circumstance under which those shares would not be issued; as such 2,237,000 shares expected to be issued in the fourth quarter of 2020 pursuant to the Sale & Purchase Agreement for SAPESCO have been included in basic earnings per share since June 1, 2020.

 

24

 

 

Date   Transaction Detail   Change in Shares     Year-to-date period ended September 30, 2019 Weighted Average Ordinary Shares Outstanding  
December 31, 2018   Beginning Balance             85,562,769  
January 9, 2019   Other     33,796       32,806  
February 19, 2019   NPS equity stock earn-out     1,300,214       1,300,214  
August 14, 2019   Restricted stock vesting     250,310       250,310  
September 30, 2019   Ending Balance             86,938,883  

 

    Quarter ended     Year-to-date period ended  
Shares for Use in Allocation of Participating Earnings:   September 30, 2020     September 30, 2019     September 30, 2020     September 30, 2019  
                         
Weighted average ordinary shares outstanding     89,876,456       87,024,655       88,452,027       86,938,883  
Non-vested, participating restricted shares     869,424       1,571,126       869,424       1,382,896  
Shares for use in allocation of participating earnings     90,745,880       88,595,781       89,321,451       88,321,779  

 

 

Basic earnings per share (EPS):

 

 

    Quarter ended     Year-to-date Period Ended  
    September 30, 2020     September 30, 2019     September 30, 2020     September 30, 2019  
                         
Net income   $ 11,666     $ 11,110     $ 33,569     $ 35,640  
Less dividends to:                                
Ordinary Shares     -       -       -       -  
Non-vested participating shares     -       -       -       -  
Total Undistributed Earnings   $ 11,666     $ 11,110     $ 33,569     $ 35,640  

 

    Quarter ended     Year-to-date period ended  
   

September 30,

2020

   

September 30,

2019

   

September 30,

2020

   

September 30,

2019

 
                          
Allocation of undistributed earnings to Ordinary Shares   $ 11,554     $        10,913     $ 33,242     $ 35,082  
Allocation of undistributed earnings to Non-vested Shares     112       197       327       558  
Total Undistributed Earnings   $ 11,666     $ 11,110     $ 33,569     $ 35,640  

 

 

    Quarter ended     Year-to-date period ended  
Ordinary Shares:   September 30,
2020 		    September 30, 2019     September 30, 2020     September 30, 2019  
                       
Distributed Earnings   $  -     $ -     $  -     $ -  
Undistributed Earnings     0.13       0.13       0.38       0.40  
Total   $ 0.13     $ 0.13     $ 0.38     $ 0.40  

 

25

 

 

Diluted earnings per share (EPS):

 

    Quarter ended September 30, 2020     Quarter ended September 30, 2019  
Ordinary shares   Undistributed & distributed earnings to ordinary shareholders     Ordinary shares     EPS     Undistributed & distributed earnings to ordinary shareholders     Ordinary shares     EPS