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 June 30, 2019

 

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 [X] 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 [X]

 

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 [X]

 

 

 

 

 

 

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 333-229801 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statements) and to be a part thereof from the date on which this report on Form 6-K is filed, to the extent not superseded by documents or reports subsequently filed or furnished.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

 

BASIS OF THIS PERIODIC REPORT ON FORM 6-K 3
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 11
4. BUSINESS COMBINATION 12
5. ACCOUNTS RECEIVABLE 14
6. SERVICE INVENTORIES 15
7. PROPERTY, PLANT, & EQUIPMENT 15
8. GOODWILL AND INTANGIBLE ASSETS 16
9. DEBT 17
10. FAIR VALUE ACCOUNTING 19
11. EMPLOYEE BENEFITS 19
12. SHARE-BASED COMPENSATION 19
13. COMMITMENTS AND CONTINGENCIES 20
14. EQUITY 21
15. INCOME PER SHARE 23
16. INCOME TAXES 25
17. RELATED PARTY TRANSACTIONS 25
18. REPORTABLE SEGMENTS 25
Cautionary Note Regarding Forward-Looking Statements 28
ITEM 2. OPERATING AND FINANCIAL REVIEW 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37
ITEM 4. INTERNAL CONTROLS AND PROCEDURES 38
PART II - OTHER INFORMATION 39
Item 1. Legal Proceedings. 39
Item 1A. Risk Factors. 39

 

2

 

 

BASIS OF THIS PERIODIC REPORT ON FORM 6-K

 

On June 6, 2018, National Energy Services Reunited Corp. (“NESR,” the “Company,” “we,” “our,” “us” or similar terms) acquired all of the issued and outstanding equity interests of NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES” and, together with NPS, the “Subsidiaries”) (collectively, the “Business Combination”). As a result of the Business Combination, NESR is the accounting acquirer for accounting purposes, NPS and GES are acquirees and NPS is the accounting predecessor. The Business Combination was accounted for using the acquisition method of accounting, and the Successor (as defined below) financial statements reflect a new basis of accounting that is based on fair value of net assets acquired. See Note 4, Business Combination, to the unaudited condensed consolidated interim financial statements included in Part 1, Item 1, “Financial Statements (Unaudited)” of this Periodic Report on Form 6-K (the “Periodic Report”) for further discussion of the Business Combination.

 

The historical financial information contained in this Periodic Report includes periods that ended prior to the Business Combination. In this Periodic Report, unless we have indicated otherwise, or the context otherwise requires, references to the “Company” for time periods prior to June 6, 2018 refer to NPS, which is the “Predecessor” for accounting purposes, and for the time period from and after June 7, 2018 refer to NESR and its consolidated subsidiaries, which is the “Successor” for accounting purposes. The financial statements of our Predecessor may not be indicative of the financial results that will be reported by us for periods subsequent to the Business Combination.

 

FINANCIAL INFORMATION AND CURRENCY OF FINANCIAL STATEMENTS

 

The financial statements included in 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 unaudited 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)

 

    June 30, 2019     December 31, 2018  
             
Assets                
Current assets                
Cash and cash equivalents     69,643       24,892  
Accounts receivable, net     102,731       62,636  
Unbilled revenue     92,333       95,145  
Service inventories, net     65,057       58,151  
Prepaid assets     9,306       6,937  
Retention withholdings     27,887       22,011  
Other receivables    

22,278

     

16,695

 
Other current assets     9,439       13,178  
Total current assets     398,674       299,645  
Non-current assets                
Property, plant and equipment, net     354,034       328,727  
Intangible assets     130,383       138,052  
Goodwill     574,764       570,540  
Other assets     3,272       6,345  
Total assets   $ 1,461,127     $ 1,343,309  
                 
Liabilities and equity                
Liabilities                
Accounts payable     68,235       66,264  
Accrued expenses     71,264       38,986  
Current installments of long-term debt     -       45,093  
Short-term borrowings     5,267       31,817  
Income taxes payable     3,584       10,991  
Other taxes payable    

14,202

     

5,806

 
Other current liabilities    

6,460

      24,123  
Total current liabilities     169,012       223,080  
                 
Long-term debt     361,234       225,172  
Deferred tax liabilities     29,967       30,756  
Pension benefit liabilities    

14,239

     

13,828

 
Other liabilities     18,576       19,482  
Total liabilities     593,028       512,318  
                 
Commitments and contingencies (Note 13)                
                 
Equity                
Preferred shares, no par value; unlimited shares authorized; none issued and outstanding at June 30, 2019     -       -  
Common stock, no par value; unlimited shares authorized; 86,896,779 shares issued and outstanding at June 30, 2019 and December 31, 2018     801,545       801,545  
Additional paid in capital     13,698       1,034  
Retained earnings     52,827       28,297  
Accumulated other comprehensive income     29       48  
Total shareholders’ equity     868,099       830,924  
Non-controlling interests     -       67  
Total equity     868,099       830,991  
Total liabilities and equity   $ 1,461,127     $ 1,343,309  

 

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)

 

    Successor (NESR)     Predecessor (NPS)  
Description   Period from January 1, 2019 to June 30, 2019     Period from April 1, 2019 to June 30, 2019     Period from June 7, 2018 to June 30, 2018     Period from January 1, 2018 to June 6, 2018     Period from April 1, 2018 to June 6, 2018  
                               
Revenues   $ 311,603     $ 159,899     $ 44,986     $ 137,027     $ 60,185  
Cost of services     (231,390     (116,893     (37,055 )     (104,242 )     (46,070 )
Gross profit     80,213       43,006       7,931       32,785       14,115  
Selling, general and administrative expense     (30,107     (17,062 )     (9,021 )     (19,969 )     (10,469 )
Amortization     (8,003     (3,949 )     (1,536 )     (10 )     (10 )
Operating income     42,103       21,995       (2,626 )     12,806       3,636  
Interest expense, net     (9,680 )     (5,750     (1,900 )     (4,090 )     (1,265 )
Other income (expense), net     (499 )     (438 )     (468 )     362       271  
Income before income tax     31,924       15,807       (4,994 )     9,078       2,642  
Income tax (expense) benefit     (7,394 )     (4,451 )     1,029       (2,342 )     (1,359 )
Net income (loss)     24,530       11,356       (3,965 )     6,736       1,283  
Net loss attributable to non-controlling interests     -       -       (219 )     (881 )     (541 )
Net income attributable to shareholders   $

24,530

    $ 11,356     $ (3,746 )   $ 7,617     $ 1,824  
                                         
Weighted average shares outstanding:                                        
Basic     86,895,285       86,896,779       85,562,769       348,524,566       348,524,566  
Diluted     86,895,285       86,896,779       85,562,769       370,000,000       370,000,000  
                                         
Net earnings per share:                                        
Basic   $        0.28     $       0.13     $ (0.05 )   $ 0.02     $ 0.00  
Diluted   $ 0.28     $ 0.13     $ (0.05 )   $ 0.02     $ 0.00  

 

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)

 

    Successor (NESR)     Predecessor (NPS)  
Description   Period from January 1, 2019 to June 30, 2019       Period from April 1, 2019 to June 30, 2019     Period from June 7, 2018 to June 30, 2018     Period from January 1, 2018 to June 6, 2018     Period from April 1, 2018 to June 6, 2018  
Net income   $   24,530     $   11,356     $ (3,965 )   $ 6,736     $ 1,283  
Other comprehensive income, net of tax                                        
Foreign currency translation adjustments     (19     (19     -       (16 )     (17 )
Total Comprehensive Income, net of tax     24,511       11,337       (3,965 )     6,720       1,266  
Comprehensive loss attributable to non-controlling interest     -       -       -       -       -  
Comprehensive income / (loss) attributable to shareholder interest   $     24,511     $ 11,337     $ (3,965 )   $ 6,720     $ 1,266  

 

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 SHAREHOLDERS’ EQUITY

(In US$ thousands, except share data)

 

For the Predecessor (NPS) quarter from April 1, 2018 to June 6, 2018 and period from January 1, 2018 to June 6, 2018:

 

Predecessor -NPS   Shares Outstanding     Common Stock     Redeemable Convertible Shares Outstanding     Redeemable Convertible Shares     Additional Paid in Capital     Accumulated Other Comprehensive Income -Loss     Retained Earnings -Accumulated Deficit     Total Company Equity     Non-controlling Interests     Total Shareholders’ Equity  
Balance at March 31, 2018     348,524,566       348,525       21,475,434       21,475       3,345       (435 )     (24,294 )     348,616       (2,300 )     346,316  
Net income -loss     -       -       -       -       -       -       1,824       1,824       (541 )     1,283  
Foreign currency translation adjustments     -       -       -       -       -       (17 )     -       (17 )     -       (17 )
Conversion of redeemable shares     -       -       -       -       -       -       -       -       -       -  
Dividends paid     -       -       -       -       -       -       -       -       -       -  
Amount of provision for Zakat     -       -       -       -       -       -       (409 )     (409 )     -       (409 )
Balance at June 6, 2018     348,524,566       348,525       21,475,434       21,475       3,345       (452 )     (22,879 )     350,014       (2,841 )     347,173  

 

Predecessor (NPS)   Shares Outstanding     Common Stock     Redeemable Convertible Shares Outstanding     Redeemable Convertible Shares     Additional Paid in Capital     Accumulated Other Comprehensive Income (Loss)     Retained Earnings (Accumulated Deficit)     Total Company Equity     Non-controlling Interests     Total Shareholders’ Equity  
Balance at January 1, 2018     342,250,000       342,250       27,750,000       27,750       3,345       (436 )     18,480       391,389       (1,960 )     389,429  
Net income (loss)     -         -         -         -         -         -         7,617       7,617       (881 )     6,736  
Foreign currency translation adjustments     -         -         -         -         -         (16 )     -         (16 )     -         (16 )
Conversion of redeemable shares     6,274,566       6,275       (6,274,566 )     (6,275 )     -         -         -         -         -         -  
Dividends paid     -         -         -         -         -         -         (48,210 )     (48,210 )     -         (48,210 )
Amount of provision for Zakat     -         -         -         -         -         -         (766 )     (766 )     -         (766 )
Balance at June 6, 2018     348,524,566       348,525       21,475,434       21,475       3,345       (452 )     (22,879 )     350,014       (2,841 )     347,173  

 

For the Successor (NESR) period from June 7, 2018 to June 30, 2018:

 

Successor -NESR   Ordinary Shares     Retained Earnings (Accumulated Deficit)    

Total
Equity

    Non- controlling Interests    

Total

Shareholders’ Equity

 
    Shares     Amount                          
Balance at June 7, 2018     11,730,425       56,602       (4,611 )     51,991                      -        51,991  
Reclassification of shares previously subject to redemption     16,921,700       165,188       -         165,188       -       165,188  
Redeemed shares     (1,916,511 )     (19,380 )     -         (19,380 )     -       (19,380 )
Shares issued to acquire NPS     25,077,277       255,537               -       255,537       -       255,537  
Shares issued to acquire GES     28,346,229       288,848       -           288,848       -       288,848  
Shares issued to related party for loan fee and transaction costs     266,809       2,719       -         2,719       -       2,719  
Shares issued to Backstop Investor     4,829,375       48,294       -         48,294       -       48,294  
Shares issued for IPO underwriting fees     307,465       3,737       -         3,737       -       3,737  
Non-controlling interest     -         -         -         -       (951 )     (951 )
Acquisition of non-controlling interest during the period     -         -         995       995       (995 )     -  
Net Income -loss through June 30, 2018     -         -         (3,746 )     (3,746 )     (219 )     (3,965 )
Balance at June 30, 2018     85,562,769       801,545       (7,362 )     794,183       (2,165 )     792,018  

 

For the Successor (NESR) quarter from April 1, 2019 to June 30, 2019 and period from January 1, 2019 to June 30, 2019:

 

Successor (NESR)   Shares     Amount     Additional Paid In Capital     Accumulated Other Comprehensive Income (Loss)     Retained Earnings (Accumulated Deficit)    

Total

Shareholders’ Equity

    Noncontrolling Interests     Total Equity  
                                                               
Balance at March 31, 2019     86,896,779       801,545       12,322       48       41,472       855,387                -       855,387  
Stock-based Compensation     -       -       1,373       -       -       1,373       -       1,373  
Other     -       -       3       (19     (1     (17     -       (17 )
Net income from April 1, 2019 to June 30, 2019     -       -       -       -       11,356       11,356       -       11,356  
Balance at June 30, 2019     86,896,779       801,545       13,698       29       52,827       868,099       -       868,099  

 

   Successor (NESR)     Shares         Amount       Additional Paid In Capital     Accumulated Other Comprehensive Income (Loss)     Retained Earnings (Accumulated Deficit)    

Total

Shareholders’ Equity

       Noncontrolling Interests     Total Equity  
                                                 
Balance at December 31, 2018     85,562,769       801,545       1,034       48       28,297       830,924       67       830,991  
Stock-based Compensation     -       -       2,113       -       -       2,113       -         2,113  
Other     33,796       -       4       (19 )     -       (15 )     -         (15 )
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 June 30, 2019

    -       -       -       -       24,530       24,530       -       24,530  
Balance at June 30, 2019     86,896,779       801,545       13,698       29       52,827       868,099       -       868,099  

 

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)

 

   

Period from

January 1 to

June 30, 2019

   

Period from

June 7 to

June 30, 2018

   

Period from

January 1 to

June 6, 2018

 
Description   Successor (NESR)     Predecessor (NPS)  
Cash flows from operating activities:                        
Net income/(loss)   $ 24,530     $ (3,965 )   $ 6,736  
Adjustments to reconcile net income to net cash provided by operating activities:                        
Depreciation and amortization     38,476       6,460       17,284  
Shares issued for transaction costs     -       2,175          
Stock-based compensation     2,113               -  
(Gain) on disposal of assets     (356 )     (281 )     -  
Accrued interest     2,484       1,899       3,350  
Deferred tax expense (benefit)     (1,077 )     -       -  
Allowance for doubtful receivables     476       -       2,402  
Provision for obsolete service inventories     1,057       -       -  
Other operating activities, net     (1,848 )     603       1,442  
Changes in operating assets and liabilities:     -                  
(Increase) decrease in accounts receivable     (41,440 )     801       (15 )
(Increase) in inventories     (7,964 )     (35 )     (2,080 )
(Increase) decrease in prepaid expenses     (2,289 )     462       (759 )
(Increase) in other current assets     (8,651 )     (8,387 )     (16,257 )
(Increase) decrease in other long-term assets and liabilities     702     2,039       (544 )
Increase in accounts payable and accrued expenses     20,009       13,397       7,335  
Increase (decrease) in other current liabilities     (2,050 )     (844 )     1,932  
Net cash provided by operating activities     24,172       14,324       20,826  
                         
Cash flows from investing activities:                        
Capital expenditures     (56,513 )     (2,157 )     (9,861 )
Proceeds from disposal of assets     1,273       -       -  
Proceeds from the Company’s Trust account     -       231,782       -  
Acquisition of business, net of cash acquired     -       (282,190 )     (1,098 )
Other investing activities     (285 )     330       3,043  
Net cash used in investing activities     (55,525 )     (52,235 )     (7,916 )
                         
Cash flows from financing activities:                        
Proceeds from long-term debt     365,000       50,000       47,063  
Repayments of long-term debt     (278,039 )     -       -  
Net change in short-term borrowings     (7,013 )                
Proceeds from issuance of shares     -       48,294       -  
Redemption of ordinary shares     -       (19,380 )     -  
Payment of deferred underwriting fees     -       (5,333 )     (164 )
Dividend paid     -       -       (48,210 )
Other financing activities, net     (3,825 )     1,185       (4,429 )
Net cash provided by (used in) financing activities     76,123       74,766       (5,740 )
                         
Effect of exchange rate changes on cash     (19 )     -       (16 )
Net increase (decrease) in cash     44,751       36,855       7,154  
Cash and cash equivalents, beginning of period     24,892       46       24,502  
Cash and cash equivalents, end of period     69,643       36,901       31,656  
                         
Supplemental disclosure of cash flow information (also refer Note 3):                        
Interest paid     8,317       143       3,636  
Income taxes paid     13,890       3,061       345  

 

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) is a British Virgin Islands corporation headquartered in Houston, Texas. The Company, through its wholly-owned subsidiaries, NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES” and, together with NPS, the “Subsidiaries”) is a regional provider of services to the oil and gas industry in the Middle East and North Africa (“MENA”) and Asia Pacific regions.

 

NESR was incorporated in the British Virgin Islands as a special purpose acquisition company on January 23, 2017 for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation, or contractual control arrangement with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination with one or more businesses or entities. On May 17, 2017, NESR sold 21,000,000 units, each consisting of one ordinary share and one warrant, in its initial public offering, generating gross proceeds of $210 million. Simultaneously with the closing of its initial public offering, NESR consummated the sale of 11,850,000 warrants (the “Private Warrants”) at a price of $0.50 per warrant in a private placement to its sponsor, NESR Holdings Ltd. (“NESR Holdings”), generating gross proceeds of $5.9 million. On May 30, 2017, in connection with the underwriters’ election to partially exercise their over-allotment option, NESR consummated the sale of an additional 1,921,700 units at $10.00 per unit and the sale of an additional 768,680 Private Warrants at $0.50 per warrant, generating total gross proceeds of $19.6 million.

 

An aggregate amount of $229.2 million from the net proceeds of the sale of the units in the initial public offering and the Private Warrants was placed in a trust account (“Trust Account”) until the earlier of: (i) the consummation of a business combination or (ii) the distribution of the trust account. On June 6, 2018 (the “Closing Date”), NESR acquired all of the issued and outstanding equity interests of NPS and GES (the “Business Combination”). Subsequently, the proceeds held in the Trust Account aggregating $231.8 million (including interest) were released.

 

Both NPS and GES are regional providers of services to the oil and gas industry in the MENA and Asia Pacific regions. Revenues are primarily derived from services provided during the drilling, completion and production phases of an oil or natural gas well. NPS operates in 12 countries with the majority of its revenues derived from operations in Saudi Arabia, Algeria, Qatar, UAE and Iraq. GES provides drilling equipment for rental and related services, well engineering services and directional drilling services imports, and sells oilfield equipment and renders specialized services to oil companies in Oman, Saudi Arabia, Algeria 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, 2018 and Report on Form 6-K for the quarterly period ended March 31, 2019.

 

The Business Combination was accounted for under Accounting Standards Codification (“ASC”) Topic 805, Business Combination. Pursuant to ASC 805, NESR was determined to be the accounting acquirer based on evaluation of the facts and circumstances including:

 

The transfer of cash by NESR;
   
NESR’s executive management comprise the C-Suite of the combined company;
   
NESR’s right to designate members of the board; and
   
NESR initiated the Business Combination.

 

9

 

 

As a result of the Business Combination, NPS and GES were acquirees and NPS was determined to be the accounting “Predecessor”. NPS was determined to be the accounting “Predecessor” as the Company expects to use the NPS platform to grow the business as it operates throughout the Middle East and Africa whereas GES is concentrated in Oman. Further, the market size of countries where NPS is operating is much larger than that of GES and the valuation and price paid for NPS was higher than that of GES. The Company’s financial statement presentation distinguishes a Predecessor for periods prior to the Closing Date. NESR is the “Successor” for periods after the Closing Date, which includes the consolidated financial results of both NPS and GES. The transactions were accounted for as a business combination using the acquisition method of accounting, and the Successor financial statements reflect a new basis of accounting for both NPS and GES that is based on the fair value of assets acquired and liabilities assumed. See Note 4, Business Combination, for further discussion on the Business Combination. As a result of the application of the acquisition method of accounting as of the Closing Date, the financial statements for the predecessor periods and for the successor period are presented on a different basis of accounting and are, therefore, not comparable. The historical information of NESR prior to the Business Combination has not been reflected in the Company’s financial statements prior to June 7, 2018, as it was not deemed the Predecessor. Statement of operations activity of NESR, being nominal in nature, prior to the closing of the Business Combination were recorded in the opening retained earnings as of June 7, 2018 and not presented separately.

 

In the accompanying condensed consolidated interim financial statements, the successor periods are from June 7, 2018 to June 30, 2018 (“2018 Successor Period”), January 1, 2019 to June 30, 2019 (“2019 Successor Period”), and April 1, 2019 to June 30, 2019 (“2019 Successor Quarter) and the predecessor periods are from January 1, 2018 to June 6, 2018 (“2018 Predecessor Period”) and April 1, 2018 to June 6, 2018 (“2018 Predecessor Quarter”).

 

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.

 

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 purchase price allocation for the acquisition of NPS and GES, allowance for doubtful accounts, impairment of property, plant and equipment, 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 liabilities pertaining to unrecognized tax benefits, recoverability of deferred taxes and contingencies and actuarial assumptions in employee benefit plans.

 

10

 

 

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 our estimates.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Supplemental cash flow information

 

Non-cash transactions were as follows for the 2019 Successor Period:

 

 

Purchases of property, plant, and equipment in accounts payable and short-term debt at June 30, 2019 of $28.8 million and $5.1 million, respectively, are not included under “Capital expenditures” within the condensed consolidated statement of cash flows.

 

11

 

 

Recently issued accounting standards not yet adopted

 

On August 28, 2018 the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to The Disclosure Requirements for Defined Benefit Plans.” ASU No. 2018-14 amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The update is effective for the Company for fiscal years ending after December 15, 2021. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

 

On August 28, 2018 the FASB issued ASU No 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU No. 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

 

In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements.” ASU 2018-09 makes changes to clarify the Accounting Standards Codification, corrects unintended application of guidance, and makes minor improvements to the Accounting Standards Codification that are not expected to have a significant effect on current accounting practice. The amendments are effective for the Company for fiscal years beginning after December 15, 2019 and for interim periods in fiscal years beginning after December 15, 2020. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and expects to complete its evaluation by the third quarter of fiscal 2019.

 

In January 2017, the FASB issued ASU No. 2017-04 “Simplifying the Test for Goodwill.” The update amends Accounting Standard Codification No. 350 Intangibles - Goodwill and Other, provides guidance that simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under accounting topic 350. The amendments in this update will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2021. The Company does not expect the adoption of this standard to have an impact on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments”. The new standard amends the impairment model for trade receivables, net investments in leases, debt securities, loans and certain other instruments to utilize an expected loss methodology in place of the currently used incurred loss methodology. This pronouncement is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. The Company is currently evaluating the provisions of the pronouncement and assessing the impact, if any, on its consolidated financial statements and related disclosures.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued 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. At its July 17, 2019, Board meeting, the FASB tentatively deferred the effective date for the Company’s consolidated financial statements by one year to as of and for the year ending December 31, 2021 and for interim periods beginning in 2022. The FASB plans to issue a proposed ASU to incorporate this decision. The Company is currently evaluating the provisions of the pronouncement and assessing the impact, if any, on its consolidated financial statements and related disclosures.

 

On August 6, 2018 the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” This ASU is intended to reduce costs and ease implementation of the lease standard for financial statement preparers. ASU 2018-11 provides a new transition method and a practical expedient for separating components of a contract. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, the amendments in ASU 2018-11 provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606). At its July 17, 2019, Board meeting, the FASB tentatively deferred the effective date for the Company’s consolidated financial statements by one year to as of and for the year ended December 31, 2021 and for interim periods beginning in 2022. The FASB plans to issue a proposed ASU to incorporate this decision. The Company is currently evaluating the provisions of the pronouncement and assessing the impact, if any, on its consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue. ASU 2014-09 supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 sets forth a five-step model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers,” which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for the Company’s consolidated financial statements as of and for the year ending December 31, 2019 and for interim periods beginning in 2020. The Company is currently analyzing the provisions of the pronouncement, assessing the impact of the new standard on revenue contracts, and evaluating prospective disclosures as compared to other industry participants. The Company expects to substantially complete its evaluation and document its conclusions by the end of the third quarter of fiscal 2019. The Company anticipates utilizing the modified retrospective approach for adopting the new standard.

 

4. BUSINESS COMBINATION

 

On June 6, 2018, NESR consummated the Business Combination and related financing transactions, acquiring all of the issued and outstanding equity interests of NPS and GES.

 

Accounting treatment

 

The Business Combination is accounted for under ASC 805. Pursuant to ASC 805, NESR has been determined to be the accounting acquirer. Refer to Note 2, Basis of Presentation, for more information. NPS and GES both constitute businesses, with inputs, processes, and outputs. Accordingly, the acquisition of NPS and GES both constitute the acquisition of a business for purposes of ASC 805 and due to the change in control of each of NPS and GES was accounted for using the acquisition method. NESR recorded the fair value of assets acquired and liabilities assumed from NPS and GES.

 

12

 

 

The following table summarizes the final allocation of the purchase price (in thousands):

 

Allocation of consideration

 

    NPS     GES  
    (In thousands)  
Cash and cash equivalents   $ 31,656     $ 5,206  
Accounts receivable     55,392       18,013  
Unbilled revenue     41,378       45,343  
Inventories     33,652       31,092  
Current assets     19,463       8,719  
Property, plant and equipment     216,094       91,444  
Intangible assets     94,000       53,000  
Deferred tax assets     -       554  
Other assets     7,457       1,254  
Total identifiable assets acquired     499,092       254,625  
                 
Accounts payable     26,457       31,113  
Accrued expenses     28,685       25,388  
Current portion of loans and borrowings     -       16,368  
Short-term borrowings     55,836       9,000  
Current liabilities     3,665       15,449  
Loans and borrowings     149,399       25,098  
Deferred tax liabilities     24,098       8,053  
Other liabilities     22,363       9,910  
Non-controlling interest     (2,841 )     837  
Net identifiable liabilities acquired     307,662       141,216  
Total fair value of net assets acquired     191,328       113,409  
Goodwill     399,325       175,439  
Total gross consideration   $ 590,755     $ 288,848  

 

In the 2019 Successor Period, the Company updated its valuation of certain identifiable assets and liabilities. These measurement period changes resulted in an increase of $3.2 million to goodwill in the 2019 Successor Period as compared to the amounts recorded as of December 31, 2018. For NPS, current liabilities increased by $3.2 million in the 2019 Successor Period due to income tax return-to-accrual adjustments that resulted from the filing of the 2018 income tax returns. For GES, other liabilities increased by $1.1 million due to an additional provision for uncertain tax positions.  

 

The impact of these adjustments on the 2019 Successor Period was not material to the condensed consolidated interim financial statements.

 

Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The final allocation to intangible assets is as follows (in thousands):

 

13

 

 

Intangible assets

 

    Fair Value      
    NPS     GES     Total     Useful Life
    (In thousands)      
Customer contracts   $ 77,000     $ 44,500     $ 121,500     10 years
Trademarks and trade names     17,000       8,500       25,500     8 years
Total intangible assets   $ 94,000     $ 53,000     $ 147,000      

 

Goodwill

 

$574.8 million has been allocated to goodwill as of June 30, 2019. 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 at the Subsidiaries.

 

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.

 

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, 2017 for the Predecessor Period and Predecessor Quarter ended June 6, 2018 (in thousands):

 

   

Period from
January 1 to
June 30, 2018
   

Period from
April 1 to
June 30, 2018
 
Revenues     248,915       131,357  
Net income     10,162       8,534  

 

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. 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.

 

5. ACCOUNTS RECEIVABLE

 

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

 

    June 30, 2019     December 31, 2018  
Trade receivables   $ 103,181     $ 63,329  
Less: allowance for doubtful accounts     (450 )     (693 )
Total   $ 102,731     $ 62,636  

 

14

 

 

Trade receivables relate to the sale of services, for which credit is extended based on our evaluation of the customer’s credit-worthiness. The gross contractual amounts of trade receivables at June 30, 2019 and December 31, 2018 were $107.8 million and $69.1 million, respectively. Movement in the allowance for doubtful accounts is as follows (in thousands):

 

   

Period from

April 1, 2019 to

June 30, 2019
   

Period from

June 7, 2018 to

June 30, 2018
   

Period from

April 1, 2018 to

June 6, 2018
 
      Successor (NESR)       Predecessor (NPS)  
Allowance for doubtful accounts at beginning of period     (760 )     -       (4,106 )
Add: additional allowance for the year     (339 )     -       (2,402 )
Less: bad debt expense     649       -       -  
Allowance for doubtful accounts at end of period     (450 )     -       (6,508 )

 

   

Period from

January 1, 2019 to June 30, 2019

   

Period from

June 7, 2018 to

June 30, 2018

 

Period from

January 1, 2018 to

June 6, 2018

 
      Successor (NESR)       Predecessor (NPS)  
Allowance for doubtful accounts at beginning of period     (693 )     -       (4,106 )
Add: additional allowance for the year     (476 )     -       (2,402 )
Less: bad debt expense     719       -       -  
Allowance for doubtful accounts at end of period     (450 )     -       (6,508 )

 

6. SERVICE INVENTORIES

 

The following table summarizes the service inventories of the Company as of the period end dates set forth below (in thousands):

 

    June 30, 2019     December 31, 2018  
             
Spare parts   $ 34,923     $ 29,928  
Chemicals     15,247       14,803  
Raw materials     3,432       200  
Consumables     13,666       14,375  
Total     67,268       59,306  
Less: allowance for obsolete and slow-moving inventories     (2,211 )     (1,155 )
Total   $ 65,057     $ 58,151  

 

7. 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 thousands):

 

   

Estimated

Useful Lives

(in years)

    June 30, 2019     December 31, 2018  
Buildings and leasehold improvements     5 to 25     $ 21,525     $ 21,572  
Drilling rigs, plant and equipment     3 to 15       321,214       278,249  
Furniture and fixtures     5       1,525       1,348  
Office equipment and tools     3 to 6       34,011       31,568  
Vehicles and cranes     5 to 8       6,967       4,179  
Less: Accumulated depreciation             (62,897 )     (32,522 )
Land             5,104       5,104  
Capital work in progress             26,585       19,229  
Total           $ 354,034     $ 328,727  

 

15

 

 

The Company recorded depreciation expense of $30.5 million, $16.0 million, $3.2 million, $6.9 million and $9.3 million, in the 2019 Successor Period, 2019 Successor Quarter, 2018 Successor Period, 2018 Predecessor Period, and 2018 Predecessor Quarter, respectively, in the Condensed Consolidated Statement of Operations.

 

8. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

Changes in the carrying amount of goodwill of the Company between December 31, 2018 and June 30, 2019 are as follows (in thousands):

 

    Production Services    

Drilling and

Evaluation

Services

    Goodwill  
Balance as of December 31, 2018   $ 416,494       154,046       570,540  
Measurement period adjustments     3,152      

1,072

      4,224  
Balance as of June 30, 2019   $ 419,646       155,118       574,764  

 

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     10  
Trademarks and trade names     8  
Total intangible assets     9.6  

 

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

 

    June 30, 2019     December 31, 2018  
    Gross carrying amount     Accumulated amortization     Net carrying amount     Gross carrying amount     Accumulated amortization     Net carrying amount  
                                     
Customer contracts   $ 121,500     $ (13,164 )   $ 108,338     $ 121,500     $ (7,088 )   $ 114,412  
Trademarks and trade names     25,500       (3,453 )     22,047       25,500       (1,860 )     23,640  
Total intangible assets   $ 147,000     $ (16,617 )   $ 130,383     $ 147,000     $ (8,948 )   $ 138,052  

 

16

 

 

9. DEBT

 

Short-term debt

 

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

 

    June 30, 2019     December 31, 2018  
             
Modified Hana Loan   $ -     $ 10,000  
Other short-term borrowings     5,267       21,817  
Short-term debt, excluding current installments of long-term debt   $ 5,267     $ 31,817  

 

Other short-term borrowings consist of financings for capital equipment purchases, factoring of invoices and letters of credit.

 

Hana Loan and Modified Hana Loan agreements

 

In connection with the Business Combination, on June 5, 2018, NESR entered into a loan agreement with Hana Investments pursuant to which NESR borrowed $50.0 million on an unsecured basis (the “Hana Loan”). The Hana Loan had a scheduled maturity date of December 17, 2018 and was interest bearing, accruing interest at the greater of (i) an amount equal to $4.0 million or prorated if the loan was prepaid; and (ii) at a rate per annum equal to one-month Intercontinental Exchange LIBOR, adjusted monthly on the first day of each calendar month, plus a margin of 2.25% payable on maturity or prepaid. The interest was payable in NESR ordinary shares or cash at the election of the lender. The loan was subject to an origination fee of $0.6 million payable in NESR ordinary shares at $11.244 per share, which resulted in the issuance of 53,362 shares at closing of the Business Combination.

 

During 2018, the Company paid $44 million for both principal and interest in cash on the Hana Loan and entered into an extension (the “Modified Hana Loan”) for the balance of the loan which was fully repaid with cash during January 2019. The terms and conditions contained in the Hana Loan remained unchanged in the Modified Hana Loan.

 

Long-term debt

 

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

 

    June 30, 2019     December 31, 2018  
             
Secured Term Loan   $ 300,000     $ -  
Secured Revolving Credit Facility     65,000          
Murabaha credit facility     -       150,000  
APICORP bilateral term facility     -       46,875  
SABB bilateral term facility     -       43,333  
Term loan Ahli Bank     -       2,382  
NBO loan $60,000     -       23,333  
NBO loan $20,000     -       4,899  
Less: unamortized debt issuance costs     (3,766 )     (557 )
Total loans and borrowings     361,234       270,265  
Less: current portion of long-term debt     -       (45,093 )
Long-term debt, net unamortized debt issuance costs and excluding current installments   $ 361,234     $ 225,172  

  

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, Gulf Energy SAOC and National Petroleum Technology Company as borrowers, and HSBC, Mashreqbank PSC, APICORP and Saudi British Bank, as the “Lenders.” Upon consummation of this transaction, the Company settled its existing debt obligations with the exception of a $30.1 million working capital facility with HSBC, described below, used for the issuance of letters of guarantee and letters of credit.

 

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.

 

The $525.0 million Secured Facilities Agreement consists of a $300.0 million term loan due 2025 (the “Term Loan” or “Secured Term Loan”), a $65.0 million Revolving Credit Facility (“RCF” or “Secured Revolving Credit Facility”) due 2023, and a $160.0 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 of June 30, 2019, this results in an interest rate of 2.40%. The Company has drawn $300.0 million of the Term Loan and $65.0 million of the RCF as of June 30, 2019.

 

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. 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.

 

The Secured Facilities Agreement also includes a working capital facility of $160.0 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 June 30, 2019, the Company had utilized $93.1 million under this working capital facility and the balance of $66.9 million was available to the Company.

 

The Company has also retained legacy bilateral working capital facilities from HSBC totaling $30.1 million in Qatar ($16.4 million), in UAE ($13.6 million) and Kuwait ($0.1 million). As of June 30, 2019, the Company had utilized $29.0 million under this working capital facility and the balance of $1.1 million was available to the Company.

 

Amounts utilized entails that Company has utilized both the facilities by issuing letters of credit to its vendors under both working capital facilities but it still remains off balance sheet until drawn. Once the Company draws the letter of credit to settle any vendor dues, it is classified as short-term borrowings until repaid.

 

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 is in compliance with all financial covenants as of June 30, 2019.

 

17

 

 

Other debt information

 

Scheduled principal payments of long-term debt for periods subsequent to June 30, 2019 are as follows (in thousands):

 

2019   $ -  
2020     15,000  
2021     37,500  
2022     45,000  
2023     110,000  
2024     45,000  
Thereafter     112,500  
Total   $ 365,000  

  

18

 

 

10. FAIR VALUE ACCOUNTING

 

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable, loans and borrowings and an embedded derivative. The fair value of the Company’s financial instruments approximates the carrying amounts represented in the accompanying 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.

 

11. EMPLOYEE BENEFITS

 

Defined benefit plan

 

The Company provides defined benefit plan of severance pay to the 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 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 thousands):

 

   

Period from
January 1, 2019 to

June 30, 2019

   

Period from

June 7, 2018 to

June 30, 2018

   

Period from
January 1, 2018 to

June 6, 2018

 
      Successor (NESR)       Predecessor (NPS)  
Service Cost     1,440       189       866  
Interest Cost     176       30       168  
Other     55       (11 )     375  
Net Cost     1,671       208       1,409  

 

   

Period from
April 1, 2019 to

June 30, 2019

   

Period from
June 7, 2018 to

June 30, 2018

   

Period from
April 1, 2018 to

June 6, 2018

 
      Successor (NESR)       Predecessor (NPS)  
Service Cost     591       189       347  
Interest Cost     43       30       67  
Other     66       (11 )     188  
Net Cost     700       208       602  

 

The Company made contributions to its defined benefit plan of $1.1 million, $0.1 million, $0.2 million , $0.7 million and $0.1 million, in the 2019 Successor Period, 2019 Successor Quarter, 2018 Successor Period, 2018 Predecessor Period, and 2018 Predecessor Quarter, respectively, in the Condensed Consolidated Statement of Operations. The scheme 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 Statement of Operations as incurred. Total contributions were $1.6 million, $0.8 million and $0.3 million, for the 2019 Successor Period, 2019 Successor Quarter, and 2018 Successor Period, respectively, in the Condensed Consolidated Statement of Operations.

 

12. SHARE-BASED COMPENSATION

 

On May 18, 2018, the NESR shareholders approved the NESR 2018 Long Term Incentive Plan (the “LTIP”), effective upon the closing of the Business Combination. The board of directors previously approved the LTIP on February 9, 2018, including the performance criteria upon which performance goals may be based. A total of 5,000,000 ordinary shares are reserved for issuance under the LTIP.

 

19

 

 

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 share-based 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 table sets forth the LTIP activity for the periods indicated:

 

    Number of
Restricted Shares
    Weighted Average Grant Date Fair Value per Share  
Unvested at December 31, 2018 (NESR - Successor)     725,200     $ 11.15  
Granted     970,000     $ 10.36  
Vested     -          
Forfeited     (95,000 )   $ 10.86  
Unvested at June 30, 2019 (NESR - Successor)     1,600,200     $ 10.59  

 

    Number of
Restricted Shares
    Weighted Average Grant Date Fair Value per Share  
Unvested at March 31, 2019 (NESR - Successor)     725,200     $ 11.15  
Granted     970,000     $ 10.36  
Vested     -          
Forfeited     (95,000 )   $ 10.86  
Unvested at June 30, 2019 (NESR - Successor)     1,600,200     $ 10.59  

 

At June 30, 2019, we had unrecognized compensation expense of $13.8 million related to unvested LTIP to be recognized on a straight-line basis over a weighted average remaining period of 2.49 years. The amount of stock-based compensation expense was $2.1 million and $1.4 million for the 2019 Successor Period and 2019 Successor Quarter, respectively. Expenses for the 2019 Successor Period were recorded for $1.0 million in costs of services and $1.1 million in selling, general and administrative services in the Condensed Consolidated Statement of Operations. Expenses for the 2019 Successor Quarter were recorded for $0.7 million in costs of services and $0.7 million in selling, general and administrative services in the Condensed Consolidated Statement of Operations. There is no income tax impact of the stock-based compensation recorded by the Company.

 

13. COMMITMENTS AND CONTINGENCIES

 

Capital expenditure commitments

 

The Company was committed to incur capital expenditures of $44.9 million at June 30, 2019. These commitments are expected to be settled during 2019 and 2020.

 

Operating lease commitments

 

Future minimum lease commitments under non-cancellable operating leases with initial or remaining terms of one year or more at June 30, 2019, are payable as follows (in thousands):

 

2019   $ 1,846  
2020     3,444  
2021     3,296  
2022     2,927  
2023     2,791  
2024     2,792  
Thereafter     4,425  
Total   $ 21,521  

 

The Company recorded rental expense of $56.4 million, $30.9 million, $6.3 million, $19.5 million, and $9.2 million, in the 2019 Successor Period, 2019 Successor Quarter, 2018 Successor Period, 2018 Predecessor Period, and 2018 Predecessor Quarter, respectively, in the Condensed Consolidated Statement of Operations.

 

20

 

 

Other commitments

 

The Company has outstanding letters of credit amounting to $41.7 million and $10.3 million as of June 30, 2019 and December 31, 2018, respectively.

 

In the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as surety bonds for performance, and other bank issued guarantees, including cash margin guarantees, which totaled $109.2 million and $41.4 million as of June 30, 2019 and December 31, 2018, 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 our condensed consolidated interim financial statements.

 

As of June 30, 2019, and December 31, 2018, the Company had a liability of $6.7 million and $6.7 million, respectively, on the consolidated balance sheet included in the line item “Other liabilities” reflecting various liabilities associated with the 2014 acquisition of NPS Bahrain.

 

Registration rights

 

The Company is a party to various registration rights agreements with holders of its securities. These registration rights agreements provide certain holders with demand and “piggyback” registration rights, and holders have other rights to require the Company to register for resale such securities pursuant to Rule 415 under the Securities Act. The registration rights are subject to various limitations. The Company generally bears the expenses incurred in connection with the filing of any such registration statements. On July 16, 2018, the Company filed a registration statement on Form F-3 pursuant to certain registration rights agreements, which was declared effective on August 22, 2018. On February 22, 2019, the Company filed another registration statement on Form F-3 pursuant to certain registration rights agreements, which was declared effective on March 4, 2019.

 

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.

 

14. 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 June 30, 2019, there were 86,896,779 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 commencing on July 6, 2018 (30 days after the completion of the Business Combination). The warrants must be exercised for whole ordinary shares. The warrants expire on June 6, 2023 (five years after the completion of the Business Combination). 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 June 30, 2019, there were no preferred shares issued or outstanding.

 

21

 

 

At the Closing Date, there were 11,730,425 ordinary shares outstanding that were not subject to possible redemption and 16,921,700 ordinary shares that were subject to possible redemption as a result of the Business Combination that were recorded outside of permanent equity as a liability on NESR’s consolidated balance sheet. On the Closing Date, the 16,921,700 ordinary shares were reclassed to permanent equity at the fair value of $165.2 million (redemption value of $10.11 per share less $0.35 underwriting fee per share or $9.76 per share). Of the ordinary shares reclassed, 1,916,511 ordinary shares were redeemed for $19.4 million ($10.11 per share). In connection with the completion of the Business Combination, $3.7 million in NESR ordinary shares (307,465) was issued for underwriting fees.

 

Pursuant to the NPS Stock Purchase Agreement dated November 12, 2017, Hana Investments exchanged its portion of the acquired NPS shares, totaling 83,660,878 shares, for 13,340,448 NESR ordinary shares, including accrued interest, at the time that NESR completed the Business Combination. At closing of the Business Combination, NESR purchased the remaining outstanding NPS shares with $292.8 million in cash and 11,318,828 NESR ordinary shares, subject to certain adjustments. Also, on the Closing Date, the Company paid interest totaling $4.7 million in stock (418,001 ordinary shares) to Hana Investments.

 

As discussed in Note 9, Debt, on June 5, 2018, in connection with the Business Combination, NESR entered into the Hana Loan with Hana Investments pursuant to which NESR borrowed $50.0 million on an unsecured basis. The loan was subject to an origination fee of $0.6 million payable in NESR ordinary shares at $11.244 per share, which resulted in the issuance of 53,362 shares at closing of the Business Combination.

 

In connection with the Business Combination, on June 5, 2018, the Company entered into a Relationship Agreement with Hana Investments (the “Olayan Relationship Agreement”), to set out certain rights to which Hana Investments will be entitled as a shareholder of the Company and certain obligations of the Company and NESR Holdings. The Company reimbursed Hana Investments for transaction fees and expenses in the amount of $2.1 million through the issuance of NESR ordinary shares at a conversion rate of $11.244 per share (213,447 ordinary shares) at closing of the Business Combination.

 

On June 6, 2018, NESR acquired 88% of the outstanding shares of GES from certain owners of GES in exchange for the issuance of 25,309,848 NESR ordinary shares, and NESR Holdings acquired the remaining 12% of the outstanding shares of GES for a total cash purchase price of $29.3 million as discussed in Note 4, Business Combination. NESR Holdings organized financing of the acquisition through certain loan contracts and assigned the GES shares which it acquired to NESR, and NESR assumed the obligation to satisfy the loan contracts. NESR elected to issue NESR ordinary shares to satisfy the loan contracts and issued a total of 3,036,381 NESR ordinary shares in settlement of the loan contracts and accrued interest.

 

In connection with the Business Combination, on April 27, 2018, the Company entered into the Forward Purchase Agreement with MEA Energy Investment Company 2 Ltd. (the “Backstop Investor”), pursuant to which the Company agreed to sell up to $150 million of the Company’s ordinary shares to the Backstop Investor or its designees and commonly controlled affiliates. On the Closing Date, the Company drew down $48,293,763 under the primary placement of the Forward Purchase Agreement and issued 4,829,375 ordinary shares to the Backstop Investor.

 

In February 2019, pursuant to the NPS Stock Purchase Agreement, the Company issued to the NPS selling shareholders 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 and based on the 2018 EBITDA (earnings before income taxes, depreciation and amortization) of NESR satisfying scheduled financial thresholds. As of year-end 2018, the Company presented its $10.5 million obligation under the terms of the NPS Equity Stock Earn-Out arrangement as part of Other current liabilities. It was reclassified to Additional paid in capital in the first quarter of 2019 when the shares were issued.

 

22

 

 

15. INCOME PER SHARE

 

Basic income 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 income 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.

 

2018 Predecessor Period and 2018 Predecessor Quarter

 

The following table sets forth the calculation of basic and diluted earnings per common share for the periods presented (in thousands except shares and per share amounts):

 

    2018     2018  
    Period from     Period from  
    January 1 to     April 1 to