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 month of August 2021
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 333-233422, 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statements) and to be a part thereof from the date on which this report on Form 6-K is filed, to the extent not superseded by documents or reports subsequently filed or furnished.
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TABLE OF CONTENTS
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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 unaudited condensed consolidated interim financial statements.
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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, 2021 |
December 31, 2020 (Revised, Note 3) |
|||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 66,074 | $ | 75,012 | ||||
| Accounts receivable, net | 116,483 | 116,835 | ||||||
| Unbilled revenue | 117,909 | 158,457 | ||||||
| Service inventories | 103,305 | 94,263 | ||||||
| Prepaid assets | 13,238 | 11,480 | ||||||
| Retention withholdings | 46,384 | 36,773 | ||||||
| Other receivables | 19,327 | 18,454 | ||||||
| Other current assets | 3,695 | 3,943 | ||||||
| Total current assets | 486,415 | 515,217 | ||||||
| Non-current assets | ||||||||
| Property, plant and equipment, net | 452,453 | 437,743 | ||||||
| Intangible assets, net | 131,424 | 110,376 | ||||||
| Goodwill | 628,752 | 620,921 | ||||||
| Other assets | 7,853 | 2,797 | ||||||
| Total assets | $ | 1,706,897 | $ | 1,687,054 | ||||
| Liabilities and equity | ||||||||
| Liabilities | ||||||||
| Accounts payable | 138,914 | 144,614 | ||||||
| Accrued expenses | 39,977 | 73,783 | ||||||
| Current installments of long-term debt | 54,077 | 47,500 | ||||||
| Short-term borrowings | 59,709 | 42,360 | ||||||
| Income taxes payable | 7,472 | 9,420 | ||||||
| Other taxes payable | 5,095 | 11,289 | ||||||
| Other current liabilities | 49,542 | 30,400 | ||||||
| Total current liabilities | 354,786 | 359,366 | ||||||
| Long-term debt | 287,483 | 308,614 | ||||||
| Deferred tax liabilities | 19,447 | 21,070 | ||||||
| Employee benefit liabilities | 23,520 | 21,515 | ||||||
| Other liabilities | 37,515 | 32,071 | ||||||
| Total liabilities | 722,751 | 742,636 | ||||||
| Commitments and contingencies (Note 14) | - | - | ||||||
| Equity | ||||||||
| Preferred shares, no par value; unlimited shares authorized; none issued and outstanding at June 30, 2021 and December 31, 2020, respectively | - | - | ||||||
| Common stock and additional paid in capital, no par value; unlimited shares authorized; 91,119,218 and 87,777,553 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 851,548 | 831,146 | ||||||
| Retained earnings | 132,509 | 113,216 | ||||||
| Accumulated other comprehensive income | 97 | 64 | ||||||
| Total shareholders’ equity | 984,154 | 944,426 | ||||||
| Non-controlling interests | (8 | ) | (8 | ) | ||||
| Total equity | 984,146 | 944,418 | ||||||
| Total liabilities and equity | $ | 1,706,897 | $ | 1,687,054 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(In US$ thousands, except share data and per share amounts)
| June 30 2021 | June 30 2020 | June 30 2021 | June 30 2020 | |||||||||||||
| Quarter ended | Year-to-date period ended | |||||||||||||||
| Description | June 30, 2021 | June 30, 2020 (Revised, Note 3) | June 30, 2021 | June 30, 2020 (Revised, Note 3) | ||||||||||||
| Revenues | $ | 234,927 | $ | 203,249 | $ | 447,353 | $ | 402,548 | ||||||||
| Cost of services | (193,931 | ) | (164,343 | ) | (368,242 | ) | (322,613 | ) | ||||||||
| Gross profit | 40,996 | 38,906 | 79,111 | 79,935 | ||||||||||||
| Selling, general and administrative expenses | (22,379 | ) | (17,114 | ) | (40,525 | ) | (35,741 | ) | ||||||||
| Amortization | (4,499 | ) | (3,934 | ) | (8,507 | ) | (7,821 | ) | ||||||||
| Operating income | 14,118 | 17,858 | 30,079 | 36,373 | ||||||||||||
| Interest expense, net | (3,234 | ) | (4,165 | ) | (6,397 | ) | (8,675 | ) | ||||||||
| Gain/(loss) on Private Warrant Liability | - | (22 | ) | - | 558 | |||||||||||
| Other income / (expense), net | (655 | ) | (309 | ) | (372 | ) | (420 | ) | ||||||||
| Income before income tax | 10,229 | 13,362 | 23,310 | 27,836 | ||||||||||||
| Income tax expense | (2,408 | ) | (2,848 | ) | (4,017 | ) | (5,375 | ) | ||||||||
| Net income | 7,821 | 10,514 | 19,293 | 22,461 | ||||||||||||
| Net income / (loss) attributable to non-controlling interests | - | - | - | - | ||||||||||||
| Net income attributable to shareholders | $ | 7,821 | $ | 10,514 | $ | 19,293 | $ | 22,461 | ||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 91,124,273 | 88,232,694 | 90,788,083 | 87,731,986 | ||||||||||||
| Diluted | 94,636,374 | 88,232,694 |
93,368,023 |
87,731,986 | ||||||||||||
| Net earnings per share (Note 16): | ||||||||||||||||
| Basic | $ | 0.09 | $ | 0.12 | $ | 0.21 | $ | 0.25 | ||||||||
| Diluted | $ | 0.08 | $ | 0.12 | $ | 0.21 | $ | 0.25 | ||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME
(In US$ thousands)
| June 30 2021 | June 30 2020 | June 30 2021 | June 30 2020 | |||||||||||||
| Quarter ended | Year-to-date period ended | |||||||||||||||
| Description | June 30, 2021 | June 30, 2020 (Revised, Note 3) | June 30, 2021 | June 30, 2020 (Revised, Note 3) | ||||||||||||
| Net income | $ | 7,821 | $ | 10,514 | $ | 19,293 | $ | 22,461 | ||||||||
| Other comprehensive income, net of tax | ||||||||||||||||
| Foreign currency translation adjustments | - | 6 | 33 | 35 | ||||||||||||
| Total Comprehensive Income, net of tax | 7,821 | 10,520 | 19,326 | 22,496 | ||||||||||||
| Comprehensive income attributable to non-controlling interest | - | - | - | - | ||||||||||||
| Comprehensive income attributable to shareholders | $ | 7,821 | $ | 10,520 | $ | 19,326 | $ | 22,496 | ||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF SHAREHOLDERS’ EQUITY
(In US$ thousands, except share data)
| Ordinary | Add | Other | Retained | Shareholdes equity | Non-controlling | Total | ||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| and | Accumulated | Total | ||||||||||||||||||||||||||
| Ordinary |
Additional Paid in |
Other Comprehensive | Retained | Company Shareholders’ |
Non- controlling |
Total Shareholders’ | ||||||||||||||||||||||
| Description | Shares | Capital | Income | Earnings | Equity | Interests | Equity | |||||||||||||||||||||
| Balance at March 31, 2021 | 90,852,607 | $ | 846,160 | $ | 97 | $ | 124,688 | $ | 970,945 | $ | (8 | ) | $ | 970,937 | ||||||||||||||
| Share-based compensation expense | - | 3,039 | - | - | 3,039 | - | 3,039 | |||||||||||||||||||||
| Vesting of restricted share units | - | - | - | - | - | - | - | |||||||||||||||||||||
| Conversion of Private Warrants to Public Warrants | - | - | - | - | - | - | - | |||||||||||||||||||||
| Shares issued to SAPESCO Selling Shareholders (Note 4) | 266,611 | 2,349 | - | - | 2,349 | - | 2,349 | |||||||||||||||||||||
| Other | - | - | - | - | - | - | - | |||||||||||||||||||||
| Net income | - | - | - | 7,821 | 7,821 | - | 7,821 | |||||||||||||||||||||
| Balance at June 30, 2021 | 91,119,218 | $ | 851,548 | $ | 97 | $ | 132,509 | $ | 984,154 | $ | (8 | ) | $ | 984,146 | ||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| and | Accumulated | Total | ||||||||||||||||||||||||||
| Ordinary |
Additional Paid in |
Other Comprehensive | Retained | Company Shareholders’ |
Non- controlling |
Total Shareholders’ | ||||||||||||||||||||||
| Description | Shares | Capital | Income | Earnings | Equity | Interests | Equity | |||||||||||||||||||||
| Balance at March 31, 2020 (Revised, Note 3) | 87,495,221 | $ | 824,577 | $ | 58 | $ | 74,518 | $ | 899,153 | $ | - | $ | 899,153 | |||||||||||||||
| Share-based compensation expense | - | 2,125 | - | - | 2,125 | - | 2,125 | |||||||||||||||||||||
| Conversion of Private Warrants to Public Warrants | - | 372 | - | - | 372 | - | 372 | |||||||||||||||||||||
| Other | - | 2 | 6 | - | 8 | 59 | 67 | |||||||||||||||||||||
| Net income | - | - | - | 10,514 | 10,514 | - | 10,514 | |||||||||||||||||||||
| Balance at June 30, 2020 (Revised, Note 3) | 87,495,221 | $ | 827,076 | $ | 64 | $ | 85,032 | $ | 912,172 | $ | 59 | $ | 912,231 |
|
||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| and | Accumulated | Total | ||||||||||||||||||||||||||
| Ordinary |
Additional Paid in |
Other Comprehensive | Retained | Company Shareholders’ |
Non- controlling |
Total Shareholders’ | ||||||||||||||||||||||
| Description | Shares | Capital | Income | Earnings | Equity | Interests | Equity | |||||||||||||||||||||
| Balance at December 31, 2020 (Revised, Note 3) | 87,777,553 | $ | 831,146 | $ | 64 | $ | 113,216 | $ | 944,426 | $ | (8 | ) | $ | 944,418 | ||||||||||||||
| Share-based compensation expense | - | 4,600 | - | - | 4,600 | - | 4,600 | |||||||||||||||||||||
| Shares issued to SAPESCO Selling Shareholders (Note 4) | 2,648,650 | 15,802 | - | - | 15,802 | - | 15,802 | |||||||||||||||||||||
| Vesting of restricted share units | 693,015 | - | - | - | - | - | - | |||||||||||||||||||||
| Other | - | - | 33 | - | 33 | - | 33 | |||||||||||||||||||||
| Net income | - | - | - | 19,293 | 19,293 | - | 19,293 | |||||||||||||||||||||
| Balance at June 30, 2021 | 91,119,218 | $ |
851,548 |
$ | 97 | $ | 132,509 | $ | 984,154 | $ | (8 | ) | $ |
984,146 |
||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| and | Accumulated | Total | ||||||||||||||||||||||||||
| Ordinary |
Additional Paid in |
Other Comprehensive | Retained | Company Shareholders’ |
Non- controlling |
Total Shareholders’ | ||||||||||||||||||||||
| Description | Shares | Capital | Income | Earnings | Equity | Interests | Equity | |||||||||||||||||||||
| Balance at December 31, 2019 (Revised, Note 3) | 87,187,289 | $ | 822,942 | $ | 29 | $ | 62,571 | $ | 885,542 | $ | - | $ | 885,542 | |||||||||||||||
| Balance at beginning, value | 87,187,289 | $ | 822,942 | $ | 29 | $ | 62,571 | $ | 885,542 | $ | - | $ | 885,542 | |||||||||||||||
| Share-based compensation expense | - | 3,760 | - | - | 3,760 | - | 3,760 | |||||||||||||||||||||
| Shares issued to SAPESCO Selling Shareholders (Note 4) | - | - | - | - | - | - | - | |||||||||||||||||||||
| Vesting of restricted share units | 307,932 | - | - | - | - | - | - | |||||||||||||||||||||
| Conversion of Private Warrants to Public Warrants | - | 372 | - | - | 372 | - | 372 | |||||||||||||||||||||
| Other | - | 2 | 35 | - | 37 | 59 | 96 | |||||||||||||||||||||
| Net income | - | - | - | 22,461 | 22,461 | - | 22,461 | |||||||||||||||||||||
| Balance at June 30, 2020 (Revised, Note 3) | 87,495,221 | $ | 827,076 | $ | 64 | $ | 85,032 | $ | 912,172 | $ | 59 | $ | 912,231 | |||||||||||||||
| Balance at ending, value | 87,495,221 | $ | 827,076 | $ | 64 | $ | 85,032 | $ | 912,172 | $ | 59 | $ | 912,231 | |||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(In US$ thousands)
| June 30 2021 | June 30 2020 | |||||||
| Year-to-date period ended | ||||||||
| June 30, 2021 |
June 30, 2020 (Revised, Note 3) |
|||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 19,293 | $ | 22,461 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 62,320 | 59,585 | ||||||
| Share-based compensation expense | 4,600 | 3,760 | ||||||
| Loss (Gain) on disposal of assets | 367 | 240 | ||||||
| Non-cash interest (income) expense | (51 | ) | (125 | ) | ||||
| Deferred tax expense (benefit) | (1,623 | ) | (2,126 | ) | ||||
| Allowance for (reversal of) doubtful receivables | 286 | (26 | ) | |||||
| Provision for obsolete service inventories | - | 614 | ||||||
| Loss (Gain) on Private Warrant liability | - | (558 | ) | |||||
| Other operating activities, net | 240 | 219 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| (Increase) decrease in accounts receivable | 9,308 | 1,887 | ||||||
| (Increase) decrease in Unbilled revenue | 41,900 | (44,517 | ) | |||||
| (Increase) decrease in Retention withholdings | (9,611 | ) | (8,701 | ) | ||||
| (Increase) decrease in inventories | (6,288 | ) | (7,883 | ) | ||||
| (Increase) decrease in prepaid expenses | (1,449 | ) | 857 | |||||
| (Increase) decrease in other current assets | 1,567 | 6,685 | ||||||
| (Increase) decrease in other long-term assets and liabilities | (516 | ) | (2,140 | ) | ||||
| Increase (decrease) in accounts payable and accrued expenses | (32,038 | ) | 23,185 | |||||
| Increase (decrease) in other current liabilities | (8,834 | ) | (818 | ) | ||||
| Net cash provided by operating activities | 79,471 | 52,599 | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (32,568 | ) | (50,661 | ) | ||||
| Proceeds from disposal of assets | 784 | 1,277 | ||||||
| Acquisition of business, net of cash acquired | (36,923 | ) | 3,740 | |||||
| Other investing activities | (3,104 | ) | (570 | ) | ||||
| Net cash used in investing activities | (71,811 | ) | (46,214 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from long-term debt | - | 15,000 | ||||||
| Repayments of long-term debt | (15,000 | ) | - | |||||
| Proceeds from short-term borrowings | 58,394 | 3,999 | ||||||
| Repayments of short-term borrowings | (40,938 | ) | (7,131 | ) | ||||
| Payments on capital leases | (10,117 | ) | (11,180 | ) | ||||
| Payments on seller-provided financing for capital expenditures | (8,830 | ) | (992 | ) | ||||
| Other financing activities, net | (141 | ) | - | |||||
| Net cash provided by (used in) financing activities | (16,632 | ) | (304 | ) | ||||
| Effect of exchange rate changes on cash | 34 | 35 | ||||||
| Net increase (decrease) in cash | (8,938) | 6,116 | ||||||
| Cash and cash equivalents, beginning of period | 75,012 | 73,201 | ||||||
| Cash and cash equivalents, end of period | $ | 66,074 | $ | 79,317 | ||||
| Supplemental disclosure of cash flow information (also refer Note 3): | ||||||||
| Interest paid | 4,696 | 3,970 | ||||||
| Income taxes paid | 8,100 | 5,800 | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated interim financial statements.
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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,” or the “NPS/GES Business Combination”). The formation of NESR as an operating entity was completed on June 7, 2018, after the transactions were approved by the NESR shareholders. On June 1, 2020, NESR further expanded its footprint within the MENA region when its NPS subsidiary acquired Sahara Petroleum Services Company S.A.E. (“SAPESCO,” the “SAPESCO Business Combination”). On May 5, 2021, NESR again expanded its footprint within the MENA region when its NPS subsidiary acquired specific oilfield service lines of Action Energy Company W.L.L. (“Action,” the “Action Business Combination”).
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, Libya and Kuwait.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting purposes. Accordingly, certain information and note disclosures normally included in full-year financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying Condensed Consolidated Balance Sheet as of December 31, 2020, has been derived from the audited consolidated financial statements as of that date, but does not include all disclosures required by U.S. GAAP. 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, 2020. In the opinion of management, all adjustments considered necessary for the fair statement of these condensed consolidated interim financial statements have been made. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature.
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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 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 the purchase price allocations for the acquisitions of SAPESCO and Action, 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, unrecognized tax benefits, recoverability of deferred tax assets, 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 were as follows as of June 30, 2021:
| ● | Purchases of property, plant, and equipment in Accounts payable and Accrued expenses at June 30, 2021 of $2.5 million and $0.3 million, respectively, are not included under “Capital expenditures” within the Condensed Consolidated Statement of Cash Flows. | |
| ● | Capital lease obligations of $25.1 million classified as a short-term obligation within Other current liabilities and $21.9 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 $11.3 million 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 $0.1 million classified in Other current liabilities at June 30, 2021, related to the future payment of 7,268 shares for the purchase of SAPESCO (Note 4), are not included under “Acquisition of business, net of cash acquired” within the Condensed Consolidated Statement of Cash Flows. | |
| ● | Obligations of $17.3 million classified as Other current liabilities and $5.8 million classified as Other liabilities, related to the future payments of cash for the purchase of Action (Note 4), are not included under “Acquisition of business, net of cash acquired” within the Condensed Consolidated Statement of Cash Flows. | |
| ● | During the year-to-date period ended June 30, 2021, the Company issued NESR ordinary share consideration of 2,237,000 shares, 145,039 Additional Earn-Out Shares, and 266,611 shares primarily relating to Customer Receivables Earn-Out Shares, to the SAPESCO selling shareholders (Note 4). These transactions were non-cash and do not appear in the Condensed Consolidated Statement of Cash Flows for the year-to-date period ended June 30, 2021. |
Non-cash transactions for the year-to-date period ended June 30, 2020 were as follows:
| ● | Purchases of property, plant, and equipment in Accounts payable, Accrued expenses and Short-term borrowings at June 30, 2020 of $15.2 million, $0.9 million, and $28.6 million, respectively, are not included under “Capital expenditures” within the Condensed Consolidated Statement of Cash Flows. | |
| ● | Capital lease obligations of $27.0 million classified as a short-term obligation within Other current liabilities and $9.0 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 $3.5 million included in Other current liabilities and $1.5 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 $1.5 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 $40.6 million classified, 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. |
| 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 June 30, 2021.
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.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The FASB also issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021, which adds implementation guidance to clarify which optional expedients in Topic 848 may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified as a result of the discounting transition. The ASUs may be applied through December 31, 2022 and are applicable to our contracts and hedging relationships that reference LIBOR. We are still evaluating whether to apply any of the expedients and/or exceptions included in these ASUs.
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.
Correction of Warrant Accounting for the quarter and year-to-date periods ended June 30, 2020
On April 12, 2021, the Staff of the SEC released Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (the “Statement”). In response to the Statement, the Company determined that it had incorrectly accounted for its Private Warrants (Note 15) as equity, instead of liabilities. In accordance with ASC 480, Distinguishing Liabilities from Equity, the Company’s Private Warrants should have been both initially and subsequently measured at fair value with changes in fair value recognized in earnings from inception until their conversion to Public Warrants. Private Warrants were converted into Public Warrants periodically between December of 2018 and May of 2020. The Private Warrants were determined to be within the scope of liability accounting due to provisions that could result in different settlement amounts depending upon the characteristics of the holder of the Private Warrant. Management concluded the misstatement is immaterial to its previously issued condensed consolidated interim financial statements; however, the Company has corrected its presentation in the accompanying Condensed Consolidated Interim Statement of Operations, Condensed Consolidated Interim Statement of Comprehensive Income, and Condensed Consolidated Interim Statements of Shareholders’ Equity, Condensed Consolidated Interim Statement of Cash Flows for the three and six months ended June 30, 2020 (in $US thousands, except per share amounts) as follows:
SCHEDULE OF RESTATEMENT
| As Previously Reported | As Revised | As Previously Reported | As Revised | |||||||||||||
| Quarter ended June 30, 2020 | Year-to-date period ended June 30, 2020 | |||||||||||||||
| As Previously Reported | As Revised | As Previously Reported | As Revised | |||||||||||||
| Condensed Consolidated Interim Statements of Operations | ||||||||||||||||
| Gain/(loss) on warrant liability | $ | - | $ | (22) | $ | - | $ | 558 | ||||||||
| Income before income tax | 13,384 | 13,362 | 27,278 | 27,836 | ||||||||||||
| Net income | 10,536 | 10,514 | 21,903 | 22,461 | ||||||||||||
| Basic earnings per share | 0.12 | 0.12 | 0.25 | 0.25 | ||||||||||||
| Diluted earnings per share | 0.12 | 0.12 | 0.25 | 0.25 | ||||||||||||
| Condensed Consolidated Interim Statements of Comprehensive Income | ||||||||||||||||
| Total Comprehensive Income, net of tax | 10,542 | 10,520 | 21,938 | 22,496 | ||||||||||||
| Condensed Consolidated Interim Statements Of Shareholders’ Equity | ||||||||||||||||
| Retained Earnings | 89,564 | 85,032 | 89,564 | 85,032 | ||||||||||||
| Total Company Shareholders’ Equity | 912,172 | 912,172 | 912,172 | 912,172 | ||||||||||||
| Total Shareholders’ Equity | 912,231 | 912,231 | 912,231 | 912,231 | ||||||||||||
| Condensed Consolidated Interim Statements of Cash Flows | ||||||||||||||||
| Net income | 21,903 | 22,461 | ||||||||||||||
| Loss (Gain) on warrant liability | - | 558 | ||||||||||||||
| 11 |
Correction of Warrant Accounting as of and for the Years Ended December 31, 2020 and 2019 and for the period From June 7, 2018 to December 31, 2018
As described above, in the first quarter of 2021, the Company determined that it had incorrectly accounted for its Private Warrants (Note 15) as equity, instead of liabilities. In accordance with ASC 480, Distinguishing Liabilities from Equity, the Company’s Private Warrants should have been both initially and subsequently measured at fair value with changes in fair value recognized in earnings until their conversion to Public Warrants. Private Warrants were converted into Public Warrants periodically between December of 2018 and May of 2020. Management concluded the misstatement is immaterial to previously issued consolidated financial statements; however, the Company intends to correct its presentation prospectively in future filings. The impact of the misstatement on the Consolidated Balance Sheet, Consolidated Statement of Operations, Consolidated Statement of Comprehensive Income, Consolidated Statement of Cash Flows as of and for the years ended December 31, 2020 and 2019 and for the period from June 7, 2018 to December 31, 2018 is shown in the table below (in US$ thousands, except per share amounts):
|
As
of and for
the year ended December 31, 2020 |
As
of and for
the year ended December 31, 2019 |
For
the period from
June 7, 2018 to December 31, 2018 |
||||||||||||||||||||||
| As Previously Reported | As Revised | As Previously Reported | As Revised | As Previously Reported | As Revised | |||||||||||||||||||
| Consolidated Balance Sheets | ||||||||||||||||||||||||
| Warranty liabilities | $ | - | $ | - | $ | - | $ | 930 | ||||||||||||||||
| Total liabilities | 742,636 | 742,636 | 635,892 | 636,822 | ||||||||||||||||||||
| Total equity | 944,418 | 944,418 | 886,472 | 885,542 | ||||||||||||||||||||
| Consolidated Statements of Operations | ||||||||||||||||||||||||
| Gain/(loss) on warrant liability | - | 557 | - | 5,054 | $ | - | $ | (1,816 | ) | |||||||||||||||
| Income before income tax | 60,792 | 61,349 | 52,435 | 57,489 | 44,411 | 42,595 | ||||||||||||||||||
| Net income | 50,087 | 50,644 | 39,364 | 44,418 | 34,980 | 33,164 | ||||||||||||||||||
| Basic earnings per share | 0.56 | 0.57 | 0.45 | 0.51 | 0.41 | 0.39 | ||||||||||||||||||
| Diluted earnings per share | 0.56 | 0.56 | 0.45 | 0.45 | 0.40 | 0.38 | ||||||||||||||||||
| Consolidated Statements of Comprehensive Income | ||||||||||||||||||||||||
| Total Comprehensive Income, net of tax | 50,122 | 50,679 | 39,345 | 44,399 | 35,143 | 33,327 | ||||||||||||||||||
| Consolidated Statements of Shareholders’ Equity | ||||||||||||||||||||||||
| Retained Earnings | 117,748 | 113,216 | 67,661 | 62,571 | 28,297 | 18,153 | ||||||||||||||||||
| Total Company Shareholders’ Equity | 944,426 | 944,426 | 886,472 | 885,542 | 830,924 | 818,281 | ||||||||||||||||||
| Total Shareholders’ Equity | 944,418 | 944,418 | 886,472 | 885,542 | 830,991 | 818,348 | ||||||||||||||||||
| Consolidated Statements of Cash Flows | ||||||||||||||||||||||||
| Net income | 50,087 | 50,644 | 39,364 | 44,418 | 34,980 | 33,164 | ||||||||||||||||||
| Loss (Gain) on warrant liability | - | 557 | - | 5,054 | - | (1,816 | ) | |||||||||||||||||
| 12 |
4. BUSINESS COMBINATIONS
Action Business Combination
On May 5, 2021, NESR executed the Sale and Purchase Agreement (“Action Sale and Purchase Agreement”) to acquire specific oilfield service lines of Action Energy Company W.L.L.
Description of the Action Transaction
Under the terms of the Action Sale & Purchase Agreement, NESR acquired the working capital, property, plant, and equipment, contract labor force, and the economic benefit of three five-year customer contracts associated with specific oilfield service lines of Action in an all-cash transaction which comprised of $36.7 million paid at closing and an estimated $16.8 million deferred consideration payment to be paid 6 months after closing.
The Action Sale & Purchase Agreement also contained earn-out mechanisms that enabled the sellers to receive additional consideration after the closing of the Action Business Combination as follows:
| ● | First Earn-Out Consideration (“First Earn-Out”) of 1% of revenue associated with the three acquired customer contracts, including the first renewal of each of these contracts (if any). The First Earn-Out is payable quarterly; |
| ● | Second Earn-Out Consideration (“Second Earn-Out”) of 3% of the revenue associated with the first renewal (if any) of the three acquired customer contracts. 66.66% of the Second Earn-Out is payable upon contract renewal with the remaining balance due at the conclusion of the renewed contract’s term. At its discretion, NESR may settle the Second Earn-Out using cash or shares; and |
| ● | Third Earn-Out Consideration (“Third Earn-Out”) of up to 1.12% of the revenue associated with the three acquired contracts, dependent on the amount of incremental earnings before interest, taxes, depreciation, and amortization contributed by the contracts minus certain adjustments such as capital expenditures. The Third Earn-Out is payable within 90 days of the conclusion of the term of the last of the three acquired customer contracts. At its discretion, NESR may settle the Third Earn-Out using cash or shares. |
| 13 |
Collectively, the First Earn-Out, Second Earn-Out, and Third Earn-Out were fair valued at $6.4 million as of May 5, 2021. The First Earn-Out and Second Earn-Out were determined using a discounted cash flow approach within a scenario analysis. The Third Earn-Out was valued using a Monte Carlo simulation.
Financing of Action Business Combination
Consideration for the Action Business Combination was funded through the following sources and transactions:
| ● | cash and cash equivalents of $36.7 million; |
| ● | deferred cash consideration of $16.8 million; |
The following summarizes the consideration to purchase the working capital, property, plant, and equipment, contract labor force, and the economic benefit of three five-year customer contracts associated with specific oilfield service lines of Action:
SCHEDULE OF CONSIDERATION TO PURCHASE ISSUED AND OUTSTANDING EQUITY INTEREST
| 5.5.2021 | ||||
| Consideration (In US$ thousands) | ||||
| Cash consideration | $ | 36,767 | ||
| Deferred cash consideration | 16,786 | |||
| Total consideration – cash | 53,553 | |||
| First Earn-Out | 2,719 | |||
| Second Earn-Out | 3,639 | |||
| Third Earn-Out | - | |||
| Total estimated earn-out mechanisms | 6,358 | |||
| Preliminary consideration | $ | 59,911 | ||
| 14 |
Accounting treatment
The Action Business Combination was accounted for under ASC 805, Business Combinations (“ASC 805”). Pursuant to ASC 805, NESR has been determined to be the accounting acquirer. Action constitutes a business, with inputs, processes, and outputs. Accordingly, the acquisition of Action constitutes the acquisition of a business for purposes of ASC 805, and due to the change in control of Action was accounted for using the acquisition method. NESR recorded the fair value of assets acquired and liabilities assumed from Action.
The allocation of the consideration to the tangible and intangible assets acquired and liabilities assumed, is based on various estimates. As of June 30, 2021, 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) finalizing our completeness procedures for liabilities, (6) accounting for income taxes, and (7) concluding valuation procedures for Employee benefit 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 2021. Any adjustments will be recognized in the reporting period in which the adjustment amounts are determined.
The following table summarizes the preliminary allocation of the purchase price allocation (in US$ thousands):
SCHEDULE OF PURCHASE PRICE ALLOCATION
Preliminary allocation of consideration
| 5.5.2021 | ||||
| Cash and cash equivalents | $ | 382 | ||
| Accounts receivable | 8,814 | |||
| Unbilled revenue | 1,352 | |||
| Service inventories | 2,952 | |||
| Prepaid assets | 310 | |||
| Retention withholdings | - | |||
| Other current assets | 1,756 | |||
| Property, plant and equipment | 13,605 | |||
| Intangible assets | 29,500 | |||
| Other assets | 2,053 | |||
| Total identifiable assets acquired | 60,724 | |||
| Accounts payable | 5,294 | |||
| Accrued expenses | 2,428 | |||
| Current installments of long-term debt | - | |||
| Short-term borrowings | - | |||
| Income taxes payable | - | |||
| Other taxes payable | - | |||
| Other current liabilities | 200 | |||
| Deferred tax liabilities | - | |||
| Long-term debt | - | |||
| Employee benefit liabilities | 722 | |||
| Other liabilities | - | |||
| Non-controlling interests | - | |||
| Net identifiable liabilities acquired | 8,644 | |||
| Total fair value of net assets acquired | 52,080 | |||
| Goodwill | 7,831 | |||
| Preliminary consideration | $ | 59,911 |
| 15 |
All employee benefit liabilities relate to end of service benefits (Note 12).
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):
SCHEDULE OF PRELIMINARY ALLOCATION TO INTANGIBLE ASSETS
| Fair Value | ||||||
| Total | Useful Life | |||||
| (In US$ thousands) | ||||||
| Customer relationships | $ | 29,500 | 10 years | |||
| Total intangible assets | $ | 29,500 | ||||
Goodwill
As of June 30, 2021, $7.8 million has been allocated to goodwill. Goodwill represents the excess of the gross consideration transferred over the fair value of the underlying net tangible and identifiable definite-lived intangible assets acquired. Goodwill is not amortizable and/or deductible for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of the strong market positions and the assembled workforces.
In accordance with FASB ASC Topic 350, Goodwill and Other Intangible Assets, goodwill will not be amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. In the event management determines that the value of goodwill has become impaired, an accounting charge for the amount of impairment during the period in which the determination is made may be recognized.
| 16 |
Unaudited pro-forma information
The following table summarizes the preliminary supplemental consolidated results of the Company on an unaudited pro-forma basis, as if the Action Business Combination had been consummated on January 1, 2020 for the quarter and year-to-date periods ended June 30, 2021 and 2020, respectively (in US$ thousands):
SCHEDULE OF UNAUDITED PROFORMA INFORMATION
|
June 30, 2021 |
June 30, 2020 |
June 30, 2021 |
June 30, 2020 |
|||||||||||||
| Quarter ended | Year-to-date period ended | |||||||||||||||
|
June 30, 2021 |
June 30, 2020 |
June 30, 2021 |
June 30, 2020 |
|||||||||||||
| Revenues | $ | 237,018 | $ | 208,615 | $ | 455,718 | $ | 413,280 | ||||||||
| Net income/(loss) | 7,951 | 10,770 | 19,811 | 22,371 | ||||||||||||
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 consolidated company during the periods presented and are not necessarily indicative of 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 Action Business Combination are included in the earliest period presented.
Action revenue of $4.4 million and net income of $0.4 million are included in the Condensed Consolidated Statement of Operations during the quarter and year-to-date periods ended June 30, 2021.
SAPESCO Business Combination
In June of 2020, NESR executed the First Deed of Amendment (“First Deed of Amendment”) to the Agreement dated February 13, 2020 related to the sale and purchase of 99.7% of SAPESCO (collectively with the First Deed of Amendment, the “SAPESCO Sale & Purchase Agreement”). The executed First Deed of Amendment gave NESR control over SAPESCO effective from June 1, 2020. Accordingly, the accounting of the acquisition was carried out effective June 1, 2020.
Description of the SAPESCO Transaction
Under the terms of the SAPESCO Sale & Purchase Agreement, NESR acquired 99.7% of the issued and outstanding shares of SAPESCO in a cash and stock transaction which comprised of $11.0 million to be paid at closing, an additional $6.0 million to be paid in three equal installments, for total cash consideration of $17.0 million, and the issuance of 2,237,000 NESR shares. Formal closing and legal transfer of the $11.0 million of cash and $6.0 million of deferred cash consideration occurred during 2020. The transfer of 2,237,000 NESR ordinary shares was completed in the quarter ended March 31, 2021. The formal closing and transfer of consideration was temporarily delayed as a result of the global COVID-19 pandemic.
The SAPESCO Sale & Purchase Agreement also contained earn-out mechanisms that enabled the sellers to receive additional consideration after the closing of the SAPESCO 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 was 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 as of June 1, 2020. The Cash Earn-Out was determined using a discounted cash flow approach within a scenario analysis. The Additional Earn-Out Shares were valued using a Monte Carlo simulation. In the fourth quarter of 2020, the Company reduced the liabilities recorded for the Cash Earn-Out and Additional Earn-Out Shares to $2.1 million based on expected settlement values at the reporting date that were subsequently finalized with the sellers in the quarter ended March 31, 2021. This adjustment was reflected in Other income/(expense), net, as ASC 805 precludes adjusting goodwill for subsequent revisions to contingent consideration. The downward revision to the liabilities recorded for the Cash Earn-Out and Additional Earn-Out Shares was primarily on account of settlement negotiations with the sellers during the fourth quarter of 2020 that altered the mix of cash and equity consideration to be paid upon final settlement of these earn-outs. The Cash Earn-Out and Additional Earn-Out Shares were formally settled in the quarter ended March 31, 2021 through the transfer of $0.5 million of cash and 145,039 ordinary shares valued at $1.6 million, respectively.
The Customer Receivables Earn-Out Shares contingency and corresponding long-dated and doubtful receivables, were fair valued at $0.0 (zero) at June 1, 2020. Subsequently, as the Company has collected some of these amounts and disbursed 266,611 shares to the SAPESCO selling shareholders. The Company has recorded $0.1 million of Other Current Liabilities as of June 30, 2021 relating primarily to the expected issuance of 7,268 Customer Receivables Earn-Out Shares later in 2021.
| 17 |
Financing of SAPESCO Business Combination
Consideration for the SAPESCO Business Combination was funded through the following sources and transactions:
| ● | cash and cash equivalents of $11.0 million; |
| ● | deferred cash consideration of $6.0 million; |
| ● | the issuance of 2,237,000 NESR ordinary shares to the SAPESCO selling shareholders in exchange for their SAPESCO shares. |
The following summarizes the consideration to purchase 99.7% of the issued and outstanding equity interests of SAPESCO:
SCHEDULE OF CONSIDERATION TO PURCHASE ISSUED AND OUTSTANDING EQUITY INTEREST
| SAPESCO | ||||||||
| Value (In US$ 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 | ||||||
| Cash Earn-Out | 5,301 | |||||||
| Additional Earn-Out Shares | 6,377 | (2) | ||||||
| Total estimated earn-out mechanisms | 11,678 | (2) | ||||||
| Total consideration | $ | 40,649 | 2,237,000 | |||||
| (1) | The fair value of NESR ordinary shares was determined based upon the $5.37 per share closing price of NESR ordinary shares on June 1, 2020, the acquisition date of the SAPESCO Business Combination. Control was transferred by agreement with the selling shareholders of SAPESCO. |
| (2) | The quantity of Additional Earn-Out Shares was negotiated in the quarter ended December 31, 2020 and finalized in the quarter ended March 31, 2021 when settled with the sellers for 145,039 shares. |
Accounting treatment
The SAPESCO Business Combination was accounted for under ASC 805, Business Combinations (“ASC 805”). Pursuant to ASC 805, NESR has been determined to be the accounting acquirer. SAPESCO constitutes a business, with inputs, processes, and outputs. Accordingly, the acquisition of SAPESCO constitutes the acquisition of a business for purposes of ASC 805, and due to the change in control of SAPESCO was accounted for using the acquisition method. NESR recorded the fair value of assets acquired and liabilities assumed from SAPESCO.
| 18 |
The following table summarizes the final allocation of the purchase price allocation (in US$ thousands):
SCHEDULE OF PURCHASE PRICE ALLOCATION
Allocation of consideration
| Cash and cash equivalents | $ | 3,740 | ||
| Accounts receivable | 14,847 | |||
| Unbilled revenue | 6,126 | |||
| Service inventories | 5,641 | |||
| Prepaid assets | 679 | |||
| Retention withholdings | 279 | |||
| Other current assets | 552 | |||
| Property, plant and equipment | 14,385 | |||
| Intangible assets | 3,340 | |||
| Other assets | 200 | |||
| Total identifiable assets acquired | 49,789 | |||
| Accounts payable | 11,984 | |||
| Accrued expenses | 6,613 | |||
| Current installments of long-term debt | 5,400 | |||
| Short-term borrowings | 5,692 | |||
| Income taxes payable | 313 | |||
| Other taxes payable | 3,802 | |||
| Other current liabilities | 2,237 | |||
| Long-term debt | 15,572 | |||
| Employee benefit liabilities | 1,455 | |||
| Other liabilities | 2,237 | |||
| Non-controlling interests | (8 | ) | ||
| Net identifiable liabilities acquired | 55,297 | |||
| Total fair value of net assets acquired | (5,508 | ) | ||
| Goodwill | 46,157 | |||
| Total consideration | $ | 40,649 |
All employee benefit liabilities relate to end of service benefits (Note 12).
The Company finalized its valuation of identifiable assets and liabilities during the quarter ended December 31, 2020.
Intangible assets
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 US$ thousands):
SCHEDULE OF PRELIMINARY ALLOCATION TO INTANGIBLE ASSETS
| Fair Value | ||||||
| Total | Useful Life | |||||
| (In US$ thousands) | ||||||
| Customer relationships | $ | 2,900 | 8 years | |||
| Trademarks and trade names | 440 | 2 years | ||||
| Total intangible assets | $ | 3,340 | ||||
Goodwill
As of June 30, 2021, $46.2 million has been allocated to goodwill. Goodwill represents the excess of the gross consideration transferred over the fair value of the underlying net tangible and identifiable definite-lived intangible assets acquired. Goodwill is not amortizable and/or deductible for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of the strong market positions and the assembled workforces.
In accordance with FASB ASC Topic 350, Goodwill and Other Intangible Assets, goodwill will not be amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. In the event management determines that the value of goodwill has become impaired, an accounting charge for the amount of impairment during the period in which the determination is made may be recognized.
| 19 |
Unaudited pro-forma information
The following table summarizes the supplemental consolidated results of the Company on an unaudited pro-forma basis, as if the SAPESCO Business Combination had been consummated on January 1, 2019 for the quarter and year-to-date periods ended June 30, 2020 (in US$ thousands):
SCHEDULE OF UNAUDITED PROFORMA INFORMATION
| Quarter ended |
Year-to-date period ended |
|||||||
| June 30, 2020 | June 30, 2020 | |||||||
| Revenues | $ | 209,563 | $ | 421,287 | ||||
| Net income/(loss) | 7,034 | 19,184 | ||||||
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 consolidated company during the periods presented and are not necessarily indicative of 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 consolidated 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 SAPESCO Business Combination are included in the earliest period presented.
SAPESCO revenue of $16.5 million and $31.3 million and net income of $