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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the month of November 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 ☒ Form 40-F ☐

 

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

 

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

 

 

 

 

 

 

INCORPORATION BY REFERENCE

 

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statements) and to be a part thereof from the date on which this report on Form 6-K is filed, to the extent not superseded by documents or reports subsequently filed or furnished.

 

1
 

 

TABLE OF CONTENTS

 

FINANCIAL INFORMATION AND CURRENCY OF FINANCIAL STATEMENTS 3
PART I – FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 4
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS 4
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS 5
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME 6
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF SHAREHOLDERS’ EQUITY 7
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS 8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS 9
1. DESCRIPTION OF BUSINESS 9
2. BASIS OF PRESENTATION 9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 10
4. BUSINESS COMBINATION 13
5. REVENUE 20
6. ACCOUNTS RECEIVABLE 20
7. SERVICE INVENTORIES 21
8. PROPERTY, PLANT, & EQUIPMENT 21
9. GOODWILL AND INTANGIBLE ASSETS 22
10. DEBT 23
11. FAIR VALUE ACCOUNTING 26
12. EMPLOYEE BENEFITS 27
13. SHARE-BASED COMPENSATION 27
14. COMMITMENTS AND CONTINGENCIES 28
15. EQUITY AND WARRANTS 29
16. EARNINGS PER SHARE 30
17. INCOME TAXES 33
18. RELATED PARTY TRANSACTIONS 33
19. REPORTABLE SEGMENTS 34
20. SUBSEQUENT EVENTS 35
Cautionary Note Regarding Forward-Looking Statements 36
ITEM 2. OPERATING AND FINANCIAL REVIEW 37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 48
ITEM 4. INTERNAL CONTROLS AND PROCEDURES 49
PART II - OTHER INFORMATION 50
Item 1. Legal Proceedings. 50
Item 1A. Risk Factors. 50

 

2
 

 

FINANCIAL INFORMATION AND CURRENCY OF FINANCIAL STATEMENTS

 

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

 

    September 30, 2021     December 31, 2020
(Revised, Note 3)
 
             
Assets                
Current assets                
Cash and cash equivalents   $ 101,018     $ 75,012  
Accounts receivable, net     98,223       116,835  
Unbilled revenue     138,900       158,457  
Service inventories     100,757       94,263  
Prepaid assets     20,068       11,480  
Retention withholdings     43,199       36,773  
Other receivables     23,942       18,454  
Other current assets     7,391       3,943  
Total current assets     533,498       515,217  
Non-current assets                
Property, plant and equipment, net     466,732       437,743  
Intangible assets, net     126,323       110,376  
Goodwill     629,675       620,921  
Other assets     10,156       2,797  
Total assets   $ 1,766,384     $ 1,687,054  
                 
Liabilities and equity                
Liabilities                
Accounts payable     143,753       144,614  
Accrued expenses     69,048       73,783  
Current installments of long-term debt     -       47,500  
Short-term borrowings     96,468       42,360  
Income taxes payable     9,272       9,420  
Other taxes payable     2,142       11,289  
Other current liabilities     48,256       30,400  
Total current liabilities     368,939       359,366  
                 
Long-term debt     330,569       308,614  
Deferred tax liabilities     17,148       21,070  
Employee benefit liabilities     25,203       21,515  
Other liabilities     35,695       32,071  
Total liabilities     777,554       742,636  
                 
Commitments and contingencies (Note 14)     -       -  
                 
Equity                
Preferred shares, no par value; unlimited shares authorized; none issued and outstanding at September 30, 2021 and December 31, 2020, respectively           -  
Common stock and additional paid in capital, no par value; unlimited shares authorized; 91,361,235 and 87,777,553 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively     854,301       831,146  
Retained earnings     134,440       113,216  
Accumulated other comprehensive income     97       64  
Total shareholders’ equity     988,838       944,426  
Non-controlling interests     (8 )     (8 )
Total equity     988,830       944,418  
Total liabilities and equity   $ 1,766,384     $ 1,687,054  

 

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

 

4
 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS

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

 

Description   September 30, 2021     September 30, 2020
(Revised, Note 3)
    September 30, 2021     September 30, 2020
(Revised, Note 3)
 
    Quarter ended     Year-to-date period ended  
Description   September 30, 2021     September 30, 2020
(Revised, Note 3)
    September 30, 2021     September 30, 2020
(Revised, Note 3)
 
                         
Revenues   $ 217,992     $ 218,423     $ 665,345     $ 620,971  
Cost of services     (186,095 )     (177,953 )     (554,337 )     (500,566 )
Gross profit     31,897       40,470       111,008       120,405  
Selling, general and administrative expenses     (19,067 )     (17,449 )     (59,592 )     (53,190 )
Amortization     (4,728 )     (4,034 )     (13,235 )     (11,855 )
Operating income     8,102       18,987       38,181       55,360  
Interest expense, net     (3,717 )     (3,793 )     (10,114 )     (12,468 )
Gain/(loss) on Private Warrant Liability     -       -       -       558  
Other income / (expense), net     (1,252 )     37       (1,624 )     (383 )
Income before income tax     3,133       15,231       26,443       43,067  
Income tax expense     (1,202 )     (3,565 )     (5,219 )     (8,940 )
Net income     1,931       11,666       21,224       34,127  
Net income / (loss) attributable to non-controlling interests     -       -       -       -  
Net income attributable to shareholders   $ 1,931     $ 11,666     $ 21,224     $ 34,127  
                                 
Weighted average shares outstanding:                                
Basic     91,250,125       89,876,456       90,943,363       88,452,027  
Diluted     93,116,486       89,876,456       93,288,498       88,452,027  
                                 
Net earnings per share (Note 16):                                
Basic   $ 0.02     $ 0.13     $ 0.23     $ 0.38  
Diluted   $ 0.02     $ 0.13     $ 0.23     $ 0.38  

 

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)

 

Description   September 30, 2021     September 30, 2020
(Revised, Note 3)
    September 30, 2021     September 30, 2020
(Revised, Note 3)
 
    Quarter ended     Year-to-date period ended  
Description   September 30, 2021     September 30, 2020
(Revised, Note 3)
    September 30, 2021     September 30, 2020
(Revised, Note 3)
 
                         
Net income   $ 1,931     $ 11,666     $ 21,224     $ 34,127  
Other comprehensive income, net of tax                                
Foreign currency translation adjustments     -       -       33       35  
Total Comprehensive Income, net of tax     1,931       11,666       21,257       34,162  
Comprehensive income attributable to non-controlling interest     -       -       -       -  
Comprehensive income attributable to shareholders   $ 1,931     $ 11,666     $ 21,257     $ 34,162  

 

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

 

6
 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF SHAREHOLDERS’ EQUITY

(In US$ thousands, except share data)

  

          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 June 30, 2021     91,119,218     $ 851,548     $ 97     $ 132,509     $ 984,154     $ (8 )   $ 984,146  
Share-based compensation expense     -       2,753       -       -       2,753       -       2,753  
Vesting of restricted share units     242,017       -       -       -       -       -       -  
Other     -       -       -       -       -       -       -  
Net income     -       -       -       1,931       1,931       -       1,931  
Balance at September 30, 2021     91,361,235     $ 854,301     $ 97     $ 134,440     $ 988,838      $ (8 )   $ 988,830  

 

          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 June 30, 2020 (Revised, Note 3)     87,495,221     $ 827,076     $ 64     $ 85,032     $ 912,172     $ 59     $ 912,231  
Share-based compensation expense     -       2,082       -       -       2,082       -       2,082  
Vesting of restricted share units     282,332       -       -       -       -       -       -  
Other     -       (5 )     -       -       (5 )     (3 )     (8 )
Net income     -       -       -       11,666       11,666       -       11,666  
Balance at September 30, 2020 (Revised, Note 3)     87,777,553     $ 829,153     $ 64     $ 96,698     $ 925,915     $ 56     $ 925,971  

 

          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     -       7,353       -       -       7,353       -       7,353  
Shares issued to SAPESCO Selling Shareholders (Note 4)     2,648,650       15,802       -       -       15,802       -       15,802  
Vesting of restricted share units     935,032       -       -       -       -       -       -  
Other     -       -       33       -       33       -       33  
Net income     -       -       -       21,224       21,224       -       21,224  
Balance at September 30, 2021     91,361,235     $ 854,301     $ 97     $ 134,440     $ 988,838       $ (8 )   $ 988,830  

 

          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  
Share-based compensation expense     -       5,842       -       -       5,842       -       5,842  
Shares issued to SAPESCO Selling Shareholders (Note 4)     -       -       -       -       -       -       -  
Vesting of restricted share units     590,264       -       -       -       -       -       -  
Conversion of Private Warrants to Public Warrants     -       372       -       -       372       -       372  
Other     -       (3 )     35       -       32       56       88  
Net income     -       -       -       34,127       34,127       -       34,127  
Balance at September 30, 2020 (Revised, Note 3)     87,777,553     $ 829,153     $ 64     $ 96,698     $ 925,915     $ 56     $ 925,971  

 

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)

 

    September 30, 2021     September 30, 2020  
    Year-to-date period ended  
    September 30, 2021     September 30, 2020 (Revised, Note 3)  
             
Cash flows from operating activities:                
Net income   $ 21,224     $                            34,127  
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization     96,338       91,783  
Share-based compensation expense     7,353       5,842  
Loss (Gain) on disposal of assets     (1,405 )     688  
Non-cash interest (income) expense      537       (118 )
Deferred tax expense (benefit)      (3,922 )     (3,332 )
Allowance for (reversal of) doubtful receivables     70       (97 )
Provision for obsolete service inventories     230       821  
Loss (Gain) on Private Warrant liability     -       (558 )
Other operating activities, net     353       (184 )
Changes in operating assets and liabilities:                
(Increase) decrease in accounts receivable     27,106       (13,223 )
(Increase) decrease in Unbilled revenue     20,909       (73,505 )
(Increase) decrease in Retention withholdings     (6,186 )     13,881  
(Increase) decrease in inventories     (4,396 )     (10,755 )
(Increase) decrease in prepaid expenses     (8,278 )     2,002  
(Increase) decrease in other current assets     (6,431 )     2,224  
(Increase) decrease in other long-term assets and liabilities     (2,142 )     (5,746 )
Increase (decrease) in accounts payable and accrued expenses     (20,087 )     40,970  
Increase (decrease) in other current liabilities     (6,501 )     1,234  
Net cash provided by operating activities     114,772       86,054  
                 
Cash flows from investing activities:                
Capital expenditures     (50,864 )     (75,448 )
Proceeds from disposal of assets     2,127       1,490  
Acquisition of business, net of cash acquired     (36,923 )     (11,260 )
Other investing activities     (3,204 )     (628 )
Net cash used in investing activities     (88,864 )     (85,846 )
                 
Cash flows from financing activities:                
Proceeds from long-term debt     -       15,000  
Repayments of long-term debt     (26,250 )     (18,472 )
Proceeds from short-term borrowings     121,806       14,928  
Repayments of short-term borrowings     (67,644 )     (15,829 )
Payments on capital leases     (15,983 )     (15,679 )
Payments on seller-provided financing for capital expenditures     (11,520 )     (2,905 )
Other financing activities, net     (345 )     -  
Net cash provided by (used in) financing activities     64       (22,957 )
                 
Effect of exchange rate changes on cash     34       35  
Net increase (decrease) in cash     26,006       (22,714 )
Cash and cash equivalents, beginning of period     75,012       73,201  
Cash and cash equivalents, end of period   $ 101,018     $ 50,487  
                 
Supplemental disclosure of cash flow information (also refer Note 3):                
Interest paid     7,579       10,152  
Income taxes paid     11,430       12,642  

 

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

 

8
 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 

1. DESCRIPTION OF BUSINESS

 

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

 

Formed in January 2017, NESR started as a special purpose acquisition company (“SPAC”) designed to invest in the oilfield services space globally. NESR filed a registration statement for its initial public offering in May 2017. In November 2017, NESR announced the acquisition of two oilfield services companies in the MENA region: NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES” and, together with NPS, the “Subsidiaries,” 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.

 

9
 

 

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 September 30, 2021:

 

  Purchases of property, plant, and equipment in Accounts payable and Accrued expenses at September 30, 2021 of $5.6 million and $17.5 million, respectively, are not included under “Capital expenditures” within the Condensed Consolidated Statement of Cash Flows.
  Capital lease obligations of $21.5 million classified as a short-term obligation within Other current liabilities and $19.5 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 $12.3 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 September 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 $18.0 million classified as Other current liabilities and $6.1 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 September 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 September 30, 2021.

 

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

 

  Purchases of property, plant, and equipment in Accounts payable, Accrued expenses and Short-term borrowings at September 30, 2020 of $25.6 million (inclusive of seller-provided installment financing balances described below), $0.3 million, and $23.0 million, respectively, are not included under “Capital expenditures” within the Condensed Consolidated Statement of Cash Flows.
  Capital lease obligations of $24.5 million classified as a short-term obligation within Other current liabilities and $3.8 million classified as a long-term obligation within Other liabilities, are not included under “Payments on capital leases” within the Condensed Consolidated Statement of Cash Flows.
  Purchases of property, plant, and equipment using seller-provided installment financing of $3.0 million included in Other current liabilities and $0.7 million in Other liabilities are not included under “Payments on seller-provided financing for capital expenditures” within the Condensed Consolidated Statement of Cash Flows. Additionally, purchases of property, plant, and equipment using seller-provided installment financing of $11.5 million included in Accounts Payable are not included under “Payments on seller-provided financing for capital expenditures” within the Condensed Consolidated Statement of Cash Flows.
  Obligations of $7.3 million and $18.4 million classified in Other current liabilities and Other liabilities, respectively, related to the future payments of cash and shares for the purchase of SAPESCO (Note 5), are not included under “Acquisition of business, net of cash acquired” within the Condensed Consolidated Statement of Cash Flows.

 

10
 

 

Recently issued accounting standards not yet adopted

 

The SEC permits qualifying Emerging Growth Companies (“EGC”) to defer the adoption of accounting standards updates until the time when a private company would adopt such standards. The Company continues to qualify as an EGC as of September 30, 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 September 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, Condensed Consolidated Interim Statements of Shareholders’ Equity, and Condensed Consolidated Interim Statement of Cash Flows for the three month and year-to-date periods ended September 30, 2020 (in $US thousands, except per share amounts) as follows:

SCHEDULE OF RESTATEMENT 

    Quarter ended
September 30, 2020
    Year-to-date period ended September 30, 2020  
    As Previously Reported     As Revised     As Previously Reported     As Revised  
Condensed Consolidated Interim Statements of Operations                        
Gain/(loss) on warrant liability   $ -     $ -     $ -     $ 558  
Income before income tax     15,231       15,231       42,509       43,067  
Net income     11,666       11,666       33,569       34,127  
Basic earnings per share     0.13       0.13       0.38       0.38  
Diluted earnings per share     0.13       0.13       0.38       0.38  
                                 
Condensed Consolidated Interim Statements of Comprehensive Income                                
Total Comprehensive Income, net of tax     11,666       11,666       33,604       34,162  
                                 
Condensed Consolidated Interim Statements Of Shareholders’ Equity                                
Retained Earnings     101,230       96,698       101,230       96,698  
Total Company Shareholders’ Equity     925,915       925,915       925,915       925,915  
Total Shareholders’ Equity     925,971       925,971       925,971       925,971  
                                 
Condensed Consolidated Interim Statements of Cash Flows                                
Net income                     33,569       34,127  
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 Statements of Shareholders’ Equity, and 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 $36.8 million paid at closing and an estimated $17.2 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 $6.6 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 $36.8 million;
   
deferred cash consideration of $17.2 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:

 

    Consideration (In US$ thousands)  
       
Cash consideration   $ 36,767  
Deferred cash consideration     17,232  
Total consideration – cash     53,999  
         
First Earn-Out     2,824  
Second Earn-Out     3,799  
Third Earn-Out     -  
Total estimated earn-out mechanisms     6,623  
         
Preliminary consideration   $ 60,622  

 

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 September 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):

 

Preliminary allocation of consideration

 

Cash and cash equivalents   $ 382  
Accounts receivable     8,565  
Unbilled revenue     1,352  
Service inventories     2,952  
Prepaid assets     310  
Other receivables     89  
Other current assets     1,756  
Property, plant and equipment     13,605  
Intangible assets     29,100  
Other assets     2,054  
Total identifiable assets acquired     60,165  
         
Accounts payable     4,947  
Accrued expenses     2,428  
Other current liabilities     200  
Employee benefit liabilities     722  
Net identifiable liabilities acquired     8,297  
Total fair value of net assets acquired     51,868  
Goodwill     8,754  
Preliminary consideration   $ 60,622  

 

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):

 

      Fair Value      
      Total     Useful Life
      (In US$ thousands)      
Customer relationships   $ 29,100     10 years
Total intangible assets   $ 29,100      

 

Goodwill

 

As of September 30, 2021, $8.8 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 September 30, 2021 and 2020, respectively (in US$ thousands):

 

      Quarter ended       Year-to-date period ended  
      September 30, 2021       September 30, 2020       September 30, 2021       September 30, 2020  
                                 
Revenues   $ 217,992     $ 225,411     $ 673,710     $ 638,691  
Net income/(loss)     1,931       12,968       21,742       35,339  

 

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 $9.1 million and $13.5 million and net income of $1.5 million and $1.9 million are included in the Condensed Consolidated Statement of Operations during the quarter and year-to-date periods ended September 30, 2021, respectively.

 

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 September 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:

 

    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):

 

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):

 

    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 September 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 September 30, 2020 (in US$ thousands):

 

    Quarter ended    

Year-to-date

period ended

 
    September 30, 2020     September 30, 2020  
             
Revenues   $ 218,423     $ 639,667  
Net income/(loss)     12,264       31,448  

 

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 $15.0 million and $46.3 million and net income of $2.0 million and $9.6 million are included in the Condensed Consolidated Statement of Operations during the quarter and year-to-date periods ended September 30, 2021, respectively.

 

5. REVENUE

 

Disaggregation of revenue

 

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

 

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

 

    Quarter ended     Year-to-date period ended  
Revenue by Phase in Well’s Lifecycle:   September 30, 2021     September 30, 2020     September 30, 2021     September 30, 2020  
Production Services   $ 138,060     $ 148,292     $ 427,497     $ 420,516  
Drilling and Evaluation Services     79,932       70,131       237,848       200,455  
Total revenue by phase in well’s life cycle   $      217,992     $ 218,423     $       665,345     $ 620,971  

 

6. ACCOUNTS RECEIVABLE

 

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

 

    September 30, 2021     December 31, 2020  
Trade receivables   $ 99,662     $ 118,557  
Less: allowance for doubtful accounts     (1,439 )     (1,722 )
Total   $ 98,223     $ 116,835  

 

20
 

 

Trade receivables relate to the sale of services, for which credit is extended based on the Company’s evaluation of the customer’s creditworthiness. The gross contractual amounts of trade receivables at September 30, 2021 and December 31, 2020 were $99.7 million and $118.6 million, respectively. The movement in the allowance for doubtful accounts is as follows (in US$ thousands):

 

    Quarter ended     Year-to-date period ended  
    September 30, 2021     September 30, 2020     September 30, 2021     September 30, 2020  
                         
Allowance for doubtful accounts at beginning of period   $ (1,655 )   $ (2,365 )   $ (1,722 )   $ (1,843 )
(Increase) decrease to allowance for the period     216     233       (70 )     259  
(Recovery) write-off of doubtful accounts     -       182       353       343  
Non-cash reclass of allowance for doubtful accounts from unbilled revenue to accounts receivable     -     (45 )     -     (754 )
Allowance for doubtful accounts at end of period   $ (1,439 )   $ (1,995 )   $ (1,439 )   $ (1,995 )

 

7. SERVICE INVENTORIES

 

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

 

    September 30,     December 31,  
    2021     2020  
             
Spare parts   $         61,314     $ 54,709  
Chemicals     24,380       24,422  
Consumables     15,063       15,132  
Total   $ 100,757     $ 94,263  

 

8. PROPERTY, PLANT & EQUIPMENT

 

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

 

    Estimated Useful Lives (in years)     September 30, 2021     December 31, 2020  
Buildings and leasehold improvements      5 to 25     $ 40,594     $ 31,827  
Drilling rigs, plant and equipment      3 to 15       622,302       534,964  
Furniture and fixtures     5       2,515       2,282  
Office equipment and tools      3 to 10       40,339       39,174  
Vehicles and cranes      5 to 8       7,586       7,429  
Less: Accumulated depreciation              (261,500 )     (193,261 )
Land             5,104       5,104  
Capital work in progress             9,792       10,224  
Total           $ 466,732     $ 437,743  

 

21
 

 

The Company recorded depreciation expense of $29.3 million, $28.0 million, $83.1 million and $79.8 million for the quarter ended September 30, 2021, the quarter ended September 30, 2020, the year-to-date period ended September 30, 2021, and the year-to-date period ended September 30, 2020, respectively, in the Condensed Consolidated Interim Statement of Operations.

 

9. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

Changes in the carrying amount of goodwill of the Company between December 31, 2020, and September 30, 2021 are as follows (in US$ thousands):

 

    Production Services     Drilling and Evaluation Services     Goodwill  
Balance as of December 31, 2020   $ 443,457     177,464     620,921  
Action Business Combination     5,118       3,636       8,754  
Balance as of September 30, 2021   $ 448,575     181,100     629,675  

 

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 & relationships     10.0  
Trademarks and trade names     7.9  
Total intangible assets     9.7  

 

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

 

    September 30, 2021     December 31, 2020  
      Gross carrying amount       Accumulated amortization       Net carrying amount       Gross carrying amount       Accumulated amortization       Net carrying amount  
                                                 
Customer contracts & relationships   $ 153,500     $ (42,383 )   $ 111,117     $ 124,400     $ (31,685 )   $ 92,715  
Trademarks and trade names     25,940       (10,734 )     15,206       25,940       (8,279 )     17,661  
Total intangible assets   $ 179,440     $ (53,117 )   $ 126,323     $ 150,340     $ (39,964 )   $ 110,376  

 

The aggregate amortization expense remaining for each of the five years subsequent to December 31, 2020 is $4.7 million for 2021, $18.7 million for 2022, $18.6 million for 2023, $18.6 million for 2024, and $18.6 million for 2025.

 

22
 

 

10. DEBT

 

Long-term debt

 

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

    September 30, 2021     December 31, 2020  
             
Secured Term Loan   $ 258,750     $ 285,000  
Secured Revolving Credit Facility     65,000       65,000  
CIB Long-Term Debt     10,000       10,000  
Less: unamortized debt issuance costs     (3,181 )     (3,886 )
Total loans and borrowings     330,569       356,114  
Less: current installments of long-term debt (1)     -     (47,500 )
Long-term debt, net of unamortized debt issuance costs and excluding current installments   $ 330,569     $ 308,614  

 

(1) As discussed in Note 20, Subsequent Events, during the fourth quarter of 2021, the Company entered into a $860 million term loan and revolving Secured Facilities Agreement. The $860 million consists of a $430 million term loan, a $350 million working capital facility for letters of guarantee and letters of credit, and a $80 million revolving credit facility. No payments are due on the term loan until the first quarter of 2023 and as such, the Company has reflected all maturities at September 30, 2021 as long-term obligations. 

 

23
 

 

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 and Gas Wells Services WLL (“NPS Bahrain”) and its Kuwait branch, Gulf Energy SAOC and National Petroleum Technology Company as borrowers, and HSBC, Mashreqbank PSC, APICORP and Saudi British Bank, as the “Lenders.” On May 23, 2019 and June 20, 2019, the Company entered into $35.0 million and $40.0 million Incremental Facilities Agreements, respectively, increasing the size of the Secured Facilities Agreement to $485.0 million and $525.0 million, respectively. During the year ended December 31, 2020, the Secured Facilities Agreement was reduced to $501.3 million primarily as a result of the non-renewal of a project-specific letter of credit and the payment of the first two installments of the long-term loan. During the year-to-date period ended September 30, 2021, the Secured Facilities Agreement was decreased to $492.8 million primarily as a result of additional working capital capacity offset by installment payments on the term loan.

 

The $492.8 million Secured Facilities Agreement consists of a $258.8 million term loan due by May 6, 2025 (the “Term Loan” or “Secured Term Loan”), a $65.0 million revolving credit facility due by May 6, 2023 (“RCF” or “Secured Revolving Credit Facility”), and a $169.0 million working capital facility that renews annually by mutual agreement of the Lenders and the Company. Borrowings under the Term Loan and RCF incur interest at the rate of three-month LIBOR plus 2.4% to 2.7% per annum, varying based on the Company’s Net Debt / EBITDA ratio as defined in the Secured Facilities Agreement. As of September 30, 2021, and December 31, 2020, this resulted in an interest rate of 2.6% and 2.6%, respectively. As of September 30, 2021, and December 31, 2020, the Company had drawn $258.8 million and $285.0 million, respectively, of the Term Loan and $65 million and $65 million, respectively, of the RCF.

 

The RCF was obtained for general corporate and working capital purposes including capital expenditure related requirements and acquisitions (including transaction related expenses). The RCF requires the payment of a commitment fee each quarter. The commitment fee is computed at the rate of 0.60% per annum based on the average daily amount by which the borrowing base exceeds the outstanding borrowings during each quarter. Under the terms of the RCF, the final settlement is due by May 6, 2023. The Company is required to repay the amount of any principal balance outstanding together with any unpaid accumulated interest at three-month LIBOR plus 2.4% to 2.7% per annum, varying based on the Company’s Net Debt / EBITDA ratio as defined in the Secured Facilities Agreement. The Company is permitted to make any prepayment under this RCF in multiples of $5.0 million during this 4-year period up to May 6, 2023. Any unutilized balances from the RCF can be drawn down again during the 4-year tenure at the same terms. As of September 30, 2021, and December 31, 2020, the Company had $0.0 (zero) million and $0.0 (zero) million, respectively, available to be drawn under the RCF.

 

The Secured Facilities Agreement also includes a working capital facility of $169.0 million and $151.3 million as of September 30, 2021 and December 31, 2020, respectively, for issuance of letters of guarantee and letters of credit and refinancing letters of credit into short-term debt over a period of one year, which carries an interest rate equal to three-month U.S. Dollar LIBOR for the applicable interest period, plus a margin of 1.00% to 1.25% per annum. As of September 30, 2021, and December 31, 2020, the Company had utilized $160.2 million and $129.4 million, respectively, under this working capital facility and the balance of $8.8 million and $21.9 million, respectively, was available to the Company.

 

The Company has also retained legacy bilateral working capital facilities from HSBC totaling $24.7 million and $24.7 million at September 30, 2021 and December 31, 2020, respectively, in Qatar ($10.3 million at September 30, 2021, $10.3 million at December 31, 2020), in the UAE ($14.3 million at September 30, 2021, and $14.3 million at December 31, 2020) and in Kuwait ($0.1 million at September 30, 2021 and $0.1 million at December 31, 2020). As of September 30, 2021, and December 31, 2020, the Company had utilized $18.1 million and $18.5 million, respectively, under this working capital facility and the balance of $6.7 million and $6.2 million, respectively, was available to the Company.

 

24
 

 

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

 

The Secured Facilities Agreement includes covenants that specify maximum leverage (Net Debt / EBITDA) up to 3.50, minimum debt service coverage ratio (Cash Flow / Debt Service) of at least 1.25, and interest coverage (EBITDA / Interest) of at least 4.00. The Company is in compliance with all financial covenants as of September 30, 2021.

 

CIB Long-Term Debt

 

As part of the SAPESCO transaction, the Company assumed a $21.0 million debt obligation with Commercial International Bank (“CIB,” and collectively, “CIB Long-Term Debt”). Under the terms of its arrangement with CIB, the Company repaid $11.0 million of this balance during the third quarter of 2020 with the remaining $10.0 million due during the third quarter of 2021 but subsequently renegotiated to be repaid in the fourth quarter of 2021. Borrowings under the CIB Long-Term Debt incur interest at 2% per annum over 6 months LIBOR (to be settled on monthly basis) plus 50 basis points per annum. As of December 31, 2020, this resulted in an interest rate of 2.3%. The Company’s CIB Long-Term Debt is secured by a letter of guarantee from Mashreqbank PSC.

 

Short-term debt

 

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

   

September 30,

2021

   

December 31,

2020

 
             
CIB Short-Term Debt   $ 871     $ 2,125  
ABK Short-Term Debt     -       2,252  
HSBC Loan Line     36,000       -  
Other short-term borrowings from working capital facilities     59,597       37,983  
Short-term debt, excluding current installments of long-term debt   $ 96,468     $ 42,360  

 

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

 

CIB Short-Term Debt

 

The Commercial International Bank Short-Term Debt facilities (collectively, “CIB Short-Term Debt”) include a $1.5 million U.S. Dollar time loan facility, a E£2 million Egyptian Pound time loan facility, and a E£10 million Egyptian pound time loan overdraft facility, and $14.5 million U.S. dollars in letters of guarantee. Each CIB Short-Term Debt borrowing matures three months from the date of borrowing with the latest maturity date for amounts outstanding as of September 30, 2021 being December 31, 2021.

 

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

 

As of September 30, 2021, and December 31, 2020, the CIB Short-Term Debt resulted in an interest rate of 2.4% and 2.3%, respectively, for U.S. Dollar denominated balances, and 10% and 10.0%, respectively, for Egyptian Pound denominated balances. As of September 30, 2021, the Company had utilized $0.9 million of the U.S. Dollar time loan facility, E£0.0 (zero) million of the Egyptian Pound time loan facility, and E£0.0 (zero) million of the Egyptian pound time loan overdraft facility, and $7.9 million in letters of guarantee, with the balances of $0.6 million, E£2 million, E£10 million, and $6.6 million, respectively, available to the Company. As of December 31, 2020, the Company had utilized $1.3 million of the U.S. Dollar time loan facility, E£2.0 million of the Egyptian Pound time loan facility, and E£9.8 million of the Egyptian pound time loan overdraft facility, and $8.3 million in letters of guarantee, with the balances of $0.2 million, E£0.0 (zero) million, E£0.2 million, and $6.3 million, respectively, available to the Company.

 

ABK Short-Term Debt

 

The Al Ahli Bank of Kuwait working capital and overdraft facilities (collectively, “ABK Short-Term Debt”) mature nine months from the date of borrowing. The ABK Short-Term Debt facilities include a $3.0 million U.S. Dollar time loan facility and $0.2 million U.S. dollars in letters of guarantee. The ABK Short-Term Debt accrues interest at 1.65% per annum over The Central Bank of Egypt’s Corridor Offer Rate. As of September 30, 2021, and December 31, 2020, this resulted in an interest rate of 11% and 11%, respectively. As of September 30, 2021, the Company had utilized $0.0 (zero) million of the ABK Short-Term Debt facility and $0.1 million in letters of guarantee with $3.0 million and $0.1 million, respectively, available to the Company. As of December 31, 2020, the Company had utilized $2.3 million of the ABK Short-Term Debt facility and $0.2 million in letters of guarantee with $0.8 million and $0.0 (zero) million, respectively, available to the Company. There are no financial covenants associated with the ABK Short-Term Debt.

 

HSBC Loan Line

 

On May 3, 2021, the Company borrowed $9.9 million from HSBC to provide short term liquidity for the Action Business Combination. Interest accrued at a rate of 3% plus 1 month LIBOR, per annum, resulting in a rate of 3.1% during the term of the loan. The Company repaid the $9.9 million on August 9, 2021.

 

On August 9, 2021, the Company borrowed an additional $36.0 million from HSBC to repay the $9.9 million HSBC Loan Line previously borrowed and to provide additional liquidity in anticipation of the Company’s October 2021 Secured Facilities Agreement refinancing (Note 20). The $36 million is repayable on December 4, 2021. Interest accrues at 1 month LIBOR plus 2.4%, resulting in an interest rate of 2.5% at September 30, 2021.

 

Other debt information

 

Scheduled principal payments of long-term debt for periods subsequent to September 30, 2021 are as follows (in US$ thousands):

      2021  
2021   $ 21,250  
2022     45,000  
2023     110,000  
2024     45,000  
2025     112,500  
Thereafter     -  
Total   $ 333,750  

 

As part of the SAPESCO transaction, the Company also assumed other working capital facilities totaling $0.6 million with one bank. The facilities are used for letters of guarantee. As of September 30, 2021, the Company has utilized $0.6 million of these facilities with $0.0 (zero) million available.

 

In the third quarter of 2021, the Company obtained a $3.0 million working capital facility for the purpose of issuing letters of guarantee in Algeria. The Company utilized $3.0 million of this facility as of September 30, 2021.

 

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11. FAIR VALUE ACCOUNTING

 

The Company measures and records liabilities for its Private Warrants (note 15) at fair value in the accompanying financial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, includes:

 

  Level 1 – Observable inputs for identical assets or liabilities such as quoted prices in active markets;
  Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
  Level 3 – Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use.

 

The following tables present the Company’s fair value hierarchy for its financial liabilities measured at fair value on a recurring basis:

 

      As of September 30, 2021  
      Level 1       Level 2       Level 3       Total  
Liabilities:                                
Liability for Private Warrants (Note 15)   $ -     $ -     $ -     $ -  

 

        As of December 31, 2020    
        Level 1           Level 2           Level 3           Total    
Liabilities:                                
Liability for Private Warrants (Note 15)   $ -     $ -     $ -     $ -  

 

The Company’s Private Warrants are included as Level 3 measurements in the tables above. The fair value of the Company’s Private Warrant liability was calculated using the Black-Scholes model and the following assumptions:

      As of       As of  
      September 30,       December 31,  
      2021       2020  
Fair value of Company’s common stock   $ -     $ -  
Dividend yield     - %     - %
Expected volatility     - %     - %
Risk Free interest rate     - %     - %
Expected life (years)     -       -  
Fair value of financial instruments – Private Warrants   $ -     $ -  

 

The change in fair value of the Company’s Private Warrants is as follows:

    Quarter ended     Year-to-date period ended  
    September 30, 2021     September 30, 2020     September 30, 2021     September 30, 2020  
Beginning Balance   $ -     $ -     $ -     $ (930 )
Change in Private Warrant liability     -       -       -       930  
Ending Balance   $ -     $ -     $ -     $ -  

 

The Company’s other financial instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable, contingent consideration assumed in the Action transaction (Note 4), loans and borrowings and capital lease obligations. The fair value of the Company’s other financial instruments approximates the carrying amounts represented in the accompanying Condensed Consolidated Balance Sheets, primarily due to their short-term nature. The fair value of the Company’s long-term borrowings also approximates the carrying amounts as these loans are carrying interest at the market rate.

 

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12. EMPLOYEE BENEFITS

 

Defined benefit plan

 

The Company provides a defined benefit plan of severance pay to eligible employees. The severance pay plan provides for a lump sum payment to employees on separation (retirement, resignation, death while in employment or on termination of employment) of an amount based upon the employees last drawn salary and length of service, subject to the completion of a 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 periodic benefit cost were as follows (in US$ thousands):

 

   

September 30, 2021

    September 30, 2020    

September 30, 2021

    September 30, 2020  
    Quarter ended     Year-to-date period ended  
   

September 30, 2021

    September 30, 2020    

September 30, 2021

    September 30, 2020  
                         
Service cost   $ 1,640     $ 855     $ 3,706     $ 2,755  
Interest cost     410       214       927       689  
Other     -       -            -       -  
Net cost   $ 2,050     $ 1,069     $ 4,633     $ 3,444  

 

The Company made employer contributions (direct payment of benefits) to its defined benefit plan of $0.6 million, $0.1 million, $2.0 million and $0.1 million for the quarter ended September 30, 2021, the quarter ended September 30, 2020, the year-to-date period ended September 30, 2021, and the year-to-date period ended September 30, 2020, respectively. The plan of the Company is unfunded.

 

Defined contribution plan

 

The Company also provides a defined contribution retirement plan and occupational hazard insurance for Omani employees. Contributions to a defined contribution retirement plan and occupational hazard insurance for Omani employees in accordance with the Omani Social Insurances Law are recognized as an expense in the Condensed Consolidated Interim Statement of Operations as incurred. Total contributions were of $0.9 million, $0.8 million, $2.8 million and $2.4 million for the quarter ended September 30, 2021, the quarter ended September 30, 2020, the year-to-date period ended September 30, 2021, and the year-to-date period ended September 30, 2020, respectively. The plan of the Company is unfunded.

 

13. SHARE-BASED COMPENSATION

 

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

 

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

 

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

    Quarter ended  
    September 30, 2021     September 30, 2020  
    Number of Restricted Shares     Weighted Average Value per Share     Number of Restricted Shares     Weighted Average Value per Share  
Unvested at Beginning of Period     2,357,225     $ 9.43       2,244,662     $ 7.72  
Granted     191,250     $ 11.5       39,000     $ 8.46  
Vested and issued     (242,017 )   $ 9.92       (282,332 )   $ 9.98  
Forfeited     (64,172 )   $ 9.75       (12,001 )   $ 8.60  
Unvested at End of Period     2,242,286     $ 9.47       1,989,329     $ 7.41  

 

    Year-to-date period ended  
    September 30, 2021     September 30, 2020  
    Number of Restricted Shares     Weighted Average Value per Share     Number of Restricted Shares     Weighted Average Value per Share  
Unvested at Beginning of Period     2,038,662     $ 7.38       1,502,590     $ 10.25  
Granted     1,284,335     $ 11.89       1,119,905     $ 5.16  
Vested and issued     (935,032 )   $ 8.04       (590,264 )   $ 10.18  
Forfeited     (145,679 )   $ 9.25       (43,002 )   $ 9.74  
Unvested at End of Period     2,242,286     $ 9.47       1,989,329     $ 7.41  

 

At September 30, 2021 and 2020, the Company had unrecognized compensation expense of $16.3 million and $11.2 million, respectively, related to unvested LTIP to be recognized on a straight-line basis over a weighted average remaining period of 2.1 years and 1.8 years, respectively. Stock-based compensation has been recorded in the Condensed Consolidated Statement of Operations as follows (in US$ thousands):

    Quarter ended     Year-to-date period ended  
    September 30, 2021     September 30, 2020     September 30, 2021     September 30, 2020  
                         
Cost of Services   $ 1,316     $ 938     $ 3,494     $ 2,604  
Selling, general and administrative expenses     1,437       1,141       3,859       3,237  
Net cost   $ 2,753     $ 2,079     $ 7,353     $ 5,841  

 

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14. COMMITMENTS AND CONTINGENCIES

 

Capital expenditure commitments

 

The Company was committed to incur capital expenditures of $41.5 million and $16.1 million at September 30, 2021, and December 31, 2020, respectively. Commitments outstanding as of September 30, 2021, are expected to be settled during 2021 and 2022.

 

Capital lease commitments

 

The Company leases certain hydraulic fracturing equipment under capital leases that expire between 2021 and 2023. The leases have terms ranging from 24-36 months and imputed interest rates between 4.3%-6.5% per annum. As of September 30, 2021, and December 31, 2020, the total recorded liability for these capital leases was $9.5 million and $25.5 million, respectively, with $7.5 million and $22.3 million, respectively, classified as a short-term obligation within Other current liabilities account and $2.0 million and $3.2 million, respectively, classified as long-term obligations within Other liabilities account in the Condensed Consolidated Balance Sheets. Total interest expense incurred on these capital leases was $0.1 million, $0.4 million, $0.4 million and $1.2 million for the quarter ended September 30, 2021, the quarter ended September 30, 2020, the year-to-date period ended September 30, 2021, and the year-to-date period ended September 30, 2020, respectively, in the Condensed Consolidated Interim Statement of Operations. Depreciation of assets held under these capital leases is included within depreciation expense.

 

The Company also leases certain equipment in Egypt under capital leases that expire between 2021 and 2024. These capital leases were acquired in the SAPESCO Business Combination (Note 4). As of September 30, 2021, and December 31, 2020, the total recorded liability for these capital leases was $2.5 million and $3.0 million, respectively, with $0.8 million and $0.7 million, respectively, classified as a short-term obligation within Other current liabilities account and $1.7 million and $2.3 million, respectively, classified as a long-term obligation within Other liabilities account in the Condensed Consolidated Balance Sheets. Total interest expense incurred on these capital leases was $0.2 million, $0.2 million, $0.4 million and $0.2 million for the quarter ended September 30, 2021, the quarter ended September 30, 2020, the year-to-date period ended September 30, 2021, and the year-to-date period ended September 30, 2020, respectively, in the Condensed Consolidated Interim Statement of Operations. Depreciation of assets held under these capital leases is included within depreciation expense.

 

The Company also leases certain basecamp equipment in Saudi Arabia under a capital lease that expires in 2023 and an imputed interest rate of 2.5% per annum. As of September 30, 2021, and December 31, 2020, the total recorded liability for this capital lease was $29.0 million and $0.0 (