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2020-06-30 0001698514 NESR:UnallocatedExpensesMember 2019-01-01 2019-06-30 0001698514 NESR:MENAMember 2020-04-01 2020-06-30 0001698514 NESR:MENAMember 2019-04-01 2019-06-30 0001698514 NESR:MENAMember 2020-01-01 2020-06-30 0001698514 NESR:MENAMember 2019-01-01 2019-06-30 0001698514 NESR:RestOfWorldMember 2020-04-01 2020-06-30 0001698514 NESR:RestOfWorldMember 2019-04-01 2019-06-30 0001698514 NESR:RestOfWorldMember 2020-01-01 2020-06-30 0001698514 NESR:RestOfWorldMember 2019-01-01 2019-06-30 0001698514 NESR:MENAMember 2020-06-30 0001698514 NESR:MENAMember 2019-12-31 0001698514 NESR:RestOfWorldMember 2020-06-30 0001698514 NESR:RestOfWorldMember 2019-12-31 iso4217:USD xbrli:shares iso4217:USD xbrli:shares xbrli:pure NESR:Segment

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

Commission File Number: 001-38091

 

NATIONAL ENERGY SERVICES REUNITED CORP.

(Exact name of Registrant as specified in its charter)

 

Not Applicable

(Translation of registrant’s name into English)

 

777 Post Oak Blvd., Suite 730

Houston, Texas 77056

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F [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statements) and to be a part thereof from the date on which this report on Form 6-K is filed, to the extent not superseded by documents or reports subsequently filed or furnished.

 

 
 

 

TABLE OF CONTENTS

 

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

 

2
 

 

FINANCIAL INFORMATION AND CURRENCY OF FINANCIAL STATEMENTS

 

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

 

3
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In US$ thousands, except share data)

 

   June 30, 2020   December 31, 2019 
         
Assets          
Current assets          
Cash and cash equivalents  $79,317   $73,201 
Accounts receivable, net   113,454    98,799 
Unbilled revenue   126,840    76,347 
Service inventories, net   91,764    78,841 
Prepaid assets   9,412    9,590 
Retention withholdings   49,671    40,970 
Other receivables   14,923    14,019 
Other current assets   5,158    11,442 
Total current assets   490,539    403,209 
Non-current assets          
Property, plant and equipment, net   458,161    419,307 
Intangible assets, net   119,206    122,714 
Goodwill   595,706    574,764 
Other assets   1,278    2,370 
Total assets  $1,664,890   $1,522,364 
           
Liabilities and equity          
Liabilities          
Accounts payable  $123,213   $65,704 
Accrued expenses   49,393    69,137 
Current installments of long-term debt   46,372    15,000 
Short-term borrowings   39,781    37,963 
Income taxes payable   9,138    7,542 
Other taxes payable   9,067    7,189 
Other current liabilities   53,272    25,601 
Total current liabilities   330,236    228,136 
           
Long-term debt   335,457    330,564 
Deferred tax liabilities   24,090    26,217 
Employee benefit liabilities   18,900    16,745 
Other liabilities   43,976    34,230 
Total liabilities   752,659    635,892 
           
Commitments and contingencies (Note 14)   -     -  
           
Equity          
Preferred shares, no par value; unlimited shares authorized; none issued and outstanding at June 30, 2020 and December 31, 2019, respectively   -    - 
Common stock, no par value; unlimited shares authorized; 87,495,221 and 87,187,289 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively   801,545    801,545 
Additional paid in capital   20,999    17,237 
Retained earnings   89,564    67,661 
Accumulated other comprehensive income   64    29 
Total shareholders’ equity   912,172    886,472 
Non-controlling interests   59    - 
Total equity   912,231    886,472 
Total liabilities and equity  $1,664,890   $1,522,364 

 

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

 

4
 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS

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

 

                     
   Quarter ended   Year-to-date period ended 
Description  June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019 
                 
Revenues  $203,249   $159,899   $402,548   $311,603 
Cost of services   (164,343)   (116,893)   (322,613)   (231,390)
Gross profit   38,906    43,006    79,935    80,213 
Selling, general and administrative expenses   (17,114)   (17,062)   (35,741)   (30,107)
Amortization   (3,934)   (3,949)   (7,821)   (8,003)
Operating income   17,858    21,995    36,373    42,103 
Interest expense, net   (4,165)   (5,750)   (8,675)   (9,680)
Other income / (expense), net   (309)   (438)   (420)   (499)
Income before income tax   13,384    15,807    27,278    31,924 
Income tax expense   (2,848)   (4,451)   (5,375)   (7,394)
Net income / (loss)   10,536    11,356    21,903    24,530 
Net income / (loss) attributable to non-controlling interests   -    -    -    - 
Net income attributable to shareholders  $10,536   $11,356   $21,903   $24,530 
                     
Weighted average shares outstanding:                    
Basic   88,232,694    86,896,779    87,731,986    86,895,285 
Diluted   88,232,694    86,896,779    87,731,986    86,895,285 
                     
Net earnings per share (Note 16):                    
Basic  $0.12   $0.13   $0.25   $0.28 
Diluted  $0.12   $0.13   $0.25   $0.28 

 

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)

 

                     
   Quarter ended   Year-to-date period ended 
Description  June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019 
                 
Net income  $10,536   $11,356   $21,903   $24,530 
Other comprehensive income, net of tax                    
Foreign currency translation adjustments   6    (19)   35    (19)
Total Comprehensive Income, net of tax   10,542    11,337    21,938    24,511 
Comprehensive income attributable to non-controlling interest   -    -    -    - 

Comprehensive income attributable to shareholders

  $10,542   $11,337   $21,938   $24,511 

 

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)

 

   1   2   3   4   5   6   7   8 
               Accumulated      Total         
      

Additional

Paid In

  

Other

Comprehensive

   Retained

  

Company

Stockholders’

   Noncontrolling  

Total

Stockholders’

 
Description  Ordinary Shares   Capital   Income   Earnings   Equity   Interests   Equity 
   Shares   Amount                         
Balance at March 31, 2020   87,495,221   $801,545   $18,872   $58   $79,028   $899,503   $-   $899,503 

Share-based compensation expense

   -    -    2,125    -    -    2,125    -    2,125 
Vesting of restricted share units   -    -    -    -    -    -    -    - 
Other   -    -    2    6    -    8    59    67 
Net income   -    -    -    -    10,536    10,536    -    10,536 
Balance at June 30, 2020  87,495,221   $801,545   $20,999   $64   $89,564   $912,172   $59   $912,231 

 

Successor (NESR)  Shares   Amount  

Additional

Paid in

Capital

   Accumulated Other Comprehensive Income (Loss)  

Retained

Earnings

  

Total

Shareholders’
Equity

   Noncontrolling Interests   Total Equity 
                                 
Balance at March 31, 2019   86,896,779   $801,545   $12,322   $48   $41,472   $855,387   $              -   $855,387 

Share-based compensation expense

   -    -    1,373    -    -    1,373    -    1,373 
Other   -    -    3    (19)   (1)   (17)   -    (17)
Net income   -    -    -    -    11,356    11,356    -    11,356 
Balance at June 30, 2019   86,896,779   $801,545   $13,698   $29   $52,827   $868,099   $-   $868,099 

 

   1    2    3    4    5    6    7    8 
               Accumulated      Total         
      

Additional

Paid In

  

Other

Comprehensive

   Retained

  

Company

Stockholders’

   Noncontrolling  

Total

Stockholders’

 
Description  Ordinary Shares   Capital   Income   Earnings   Equity   Interests   Equity 
   Shares   Amount                         
Balance at December 31, 2019   87,187,289   $801,545   $17,237   $29   $67,661   $886,472   $-   $886,472 

Share-based compensation expense

   -    -    3,760    -    -    

3,760

    -    

3,760

 
Vesting of restricted share units   307,932    -    -    -    -    -    -    - 
Other   -    -    

2

    

35

    -    

37

    

59

    

96

 
Net income   -    -    -    -    

21,903

    

21,903

    -    

21,903

 
Balance at June 30, 2020   87,495,221   $801,545   $20,999   $64   $89,564   $912,172   $

59

   $912,231 

 

Successor (NESR)    Shares      Amount    

 Additional

Paid in

Capital

    Accumulated Other Comprehensive Income (Loss)    

Retained

Earnings

   

Total
Shareholders’
Equity

     Noncontrolling Interests     Total Equity  
                                                 
Balance at December 31, 2018     85,562,769     $ 801,545     $ 1,034     $ 48     $ 28,297     $ 830,924     $ 67     $ 830,991  

Share-based compensation expense

    -       -       2,113       -       -       2,113       -       2,113  
Other     33,796       -       4       (19 )     -       (15 )     -       (15 )
Acquisition of non-controlling interest during the period     -       -       67       -       -       67       (67 )     -  
NPS equity earn-out     1,300,214       -       10,480       -       -       10,480       -       10,480  
Net income     -       -       -       -       24,530       24,530       -       24,530  
Balance at June 30, 2019     86,896,779     $ 801,545     $ 13,698     $ 29     $ 52,827     $ 868,099     $ -     $ 868,099  

 

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

 

7
 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(In US$ thousands)

 

   Year-to-date period ended
June 30, 2020
   Year-to-date period ended
June 30, 2019
 
         
Cash flows from operating activities:          
Net income  $21,903   $24,530 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   59,585    38,476 

Share-based compensation expense

   3,760    2,113 
Loss (Gain) on disposal of assets   240    (356)
Non-cash interest expense   (125)   2,484 
Deferred tax expense (benefit)   

(2,126

)   (1,077)
Allowance for (reversal of) doubtful receivables   (26)   476 
Provision for obsolete service inventories   614    1,057 
Other operating activities, net   219    (1,848)
Changes in operating assets and liabilities:          
Decrease (increase) in accounts receivable   1,887    (41,440)
(Increase) in inventories   (7,883)   (7,964)
Decrease (increase) in prepaid assets   857    (2,289)
(Increase) in other current assets   (46,533)   (8,651)
(Increase) decrease in other long-term assets and liabilities   

(2,140

)   702 
Increase in accounts payable and accrued expenses   23,185    20,009 
(Decrease) in other current liabilities   (818)    (2,050)
Net cash provided by operating activities   52,599    24,172 
           
Cash flows from investing activities:          
Capital expenditures   (50,661)   (56,513)
Proceeds from disposal of assets   1,277    1,273 
Acquisition of business, net of cash acquired (Note 5)   3,740    - 
Other investing activities   (570)   (285)
Net cash used in investing activities   (46,214)   (55,525)
           
Cash flows from financing activities:          
Proceeds from long-term debt   15,000    365,000 
Repayments of long-term debt   -    (278,039)
Proceeds from short-term borrowings   3,999    

-

 
Repayments of short-term borrowings   (7,131)   (7,013)
Payments on capital leases   (11,180)   - 
Payments on seller-provided financing for capital expenditures   (992)   - 
Other financing activities, net   -    (3,825)

Net cash (used in) provided by financing activities

   (304)   76,123 
           
Effect of exchange rate changes on cash   35    (19)
Net increase in cash   6,116    44,751 
Cash and cash equivalents, beginning of period   73,201    24,892 
Cash and cash equivalents, end of period  $79,317   $69,643 
           
Supplemental disclosure of cash flow information (also refer Note 3):          
Interest paid   7,467    8,317 
Income taxes paid   6,196    13,890 

 

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

 

8
 

 

NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 

1. DESCRIPTION OF BUSINESS

 

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

 

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

 

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

 

2. BASIS OF PRESENTATION

 

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

 

Emerging growth company

 

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

 

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

 

9
 

 

Use of estimates

 

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

 

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

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Supplemental cash flow information

 

Non-cash transactions for the year-to-date period ended 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.

 

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

 

  Purchases of property, plant, and equipment in accounts payable and short-term debt at June 30, 2019 of $28.8 million and $5.1 million, respectively, are not included under “Capital expenditures” within the Condensed Consolidated Statement of Cash Flows.

 

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, 2020.

 

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

 

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

  

11
 

 

4. REVENUE

 

Disaggregation of revenue

 

There is significant homogeneity amongst the Company’s revenue-generating activities. In all service lines, the Company provides a “suite of services” to fulfill a customer purchase/service order, encompassing personnel, use of Company equipment, and supplies required to perform the services. Over 98% percent 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):

 

 SCHEDULE OF DISAGGREGATION OF REVENUE BY GEOGRAPHY

   Quarter ended   Year-to-date period ended 
Revenue by Phase in Well’s Lifecycle:  June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019 
Production Services  $139,034   $95,358   $272,224   $187,471 
Drilling and Evaluation Services   64,215    64,541    130,324    124,132 
Total revenue by phase in well’s life cycle  $203,249   $159,899   $402,548   $311,603 

 

5. BUSINESS COMBINATION

 

In June of 2020, NESR executed the Deed of Amendment (“Deed of Amendment”) to the Agreement dated February 13, 2020 related to the sale and purchase of 99.7% of SAPESCO (collectively with the Deed of Amendment, the “Sale & Purchase Agreement”). The executed Deed of Amendment gives NESR control over SAPESCO effective from June 1, 2020. Accordingly, the accounting of the acquisition has been carried out effective June 1, 2020. Formal closing and legal transfer of consideration will be completed in the third quarter of 2020 upon final regulatory approvals and completion of normal closing requirements, which were temporarily delayed as a result of the global COVID-19 pandemic.

 

Description of the SAPESCO Transaction

 

Under the terms of the Sale & Purchase Agreement, NESR acquired 99.7% of the issued and outstanding shares of SAPESCO in a cash and stock transaction which comprised of $11.0 million to be paid at closing, an additional $6.0 million to be paid in three equal installments by September 1, 2020, for a total cash consideration of $17.0 million, and the issuance of 2,237,000 NESR shares based on a $10.00 per share conversion rate.

 

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

 

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

 

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

 

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Financing of Business Combination

 

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

 

cash and cash equivalents of $11 million, reflected in Other current liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2020;
   

deferred consideration of $6 million ($5.958 million at present value on June 1, 2020), reflected in Other current liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2020;

   
the issuance of 2,237,000 NESR ordinary shares to the SAPESCO selling stockholders in exchange for their SAPESCO shares also reflected in Other liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2020.

 

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

 

 SAPESCO [Member]

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

 

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

 

Accounting treatment

 

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

 

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

 

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

 

Allocation of consideration

 

  

      
Cash and cash equivalents  $3,740 
Accounts receivable, net   16,516 
Unbilled revenue   5,976 
Service inventories   5,654 
Prepaid assets   679 
Retention withholdings   279 
Other current assets   551 
Property, plant and equipment   34,161 
Intangible assets   4,220 
Other assets   200 
Total identifiable assets acquired   71,976 
      
Accounts payable   11,974 
Accrued expenses   6,455 
Current installments of long-term debt   5,400 
Short-term borrowings   5,692 
Income taxes payable   313 
Other taxes payable   2,514 
Other current liabilities   

1,679

 
Long-term debt   15,582 
Employee benefit liabilities   868 
Other liabilities   1,733 
Noncontrolling interests   59 
Net identifiable liabilities acquired   52,269 
Total fair value of net assets acquired   19,707 
Goodwill   20,942 
Preliminary consideration  $40,649 

 

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 contracts  $

3,770

   8 years
Trademarks and trade names   450   2 years
Total intangible assets  $4,220    

 

Goodwill

 

As of June 30, 2020, $20.9 million has been allocated to goodwill. Goodwill represents the excess of the gross consideration transferred over the fair value of the underlying net tangible and identifiable definite-lived intangible assets acquired. The goodwill is not amortizable for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily of the strong market positions and the assembled workforces.

 

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

 

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Transaction costs

 

The Company incurred $0.9 million in advisory, legal, accounting, and management fees through June 30, 2020, which includes the amounts the Company had spent prior to the acquisition date of the Business Combination. These costs are recorded in selling, general and administrative expenses in the Condensed Consolidated Interim Statements of Operations in connection with the Business Combination. Transaction costs are reported as a cash outflow from operating activities by the Company.

 

Unaudited pro-forma information

 

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

 

   Quarter ended   Year-to-date period ended 
   June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019 
                 
Revenues  $209,563   $179,557   $421,287   $347,941 
Net income/(loss)   7,034    17,695    19,184    35,086 

 

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

 

SAPESCO revenue of $3.9 million and net income of $0.1 million are included in the consolidated statement of operations during the quarter and year-to-date periods ended June 30, 2020.

 

6. ACCOUNTS RECEIVABLE

 

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

  

   June 30, 2020   December 31, 2019 
Trade receivables  $

115,819

   $100,642
Less: allowance for doubtful accounts   (2,365)    (1,843)
Total  $113,454   $98,799

 

 

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Trade receivables relate to the sale of services, for which credit is extended based on our evaluation of the customer’s creditworthiness. The gross contractual amounts of trade receivables at June 30, 2020 and December 31, 2019 were $115.8 million and $100.6 million, respectively. Movement in the allowance for doubtful accounts is as follows (in US$ thousands):

 

                 
   Quarter ended   Year-to-date period ended 
   June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019 
                 
Allowance for doubtful accounts at beginning of period  $(2,442)  $(760)  $(1,843)  $(693)
(Increase) decrease to allowance for the year   (25)   (339)   26    (476)
(Recovery) write-off of doubtful accounts   161    649    161    719 
Non-cash reclass of allowance for doubtful accounts between unbilled revenue and accounts receivable   (59)   -    (708)   - 
Allowance for doubtful accounts at end of period  $(2,365)  $(450)  $(2,365)  $(450)

 

 

7. SERVICE INVENTORIES

 

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

 

   June 30,   December 31, 
   2020   2019 
         
Spare parts  $54,739   $39,428 
Chemicals   24,589    22,852 
Raw materials   911    2,441 
Consumables   13,916    15,897 
Total   94,155    80,618 
Less: allowance for obsolete and slow-moving inventories   (2,391)   (1,777)
Total  $91,764   $78,841 

 

 

8. PROPERTY, PLANT, & EQUIPMENT

 

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

 

    Estimated Useful Lives (in years)   June 30, 2020     December 31, 2019  
Buildings and leasehold improvements   5 to 25   $ 38,701     $ 36,853  
Oilfield equipment   3 to 15     505,504       411,984  
Furniture and fixtures   5     1,503       3,720  
Office equipment and tools   3 to 6     39,589       35,991  
Vehicles and cranes   5 to 8     8,262       12,292  
Less: Accumulated depreciation         (151,440 )     (104,689 )
Land         5,104       5,104  
Capital work in progress         10,938       18,052  
Total       $ 458,161     $ 419,307  

 

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The Company recorded depreciation expense of $26.4 million, $16.0 million, $51.8 million and $30.5 million for the quarter ended June 30, 2020, the quarter ended June 30, 2019, the year-to-date period ended June 30, 2020, and the year-to-date period ended June 30, 2019, respectively, in the Condensed Consolidated Interim Statement of Operations.

 

9. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

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