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statements) and to be a part thereof from the date on which this report on Form 6-K is filed, to the extent not superseded by documents or reports subsequently filed or furnished.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

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.

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.

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.

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.

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
Acquisition of non-controlling interest during the period		-
NPS equity earn-out		-
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.

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.

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.

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.

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.

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):

	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.

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
	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.

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):

	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.

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

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

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):