NOTES
TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1.
DESCRIPTION OF BUSINESS
National
Energy Services Reunited Corp. (“NESR,” the “Company,” “we,” “our,” “us”
or similar terms) is a British Virgin Islands corporation headquartered in Houston, Texas. The Company, through its wholly-owned
subsidiaries, NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES” and, together with NPS, the
“Subsidiaries”) is a regional provider of services to the oil and gas industry in the Middle East and North Africa
(“MENA”) and Asia Pacific regions.
NESR
was incorporated in the British Virgin Islands as a special purpose acquisition company on January 23, 2017 for the purpose of
acquiring, engaging in a share exchange, share reconstruction and amalgamation, or contractual control arrangement with, purchasing
all or substantially all of the assets of, or engaging in any other similar business combination with one or more businesses or
entities. On May 17, 2017, NESR sold 21,000,000 units, each consisting of one ordinary share and one warrant, in its initial public
offering, generating gross proceeds of $210 million. Simultaneously with the closing of its initial public offering, NESR consummated
the sale of 11,850,000 warrants (the “Private Warrants”) at a price of $0.50 per warrant in a private placement to
its sponsor, NESR Holdings Ltd. (“NESR Holdings”), generating gross proceeds of $5.9 million. On May 30, 2017, in
connection with the underwriters’ election to partially exercise their over-allotment option, NESR consummated the sale
of an additional 1,921,700 units at $10.00 per unit and the sale of an additional 768,680 Private Warrants at $0.50 per warrant,
generating total gross proceeds of $19.6 million.
An
aggregate amount of $229.2 million from the net proceeds of the sale of the units in the initial public offering and the Private
Warrants was placed in a trust account (“Trust Account”) until the earlier of: (i) the consummation of a business
combination or (ii) the distribution of the trust account. On June 6, 2018 (the “Closing Date”), NESR acquired all
of the issued and outstanding equity interests of NPS and GES (the “Business Combination”). Subsequently, the proceeds
held in the Trust Account aggregating $231.8 million (including interest) were released.
Both
NPS and GES are regional providers of services to the oil and gas industry in the MENA and Asia Pacific regions. Revenues are
primarily derived from services provided during the drilling, completion and production phases of an oil or natural gas well.
NPS operates in 12 countries with the majority of its revenues derived from operations in Saudi Arabia, Algeria, Qatar, UAE and
Iraq. GES provides drilling equipment for rental and related services, well engineering services and directional drilling services
imports, and sells oilfield equipment and renders specialized services to oil companies in Oman, Saudi Arabia, Algeria and Kuwait.
2.
BASIS OF PRESENTATION
The
accompanying condensed consolidated interim financial statements of the Company have been prepared in accordance with U.S. GAAP
for interim financial reporting purposes. Accordingly, certain information and note disclosures normally included in financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These
condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form
20-F for the year ended December 31, 2018 and Reports on Form 6-K for the quarterly periods ended March 31, 2019 and June 30,
2019.
The
Business Combination was accounted for under Accounting Standards Codification (“ASC”) Topic 805, Business Combination.
Pursuant to ASC 805, NESR was determined to be the accounting acquirer based on evaluation of the facts and circumstances including:
|
●
|
The
transfer of cash by NESR;
|
|
|
|
|
●
|
NESR’s
executive management comprise the C-Suite of the combined company;
|
|
|
|
|
●
|
NESR’s
right to designate members of the board; and
|
|
|
|
|
●
|
NESR
initiated the Business Combination.
|
As
a result of the Business Combination, NPS and GES were acquirees and NPS was determined to be the accounting “Predecessor”.
NPS was determined to be the accounting “Predecessor” as the Company expects to use the NPS platform to grow the business
as it operates throughout the Middle East and Africa whereas GES is concentrated in Oman. Further, the market size of countries
where NPS is operating is much larger than that of GES and the valuation and price paid for NPS was higher than that of GES. The
Company’s financial statement presentation distinguishes a Predecessor for periods prior to the Closing Date. NESR is the
“Successor” for periods after the Closing Date, which includes the consolidated financial results of both NPS and
GES. The transactions were accounted for as a business combination using the acquisition method of accounting, and the Successor
financial statements reflect a new basis of accounting for both NPS and GES that is based on the fair value of assets acquired
and liabilities assumed. See Note 4, Business Combination, for further discussion on the Business Combination. As a result of
the application of the acquisition method of accounting as of the Closing Date, the financial statements for the predecessor periods
and for the successor period are presented on a different basis of accounting and are, therefore, not comparable. The historical
information of NESR prior to the Business Combination has not been reflected in the Company’s financial statements prior
to June 7, 2018, as it was not deemed the Predecessor. Statement of operations activity of NESR, being nominal in nature, prior
to the closing of the Business Combination were recorded in the opening retained earnings as of June 7, 2018 and not presented
separately.
In
the accompanying condensed consolidated interim financial statements, the successor periods are from June 7, 2018 to September
30, 2018 (“2018 Successor Period”), July 1, 2018 to September 30, 2018 (“2018 Successor Quarter”), January
1, 2019 to September 30, 2019 (“2019 Successor Period”), and July 1, 2019 to September 30, 2019 (“2019 Successor
Quarter”) and the predecessor period is from January 1, 2018 to June 6, 2018 (“2018 Predecessor Period”).
Emerging
growth company
The
Company is an “emerging growth company,” as defined in Section 2(a) of the U.S. Securities Act of 1933 as amended
(the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS
Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other
public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act.
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial
accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared
effective or do not have a class of securities registered under the Securities Exchange Act of 1934) are required to comply with
the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition
period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.
The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised
and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt
the new or revised standard at the time private companies adopt the new or revised standard. This may make a comparison of the
Company’s condensed consolidated interim financial statements with another public company that is neither an emerging growth
company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because
of the potential differences in accounting standards used.
Use
of estimates
The
preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company’s significant estimates include estimates made towards purchase price allocation for the
acquisition of NPS and GES, allowance for doubtful accounts, impairment of property, plant and equipment, goodwill and intangible
assets, estimated useful life of property plant and equipment and intangible assets, provision for inventories obsolescence, recoverability
of unbilled revenue, provision for liabilities pertaining to unrecognized tax benefits, recoverability of deferred taxes and contingencies
and actuarial assumptions in employee benefit plans.
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 for the 2019 Period:
|
|
●
|
Purchases
of property, plant, and equipment in accounts payable and short-term borrowings at September 30, 2019 of $28.3
million and $22.6 million, respectively, are not included under “Capital expenditures” within the
condensed consolidated statement of cash flows.
|
Recently
issued accounting standards not yet adopted
On
August 28, 2018 the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”)
No 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure
Framework—Changes to The Disclosure Requirements for Defined Benefit Plans.” ASU No. 2018-14 amends ASC 715 to add,
remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The update is effective
for the Company for fiscal years ending after December 15, 2021. The Company does not expect the adoption of this standard to
have a material impact on its consolidated financial statements.
On
August 28, 2018 the FASB issued ASU No 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes
to the Disclosure Requirements for Fair Value Measurement.” ASU No. 2018-13 modifies the disclosure requirements on fair
value measurements in Topic 820. The amendments in ASU No. 2018-13 are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019. The Company does not expect the adoption of this standard
to have a material impact on its consolidated financial statements.
In
July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements.” ASU 2018-09 makes changes to clarify the
Accounting Standards Codification, corrects unintended application of guidance, and makes minor improvements to the Accounting
Standards Codification that are not expected to have a significant effect on current accounting practice. The amendments are effective
for the Company for fiscal years beginning after December 15, 2019 and for interim periods in fiscal years beginning after December
15, 2020. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting.” ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation (which currently
only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services.
Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The amendments
are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company
does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In
January 2017, the FASB issued ASU No. 2017-04 “Simplifying the Test for Goodwill.” The update amends Accounting Standard
Codification No. 350 Intangibles - Goodwill and Other, provides guidance that simplifies the accounting for goodwill impairment
for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under
accounting topic 350. The amendments in this update will be applied prospectively and is effective for annual and interim impairment
tests performed in periods beginning after December 15, 2021. The Company does not expect the adoption of this standard to have
an impact on its consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial
Instruments”. The new standard amends the impairment model for trade receivables, net investments in leases, debt securities,
loans and certain other instruments to utilize an expected loss methodology in place of the currently used incurred loss methodology.
This pronouncement is effective for annual periods beginning after December 15, 2020, including interim periods within those annual
periods. The Company is currently evaluating the provisions of the pronouncement and assessing the impact, if any, on its consolidated
financial statements and related disclosures.
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, “Leases,” a new
standard on accounting for leases. This update increases transparency and comparability among organizations by recognizing lease
assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. At its July 17, 2019,
Board meeting, the FASB tentatively deferred the effective date for the Company’s consolidated financial statements by one
year to as of and for the year ending December 31, 2021 and for interim periods beginning in 2022. The FASB plans to issue a proposed
ASU to incorporate this decision. The Company is currently evaluating the provisions of the pronouncement and assessing the impact,
if any, on its consolidated financial statements and related disclosures.
On
August 6, 2018 the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements.” This ASU is intended
to reduce costs and ease implementation of the lease standard for financial statement preparers. ASU 2018-11 provides a new transition
method and a practical expedient for separating components of a contract. Under this new transition method, an entity initially
applies the new leases standard at the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained
earnings in the period of adoption. Additionally, the amendments in ASU 2018-11 provide lessors with a practical expedient, by
class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for
those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance
(Topic 606). At its July 17, 2019, Board meeting, the FASB tentatively deferred the effective date for the Company’s consolidated
financial statements by one year to as of and for the year ended December 31, 2021 and for interim periods beginning in 2022.
The FASB plans to issue a proposed ASU to incorporate this decision. The Company is currently evaluating the provisions of the
pronouncement and assessing the impact, if any, on its consolidated financial statements and related disclosures.
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive
model for entities to use in accounting for revenue. ASU 2014-09 supersedes the revenue recognition requirements in FASB ASC Topic
605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 sets forth a five-step model for determining
when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to depict the transfer of
goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or
services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers,” which deferred
the effective date of ASU 2014-09 for all entities by one year and is effective for the Company’s consolidated financial
statements as of and for the year ending December 31, 2019 and for interim periods beginning in 2020. The Company is currently
analyzing the provisions of the pronouncement, assessing the impact of the new standard on revenue contracts, and evaluating prospective
disclosures as compared to other industry participants. The Company expects to substantially complete its evaluation and document
its conclusions during the fourth quarter of fiscal 2019. The Company anticipates utilizing the modified retrospective
approach for adopting the new standard.
4.
BUSINESS COMBINATION
On
June 6, 2018, NESR consummated the Business Combination and related financing transactions, acquiring all of the issued and outstanding
equity interests of NPS and GES.
Accounting
treatment
The
Business Combination is accounted for under ASC 805. Pursuant to ASC 805, NESR has been determined to be the accounting acquirer.
Refer to Note 2, Basis of Presentation, for more information. NPS and GES both constitute businesses, with inputs, processes,
and outputs. Accordingly, the acquisition of NPS and GES both constitute the acquisition of a business for purposes of ASC 805
and due to the change in control of each of NPS and GES was accounted for using the acquisition method. NESR recorded the fair
value of assets acquired and liabilities assumed from NPS and GES.
The
following table summarizes the final allocation of the purchase price (in thousands):
Allocation
of consideration
|
|
|
NPS
|
|
|
GES
|
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
31,656
|
|
|
$
|
5,206
|
|
|
Accounts receivable
|
|
|
55,392
|
|
|
|
18,013
|
|
|
Unbilled revenue
|
|
|
41,378
|
|
|
|
45,343
|
|
|
Inventories
|
|
|
33,652
|
|
|
|
31,092
|
|
|
Current assets
|
|
|
19,463
|
|
|
|
8,719
|
|
|
Property, plant and equipment
|
|
|
216,094
|
|
|
|
91,444
|
|
|
Intangible assets
|
|
|
94,000
|
|
|
|
53,000
|
|
|
Deferred tax assets
|
|
|
-
|
|
|
|
554
|
|
|
Other assets
|
|
|
7,457
|
|
|
|
1,254
|
|
|
Total
identifiable assets acquired
|
|
|
499,092
|
|
|
|
254,625
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
26,457
|
|
|
|
31,113
|
|
|
Accrued expenses
|
|
|
28,685
|
|
|
|
25,388
|
|
|
Current portion of loans and borrowings
|
|
|
-
|
|
|
|
16,368
|
|
|
Short-term borrowings
|
|
|
55,836
|
|
|
|
9,000
|
|
|
Current liabilities
|
|
|
3,665
|
|
|
|
15,449
|
|
|
Loans and borrowings
|
|
|
149,399
|
|
|
|
25,098
|
|
|
Deferred tax liabilities
|
|
|
24,098
|
|
|
|
8,053
|
|
|
Other liabilities
|
|
|
22,363
|
|
|
|
9,910
|
|
|
Non-controlling
interest
|
|
|
(2,841
|
)
|
|
|
837
|
|
|
Net
identifiable liabilities acquired
|
|
|
307,662
|
|
|
|
141,216
|
|
|
Total fair value
of net assets acquired
|
|
|
191,430
|
|
|
|
113,409
|
|
|
Goodwill
|
|
|
399,325
|
|
|
|
175,439
|
|
|
Total
gross consideration
|
|
$
|
590,755
|
|
|
$
|
288,848
|
|
During the quarter
ended June 30, 2019, the Company finalized its valuation of certain identifiable assets and liabilities. These measurement
period changes resulted in an increase of $3.2 million to goodwill in the 2019 Successor Period as compared to the amounts recorded
as of December 31, 2018. For NPS, current liabilities increased by $3.2 million in the 2019 Successor Period due to income tax
return-to-accrual adjustments that resulted from the filing of the 2018 income tax returns. For GES, other liabilities increased
by $1.1 million due to an additional provision for uncertain tax positions.
The
impact of these adjustments on the 2019 Successor Period was not material to the condensed consolidated interim financial statements.
Intangible
assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The
final allocation to intangible assets is as follows (in thousands):
Intangible
assets
|
|
|
Fair
Value
|
|
|
|
|
|
|
NPS
|
|
|
GES
|
|
|
Total
|
|
|
Useful
Life
|
|
|
|
(In thousands)
|
|
|
|
|
Customer contracts
|
|
$
|
77,000
|
|
|
$
|
44,500
|
|
|
$
|
121,500
|
|
|
10 years
|
|
Trademarks and
trade names
|
|
|
17,000
|
|
|
|
8,500
|
|
|
|
25,500
|
|
|
8 years
|
|
Total
intangible assets
|
|
$
|
94,000
|
|
|
$
|
53,000
|
|
|
$
|
147,000
|
|
|
|
Goodwill
$574.8
million has been allocated to goodwill as of September 30, 2019. Goodwill represents the excess of the gross consideration transferred
over the fair value of the underlying net tangible and identifiable definite-lived intangible assets acquired. The goodwill is
not amortizable for tax purposes. Qualitative factors that contribute to the recognition of goodwill include certain intangible
assets that are not recognized as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized
apart from goodwill consist primarily of the strong market positions and the assembled workforces at the Subsidiaries.
In
accordance with FASB ASC Topic 350, “Goodwill and Other Intangible Assets,” goodwill will not be amortized,
but instead will be tested for impairment at least annually or more frequently if certain indicators are present. In the event
management determines that the value of goodwill has become impaired, an accounting charge for the amount of impairment during
the period in which the determination is made may be recognized.
Unaudited
pro forma information
The
following table summarizes the supplemental consolidated results of the Company on an unaudited pro forma basis, as if the Business
Combination had been consummated on January 1, 2017 (in thousands):
|
|
|
Period
from
January 1 to
September 30,
2018
|
|
|
Revenues
|
|
$
|
394,495
|
|
|
Net income
|
|
|
8,971
|
|
These
pro forma results were based on estimates and assumptions, which the Company believes are reasonable. They are not the results
that would have been realized had the Company been a combined company during the periods presented and are not necessarily indicative
of consolidated results of operations in future periods. The pro forma results include adjustments primarily related to purchase
accounting adjustments. Acquisition costs and other non-recurring charges incurred in connection with the Business Combination
are included in the earliest period presented.
5.
ACCOUNTS RECEIVABLE
The
following table summarizes the accounts receivable of the Company as of the period end dates set forth below (in thousands):
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Trade receivables
|
|
$
|
108,394
|
|
|
$
|
63,329
|
|
|
Less:
allowance for doubtful accounts
|
|
|
(1,025
|
)
|
|
|
(693
|
)
|
|
Total
|
|
$
|
107,370
|
|
|
$
|
62,636
|
|
Trade
receivables relate to the sale of services, for which credit is extended based on our evaluation of the customer’s credit-worthiness.
The gross contractual amounts of trade receivables at September 30, 2019 and December 31, 2018 were $113.2 million and
$69.1 million, respectively. Movement in the allowance for doubtful accounts is as follows (in thousands):
|
|
|
Period
from
January
1, 2019 to
September
30, 2019
|
|
|
Period
from
June
7, 2018 to
September
30, 2018
|
|
|
Period
from
January
1, 2018 to
June
6, 2018
|
|
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
Allowance
for doubtful accounts at beginning of period
|
|
$
|
(693
|
)
|
|
|
-
|
|
|
$
|
(4,106
|
)
|
|
Add: additional allowance
for the year
|
|
|
(1,051
|
)
|
|
|
-
|
|
|
|
(2,402
|
)
|
|
Less:
write-off of doubtful accounts
|
|
|
719
|
|
|
|
-
|
|
|
|
-
|
|
|
Allowance
for doubtful accounts at end of period
|
|
$
|
(1,025
|
)
|
|
|
-
|
|
|
$
|
(6,508
|
)
|
|
|
|
Period
from
July
1, 2019 to September 30, 2019
|
|
|
Period
from
July
1, 2018 to
September
30, 2018
|
|
|
|
|
Successor
(NESR)
|
|
|
Allowance for doubtful accounts
at beginning of period
|
|
$
|
(450
|
)
|
|
$
|
-
|
|
|
Add: additional allowance for the year
|
|
|
(575
|
)
|
|
|
-
|
|
|
Less: write-off
of doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
Allowance for
doubtful accounts at end of period
|
|
$
|
(1,025
|
)
|
|
$
|
-
|
|
6.
SERVICE INVENTORIES
The
following table summarizes the service inventories of the Company as of the period end dates set forth below (in thousands):
|
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
|
|
|
|
|
|
|
|
|
Spare parts
|
|
$
|
36,118
|
|
|
$
|
29,928
|
|
|
Chemicals
|
|
|
16,420
|
|
|
|
14,803
|
|
|
Raw materials
|
|
|
3,452
|
|
|
|
200
|
|
|
Consumables
|
|
|
18,438
|
|
|
|
14,375
|
|
|
Total
|
|
|
74,428
|
|
|
|
59,306
|
|
|
Less: allowance
for obsolete and slow-moving inventories
|
|
|
(2,087
|
)
|
|
|
(1,155
|
)
|
|
Total
|
|
$
|
72,341
|
|
|
$
|
58,151
|
|
7.
PROPERTY, PLANT, & EQUIPMENT
Property,
plant and equipment, net of accumulated depreciation, of the Company consists of the following as of the period end dates set
forth below (in thousands):
|
|
|
Estimated
Useful
Lives
(in
years)
|
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
|
Buildings
and leasehold improvements
|
|
|
5
to 25
|
|
|
$
|
24,635
|
|
|
$
|
21,572
|
|
|
Drilling rigs, plant
and equipment
|
|
|
3
to 15
|
|
|
|
370,227
|
|
|
|
278,249
|
|
|
Furniture and fixtures
|
|
|
5
|
|
|
|
1,194
|
|
|
|
1,348
|
|
|
Office equipment and
tools
|
|
|
3
to 6
|
|
|
|
34,392
|
|
|
|
31,568
|
|
|
Vehicles and cranes
|
|
|
5
to 8
|
|
|
|
6,130
|
|
|
|
4,179
|
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
(79,848
|
)
|
|
|
(32,522
|
)
|
|
Land
|
|
|
|
|
|
|
5,104
|
|
|
|
5,104
|
|
|
Capital
work in progress
|
|
|
|
|
|
|
21,651
|
|
|
|
19,229
|
|
|
Total
|
|
|
|
|
|
$
|
383,485
|
|
|
$
|
328,727
|
|
The
Company recorded depreciation expense of $47.7 million, $17.2 million, $19.0 million, $14.2 million and $9.3 million,
in the 2019 Successor Period, 2019 Successor Quarter, 2018 Successor Period, 2018 Successor Quarter, and 2018 Predecessor Period,
respectively, in the Condensed Consolidated Statement of Operations.
8.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
Changes
in the carrying amount of goodwill of the Company between December 31, 2018 and September 30, 2019 are as follows (in thousands):
|
|
|
Production
Services
|
|
|
Drilling
and
Evaluation
Services
|
|
|
Goodwill
|
|
|
Balance as of December
31, 2018
|
|
$
|
416,494
|
|
|
|
154,046
|
|
|
|
570,540
|
|
|
Measurement period adjustments
|
|
|
3,152
|
|
|
|
1,072
|
|
|
|
4,224
|
|
|
Balance as
of September 30, 2019
|
|
$
|
419,646
|
|
|
|
155,118
|
|
|
|
574,764
|
|
Intangible
assets subject to amortization, net
The
following is the weighted average amortization period for intangible assets of the Company subject to amortization (in years):
|
|
|
Amortization
|
|
|
Customer
contracts
|
|
|
10
|
|
|
Trademarks
and trade names
|
|
|
8
|
|
|
Total
intangible assets
|
|
|
9.6
|
|
The
details of our intangible assets subject to amortization are set forth below (in thousands):
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Net
carrying amount
|
|
|
Gross
carrying amount
|
|
|
Accumulated
amortization
|
|
|
Net
carrying amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
contracts
|
|
$
|
121,500
|
|
|
$
|
(16,202
|
)
|
|
$
|
105,298
|
|
|
$
|
121,500
|
|
|
$
|
(7,088
|
)
|
|
$
|
114,412
|
|
|
Trademarks
and trade names
|
|
|
25,500
|
|
|
|
(4,250
|
)
|
|
|
21,250
|
|
|
|
25,500
|
|
|
|
(1,860
|
)
|
|
|
23,640
|
|
|
Total
intangible assets
|
|
$
|
147,000
|
|
|
$
|
(20,452
|
)
|
|
$
|
126,548
|
|
|
$
|
147,000
|
|
|
$
|
(8,948
|
)
|
|
$
|
138,052
|
|
9.
DEBT
Short-term
debt
The
Company’s short-term debt obligations consist of the following (in thousands):
|
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
|
|
|
|
|
|
|
|
|
Modified
Hana Loan
|
|
$
|
-
|
|
|
$
|
10,000
|
|
|
Other
short-term borrowings
|
|
|
28,261
|
|
|
|
21,817
|
|
|
Short-term
debt, excluding current installments of long-term debt
|
|
$
|
28,261
|
|
|
$
|
31,817
|
|
Short-term
borrowings primarily consist of financing for capital
equipment and inventory purchases.
Hana
Loan and Modified Hana Loan agreements
In
connection with the Business Combination, on June 5, 2018, NESR entered into a loan agreement with Hana Investments pursuant to
which NESR borrowed $50.0 million on an unsecured basis (the “Hana Loan”). The Hana Loan had a scheduled maturity
date of December 17, 2018 and was interest bearing, accruing interest at the greater of (i) an amount equal to $4.0 million or
prorated if the loan was prepaid; and (ii) at a rate per annum equal to one-month Intercontinental Exchange LIBOR, adjusted monthly
on the first day of each calendar month, plus a margin of 2.25% payable on maturity or prepaid. The interest was payable in NESR
ordinary shares or cash at the election of the lender. The loan was subject to an origination fee of $0.6 million payable in NESR
ordinary shares at $11.244 per share, which resulted in the issuance of 53,362 shares at closing of the Business Combination.
During
2018, the Company paid $44 million for both principal and interest in cash on the Hana Loan and entered into an extension (the
“Modified Hana Loan”) for the balance of the loan which was fully repaid with cash during January 2019. The terms
and conditions contained in the Hana Loan remained unchanged in the Modified Hana Loan.
Long-term
debt
The
Company’s long-term debt obligations consist of the following (in thousands):
|
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
|
|
|
|
|
|
|
|
|
Secured
Term Loan
|
|
$
|
300,000
|
|
|
$
|
-
|
|
|
Secured Revolving Credit
Facility
|
|
|
50,000
|
|
|
|
|
|
|
Murabaha credit facility
|
|
|
-
|
|
|
|
150,000
|
|
|
APICORP bilateral term
facility
|
|
|
-
|
|
|
|
46,875
|
|
|
SABB bilateral term
facility
|
|
|
-
|
|
|
|
43,333
|
|
|
Term loan Ahli Bank
|
|
|
-
|
|
|
|
2,382
|
|
|
NBO loan $60,000
|
|
|
-
|
|
|
|
23,333
|
|
|
NBO loan $20,000
|
|
|
-
|
|
|
|
4,899
|
|
|
Less:
unamortized debt issuance costs
|
|
|
(4,615
|
)
|
|
|
(557
|
)
|
|
Total loans and borrowings
|
|
|
345,385
|
|
|
|
270,265
|
|
|
Less:
current portion of long-term debt
|
|
|
(7,500
|
)
|
|
|
(45,093
|
)
|
|
Long-term
debt, net unamortized debt issuance costs and excluding current installments
|
|
$
|
337,885
|
|
|
$
|
225,172
|
|
Secured
Facilities Agreement
On May 5, 2019, the Company
entered into a $450.0 million term loan, revolving credit, and working capital facilities agreement (the “Secured Facilities
Agreement”) with Arab Petroleum Investments Corporation (“APICORP”) – Bahrain Banking Branch, HSBC Bank
Middle East Limited (“HSBC”), Mashreqbank PSC and Saudi British Bank acting as initial mandated lead arrangers and
bookrunners, Mashreqbank PSC acting as global agent, APICORP and Mashreqbank PSC acting as security agents, NPS Bahrain for Oil
& Gas Wells Services WLL 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.” Upon consummation of this transaction,
the Company settled its existing debt obligations with the exception of a $30.4 million working capital facility with HSBC,
described below, used for the issuance of letters of guarantee and letters of credit.
On
May 23, 2019 and June 20, 2019, the Company entered into $35.0 million and $40.0 million Incremental Facilities Agreements, respectively,
increasing the size of the Secured Facilities Agreement to $485.0 million and $525.0 million, respectively.
The
$525.0 million Secured Facilities Agreement consists of a $300.0 million term loan due 2025 (the “Term Loan” or “Secured
Term Loan”), a $65.0 million Revolving Credit Facility (“RCF” or “Secured Revolving Credit Facility”)
due 2023, and a $160.0 million working capital facility. Borrowings under the Term Loan and RCF incur interest at the rate of
three-month LIBOR plus 2.4% to 2.7% per annum, varying based on the Company’s Net Debt / EBITDA ratio. As of September 30,
2019, this results in an interest rate of 4.6%. The Company has drawn $300.0 million of the Term Loan and $50.0
million of the RCF as of September 30, 2019.
The
RCF was obtained for general corporate and working capital purposes including capital expenditure related requirements and
acquisitions (including transaction related expenses). The RCF requires the payment of a commitment fee each quarter. The
commitment fee is computed at the rate of 0.60% per annum based on the average daily amount by which the borrowing base
exceeds the outstanding borrowings during each quarter. Under the terms of the RCF, the final settlement is due by May 6,
2023. The Company is required to repay the amount of any principal balance outstanding together with any unpaid accumulated
interest at three-month LIBOR plus 2.4% to 2.7% per annum, varying based on the Company’s Net Debt / EBITDA ratio. The
Company is permitted to make any prepayment under this RCF in multiples of $5.0 million during this 4-year period up to May
6, 2023. Any unutilized balances from the RCF can be drawn down again during the 4-year tenure at the same terms. As
of September 30, 2019, the Company has $15.0 million available to be drawn under the RCF.
The
Secured Facilities Agreement also includes a working capital facility of $160.0 million for issuance of letters of guarantee and
letters of credit and refinancing letters of credit over a period of one year, which carries an interest rate equal to three-month
U.S. Dollar LIBOR for the applicable interest period, plus a margin of 1.00% to 1.25% per annum. As of September 30, 2019, the
Company had utilized $130.7 million under this working capital facility and the balance of $29.3 million was available
to the Company.
The
Company has also retained legacy bilateral working capital facilities from HSBC totaling $30.4 million in Qatar ($16.4
million), in UAE ($13.9 million) and Kuwait ($0.1 million). As of September 30, 2019, the Company had utilized $27.5
million under this working capital facility and the balance of $2.9 million was available to the Company.
Utilization
of the working capital facilities under both the legacy arrangement and Secured Facilities Agreement comprises both letters of
credit issued to vendors 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 that will be repaid quarterly over a one-year period.
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, 2019.
Other
debt information
Scheduled
principal payments of long-term debt for periods subsequent to September 30, 2019 are as follows (in thousands):
|
2019
|
|
$
|
-
|
|
|
2020
|
|
|
15,000
|
|
|
2021
|
|
|
37,500
|
|
|
2022
|
|
|
45,000
|
|
|
2023
|
|
|
95,000
|
|
|
2024
|
|
|
45,000
|
|
|
Thereafter
|
|
|
112,500
|
|
|
Total
|
|
$
|
350,000
|
|
10.
FAIR VALUE ACCOUNTING
The
Company’s financial instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable,
loans and borrowings and an embedded derivative. The fair value of the Company’s financial instruments approximates the
carrying amounts represented in the accompanying balance sheets, primarily due to their short-term nature. The fair value of the
Company’s long-term borrowings also approximates the carrying amounts as these loans are carrying interest at the market
rate.
11.
EMPLOYEE BENEFITS
Defined
benefit plan
The
Company provides defined benefit plan of severance pay to the eligible employees. The severance pay plan provides for a lump sum
payment to employees on separation (retirement, resignation, death while in employment or on termination of employment) of an
amount based upon the employees last drawn salary and length of service, subject to the completion of minimum service period (1-2
years) and taking into account the provisions of local applicable law or as per employee contract. The Company records annual
amounts relating to these long-term employee benefits based on calculations that incorporate various actuarial and other assumptions,
including discount rates, mortality, assumed rates of return, compensation increases and turnover rates. The Company reviews its
assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate
to do so. The effect of modifications to those assumptions is recorded in the Condensed Consolidated Statement of Operations.
The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience
and market conditions. The net periodic costs are recognized as employees render the services necessary to earn these benefits.
The
Components of net period benefit cost were as follows (in thousands):
|
|
|
Period
from
January 1, 2019 to
September
30, 2019
|
|
|
Period
from
June
7, 2018 to
September
30, 2018
|
|
|
Period
from
January 1, 2018 to
June
6, 2018
|
|
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
Service Cost
|
|
$
|
2,255
|
|
|
$
|
1,153
|
|
|
$
|
866
|
|
|
Interest Cost
|
|
|
551
|
|
|
|
208
|
|
|
|
168
|
|
|
Other
|
|
|
77
|
|
|
|
70
|
|
|
|
375
|
|
|
Net Cost
|
|
$
|
2,883
|
|
|
$
|
1,431
|
|
|
$
|
1,409
|
|
|
|
|
Period
from
July 1, 2019 to
September
30, 2019
|
|
|
Period
from
July 1, 2018 to
September
30, 2018
|
|
|
|
|
Successor
(NESR)
|
|
|
Service Cost
|
|
$
|
815
|
|
|
$
|
964
|
|
|
Interest Cost
|
|
|
375
|
|
|
|
178
|
|
|
Other
|
|
|
22
|
|
|
|
81
|
|
|
Net Cost
|
|
$
|
1,212
|
|
|
$
|
1,223
|
|
The
Company made contributions to its defined benefit plan of $1.6 million, $0.5 million, $0.9 million, $0.7 million
and $0.7 million, in the 2019 Successor Period, 2019 Successor Quarter, 2018 Successor Period, 2018 Successor Quarter, and 2018
Predecessor Period, respectively, in the Condensed Consolidated Statement of Operations. 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 Statement of Operations as incurred. Total contributions
were $2.4 million, $0.8 million, $0.8 million and $0.5 million, for the 2019 Successor Period, 2019
Successor Quarter, 2018 Successor Period, and 2018 Successor Quarter, respectively, in the Condensed Consolidated Statement of
Operations.
12.
SHARE-BASED COMPENSATION
On
May 18, 2018, the NESR shareholders approved the NESR 2018 Long Term Incentive Plan (the “LTIP”), effective upon the
closing of the Business Combination. The board of directors previously approved the LTIP on February 9, 2018, including the performance
criteria upon which performance goals may be based. A total of 5,000,000 ordinary shares are reserved for issuance under the LTIP.
Grants to members of our Board of Directors are time-based and vest ratably over a 1-year period. Grants to our 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 table sets forth the LTIP activity for the periods indicated:
|
|
|
Number
of
Restricted Shares
|
|
|
Weighted
Average Grant Date Fair Value per Share
|
|
|
Unvested
at December 31, 2018 (NESR - Successor)
|
|
|
725,200
|
|
|
$
|
10.94
|
|
|
Granted
|
|
|
1,184,000
|
|
|
$
|
9.86
|
|
|
Vested and issued
|
|
|
(250,310
|
)
|
|
$
|
10.32
|
|
|
Forfeited
|
|
|
(106,000
|
)
|
|
$
|
10.87
|
|
|
Unvested
at September 30, 2019 (NESR - Successor)
|
|
|
1,552,890
|
|
|
$
|
10.22
|
|
|
|
|
Number
of
Restricted Shares
|
|
|
Weighted
Average Grant Date Fair Value per Share
|
|
|
Unvested
at June 30, 2019 (NESR - Successor)
|
|
|
1,600,200
|
|
|
$
|
10.59
|
|
|
Granted
|
|
|
214,000
|
|
|
$
|
7.60
|
|
|
Vested and issued
|
|
|
(250,310
|
)
|
|
$
|
10.32
|
|
|
Forfeited
|
|
|
(11,000
|
)
|
|
$
|
10.36
|
|
|
Unvested
at September 30, 2019 (NESR - Successor)
|
|
|
1,552,890
|
|
|
$
|
10.22
|
|
At
September 30, 2019, the Company had unrecognized compensation expense of $13.4 million related to unvested LTIP
to be recognized on a straight-line basis over a weighted average remaining period of 2.26 years. Stock-based compensation
has been recorded in the Condensed Consolidated Statement of Operations as follows for the periods presented:
|
|
|
Cost
of services
|
|
|
Selling,
general
and
administrative
expense
|
|
|
Total
|
|
|
2019 Successor Period
|
|
$
|
1,813,635
|
|
|
$
|
2,243,336
|
|
|
$
|
4,056,971
|
|
|
2019 Successor Quarter
|
|
|
757,779
|
|
|
|
1,187,479
|
|
|
|
1,945,258
|
|
|
2018 Successor Period
|
|
|
165,591
|
|
|
|
165,592
|
|
|
|
331,183
|
|
|
2018 Successor Quarter
|
|
|
165,591
|
|
|
|
165,592
|
|
|
|
331,183
|
|
There
is no income tax impact of the stock-based compensation recorded by the Company.
13.
COMMITMENTS AND CONTINGENCIES
Capital
expenditure commitments
The
Company was committed to incur capital expenditures of $15.7 million at September 30, 2019. These commitments are expected
to be settled during 2019 and 2020.
Capital
lease commitments
Future
minimum lease commitments under non-cancellable capital leases with initial or remaining terms of one year or more at September
30, 2019, are payable as follows (in thousands):
|
2019
|
|
$
|
4,500
|
|
|
2020
|
|
|
18,000
|
|
|
2021
|
|
|
12,000
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
$
|
34,500
|
|
Operating
lease commitments
Future
minimum lease commitments under non-cancellable operating leases with initial or remaining terms of one year or more at September
30, 2019, are payable as follows (in thousands):
|
2019
|
|
$
|
6,262
|
|
|
2020
|
|
|
24,814
|
|
|
2021
|
|
|
19,224
|
|
|
2022
|
|
|
3,508
|
|
|
2023
|
|
|
2,791
|
|
|
2024
|
|
|
2,792
|
|
|
Thereafter
|
|
|
4,425
|
|
|
Total
|
|
$
|
63,816
|
|
The
Company recorded rental expense for cancellable and non-cancellable leases of $80.9 million, $24.5 million,
$31.2 million, $25.2 million, and $19.5 million, in the 2019 Successor Period, 2019 Successor Quarter, 2018 Successor Period,
2018 Successor Quarter, and 2018 Predecessor Period, respectively, in the Condensed Consolidated Statement of Operations.
Other
commitments
The
Company has outstanding letters of credit amounting to $28.2 million and $10.3 million as of September 30, 2019 and December
31, 2018, respectively.
In
the normal course of business with customers, vendors and others, we have entered into off-balance sheet arrangements, such as
surety bonds for performance, and other bank issued guarantees, including cash margin guarantees, which totaled $110.5
million and $41.4 million as of September 30, 2019 and December 31, 2018, respectively. A liability is accrued when a loss is
both probable and can be reasonably estimated. None of the off-balance sheet arrangements either has, or is likely to have, a
material effect on our condensed consolidated interim financial statements.
As
of September 30, 2019, and December 31, 2018, the Company had a liability of $6.7 million and $6.7 million, respectively,
on the consolidated balance sheet included in the line item “Other liabilities” reflecting various liabilities associated
with the 2014 acquisition of NPS Bahrain.
Registration
rights
The
Company is a party to various registration rights agreements with holders of its securities. These registration rights agreements
provide certain holders with demand and “piggyback” registration rights, and holders have other rights to require
the Company to register for resale such securities pursuant to Rule 415 under the Securities Act. The registration rights are
subject to various limitations. The Company generally bears the expenses incurred in connection with the filing of any such registration
statements. On July 16, 2018, the Company filed a registration statement on Form F-3 pursuant to certain registration rights agreements,
which was declared effective on August 22, 2018. On February 22, 2019, the Company filed another registration statement on Form
F-3 pursuant to certain registration rights agreements, which was declared effective on March 4, 2019.
Legal
proceedings
The
Company is involved in certain legal proceedings which arise in the ordinary course of business and the outcomes of which are
currently subject to uncertainties and therefore the probability of a loss, if any, being sustained and an estimate of the amount
of any loss are difficult to ascertain. Consequently, it is not possible to make a reasonable estimate of the expected financial
effect, if any, that will result from ultimate resolution of these disputes. The Company is contesting these claims/disputes and
the Company’s management currently believes that provision against these potential claims is not required as the ultimate
outcome of these disputes would not have a material impact on the Company’s business, financial condition or results of
operations.
14.
EQUITY
The
Company is authorized to issue an unlimited number of ordinary shares, no par value, and preferred shares, no par value. The Company’s
ordinary shares are entitled to one vote for each share. As of September 30, 2019, there were 87,147,089 ordinary shares outstanding,
22,921,700 public warrants and 12,618,680 private warrants. Each warrant entitles the registered holder to purchase one-half of
one ordinary share at a price of $5.75 per half share at any time commencing on July 6, 2018 (30 days after the completion of
the Business Combination). The warrants must be exercised for whole ordinary shares. The warrants expire on June 6, 2023 (five
years after the completion of the Business Combination). The private warrants are identical to the public warrants except that
such warrants are exercisable for cash (even if a registration statement covering the ordinary shares issuable upon exercise of
such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable so long as they
are still held by the initial purchasers or their affiliates. No public warrants are exercisable for cash unless there is an effective
and current registration statement covering the ordinary shares issuable upon exercise of the warrants and a current prospectus
relating to such ordinary shares.
The
Company is authorized to issue an unlimited number of preferred shares divided into five classes with designations, voting and
other rights and preferences as may be determined from time to time by the Board of Directors. As of September 30, 2019, there
were no preferred shares issued or outstanding.
At
the Closing Date, there were 11,730,425 ordinary shares outstanding that were not subject to possible redemption and 16,921,700
ordinary shares that were subject to possible redemption as a result of the Business Combination that were recorded outside of
permanent equity as a liability on NESR’s consolidated balance sheet. On the Closing Date, the 16,921,700 ordinary shares
were reclassed to permanent equity at the fair value of $165.2 million (redemption value of $10.11 per share less $0.35 underwriting
fee per share or $9.76 per share). Of the ordinary shares reclassed, 1,916,511 ordinary shares were redeemed for $19.4 million
($10.11 per share). In connection with the completion of the Business Combination, $3.7 million in NESR ordinary shares (307,465)
were issued for underwriting fees.
Pursuant
to the NPS Stock Purchase Agreement dated November 12, 2017, Hana Investments exchanged its portion of the acquired NPS shares,
totaling 83,660,878 shares, for 13,340,448 NESR ordinary shares, including accrued interest, at the time that NESR completed the
Business Combination. At closing of the Business Combination, NESR purchased the remaining outstanding NPS shares with $292.8
million in cash and 11,318,828 NESR ordinary shares, subject to certain adjustments. Also, on the Closing Date, the Company paid
interest totaling $4.7 million in stock (418,001 ordinary shares) to Hana Investments.
As
discussed in Note 9, Debt, on June 5, 2018, in connection with the Business Combination, NESR entered into the Hana Loan with
Hana Investments pursuant to which NESR borrowed $50.0 million on an unsecured basis. The loan was subject to an origination fee
of $0.6 million payable in NESR ordinary shares at $11.244 per share, which resulted in the issuance of 53,362 shares at closing
of the Business Combination.
In
connection with the Business Combination, on June 5, 2018, the Company entered into a Relationship Agreement with Hana Investments
(the “Olayan Relationship Agreement”), to set out certain rights to which Hana Investments will be entitled as a shareholder
of the Company and certain obligations of the Company and NESR Holdings. The Company reimbursed Hana Investments for transaction
fees and expenses in the amount of $2.1 million through the issuance of NESR ordinary shares at a conversion rate of $11.244 per
share (213,447 ordinary shares) at closing of the Business Combination.
On
June 6, 2018, NESR acquired 88% of the outstanding shares of GES from certain owners of GES in exchange for the issuance of 25,309,848
NESR ordinary shares, and NESR Holdings acquired the remaining 12% of the outstanding shares of GES for a total cash purchase
price of $29.3 million as discussed in Note 4, Business Combination. NESR Holdings organized financing of the acquisition through
certain loan contracts and assigned the GES shares which it acquired to NESR, and NESR assumed the obligation to satisfy the loan
contracts. NESR elected to issue NESR ordinary shares to satisfy the loan contracts and issued a total of 3,036,381 NESR ordinary
shares in settlement of the loan contracts and accrued interest.
In
connection with the Business Combination, on April 27, 2018, the Company entered into the Forward Purchase Agreement with MEA
Energy Investment Company 2 Ltd. (the “Backstop Investor”), pursuant to which the Company agreed to sell up to $150
million of the Company’s ordinary shares to the Backstop Investor or its designees and commonly controlled affiliates. On
the Closing Date, the Company drew down $48,293,763 under the primary placement of the Forward Purchase Agreement and issued 4,829,375
ordinary shares to the Backstop Investor.
In
February 2019, pursuant to the NPS Stock Purchase Agreement, the Company issued to the NPS selling shareholders 1,300,214 NESR
ordinary shares to satisfy its obligation in connection with the NPS Equity Stock Earn-Out, a contingent consideration obligation
arising from its acquisition of NPS in 2018 and based on the 2018 EBITDA (earnings before income taxes, depreciation and amortization)
of NESR satisfying scheduled financial thresholds. As of year-end 2018, the Company presented its $10.5 million obligation under
the terms of the NPS Equity Stock Earn-Out arrangement as part of Other current liabilities. It was reclassified to Additional
paid in capital in the first quarter of 2019 when the shares were issued.
15.
EARNINGS PER SHARE
Basic
earnings per common share was computed using the two-class method by dividing basic net income attributable to common shareholders
by the weighted-average number of common shares outstanding. Diluted earnings per common share was computed using the two-class
method by dividing diluted net income attributable to common shareholders by the weighted-average number of common shares outstanding
plus dilutive common equivalent shares. Dilutive common equivalent shares include all in-the-money outstanding contracts to issue
common shares as if they were exercised or converted.
2019
Successor Period and 2019 Successor Quarter
The
following tables provide a reconciliation of the data used in the calculation of basic and diluted ordinary shares outstanding
for the period (in thousands except shares and per share amounts).
|
Date
|
|
Transaction
Detail
|
|
Change
in
Shares
|
|
|
Period
from
January 1, 2019 to
September 30, 2019
Weighted Average
Ordinary Shares
Outstanding
|
|
|
December
31, 2018
|
|
Beginning
Balance
|
|
|
|
|
|
|
85,562,769
|
|
|
January 9, 2019
|
|
Other
|
|
|
33,796
|
|
|
|
32,806
|
|
|
February 19, 2019
|
|
NPS equity stock
earn-out
|
|
|
1,300,214
|
|
|
|
1,300,214
|
|
|
August
14, 2019
|
|
Restricted
stock vesting
|
|
|
250,310
|
|
|
|
43,094
|
|
|
September
30, 2019
|
|
Ending Balance
|
|
|
|
|
|
|
86,938,883
|
|
|
Date
|
|
Transaction
Detail
|
|
Change
in
Shares
|
|
|
Period
from
July 1, 2019 to
September 30, 2019
Weighted Average
Ordinary Shares
Outstanding
|
|
|
June
30, 2019
|
|
Beginning Balance
|
|
|
|
|
|
|
86,896,779
|
|
|
August 14, 2019
|
|
Restricted stock vesting
|
|
|
250,310
|
|
|
|
127,876
|
|
|
September 30, 2019
|
|
Ending Balance
|
|
|
|
|
|
|
87,024,655
|
|
|
|
|
Period
from
January
1, 2019 to
|
|
|
Period
from
July
1, 2019 to
|
|
|
|
|
September
30, 2019
|
|
|
September
30, 2019
|
|
|
|
|
Shares
for Use in Allocation
|
|
|
Shares
for Use in Allocation
|
|
|
|
|
to
Participating Earnings
|
|
|
to
Participating Earnings
|
|
|
Weighted average ordinary
shares outstanding
|
|
$
|
86,938,883
|
|
|
$
|
87,024,655
|
|
|
Non-vested,
participating restricted shares
|
|
|
1,382,896
|
|
|
|
1,571,126
|
|
|
Shares
for use in allocation of participating earnings
|
|
$
|
88,321,779
|
|
|
$
|
88,595,781
|
|
Basic
earnings per share (EPS):
|
|
|
Period
from
January 1 to
September
30, 2019
|
|
|
Period
from
July
1 to
September
30, 2019
|
|
|
Net income
|
|
$
|
35,138
|
|
|
$
|
10,608
|
|
|
Less dividends to:
|
|
|
-
|
|
|
|
-
|
|
|
Ordinary Shares
|
|
|
-
|
|
|
|
-
|
|
|
Non-vested participating
shares
|
|
|
-
|
|
|
|
-
|
|
|
Undistributed
Successor Period Earnings
|
|
$
|
35,138
|
|
|
$
|
10,608
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of earnings
to Ordinary Shares
|
|
$
|
35,082
|
|
|
$
|
10,420
|
|
|
Allocation of earnings
to Nonvested Shares
|
|
|
558
|
|
|
|
188
|
|
|
|
|
Ordinary
Shares
|
|
|
Ordinary
Shares
|
|
|
Distributed Earnings
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Undistributed
Earnings
|
|
|
0.40
|
|
|
|
0.12
|
|
|
Total
|
|
$
|
0.40
|
|
|
$
|
0.12
|
|
Diluted
earnings per share (EPS):
|
|
|
Period
from January 1 to
September 30, 2019
|
|
|
Period
from July 1 to
September 30, 2019
|
|
|
Ordinary
shares
|
|
Undistributed
& distributed earnings to ordinary shareholders
|
|
|
Ordinary
shares
|
|
|
EPS
|
|
|
Undistributed
& distributed earnings to ordinary shareholders
|
|
|
Ordinary
shares
|
|
|
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported — basic
|
|
$
|
35,082
|
|
|
|
86,938,883
|
|
|
$
|
0.40
|
|
|
$
|
10,913
|
|
|
|
87,024,655
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add-back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to nonvested
shareholders
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
12,618,680 Private Warrants @ $5.75 per half
share (anti-dilutive)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
22,921,700 Public Warrants @ $5.75 per half
share (anti-dilutive)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings reallocated to nonvested
shareholders
|
|
|
(558
|
)
|
|
|
|
|
|
|
|
|
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS — Ordinary shares
|
|
$
|
35,082
|
|
|
|
86,938,883
|
|
|
$
|
0.40
|
|
|
$
|
10,913
|
|
|
|
87,024,655
|
|
|
$
|
0.13
|
|
Warrants
that could be converted into as many as 17,770,190 ordinary shares are excluded from diluted EPS as they are anti-dilutive.
2018
Successor Period and 2018 Successor Quarter
The
following table provides a reconciliation of the data used in the calculation of basic and diluted common shares outstanding for
the periods as tabulated below:
Basic
EPS:
|
Date
|
|
Transaction
Detail
|
|
Change
in
Shares
|
|
|
Total
Shares Outstanding
|
|
|
12/31/2017
|
|
Beginning balance
|
|
|
|
|
|
|
11,730,425
|
|
|
6/6/2018
|
|
Shares issued to Backstop Investor
|
|
|
4,829,375
|
|
|
|
16,559,800
|
|
|
6/6/2018
|
|
Shares issued for IPO underwriting fees
|
|
|
307,465
|
|
|
|
16,867,265
|
|
|
6/6/2018
|
|
Shares issued to NPS/GES
|
|
|
53,690,315
|
|
|
|
70,557,580
|
|
|
6/6/2018
|
|
Reclassification
of shares previously subject to redemption less redeemed shares
|
|
|
15,005,189
|
|
|
|
85,562,769
|
|
|
6/30/2018
|
|
Ending balance
|
|
|
|
|
|
|
85,562,769
|
|
Diluted
EPS:
|
Weighted avg units outstanding
|
|
|
85,562,769
|
|
|
Dilutive common shares
|
|
|
277,543
|
|
|
Weighted avg
dilutive units outstanding
|
|
|
85,840,312
|
|
The
following table sets forth the calculation of basic and diluted earnings per common share for the periods presented:
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
July
1 to
|
|
|
June
6 to
|
|
|
|
|
September
30, 2018
|
|
|
September
30, 2018
|
|
|
Weighted average basic common shares outstanding
|
|
|
85,562,769
|
|
|
|
85,562,769
|
|
|
Dilutive potential
common shares from grant of restricted stock units
|
|
|
349,946
|
|
|
|
277,543
|
|
|
Weighted average dilutive common
shares outstanding
|
|
|
85,912,715
|
|
|
|
85,840,312
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
16,110,000
|
|
|
|
12,362,000
|
|
|
Less: Earnings
allocated to participating securities
|
|
|
-
|
|
|
|
-
|
|
|
Net income available
to basic common shares
|
|
|
16,110,000
|
|
|
|
12,362,000
|
|
|
Basic earnings per common share
|
|
|
0.19
|
|
|
|
0.14
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
16,110,000
|
|
|
|
12,362,000
|
|
|
Less: Earnings
allocated to participating securities
|
|
|
-
|
|
|
|
-
|
|
|
Net income available
to diluted common shares
|
|
|
16,110,000
|
|
|
|
12,362,000
|
|
|
Diluted earnings per common share
|
|
|
0.19
|
|
|
|
0.14
|
|
2018
Predecessor Period
The
following table sets forth the calculation of basic and diluted earnings per common share for the periods presented (in thousands
except shares and per share amounts):
|
|
|
2018
|
|
|
|
|
Period
from
|
|
|
|
|
January
1 to
|
|
|
|
|
June
6, 2018
|
|
|
Weighted average basic common shares outstanding
|
|
|
348,524,566
|
|
|
Dilutive potential
common shares
|
|
|
21,475,434
|
|
|
Weighted average dilutive common
shares outstanding
|
|
|
370,000,000
|
|
|
Basic:
|
|
|
|
|
|
Net Income
|
|
|
6,736
|
|
|
Less: Earnings
allocated to participating securities
|
|
|
192
|
|
|
Net income available
to basic common shares
|
|
|
6,928
|
|
|
Basic earnings per common share
|
|
|
0.02
|
|
|
Diluted:
|
|
|
|
|
|
Net Income
|
|
|
6,736
|
|
|
Less: Earnings
allocated to participating securities
|
|
|
181
|
|
|
Net income available
to diluted common shares
|
|
|
6,917
|
|
|
Diluted earnings per common share
|
|
|
0.02
|
|
16.
INCOME TAXES
NESR
is a holding company incorporated in the British Virgin Islands which exempts from corporate income tax income generated
outside of the British Virgin Islands. The Subsidiaries operate in multiple tax jurisdictions throughout the MENA and Asia Pacific
regions. NPS is based in the Emirate of Dubai in the UAE where no federal taxation exists and operates in 12 countries, where
statutory tax rates generally vary from 0% to 35%. GES is based in the Sultanate of Oman, which has a 15% statutory corporate
income tax rate, and also operates in Saudi Arabia, Algeria and Kuwait.
The
Company’s effective tax rate was 23.4%, 24.0%, 19.5%, 19.8% and 25.7%, in the 2019 Successor Period, 2019 Successor
Quarter, 2018 Successor Period, 2018 Successor Quarter, and 2018 Predecessor Period, respectively, in the Condensed Consolidated
Statement of Operations. The tax rates for the successor periods have varied from 19.5% to 24.0%, with differences primarily
attributable to revenue mix by country between periods and the prevalence of nondeductible costs such as share-based compensation.
17.
RELATED PARTY TRANSACTIONS
Mubadarah
Investment LLC (“Mubadarah”)
GES
leases office space in a building it owns in Muscat, Oman to Mubadarah along with other Mubadarah group entities (collectively,
the “Mubadarah group entities”). GES charges rental income to the Mubadarah group entities for the occupation of the
office space, based on usage. Rental income charged by GES to the Mubadarah group entities amounted to $168,000, $49,000,
$57,000 and $43,000 in the 2019 Successor Period, 2019 Successor Quarter, 2018 Successor Period, and 2018 Successor Quarter, respectively,
in the Condensed Consolidated Statement of Operations. The outstanding balance of receivables from Mubadarah was $1.3 million
at September 30, 2019. Mubadarah is owned by Hilal Al Busaidy and Yasser Al Barami, and, collectively with Mubadarah, they own
19.7% of the Company.
Prime
Business Solutions LLC (“PBS”)
PBS
is 100% owned by Mubadarah Business Solutions LLC and is involved in the development and maintenance of Enterprise Resource Planning
(“ERP”) systems.
PBS
has developed and implemented the GEARS (ERP) system for GES and is currently engaged to maintain it. GES has paid maintenance
fees to PBS totaling $209,000, $209,000, zero, and zero in the 2019 Successor Period, 2019 Successor Quarter, 2018 Successor
Period, and 2018 Successor Quarter, respectively.
Key
Management and Founders
Hilal
Al Busaidy and Yasser Al Barami are both founding shareholders of GES. Certain shares owned by them were converted into NESR ordinary
shares as part of the Business Combination.
18.
REPORTABLE SEGMENTS
Operating
segments are components of an enterprise where separate financial information is available that are evaluated regularly by the
Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance.
The Company reports segment information based on the “management” approach and its CODM is its Chief Executive Officer.
The
Company’s services are similar to one another in that they consist of oilfield services and related offerings, whose customers
are oil and gas companies. The results of operations of the service offerings are regularly reviewed by the CODM for the Company
for the purposes of determining resource and asset allocation and assessing performance. The Company has determined that it has
two reportable segments, Production Services and Drilling and Evaluation Services. Management evaluates the operating results
of its reportable segments primarily based on revenue and segment EBITDA. The Company defines EBITDA as net income adjusted for
interest expense, depreciation and amortization, and income tax benefit or expense. Total Segment EBITDA does not include
general corporate expenses as these expenses are not allocated to the Company’s reportable segments and not reported to
the Company’s CODM.
Total Segment EBITDA is not a measure of financial performance under
U.S. GAAP and should not be considered an alternative to net income, the most directly comparable U.S. GAAP measure or
any other measure of financial performance presented in accordance with U.S. GAAP. Our calculation of Total Segment EBITDA
may not be comparable to that reported by other companies. The Company believes that the presentation of Total Segment
EBITDA enables the Company and its shareholders to better assess each segment’s operating results relative to its operating
results in prior periods and improves the comparability of the information presented. Investors should consider this non-U.S.
GAAP measure in the context of the Company’s U.S. GAAP results.
Production
Services that are offered depend on the well life cycle in which the services may fall. They include, but are not limited to,
the following types of service offerings: coil tubing, stimulation and pumping, nitrogen services, completions, pipelines, cementing,
laboratory services and filtration services.
Drilling
and Evaluation Services generates its revenue from the following service offerings: drilling and workover rigs, rig services,
drilling services and rentals, fishing and remedials, directional drilling, turbines drilling, drilling fluids, wireline logging
services, slickline services and well testing services.
The
Company’s operations and activities are located within certain geographies, primarily the MENA region and the Asia Pacific
region, which includes Malaysia, Indonesia and India.
In
accordance with FASB ASC 280 - Segment Reporting, information on revenues and long-lived assets of the operations of the Company
are disclosed below (in thousands):
Revenue
from operations
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
January
1,
2019 to
September 30,
2019
|
|
|
July
1,
2019 to
September 30,
2019
|
|
|
June
7,
2018 to
September 30,
2018
|
|
|
July
1,
2018 to
September 30,
2018
|
|
|
January
1,
2018 to
June 6,
2018
|
|
|
Reportable
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
Services
|
|
$
|
284,631
|
|
|
$
|
97,160
|
|
|
$
|
117,268
|
|
|
$
|
88,666
|
|
|
$
|
112,295
|
|
|
Drilling
and Evaluation Services
|
|
|
188,578
|
|
|
|
64,446
|
|
|
|
73,298
|
|
|
|
56,914
|
|
|
|
24,732
|
|
|
Total
revenue
|
|
$
|
473,209
|
|
|
$
|
161,606
|
|
|
$
|
190,566
|
|
|
$
|
145,580
|
|
|
$
|
137,027
|
|
Long-lived
assets
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Reportable
Segment:
|
|
|
|
|
|
|
|
|
|
Production
Services
|
|
$
|
262,736
|
|
|
$
|
219,278
|
|
|
Drilling
and Evaluation Services
|
|
|
109,259
|
|
|
|
98,163
|
|
|
Unallocated
|
|
|
11,490
|
|
|
|
11,286
|
|
|
Total
|
|
$
|
383,485
|
|
|
$
|
328,727
|
|
Total Segment EBITDA
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
January
1,
2019 to
September 30, 2019
|
|
|
July
1,
2019 to
September 30,
2019
|
|
|
June
7,
2018 to
September 30,
2018
|
|
|
July
1,
2018 to
September 30,
2018
|
|
|
January
1,
2018 to
June 6,
2018
|
|
|
Reportable Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production Services
|
|
|
98,007
|
|
|
|
32,581
|
|
|
|
41,952
|
|
|
|
33,180
|
|
|
|
36,836
|
|
|
Drilling and Evaluation Services
|
|
|
40,869
|
|
|
|
15,239
|
|
|
|
18,905
|
|
|
|
17,630
|
|
|
|
3,267
|
|
|
Unallocated Costs
|
|
|
(13,855
|
)
|
|
|
(4,992
|
)
|
|
|
(13,453
|
)
|
|
|
(6,770
|
)
|
|
|
(9,651
|
)
|
|
Total Segment
EBITDA
|
|
$
|
125,021
|
|
|
$
|
42,828
|
|
|
$
|
47,404
|
|
|
$
|
44,040
|
|
|
$
|
30,452
|
|
The following table presents a reconciliation
of segment operating income, which is the most comparable financial measure under U.S. GAAP, to Total Segment EBITDA:
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
|
|
Period
from
January
1,
2019
to
September
30, 2019
|
|
|
Period
from
July
1,
2019
to
September
30, 2019
|
|
|
Period
from
June
7,
2018
to
September
30, 2018
|
|
|
Period
from
July
1,
2018
to
September
30, 2018
|
|
|
Period
from
January
1,
2018
to
June
6, 2018
|
|
|
Production
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
EBITDA
|
|
$
|
98,007
|
|
|
$
|
32,581
|
|
|
$
|
41,952
|
|
|
$
|
33,180
|
|
|
$
|
36,836
|
|
|
Depreciation
and amort.
|
|
|
(34,212
|
)
|
|
|
(12,322
|
)
|
|
|
(14,678
|
)
|
|
|
(9,615
|
)
|
|
|
(13,121
|
)
|
|
Other
(income)/expense, net
|
|
|
1,166
|
|
|
|
188
|
|
|
|
(1,519
|
)
|
|
|
(1,681
|
)
|
|
|
236
|
|
|
Segment
Operating Income
|
|
|
64,961
|
|
|
|
20,447
|
|
|
|
25,755
|
|
|
|
21,884
|
|
|
|
23,951
|
|
|
Drilling
and Evaluation Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
EBITDA
|
|
|
40,869
|
|
|
|
15,239
|
|
|
|
18,905
|
|
|
|
17,630
|
|
|
|
3,267
|
|
|
Depreciation
and amort.
|
|
|
(16,849
|
)
|
|
|
(5,980
|
)
|
|
|
(7,742
|
)
|
|
|
(5,791
|
)
|
|
|
(4,083
|
)
|
|
Other
(income)/expense, net
|
|
|
55
|
|
|
|
(76
|
)
|
|
|
(992
|
)
|
|
|
(893
|
)
|
|
|
(92
|
)
|
|
Segment
Operating Income
|
|
|
24,075
|
|
|
|
9,183
|
|
|
|
10,171
|
|
|
|
10,946
|
|
|
|
(908
|
)
|
|
Unallocated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
EBITDA
|
|
|
(13,855
|
)
|
|
|
(4,992
|
)
|
|
|
(13,453
|
)
|
|
|
(6,770
|
)
|
|
|
(9,651
|
)
|
|
Share-based
compensation
|
|
|
(4,057
|
)
|
|
|
(1,944
|
)
|
|
|
(331
|
)
|
|
|
(331
|
)
|
|
|
-
|
|
|
Depreciation
and amort.
|
|
|
(8,667
|
)
|
|
|
(2,950
|
)
|
|
|
(1,404
|
)
|
|
|
(1,958
|
)
|
|
|
(80
|
)
|
|
Other
(income)/expense, net
|
|
|
(592
|
)
|
|
|
18
|
|
|
|
2,529
|
|
|
|
2,124
|
|
|
|
(506
|
)
|
|
Segment
Operating Income
|
|
|
(27,171
|
)
|
|
|
(9,868
|
)
|
|
|
(12,659
|
)
|
|
|
(6,935
|
)
|
|
|
(10,237
|
)
|
|
Total
Operating Income
|
|
$
|
61,865
|
|
|
$
|
19,762
|
|
|
$
|
23,267
|
|
|
$
|
25,895
|
|
|
$
|
12,806
|
|
Revenue
by geographic area
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
January
1,
2019 to
September 30, 2019
|
|
|
July
1,
2019 to
September 30,
2019
|
|
|
June
7,
2018 to
September 30,
2018
|
|
|
July
1,
2018 to
September 30,
2018
|
|
|
January
1,
2018
to
June 6,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MENA
|
|
$
|
465,856
|
|
|
$
|
158,229
|
|
|
$
|
188,488
|
|
|
$
|
143,914
|
|
|
$
|
134,479
|
|
|
Rest of world
|
|
|
7,353
|
|
|
|
3,377
|
|
|
|
2,078
|
|
|
|
1,666
|
|
|
|
2,548
|
|
|
Total
revenue
|
|
$
|
473,209
|
|
|
$
|
161,606
|
|
|
$
|
190,566
|
|
|
$
|
145,580
|
|
|
$
|
137,027
|
|
Long-lived
assets by geographic area
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Geographic
Area:
|
|
|
|
|
|
|
|
|
|
MENA
|
|
$
|
374,911
|
|
|
$
|
319,552
|
|
|
Rest of world
|
|
|
8,574
|
|
|
|
9,175
|
|
|
Total
|
|
$
|
383,485
|
|
|
$
|
328,727
|
|
Cautionary
Note Regarding Forward-Looking Statements
This
Periodic Report on Form 6-K (this “Periodic Report”) contains forward-looking statements (as such term is defined
in Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Any and all statements contained in this Periodic Report that
are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,”
“would,” “should,” “could,” “project,” “estimate,” “predict,”
“potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,”
“help,” “believe,” “continue,” “intend,” “expect,” “future,”
and terms of similar import (including the negative of any of these terms) may identify forward-looking statements. However, not
all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Periodic
Report may include, without limitation, statements regarding the benefits resulting from our recent business combination transaction,
the plans and objectives of management for future operations, projections of income or loss, earnings or loss per share, capital
expenditures, dividends, capital structure or other financial items, our future financial performance, including any such statement
contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant
to the rules and regulations of the Securities and Exchange Commission (“SEC”), expansion plans and opportunities,
and the assumptions underlying or relating to any such statement.
The
forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may
not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions
and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results
and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements
as a result of these risks and uncertainties. Factors that may influence or contribute to the accuracy of the forward-looking
statements or cause actual results to differ materially from expected or desired results may include, without limitation:
|
|
●
|
The
ability to recognize the anticipated benefits of our recent business combination transaction, which may be affected by, among
other things, the price of oil, natural gas, natural gas liquids, competition, our ability to integrate the businesses acquired
and the ability of the combined business to grow and manage growth profitably;
|
|
|
●
|
Integration
costs related to our recent business combination;
|
|
|
●
|
Estimates
of our future revenue, expenses, capital requirements and our need for financing;
|
|
|
●
|
The
risk of legal complaints and proceedings and government investigations;
|
|
|
●
|
Our
financial performance;
|
|
|
●
|
Success
in retaining or recruiting, or changes required in, our officers, key employees or directors;
|
|
|
●
|
Current
and future government regulations;
|
|
|
●
|
Developments
relating to our competitors;
|
|
|
●
|
Changes
in applicable laws or regulations;
|
|
|
●
|
The
possibility that we may be adversely affected by other economic and market conditions, political disturbances, war, terrorist
acts, international currency fluctuations, business and/or competitive factors; and
|
|
|
●
|
Other
risks and uncertainties set forth under the caption “Risk Factors” in Part I, Item 3D of the Company’s Annual
Report on Form 20-F for the year ended December 31, 2018 (the “Annual Report”).
|
Readers
are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them
and to the risk factors. We disclaim any obligation to update the forward-looking statements contained in this Periodic Report
to reflect any new information or future events or circumstances or otherwise, except as required by law. Readers should read
this Periodic Report in conjunction with the discussion under Part II, Item 1A below, our unaudited condensed consolidated interim
financial statements and the related notes thereto included in this Periodic Report, and other documents which we may furnish
from time to time with the SEC.
ITEM
2. OPERATING AND FINANCIAL REVIEW
The
following discussion and analysis should be read in conjunction with the unaudited condensed consolidated interim financial statements
and related notes included in this Periodic Report. In addition, such analysis should be read in conjunction with the audited
consolidated financial statements, the related notes, and the other information included in the Annual Report. The following discussion
and analysis contain forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. Please
read “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We
are a regional provider of services to the oil and gas industry in the MENA and Asia Pacific regions. We currently operate in
15 countries, with a strong presence in Saudi Arabia, Oman, Algeria, UAE, and Iraq. Our vision was founded on creating
a regional provider for oilfield services that offered a full portfolio of solutions for our customers throughout the region with
a strong focus on supporting the economies in which we operate. We believe strongly in employing locals and searching for opportunities
to bring value into the region. With its vast reserves of oil and gas, the MENA region continues to dominate in its role as a
vital source of global energy supply and stability. Our services include a broad suite of offerings that are essential in the
drilling and completion of new oil and natural gas wells and in the remedial work on existing wells, both onshore and offshore,
including completion services and equipment and drilling & evaluation services and equipment.
Factors
Affecting our Results of Operations
Cyclical
Nature of Sector
We
provide oilfield services to exploration and production companies with operations in the onshore and offshore oil and gas sectors
in the MENA, particularly the Middle East, and Asia Pacific regions. Demand for our services is mainly driven by our customers’
operations and is therefore linked to global commodity prices and expectations about future prices, rig activity and other factors.
The
oilfield services sector is a highly cyclical industry. As a result, our operating results can fluctuate from quarter to quarter
and period to period. However, due to the lower average cost per barrel in the Middle East and the need for infrastructure spending
to sustain or increase current production levels of these oil rich countries, we believe that we are less affected by oil price
volatility as compared to oilfield services companies that operate in other regions, as discussed below.
Global
E&P Trends and Oil Prices
Since
the most recent downturn in oil prices, which commenced in 2014, many projects have been deferred by exploration & production
(“E&P”) companies, as they sought to reduce oilfield service costs in an attempt to lower their break-even points.
Pricing concessions were granted by service providers in order to maintain their market share during these periods. After a double-digit
decline in 2016, global E&P spending has posted successive years of increases, improving year-over-year by 4% in 2017 and
8% in 2018 and is expected to increase further in 2019. Despite these trends and estimates in global E&P spending, the pricing
environment for oilfield services has been challenging due to the overhang of oilfield service capacity in certain regions globally.
Drilling
Environments
Based
on energy industry data, offshore oil production currently provides an estimated 30% of all global oil supply; however, the bulk
of oil production comes from onshore activity. We provide services to E&P companies with both onshore and offshore drilling
operations. Offshore drilling generally provides higher margins to service providers due to greater complexity, logistical challenges
and the need for innovative solutions.
Geographic
Concentration; Middle Eastern Operations
Over
90% of our revenue has historically come from the MENA region, particularly the Middle East. The Middle East has almost half of
the world’s proven oil reserves and accounts for almost a third of oil production, according to the BP Statistical Review
of World Energy. The countries in the Arabian Gulf account for approximately one-quarter of global oil production and given the
low break-even price, it is a key region for oilfield service companies. Most oil and gas fields in the Middle East are legacy
fields on land or in shallow waters. These fields are largely engaged in development drilling activity, driven by the need for
redevelopment, enhanced oil recovery via stimulation and the drilling of new production wells. Further, a number of gas fields
scheduled to be developed in the near future will require oilfield services. Although the region still has low break-even levels,
it is expected that more complex projects, with higher break-even prices, will be developed in the future and other new technologies
will be required to meet customer expectations or drilling requirements. As a result, our capital expenditure and related financing
needs may increase materially in the future.
In
addition, regional drilling operations may be impacted by local political and economic trends. Due to the concentration of our
operations in the MENA region, and particularly the Middle East, our financial condition and results of operations may be impacted
by geopolitical, political or economic instability affecting the countries in which we operate, including armed conflict, imposition
of economic sanctions, changes in governments and currency devaluations, among others.
Many
MENA countries rely on the energy sector as the major source of national revenues. For example, according to energy industry data,
during the recent industry downturn the MENA region saw less reduction in oil and gas activities than North America. Even at lower
oil and gas prices, such oil and gas dependent economies have continued to maintain significant production and drilling activities.
Further, given that Middle East markets have among the lowest break-even prices, they can continue to produce profitably at significantly
lower commodity prices.
Key
Components of Revenues and Expenses
Revenues
We
earn revenue from our broad suite of oilfield services, including coiled tubing, cementing, stimulation and pumping, well testing
services, drilling services and rental, fishing and remediation, drilling and workover rigs, nitrogen services, wireline logging
services, turbines drilling, directional drilling, filtration services and slickline services, among others. We recognize revenues
as services are rendered and collectability is reasonably assured. Our services are based on fixed or determinable price purchase
orders or contracts with customers and do not include a right of return. Rates for services and equipment are typically priced
on a per day, per man hour, per unit of measure or other similar basis.
Cost
of services
Cost
of services primarily includes staff costs for service personnel, purchase of non-capitalized material and equipment (such as
tools and rental equipment), depreciation relating to capital assets used in our operations, vehicle and equipment rental and
maintenance and repair.
Selling,
general and administrative (“SG&A”)
SG&A
expense primarily includes salary and employee benefits for non-production personnel (primarily management and administrative
personnel), professional service fees (including expenses relating to the Business Combination), office rental and equipment,
office supplies and non-capitalized office equipment and depreciation of office furniture and fixtures.
Amortization
Amortization
expense primarily includes amortization of intangible assets associated with acquired customer contracts, trademarks and tradenames.
Interest
expense, net
Interest
expense primarily consists of interest on outstanding debt, net of interest income.
Other
income (expense), net
Other
operating income (expenses) primarily consists of gain/loss on disposal of fixed assets, bank charges and foreign exchange transaction
expenses.
Key
Performance Indicators
We
track two principal non-financial performance indicators that are important drivers of our results of operations: rig count and
oil price. Oil price is important because the level of spending by E&P companies, our principal customers, is significantly
influenced by anticipated future prices of oil, which is typically indicative of expected supply and demand. Changes in E&P
spending, in turn, typically result in an increased or decreased demand for our services. Rig count, particularly in the regions
in which we operate, is an indicator of the level of activity and spending by our E&P customers and has historically been
an important indicator of our financial performance and activity levels.
The
following table shows rig count (Source: Baker Hughes Published Rig Count Data) and average oil prices as of the dates indicated:
|
|
|
As
of September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Rig count:
|
|
|
|
|
|
|
|
|
|
MENA
|
|
|
486
|
|
|
|
457
|
|
|
Rest
of World – outside of North America
|
|
|
645
|
|
|
|
547
|
|
|
Total
|
|
|
1,131
|
|
|
|
1,004
|
|
|
|
|
|
|
|
|
|
|
|
|
Brent Crude (per barrel)
|
|
$
|
60.78
|
|
|
$
|
81.34
|
|
Basis
of Presentation of Financial Information
Business
Combination Accounting and Presentation of Results of Operations
As
a result of the Business Combination, NESR was determined to be the accounting acquirer and NPS was determined to be the predecessor
for SEC reporting purposes. Pursuant to Accounting Standard Codification (“ASC”) 805, Business Combinations
(“ASC 805”), the acquisition-date fair value of the purchase consideration paid by NESR to affect the Business Combination
was allocated to the assets acquired and the liabilities assumed based on their estimated fair values. As a result of the application
of the acquisition method of accounting resulting from the Business Combination, the financial statements and certain notes to
the financial statements included Part 1, Item 1, “Financial Statements (Unaudited)” of this Periodic Report separate
our presentations into two distinct sets of reporting periods, the period before the date of consummation of the Business Combination
(“Predecessor Period”) and the period after that date (“Successor Period”), to indicate the application
of the different basis of accounting between the periods presented. The predecessor period reflects the historical financial information
of NPS prior to the Business Combination, while the successor period reflects our consolidated financial information, including
the results of NPS and GES, after the Business Combination. The successor periods are from June 7, 2018 to September 30, 2018
(“2018 Successor Period”), July 1, 2018 to September 30, 2018 (“2018 Successor Quarter”), January 1, 2019
to September 30, 2019 (“2019 Successor Period”), and July 1, 2019 to September 30, 2019 (“2019 Successor Quarter”)
and the predecessor period is from January 1, 2018 to June 6, 2018 (“2018 Predecessor Period”). References to the
“2018 periods” below refers to the aggregation of results from the 2018 predecessor and successor periods to enhance
comparability with 2019 amounts.
Our
Condensed Consolidated Statement of Operations subsequent to the Business Combination includes depreciation and amortization expense
on the NPS and GES property, plant, and equipment balances resulting from the fair value adjustments made under the new basis
of accounting. Certain other items of income and expense, particularly depreciation and amortization were also impacted and NPS
stand-alone results are presented as the Predecessor. Therefore, our financial information prior to the Business Combination is
not comparable to our financial information subsequent to the Business Combination.
Segments
We
operate our business and report our results of operations through two operating and reporting segments, Production Services and
Drilling and Evaluation Services, which aggregate services performed during distinct stages of a typical life cycle of an oil
well.
Production
Services. Our Production Services segment includes the results of operations from services that are generally offered and
performed during the production stage of a well’s lifecycle. These services mainly include coiled tubing, cementing, stimulation
and pumping, nitrogen services, filtration services, completions, pipelines, laboratory services and artificial lift services.
Our Production Services accounted for 60%, 60%, 62%, 61% and 82%, in the 2019 Successor Period, 2019 Successor Quarter, 2018
Successor Period, 2018 Successor Quarter, and 2018 Predecessor Period, respectively.
Drilling
and Evaluation Services. Our Drilling and Evaluation Services segment includes the results of operations from services that
are generally offered and performed during pre-production stages of a well’s lifecycle and related mainly to the operation
of oil rigs. The services mainly include well testing services, drilling services and rental, fishing and remediation, drilling
and workover rigs, wireline logging services, turbines drilling, directional drilling, slickline services and drilling fluids,
among others. Our Drilling and Evaluation Services accounted for 40%, 40%, 38%, 39% and 18%, in the 2019 Successor Period,
2019 Successor Quarter, 2018 Successor Period, 2018 Successor Quarter, and 2018 Predecessor Period, respectively.
See
Item 4B, “Business Overview” in our Annual Report on Form 20-F for the year ended December 31, 2018, which is hereby
incorporated by reference into this Periodic Report, for a description of our reportable segments.
Results
of Operations
The
discussions below relating to significant line items from our consolidated statements of operations are based on available information
and represent our analysis of significant changes or events that impact the fluctuations in or comparability of reported amounts.
Where appropriate, we have identified specific events and changes that affect comparability or trends. In addition, the discussions
below for revenues are on an aggregate basis for each fiscal period, as the business drivers for all services are similar.
2019
compared to 2018
The
following table presents our consolidated income statement data for the periods indicated:
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Description
|
|
January
1,
2019
to
September 30,
2019
|
|
|
July
1,
2019 to
September 30,
2019
|
|
|
June
7,
2018 to
September 30,
2018
|
|
|
July
1,
2018 to
September 30,
2018
|
|
|
January
1,
2018 to
June 6,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
473,209
|
|
|
$
|
161,606
|
|
|
$
|
190,566
|
|
|
$
|
145,580
|
|
|
$
|
137,027
|
|
|
Cost
of services
|
|
|
(352,716
|
)
|
|
|
(121,326
|
)
|
|
|
(139,404
|
)
|
|
|
(102,349
|
)
|
|
|
(104,242
|
)
|
|
Gross
profit
|
|
|
120,493
|
|
|
|
40,280
|
|
|
|
51,162
|
|
|
|
43,231
|
|
|
|
32,785
|
|
|
Selling,
general and administrative expense
|
|
|
(46,592
|
)
|
|
|
(16,485
|
)
|
|
|
(22,779
|
)
|
|
|
(13,759
|
)
|
|
|
(19,969
|
)
|
|
Amortization
|
|
|
(12,036
|
)
|
|
|
(4,033
|
)
|
|
|
(5,116
|
)
|
|
|
(3,577
|
)
|
|
|
(10
|
)
|
|
Operating
income
|
|
|
61,865
|
|
|
|
19,762
|
|
|
|
23,267
|
|
|
|
25,895
|
|
|
|
12,806
|
|
|
Interest
expense, net
|
|
|
(14,691
|
)
|
|
|
(5,011
|
)
|
|
|
(8,099
|
)
|
|
|
(6,199
|
)
|
|
|
(4,090
|
)
|
|
Other
income (expense), net
|
|
|
(629
|
)
|
|
|
(130
|
)
|
|
|
(18
|
)
|
|
|
450
|
|
|
|
362
|
|
|
Income
before income tax
|
|
|
46,545
|
|
|
|
14,621
|
|
|
|
15,150
|
|
|
|
20,146
|
|
|
|
9,078
|
|
|
Income
tax (expense) benefit
|
|
|
(10,905
|
)
|
|
|
(3,511
|
)
|
|
|
(2,960
|
)
|
|
|
(3,989
|
)
|
|
|
(2,342
|
)
|
|
Net
income (loss)
|
|
|
35,640
|
|
|
|
11,110
|
|
|
|
12,190
|
|
|
|
16,157
|
|
|
|
6,736
|
|
Revenue.
Revenue was $473.2 million for the 2019 Successor Period compared to $137.0 million for the 2018 Predecessor Period
and $190.6 for the 2018 Successor Period, or $327.6 million in total for the 2018 periods. Revenue was $161.6 million for
the 2019 Successor Quarter compared to $145.6 million for the 2018 Successor Quarter.
The
table below presents our revenue by segment for the periods indicated:
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
January
1,
2019 to
September 30,
2019
|
|
|
July
1,
2019 to
September 30,
2019
|
|
|
June
7,
2018 to
September
30,
2018
|
|
|
July
1,
2018 to
September 30,
2018
|
|
|
January
1,
2018
to
June
6,
2018
|
|
|
Reportable
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
Services
|
|
$
|
284,631
|
|
|
$
|
97,160
|
|
|
$
|
117,268
|
|
|
$
|
88,666
|
|
|
$
|
112,295
|
|
|
Drilling
and Evaluation Services
|
|
|
188,578
|
|
|
|
64,446
|
|
|
|
73,298
|
|
|
|
56,914
|
|
|
|
24,732
|
|
|
Total
revenue
|
|
$
|
473,209
|
|
|
$
|
161,606
|
|
|
$
|
190,566
|
|
|
$
|
145,580
|
|
|
$
|
137,027
|
|
Production
Services revenue was $284.6 million for the 2019 Successor Period compared to $112.3 million for the 2018 Predecessor Period
and $117.3 for the 2018 Successor Period, or $229.6 million in total for the 2018 periods. Production Services revenue was $97.2
million for the 2019 Successor Quarter compared to $88.7 million for the 2018 Successor Quarter. The increase in revenue was
primarily due to higher coil tubing and stimulation activities in Saudi Arabia, Iraq and the United Arab Emirates.
Drilling
and Evaluation Services revenue was $188.6 million for the 2019 Successor Period compared to $24.7 million for the 2018
Predecessor Period and $73.3 for the 2018 Successor Period, or $98.0 million in total for the 2018 periods. Drilling and Evaluation
Services revenue was $64.4 million for the 2019 Successor Quarter compared to $56.9 million for the 2018 Successor Quarter.
The increase in revenue was primarily due to higher well testing, logging and drilling services activities in Saudi Arabia,
Iraq and Algeria.
Cost
of services. Cost of services was $352.7 million for the 2019 Successor Period compared to $104.2 million for the
2018 Predecessor Period and $139.4 million for the 2018 Successor Period, or $243.6 million in total for the 2018 periods. Cost
of services was $121.3 million for the 2019 Successor Quarter compared to $102.3 million for the 2018 Successor Quarter.
Cost of services as a percentage of total revenue was 75%, 75%, 73%, 76% and 70%, for the 2019 Successor Period, 2019 Successor
Quarter, 2018 Successor Period, 2018 Successor Quarter, and 2018 Predecessor Period, respectively. The change in cost of services
as percentage of total revenue is mainly due to a change in revenue mix between business lines with lower and
higher margins. Cost of services included depreciation expense of $47.7 million, $17.2 million, $19.0 million, $14.2
million and $9.3 million, in the 2019 Successor Period, 2019 Successor Quarter, 2018 Successor Period, 2018 Successor Quarter,
and 2018 Predecessor Period, respectively. Depreciation expense during the Successor periods and quarters has increased due
to additional capital expenditures throughout the Successor periods and quarters, especially as compared to the Predecessor Period.
Gross
profit. Gross profit as a percentage of total revenue was 25%, 25%, 27%, 24% and 30%, for the 2019 Successor Period,
2019 Successor Quarter, 2018 Successor Period, 2018 Successor Quarter, and 2018 Predecessor Period, respectively. The change in
trend is described under “Revenue” and “Cost of services.”
Selling,
general and administrative expense. SG&A expense, which represents costs associated with managing and supporting our
operations, was $46.6 million for the 2019 Successor Period compared to $20.0 million for the 2018 Predecessor Period and
$22.8 million for the 2018 Successor Period, or approximately $42.8 million in total for the 2018 periods. SG&A was
$16.5 million for the 2019 Successor Quarter compared to $13.8 million for the 2018 Successor Quarter. SG&A
as a percentage of total revenue was 10%, 10%, 12%, 15% and 9%, for the 2019 Successor Period, 2019 Successor Quarter,
2018 Successor Period, 2018 Successor Quarter, and 2018 Predecessor Period, respectively. The reduction of expenses as percentage
of revenue for the 2019 Successor Period and Quarter is primarily due to integration cost savings realized following
the Business Combination, along with revenue growth.
Amortization
expense. Amortization expense was $12.0 million for the 2019 Successor Period compared to $10 thousand for the
2018 Predecessor Period and $5.1 million for the 2018 Successor Period, or $5.1 million in total for the 2018 periods. Amortization
expense was $4.0 million for the 2019 Successor Quarter compared to $3.6 million for the 2018 Predecessor Quarter. The
increase in the Successor Period and Quarter amortization was driven mainly by acquired
intangible assets resulting from the Business Combination.
Interest
expense, net. Interest expense, net, was $14.7 million for the 2019 Successor Period compared to $4.1 million for
the 2018 Predecessor Period and $8.1 million for the 2018 Successor Period, or $12.2 million in total for the 2018 periods. Interest
expense, net was $5.0 million for the 2019 Successor Quarter compared to $6.2 million for the 2018 Successor Quarter. The
increase in interest expense during the 2019 Successor Period as compared to the 2018 periods is mainly attributable
to the impact of the loan arrangement fees write-off of the prior credit facilities following the May 2019 refinancing
as well as the incremental impact of including GES throughout the 2019 Successor Period, as compared to only post-acquisition
in the 2018 periods. Comparing the 2019 Successor Quarter to the 2018 Successor Quarter, interest expense has decreased due to
more favorable terms obtained as part of the May 2019 refinancing.
Other
(expense) income, net. Other (expense) income, net, was ($0.6) million for the 2019 Successor Period compared to
$0.4 million for the 2018 Predecessor Period and ($18,000) for the 2018 Successor Period, or $0.4 million in total
for the 2018 periods. Other (expense) income, net was ($0.1) million for the 2019 Successor Quarter compared to $0.5 million
for the 2018 Successor Quarter. Differences between periods were mainly attributed to losses and gains on fixed assets.
Income
tax expense (benefit). Income tax expense (benefit) was $10.9 million for the 2019 Successor Period compared to
$2.3 million for the 2018 Predecessor Period and $3.0 million for the 2018 Successor Period, or $5.3 million in total for the
2018 periods. Income tax expense (benefit) was $3.5 million for the 2019 Successor Quarter compared to $4.0 million for
the 2018 Successor Quarter. See Note 16, Income taxes, to our condensed consolidated interim financial statements included in
Part 1, Item 1, “Financial Statements (Unaudited)” of this Periodic Report.
Net
income. Net income (loss) was $35.6 million for the 2019 Successor Period compared to $6.7 million
for the 2018 Predecessor Period and $12.2 million for the 2018 Successor Period, or $18.9 million in total for the 2018 periods.
Net income was $11.1 million for the 2019 Successor Quarter compared to $16.2 million for the 2018 Predecessor Quarter.
Supplemental
Segment EBITDA Discussion
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
Period
from
|
|
|
|
|
January
1,
2019 to
September 30,
2019
|
|
|
July
1,
2019 to
September 30,
2019
|
|
|
June
7,
2018 to
September 30,
2018
|
|
|
July
1,
2018 to
September 30,
2018
|
|
|
January
1,
2018 to
June 6,
2018
|
|
|
Reportable
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
Services
|
|
|
98,007
|
|
|
|
32,581
|
|
|
|
41,952
|
|
|
|
33,180
|
|
|
|
36,836
|
|
|
Drilling
and Evaluation Services
|
|
|
40,869
|
|
|
|
15,239
|
|
|
|
18,905
|
|
|
|
17,630
|
|
|
|
3,267
|
|
Production
Services EBITDA was $98.0 million for the 2019 Successor Period compared to $36.8 million for the 2018 Predecessor
Period and $41.9 for the 2018 Successor Period, or $78.8 million in total for the 2018 periods. Production Services EBITDA
was $32.6 million for the 2019 Successor Quarter compared to $33.2 million for the 2018 Successor Quarter. The increase
was in line with higher coil tubing and cementing activities as described above.
Drilling
and Evaluation Services EBITDA was $40.9 million for the 2019 Successor Period compared to $3.3 million for the 2018 Predecessor
Period and $18.9 million for the 2018 Successor Period, or $22.2 million in total for the 2018 periods. Drilling and Evaluation
Services EBITDA was $15.2 million for the 2019 Successor Quarter compared to $17.6 million for the 2018 Successor Quarter.
The decrease in EBITDA margins was largely attributable to pricing discounts for testing services combined with the delayed start-up
of drilling rig operations from a legacy joint venture in Oman.
Liquidity
and Capital Resources
Our
objective in financing our business is to maintain sufficient liquidity, adequate financial resources and financial flexibility
to fund the requirements of our business. We had cash and cash equivalents of $43.1 million as of September 30, 2019 and
$24.9 million as of December 31, 2018. Our outstanding long-term debt was $337.9 million as of September 30, 2019 and $225.2
million as of December 31, 2018. We believe that our cash on hand, cash flows generated from operations, and liquidity available
through our credit facilities, including recently drawn facilities, will provide sufficient liquidity to manage our global cash
needs. As of September 30, 2019, the Company has $15.0 million available to be drawn under the RCF as well as $32.2 million
available to be drawn under its working capital facilities. See “Capital Resources” below.
Cash
Flows
Cash
flows provided by (used in) each type of activity were as follows for the periods presented:
(in
thousands)
|
|
|
Successor
(NESR)
|
|
|
Predecessor
(NPS)
|
|
|
|
|
Period
from
January 1,
2019 to
September 30,
2019
|
|
|
Period
from
June 7,
2018 to
September 30,
2018
|
|
|
Period
from
January 1,
2018 to
June 6,
2018
|
|
|
Cash Provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
45,290
|
|
|
|
14,431
|
|
|
|
20,826
|
|
|
Investing Activities
|
|
|
(89,971
|
)
|
|
|
(64,706
|
)
|
|
|
(7,916
|
)
|
|
Financing Activities
|
|
|
62,890
|
|
|
|
117,789
|
|
|
|
(5,740
|
)
|
|
Effect of exchange
rate changes on cash
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in
cash and cash equivalents
|
|
|
18,190
|
|
|
|
67,514
|
|
|
|
7,154
|
|
Operating
Activities
Cash
flows provided by operating activities were $45.3 million for the 2019 Successor Period compared to cash flows provided
by operating activities of $20.8 million for the 2018 Predecessor Period and $14.4 for the 2018 Successor Period, or $35.3 million
in total for the 2018 periods. Cash flows from operating activities increased by $10.1 million in the 2019 Period
compared to the 2018 periods, primarily due to the impact of GES throughout the 2019 Successor Period as compared to the 2018
periods which only includes GES for part of the year.
Investing
Activities
Cash
flows used in investing activities were $90.0 million for the 2019 Successor Period compared to cash flows used in investing
activities of $7.9 million for the 2018 Predecessor Period and $64.7 for the 2018 Successor Period, or $72.6 million in total
for the 2018 periods. The difference between periods was primarily due to the change in timing of cash payments for capital expenditures.
Our principal recurring investing activity is the funding of capital expenditures to ensure that we have the appropriate levels
and types of machinery and equipment in place to generate revenue from operations.
Financing
Activities
Cash
flows provided by financing activities were $62.9 million for the 2019 Successor Period compared to cash flows used
in financing activities of $5.8 million for the 2018 Predecessor Period and cash flows provided by financing activities
of $117.8 million for the 2018 Successor Period, or cash flows provided by financing activities of $112.0 million in total
for the 2018 periods. In the Successor Period as compared to the 2018 periods, the Company’s choice of financing shifted
from a mixture of debt and equity to only debt. While equity was used in the 2018 Successor Period to finance the Business Combination,
this transaction type has not reoccurred in the 2019 Successor Period. Additionally, a dividend to the former owners of NPS in
the Predecessor Period did not reoccur in 2019.
Credit
Facilities
As
of and after September 30, 2019, we had the following principal credit facilities and instruments outstanding or available:
Secured
Facilities Agreement
On May 5, 2019, the Company entered into a $450.0 million term loan, revolving credit, and working capital
facilities agreement (the “Secured Facilities Agreement”) with Arab Petroleum Investments Corporation (“APICORP”)
– Bahrain Banking Branch, HSBC Bank Middle East Limited (“HSBC”), Mashreqbank PSC and Saudi British Bank acting
as initial mandated lead arrangers and bookrunners, Mashreqbank PSC acting as global agent, APICORP and Mashreqbank PSC acting
as security agents, NPS Bahrain for Oil & Gas Wells Services WLL 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.” Upon
consummation of this transaction, the Company settled its existing debt obligations with the exception of a $30.4 million working
capital facility with HSBC, described below, used for the issuance of letters of guarantee and letters of credit.
On
May 23, 2019 and June 20, 2019, the Company entered into $35.0 million and $40.0 million Incremental Facilities Agreements, respectively,
increasing the size of the Secured Facilities Agreement to $485.0 million and $525.0 million, respectively.
The
$525.0 million Secured Facilities Agreement consists of a $300.0 million term loan due 2025 (the “Term Loan” or “Secured
Term Loan”), a $65.0 million Revolving Credit Facility (“RCF” or “Secured Revolving Credit Facility”)
due 2023, and a $160.0 million working capital facility. Borrowings under the Term Loan and RCF incur interest at the rate of
three-month LIBOR plus 2.4% to 2.7% per annum, varying based on the Company’s Net Debt / EBITDA ratio. As of September 30,
2019, this results in an interest rate of 4.6%. The Company has drawn $300.0 million of the Term Loan and $50.0 million of the
RCF as of September 30, 2019.
The
RCF was obtained for general corporate and working capital purposes including capital expenditure related requirements and acquisitions
(including transaction related expenses). The RCF requires the payment of a commitment fee each quarter. The commitment fee is
computed at the rate of 0.60% per annum based on the average daily amount by which the borrowing base exceeds the outstanding
borrowings during each quarter. Under the terms of the RCF, the final settlement is due by May 6, 2023. The Company is required
to repay the amount of any principal balance outstanding together with any unpaid accumulated interest at three-month LIBOR plus
2.4% to 2.7% per annum, varying based on the Company’s Net Debt / EBITDA ratio. The Company is permitted to make any prepayment
under this RCF in multiples of $5.0 million during this 4-year period up to May 6, 2023. Any unutilized balances from the RCF
can be drawn down again during the 4-year tenure at the same terms. As of September 30, 2019, the Company has $15.0 million available to be drawn under the RCF.
The
Secured Facilities Agreement also includes a working capital facility of $160.0 million for issuance of letters of guarantee and
letters of credit and refinancing letters of credit over a period of one year, which carries an interest rate equal to three-month
U.S. Dollar LIBOR for the applicable interest period, plus a margin of 1.00% to 1.25% per annum. As of September 30, 2019, the
Company had utilized $130.7 million under this working capital facility and the balance of $29.3 million was available to the
Company.
The
Company has also retained legacy bilateral working capital facilities from HSBC totaling $30.4 million in Qatar ($16.4 million),
in UAE ($13.9 million) and Kuwait ($0.1 million). As of September 30, 2019, the Company had utilized $27.5 million under this
working capital facility and the balance of $2.9 million was available to the Company.
Utilization
of the working capital facilities under both the legacy arrangement and Secured Facilities Agreement comprises both letters of
credit issued to vendors 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 that will be repaid quarterly over a one-year period.
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, 2019.
Capital
Resources
In
the next twelve months, we believe cash on hand, cash flows from operating activities and available credit facilities, including
those of our subsidiaries, will provide us with sufficient capital resources and liquidity to manage our working capital needs,
meet contractual obligations, fund capital expenditures, and support the development of our short-term operating strategies. Although
varying in approach by jurisdiction, the Company is able to make use of excess cash generated in a particular jurisdiction to
fund cash needs of other jurisdictions.
We
plan to pursue strategic acquisitions as an element of our business strategy. The timing, size or success of any acquisition and
the associated potential capital commitments are unpredictable and uncertain. We may seek to fund all or part of any such acquisition
with proceeds from debt or equity issuances, or may issue equity directly to the sellers, in any such acquisition, or any combination
thereof. Our ability to obtain capital for strategic acquisitions will depend on our future operating performance, financial condition
and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions
in our industry, the global economy, the global financial markets and other factors, many of which are beyond our control. In
addition, any additional debt service requirements we take on could be based on higher interest rates and shorter maturities and
could impose a significant burden on our results of operations and financial condition, and the issuance of additional equity
securities could result in significant dilution to our shareholders.
Other
Factors Affecting Liquidity
Customer
receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject
to our customers delaying or failing to pay our invoices. In weak economic environments, we may experience increased delays and
failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their
access to the credit markets as well as unsettled political conditions. If our customers delay paying or fail to pay us a significant
amount of our outstanding receivables, it could have a material impact on our liquidity, consolidated results of operations and
consolidated financial condition. Two of our largest customers, Saudi Aramco and Petroleum Development Oman, are owned by the
governments of Saudi Arabia and Oman, respectively. It is customary for Saudi Aramco to delay payments of a portion (10%) of receivables
until all taxes due within the country are fully paid and settled.
See
“Off-Balance Sheet Arrangements” below for more information.
Shelf
registration statement. On August 23, 2019, the Company filed a shelf registration statement
on Form F-3 with the Securities and Exchange Commission (the “SEC”). On September 13, 2019, the SEC declared the shelf
registration statement effective. The shelf registration statement gives the Company the ability to sell up to $300.0 million
of the Company’s ordinary shares from time to time in one or more offerings. The specific terms, including the amount, of
any ordinary shares to be sold in such an offering, if it does occur, would be described in supplemental filings with the SEC.
The shelf registration statement currently provides the Company additional flexibility with regard to potential financings that
it may undertake when market conditions permit. The shelf registration statement will expire in 2022.
Dividend
Policy
We
have not paid any cash dividends on our ordinary shares to date and do not intend to pay cash dividends in the foreseeable future.
The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and
general financial condition. The payment of any cash dividends will be within the discretion of our Board of Directors. In addition,
our ability to declare dividends may be limited by restrictive covenants we may agree to in connection with our indebtedness.
Off-Balance
Sheet Arrangements
Letters
of credit. The Company has outstanding letters of credit amounting to $25.6 million and $10.3 million as of September
30, 2019 and December 31, 2018, respectively.
Guarantee
agreements. In the normal course of business with customers, vendors and others, we have entered into off-balance sheet
arrangements, such as surety bonds for performance, and other bank issued guarantees, including cash margin guarantees, which
totaled $110.5 million and $41.4 million as of September 30, 2019 and December 31, 2018, respectively. A liability is accrued
when a loss is both probable and can be reasonably estimated. None of the off-balance sheet arrangements either has, or is likely
to have, a material effect on our condensed consolidated interim financial statements. See “Off-Balance Sheet Arrangements”
below for more information.
Contractual
Obligations
The
information in the Annual Report on Form 20-F for the year ended December 31, 2018 under the section entitled “Tabular Disclosure
of Contractual Obligations” in Part I, Item 5F, is hereby incorporated by reference into this Periodic Report. As of September
30, 2019, there were no material changes to this disclosure regarding our contractual obligations except as it relates to our
estimated long-term debt principal payments, estimated interest payments, and short-term borrowings.
As
a result of our May 2019 debt refinancing described elsewhere in this periodic report, as of September 30, 2019, our future contractual
obligations related to estimated long-term debt principal payments, estimated interest payments, and short-term borrowings are
$350.0 million, $76.9 million, and $28.3 million, respectively. As of September 30, 2019, for estimated long-term debt principal
payments, we anticipate paying $7.5 million in less than 1 year, $78.8 million from 1 to 3 years in the future, $140.0 million
from 3-5 years into the future, and $123.7 million more than 5 years in the future. As of September 30, 2019, for estimated interest
payments, we anticipate paying $16.8 million within 1 year, $33.6 million from 1 to 3 years in the future, $21.8 million from
3-5 years into the future, and $4.7 million more than 5 years in the future. For short-term borrowings payments, as of September
30, 2019, we anticipate paying $28.3 million within the next 12 months.
Critical
Accounting Policies and Estimates
The
information in the Annual Report on Form 20-F for the year ended December 31, 2018 under the section entitled “Critical
Accounting Policies and Estimates” in Part I, Item 5A, is hereby incorporated by reference into this Periodic Report. As
of September 30, 2019, there were no material changes to this disclosure regarding our Critical Accounting Policies and Estimates
made in the Annual Report.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign
Currency Risk
We
are exposed to foreign currency risks that arise from normal business operations. These risks include transaction gains and losses
associated with transactions denominated in currencies other than a location’s functional currency.
US
dollar balances in the United Arab Emirates, Saudi Arabia, Oman and Qatari entities are not considered to represent significant
currency risk as the respective currencies in these countries are pegged to the U.S. dollar. Our foreign currency risk arises
from the settlement of transactions in currencies other than our functional currency, specifically in Algerian Dinar, Libyan Dinar,
and Iraqi Dinar. However, customer contracts in these countries are largely denominated in U.S. dollars.
Credit
Risk
Credit
risk is the risk that one party to a financial instrument may fail to discharge an obligation and cause the other party to incur
a financial loss. We are exposed to credit risk on our accounts receivable and other receivables and certain other assets (such
as bank balances) as reflected in our consolidated balance sheet, with the maximum exposure equaling the carrying amount of these
assets in the consolidated balance sheet. We seek to manage our credit risk with respect to banks by only dealing with reputable
banks (our cash and cash equivalents are primarily held with banks and financial institution counterparties that are rated A1
to Baa3, based on Moody’s ratings) and with respect to customers by monitoring outstanding receivables and following up
on outstanding balances. Management also considers the factors that may influence the credit risk of its customer base, including
the default risk of the industry and the country in which our customers operate. We sell our products to a variety of customers,
mainly to national oil companies in the MENA and Asia Pacific regions.
Liquidity
Risk
Liquidity
risk is the risk that we may not be able to meet our financial obligations as they fall due. Our approach to managing liquidity
risk is to ensure, as far as possible, that we will always have sufficient liquidity to meet our liabilities when due, under both
normal and stressed conditions, without incurring unacceptable costs or liabilities. We maintain cash flow forecasts to monitor
our liquidity position.
Accounts
payable are normally settled within the terms of purchase from the supplier. We believe cash on hand, cash flows from operating
activities and the available credit facilities will provide us with sufficient capital resources and liquidity to manage our working
capital needs, meet contractual obligations, fund capital expenditures, and support the development of our short-term and long-term
operating strategies.
Market
Risk
We
are exposed to market risks primarily from changes in interest rates on our long-term borrowings as well as fluctuations in foreign
currency exchange rates applicable to our foreign subsidiaries and where local exchange rates are not pegged to the U.S. dollar
(Algeria, Libya and Iraq). However, the foreign exchange risk is largely mitigated by the fact that all customer contracts are
denominated in U.S. dollars.
We
do not use derivatives for trading purposes, to generate income or to engage in speculative activity.
ITEM
4. INTERNAL CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information required
to be disclosed in our reports that we submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that a control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures (as defined in rules 13(a)-15(e) and 15(d)-15(e) under the Securities
Exchange Act of 1934, as amended), were not effective as of the end of the period covered by this Periodic Report due to the material
weaknesses in our internal control over financial reporting described below.
Material
Weaknesses identified as of December 31, 2018
In
connection with the audit of the Company’s financial statements for the year ended December 31, 2018, management and the
Company’s independent registered public accounting firm identified a material weakness in the Company’s internal control
over financial reporting. It was concluded that the Company did not maintain an effective control environment over its financial
reporting process by providing sufficient resources and technical expertise over accounting for income taxes and preparation of
cash flows, in accordance with ASC 740 and ASC 230, respectively. The operators of review controls over accounting for
income taxes and preparation of cash flows did not have sufficient information to perform an effective review to ensure compliance
with U.S. GAAP. Specific observations contributing to this material weakness include: 1) during the course of the year-end financial
close, our auditors identified adjustments related to certain income tax accounts and 2) the Company did not have timely management
review controls over the statement of cash flows to verify the completeness and adequacy of information prior to presentation
of the information to the independent auditors. Notwithstanding the identified material weakness, all required accounting entries
have been reflected in our condensed consolidated interim financial statements. If left unremediated, the material weakness could
result in future material misstatement of the condensed consolidated interim financial statements that would not be prevented
or detected.
In
connection with the preparation of our Subsidiaries’ consolidated financial statements as of and for the
years ended December 31, 2015, 2016 and 2017, management of NPS and GES separately identified material weaknesses in internal
controls over their financial reporting. Specifically, both had deficiencies in the financial statement close process with a cited
lack of U.S. GAAP reporting expertise.
Management
is evaluating changes designed to increase the effectiveness of its review controls over financial reporting processes and to
ensure sufficient expertise and resources are allocated to verify compliance with U.S. GAAP. Changes since December 31, 2018 have
included hiring additional personnel with U.S. GAAP reporting expertise, adjusting internal close and reporting timelines to allow
more time for internal control to operate, and modifying financial reporting processes to add additional levels of review over
the accuracy and completeness of information utilized in the preparation of the Company’s income tax provision and statement
of cash flows. Management began testing the controls over the accuracy and completeness of information utilized in the preparation
of the Company’s income tax provision and statement of cash flows during the third quarter of 2019. As the Company continues
to evaluate and work to improve its internal control over financial reporting, management may execute additional measures to modify
the remediation actions described above. Management will continue to review and make necessary changes to the overall design of
the Company’s internal control.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
We
are not and have not been involved in any material legal proceedings, other than legal proceedings in the ordinary course of business
incidental to our business. Although no assurances can be given about the final outcome of pending legal proceedings, at the present
time we are not a party to any legal proceeding or investigation that, in the opinion of management, is likely to have a material
impact on our business, financial condition or results of operations.
There
are no proceedings in which any of our directors, officers or any of their respective affiliates, or any beneficial shareholder
of more than five percent of voting securities, is an adverse party or has a material interest adverse to the above-mentioned
Company’s interest.
Item
1A. Risk Factors.
Risks
Relating to Our Business and Operations
There
are several factors that affect our business and operations, many of which are beyond our control. In addition to information
set forth in this Periodic Report, careful consideration should be given to the risk factors discussed under the caption “Risk
Factors” in Part I, Item 3D of the Annual Report on Form 20-F for the year ended December 31, 2018, which could have a material
impact on our business, financial condition or results of operations and are hereby incorporated by reference into this Periodic
Report. Such risks are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently
believe to be immaterial may also have a material impact on our business, financial condition or results of operations.