National Energy Services Reunited Corp 20-F for FY2019
National Energy Services Reunited Corp. (NESR)
About this 20-F
National Energy Services Reunited Corp filed this 20-F on March 18, 2020, covering the fiscal year ended December 31, 2019 (FY2019).
Headline figures
Fiscal year ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $39.36M
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38091
NATIONAL ENERGY SERVICES REUNITED CORP.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of registrant’s name into English)
British Virgin Islands
(Jurisdiction of incorporation or organization)
777 Post Oak Blvd., Suite 730
Houston, Texas 77056
(Address of principal executive office)
Christopher L. Boone
Chief Financial Officer
777 Post Oak Blvd., Suite 730
Houston, Texas 77056
Phone (832) 925-3777
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbols |
Name of each exchange on which registered | ||
| Ordinary shares, no par value per share | NESR |
The Nasdaq Capital Market | ||
| Warrants to purchase one-half of one ordinary share | NESRW |
The Nasdaq Capital Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act. None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.
As of December 31, 2019, there were 87,187,289 ordinary shares and 35,540,380 warrants outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Emerging growth company [X]
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. [ ]
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP [X]
International Financial Reporting Standards as issued by the International Accounting Standards Board [ ]
Other [ ]
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 [ ] Item 18 [ ]
If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
TABLE OF CONTENTS
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This Annual Report on Form 20-F (this “Annual 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 Annual 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 Annual Report may include, without limitation, statements regarding 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:
| ● | 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, public health crises and threats, such as coronavirus (COVID-19), business and/or competitive factors; and | |
| ● | Other risks and uncertainties set forth in Part I, Item 3D, “Risk Factors” included in this Annual Report. |
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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 Annual Report to reflect any new information or future events or circumstances or otherwise, except as required by law. Readers should read this Annual Report in conjunction with the discussion under Part I, Item 3D, “Risk Factors” included in this Annual Report, our consolidated financial statements and the related notes thereto included in this Annual Report, and other documents which we may furnish from time to time with the SEC.
BASIS OF THIS ANNUAL REPORT ON FORM 20-F
On June 6, 2018, National Energy Services Reunited Corp. (“NESR,” the “Company,” “we,” “our,” “us” or similar terms) acquired all of the issued and outstanding equity interests of NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES” and, together with NPS, the “Subsidiaries”) (collectively, the “Business Combination”). As a result of the Business Combination, NESR is the accounting acquirer for accounting purposes, NPS and GES are acquirees and NPS is the accounting predecessor. The Business Combination was accounted for using the acquisition method of accounting, and the Successor (as defined below) financial statements reflect a new basis of accounting that is based on fair value of net assets acquired. See Note 4, Business Combination, to the consolidated financial statements included in Item 18, “Financial Statements” of this Annual Report for further discussion of the Business Combination.
The historical financial information contained in this Annual Report includes periods that ended prior to the Business Combination. In this Annual Report, unless we have indicated otherwise, or the context otherwise requires, references to the “Company” for time periods prior to June 6, 2018 refer to NPS, which is the “Predecessor” for accounting purposes, and for time periods from and after June 7, 2018 refer to NESR and its consolidated subsidiaries, which is the “Successor” for accounting purposes. The financial statements of our Predecessor may not be indicative of the financial results that are or will be reported by us for periods subsequent to the Business Combination.
FINANCIAL INFORMATION AND CURRENCY OF FINANCIAL STATEMENTS
The financial statements included in Item 18, “Financial Statements” of this Annual Report have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Unless otherwise indicated, all references in this Annual Report to “dollars,” “$,” or “US$” are to U.S. dollars, which is the reporting currency of the consolidated financial statements.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
You should read the following selected consolidated financial data in conjunction with Item 5, “Operating and Financial Review and Prospects” and our historical consolidated financial statements and related notes thereto included elsewhere in this Annual Report. The financial information included in this Annual Report may not be indicative of our future financial position, results of operations or cash flows.
Set forth below are (i) selected historical consolidated financial data as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, which have been derived from our audited consolidated financial statements included in Item 18, “Financial Statements” of this Annual Report, and (ii) selected historical consolidated financial data as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015, which have been derived from audited consolidated financial statements not included in this Annual Report.
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SELECTED FINANCIAL DATA
| (In US$ thousands, except share data and per share amounts) | |||||||||||||||||||||||||
| Successor (NESR) | Predecessor (NPS) | ||||||||||||||||||||||||
Period from January 1 to December 31, 2019 | Period from June 7 to December 31, 2018 | Period from January 1 to June 6, 2018 | Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2015 | ||||||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||||||||
| Revenues | $ | 658,385 | $ | 348,590 | $ | 137,027 | $ | 271,324 | $ | 224,115 | $ | 203,715 | |||||||||||||
| Cost of services | (506,799 | ) | (249,159 | ) | (104,242 | ) | (200,149 | ) | (157,382 | ) | (138,890 | ) | |||||||||||||
| Gross profit | 151,586 | 99,431 | 32,785 | 71,175 | 66,733 | 64,825 | |||||||||||||||||||
| Selling, general and administrative expense | (63,840 | ) | (36,705 | ) | (19,969 | ) | (30,336 | ) | (25,954 | ) | (28,911 | ) | |||||||||||||
| Amortization | (15,932 | ) | (9,373 | ) | (10 | ) | (607 | ) | (22,663 | ) | (23,583 | ) | |||||||||||||
| Operating income | 71,814 | 53,353 | 12,806 | 40,232 | 18,116 | 12,331 | |||||||||||||||||||
| Interest expense, net | (18,971 | ) | (14,383 | ) | (4,090 | ) | (6,720 | ) | (5,677 | ) | (4,319 | ) | |||||||||||||
| Other income / (expense), net | (408 | ) | 5,441 | 362 | (573 | ) | (1,441 | ) | (1,029 | ) | |||||||||||||||
| Income before income tax | 52,435 | 44,411 | 9,078 | 32,939 | 10,998 | 6,983 | |||||||||||||||||||
| Income tax expense | (13,071 | ) | (9,431 | ) | (2,342 | ) | (4,586 | ) | (2,648 | ) | (1,870 | ) | |||||||||||||
| Net income / (loss) | 39,364 | 34,980 | 6,736 | 28,353 | 8,350 | 5,113 | |||||||||||||||||||
| Net income / (loss) attributable to non-controlling interests | - | (163 | ) | (881 | ) | (2,273 | ) | (193 | ) | (74 | ) | ||||||||||||||
| Net income attributable to shareholders | $ | 39,364 | $ | 35,143 | $ | 7,617 | $ | 30,626 | $ | 8,543 | $ | 5,187 | |||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||||
| Basic | 86,997,554 | 85,569,020 | 348,524,566 | 342,250,000 | 340,932,192 | 333,000,000 | |||||||||||||||||||
| Diluted | 86,997,554 | 86,862,983 | 370,000,000 | 370,000,000 | 368,682,192 | 370,000,000 | |||||||||||||||||||
| Net earnings per share: | |||||||||||||||||||||||||
| Basic | $ | 0.45 | $ | 0.41 | $ | 0.02 | $ | 0.09 | $ | 0.02 | $ | 0.02 | |||||||||||||
| Diluted | $ | 0.45 | $ | 0.40 | $ | 0.02 | $ | 0.08 | $ | 0.02 | $ | 0.01 | |||||||||||||
| (In US$ thousands, except share data and per share amounts) | |||||||||||||||||||||||||
| Successor (NESR) | Predecessor (NPS) | ||||||||||||||||||||||||
| December 31, 2019 | December 31, 2018 | June 6, 2018 | December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||||
| Balance sheet data: | |||||||||||||||||||||||||
| Cash and cash equivalents | $ | 73,201 | 24,892 | $ | 31,656 | 24,502 | 25,534 | 24,894 | |||||||||||||||||
| Property, plant and equipment, net | 419,307 | 328,727 | 257,955 | 264,269 | 259,969 | 235,662 | |||||||||||||||||||
| Total assets | 1,522,364 | 1,343,309 | 633,872 | 619,572 | 602,910 | 602,298 | |||||||||||||||||||
| Long-term debt | 330,564 | 225,172 | 147,199 | 147,024 | 149,071 | 148,792 | |||||||||||||||||||
| Total equity | 886,472 | 830,991 | 347,173 | 389,429 | 382,081 | 374,684 | |||||||||||||||||||
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B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
An investment in our ordinary shares involves a high degree of risk. You should consider carefully the following risk factors, as well as the other information contained in this Annual Report, before making an investment in our ordinary shares. Any of the risk factors described below could significantly and negatively affect our financial position, results of operations or cash flows. In addition, these risks represent important factors that can cause our actual results to differ materially from those anticipated in our forward-looking statements.
Risks Relating to Our Business and Operations
Trends in oil and natural gas prices affect the level of exploration, development, and production activity of our customers and the demand for our services and products, which could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
Demand for our services and products is sensitive to the level of exploration, development, and production activity of, and the corresponding capital spending by, oil and natural gas companies. The level of exploration, development, and production activity is directly affected by trends in oil and natural gas prices, which historically have been volatile and are likely to continue to be volatile. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty, and a variety of other economic factors that are beyond our control. During the 5-year period ended December 31, 2019, average prices for both crude oil and natural gas have been lower than the previous 5-year period. The prolonged reduction in oil and natural gas prices, depressed levels of exploration, development, and production activity over the past several years and incremental further reductions could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition. Even the perception of longer-term lower oil and natural gas prices by oil and natural gas companies can result in the reduction or deferral of major expenditures given the long-term nature of many large-scale development projects.
Factors affecting the prices of oil and natural gas include:
| ● | the global and regional level of supply and demand for oil and natural gas including liquefied natural gas imports and exports; | |
| ● | governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves, including environmental regulations; | |
| ● | weather conditions, natural disasters, and public health crises and threats, such as coronavirus (COVID-19); | |
| ● | worldwide political, military, and economic conditions; | |
| ● | the ability or willingness of the Organization of the Petroleum Exporting Countries (“OPEC”) to set and maintain oil production levels and quotas and member country compliance with quotas; | |
| ● | the level of oil and gas production by non-OPEC countries; | |
| ● | oil refining capacity and shifts in end-customer preferences toward fuel efficiency and the use of natural gas; |
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| ● | the cost of producing and delivering oil and natural gas; | |
| ● | technological advances affecting energy consumption; and | |
| ● | potential acceleration of the development of alternative fuels. |
Public health crises and threats could have a material adverse effect on our business and results of operations.
Public health crises and threats, such as coronavirus (COVID-19) and other highly communicable viruses or diseases, outbreaks of which have already occurred in various parts of the world, could adversely impact our operations and personnel, the operations and personnel of our customers and the global economy, including the worldwide demand for oil and gas and the level of demand for our services. The quarantine of personnel or the inability or unwillingness of personnel to access our job sites could adversely affect our operations. We participate in a global supply chain, which includes equipment and materials that may be sourced from affected parts of the world. A prolonged disruption caused by such public health crises and threats could result in the delay of equipment and materials that may impact our ability to reliably serve our customers. Travel restrictions or operational problems in any part of the world in which we operate, or any reduction in the demand for services caused by public health crises and threats in the future, may materially impact our operations and have an adverse effect on our results of operations.
Impairment in the carrying value of goodwill could result in the incurrence of impairment charges.
As of December 31, 2019, we had goodwill of $574.8 million. We review the carrying value of our goodwill for impairment annually or more frequently if certain indicators are present. In the event we determine that the value of goodwill has become impaired, an accounting charge for the amount of the impairment during the period in which the determination is made may be recognized. While we have not recorded any impairment charge for goodwill for the periods presented in this Annual Report, future changes in our business and operations or external market conditions, among other factors, could require us to record an impairment charge for goodwill, which could lead to decreased assets and reduced net income. If a significant write down were required, the charge could have a material adverse effect on our financial condition and results of operations.
We operate in multiple countries across the Middle East, North Africa, and Asia. Therefore, our operations will be subject to political and economic instability and risk of government actions that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
We will be exposed to risks inherent in doing business in each of the countries in which we operate. Our operations will be subject to various risks unique to each country that could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. With respect to any particular country, these risks may include but are not limited to:
| ● | civil unrest, acts of terrorism, force majeure, war, other armed conflict, and sanctions; | |
| ● | recent efforts toward modernization in the region could have unanticipated consequences to cause unrest or political change that could cause loss of contracts; | |
| ● | inflation; | |
| ● | currency fluctuations, devaluations, and conversion restrictions; | |
| ● | government actions that may result in expropriation and nationalization of assets in that country; | |
| ● | confiscatory taxation or other adverse tax policies; | |
| ● | actions that limit or disrupt markets or our operations, restrict payments, limit the movement of funds or result in the deprivation of contract rights; | |
| ● | actions that result in the inability to obtain or retain licenses required for operation; and | |
| ● | retaliatory actions that may be taken by one country against other countries in the region. |
For example, due to the unsettled political conditions in many oil-producing countries, our operations, revenue, and profits will be subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls, and governmental actions. These and other risks described above could result in the loss of our personnel or assets, cause us to evacuate our personnel from certain countries, cause us to increase spending on security, cause us to cease operating in certain countries, disrupt financial and commercial markets, including the supply of and pricing for oil and natural gas, disrupt the supply of equipment required to operate in a country, result in labor shortages and generate greater political and economic instability in some of the geographic areas in which we operate. Any possible reprisals as a consequence of military or other action, such as acts of terrorism in the United States or elsewhere, could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
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Physical dangers are inherent in our operations and may expose us to significant potential losses. Personnel and property may be harmed during the process of drilling for oil and natural gas.
Drilling for and producing hydrocarbons, and the associated products and services that we provide, include inherent dangers that may lead to property damage or damage to geological formations, personal injury or loss of life, or the discharge of hazardous materials into the environment. Many of these events are outside our control. Typically, we provide products and services at a well site where our personnel and equipment are located together with personnel and equipment of our customer and third parties, such as other service providers. At many sites, we depend on other companies and personnel to conduct drilling operations in accordance with appropriate safety standards. From time to time, personnel are injured or equipment or property is damaged or destroyed as a result of accidents, failed equipment, faulty products or services, failure of safety measures, uncontained formation pressures or other dangers inherent in drilling for oil and natural gas. Any of these events can be the result of human error. With increasing frequency, our products and services are deployed on more challenging prospects both onshore and offshore, where the occurrence of the types of events mentioned above can have an even more catastrophic impact on people, equipment and the environment. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could expose us to a variety of claims, losses and remedial obligations.
We may not be fully indemnified against financial losses in all circumstances where damage to or loss of property, personal injury, death or environmental harm occur.
As is customary in our industry, our contracts typically require that our customers indemnify us for claims arising from the injury or death of their employees (and those of their other contractors), the loss or damage of their equipment (and that of their other contractors), damage to the well or reservoir and pollution originating from the customer’s equipment or from the reservoir (including uncontained oil flow from a reservoir) and claims arising from catastrophic events, such as a well blowout, fire, explosion and from pollution below the surface. Conversely, we typically indemnify our customers for claims arising from the injury or death of our employees, the loss or damage of our equipment (other than equipment lost in the hole) or pollution originating from our equipment above the surface of the earth or water.
Our indemnification arrangements may not protect us in every case. For example, from time to time we may enter into contracts with less favorable indemnities or perform work without a contract that protects us. Our indemnity arrangements may also be held to be overly broad in some courts and/or contrary to public policy in some jurisdictions, and to that extent unenforceable. Additionally, some jurisdictions which permit indemnification nonetheless limit its scope by statute. We may be subject to claims brought by third parties or government agencies with respect to which we are not indemnified. Furthermore, the parties from which we seek indemnity may not be solvent, may become bankrupt, may lack resources or insurance to honor their indemnities or may not otherwise be able to satisfy their indemnity obligations to us. The lack of enforceable indemnification could expose us to significant potential losses.
Further, our assets generally are not insured against loss from political violence such as war, terrorism or civil commotion. If any of our assets are damaged or destroyed as a result of an uninsured cause, we could recognize a loss of those assets.
We operate in multiple countries and earn revenue in different currencies and as such may be exposed to risks arising from fluctuating exchange rates and currency control restrictions, which may limit our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries or to repatriate assets from some countries.
A portion of our consolidated revenue and consolidated operating expenses is in foreign currencies. As a result, we will be subject to significant risks, including:
| ● | foreign currency exchange risks resulting from changes in foreign currency exchange rates and the implementation of exchange controls; and | |
| ● | potential limitations that might be imposed on their ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries. |
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Changes in or new interpretations of tax laws and currency/repatriation controls could impact the determination of our income tax liabilities for a tax year.
We have operations in 15 countries. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including income actually earned, income deemed earned, and revenue-based tax withholding. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction, as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned and expenditures incurred. Changes in the operating environment, including changes in or new interpretations of tax law and currency/repatriation controls, could impact the determination of our income tax liabilities for the year.
Effective January 1, 2018, the GCC countries agreed to impose a value added tax (“VAT”) at a standard rate of 5% across the GCC. However, some goods and services are exempt from the charge of VAT or taxed at a rate of zero percent. Businesses subject to the VAT must keep detailed financial and business records. This includes collecting invoices and accounting for the goods or services bought and sold, as well as the VAT paid and charged going forward.
A material weakness in our internal control over financial reporting has been identified. If the material weakness persists or if we fail to develop or maintain an effective system of internal control, we may not be able to report our financial results accurately or prevent fraud, which could have a material adverse effect on our business, ordinary shares, results of operations and/or financial condition.
Effective internal control is necessary for us to provide reliable and accurate financial statements and to effectively prevent fraud. As described in Item 15, “Controls and Procedures,” we have concluded that our disclosure controls and procedures were not effective as of December 31, 2019 due to a material weakness in our internal control over financial reporting associated with accounting for certain income taxes in accordance with U.S. GAAP. We are designing, implementing, and evaluating measures designed to remediate the material weakness. However, we cannot be certain that these measures will be successful or that we will be able to prevent future material weaknesses or significant deficiencies.
Lack of consolidation in a taxpaying jurisdiction prevents offsetting some losses against taxable profits.
NESR is a British Virgin Islands corporation. NESR is not taxed by the British Virgin Islands on income generated outside of the British Virgin Islands. As a result of our legal entity structure, annual losses in one of our subsidiaries may not be eligible to be offset against profits in another subsidiary to reduce consolidated tax liabilities.
The owners of NESR ordinary shares are subject to tax risks due to the possibility of changes in tax rules and regulations in foreign countries.
The British Virgin Islands does not impose income taxes on British Virgin Islands companies for dividends received or subsidiary operating profits generated outside of the British Virgin Islands. The law could change to impose such taxes. In addition, our subsidiaries operate in many countries that have different tax rates and systems which may change including jurisdictions that currently do not impose tax on corporations. U.S. shareholders must report on their tax returns all investments in foreign stocks, including ordinary shares.
Our business is dependent on capital spending by our customers, and reductions in capital spending could have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition.
Our business is directly affected by changes in capital expenditures by our customers and reductions in our customers’ capital spending could reduce demand for our services and products and have a material adverse effect on our business, consolidated results of operations, and consolidated financial condition. Most of our contracts can be cancelled or renegotiated by our customers at any time. Some of the items that may impact our customer’s capital spending include:
| ● | oil and natural gas prices, including volatility of oil and natural gas prices and expectations regarding future prices; | |
| ● | changes in government incentives and tax regimes; |
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| ● | the inability of our customers to access capital on economically favorable terms; | |
| ● | the consolidation of our customers; | |
| ● | customer personnel changes; and | |
| ● | adverse developments in the business or operations of our customers, including write-downs of reserves and borrowing base reductions under customer credit facilities. |
As a result of the decrease in commodity prices, many of our customers have reduced capital spending over the last few years. The short-term tenor of most of our contracts and the extreme financial stress experienced by our customers have combined to generate demands by many of our customers for reductions in the prices of our products and services. With respect to national oil company customers, we are also subject to risk of policy, regime, currency and budgetary changes, all of which may affect our customers’ capital expenditures. Commodity prices are expected to remain range bound, with limited prospects for rising prices and continued risk of further reductions, which may result in further capital budget reductions in the future.
Our assets require capital for maintenance, upgrades and refurbishment and we may require significant capital expenditures for new equipment.
Our revenue is generated principally from providing services and related equipment as well as renting tools and equipment. Our tools and equipment require capital investment in maintenance, upgrades and refurbishment to maintain our competitiveness. To the extent we are unable to fund such projects, we may have less equipment available for service or our equipment may not be attractive to potential or current customers. Additionally, increased demand, competition or advances in technology within our industry may require us to update or replace existing equipment. Such demands on our capital or reductions in demand for our equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations.
If our Subsidiaries are unable to comply with the restrictions and covenants in their debt agreements, they could default under the terms of such agreements, which could result in an acceleration of repayment.
If our Subsidiaries are unable to comply with the restrictions and covenants in their debt agreements, they could default under the terms of these agreements. Our Subsidiaries’ ability to comply with these restrictions and covenants, including meeting financial ratios and tests, may be affected by events beyond their control. As a result, we cannot assure that our Subsidiaries will be able to comply with these restrictions and covenants or meet such financial ratios and tests.
If our Subsidiaries are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium (if any), and interest on their indebtedness, or if they otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing their indebtedness they could default under the terms of the agreements governing such indebtedness. In the event of such a default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our Subsidiaries’ debt agreements could terminate their commitments to lend, cease making further loans, seize collateral and institute foreclosure proceedings against their assets, and our Subsidiaries could be forced into bankruptcy or liquidation. If any of these events occur, the assets of our Subsidiaries might not be sufficient to repay in full all of their outstanding indebtedness and we may be unable to find alternative financing. Even if we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us or our Subsidiaries. Additionally, we may not be able to amend their debt agreements or obtain needed waivers on satisfactory terms.
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To service our indebtedness, we may require a significant amount of cash, and our ability to generate cash will depend on many factors beyond our control.
Our ability to make payments on and to refinance our Subsidiaries’ indebtedness and to fund planned capital expenditures depends in part on our ability to generate cash in the future. Our growth and capital expenditure plan require substantial capital, and any inability to obtain such capital could lead to a decline in our ability to sustain our current business, access new service markets or grow our business. Our Subsidiaries’ debt is required to be repaid through an installment structure that may unduly strain our ability to meet our growth objectives. Our ability to service such indebtedness is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot provide assurance that we will generate sufficient cash flow from operations, that we will realize operating improvements on schedule, or that future borrowings will be available to us in an amount sufficient to enable us to service and repay our Subsidiaries’ indebtedness or to fund their other liquidity needs. If we are unable to satisfy our Subsidiaries’ debt obligations, we may have to undertake alternative financing plans, such as:
| ● | refinancing or restructuring their debt; | |
| ● | selling assets; | |
| ● | reducing or delaying capital investments; or | |
| ● | seeking to raise additional capital. |
Collection of receivables from work performed may not be sufficient to fund working capital needs. We have arranged financing in anticipation of our projected cash requirements, but events beyond our control could cause cash collection to be less than projected and cause us not to meet our Subsidiaries’ debt obligations.
We cannot provide assurance that any additional refinancing or debt restructuring would be possible, that any assets could be sold or that, if sold, the timing of the sales and the amount of proceeds realized from those sales would be favorable to us or that additional financing could be obtained on acceptable terms. Our inability to generate sufficient cash flows to satisfy the debt obligations, or to obtain alternative financing, could materially and adversely affect our business, financial condition, results of operations and prospects.
Our borrowings under our various loan agreements and other financing arrangements expose us to interest rate risk and such arrangements also include restrictive covenants that may impact their ability to make distributions to us.
Our earnings are exposed to interest rate risk associated with $383.5 million in borrowings under our various loan agreements and other financing arrangements as of December 31, 2019. Each of these arrangements requires the payment of floating interest rates based upon short-term interest rate indices. If interest rates increase, so will our interest costs, which may have a material adverse effect on our financial condition and results of operations. Furthermore, the terms of these financing arrangements, including the restrictive covenants therein, may restrict our ability to make distributions to us, which could materially adversely affect our liquidity and financial condition.
The geographic concentration of our customers exposes us to the risks of the regional economy and other regional adverse conditions. The credit risks of our concentrated customer base in the energy industry could result in losses. In addition, we depend on a small number of customers for a significant portion of our revenues. Therefore, the loss of these customers could result in a decline in our revenues and adversely affect our financial condition, results of operations or cash flows.
Our primary customers are in the Middle East and North Africa and all are in the energy industry. Among our customers are national oil companies (“NOCs”). Given the importance of national oil companies, which dominate the petroleum industry in our countries of operation, our business is more susceptible to regional economic, budgetary and political conditions than other, more geographically diversified competitors. Any changes in market conditions, unforeseen circumstances, or other events affecting the area in which our assets are located could have a material adverse effect on our business, operating result, and financial condition.
As of December 31, 2019, we had 27 contracts with two major customers in the region which generated 61% of our revenue. Furthermore, during the years ended December 31, 2019, 2018 and 2017, a substantial portion of both legacy organization revenues came from those two major customers. Given the terms of our customer contracts, there remains a risk of termination of one or more of such contracts and/or a lack of engagement in the same manner, or to the same level, as has been the case historically. The loss of all or even a portion of the business from a major customer, the failure to extend or replace the contracts with the major customer, or the extension or replacement of such contracts on less favorable terms, as a result of competition or otherwise, could adversely affect our financial condition, results of operations or cash flows.
We have more than 46 contracts with five major customers in the region which generate more than 69% of our revenue. The loss of all or even a portion of the business from these key customers, the failure to extend or replace the contracts with these key customers, or the extension or replacement of such contracts on less favorable terms, as a result of competition or otherwise, could adversely affect our financial condition, results of operations, or cash flow.
We are exposed to the credit risk of our customers and counterparties, and a general increase in the delay or nonpayment and nonperformance by our customers could have an adverse effect on our financial condition, results of operations, or cash flows.
We are subject to risks of loss resulting from non-payment or non-performance by our customers and other counterparties. Customers may also delay payments by imposing complex administrative processes, by disputing or rejecting invoices, or through other means. Any increase in the non-payment and non-performance by our customers could adversely affect our financial condition, results of operations, or cash flows. Additionally, equity values for many of our customers continue to be low. The combination of a reduction of cash flow resulting from lower commodity prices, a reduction in borrowing bases under reserve-based credit facilities, and the lack of availability of debt or equity financing may result in a significant reduction in the liquidity of our customers and their ability to make payment or perform on their obligations to us. Furthermore, some of our customers may be leveraged and subject to their own operating and regulatory risks, which increases the risk that they may default on their obligations to us.
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Actions of and disputes with any of our joint venture partners could have a material adverse effect on our business and results of operations of our joint ventures and, in turn, our business and consolidated results of operations.
We may conduct some operations through joint ventures, where control may be shared with unaffiliated third parties. As with any joint venture arrangement, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major issues. We also cannot control the actions of our joint venture partners, including any non-performance, default, or bankruptcy of our joint venture partners. These factors could have a material adverse effect on the business and results of operations of our joint ventures and, in turn, our business and consolidated results of operations.
If we are unable to keep pace with technology developments in the industry, this could adversely affect our ability to maintain or grow market share.
The oilfield service industry is subject to the introduction of new drilling and completion techniques and services using new technologies, some of which may be subject to patent or other intellectual property protections. We intend to introduce and integrate new technologies and procedures used by North American and European based oilfield service companies; however, we cannot be certain that we will be able to develop and implement new technologies or services on a timely basis or at an acceptable cost. The oilfield service industry is highly competitive and dominated by a few large players that have resources to invest in new technologies. Our ability to continually provide competitive technology and services can impact our ability to maintain or increase prices for our services, maintain market share, and negotiate acceptable contract terms with our customers. If we are unable to continue to acquire or develop competitive technology or deliver it to our clients in a timely and cost-competitive manner in the various markets we serve, it could adversely affect our financial condition, results of operations, and cash flows.
Limitations on our ability to protect our intellectual property rights, including our trade secrets, could cause a loss in revenue and any competitive advantage.
Some of our products or services, and the processes they use to produce or provide products and services, constitute trade secrets and confidential know how. We may lose employees who have important trade secrets and who may not be prohibited in the relevant countries from using such trade secrets to compete. Our business may be adversely affected if any acquired patents are unenforceable, the claims allowed under their patents are not sufficient to protect our technology, our patent applications are denied, or our trade secrets are not adequately protected. In addition, our competitors may be able to independently develop technology that is similar to the technology used by us without infringing on our patents or gaining access to our trade secrets, which could adversely affect our financial condition, results of operations, and cash flows.
We may be subject to litigation if another party claims that we have infringed upon such third party’s intellectual property rights.
The tools, techniques, methodologies, programs and components that we use to provide our services may infringe upon the intellectual property rights of others. Infringement claims generally result in significant legal and other costs and may distract our management from running our core business. Royalty payments under licenses from third parties, if available, and developing non-infringing technologies would increase our costs. If a license were required and not available, we might not be able to continue providing a particular service or product, which could adversely affect our financial condition, results of operations, and cash flows.
Environmental compliance costs and liabilities could reduce our earnings and cash available for operations.
We are subject to increasingly stringent laws and regulations relating to the importation and use of hazardous materials, radioactive materials, chemicals and explosives, and to environmental protection and health and safety, including laws and regulations governing air emissions, hydraulic fracturing, water and other discharges and waste management. We expect to incur capital and operating costs to comply with environmental laws and regulations. The technical requirements of these laws and regulations are becoming increasingly complex, stringent and expensive to implement.
Our operations use and generate hazardous substances and wastes. Accordingly, we could become subject to material liabilities relating to the investigation and cleanup of potentially contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances or wastes. Applicable laws may provide for “strict liability” for remediation costs, damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several liabilities for remediation of spills and releases of hazardous substances and wastes. Joint and several liability can render one party liable for all damages arising from a spill or release even if other parties also contributed to the spill or release.
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In addition, stricter enforcement of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs, become the basis for new or increased liabilities, subject us to certain government-imposed penalties or result in certain licenses being revoked. Any of these developments could reduce our earnings and cash available for operations or otherwise result in interruptions or delays in our operations that could have an adverse effect on our financial position.
We could be subject to substantial liability claims, which could adversely affect our financial condition, results of operations, and cash flows.
The technical complexities of our operations expose us to a wide range of significant health, safety and environmental risks. Our products and service offerings involve production-related activities, radioactive materials, chemicals, explosives, and other equipment and services that are deployed in challenging exploration, development, and production environments. An accident involving these services or equipment, or a failure of a product, could cause personal injury, loss of life, damage to or destruction of property, equipment or the environment, or suspension of operations. Our insurance may not protect us against liability for certain kinds of events, including events involving pollution, or against losses resulting from business interruption. Moreover, we may not be able to maintain insurance for certain risks or at levels of risk coverage or policy limits that we deem adequate. Any damages caused by our services or products that are not covered by insurance or are in excess of policy limits or subject to substantial deductibles, could adversely affect our financial condition, results of operations, and cash flows.
Demand for our products and services could be reduced by existing and future legislation or regulations.
Environmental advocacy groups and regulatory agencies in the United States and other countries have been focusing considerable attention on the emissions of carbon dioxide, methane and other greenhouse gasses and their role in climate change. Existing or future legislation and regulations related to greenhouse gas emissions and climate change, as well as government initiatives to conserve energy or promote the use of alternative energy sources, may significantly curtail demand and production of fossil fuels such as oil and natural gas in areas of the world where our customers operate and thus adversely affect future demand for our services. Additionally, scientists have concluded that increasing concentrations of greenhouse gasses in the earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, droughts, and floods and other adverse climatic events. If any such effects were to occur, they could result in damage to our equipment and our clients’ facilities, and have an adverse effect on our financial condition and results of operations.
Some international, national and local governments and agencies have also adopted laws and regulations or are evaluating proposed legislation and regulations that are focused on the extraction of shale gas or oil using hydraulic fracturing. Hydraulic fracturing is a stimulation treatment routinely performed on oil and gas wells in low-permeability reservoirs. Specially engineered fluids with proppants are pumped at high pressure and rate into the reservoir interval to be treated, causing cracks in the target formation. Future hydraulic fracturing-related legislation or regulations could limit or ban hydraulic fracturing, or lead to operational delays and increased costs, including for the capture of fugitive methane emissions, and therefore reduce demand for our pressure pumping services. If such additional international, national, or local legislation or regulations are enacted, it could adversely affect our financial condition, results of operations, and cash flows.
Some of our customers may require bids for contracts in the form of long-term, fixed pricing contracts that may require us to assume additional risks associated with cost over-runs, operating cost inflation, labor availability and productivity, supplier and contractor pricing and performance, and potential claims for liquidated damages.
Some of our customers, primarily NOCs, may require bids for contracts in the form of long-term, fixed pricing contracts that may require us to provide integrated project management services outside our normal discrete businesses to act as project managers as well as service providers, and may require us to assume additional risks associated with cost over-runs. These customers may provide us with inaccurate information in relation to their reserves, which is a subjective process that involves location and volume estimation that may result in cost over-runs, delays, and project losses. In addition, NOCs often operate in countries with unsettled political conditions, war, civil unrest, or other types of community issues that may also result in cost over-runs, delays, and project losses.
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Providing services on an integrated basis or long-term may also require us to assume additional risks associated with operating cost inflation, labor availability and productivity, supplier pricing and performance, and potential claims for liquidated damages. We might rely on third-party subcontractors and equipment providers to assist them with the completion of these types of contracts. To the extent that we cannot engage subcontractors or acquire equipment or materials in a timely manner and on reasonable terms or on terms consistent with the customer contract, our ability to complete a project in accordance with stated deadlines or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price work, we could experience losses in the performance of these contracts. These delays and additional costs may be substantial, and we may be required to compensate our customers for these delays. This may reduce the profit to be realized or result in a loss on a project and adversely affect our financial condition, results of operations, and cash flows.
The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business.
We depend on the efforts of our executive officers and other key employees to manage our operations. The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business. Although we expect all of our key personnel to remain with us, it is possible that we will lose some key personnel, the loss of which could negatively impact our business operations and profitability. In addition, the delivery of our services and products requires personnel with specialized skills and experience. Our ability to be productive and profitable will depend upon our ability to employ and retain such skilled workers.
Our growth potential and ability to operate could be materially and adversely affected if we cannot employ and retain technical personnel at a competitive cost.
Many of the products and services we provide and sell are complex and highly engineered and often must perform in harsh conditions. Our success depends upon our ability to employ and retain technical personnel with the ability to design, utilize, and enhance these services and products. A significant increase in the wages paid by competing employers could result in increased competition for the skilled labor force we require, increases in the wage rates that we must pay, or both. If either of these events were to occur, our cost structures could increase, our margins could decrease, and our growth potential, if any, could be impaired.
Our failure to comply with complex U.S. and foreign laws and regulations could have a material adverse effect on our operations.
We are subject to complex U.S. and foreign laws and regulations, such as the U.S. Foreign Corrupt Practices Act and various other anti-bribery and anti-corruption laws. At this time, the U.K. Bribery Act has not been adopted to apply to British Virgin Islands companies, but does apply to any employees of us or our Subsidiaries that are U.K. citizens and any subsidiaries formed in the U.K. We may also be subject to trade control regulations and trade sanctions laws that restrict the movement of certain goods to, and certain operations in, various countries or with certain persons. Thus, our ability to transfer people and products among certain countries will be subject to maintaining required licenses and complying with these laws and regulations. The internal controls, policies and procedures, and employee training and compliance programs we expect to implement to deter prohibited practices may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies or violating applicable laws and regulations. Any determination that we have violated or are responsible for violations of anti-bribery, trade control, trade sanctions or anti-corruption laws could have a material adverse effect on our financial condition and may result in fines and penalties, administrative remedies or restrictions on business conduct, and could have a material adverse effect on our reputation and our business.
Regulatory enforcement and accountability mechanisms have steadily changed the financial landscape for companies organized in the British Virgin Islands. One major regulatory change comes from the implementation of a key anti-money laundering treaty with the United States, known as the Foreign Account Tax Compliance Act (“FATCA”). FATCA implementation began on June 30, 2014, and it requires foreign entities to identify and report specific information to the United States Internal Revenue Service (“IRS”) about U.S. taxpayers holding foreign accounts and assets.
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Another key regulatory change began on September 1, 2017, with the British Virgin Islands’ full integration of the “Common Reporting Standard” (“CRS”) into its banking system. The CRS is specifically designed to fight against tax evasion and money laundering. Under the CRS system, banks in the CRS jurisdiction are required to determine where the individual is a “tax resident,” and if the individual is banking outside their country of residence, the banks may report information about the accounts to the national tax authority in the country where the account is held, who then may share that information with the individual’s country of residency.
We and U.S. persons working for us are subject to sanctions regimes adopted by the United States and other jurisdictions.
We and U.S. persons working for us are subject to laws, reporting requirements or sanctions imposed by the United States or by other jurisdictions where we do business that may restrict or even prohibit us, U.S. persons, or certain of our affiliates from doing business in certain countries, or with designated companies in the oil and natural gas sector. Such restrictions may provide a competitive advantage to competitors formed in or operating from countries that may not impose comparable restrictions. The Middle East, Asia, and Africa are locations in which from time to time the United States, the United Nations or the European Union has imposed economic sanctions to restrict or impede contracting in identified sanctioned countries. The U.S. Commerce Department or State Department regulates the types of technologies that can be sold or used in some countries. We cannot predict what sanctions might be imposed against any country in which our Subsidiaries might operate or might receive contracts for performing services. Trade restrictions and sanctions could adversely impact our potential income, or our ability to pursue new undeveloped business objectives.
The United States government has implemented mechanisms to collect information on companies registered on the U.S. stock exchange related to business activities that might be sanctionable under the various U.S. sanctions programs if the foreign companies or its subsidiaries are U.S. companies. Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 requires annual or quarterly “219 Report” to the SEC by any company registered on a U.S. stock exchange to disclose as if the listed company were a U.S. entity, certain business activities relating to any country subject to U.S. sanctions, which in most cases includes the energy sector, even if the activity is not prohibited by U.S. sanctions by the foreign company. Such reporting of any future activities that might be engaged in by our Subsidiaries, even though not prohibited by the sanctions, could initiate an investigation by the U.S. government and require us to engage counsel to monitor or respond to such investigations. Generally, 219 Report disclosures include activities that constitute an investment in the energy sector of $5 million each, or in the aggregate of over $20 million in a 12-month period. A 219 Report also requires reporting of any transaction with a person or entity identified to the SDN List. The risk of an investigation or inadvertent action that relates to sanctioned activity could increase costs and have an adverse impact on financial conditions and results of operations.
Our operations in Middle Eastern countries will require us to incur additional costs in order to comply with U.S., U.K. and EU sanctions-related regulations.
The United States government, the UK government and the EU have established lists of corporations, and people in the case of the United States, with which engaging in business by a U.S. person is prohibited without a license and disclosure is required in a 219 Report. These lists in the United States are referred to as the List of Specially Designated Nationals (“SDN List”). There are no discernible qualifications or objective standards for determining when a person might be identified to an SDN List, other than the opinion of the Office of Foreign Assets Control that there is some cause or connection to believe that such foreign person may have been doing business with or for a sanctioned country or person already on the SDN List. There is no advance notice or due process for the listed person. If any person were to be identified to an SDN List, no U.S. persons can be involved in contracting or providing services to or with such listed person without a license. If a Target Company affiliate were to be performing a contract with a person that becomes named to the SDN List, the contract may have to be terminated and/or disclosed, which could result in additional costs or losses.
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Although we cannot be assured that no person or company in the Middle East with which one of our Subsidiaries has done business will not be identified on an SDN List in the future, we have confirmed that none of our Subsidiaries, their key employees, key vendors, or any company with which they are currently conducting business are listed on the SDN List or similar lists in the EU and UK. If any customer, employee or vendor were to be listed on an SDN List in the future, we will need to incur costs to seek legal advice to determine whether any further business could be conducted with such person or whether all business relationships with such person must cease.
We are subject to litigation risks that may not be covered by insurance.
In the ordinary course of business, we become the subject of various claims, lawsuits, and administrative proceedings seeking damages or other remedies concerning their commercial operations, employees, and other matters. We maintain insurance to cover certain potential losses and are subject to various self-insurance retentions and deductibles under our insurance policies. It is possible, however, that a judgment could be rendered against us in cases in which we could be uninsured and beyond the amounts that we currently have reserved or anticipate incurring for such matters. If we were to be sued under any of the agreements related to the Business Combination or if we were made a party to lawsuits to which our Subsidiaries are currently a party, we could be exposed to one or more judgments that are in excess of what our management may believe that it should pay and would not likely be covered by insurance.
We may be unable to obtain or renew permits necessary for our operations, which could inhibit our ability to do business.
In order to perform our operations, we are required to obtain and maintain a number of government permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. While this is a common scenario for foreign investors operating in the region, we will need to ensure that relevant foreign ownership restrictions and/or applicable licenses, permits, and approvals for the operation of foreign owned entities in the jurisdictions of the GCC are complied with. The GCC has made efforts to increase local content and in country value requirements. All the permits, licenses, approval limits, and standards require a significant amount of monitoring, record keeping, and reporting in order to demonstrate compliance with the underlying permit, license, approval limit or standard. Noncompliance or incomplete documentation of our compliance status may result in the imposition of fines, penalties and injunctive relief. A decision by a government agency to deny or delay the issuance of a new or existing material permit or other approval, or to revoke or substantially modify an existing permit or other approval, could adversely affect our ability to initiate or continue operations at the affected location or facility. Furthermore, it could adversely affect our financial condition, results of operations, and cash flows.
We operate in a highly competitive industry, and many of our competitors are larger and have greater resources.
Several of our primary competitors are diversified multinational companies with substantially larger operating staffs and greater capital resources. These larger competitors’ greater resources could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope and retained skilled personnel.
Cybersecurity risks and threats could adversely affect our business.
We rely heavily on information systems to conduct our business. There can be no assurance that the systems we have designed to prevent or limit the effects of cyber incidents or attacks will be sufficient to prevent or detect such incidents or attacks, or to avoid a material impact on our systems when such incidents or attacks do occur. If our systems for protecting against cybersecurity risks are circumvented or breached, this could result in the loss of our intellectual property or other proprietary information, including customer data, and disruption of our business operations.
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A cyber incident or attack could result in the disclosure of confidential or proprietary customer information, theft or loss of intellectual property, damage to our reputation with our customers and the market, failure to meet customer requirements or customer dissatisfaction, theft or exposure to litigation and enforcement actions including under data privacy laws and regulations, damage to equipment (which could cause environmental or safety issues) and other financial costs and losses. In addition, as cybersecurity threats continue to evolve, we may be required to devote additional resources to continue to enhance our protective measures or to investigate or remediate any cybersecurity vulnerabilities. We do not presently maintain insurance coverage to protect against cybersecurity risks. If we procure such coverage in the future, we cannot ensure that it will be sufficient to cover any particular losses we may experience as a result of such cyberattacks.
We depend on our suppliers to provide services and equipment in a timely manner and any delays, interruptions or failures by suppliers could expose us to increased costs or inability to meet contractual obligations.
We rely on suppliers of equipment and spare parts as well as suppliers of technical labor to perform certain contractual obligations with our clients. Failure by suppliers to provide goods and services in a timely manner could lead to delays by us in fulfilling contractual obligations, the inability to fulfill such obligations, or additional costs in seeking replacement suppliers.
We have engaged in a number of related party transactions, the termination of which may inhibit business.
We rely at times upon services and products supplied by related parties if no other suitable alternatives are available. For example, a related party vendor provides software services that supports certain of our operations in a country where we have a perpetual license to use an Enterprise Resource Planning system. However, if the software services are discontinued, it could result in a disruption of supporting business processes and require time and resources for sourcing replacement services and products.
We might require additional equity or debt financing to fund operations and/or future acquisitions.
We may need access to additional debt or equity capital to fund operations or to fund potential acquisitions. If additional capital is required, we may not be able to obtain debt and/or equity financing on terms favorable to us, or at all. The failure to obtain additional funding could result in a curtailment of our operations and future development, which in turn could adversely affect our business, results of operations, and financial condition.
If we do not effectively or efficiently integrate the operations of businesses or companies we acquire, including the integration of the operations of our Subsidiaries, our future growth will be limited.
We may not achieve expected returns and other benefits as a result of various factors, including integration and collaboration challenges. The success of any acquisition is subject to various risks, including:
| ● | the inability to integrate the operations of recently acquired assets; | |
| ● | the diversion of management’s attention from other business concerns; | |
| ● | the failure to realize expected volumes, revenues, profitability, or growth; | |
| ● | the failure to realize any expected synergies and cost savings; | |
| ● | the coordination of geographically disparate organizations, systems, and facilities; | |
| ● | the assumption of unknown liabilities; | |
| ● | the loss of customers or key employees; and | |
| ● | potential environmental or regulatory liabilities and title problems. |
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The assessment by our management of these risks is inexact and may not reveal or resolve all existing and potential risks. Realization of any of these risks could adversely affect our financial condition, results of operations and cash flows.
Risks Related to Our Capital Structure
The market price of our ordinary shares and warrants may decline.
Fluctuations in the price of our ordinary shares and warrants could contribute to the loss of all or part of your investment. Trading in our ordinary shares and warrants has been limited. Even if an active market for our securities develops and continues, the trading price of our ordinary shares and warrants could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment and our ordinary shares and warrants may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our ordinary shares and warrants may not recover and may experience a further decline.
Factors affecting the trading price of our ordinary shares and warrants may include:
| ● | actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; | |
| ● | changes in the market’s expectations about our operating results; | |
| ● | success of competitors; | |
| ● | our operating results failing to meet the expectation of securities analysts or investors in a particular period; | |
| ● | changes in financial estimates and recommendations by securities analysts concerning us or the market in general; | |
| ● | operating and stock price performance of other companies that investors deem comparable to us; | |
| ● | our ability to market new and enhanced products on a timely basis; | |
| ● | changes in laws and regulations affecting our business; | |
| ● | commencement of, or involvement in, litigation involving us; | |
| ● | changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; | |
| ● | the volume of securities available for public sale; | |
| ● | any major change in our board or management; | |
| ● | sales of substantial amounts of our ordinary shares and warrants by our directors, executive officers or significant stockholders or the perception that such sales could occur; and | |
| ● | general economic and political conditions such as recession, interest rate, fuel price, international currency fluctuations, and acts of war or terrorism. |
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Many of the factors listed above are beyond our control. In addition, broad market and industry factors may materially harm the market price of our ordinary shares and warrants irrespective of our operating performance. The stock market in general, including the Nasdaq Capital Market (“Nasdaq”), has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of our ordinary shares and warrants, which currently trade on the Nasdaq, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to us could depress the price of our securities regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our ordinary shares and warrants also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our securities adversely, the price and trading volume of our ordinary shares and warrants could decline.
The trading market for our ordinary shares and warrants relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrade or provide negative outlook on our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our ordinary shares and warrants could decline. If one or more of these analysts cease coverage of our business or fail to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.
We are a holding company. Our sole material asset is our equity interest in our subsidiaries and we are accordingly dependent upon distributions from them to cover our corporate and other overhead expenses.
We are a holding company and have no material assets other than our equity interest in our Subsidiaries. We have no independent means of generating revenue. To the extent the Subsidiaries have available cash, we intend to cause them to make non-pro rata payments to us to reimburse us for our corporate and other overhead expenses. To the extent that we need funds and the Subsidiaries are restricted from making such distributions or payments under applicable law or regulation or under the terms of any financing arrangements due to restrictive covenants or otherwise, or are otherwise unable to provide such funds, our liquidity and financial condition could be materially adversely affected.
Future sales of our ordinary shares could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.
We may sell additional securities in subsequent public or private offerings. On December 31, 2019, 87,187,289 ordinary shares were outstanding and 35,540,380 warrants were outstanding. Our outstanding ordinary shares do not include ordinary shares issuable upon exercise of the warrants, which may be resold in the public market.
Downward pressure on the market price of our ordinary shares that likely will result from sales of our ordinary shares issued in connection with the exercise of the warrants could encourage short sales of our ordinary shares by market participants. Generally, short selling means selling a security, contract or commodity not owned by the seller. The seller is committed to eventually purchase the financial instrument previously sold. Short sales are used to capitalize on an expected decline in the security’s price. Such sales of ordinary shares could have a tendency to depress the price of the stock, which could increase the potential for short sales.
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We cannot predict the size of future issuances of our ordinary shares or the effect, if any, that future issuances and sales of shares of our ordinary shares will have on the market price of our ordinary shares. Sales of substantial amounts of our ordinary shares (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our ordinary shares.
Because we currently have no plans to pay cash dividends on our ordinary shares, you may not receive any return on investment unless you sell your ordinary shares for a price greater than that what you paid for it.
We currently do not expect to pay any cash dividends on our ordinary shares. Any future determination to pay cash dividends or other distributions on our ordinary shares will be at the discretion of the board of directors and will be dependent on our earnings, financial condition, operation results, capital requirements, and contractual, regulatory and other restrictions, including restrictions contained in the agreements governing any existing and future outstanding indebtedness we or our subsidiaries may incur, on the payment of dividends by us or by our subsidiaries to us, and other factors that our board of directors deems relevant.
As a result, you may not receive any return on an investment in our ordinary shares unless you sell the ordinary shares for a price greater than that what you paid for it.
There is no guarantee that the public warrants will ever be in the money, and they may expire worthless.
The exercise price for our warrants is $5.75 per one-half of an ordinary share. Warrants must be exercised for whole ordinary shares. There is no guarantee that the warrants will ever be in the money prior to their expiration on June 6, 2023 (five years after the completion of the Business Combination), and as such, the warrants may expire worthless.
Other Risks Associated with Our Business
We are not subject to the supervision of the Financial Services Commission of the British Virgin Islands and so our shareholders are not protected by any regulatory inspections in the British Virgin Islands.
We are not an entity subject to any regulatory supervision in the British Virgin Islands by the Financial Services Commission. As a result, shareholders are not protected by any regulatory supervision or inspections by any regulatory agency in the British Virgin Islands and we are not required to observe any restrictions in respect of our conduct save as disclosed in this Annual Report or our amended and restated memorandum and articles of association.
An investment in our securities may result in uncertain U.S. federal income tax consequences.
An investment in our securities may result in uncertain U.S. federal income tax consequences. For example, the United States federal income tax consequences of a cashless exercise of warrants included in the units sold in our initial public offering is unclear under current law. Prospective investors are urged to consult their tax advisers with respect to these and other tax consequences when purchasing, holding or disposing of our securities.
A majority of our directors and officers live outside the United States and all of our assets are located outside the United States; therefore, investors may not be able to enforce federal securities laws or their other legal rights.
A majority of our directors and officers reside outside of the United States and all of our assets are located outside of the United States. Thus, it may be difficult, or in some cases not possible, for investors in the United States to enforce their legal rights, to effect service of process upon all of our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties on our directors and officers under United States laws.
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As a foreign private issuer in the United States, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer.
We are a foreign private issuer under the Exchange Act and, as a result, are exempt from certain rules under the Exchange Act. Under the Exchange Act we are subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies, which may limit the information publicly available to shareholders. The rules we are exempt from include the proxy rules that impose certain disclosure and procedural requirements for proxy solicitations. In addition, we are not required to file periodic reports and financial statements with the SEC as frequently, promptly or in as much detail as U.S. companies with securities registered under the Exchange Act. We are not required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. Moreover, our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our ordinary shares. As a result of such varied reporting obligations, shareholders should not expect to receive the same information at the same time as information provided by U.S. domestic companies.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our securities less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”). We will remain an “emerging growth company” for up to the first five years after our initial public offering. However, if our non-convertible debt issued within a three-year period exceeds $1.0 billion or revenues exceeds $1.07 billion, or the market value of our ordinary shares that are held by non-affiliates (as defined by the SEC) exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, we would cease to be an emerging growth company as of the following fiscal year. As an emerging growth company, we are not required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act. We cannot predict if investors will find our ordinary shares less attractive because we may rely on these provisions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our shares and our share price may be more volatile.
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 Exchange Act) 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 an election to opt out is irrevocable. We have 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, we, as an emerging growth company, will not adopt the new or revised standard until the time private companies are required to adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
We may re-incorporate in another jurisdiction, and the laws of such jurisdiction will likely govern all of our material agreements and we may not be able to enforce our legal rights.
We may relocate the home jurisdiction of our business from the British Virgin Islands to another jurisdiction. If we determine to do this, the laws of such jurisdiction would likely govern all of our material agreements. The system of laws and the enforcement of existing laws in such jurisdiction may not be as certain in implementation and interpretation as in the British Virgin Islands. Furthermore, certain U.S. laws would continue to apply to us regardless of where we are incorporated. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business, business opportunities or capital. Any such reincorporation and the international nature of our business will likely subject us to foreign regulation.
Investors may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may be limited, because we are formed under British Virgin Islands law.
We are a company formed under the laws of the British Virgin Islands. As a result, it may be difficult for investors to enforce judgments obtained in the United States courts against some of our directors or officers.
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Our corporate affairs will be governed by our amended and restated memorandum and articles of association, the Companies Act and the common law of the British Virgin Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under British Virgin Islands law are governed by the Companies Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived from English common law, and while the decisions of the English courts are of persuasive authority, they are not binding on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law may not be as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, while statutory provisions do exist in British Virgin Islands law for derivative actions to be brought in certain circumstances, shareholders in British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred.
The British Virgin Islands Courts are also unlikely:
| ● | to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws where that liability is in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company; and | |
| ● | to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. |
There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will in certain circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary provided that:
| ● | the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process; | |
| ● | the judgment is final and for a liquidated sum; | |
| ● | the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company; | |
| ● | in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the court; | |
| ● | recognition or enforcement of the judgment would not be contrary to public policy in the British Virgin Islands; and | |
| ● | the proceedings pursuant to which judgment was obtained were not contrary to natural justice. |
In appropriate circumstances, a British Virgin Islands Court may give effect in the British Virgin Islands to other kinds of final foreign judgments such as declaratory orders, orders for performance of contracts and injunctions.
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management or controlling shareholders than they would as public shareholders of a U.S. company.
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Our amended and restated memorandum and articles of association permit the board of directors by resolution to create additional classes of securities, including shares with rights, preferences, designations and limitations as they determine which may have an anti-takeover effect.
Our amended and restated memorandum and articles of association permits the board of directors by resolution to amend the memorandum and articles of association to designate rights, preferences, designations and limitations attaching to the preferred shares as they determine in their discretion, without shareholder approval with respect to the terms or the issuance. If issued, the rights, preferences, designations and limitations of the preferred shares would be set by the board of directors and could operate to the disadvantage of the outstanding ordinary shares the holders of which would not have any pre-emption rights in respect of such an issue of preferred shares. Such terms could include, among others, preferences as to dividends and distributions on liquidation, or could be used to prevent possible corporate takeovers.
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ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company
National Energy Services Reunited Corp. is a British Virgin Islands corporation headquartered in Houston, Texas. The Company, through its wholly-owned subsidiaries, NPS and GES, is a regional provider of products and services to the oil and gas industry in the Middle East and North Africa (“MENA”) and Asia Pacific regions. Our principal executive offices are located at 777 Post Oak Blvd., Suite 730, Houston, Texas 77056 and our telephone number is +1 (832) 925 3777. Our registered agent in the British Virgin Islands is Intertrust Corporate Services (BVI) Limited, which is located at 171 Main Street, Road Town, Tortola, British Virgin Islands.
History and Business Development
National Energy Services Reunited Corp. (“NESR,” the “Company,” “we,” “our,” “us” or similar terms) is one of the largest oilfield services providers in the MENA region.
Formed in January 2017, NESR started as a special purpose acquisition company, SPAC, designed to invest in the oilfield services space globally. NESR filed a registration statement for its initial public offering in May 2017. In November 2017, NESR announced the acquisition of two oilfield services companies in the MENA region: NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES” and, together with NPS, the “Subsidiaries”). The formation of NESR as an operating entity was completed on June 7, 2018, after the transactions were approved by the SEC and NESR shareholders.
Revenues are primarily derived from helping customers unlock the full potential of their reservoirs by providing Production Services such as Cementing, Coiled Tubing, Filtration, Completions, Stimulation, Pumping and Nitrogen Services. The Company also helps its customers to access their reservoirs in a smarter and faster manner by providing Drilling and Evaluation Services such as Drilling Downhole Tools, Directional Drilling, Fishing Tools, Testing Services, Wireline, Slickline, Fluids and Rig Services. The Company has significant operations throughout the MENA region including Saudi Arabia, Oman, Qatar, Iraq, Algeria, and Kuwait.
Capital Expenditures
During the three most recent fiscal years, the Company’s capital expenditures were $193.3 million in the aggregate, comprising $111.5 million from the 2019 Successor Period, $23.2 million from the 2018 Successor Period, $9.9 million from the 2018 Predecessor Period, and $48.7 million from the 2017 Predecessor Period. For more information on our capital expenditures and requirements, see Item 5B, “Liquidity and Capital Resources.”
Electronic Information about the Company
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Our Company website can be found at http://www.nesr.com. Information on our website is not incorporated into this Annual Report or otherwise made part of this Annual Report.
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 Company has organized its service lines into two reportable segments, Production Services and Drilling and Evaluation Services.
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Principal Activities
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 include, but are not limited to, the following:
| ● | Coiled Tubing – We provide various coiled tubing services ranging from basic nitrogen lifting, fishing, milling, clean-out, scale removal and other complex well applications. We employ design software to predict the performance of coiled tubing string and fluid behavior. The work history and integrity of each coiled tubing work string is constantly monitored in real-time to allow our engineers to continually evaluate developments in coiled tubing applications. Our coiled tubing units are suitable for both onshore and offshore. | |
| ● | Hydraulic Fracturing – Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well. | |
| ● | Stimulation & Pumping – We employ stimulation and pumping services in our operations. We currently offer acidizing of wells, cleaning jobs, the release of stuck pipes during drilling, pressure testing wells and inhibition jobs on gas wells. | |
| ● | Nitrogen Services – We offer a complete nitrogen service package through our nitrogen fleets. Our equipment incorporates a combination of low, intermediate, and high-rate units. Our operational capabilities range from stand-alone nitrogen services such as freeing stuck drill pipe and unloading or cleaning out wellbores, to supplying our coiled tubing, stimulation and cementing service with the essential gaseous components necessary for positive results in various applications. | |
| ● | Completions – We provide surface and subsurface safety systems, high-pressure packer systems, flow controls, service tools, expandable liner technology, VIT (Vacuum Insulated Tubing) technology for steam applications, and engineering capabilities with manufacturing capacity and testing facilities. We focus on in-country value by taking a systems approach to well completions for maximum recovery in addition to intelligent completion architectures. | |
| ● | Pipelines – We provide pipeline services to plants and refineries including water filling and hydro testing, nitrogen purging, de-gassing and pressure testing, as well as cutting/welding and cooling down piping/vessels systems. Our equipment and resources include an existing fleet of nitrogen pump units, pig launchers and receivers, intelligent pigs, high rate pumping units at high and low pressure, and pipeline inspection services. | |
| ● | Cementing – We have over 25 years of experience in primary and remedial cementing services across the MENA and Asia Pacific regions. Our cementing solutions include cementing equipment with complete automated density control capabilities, large volume batch mixers allowing larger volume of slurries to be mixed and pumped at homogeneous density and customized cement systems for specific applications such as gas migration, ultra-light weight, flexible cement, HTHP (high-temperature/high-pressure) and self-healing cement. We also have an extensive database of knowledge and experience. | |
| ● | Laboratory Services – Certain of our locations have a central laboratory to carry out analyses for field operations. These base laboratories are run by qualified personnel who provide support and services to mobile labs in the sites where we operate. Our laboratory services include cementing tests, thickening time, rheology, fluid loss, compressive strength, mud compatibility, and free water. | |
| ● | Filtration Services – We provide filtration services through our two-stage, skid mounted, easy to handle filtration vessels. The primary and a secondary filtration stages are usually carried out together. We have filtered thousands of barrels on rig sites for reduced damage drilling as well as for UBD (Under Balanced Drilling) operations. We also provide frac tanks and pumping units as necessary. | |
| ● | Artificial Lift Services – We provide vertical, deviated and horizontal rod pumping systems, analysis and optimization recommendations for fluid level and dynamometer testing, artificial lift optimization and data interpretation, long term monitoring and optimization, and associated field services. We also provide gas lift systems and downhole monitoring systems. We maintain a downhole pump workshop that is equipped with up-to-date equipment and tools, including pump testers, barrel honing and API beam pump gauges. | |
| ● | Water & Production Assurance –Our fleet of water well drilling rigs and portfolio of water treatment technologies (chemicals and filtration) allow us to serve the full water cycle. This includes the sourcing and treatment of water for oil and gas, municipal and industrial use and the disposal of water into selected aquifers. We also provide a portfolio of production assurance chemicals to assist hydrocarbon production from a specific reservoir in meeting the desired production target. This is achieved by collaborating with selected chemical companies and academic institutes and establishing an in-house technical team of engineers and laboratory capabilities. |
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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. These services include, but are not limited to, the following:
| ● | Drilling & Workover Rigs – Our fleet of rigs range from 200 horsepower (HP) to 1,500 HP and offer drilling capabilities for all type of wells with depths up to 4,000 meters. Our fleet includes 750 HP truck-mounted, fast moving rigs, which are ideal for both light and heavy work over campaigns as both rigs are equipped with full edge mud systems that can handle normal drilling activities. We update our fleet of land drilling rigs through investment and application of the latest technology. | |
| ● | Rig Services – We provide reliable drilling tools and machine shop services for conventional and unconventional drilling applications. Our manufacturing capabilities include manufacturing flanges, subs, pup joints, pony drill collars and all types of cross overs. We also have the provision of threading and repair services for the oil and gas industry including the re-cutting of tubing and casing, repair of drilling and production tubular and well heads. | |
| ● | Drilling Services & Rentals – We provide drilling tools, on a rental basis, for conventional and unconventional drilling applications. Solutions include supply of equipment including tools, jars, accelerators and stabilizers and servicing of equipment. | |
| ● | Fishing & Remedials – Our comprehensive line of oilfield solutions addresses fishing requirements for wells, from milling, casing patches, workover projects, and abandonment and casing exit to open hole fishing. | |
| ● | Directional Drilling – Our directional drilling services provide a suite of solutions from conventional to unconventional drilling applications, including directional drilling, measurement while drilling (MWD), logging while drilling (LWD), drilling optimization, drilling engineering, borehole surveying, and surface mud logging. | |
| ● | Turbines Drilling – We have extensive experience in turbine engineering and drilling technologies. Our turbines are designed to operate under hostile drilling conditions and combine high power with reliability and steerability to deliver enhanced drilling performance in a range of hard rock drilling applications. |
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| ● | Drilling Fluids – We provide drilling fluid systems and related technologies for a number of projects, including development drilling, exploration drilling and HPHT drilling, in accordance with international standards and regulations for both onshore and offshore projects. | |
| ● | Wireline Logging Services – Our fleet of logging trucks, offshore units, logging tools and pressure control equipment provides a wide variety of cased-hole logging services to our clients, including production and injection performance evaluation, stimulation performance evaluation, water shutoff determination, tubing and multiple casing integrity, acoustic leak detection, perforation, pipe recovery, cased hole formation evaluation, and interval isolation and borehole seal. | |
| ● | Slickline Services – Our slickline services cover the basic removal of scale, wax and sand build-up, setting plugs, changing out gas lift valves, fishing and other complex well applications. | |
| ● | Well Testing Services – Our well testing services are used to measure solids, gas, oil and water produced from a well. We offer integrated well testing services in the exploration, appraisal and development phases of oil and gas wells. Our aim is to provide newer, faster and more precise testing results though innovation and superior service quality, and our services include surface well testing onshore and offshore, flow back packages, sand management, burner boom stack for gas flaring, smokeless burner, multi-phase flow meters (MPFM), zero-flaring packages, and water treatment and filtration. |
Principal Markets
The Company’s operations and activities are located within certain geographies, primarily in the MENA region. The revenue earned by geographic area, based on drilling location, was as follows for the periods presented:
| Successor (NESR) | Predecessor (NPS) | ||||||||||||||||
Period from January 1 to December 31, 2019 |
Period from June 7 to December 31, 2018 |
Period from January 1 to June 6, 2018 |
Year ended December 31, 2017 |
||||||||||||||
| MENA | $ | 647,434 | $ | 345,047 | $ | 134,479 | $ | 267,366 | |||||||||
| Rest of World | 10,951 | 3,543 | 2,548 | 3,958 | |||||||||||||
| Total | $ | 658,385 | $ | 348,590 | $ | 137,027 | $ | 271,324 | |||||||||
Seasonality
Seasonal changes in weather and significant weather events affect the demand and price of oil and therefore the demand for our services. Furthermore, customer spending patterns for oilfield services and products generally result in higher activity in the fourth quarter of each year as clients seek to utilize their annual budgets.
Sources and Availability of Raw Materials
We purchase various raw materials and component parts in connection with delivering our products and services. These materials are generally, but not always, available from multiple sources and may be subject to price volatility. While we generally do not experience significant long-term shortages of these materials, we have from time to time experienced temporary shortages of particular raw materials. We are always seeking ways to ensure the availability of resources, as well as manage costs of raw materials.
Marketing Channels
We sell to our customers through direct and indirect channels. Our primary sales channel is through our direct sales force, which has a strong country focus with local teams close to the customer.
Intellectual Property
We own and control a variety of intellectual property, including but not limited to proprietary information and software tools and applications that, in the aggregate, are material to our business. No individual instance of intellectual property is material to the Company.
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Customers
Revenues from four customers of the Successor (NESR) individually accounted for 45%, 16%, 8% and 6% of the Successor’s (NESR’s) consolidated revenues in the year ended December 31, 2019, 42%, 17%, 10% and 5% of the Successor’s (NESR’s) consolidated revenues in the period from June 7 to December 31, 2018, 49%, 0%, 16% and 9% of Predecessor’s (NPS’) consolidated revenues in the period from January 1 to June 6, 2018, and 45%, 0%, 13% and 14% of the Predecessor’s (NPS’) consolidated revenues in the year ended December 31, 2017.
Competition
We provide products and services in the MENA region in highly competitive markets, with competitors comprised of both small and large companies. Our revenues and earnings can be affected by several factors, including changes in competition, fluctuations in drilling and completion activity, perceptions of future prices of oil and gas, government regulation, disruptions caused by weather and general economic conditions. We believe that the principal competitive factors are price, performance, product and service quality, safety, response time and breadth of products and services.
Material Effects of Governmental Regulations
Our business is significantly affected by country, regional, and local laws and other regulations. These laws and regulations relate to, among other things:
| ● | worker safety standards; | |
| ● | the protection of the environment; | |
| ● | the handling and transportation of hazardous materials; and | |
| ● | the mobilization of our equipment to, and operations conducted at, our work sites. |
Numerous permits are required for the conduct of our business and operation of our various facilities and equipment. These permits can be revoked, modified or renewed by issuing authorities based on factors both within and outside our control.
We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings in the future. We also cannot predict whether additional laws and regulations will be adopted, including changes in regulatory oversight, increase of federal, state or local taxes, increase of inspection costs, or the effect such changes may have on us, our businesses or our financial condition.
Environmental Regulation
In the countries where we operate, we are subject to environmental laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection and occupational health and safety, including regulations related to greenhouse gas emissions and hydraulic fracturing. Where applicable we have obtained and maintain licenses to operate through the local ministry of environment or similar governmental authority. We have established and implemented an environmental health and safety management system based on ISO 14001 and OHSAS 18001. In addition, we remain accountable to each customer or operator we service and ensure that full compliance is maintained based on each customer’s requirements.
Most of the countries in which we operate have laws and regulations in place referencing water discharge particularly in the vicinity of inhabited areas or regulated waterways. Restrictions and controls regarding the unauthorized discharge of pollutants, including produced waters and other oil and gas wastes, into regulated waters are in place but not always subject to formal assessments by the regulators. We are working to ensure that our facilities have adequate drainage, sumps, and appropriate sedimentation tanks where required. Integrity of primary and secondary containment systems, and ensure spill prevention controls and countermeasures plans are in place to minimize the impact of potential releases or spills.
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Health and Safety Regulation
Our health and safety (HSE) standards are based on a combination of the U.S. Occupational Safety and Health Act and the International Association of Oil & Gas Producers, a global forum whose members identify and share best practices to achieve improvements. Our HSE policy objectives include:
| ● | identifying risks to health and safety and implementing measures to control risk to an acceptable level; | |
| ● | periodically setting and publishing specific health and safety targets in consultation with employees and monitoring progress towards achieving such targets; | |
| ● | providing appropriate financial and physical resources to implement our health and safety targets; | |
| ● | recognizing that management of health and safety is a prime responsibility of line management; | |
| ● | devoting sufficient resources to ensure environmentally friendly performance; | |
| ● | encouraging full commitment of employees, by involving and consulting them on HSE matters; | |
| ● | ensuring employees receive appropriate information and training; | |
| ● | periodic reviewing and auditing our health and safety system to ensure its adequacy and effectiveness; and defining internal standards on HSE reporting, service quality reporting, injury and loss prevention, mechanical lifting, driving and journey management, hazard effects and management plan, environmental management, and audit and training. |
For a full listing of our significant subsidiaries as of December 31, 2019, see Exhibit 8.1 to this Annual Report. As of the date of filing of this Annual Report, all subsidiaries are, indirectly or directly, wholly-owned by us.
D. PROPERTY, PLANT, & EQUIPMENT
Properties
We lease our headquarters in Houston, Texas. We own or lease many facilities in the various areas in which we operate throughout the world. No single tangible fixed asset is individually material to our operations.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with Item 3A, “Selected Financial Data” and the accompanying consolidated financial statements and related notes included in Item 18, “Financial Statements” in this Annual Report.
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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, Qatar, 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 local staff 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.
Fiscal year 2019 was another significant step in the Company’s pursuit of our goal to become the recognized national champion in the MENA region. In spite of the geopolitical turbulence witnessed in the MENA region, we secured and expanded our core contracts in Saudi Arabia for more than 5 years, made inroads in new countries like Bahrain and Kuwait, refinanced our credit facilities at favorable terms, and most recently, began performing under a significant unconventional gas stimulation services contract in Saudi Arabia. Our ESG strategy is designed to deliver long-term economic, social and environmental value to all the communities we operate in. We are proud to be from the MENA region and aspire to continue to be key partners to our customers who share our vision of creating long-term sustainable In-Country Value.
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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
On a macro basis, the U.S. Energy Information Administration (“EIA”) estimates that global oil markets were roughly balanced in 2019, as global oil supply declined slightly and global oil consumption grew at its slowest pace since 2011. The EIA anticipates that both supply and consumption will grow in 2020, with supply slightly outpacing demand. Regionally, the Organization of the Petroleum Exporting Countries (“OPEC”) provided a similar view in its most recent World Oil Outlook, published in November 2019, noting that it anticipated demand to be substantially flat through 2024. While Brent crude oil prices were slightly depressed on average in 2019 as compared to 2018, there continue to be good indicators that exploration and production companies in the Middle East will continue to be very active, owing to an abundance of cheap-to-extract reserves that are less sensitive to price fluctuations.
In December 2019, the emergence of a new strain of the coronavirus (COVID-19) was reported in China that has subsequently spread across China and several other countries and regions, including the United States, Japan and Europe. As a result of the outbreak, travel restrictions, quarantines and similar measures taken by governments and companies have had a significant impact on global commerce. Beginning in early March 2020, the global oil markets have experienced a precipitous decline in oil prices in response to concerns regarding the potential impacts of the coronavirus (COVID-19) outbreak on worldwide oil demand and the anticipated increases in oil production from Russia and OPEC, primarily from Saudi Arabia. Due to the uncertain and rapidly evolving outbreak of the coronavirus (COVID-19), including its duration and severity, and the anticipated increases in oil production, we cannot estimate the scope of their impact on our business, our results of operations, our financial condition, our personnel, our customers, our suppliers or the global economy. Additionally, our customers and suppliers may reduce activity during this period of uncertainty and our customers may also seek price reductions for our services. We continue to monitor the ongoing situation and may adjust our current policies and practices as more information and guidance become available.
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 exploration and production (“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.
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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 2019 (68th edition). The countries in the Middle East 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, hydraulic fracturing, 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. Revenues are recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered or rentals provided. A performance obligation arises under contracts with customers to render services or provide rentals and is the unit of account under Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The Company accounts for services rendered and rentals provided separately if they are distinct and the service or rental is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered or rentals provided on its own or with other resources that are readily available to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A contract’s standalone selling prices are determined based on the prices that the Company charges for its services rendered and rentals provided. Most of the Company’s performance obligations are satisfied over time, which is generally represented by a period of 30 days or less. The Company’s payment terms vary by the type of products or services offered. The term between invoicing and when the payment is due is typically 30-60 days.
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 facilities 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.
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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
Historically, we have tracked 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. More recently, our customers in certain parts of the MENA region have increased their efforts to commercialize natural gas, particularly from unconventional formations. Over time, we anticipate that the market for natural gas will also become a key performance indicator for the Company.
The following table shows rig count (Source: Baker Hughes Published Rig Count Data) and oil prices as of the dates indicated:
| As of December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Rig count: | ||||||||||||
| MENA | 495 | 459 | 443 | |||||||||
| Rest of World – outside of North America | 609 | 566 | 511 | |||||||||
| Total | 1,104 | 1,025 | 954 | |||||||||
| Europe Brent Spot Price FOB (per barrel) | $ | 67.77 | $ | 50.57 | $ | 66.73 | ||||||
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 in Item 18, “Financial Statements” of this Annual 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 Period is from June 7, 2018 to December 31, 2018 (“2018 Successor Period”) and January 1, 2019 to December 31, 2019 (“2019 Successor Period”), and the predecessor periods are from January 1, 2017 to December 31, 2017 (“2017 Predecessor Period”) and 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 Period and 2018 Successor Period to enhance comparability with 2019 amounts.
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Our 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 62%, 62%, 82%, and 84% of our revenues for the 2019 Successor Period, 2018 Successor Period, 2018 Predecessor Period, and 2017 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 38%, 38%, 18%, and 16% of our revenues for the 2019 Successor Period, 2018 Successor Period, 2018 Predecessor Period, and 2017 Predecessor Period, respectively. Please see Item 4B, “Business Overview” in this Annual Report for a description of our reportable segments.
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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:
| (In US$ thousands, except share data and per share amounts) | |||||||||||||
| Successor (NESR) | Predecessor (NPS) | ||||||||||||
| Description | Period from January 1 to December 31, 2019 | Period from June 7 to December 31, 2018 | Period from January 1 to June 6, 2018 | ||||||||||
| Revenues | $ | 658,385 | $ | 348,590 | $ | 137,027 | |||||||
| Cost of services | (506,799 | ) | (249,159 | ) | (104,242 | ) | |||||||
| Gross profit | 151,586 | 99,431 | 32,785 | ||||||||||
| Selling, general and administrative expense | (63,840 | ) | (36,705 | ) | (19,969 | ) | |||||||
| Amortization | (15,932 | ) | (9,373 | ) | (10 | ) | |||||||
| Operating income | 71,814 | 53,353 | 12,806 | ||||||||||
| Interest expense, net | (18,971 | ) | (14,383 | ) | (4,090 | ) | |||||||
| Other income / (expense), net | (408 | ) | 5,441 | 362 | |||||||||
| Income before income tax | 52,435 | 44,411 | 9,078 | ||||||||||
| Income tax expense | (13,071 | ) | (9,431 | ) | (2,342 | ) | |||||||
| Net income / (loss) | 39,364 | 34,980 | 6,736 | ||||||||||
| Net income / (loss) attributable to non-controlling interests | - | (163 | ) | (881 | ) | ||||||||
| Net income attributable to shareholders | $ | 39,364 | $ | 35,143 | $ | 7,617 | |||||||
| Weighted average shares outstanding: | |||||||||||||
| Basic | 86,997,554 | 85,569,020 | 348,524,566 | ||||||||||
| Diluted | 86,997,554 | 86,862,983 | 370,000,000 | ||||||||||
| Net earnings per share: | |||||||||||||
| Basic | $ | 0.45 | $ | 0.41 | $ | 0.02 | |||||||
| Diluted | $ | 0.45 | $ | 0.40 | $ | 0.02 | |||||||
Revenue. Revenue was $658.4 million for the 2019 Successor Period compared to $137.0 million for the 2018 Predecessor Period and $348.6 million for the 2018 Successor Period, or $485.6 million in total for the 2018 periods.
The table below presents our revenue by segment for the periods indicated:
| (In US$ thousands, except share data and per share amounts) | |||||||||||||
| Successor (NESR) | Predecessor (NPS) | ||||||||||||
| Description | Period from January 1 to December 31, 2019 | Period from June 7 to December 31, 2018 | Period from January 1 to June 6, 2018 | ||||||||||
| Reportable Segment: | |||||||||||||
| Production Services | $ | 405,654 | $ | 215,791 | $ | 112,295 | |||||||
| Drilling and Evaluation Services | 252,731 | 132,799 | 24,732 | ||||||||||
| Total revenue | $ | 658,385 | $ | 348,590 | $ | 137,027 | |||||||
Production Services revenue was $405.7 million for the 2019 Successor Period compared to $215.8 million for the 2018 Successor Period and $112.3 million for the 2018 Predecessor Period, or $328.1 million in total for the 2018 periods. The increase in revenue was primarily due to higher coil tubing and stimulation activities in Saudi Arabia, Iraq and the United Arab Emirates.
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Drilling and Evaluation Services revenue was $252.7 million for the 2019 Successor Period compared to $132.8 million for the 2018 Successor Period and $24.7 million for the 2018 Predecessor Period, or $157.5 million in total for the 2018 periods. 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 $506.8 million for the 2019 Successor Period compared to $249.2 million for the 2018 Successor Period and $104.2 million for the 2018 Predecessor Period, or $353.4 million in total for the 2018 periods. Cost of services as a percentage of total revenue was 77%, 71% and 76%, for the 2019 Successor Period, 2018 Successor Period, 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 and new contract startup costs. Cost of services included depreciation expense of $72.2 million, $33.0 million, and $17.3 million, in the 2019 Successor Period, 2018 Successor Period, and 2018 Predecessor Period, respectively. Depreciation expense during the Successor Period has increased due to additional capital expenditures throughout the Successor Period, especially as compared to the Predecessor Period.
Gross profit. Gross profit as a percentage of total revenue in the 2019 Successor Period, the 2018 Successor Period and the 2018 Predecessor Period was 23%, 29% and 24%, respectively. The change in trend is described above.
Selling, general and administrative expense. SG&A expense, which represents costs associated with managing and supporting our operations, was $63.8 million for the 2019 Successor Period compared to $36.7 million for the 2018 Successor Period and $19.7 million for the 2018 Predecessor Period, or $56.7 million in total for the 2018 periods. SG&A as a percentage of total revenue was 10%, 11% and 15%, for the 2019 Successor Period, 2018 Successor Period, and 2018 Predecessor Period, respectively. The reduction of expenses as percentage of revenue for the 2019 Successor Period is primarily due to integration cost savings realized following the Business Combination, along with revenue growth.
Amortization expense. Amortization expense was $15.9 million for the 2019 Successor Period compared to $10 thousand for the 2018 Predecessor Period and $9.4 million for the 2018 Successor Period, or $9.4 million in total for the 2018 periods. The increase in the Successor Period amortization was driven mainly by acquired intangible assets resulting from the Business Combination.
Interest expense, net. Interest expense, net, was $19.0 million for the 2019 Successor Period compared to $14.4 million for the 2018 Predecessor Period and $4.1 million for the 2018 Successor Period, or $18.5 million in total for the 2018 periods. 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 of our credit facilities as well as the incremental impact of including GES throughout the 2019 Successor Period, as compared to only post-acquisition in the 2018 periods, offset by lower interest rates obtained in the May 2019 refinancing of our credit facilities.
Other (expense) income, net. Other (expense) income, net, was ($0.4) million for the 2019 Successor Period compared to $5.4 million for the 2018 Predecessor Period and $0.4 million for the 2018 Successor Period, or $5.8 million in total for the 2018 periods. Differences between periods were mainly attributed to a one-time gain during the 2018 Successor Period related to the settlement of a contingent liability for the NPS earn-out.
Income tax expense (benefit). Income tax expense (benefit) was $13.1 million for the 2019 Successor Period compared to $2.3 million for the 2018 Predecessor Period and $9.4 million for the 2018 Successor Period, or $11.7 million in total for the 2018 periods. See Note 17, Income Taxes, to our consolidated financial statements included in Item 18, “Financial Statements” of this Annual Report.
Net income. Net income was $39.4 million for the 2019 Successor Period compared to $6.7 million for the 2018 Predecessor Period and $35.0 million for the 2018 Successor Period, or $41.7 million in total for the 2018 periods.
Supplemental Segment EBITDA Discussion. Our management uses Segment EBITDA as its principal measure of segment operating performance (in thousands).
| (In US$ thousands, except share data and per share amounts) | |||||||||||||
| Successor (NESR) | Predecessor (NPS) | ||||||||||||
| Description | Period from January 1 to December 31, 2019 | Period from June 7 to December 31, 2018 | Period from January 1 to June 6, 2018 | ||||||||||
| Reportable Segment: | |||||||||||||
| Production Services | $ | 130,839 | $ | 77,482 | $ | 36,836 | |||||||
| Drilling and Evaluation Services | 52,962 | 32,782 | 3,267 | ||||||||||
Production Services EBITDA was $130.9 million for the 2019 Successor Period compared to $77.5 million for the 2018 Successor Period and $36.8 million for the 2018 Predecessor Period, or $114.3 million in total for the 2018 periods. The increase in Segment EBITDA was due primarily to higher coil tubing activity in Saudi, Qatar, Iraq and the United Arab Emirates.
Drilling and Evaluation Services EBITDA was $53.0 million for the 2019 Successor Period compared to $32.8 million for the 2018 Successor Period and $3.3 million for the 2018 Predecessor Period, or $36.0 million in total for the 2018 periods. The increase in Segment EBITDA was driven by strong well testing activities in Saudi and Iraq.
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2018 Compared to 2017
The following table presents our consolidated income statement data for the periods indicated:
| (In US$ thousands, except share data and per share amounts) | |||||||||||||
| Predecessor (NPS) | |||||||||||||
| Description | Period from June 7 To December 31, 2018 | Period from January 1 To June 6, 2018 | Year ended December 31, 2017 | ||||||||||
| Revenues | $ | 348,590 | $ | 137,027 | $ | 271,324 | |||||||
| Cost of services | (249,159 | ) | (104,242 | ) | (200,149 | ) | |||||||
| Gross profit | 99,431 | 32,785 | 71,175 | ||||||||||
| Selling, general and administrative expense | (36,705 | ) | (19,969 | ) | (30,336 | ) | |||||||
| Amortization | (9,373 | ) | (10 | ) | (607 | ) | |||||||
| Operating income | 53,353 | 12,806 | 40,232 | ||||||||||
| Interest expense, net | (14,383 | ) | (4,090 | ) | (6,720 | ) | |||||||
| Other income / (expense), net | 5,441 | 362 | (573 | ) | |||||||||
| Income before income tax | 44,411 | 9,078 | 32,939 | ||||||||||
| Income tax expense | (9,431 | ) | (2,342 | ) | (4,586 | ) | |||||||
| Net income / (loss) | 34,980 | 6,736 | 28,353 | ||||||||||
| Net income / (loss) attributable to non-controlling interests | (163 | ) | (881 | ) | (2,273 | ) | |||||||
| Net income attributable to shareholders | $ | 35,143 | $ | 7,617 | $ | 30,626 | |||||||
| Weighted average shares outstanding: | |||||||||||||
| Basic | 85,569,020 | 348,524,566 | 342,250,000 | ||||||||||
| Diluted | 86,862,983 | 370,000,000 | 370,000,000 | ||||||||||
| Net earnings per share: | |||||||||||||
| Basic | $ | 0.41 | $ | 0.02 | $ | 0.09 | |||||||
| Diluted | $ | 0.40 | $ | 0.02 | $ | 0.08 | |||||||
Revenue. Revenue was $348.6 million for the 2018 Successor Period and $137.0 million for the 2018 Predecessor Period, or $485.6 million for the 2018 periods, compared to revenue of $271.3 million for the 2017 Predecessor Period. Excluding the revenue of GES, revenue for the aggregated 2018 Successor Period and the 2018 Predecessor Period would have been $389.2 million.
The table below presents our revenue by segment for the periods indicated:
| (In US$ thousands, except share data and per share amounts) | |||||||||||||
| Predecessor (NPS) | |||||||||||||
| Description | Period from June 7 to December 31, 2018 | Period from January 1 to June 6, 2018 | Year ended December 31, 2017 | ||||||||||
| Reportable Segment: | |||||||||||||
| Production Services | $ | 215,791 | $ | 112,295 | $ | 228,763 | |||||||
| Drilling and Evaluation Services | 132,799 | 24,732 | 42,561 | ||||||||||
| Total revenue | 348,590 | 137,027 | 271,324 | ||||||||||
Production Services revenue was $215.8 million for the 2018 Successor Period and $112.3 million for the 2018 Predecessor Period, or $328.1 million the 2018 periods, compared to revenue of $228.8 million for the 2017 Predecessor Period. Excluding the revenue of GES, revenue for the aggregated 2018 Successor Period and the 2018 Predecessor Period would have been $287.0 million. The increase in revenue was primarily due to higher coil tubing and stimulation activities in Saudi Arabia, Qatar, Iraq, and the United Arab Emirates.
Drilling and Evaluation Services revenue was $132.8 million for the 2018 Successor Period and $24.7 million for the 2018 Predecessor Period, or $157.5 million the 2018 periods, compared to revenue of $42.6 million for the 2017 Predecessor Period. Excluding the revenue of GES, revenue for the aggregated 2018 Successor Period and the 2018 Predecessor Period would have been $102.2 million. The increase was primarily driven by strong well testing and logging activity in Saudi Arabia and Iraq.
Cost of services. Cost of services was $249.2 million for the 2018 Successor Period, $104.2 million for the 2018 Predecessor Period and $200.1 million for the 2017 Predecessor Period. Cost of services as a percentage of total revenue was 71%, 76% and 74% for the 2018 Successor Period, 2018 Predecessor Period, and 2017 Predecessor Period, respectively. The change in trend is due mainly to revenue mix between business lines with lower and higher margins. Cost of services included depreciation of $33.0 million, $17.3 million and $37.8 million for the 2018 Successor Period, 2018 Predecessor Period and the 2017 Predecessor Period, respectively.
Gross profit. Gross profit as a percentage of total revenue in the 2018 Successor Period, the 2018 Predecessor Period and the 2017 Predecessor Period was 29%, 24% and 26%, respectively. The change in trend is described above.
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Selling, general and administrative expense. SG&A expense, which represents costs associated with managing and supporting our operations, was $36.7 million, $20.0 million and $30.3 million for the 2018 Successor Period, 2018 Predecessor Period and the 2017 Predecessor Period, respectively. As a percentage of revenue, SG&A expenses were 11%, 15% and 11% of revenue, respectively. The reduction of expenses as percentage of revenue for the 2018 Successor Period is primarily due to integration cost savings realized following the Business Combination, along with revenue growth.
Amortization expense. Amortization expense was $9.4 million, negligible and $0.6 million for the 2018 Successor Period, 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Amortization expense dropped significantly during the 2018 Predecessor Period as a result of legacy contract intangibles being fully amortized during 2017. The increase in the 2018 Successor Period amortization was driven mainly by recording the valuation of our acquired intangible assets resulting from the Business Combination.
Interest expense, net. Interest expense, net, was $14.4 million, $4.1 million and $6.7 million for the 2018 Successor Period, 2018 Predecessor Period and the 2017 Predecessor Period, respectively. The relative increase in trend was attributable to both higher LIBOR rates and higher fixed interest charges on the Murabaha bank loan, in addition to incremental interest charges arising on our bridge loan facility which was drawn down in early February 2018 and the Hana Loan which was incurred during the 2018 Successor Period to finance a portion of the consideration for the Business Combination.
Other (expense) income, net. Other (expense) income, net, was $5.4 million, $0.4 million and ($0.6) million for the 2018 Successor Period, 2018 Predecessor Period and the 2017 Predecessor Period, respectively. Other expenses decreased due to higher legal fees incurred during 2017 in connection with the renewal of bank facilities. Other income of $5.7 million was recorded in the 2018 Successor Period as a result of equity stock earn-out on purchase price consideration to previous shareholders.
Income tax. Income tax expense was $9.4 million for the 2018 Successor Period compared to $2.3 million for the 2018 Predecessor Period and $4.6 million for the 2017 Predecessor Period. The increase is primarily related to a change in the tax applied in Saudi Arabia (changing from Zakat to a Corporate Tax regime) as well as additional business in Oman where the inclusion of GES in the 2018 Successor Period has significantly increased our presence. See Note 17, Income taxes, to our consolidated financial statements included in Item 18, “Financial Statements” of this Annual Report.
Net income. Net income was $35.0 million, $6.7 million and $28.4 million for the 2018 Successor Period, 2018 Predecessor Period and the 2017 Predecessor Period, respectively.
Supplemental Segment EBITDA Discussion. Our management uses Segment EBITDA as its principal measure of segment operating performance (in thousands).
| (In US$ thousands, except share data and per share amounts) | |||||||||||||
| Predecessor (NPS) | |||||||||||||
| Description | Period from June 7 to December 31, 2018 | Period from January 1 to June 6, 2018 | Year ended December 31, 2017 | ||||||||||
| Reportable Segment: | |||||||||||||
| Production Services | $ | 77,482 | $ | 36,836 | $ | 81,780 | |||||||
| Drilling and Evaluation Services | 32,782 | 3,267 | 4,952 | ||||||||||
Production Services EBITDA was $77.5 million for the 2018 Successor Period and $36.8 million for the 2018 Predecessor Period, or $114.3 million for the 2018 periods, as compared to $81.8 million for the 2017 Predecessor Period. The increase in Segment EBITDA was due primarily to higher coil tubing activity in Saudi, Qatar, Iraq and the United Arab Emirates.
Drilling and Evaluation Services EBITDA was $32.8 million for the 2018 Successor Period and $3.3 million for the 2018 Predecessor Period, or $36.0 million for the 2018 periods, as compared to $4.9 million for the 2017 Predecessor Period. The increase in Segment EBITDA was driven by strong well testing activities in Saudi and Iraq.
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Critical Accounting Policies and Estimates
We have defined a critical accounting estimate as one that is both important to the portrayal of either our financial condition or results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe that the following are the critical accounting estimates used in the preparation of our consolidated financial statements. There are other items within our consolidated financial statements that require estimation and judgment, but they are not deemed critical as defined above. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report.
Goodwill
Goodwill is the excess cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. The goodwill relating to each reporting unit is tested for impairment annually as well as when an event, or change in circumstances, indicates an impairment may have occurred.
Goodwill is evaluated for impairment on an annual basis, or more frequently if circumstances require. We perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of the applicable reporting unit is less than its carrying amount. If we determine, as a result of its qualitative assessment, that it is not more-likely-than-not that the fair value of the applicable reporting unit is less than its carrying amount, no further testing is required. If we determine, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of the applicable reporting unit is less than its carrying amount, a goodwill impairment assessment is performed using a two-step, fair value-based test. Under the first step, goodwill is reviewed for impairment by comparing the carrying value of the reporting unit’s net assets (including allocated goodwill) to the fair value of the reporting unit. The fair value of the reporting units is determined using a discounted cash flow approach.
Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include revenue growth rates, discount rates operating margins, weighted average costs of capital, market share and future market conditions, among others. If the reporting unit’s carrying value is greater than its fair value, a second step is performed whereby the implied fair value of goodwill is estimated by allocating the fair value of the reporting unit in a hypothetical purchase price allocation analysis. If the amount of goodwill resulting from this hypothetical purchase price allocation is less than the carrying value of the reporting unit’s goodwill, the recorded carrying value of goodwill is written down to the implied fair value.
Intangible assets
Our intangible assets with finite lives consist of customer contracts and trademarks and trade names acquired in connection with the Business Combination. The cost of intangible assets with finite lives is amortized over the estimated period of economic benefit, ranging from eight to 10 years. Asset lives are adjusted whenever there is a change in the estimated period of economic benefit. No residual value has been assigned to these intangible assets.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations. We assess the recoverability of the carrying amount by preparing estimates of future revenue, margins, and cash flows. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the asset to its estimated fair value. The determination of future cash flows as well as the estimated fair value of assets involves significant estimates on the part of management. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, we could be required to recognize impairment charges in the future. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flow models.
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Revenue recognition
Effective December 31, 2019, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). The Company adopted this ASU using the modified retrospective adoption method. There was no impact on the consolidated financial statements, no cumulative effect adjustment was recognized, and no contract assets or liabilities were recorded.
The Company recognizes revenue from contracts with customers upon transfer of control of promised services to customers at an amount that reflects the consideration it expects to receive in exchange of services. We typically receive “callouts” from our customers for specific services at specific customer locations, typically initiated by the receipt of a purchase/service order or similar document from the customer. Customer callouts request that the Company provide a “suite of services” to fulfill the service order, encompassing personnel, use of Company equipment, and supplies required to perform the work. Rates for these services are defined in the Company’s contracts with customers. The term between invoicing and when the payment is due is typically 30-60 days.
Revenue is recognized for each performance obligation when the customer obtains control of the service the Company is providing. For most services, control is obtained over time as (1) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as Company employees perform and (2) the Company’s performance creates or enhances an asset that the customer controls. Revenue is recorded based on daily drilling logs, recognized at the standalone selling price of the services provided as reduced proportionately for management’s estimate of volume or early pay discount where applicable.
Costs of obtaining a customer contract that are incremental and expected to be recovered are recognized as an asset. Costs are subsequently amortized over the term of the contract or less if circumstances indicate that a shorter deferral period better matches these costs with the revenue they generate.
Income taxes
Income tax expense represents the sum of current tax and deferred tax. Interest and penalties relating to income tax are also included in the income tax expense. Income tax is recognized in the statements of operations, except to the extent that it relates to items recognized in other comprehensive income or directly in equity, in which case the related tax is recognized in other comprehensive income or directly in equity. Current tax is based on the taxable profit for the period. Taxable profit differs from net profit as reported in the statements of operations because it is determined in accordance with the rules established by the applicable taxation authorities. It therefore excludes items of income or expense that are taxable or deductible in other periods as well as items that are never taxable or deductible. Our liability for current tax is calculated using tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences except:
| ● | where the deferred tax liability arises on the initial recognition of goodwill; | |
| ● | where the deferred tax liability arises on the initial recognition of an asset or liability in a transaction that is not a Business Combination and, at the time of the transaction, affects neither accounting profit nor taxable profit or loss; and | |
| ● | In respect of taxable temporary differences associated with investments in subsidiaries and associates and interests in joint arrangements, where we are able to control the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. |
Deferred tax assets are recognized for deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilized except where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit or loss. In respect of deductible temporary differences associated with investments in subsidiaries and associates and interests in joint arrangements, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized.
The computation of our income tax expense and liability involves the interpretation of applicable tax laws and regulations in many jurisdictions throughout the world. The resolution of tax positions taken by us, through negotiations with relevant tax authorities or through litigation, can take several years to complete and in some cases it is difficult to predict the ultimate outcome. Therefore, judgment is required to determine provisions for income taxes. In addition, we have carry-forward tax losses and tax credits in certain taxing jurisdictions that are available to offset against future taxable profit. However, deferred tax assets are recognized only to the extent that it is probable that taxable profit will be available against which the unused tax losses or tax credits can be utilized. Management judgment is exercised in assessing whether this is the case and estimates are required to be made of the amount of future taxable profits that will be available.
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Recently Issued Accounting Pronouncements
Please refer to Note 3 to our consolidated financial statements included in Item 18, “Financial Statements” of this Annual Report for a discussion of recent accounting pronouncements and their anticipated impact.
B. 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 $73.2 million as of December 31, 2019 and $24.9 million as of December 31, 2018. Our outstanding long-term debt was $330.6 million as of December 31, 2019 and $225.2 million as of December 31, 2018. We believe that our cash on hand, cash flows generated from operations, and liquidity available through our credit facilities, including recently drawn facilities, will provide sufficient liquidity to manage our global cash needs. See “Capital Resources” below.
Cash Flows
| (In US$ thousands, except share data and per share amounts) | |||||||||||||||||
| Successor (NESR) | Predecessor (NPS) | ||||||||||||||||
Period from January 1 to December 31, 2019 | Period from June 7 to December 31, 2018 | Period from January 1 to June 6, 2018 | Year ended December 31, 2017 | ||||||||||||||
| Cash provided by (used in): | |||||||||||||||||
| Operating Activities | $ | 89,091 | $ | 40,840 | $ | 20,826 | $ | 83,193 | |||||||||
| Investing Activities | (107,338 | ) | (66,588 | ) | (7,916 | ) | (52,042 | ) | |||||||||
| Financing Activities | 66,575 | 50,594 | (5,740 | ) | (32,138 | ) | |||||||||||
| Effect of exchange rate changes on cash | (19 | ) | - | (16 | ) | (45 | ) | ||||||||||
| Net change in cash and cash equivalents | $ | 48,309 | $ | 24,846 | $ | 7,154 | $ | (1,032 | ) | ||||||||
Operating Activities
Cash flows provided by operating activities were $89.1 million for the 2019 Successor Period compared to cash flows provided by operating activities of $20.8 million for the 2018 Predecessor Period and $40.8 million for the 2018 Successor Period, or $61.7 million in total for the 2018 periods. Cash flows from operating activities increased by $27.4 million in the 2019 Successor Period compared to the 2018 periods, primarily due to the impact of higher depreciation and amortization in the 2019 Successor Period and the inclusion 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 $107.3 million for the 2019 Successor Period compared to cash flows used in investing activities of $7.9 million for the 2018 Predecessor Period and $66.6 for the 2018 Successor Period, or $74.5 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 $66.6 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 $50.6 million for the 2018 Successor Period, or cash flows provided by financing activities of $44.9 million in total for the 2018 periods. In the 2019 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 reoccur in the 2019 Successor Period. Additionally, a dividend to the former owners of NPS in the Predecessor Period did not reoccur in 2019.
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Credit Facilities
As of and after December 31, 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 (“NPS Bahrain”) and its Kuwait branch, Gulf Energy SAOC and National Petroleum Technology Company as borrowers, and HSBC, Mashreqbank PSC, APICORP and Saudi British Bank, as the “Lenders.” Upon consummation of this transaction, with the exception of a $30.4 million working capital facility with HSBC, described below, the Company settled all of its existing debt obligations as of May 5, 2019 and wrote-off remaining unamortized debt issuance costs of $0.8 million as of that date.
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 due 2023 (“RCF” or “Secured Revolving Credit Facility”), 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 defined in the agreement. As of December 31, 2019, this results in an interest rate of 4.3%. The Company has drawn $300.0 million of the Term Loan and $50.0 million of the RCF as of December 31, 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 as defined in the agreement. The Company is permitted to make any prepayment under this RCF in multiples of $5.0 million during this 4-year period up to May 6, 2023. Any unutilized balances from the RCF can be drawn down again during the 4-year tenure at the same terms. As of December 31, 2019, the Company has $15.0 million available to be drawn under the RCF.
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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 December 31, 2019, the Company had utilized $134.2 million under this working capital facility and the balance of $25.8 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 December 31, 2019, the Company had utilized $24.1 million under this working capital facility and the balance of $6.3 million was available to the Company.
Utilization of the working capital facilities under both the legacy arrangement and Secured Facilities Agreement comprises letters of credit issued to vendors, guarantees issued to customers, vendors, and others, and short-term borrowings used to settle letters of credit. Once a letter of credit is presented for payment by the vendor, the Company at its election can settle the letter of credit from available cash or leverage short-term borrowings that will be repaid quarterly over a one-year period. Until a letter of credit is presented for payment by the vendor, it is disclosed as an off-balance sheet obligation. For additional discussion of outstanding letters of credit and guarantees, see Note 14, Commitments and Contingencies, to our consolidated financial statements included in Item 18, “Financial Statements” of this Annual Report.
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 December 31, 2019.
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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 mergers and acquisitions, 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.
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.
For other matters affecting liquidity, see Item 5E, “Off-Balance Sheet Arrangements” below.
Capital Expenditure Commitments
The Company was committed to incur capital expenditures of $22.1 million and $25.9 million at December 31, 2019 and 2018, respectively. Commitments outstanding as of December 31, 2019 are expected to be settled during 2020.
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C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
We own and control a variety of intellectual property, including but not limited to proprietary information and software tools and applications that, in the aggregate, are material to our business. No individual instance of intellectual property is material to the Company.
Global E&P Trends and Oil Prices
See “– Global E&P Trends and Oil Prices” included in Item 5A, “Operating Results”.
E. OFF-BALANCE SHEET ARRANGEMENTS
Letters of credit. The Company has outstanding letters of credit amounting to $21.2 million and $10.3 million as of December 31, 2019 and 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 $99.1 million and $41.4 million as of December 31, 2019 and 2018, respectively. We have also entered into cash margin guarantees totaling $5.8 million at December 31, 2019. 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 consolidated financial statements.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The table below summarizes the payments due by fiscal year for our outstanding contractual obligations as of December 31, 2019. Certain amounts included in this table are based on our estimates and assumptions about these obligations, including their duration, anticipated actions by third parties and other factors. The contractual cash obligations we will actually pay in future periods may vary from those reflected in the table because the estimates and assumptions are subjective.
| Payments Due by Period | ||||||||||||||||||||
| Less than | 1 – 3 | 3 – 5 | More than | |||||||||||||||||
| (In thousands) | Total | 1 year | years | years | 5 years | |||||||||||||||
| Principal payments for long-term debt(1) | $ | 350,000 | $ | 15,000 | $ | 82,500 | $ | 140,000 | $ | 112,500 | ||||||||||
| Principal payments for short-term debt (2) | 37,963 | 37,963 | - | - | - | |||||||||||||||
| Estimated interest payments (3) | 68,950 | 15,956 | 31,465 | 18,715 | 2,814 | |||||||||||||||
| Operating leases (4) | 53,049 | 23,201 | 23,632 | 4,587 | 1,629 | |||||||||||||||
| Capital lease obligations (5) | 33,673 | 20,531 | 13,142 | - | - | |||||||||||||||
| Seller-provided installment financing for capital expenditures (6) | 5,950 | 2,975 | 2,975 | - | - | |||||||||||||||
| Contractual commitments for capital expenditures (7) | 22,077 | 22,077 | - | - | - | |||||||||||||||
| Employees’ end of service benefits (8) | 29,417 | 3,234 | 9,532 | 2,993 | 13,658 | |||||||||||||||
| Total | $ | 601,079 | $ | 140,937 | $ | 163,246 | $ | 166,295 | $ | 130,601 | ||||||||||
(1) Amounts represent the cash payments for the principal amounts related to our long-term debt at December 31, 2019. Amounts for debt do not include any unamortized discounts or deferred issuance costs. Cash payments for interest are excluded from these amounts.
(2) Amounts represent the cash payments for the principal amounts related to our short-term debt at December 31, 2019. Cash payments for interest are excluded from these amounts.
(3) Amounts represent the cash payments for interest on our debt.
(4) Amounts represent the future minimum payments under non-cancelable operating leases with initial or remaining terms of one year or more. We enter into operating leases, some of which include renewal options; however, we have excluded renewal options from the table above unless it is anticipated that we will exercise such renewals.
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(5) Represents gross future minimum payments under capital leases. We enter into capital leases for property, plant, and equipment when the terms of these leases are advantageous to immediate purchase or where other unique business factors exist.
(6) Represents future minimum under agreements to purchase capital assets using seller-provided installment financing.
(7) Contractual commitments for capital expenditures include agreements to purchase property, plant, and equipment that are enforceable and legally binding and specify all significant terms. Our performance is secured by letters of credit, as described in Item 5A, “Off Balance Sheet Arrangements,” for $21.2 million of this balance.
(8) Amount represents the expected payments of employees’ end of service benefits.
See “Forward-Looking Statements” in this Annual Report for additional information.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
We rely on the senior management of our principal operating subsidiaries to manage our business. Our senior management team is responsible for the day-to-day management of our operations. Members of our senior management are appointed from time to time by vote of the Board of Directors and hold office until a successor is elected and qualified. Our current Chief Executive Officer, Chief Financial Officer and Chief Commercial Officer are:
| Name | Age(1) | Position | ||
| Sherif Foda | 50 | Executive Chairman of the Board and Chief Executive Officer | ||
| Christopher L. Boone | 50 | Chief Financial Officer | ||
| Dhiraj Dudeja | 43 | Chief Commercial Officer |
(1) As of December 31, 2019.
Sherif Foda has served as our Chief Executive Officer and Chairman since our inception. He has more than 25 years of professional experience in the oil and gas industry working for Schlumberger Limited (NYSE: SLB) (“Schlumberger”) around the world, particularly in the Middle East, Europe and the US. From June 2016 to January 2018, he served as Senior Advisor to the Chairman of Schlumberger. From July 2013 through June 2016, he served as an officer and the President of the Production Group of Schlumberger. From June 2011 to June 2013, he served as the President of Schlumberger Europe and Africa, based in Paris. From June 2009 to June 2011, he served as Schlumberger’s Vice President and Managing Director of the Arabian market: Saudi Arabia, Kuwait and Bahrain, based in Dhahran from July 2007 to May 2009, he served as Schlumberger’s Worldwide Vice President for Well Intervention, based in Houston. From 2005 to 2007, he was Schlumberger’s Vice President for Europe, Caspian and Africa, based in Paris. From 2002 to 2005, he served as the Managing Director of Schlumberger in Oman, based in Muscat. In 2001, he served as Schlumberger’s Operations Manager for UAE, Qatar and the Arabian Gulf, based in Abu Dhabi. He started his career in 1993 with Schlumberger, working on the offshore fields in the Red Sea, then transferred to Germany for two years, then served as the general manager of operations in Eastern Europe countries (mainly Poland, Lithuania, Romania and Hungary). Prior to working in the oil and gas industry, he worked in the information technology and computer industry for two years in Egypt. Mr. Foda is a board member of Energy Recovery, Inc. (Nasdaq: ERII), a technology company based in California. He also serves on the Board of Trustees of Awty International School in Houston and is a board member for Al Fanar Venture philanthropy in London.
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We believe that Mr. Foda is qualified to serve on our Board of Directors because of his extensive experience in the oil and gas industry, including approximately 25 years with Schlumberger and his extensive oil field services industry experience throughout the MENA region and globally as an executive and board member.
Christopher L. Boone has been the Chief Financial Officer of NESR since May 29, 2019. Previously, he was Chief Financial Officer and Senior Vice President of Tesco Corporation from January 1, 2014 until its acquisition by Nabors Industries in late 2017 and until the transition to Nabors was completed in early 2018. He served as the Chief Financial Officer, Treasurer and Vice President of Lufkin Industries Inc. from May 7, 2008 to January 1, 2014 and served as its Corporate Controller from August 1999 to May 2008. Mr. Boone had been an employee of Lufkin Industries since 1993. He earned a B.S Degree in Business Administration & Accounting from Washington and Lee University and his MBA degree from The Thunderbird School of Global Management.
Dhiraj Dudeja has more than 23 years of professional experience in the oil and gas industry working for Schlumberger Limited in South and South East Asia, Middle East, Europe and the US. From April 2014 to August 2016, he led the Sales and Commercial function for the Production Group of Schlumberger. In his previous roles, he served as the Wireline Marketing and Sales Manager for Europe, Africa and Caspian; Worldwide Training & Development Manager and Acting Personnel Manager for Wireline; General Manager for Wireline for India; Oilfield Services Training & Staffing Manager for Schlumberger for the Middle East and Asia region; and Country Manager for Wireline in Vietnam. He started his career in 1996 with Schlumberger, working primarily offshore Mumbai High and then in the South China Sea, handling exploration and deep-water wireline logging operations. He also has co-founded two startups in the education analytics field in India and US, one of which he actively led from 2012 to 2014 as COO. He is also the co-founder of PetroConnect LLC, an independent E&P investment company. He graduated from the Indian Institute of Technology, Delhi (IIT-Delhi) and holds a Bachelor of Technology degree in Electrical Engineering with a minor in Management Studies.
Board of Directors
Our board of directors is currently divided into two classes, Class I and Class II, with only one class of directors being elected in each year and each class serving a two-year term. Class I Director seats will next be up for election by shareholders at the annual general meeting in 2020; and the Class II Director seats will be up for election by shareholders at the annual general meeting in 2021. Set forth below are the names, ages and positions of each of the individuals who currently serve as directors of NESR and/or who have been nominated to serve on the Board of Directors as Class II directors:
| Name | Age | Class | Position | |||
| Antonio J. Campo Mejia | 61 | I | Lead Director | |||
| Nadhmi Al-Nasr | 64 | I | Director | |||
| Amr Al Menhali(1) | 40 | I | Director | |||
| Yousef Al Nowais(1) | 65 | II | Director | |||
| Andrew Waite(2) | 58 | I | Director | |||
| Thomas D. Wood | 61 | II | Director | |||
| Hala Zeibak(3) | 38 | I | Director | |||
| Sherif Foda | 50 | II | Executive Chairman of the Board and Chief Executive Officer |
(1) Al Nowais Investments LLC (“ANI”) and NESR SPV Ltd., a Cayman company, separately are entitled to nominate one director each to the Board of Directors for so long as they or their affiliates hold at least 50% of the NESR ordinary shares acquired pursuant to the Business Combination. Mr. Yousef Al Nowais was appointed to the Board of Directors as of November 10, 2019, representing ANI. Mr. Al Menhali was appointed to the Board of Directors as of November 10, 2019, representing NESR SPV Ltd., to replace Mr. Salem Al Noaimi who submitted his resignation from the Board of Directors as of November 10, 2019.
(2) SV3 Holdings, Pte Ltd (“SV3”) is entitled to nominate one director to the Board of Directors for so long as it or its affiliates hold at least 60% of the NESR ordinary shares acquired pursuant to the Business Combination.
(3) Olayan Saudi Holding Company is entitled to nominate one director to the Board of Directors for so long as it and its affiliates collectively hold at least 6,879,225 NESR ordinary shares.
Information regarding the business experience of each director is provided below. There are no family relationships among NESR’s executive officers and directors.
Class I Directors (terms expire in 2020)
Antonio J. Campo Mejia has been an independent director of the Company since May 12, 2017 and is the Lead Director of the Board. Mr. Campo Mejia has been a non-executive director of the Supervisory Board of Fugro N.V. (Euronext: FUR), a company providing geotechnical, survey, subsea and geosciences services, since 2014 and Vice-Chairman of Basin Holdings, a global holding company focused on providing products and services to energy and industrial customers since 2012. From 2012 to 2013, Mr. Campo Mejia served as non-executive director at Integra Group, an oilfield services company, mainly active in Russia and the Commonwealth of Independent States and served as its Chief Executive Officer from 2009 to 2012. Mr. Campo Mejia also served as non-executive director at Basin Supply LP, Basin Tools LP and Basin Energy Services LP from 2009 to 2014. Prior to that, Mr. Campo Mejia spent 28 years of his professional career at Schlumberger, one of the world’s leading oilfield services company, in a multitude of senior management positions in different parts of the world. In his various roles with Schlumberger, Mr. Campo Mejia served as the President of Latin America for Oilfield Services and President of Europe & Africa and was the President of Schlumberger’s Integrated Project Management business responsible for the worldwide operations in this service line. Prior to that, Mr. Campo Mejia served as Director of Personnel for the Reservoir Management Group in Houston, Texas and Vice President of Oilfield Services Latin America South, managing a full range of services in the region. In his career prior to 1997, Mr. Campo Mejia held a number of senior management and technical positions in Schlumberger’s wireline business. Mr. Campo Mejia received his bachelor’s degree in Electronic Engineering from Pontificia Universidad Javeriana in 1980.
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We believe that Mr. Campo Mejia is qualified to serve on our Board of Directors because of his extensive experience in the oil and gas industry and his experience as an executive in oilfield services and board member of multinational companies.
Nadhmi Al-Nasr was elected to the Board as of June 6, 2018 and is an independent director. Mr. Al-Nasr is the Chief Executive Officer of NEOM, Saudi Arabia’s megacity project; and the Interim President and Executive Vice President, Administration and Finance of the King Abdullah University of Science and Technology (KAUST). Mr. Al-Nasr has been associated with KAUST from its inception in 2006 and was instrumental in its development as a state-of-the-art campus which opened its doors in 2009. Previously, Mr. Al-Nasr held several positions at Saudi Aramco, including Manager of the Shaybah Development Program, a mega-project built in one of harshest environments in Saudi Arabia. The project is widely regarded as one of Saudi Aramco’s most ambitious and successful ventures. Mr. Al-Nasr also managed the largest oilfield in the world, Ghawar oilfield, for Saudi Aramco, and ensured the Kingdom’s ability to fill the production gap caused by the loss of oil output from Iraq and Kuwait during the Gulf War. Mr. Al-Nasr has also led Saudi Petroleum Overseas Ltd. London, as its Managing Director and has served as Executive Director of Community Services for Saudi Aramco. In 2014, Mr. Al-Nasr was appointed by royal decree to serve as a member of the Supreme Economic Council and was also appointed as a member of the Board of Trustees of the King Abdulaziz Centre for National Dialogue. In March 2017, Mr. Al-Nasr was appointed as Interim President of King Abdullah Petroleum Studies and Research Center (KAPSARC), in addition to his roles as Interim President and EVP at KAUST. In August 2018, Mr. Al-Nasr was appointed as the CEO of NEOM project. Mr. Al-Nasr graduated with a Bachelor’s degree in Chemical Engineering from the King Fahd University of Petroleum and Minerals in 1978.
We believe that Mr. Al-Nasr is qualified to serve on our Board of Directors because of his extensive experience in the oil exploration and production industry and his experience with the largest oil & gas company in the world as well as leading large projects such as KAUST and NEOM.
Amr Al Menhali was nominated by our Nominating and Governance Committee and Board of Directors in November 2019 to serve as a Class I Director. Mr. Al Menhali joined Waha Capital as Chief Executive Officer in September 2019. Mr. Al Menhali has a track record of success of over 20 years in the financial services industry in a variety of senior positions and leadership roles. He has led several strategic transformation projects, building high performance businesses to achieve sustainable growth. During his career, he has developed strong leadership skills and expertise in strategy, finance, risk, credit and corporate governance. Mr. Al Menhali currently sits on the boards of several regional and international companies operating in diverse sectors, as well as on industry bodies including the UAE Banking Federation. He holds a Bachelor’s Degree, with Honours, in Business Administration. In addition, he completed the General Management Program at Harvard Business School in Boston.
We believe that Mr. Al Menhali is qualified to serve on our Board of Directors because of his extensive experience in the investment and financial services community and with diverse industries and multinational operations, including in the MENA region.
Hala Zeibak, who has been an independent director of the Company since May 12, 2017, is director of investments at Olayan Europe Limited, the investment advisory arm of The Olayan Group for the United Kingdom, Europe and Asia. The Olayan Group is a private multinational enterprise with a managed portfolio of international investments and diverse commercial and industrial operations in the Middle East. Ms. Zeibak joined The Olayan Group in July 2005 and initially worked at Olayan America in New York. She transferred to Olayan Europe in London in January 2011. Ms. Zeibak’s focus is on public and private equity investments primarily in the energy and affiliated sectors, including oil, gas, power, commodities and industrials. She is a member of the Oxford Energy Policy Club. Ms. Zeibak received a BA in Economics from Tufts University in 2003, graduating Summa Cum Laude with membership in the Phi Beta Kappa Society. She went on to earn a master’s degree in 2005 from the Fletcher School of Law & Diplomacy at Tufts. Her concentration was international finance and trade.
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We believe that Ms. Zeibak is qualified to serve on our Board of Directors because of her extensive experience in the investment community and with diverse industries and multinational operations, including in the MENA region.
Andrew Waite was elected to the Board as of June 6, 2018 and is an independent director. Mr. Waite is Co-President of SCF Partners, Inc., the ultimate general partner of SCF-VIII, L.P. and the ultimate general partner of the majority shareholder of SV3 Holdings Pte Ltd and has been an officer of that company since October 1995. He was previously Vice President of Simmons & Company International, where he served from August 1993 to September 1995. From 1984 to 1991, Mr. Waite held a number of engineering and project management positions with Royal Dutch / Shell Group, an integrated energy company. Mr. Waite currently serves on the board of directors of Nine Energy Service, Inc. (NYSE: NINE), a position he has held since February 2013, and on the board of directors of Forum Energy Technologies, Inc. (NYSE: FET), a position he has held since August 2010. Mr. Waite previously served on the board of directors of Complete Production Services, Inc., a provider of specialized oil and gas completion and production services from 2007 to 2009, Hornbeck Offshore Services, Inc., a provider of marine services to the energy sector and military customers from 2000 to 2006, Oil States International, Inc., a diversified oilfield services and equipment company, from August 1995 through April 2006, and Atlantic Navigation Holdings (Singapore) Limited (SGX: 5UL), a provider of marine logistic, ship repair, fabrication, and other marine services, from January 2016 to December 2018. Mr. Waite received an MBA with High Distinction from Harvard Business School, an MS degree in Environmental Engineering Science from California Institute of Technology and a BSc degree with First Class Honours in Civil Engineering from England’s Loughborough University.
We believe that Mr. Waite’s extensive public company experience in the energy sector, in particular in the oilfield services industry, and his experience in identifying strategic growth trends in the energy industry and evaluating potential transactions make him well qualified to serve on our Board of Directors.
Class II Directors (terms expire in 2021)
Sherif Foda’s biographical information is set forth above.
Yousef Al Nowais was nominated by our Nominating and Governance Committee and Board of Directors in November 2019 to serve as a Class II Director. He serves as the Chairman and Managing Director of Arab Development (“ARDECO”), a company he founded in his home city of Abu Dhabi, the United Arab Emirates. ARDECO is a large diversified business and a leading player in the oil & gas and petrochemical sectors as well as power generation and distribution and other engineering and infrastructure project services. He has also served as the Co-Chairman of Al Nowais Investments LLC, a leading investment company based in Abu Dhabi with local and international holdings in a broad range of strategic investments and actively managed subsidiaries. Prior to founding ARDECO, Mr. Al Nowais joined Abu Dhabi National Oil Company (“ADNOC”) after graduating from the University of Arizona in 1979 and held many senior positions in the ADNOC group, including Finance Director and Managing Director of ADNOC’s subsidiary FERTIL. From 2007-2013, Mr. Al Nowais served as Managing Director of Al Maabar International, a leading UAE organization investing internationally in real estate projects in the MENA region, which was formed as a joint venture between Al Dar Properties, Mubadala, Al Qudra Holdings, Reem Investment and Reem International.
We believe that Mr. Al Nowais is qualified to serve on our Board of Directors because of his extensive experience in the oil and gas industry.
Thomas Wood has served as a director since our inception and served as our Chief Financial Officer from inception until October 2017 and from November 29, 2017 until June 2018. He is an entrepreneur with over 35 years of experience in establishing and growing public and private companies that provide or use oil and gas contract drilling services. Since December 1990, he has served as the Chief Executive Officer of Round Up Resource Service Inc., a private investment company. Mr. Wood founded Xtreme Drilling Corp. (TSX:XDC), an onshore drilling and coil tubing technology company, in May 2005 and served as its Executive Chairman until May 2011 and its Chief Executive Officer and Director from May 2011 through August 2016. He is the founder of Savanna Energy Services Corp. (TSE: SVY), a North American energy services provider, where he served as the Chairman from 2001 to March 2005. He also served as Director at various companies engaged in the exploration and production of junior oil and gas, including Wrangler West Energy Corp. from April 2001 to 2014; New Syrus Capital Corporation from 1998 to 2001 and Player Petroleum Corporation from 1997 to 2001. In addition, Mr. Wood served as the President, Drilling and Wellbore Service, of Plains Energy Services Ltd. from 1997 to 2000 and Wrangler Pressure Control from 1998 to 2001. He served as the President of Round-Up Well Servicing Inc. from 1988 to 1997 and Vice President of Shelby Drilling from 1981 to 1987. Mr. Wood holds a BA in Economics from University of Calgary.
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We believe that Mr. Wood is qualified to serve on our Board of Directors because of his extensive experience in the oil and gas industry and his experience as an entrepreneur and building public companies and high growth organizations.
Senior Management
Members of our senior management receive compensation for the services they provide. Currently, the cash compensation for each member of senior management is comprised of base salary, annual cash incentive (bonus), and long-term equity incentive, restricted stock units (“RSUs”) issued pursuant to our 2018 Long Term Incentive Plan (the “LTIP”). During the year ended December 31, 2019, the aggregate cash compensation paid to all current members of senior management as a group was $2.1 million. LTIP grants to all current members of senior management totaled $0.9 million. Sherif Foda in his capacity as CEO waived receiving stock awards in both 2018 and 2019 in order to increase the number of shares available to grant a broader pool of employees and has announced his intention to do so for 2020 as well.
The compensation that we pay to our senior management is evaluated on an annual basis considering the following primary factors: position scope and responsibilities, experience and individual performance, market data, financial targets, personal objectives, and execution on longer-term financial and strategic goals that drive stockholder value creation. In addition, members of our senior management are eligible to participate in welfare benefit programs made available to our workforce generally, including medical, dental, life insurance and disability benefits. We believe that the compensation awarded to our senior management is consistent with that of our peers and similarly situated companies in the industry in which we operate.
Directors
Our Director compensation philosophy is to appropriately compensate our non-employee Directors for their services as a Director of a complex multi-national company. The compensation structure should align the interests of Directors and shareholders. Directors who are also employees of NESR do not receive compensation for serving on the Board. We believe that our Director fee structure is customary and reasonable and consistent with that of our peers and similarly situated companies in the industry in which we operate.
All non-employee Directors received an annual retainer of $50,000, paid in quarterly installments, and pro-rated for the partial year of service. In addition, the chairs of the Compensation and Nomination Committee receive an additional $15,000 annual retainer and the chair of the Audit Committee receives an annual retainer of $20,000, paid in quarterly installments, and pro-rated for the partial year of service. Non-employee Directors are permitted to waive Director’s fees. Additionally, all non-employee Directors received an annual equity award with a value of approximately $100,000, consisting of restricted shares that vest over one year. The actual number of restricted shares issued is calculated by dividing the closing price of our common stock on the Nasdaq exchange on the date of grant. All shares are awarded under the LTIP and follow all the terms and conditions of the LTIP. Non-employee Directors are permitted to waive Director’s equity awards.
Director Compensation
The following table provides information on the compensation earned, paid or awarded to our current Directors for the year ended December 31, 2019.
| Name | Fees
Earned or Paid in Cash ($) |
Stock Awards ($) |
Total ($) |
|||||||||
| Antonio Campo Mejia | 65,000 | - | 65,000 | |||||||||
| Nadhmi Al-Nasr | 50,000 | - | 50,000 | |||||||||
| Amr Al Menhali(1) | 12,500 | - | 12,500 | |||||||||
| Yousef Al Nowais(2) | 12,500 | - | 12,500 | |||||||||
| Andrew Waite | 70,000 | - | 70,000 | |||||||||
| Thomas D. Wood | 65,000 | - | 65,000 | |||||||||
| Hala Zeibak(3) | - | - | - | |||||||||
| Sherif Foda(4) | - | - | - | |||||||||
| (1) | Mr. Al Menhali was appointed to the Board of Directors as of November 10, 2019, representing NESR SPV Ltd. |
| (2) | Al Nowais Investments LLC (“ANI”) and NESR SPV Ltd., a Cayman company, separately are entitled to nominate one director each to the Board of Directors for so long as they or their affiliates hold at least 50% of the NESR ordinary shares acquired pursuant to the Business Combination. Mr. Yousef Al Nowais was appointed to the Board of Directors as of November 10, 2019, representing ANI. |
| (3) | Ms. Zeibak waived her 2019 compensation. |
| (4) | Members of our Board of Directors who are also our employees or employees of our subsidiaries or non-independent directors do not receive any compensation including any cash or stock grants for their service on our Board of Directors. |
| In the first quarter of 2020, the Compensation Committee of the Board of Directors approved a restricted stock award with a value of approximately $125,000 for each director except for Mr. Foda, as an employee of the Company, and Ms. Zeibak, who declined her award. While the previous Board grant occurred in November of 2018, the Board delayed the current grant to the first quarter of 2020 and increased its value by $25,000 (representing the one quarter delay) to place these awards on the same vesting timing as employee awards. |
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Equity and Long-Term Incentive Compensation Plans
On May 18, 2018, our shareholders approved the LTIP, effective upon the closing of the Business Combination. A total of 5,000,000 ordinary shares are reserved for issuance under the LTIP. The board of directors approved the LTIP on February 9, 2018, including the performance criteria upon which performance goals may be based.
The purpose of the LTIP is to enhance our 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 share-based awards to reward long-term performance of employees. 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 broader workforce.
The company has established a strong culture of stock award to all its top performers. The plan includes all employees at all levels. The program is designed to award up to 200% of the annual income as LTIP for achieving certain stretch goals and incentivizes everyone to contribute and excel. The 200% annual salary cap is applicable to all employees equally and includes the Chief Executive Officer, Chief Financial Officer and the senior executive officers of the Company. As mentioned earlier, the Chief Executive Officer waived his LTIP compensation for 2018 and 2019 to increase the pool of award to a wider range of employees.
During the 2019 Successor Period, the Company awarded 1,184,000 restricted stock units (“RSUs”) under the LTIP at a value of $11.7 million. The RSUs were allocated to the recipients at a weighted average grant date fair value of $9.86 per share and vest ratably on an annual basis over a 3-year period (1/3 of the shares vest at the anniversary of the grant date) for employees and over a 1-year period for members of our Board of Directors. Expense related to share-based compensation of $5.6 million and $1.0 million was recorded in the Consolidated Statement of Operations in the 2019 Successor Period and 2018 Successor Period, respectively. At December 31, 2019 and 2018, the Company had unrecognized compensation expense of $11.7 million and $6.9 million, respectively, related to unvested RSUs to be recognized on a straight-line basis over a weighted average remaining period of 2.0 years and 2.53 years, respectively.
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Benefit Plans and Programs
The Company provides welfare and other benefit programs made, as consistent with local custom in each Country in which it operates, generally including medical, dental, life insurance and disability benefits.
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 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 Company 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 consolidated statement of operations as incurred.
We have established an annual bonus plan for key employees whose decisions, activities and performance have a significant impact on business results. Target bonus levels are determined on an individual basis and take into account individual performance, competitive pay practices and external market conditions. Achievement of bonus payment is based largely on the achievement of our Company’s targets for the annual period.
See Item 10B, “Memorandum and Articles of Association—Voting Rights—Appointment and Removal of Directors” for a detailed description regarding the appointment and removal of our Board of Directors.
As of December 31, 2019, the Board of Directors consisted of eight directors. This included the four NESR directors existing prior to our acquisition of NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES”), Sherif Foda, Thomas Wood, Antonio J. Campo Mejia, and Hala Zeibak, and four additional directors, Nadhmi Al-Nasr, Amr Al Menhali, Yousef Al Nowais, and Andrew L. Waite. Each of Adnan Ghabris and Salem Al Noaimi submitted his respective resignation from the Board as of November 10, 2019. Mr. Al Menhali and Mr. Al Nowais were elected to the Board on November 10, 2019 for the seats vacated by Mr. Al Noaimi and Mr. Ghabris, respectively. See Item 6A, “Directors and Senior Management” for more information about our current senior management and Board of Directors.
There are no service contracts between us or any of our subsidiaries and any of our current directors providing for benefits upon termination of their service.
Committees of the Board of Directors
Our Board of Directors has established an Audit Committee, a Compensation Committee and a Nominating and Governance Committee and may create such other committees as the Board of Directors shall determine from time to time. Each of the standing committees of our Board of Directors has the composition and responsibilities described below.
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Audit Committee
We have established an Audit Committee of the Board of Directors. Our Audit Committee currently consists of Mr. Waite, Mr. Campo Mejia, and Mr. Wood, with Mr. Waite serving as the chairman of the Audit Committee. Under the Nasdaq listing standards and applicable SEC rules, subject to certain exceptions, we are required to have three members of the Audit Committee, all of whom must be independent. Our Board of Directors has determined that Mr. Waite, Mr. Campo Mejia, and Mr. Wood are each independent under applicable Nasdaq and SEC rules.
Each member of the Audit Committee is financially literate and our Board of Directors has determined that Mr. Waite qualifies as an “audit committee financial expert” as defined in applicable SEC rules.
Prior to November 10, 2019, Mr. Salem Al Noaimi served as the chairman of our Audit Committee and qualified as audit committee financial expert.
We have adopted an Audit Committee charter, which details the principal functions of the Audit Committee, including:
| ● | reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the Board of Directors whether the audited financial statements should be included in our annual reports; | |
| ● | reviewing and discussing with management and our independent auditor our quarterly financial statements prior to the filing of our quarterly reports, including the results of the independent auditor’s review of the quarterly financial statements; | |
| ● | discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements; | |
| ● | discussing with management major risk assessment and risk management policies; | |
| ● | monitoring the independence of the independent auditor; | |
| ● | verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law; | |
| ● | reviewing and approving all related-party transactions; | |
| ● | inquiring and discussing with management our compliance with applicable laws and regulations; | |
| ● | pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed; | |
| ● | appointing or replacing the independent auditor; | |
| ● | determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and | |
| ● | establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies. |
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Compensation Committee
The Board of Directors has formed a Compensation Committee of the Board of Directors. The current members of our Compensation Committee are Mr. Campo Mejia, Ms. Zeibak and Mr. Wood, with Mr. Wood serving as the chairman of the Compensation Committee. We have adopted a Compensation Committee charter, which details the principal functions of the Compensation Committee, including:
| ● | reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer’s based on such evaluation; | |
| ● | reviewing and approving the compensation of all of our other executive officers; | |
| ● | reviewing our executive compensation policies and plans; | |
| ● | implementing and administering our incentive compensation equity-based remuneration plans; | |
| ● | assisting management in complying with our proxy statement and Annual Report disclosure requirements; | |
| ● | approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers and employees; | |
| ● | if required, producing a report on executive compensation to be included in our annual proxy statement; and | |
| ● | reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors. |
The charter also provides that the Compensation Committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the Compensation Committee will consider the independence of each such adviser, including the factors required by Nasdaq and the SEC.
Nominating and Governance Committee
Our Nominating and Governance Committee consists of Mr. Wood, Mr. Al-Nasr and Mr. Campo Mejia, with Mr. Campo Mejia serving as the chairman of the Nominating and Governance Committee. The Nominating and Governance Committee is responsible for monitoring compliance with good corporate governance standards and overseeing the selection of persons to be nominated to serve on our Board of Directors. The Nominating and Governance Committee considers persons identified by its members, management, shareholders, investment bankers and others. The guidelines for selecting nominees, which are specified in our Nominating and Governance Committee charter, generally provide that persons to be nominated:
| ● | should have demonstrated notable or significant achievements in business, education or public service; | |
| ● | should possess the requisite intelligence, education and experience to make a significant contribution to the Board of Directors and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and | |
| ● | should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of our shareholders. |
The Nominating and Governance Committee will consider a number of qualifications relating to management and leadership experience, background, integrity and professionalism in evaluating a person’s candidacy for membership on the Board of Directors. The Nominating and Governance Committee may require certain skills or attributes, such as financial or accounting experience, to meet specific Board needs that arise from time to time and will also consider the overall experience and makeup of its members to obtain a broad and diverse mix of Board members. The Nominating and Governance Committee does not distinguish among nominees recommended by shareholders and other persons.
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We have adopted a Nominating and Governance Committee charter which details the principal functions of the Nominating and Governance Committee including:
| ● | reviewing the Company’s Code of Conduct and other governance guidelines at least annually and making such recommendations to the Board of Directors with respect thereto as it may seem advisable; | |
| ● | reviewing qualifications of individuals suggested as potential candidates for director of the Company, including candidates suggested by shareholders, and considering for nomination any of such individuals who are deemed qualified in line with the Board of Directors Candidate Guidelines; | |
| ● | recommending to the Board of Directors candidates for election as directors of the Company to fill open seats on the Board of Directors between annual general meetings, including vacancies created by an increase in the authorized number of directors; | |
| ● | reviewing the remuneration of non-employee directors and making such recommendations to the Board of Directors with respect thereto as it may deem advisable; | |
| ● | providing comments and suggestions to the Board of Directors concerning committee structure of the Board of Directors, committee operations, committee member qualifications, and committee member appointment; | |
| ● | reviewing any allegation that an executive officer or director may have violated the Company’s Code of Conduct and reporting its findings to the Board of Directors; and | |
| ● | taking such other actions and doing such other things as may be referred to the Nominating and Governance Committee from time to time by the Board of Directors. |
As of December 31, 2019, and 2018, we employed 4,536 and 3,590 employees and contractors, respectively, from over 40 different nationalities. As of December 31, 2017, the Predecessor company employed 1,818 employees from over 40 different nationalities.
Our employees are at the forefront of our strategy. We believe that our future success depends on our ability to attract, retain and motivate qualified personnel. NESR places great importance on building and maintaining a highly motivated and skilled workforce by identifying and developing key skills, experience and knowledge and applying this talent set to job specific requirements.
Our team of experienced professionals is dedicated to providing a safe and outstanding service to ensure customer satisfaction in all areas of operation. Extensive training is provided to our employees and is split between on-the job training, online training and classroom training. We also have a career development plan covering key competencies and skills required for employees to advance both their seniority level and career within the company.
We believe that our relations with our employees are good.
With the exception of certain of our employees in Oman, none of our employees are currently represented by unions or covered by collective bargaining agreements.
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The table below shows the number and percentage of our outstanding ordinary shares beneficially owned by each of our directors and executive officers and all of our directors and executive officers as a group as of December 31, 2019.
| Beneficial Interest in Ordinary Shares | ||||||||
| Officer and/or Director | Number
of shares | Percentage (a) | ||||||
| Sherif Foda (b) | 2,940,425 | 3.37 | % | |||||
| Christopher Boone | - | - | ||||||
| Dhiraj Dudeja | 229,576 | * | ||||||
| Antonio J. Campo Mejia | 691,194 | * | ||||||
| Nadhmi Al-Nasr | 10,050 | * | ||||||
| Amr Al Menhali | - | - | ||||||
| Yousef Al Nowais(c) | 5,358,396 | 6.15 | % | |||||
| Hala Zeibak | - | - | ||||||
| Andrew Waite | 10,050 | * | ||||||
| Thomas Wood(b) (d) | 970,126 | 1.11 | % | |||||
| All officers and directors as a group | 10,209,817 | 11.72 | % | |||||
* less than 1%
| (a) | Based on issued and outstanding shares of 87,187,289 as of December 31, 2019. | |
| (b) | As of December 31, 2018, NESR Holdings, Ltd., our Sponsor, owned 5,430,425 shares in the Company. Sherif Foda and Thomas Wood were shareholders and directors of NESR Holdings Ltd. and shared voting and dispositive control over the securities and thus shared beneficial ownership of such securities. During 2019, 2,760,000 of these shares were distributed to various individuals including employees, family of the Sponsors and other parties which contributed to the success of the SPAC process under the same conditions applicable to NESR Holdings, Ltd., including 250,000 and 885,000 shares to Mr. Foda and Mr. Wood, respectively. As of December 31, 2019, Mr. Foda has exclusive voting and dispositive power over the remaining NESR ordinary shares held by NESR Holdings, Ltd. and thus beneficially owns the remaining 2,670,425 shares. In addition to his beneficial ownership in NESR Holdings, Ltd., Mr. Foda also owns an additional 270,000 shares, inclusive of open market purchases of 20,000 shares. | |
| (c) | Includes 5,358,396 shares held by Al Nowais Investments LLC over which Mr. Al Nowais shares dispositive power. | |
| (d) | Mr. Wood purchased 75,076 shares on the open market in addition to those acquired in 2019 from NESR Holdings, Ltd. |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth information as of December 31, 2019 for each shareholder whom we know to beneficially own more than five percent of our outstanding ordinary shares:
| Ordinary Shares Held | ||||||||
| Shareholders | Number of shares (in thousands) | Percentage of Ordinary Shares Outstanding(a) | ||||||
| Mubbadrah Investment LLC(b) | 17,189 | 19.72 | % | |||||
| Olayan Saudi Holding Company | 17,025 | 19.53 | % | |||||
| NESR SPV Ltd. | 10,188 | 11.69 | % | |||||
| SV3 Holdings PTE Ltd.(c) | 6,825 | 7.83 | % | |||||
| Al-Nowais Investments LLC | 5,358 | 6.15 | % | |||||
| (a) | Based on issued and outstanding shares of 87,187,289 as of December 31, 2019. |
| (b) | Includes NESR ordinary shares owned by Mubbadrah Investments LLC, Hilal Al Busaidy and Yasser Al Barami. |
| (c) | SCF Partners and its affiliate SCF GP are the beneficial owners of a total of 6,006,820 ordinary shares and are affiliates of SV3 Holdings Pte Ltd. SV3 Holdings Pte Ltd is owned by two private equity funds: SCF-VIII AIV, L.P. and Viburnum Funds Pty Ltd. SCF-VIII AIV, L.P. has a 66 2/3% ownership interest in SV3 and Viburnum Funds Pty Ltd. has a 33 1/3% ownership interest in SV3. SCF Partners is the sole shareholder of LESA Cayman. LESA Cayman is the indirect beneficial owner of shares held by SCF-VIII AIV, L.P. through its general partner SCF -VIII Offshore G.P. Also, SCF-VIII, L.P. (of which SCF GP is the indirect beneficial owner) is the direct beneficial owner of 1,456,820 Ordinary Shares, which constitutes 1.7% of the outstanding Ordinary Shares. |
Our major shareholders have no different voting rights from those of the rest of our shareholders.
There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company.
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See Note 18, Related Party Transactions, to the consolidated financial statements included in Item 18, “Financial Statements” of this Annual Report.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18, “Financial Statements” within this Annual Report.
Legal Proceedings
See Note 14, Commitments and Contingencies, to our consolidated financial statements included in Item 18, “Financial Statements” of this Annual Report.
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.
Not applicable.
Our ordinary shares and warrants are currently listed on the Nasdaq under the symbols “NESR” and “NESRW,” respectively. Our ordinary shares and warrants each commenced separate public trading on June 5, 2017.
Not applicable.
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Our ordinary shares and warrants are currently listed on the Nasdaq under the symbols “NESR” and “NESRW,” respectively.
Not applicable.
Not applicable.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The following description of our memorandum and articles of association, as amended and restated, does not purport to be complete and is subject to, and qualified by reference to, all of the provisions of our memorandum and articles of association, which is attached as Exhibit 3.1 to this Annual Report.
Corporate Profile
We are a company incorporated in the British Virgin Islands (“BVI”) on January 23, 2017 as a BVI business company (company number 1935445) and our affairs are governed by our Memorandum and Articles of Association (which document shall be herein be referred to as our “Charter”), the BVI Business Companies Act, 2004, as amended (the “Companies Act”), and the common law of the British Virgin Islands. The registered office of the Company is at Intertrust Corporate Services (BVI) Limited of 171 Main Street, Road Town, Tortola, British Virgin Islands. The registered agent of the Company is Intertrust Corporate Services (BVI) Limited of 171 Main Street, Road Town, Tortola, British Virgin Islands. The Company may change its registered office or registered agent by a Resolution of Directors or a Resolution of Members. The change shall take effect upon the Registrar registering a notice of change filed under section 92 of the Companies Act.
Corporate Purpose
The Company has, subject to the Companies Act and any other British Virgin Islands legislation for the time being in force, irrespective of corporate benefit:
| ● | full capacity to carry on or undertake any business or activity, do any act or enter into any transaction; and |
| ● | for the purposes of the bullet above, full rights, powers and privileges. |
There are subject to the bullets, no limitations on the lawful business that the Company may carry on.
Description of Share Capital
The following is a summary of our share capital and the rights of the holders of our ordinary shares that are material to an investment in our ordinary shares. These rights are set forth in our Charter or are provided by applicable BVI law, and these rights may differ from those typically provided to shareholders of U.S. companies under the corporation laws of the various states of the United States. This summary does not contain all information that may be important to readers.
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The Company is authorized to issue an unlimited number of shares of no par value divided into six classes of shares as follows:
| ● | Ordinary shares of no par value (Ordinary Shares); | |
| ● | Class A preferred shares of no par value (Class A Preferred Shares); | |
| ● | Class B preferred shares of no par value (Class B Preferred Shares); | |
| ● | Class C preferred shares of no par value (Class C Preferred Shares); | |
| ● | Class D preferred shares of no par value (Class D Preferred Shares); and | |
| ● | Class E preferred shares of no par value (Class E Preferred Shares and together with the Class A Preferred Shares, the Class B Preferred Shares, Class C Preferred Shares and the Class D Preferred Shares being referred to as the Preferred Shares). |
As of December 31, 2019, an aggregate of 87.2 million ordinary shares were issued and outstanding. After considering unvested RSUs outstanding as of December 31, 2019, 3.2 million shares remain reserved for issuance under the 2018 LTIP. Each of our outstanding ordinary shares entitles its holder to one vote at any general meeting of shareholders. There were no preferred shares issued as of the filing of this Annual Report.
To our knowledge, there were no shareholders’ arrangements or agreements the implementation or performance of which could, at a later date, result in a change in the control of us in favor of a third person.
Our ordinary shares are governed by BVI law and our Charter. More information concerning shareholders’ rights can be found in the Companies Act and our Charter.
Form and Transfer of Shares
We are a party to various registration rights agreements with holders of our securities. These registration rights agreements provide certain holders with demand and “piggyback” registration rights, and holders have other rights to require us to register for resale such securities pursuant to Rule 415 under the Securities Act. The registration rights are subject to various limitations. We generally bear the expenses incurred in connection with the filing of any such registration statements. On July 16, 2018, we filed a registration statement on Form F-3 pursuant to the registration rights agreements, which was declared effective on August 22, 2018.
BVI law does not impose any limitations on the rights of BVI or non-BVI residents to hold or vote our shares.
Issuance of Shares
Subject to the provisions of the Charter and, where applicable, the rules of the Designated Stock Exchange (as defined in the Charter), the unissued ordinary shares of the Company shall be at the disposal of the board of directors and ordinary shares and other securities may be issued and option to acquire ordinary shares or other securities may be granted.
BVI law does not impose any limitations on the rights of BVI or non-BVI residents to hold or vote our shares.
Securities may be granted at such times, to such Eligible Persons (as defined in the Charter), for such consideration and on such terms as the board of directors may by resolution determine.
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Without prejudice to any special rights previously conferred on the holders of any existing preferred shares or class of preferred shares, any class of preferred shares may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting or otherwise as the board of directors may from time to time determine.
The Company may at the discretion of the board of directors, but shall not otherwise be obliged to, issue fractional shares or round up or down fractional holdings of shares to its nearest whole number and a fractional Share (if authorized by the board of directors) may have the corresponding fractional rights, obligations and liabilities of a whole share of the same class or series of shares.
Redemption of Shares and Treasury Shares
The Company may purchase, redeem or otherwise acquire and hold its own shares save that the Company may not purchase, redeem or otherwise acquire its own shares without the consent of the holder whose shares are to be purchased, redeemed or otherwise acquired unless the Company is permitted or required by the Companies Act or any other provision in the Charter to purchase, redeem or otherwise acquire the shares without such consent.
General Meeting of Shareholders
A general meeting of the shareholders shall be held annually at such date and time as may be determined by the board of directors. The most recent annual general meeting was held on December 12, 2019. Each of our ordinary shares entitle the holder of record thereof to attend our general meeting of shareholders, either in person or by proxy, to address the general meeting of shareholders, and to exercise voting rights, subject to the provisions of our Charter. Each share entitles the holder to one vote at a general meeting of shareholders. There is no minimum shareholding required to be able to attend or vote at a general meeting of shareholders.
BVI law provides that our board of directors is obligated to convene a general meeting of shareholders if shareholders representing, in the aggregate, 30% of the issued share capital so request in writing with an indication of the agenda. In such case, the general meeting of shareholders must be held within not less than 10 nor more than 60 days’ written notice days of the request.
Voting Rights
Each ordinary share in the Company confers upon the holder of such ordinary share (unless waived by such holder), subject to Clause 11 of the Charter, the right to one vote at a meeting of the shareholders of the company or on any resolution of shareholders.
General Meetings of Shareholders. A meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than 50% of the votes of the shares entitled to vote to be considered at the meeting. Resolutions are adopted by a simple majority of the votes validly cast. Abstentions are not considered “votes.”
Appointment and Removal of Directors. Members of our board of directors may be elected by simple majority of the votes validly cast at any general meeting of shareholders. Under the Charter, all directors can be elected for a period of up to six years with such possible extension as provided therein. Any director may be removed with or without cause by a simple majority vote at any general meeting of shareholders. If the office of a director becomes vacant, our Articles provide that the other directors, acting by a simple majority, may fill the vacancy on a provisional basis until a new director is appointed at the next general meeting of shareholders.
Neither BVI law nor the Charter contains any restrictions as to the voting of our ordinary shares by non-BVI residents.
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Amendment to Our Articles of Association
The Company may amend its Charter by a resolution of shareholders or by a resolution of the board of directors, save that no amendment may be made by a resolution of board of directors:
| ● | to restrict the rights or powers of the shareholders to amend the Charter; | |
| ● | to change the percentage of shareholders required to pass a resolution of shareholders to amend the Charter; | |
| ● | in circumstances where the Charter cannot be amended by the shareholders; or | |
| ● | to change certain provisions set forth in the Charter. |
Merger and De-Merger
The Company may merge or consolidate with another company in accordance with the applicable provisions of the Companies Act. However, the board of directors has no power to delegate down to a committee of the board the power to approve a plan of merger, consolidation or arrangement.
Liquidation
Each holder of our ordinary shares has the right to an equal share with each other holder of our ordinary shares in the distribution of any surplus assets of the Company in the event of its liquidation. The Company may by a resolution of shareholders or by a resolution of the board of directors appoint a voluntary liquidator.
Distributions
The board of directors of the Company may, by resolution of the board of directors, authorize a distribution at a time and of an amount they think fit if they are satisfied, on reasonable grounds, that, immediately after the distribution, the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as and when they fall due. Dividends may be paid in money, shares, or other property. The Company may, by resolution of the board of directors, from time to time pay to the shareholders such interim dividends as appear to the board of directors to be justified by the profits of the Company, provided always that they are satisfied, on reasonable grounds, that, immediately after the distribution, the value of the Company’s assets will exceed its liabilities and the Company will be able to pay its debts as and when they fall due. Notice in writing of any dividend that may have been declared shall be given to each shareholder and all dividends unclaimed for three years after such notice has been given to a shareholder may be forfeited by resolution of the board of directors for the benefit of the Company. No dividend shall bear interest as against the Company.
Annual Accounts
The Company shall keep records that are sufficient to show and explain the Company’s transactions and that will, at any time, enable the financial position of the Company to be determined with reasonable accuracy. The Company may by resolution of shareholders call for the board of directors to prepare periodically and make available a profit and loss account and a balance sheet. The profit and loss account and balance sheet shall be drawn up so as to give respectively a true and fair view of the profit and loss of the Company for a financial period and a true and fair view of the assets and liabilities of the Company as at the end of a financial period. The Company may by resolution of shareholders call for the accounts to be examined by auditors. The report of the auditors shall be annexed to the accounts and shall be read at the meeting of shareholders at which the accounts are laid before the Company or shall be otherwise given to the shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is Continental Stock Transfer & Trust Company.
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The following is a summary of each material contract, other than material contracts entered into in the ordinary course of business, to which we or any of our subsidiaries is a party, for the two years immediately preceding the date of this Annual Report:
| ● | Forward Purchase Agreement. 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 (the “Backstop”) of the Company’s ordinary shares to the Backstop Investor or its designees and commonly controlled affiliates. On June 8, 2018, 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. The Forward Purchase Agreement entitled the Backstop Investor to nominate one person to the Company’s board of directors for as long as it directly owned at least 7,057,453 ordinary shares within three months after the Business Combination and Adnan Ghabris was not otherwise nominated to the board. |
| ● | Nominee Agreement. On May 9, 2018, the Company entered into a Nominee Agreement, effective January 16, 2018, between the Olayan Saudi Holding Company and Hana Investments, pursuant to which the relationship between Olayan Saudi Holding Company and Hana Investments, both of which are entities within the Olayan Group, was formalized. That parties entered into an Addendum to the Nominee Agreement on June 8, 2018 in connection with the execution of the Hana Loan Agreement. |
| ● | Long Term Incentive Plan. On May 18, 2018, the Company’s shareholders approved and adopted the 2018 Long Term Incentive Plan, under which restricted stock awards are granted to members of the Board and employees. |
| ● | Share Transfer Agreement. On May 18, 2018, the Company entered into a Share Transfer Agreement with Competrol Establishment and the Olayan Saudi Holding Company pursuant to which 3,000,000 of the Company’s ordinary shares and 3,000,000 warrants were transferred between members of the Olayan Group of companies, Competrol Establishment (Seller) and Olayan Saudi Holding Company (Buyer). |
| ● | Shares Purchase Exchange Agreement. On June 5, 2018, the Company entered into the Shares Purchase Exchange Agreement with Hana Investments pursuant to which Hana Investments contributed to the Company the NPS shares owned by Hana Investments as of the Business Combination closing date and NESR issued to Hana Investments 13,340,448 shares of NESR ordinary shares. |
| ● | Olayan Relationship Agreement. On June 5, 2018, the Company entered into a Relationship Agreement with Hana Investments which set out certain rights to which Hana Investments is entitled as a shareholder of the Company, as well as certain obligations of the Company and NESR Holdings, including the right to nominate two directors and one executive vice president of the Company for so long as Hana Investments and its affiliates collectively hold, in the aggregate, at least 6,879,225 NESR ordinary shares. Hana Investments further agreed that any shares of the Company received by Hana Investments pursuant to the Shares Purchase Exchange Agreement will not be sold by Hana Investments prior to six months after the closing of the Business Combination. 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. |
| ● | Registration Rights Agreements. On June 5, 2018 and June 6, 2018, the Company entered into several Registration Rights Agreements with various holders of the Company’s 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 the registration rights agreements, which was declared effective on August 22, 2018. |
| ● | WAHA Relationship Agreement. On June 6, 2018, the Company entered into a Relationship Agreements with WAHA Finance Company (“WAHA”) pursuant to which the Company agreed, until such time as WAHA or its affiliates no longer hold at least 50% of the number of NESR ordinary shares acquired pursuant to the NPS Stock Purchase Agreement, to (i) nominate to the Board a person designated by WAHA and (ii) permit one additional representative of WAHA to observe the meetings of the Board in a non-voting capacity. |
| ● | ANI Relationship Agreement. On June 6, 2018, the Company entered into a Relationship Agreement with Al Nowais Investments LLC (“ANI”), pursuant to which the Company agreed, until such time as ANI or its affiliates no longer hold at least 50% of the number of NESR ordinary shares acquired pursuant to the NPS Stock Purchase Agreement, to (i) nominate to the Board a person designated by ANI and (ii) permit one additional representative of ANI to observe the meetings of the Board in a non-voting capacity. |
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| ● | Letter Agreement. On June 6, 2018, the Company entered into a letter agreement with the NPS Selling Stockholders pursuant to which the Company reimbursed the NPS Selling Stockholders for $5.2 million of fees, costs and expenses related to the acquisition by the Company of all of the outstanding NPS shares. |
| ● | Voting Agreement. On June 6, 2018, the Company entered into a Voting Agreement with the Sponsor and SV3 pursuant to which the Company agreed to nominate for election to the Board a nominee of SV3 and to allow at least one additional observer to attend Board meetings until such time as SV3 and its affiliates collectively beneficially own less than 4,095,000 of the outstanding ordinary shares. |
| ● | Lock-Up Agreement. On June 6, 2018, the Company entered into a Lock-Up Agreement with SV3 pursuant to which SV3 agreed not to transfer, assign or sell the ordinary shares acquired by SV3 in the Business Combination until the earlier of one year after the closing of the Business Combination and the date on which the closing price of the Company’s ordinary shares equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations and recapitalizations) for any 20 trading days within any 30- trading day period commencing 150 days after the closing of the Business Combination. |
| ● | Consent Agreement. On November 29, 2018, the Company entered into a Consent Agreement with the GES Selling Stockholders to agree on certain conditions related to the resale of NESR shares upon successful completion of a Registration Statement filed in satisfaction of a Registration Rights Agreement with these shareholders. |
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There are no exchange control restrictions on payment of dividends on the Company’s ordinary shares or on the conduct of the Company’s operations either in the United States, where the Company’s principal executive offices are located, or the BVI, where the Company is incorporated. There are no BVI laws which impose foreign exchange controls on the Company or that effect the payment of dividends, interest, or other payments to non-resident holders of the Company’s securities. BVI laws and the Charter impose no limitations on the right of non-resident or foreign owners to hold the Company’s securities or vote the Company’s ordinary shares.
NESR is a holding company incorporated in the British Virgin Islands which imposes a zero percent statutory corporate income tax rate on income generated outside of the British Virgin Islands. The Subsidiaries operate in multiple tax jurisdictions throughout the MENA and Asia Pacific regions where statutory tax rates generally vary from 12% to 35%.
The brief description below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of shares and, for U.S. federal income tax purposes, (1) an individual citizen or resident of the United States, (2) a corporation, or any other entity taxable as a corporation, organized under the laws of the United States, any state thereof or the District of Columbia, (3) an estate whose income is subject to U.S. federal income tax regardless of its source, or (4) a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust or (ii) it has in effect a valid election under applicable U.S. Treasury regulations to be treated as a U.S. person.
U.S. Federal Income Taxation
The following summary does not discuss all aspects of U.S. federal income taxation that may be applicable to U.S. Holders in light of their particular circumstances or to investors who are subject to special treatment under U.S. federal income tax law, including U.S. expatriates, insurance companies, banks, regulated investment companies, securities broker-dealers, financial institutions, tax-exempt organizations, persons holding shares as part of a straddle, hedging, constructive sale, or conversion transaction, persons subject to the foreign tax credit splitting events rules, persons subject to the alternative minimum tax, persons who acquired their shares pursuant to the exercise of employee stock options or otherwise as compensation, U.S. Holders having a functional currency other than the U.S. dollar, persons owning (directly, indirectly or by attribution) 10% or more of our outstanding share capital or voting stock and persons not holding the shares as capital assets (generally, property held for investment). This discussion also does not address the consequences of the Medicare tax on net investment income or any aspect of state, local or non-U.S. tax law or any other aspect of U.S. federal taxation other than income taxation.
If a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes owns shares, the U.S. federal income tax treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns shares and the partners in such partnership should consult their own tax advisers about the U.S. federal income tax consequences of holding and disposing of ordinary shares.
Prospective purchasers are urged to consult their own tax advisers about the application of the U.S. federal tax rules to their particular circumstances as well as the state, local, foreign and other tax consequences to them of the purchase, ownership and disposition of our shares.
Taxation of Dividends and Other Distributions on our Shares
Subject to the passive foreign investment company (“PFIC”) rules discussed below, the gross amount of distributions paid by us to U.S. Holders with respect to the shares (including the amount of any taxes withheld therefrom) will generally be includable in your gross income as dividend income on the date of receipt, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), it will be treated first as a tax-free return of your tax basis in your shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. We do not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will be treated as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above. With respect to corporate U.S. Holders, the dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.
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With respect to non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable to qualified dividend income, provided that (1) the shares are readily tradable on an established securities market in the United States, or we are eligible for the benefits of an approved qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are not a PFIC (as discussed below) for either our taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met. Pursuant to IRS authority, shares are considered for the purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the Nasdaq. You are urged to consult your own tax adviser regarding the availability of the lower rate for dividends paid with respect to our shares, including the effects of any change in law after the date of this annual report.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to our shares will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”
Sale, Exchange or Other Taxable Disposition
Upon the sale, exchange or other taxable disposition of shares, a U.S. Holder generally will recognize capital gain or loss equal to the difference between the U.S. dollar value of the amount realized on the sale, exchange or other taxable disposition and the U.S. Holder’s adjusted tax basis, determined in U.S. dollars, in the shares. Any gain or loss recognized upon the sale, exchange or other taxable disposition of the shares will be treated as long-term capital gain or loss if, at the time of the sale, exchange or other taxable disposition, the holding period of the shares exceeds one year. In the case of individual U.S. Holders, capital gains generally are subject to U.S. federal income tax at preferential rates if specified minimum holding periods are met. The deductibility of capital losses by a U.S. Holder is subject to significant limitations. U.S. Holders should consult their own tax advisers in this regard.
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Passive Foreign Investment Company
A non-U.S. corporation will be classified as a PFIC for any taxable year if (i) at least 75% of its gross income consists of passive income, (such as dividends, interest, rents, royalties (other than rents or royalties derived in the active conduct of a trade or business and received from an unrelated person) and gains on the disposition of certain minority interests or (ii) at least 50% of the average value of its assets consist of assets that produce or are held for the production of, passive income. We currently believe that we were not a PFIC for the taxable year ended December 31, 2019 and we do not expect to be classified as a PFIC in the foreseeable future. However, this conclusion is a factual determination that must be made at the close of each year and is based on, among other things, a valuation of our shares and assets, which will likely change from time to time. If we were characterized as a PFIC for any taxable year, a U.S. Holder would suffer adverse tax consequences. These consequences may include having the gains that are realized on the disposition of shares treated as ordinary income rather than capital gains and being subject to punitive interest charges with respect to certain dividends and gains and on the sale or other disposition of the shares. Furthermore, dividends paid by a PFIC are not eligible to be treated as qualified dividend income (as discussed above). In addition, if a U.S. Holder holds shares in any year in which we are treated as a PFIC, such U.S. Holder will be subject to additional tax form filing and reporting requirements.
Application of the PFIC rules is complex. U.S. Holders should consult their own tax advisers regarding the potential application of the PFIC rules to the ownership of our shares.
Information Reporting and Backup Withholding
Dividend payments with respect to our shares and proceeds from the sale, exchange or redemption of our shares may be subject to information reporting to the IRS and possible U.S. backup withholding at a current rate of 24%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on IRS Form W-9 (Request for Taxpayer Identification Number and Certification). U.S. Holders are urged to consult their tax advisers regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS and furnishing any required information. We do not intend to withhold taxes on dividends paid for individual shareholders.
Certain U.S. Holders are required to report information relating to shares of a foreign corporation, subject to certain exceptions (including an exception for shares held in accounts maintained by certain financial institutions), by attaching a complete IRS Form 8938, (Statement of Specified Foreign Financial Assets) with their tax return for each year in which they hold shares. U.S. Holders are urged to consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
Not applicable.
Documents concerning the Company which are referred to in this Annual Report are available on the SEC’s website at www.sec.gov.
Not applicable.
ITEM 11. 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 transactions denominated in currencies other than a location’s functional currency.
U.S. dollar balances held by entities in the United Arab Emirates, Saudi Arabia, Qatar, Oman, Kuwait and Qatar 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, such as Algerian Dinar, Libyan Dinar, Indian Rupee and Indonesian Rupiah. However, customer contracts in these countries are largely denominated in U.S. dollars.
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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 services 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 facility 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 (such as Algeria, Libya and Iraq). However, the foreign exchange risk is largely mitigated by the fact that most customer contracts are denominated in U.S. dollars or in currencies that trade at a fixed exchange rate with the U.S. dollar.
We do not use derivatives for trading purposes, to generate income or to engage in speculative activity.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
Not applicable.
Not applicable.
Not applicable.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There have not been any defaults, dividend arrearages, or delinquencies.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
A. 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, with 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 Annual Report due to a material weakness in our internal control over financial reporting described below.
B. MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures which (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the board of directors of the Company, and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of The Treadway Commission. Based on our evaluation under the Internal Control Integrated Framework (2013), our management concluded that our internal control over financial reporting was not effective as of December 31, 2019 due to a material weakness in our internal control over financial reporting described below.
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Status of Material Weaknesses Remediation
As discussed in our 2018 Annual Report on Form 20-F, 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 material weaknesses 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 the statement 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 the statement 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 for 2018, 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. Additionally, 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, with oversight from the Audit Committee, identified the following measures to strengthen our internal control over financial reporting and to address the identified material weaknesses described above.
| ● | Preparation of the Statement of Cash Flows |
| ○ | Disaggregated preparation of cash flow worksheet to subsidiary level from consolidated level to improve precision of review controls; | |
| ○ | Implemented quarterly in-person review with local preparer and reviewer of each cash flow worksheet by experienced U.S. GAAP resource; | |
| ○ | Designed and implemented improved template to document calculations and support utilized to prepare cash flow worksheets; | |
| ○ | Added additional review by Chief Financial Officer, including quarterly forecast to actual comparisons for investing and financing activities. |
| ● | U.S. GAAP Reporting Expertise |
| ○ | Hired additional personnel with U.S. GAAP reporting and accounting process expertise; | |
| ○ | Reorganized financial reporting organizational chart to ensure appropriate competence and authority amongst control operators; | |
| ○ | Adjusted close and reporting timelines to allow additional time for controls to operate; | |
| ○ | Engaged third-party specialists for complex accounting areas such as valuations and accounting for certain income taxes; |
| ● | Accounting for Certain Income Taxes |
| ○ | Implemented quarterly tax rollforward process to enhance data gathering from countries; | |
| ○ | Split Tax, Treasury, and Transactions role by hiring an experienced Tax and Treasury Director to improve bandwidth for supervision and review; | |
| ○ | Dedicated full time accounting resource to support Tax and Treasury Director; | |
| ○ | Hired globally recognized third-party to perform effective tax rate and income tax provision review each quarter. |
We are committed to continuous improvement and review of our internal control over financial reporting. As of December 31, 2019, we consider the material weaknesses related to preparation of the statement of cash flows and U.S. GAAP expertise to be remediated. However, before we can conclude that the material weakness related to the accounting for certain income taxes has been remediated and that the remediation efforts described above have been successful, further testing is required so that we can observe our newly designed and implemented controls operating effectively. As we continue to evaluate and work to improve our internal control over financial reporting, management, with oversight from our Audit Committee, may identify and implement additional measures to address the material weakness described above or to modify any of the remediation actions described above. Management, with oversight from our Audit Committee, will continue to review and make necessary changes to enhance the overall design and capability of the Company’s internal control over financial reporting as expeditiously as possible. While management, with oversight from our Audit Committee, is closely monitoring the implementation of the remediation actions described above, we cannot provide any assurance that the remediation efforts will be successful or that internal control over financial reporting will be effective as a result of these efforts.
| 72 |
C. ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm, since, as an “emerging growth company,” we are exempt from having our independent auditor assess our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act. We will remain an emerging growth company for the first five fiscal years after our initial public offering unless any of the following occur (1) our total annual gross revenues are $1.07 billion or more, (2) we issue more than $1 billion in non-convertible debt over a three year period, or (3) we become a “large accelerated filer” as defined in the Exchange Act Rule 12b-2.
D. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except for the remediation of the previously identified material weaknesses associated with the preparation of the statement of cash flows and U.S. GAAP expertise discussed above, there were no other changes in internal control over financial reporting during the year ended December 31, 2019 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Mr. Waite, Chairman of the Audit Committee, is an independent Director as defined by Nasdaq and is an audit committee financial expert as defined by the SEC. See Item 6A, “Directors and Senior Management” for a description of Mr. Waite’s relevant experience.
We have a Code of Conduct applicable to our employees, directors and officers, including our Chief Executive Officer and Chief Financial Officer, that meets the standards and definitions of the SEC. Any changes to, or waiver from, the Code of Conduct will be made only by the Board of Directors, or a committee thereof, and appropriate disclosure will be made promptly on our website at www.nesr.com, in accordance with the rules and regulations of the SEC.
We have posted a copy of our Code of Conduct on our website at www.nesr.com in the Investor Relations section.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by KPMG, an independent registered accounting firm and our principal external auditors, for the periods indicated.
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| (In US$ thousands, except share data and per share amounts) | ||||||||||||
| Successor (NESR) | Predecessor (NPS) | |||||||||||
| Period from | Period from | Period from | ||||||||||
| January 1 | June 7 | January 1 | ||||||||||
| to December 31, | to December 31, | to June 6, | ||||||||||
| 2019 | 2018 | 2018 | ||||||||||
| Audit fees(a) | $ | 1,721 | $ | 722 | $ | 1,064 | ||||||
| Audit-related fees(b) | - | - | - | |||||||||
| Tax fees(c) | 233 | 308 | 55 | |||||||||
| All other fees(d) | - | - | - | |||||||||
| Total | $ | 1,954 | $ | 1,030 | $ | 1,119 | ||||||
| (a) | Audit fees represent professional services rendered for the audit of our annual consolidated financial statements and services provided by the principal accountant in connection with statutory and regulatory filings or engagements. | |
| (b) | Audit-related fees consist of assurance and related services rendered by the principal accountant related to the performance of the audit or review of our consolidated financial statements, which have not been reported under audit fees above. | |
| (c) | Tax fees represent fees for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning. | |
| (d) | All other fees include services other than audit fees, audit-related fees and tax fees set forth above. |
Audit Committee’s Pre-Approval Policies and Procedures
The Audit Committee’s primary responsibilities are to assist the Board of Directors’ oversight of our accounting practices; the integrity of our financial statements; our compliance with legal and regulatory requirements; the qualifications, selection, independence and performance of our independent auditors; and the internal audit function. The Audit Committee has adopted in its charter a policy regarding the pre-approval of audit and permissible non-audit services provided by the Company’s independent auditors.
Under the policy, the Audit Committee pre-approves all audit services to be provided to the Company, whether provided by the principal auditors or other firms, and all other services (review, attest and non-audit) to be provided to the Company by the independent auditors; provided, however, that de minims non-audit services may instead be approved in accordance with applicable rules and regulations. All services provided by the principal external auditors for the years ended December 31, 2019 and 2018 were approved by the Audit Committee pursuant to the pre-approval policy.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
We are incorporated in the British Virgin Islands and our corporate governance practices are governed by applicable BVI law and our amended and restated memorandum and articles of association. Additionally, because our ordinary shares are listed on the Nasdaq, we are subject to Nasdaq’s corporate governance listing rules (“Nasdaq Listing Rules”). However, Nasdaq Listing Rule 5615(a)(3) permits a foreign private issuer like us to follow the corporate governance practices of its home country in lieu of certain Nasdaq Listing Rules. Nasdaq-listed, foreign private issuers like us are required to provide a summary of the significant ways in which their corporate governance practices differ from those followed by Nasdaq-listed, U.S. domestic issuers. We are committed to a high standard of corporate governance. As such, we endeavor to comply with the Nasdaq Listing Rules and, currently, there is no significant difference between our corporate governance practices and what the Nasdaq requires of U.S. domestic issuers.
ITEM 16H. MINE SAFETY DISCLOSURE
Not Applicable.
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See Item 18, “Financial Statements” below.
The following financial statements listed below are filed as part of this Annual Report:
National Energy Services Reunited Corp. and Subsidiaries
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
| 75 |
| No. | Description of Exhibit | |
| 8.1* | Subsidiaries of National Energy Services Reunited Corp. | |
| 12.1* | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. | |
| 12.2* | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. | |
| 13.1** | Certificate of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. | |
| 13.2** | Certificate of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. | |
| 15.1* | Consent of Independent Registered Public Accounting Firm. | |
| 101.INS* | XBRL Instance Document. | |
| 101.SCH* | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document. |
* Filed herewith.
** Furnished herewith.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
| NATIONAL ENERGY SERVICES REUNITED CORP. | ||
| By: | /s/ Sherif Foda | |
| Name: | Sherif Foda | |
| Title: | Chief Executive Officer | |
| Date: | March 17, 2020 | |
| By: | /s/ Christopher L. Boone | |
| Name: | Christopher L. Boone | |
| Title: | Chief Financial Officer | |
| Date: | March 17, 2020 | |
| 77 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
National Energy Services Reunited Corp.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of National Energy Services Reunited Corp. and subsidiaries (the “Company”) as of December 31, 2019 and 2018 (Successor Company balance sheets), the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year ended December 31, 2019 and the period from June 7, 2018 to December 31, 2018 (Successor Company operations), and of NPS Holdings Limited for the period from January 1, 2018 to June 6, 2018 and the year ended December 31, 2017 (Predecessor Company operations), and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Successor Company as of December 31, 2019 and 2018 and the results of its operations and its cash flows for the year ended December 31, 2019 and the period June 6, 2018 to December 31, 2018 in conformity with U.S. generally accepted accounting principles. Further, in our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations and its cash flows of the Predecessor Company for the period from January 1, 2018 to June 6, 2018 and for the year ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG
We have served as the Company’s auditor since 2018.
Mumbai, India
March 17, 2020
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In US$ thousands, except share data)
| December 31, 2019 | December 31, 2018 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | 73,201 | 24,892 | ||||||
| Accounts receivable, net | 98,799 | 62,636 | ||||||
| Unbilled revenue | 76,347 | 95,145 | ||||||
| Service inventories, net | 78,841 | 58,151 | ||||||
| Prepaid assets | 9,590 | 6,937 | ||||||
| Retention withholdings | 40,970 | 22,011 | ||||||
| Other receivables | 14,019 | 16,695 | ||||||
| Other current assets | 11,442 | 13,178 | ||||||
| Total current assets | 403,209 | 299,645 | ||||||
| Non-current assets | ||||||||
| Property, plant and equipment, net | 419,307 | 328,727 | ||||||
| Intangible assets, net | 122,714 | 138,052 | ||||||
| Goodwill | 574,764 | 570,540 | ||||||
| Other assets | 2,370 | 6,345 | ||||||
| Total assets | $ | 1,522,364 | $ | 1,343,309 | ||||
| Liabilities and equity | ||||||||
| Liabilities | ||||||||
| Accounts payable | 65,704 | 66,264 | ||||||
| Accrued expenses | 69,137 | 38,986 | ||||||
| Current installments of long-term debt | 15,000 | 45,093 | ||||||
| Short-term borrowings | 37,963 | 31,817 | ||||||
| Income taxes payable | 7,542 | 10,991 | ||||||
| Other taxes payable | 7,189 | 5,806 | ||||||
| Other current liabilities | 25,601 | 24,123 | ||||||
| Total current liabilities | 228,136 | 223,080 | ||||||
| Long-term debt | 330,564 | 225,172 | ||||||
| Deferred tax liabilities | 26,217 | 30,756 | ||||||
| Employee benefit liabilities | 16,745 | 13,828 | ||||||
| Other liabilities | 34,230 | 19,482 | ||||||
| Total liabilities | 635,892 | 512,318 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Equity | ||||||||
| Preferred shares, no par value; unlimited shares authorized; none issued and outstanding at December 31, 2019 and December 31, 2018, respectively | - | - | ||||||
| Common stock, no par value; unlimited shares authorized; 87,187,289 and 85,562,769 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively | 801,545 | 801,545 | ||||||
| Additional paid in capital | 17,237 | 1,034 | ||||||
| Retained earnings | 67,661 | 28,297 | ||||||
| Accumulated other comprehensive income | 29 | 48 | ||||||
| Total shareholders’ equity | 886,472 | 830,924 | ||||||
| Non-controlling interests | - | 67 | ||||||
| Total equity | 886,472 | 830,991 | ||||||
| Total liabilities and equity | $ | 1,522,364 | $ | 1,343,309 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In US$ thousands, except share data)
| Successor (NESR) | Predecessor (NPS) | |||||||||||||||
| Period from | Period from | Period from | ||||||||||||||
| January 1 | June 7 | January 1 | Year ended | |||||||||||||
| to December 31, | to December 31, | to June 6, | December 31, | |||||||||||||
| 2019 | 2018 | 2018 | 2017 | |||||||||||||
| Revenues | $ | 658,385 | $ | 348,590 | $ | 137,027 | $ | 271,324 | ||||||||
| Cost of services | (506,799 | ) | (249,159 | ) | (104,242 | ) | (200,149 | ) | ||||||||
| Gross profit | 151,586 | 99,431 | 32,785 | 71,175 | ||||||||||||
| Selling, general and administrative expense | (63,840 | ) | (36,705 | ) | (19,969 | ) | (30,336 | ) | ||||||||
| Amortization | (15,932 | ) | (9,373 | ) | (10 | ) | (607 | ) | ||||||||
| Operating income | 71,814 | 53,353 | 12,806 | 40,232 | ||||||||||||
| Interest expense, net | (18,971 | ) | (14,383 | ) | (4,090 | ) | (6,720 | ) | ||||||||
| Other income / (expense), net | (408 | ) | 5,441 | 362 | (573 | ) | ||||||||||
| Income before income tax | 52,435 | 44,411 | 9,078 | 32,939 | ||||||||||||
| Income tax expense | (13,071 | ) | (9,431 | ) | (2,342 | ) | (4,586 | ) | ||||||||
| Net income / (loss) | 39,364 | 34,980 | 6,736 | 28,353 | ||||||||||||
| Net income / (loss) attributable to non-controlling interests | - | (163 | ) | (881 | ) | (2,273 | ) | |||||||||
| Net income attributable to shareholders | $ | 39,364 | $ | 35,143 | $ | 7,617 | $ | 30,626 | ||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 86,997,554 | 85,569,020 | 348,524,566 | 342,250,000 | ||||||||||||
| Diluted | 86,997,554 | 86,862,983 | 370,000,000 | 370,000,000 | ||||||||||||
| Net earnings per share: | ||||||||||||||||
| Basic | $ | 0.45 | $ | 0.41 | $ | 0.02 | $ | 0.09 | ||||||||
| Diluted | $ | 0.45 | $ | 0.40 | $ | 0.02 | $ | 0.08 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In US$ thousands)
| Successor (NESR) | Predecessor (NPS) | |||||||||||||||
| Period from | Period from | Period from | ||||||||||||||
| January 1 | June 7 | January 1 | Year ended | |||||||||||||
| to December 31, | to December 31, | to June 6, | December 31, | |||||||||||||
| 2019 | 2018 | 2018 | 2017 | |||||||||||||
| Net income | $ | 39,364 | $ | 34,980 | $ | 6,736 | $ | 28,353 | ||||||||
| Other comprehensive income, net of tax | ||||||||||||||||
| Foreign currency translation adjustments | (19 | ) | - | (16 | ) | (45 | ) | |||||||||
| Total Comprehensive Income, net of tax | 39,345 | 34,980 | 6,720 | 28,308 | ||||||||||||
| Comprehensive income attributable to non-controlling interest | - | (163 | ) | (881 | ) | (2,273 | ) | |||||||||
| Comprehensive income attributable to shareholder interest | $ | 39,345 | $ | 35,143 | $ | 7,601 | $ | 30,581 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS SHAREHOLDERS’ EQUITY
(In US$ thousands, except share data)
For the Successor (NESR) period from January 1, 2019 to December 31, 2019:
| Accumulated | Retained | Total | ||||||||||||||||||||||||||||||
| Successor | Additional Paid In | Other Comprehensive | Earnings (Accumulated | Company Stockholders’ | Noncontrolling | Total Stockholders’ | ||||||||||||||||||||||||||
| (NESR) | Ordinary Shares |
Capital | Income (Loss) | Deficit) | Equity | Interests | Equity | |||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | 85,562,769 | 801,545 | 1,034 | 48 | 28,297 | 830,924 | 67 | 830,991 | ||||||||||||||||||||||||
| Stock-based compensation expense | - | - | 5,654 | - | - | 5,654 | - | 5,654 | ||||||||||||||||||||||||
| Vesting of restricted share units | 290,510 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Other | 33,796 | - | 2 | (19 | ) | - | (17 | ) | - | (17 | ) | |||||||||||||||||||||
| Acquisition of non-controlling interest during the period | - | - | 67 | - | - | 67 | (67 | ) | - | |||||||||||||||||||||||
| NPS equity earn-out | 1,300,214 | - | 10,480 | - | - | 10,480 | - | 10,480 | ||||||||||||||||||||||||
| Net income from January 1, 2019 to December 31, 2019 | - | - | - | - | 39,364 | 39,364 | - | 39,364 | ||||||||||||||||||||||||
| Balance at December 31, 2019 | 87,187,289 | 801,545 | 17,237 | 29 | 67,661 | 886,472 | - | 886,472 | ||||||||||||||||||||||||
For the Successor (NESR) period from June 7, 2018 to December 31, 2018:
| Accumulated | Retained | Total | ||||||||||||||||||||||||||||||
| Additional | Other | Earnings | Company | Total | ||||||||||||||||||||||||||||
| Successor | Paid In | Comprehensive | (Accumulated | Stockholders’ | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||
| (NESR) | Ordinary Shares | Capital | Income (Loss) | Deficit) | Equity | Interests | Equity | |||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||
| Balance at June 7, 2018 | 11,730,425 | $ | 56,601 | $ | - | $ | - | $ | (4,611 | ) | $ | 51,990 | $ | - | $ | 51,990 | ||||||||||||||||
| Reclassification of shares previously subject to redemption | 16,921,700 | 165,188 | - | - | 165,188 | - | 165,188 | |||||||||||||||||||||||||
| Redeemed shares | (1,916,511 | ) | (19,379 | ) | - | - | - | (19,379 | ) | - | (19,379 | ) | ||||||||||||||||||||
| Shares issued to acquire NPS | 25,077,277 | 255,537 | - | - | - | 255,537 | - | 255,537 | ||||||||||||||||||||||||
| Shares issued to acquire GES | 28,346,229 | 288,848 | - | - | - | 288,848 | - | 288,848 | ||||||||||||||||||||||||
| Shares issued to related party for loan fee and transaction costs | 266,809 | 2,719 | - | - | - | 2,719 | - | 2,719 | ||||||||||||||||||||||||
| Shares issued in secondary offering | 4,829,375 | 48,294 | - | - | - | 48,294 | - | 48,294 | ||||||||||||||||||||||||
| Shares issued for IPO underwriting fees | 307,465 | 3,737 | - | - | - | 3,737 | - | 3,737 | ||||||||||||||||||||||||
| Stock-based Compensation | - | - | 1,034 | - | - | 1,034 | - | 1,034 | ||||||||||||||||||||||||
| Business combination non-controlling interest | - | - | - | - | - | - | (2,004 | ) | (2,004 | ) | ||||||||||||||||||||||
| Other | - | - | - | 48 | - | 48 | (1 | ) | 47 | |||||||||||||||||||||||
| Acquisition of non-controlling interest during the period | - | - | - | - | 808 | 808 | (808 | ) | - | |||||||||||||||||||||||
| Non-controlling interest derecognized due to sale of subsidiary | (3,043 | ) | (3,043 | ) | 3,043 | - | ||||||||||||||||||||||||||
| Net income (loss) through December 31, 2018 | - | - | - | - | 35,143 | 35,143 | (163 | ) | 34,980 | |||||||||||||||||||||||
| Balance at December 31, 2018 | 85,562,769 | $ | 801,545 | $ | 1,034 | $ | 48 | $ | 28,297 | $ | 830,924 | $ | 67 | $ | 830,991 | |||||||||||||||||
For the Predecessor (NPS) period from January 1, 2018 to June 6, 2018:
| Redeemable | Accumulated | Retained | Total | |||||||||||||||||||||||||||||||||||||
| Convertible | Redeemable | Additional | Other | Earnings | Company | Total | ||||||||||||||||||||||||||||||||||
| Shares | Common | Shares | Convertible | Paid In | Comprehensive | (Accumulated | Stockholders’ | Noncontrolling | Stockholders’ | |||||||||||||||||||||||||||||||
| Predecessor (NPS) | Outstanding | Stock | Outstanding | Shares | Capital | Income (Loss) | Deficit) | Equity | Interests | Equity | ||||||||||||||||||||||||||||||
| Balance at January 1, 2018 | 342,250,000 | $ | 342,250 | 27,750,000 | $ | 27,750 | $ | 3,345 | $ | (436 | ) | $ | 18,480 | $ | 391,389 | $ | (1,960 | ) | $ | 389,429 | ||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | - | 7,617 | 7,617 | (881 | ) | 6,736 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (16 | ) | - | (16 | ) | - | (16 | ) | |||||||||||||||||||||||||||
| Conversion of redeemable shares | 6,274,566 | 6,275 | (6,274,566 | ) | (6,275 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||
| Dividends paid | - | - | - | - | - | - | (48,210 | ) | (48,210 | ) | - | (48,210 | ) | |||||||||||||||||||||||||||
| Amount of Provision for Zakat | - | - | - | - | - | - | (766 | ) | (766 | ) | - | (766 | ) | |||||||||||||||||||||||||||
| Balance at June 6, 2018 | 348,524,566 | $ | 348,525 | 21,475,434 | $ | 21,475 | $ | 3,345 | $ | (452 | ) | $ | (22,879 | ) | $ | 350,014 | $ | (2,841 | ) | $ | 347,173 | |||||||||||||||||||
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For the Predecessor (NPS) period from January 1, 2017 to December 31, 2017:
| Redeemable | Accumulated | Retained | Total | |||||||||||||||||||||||||||||||||||||
| Convertible | Redeemable | Additional | Other | Earnings | Company | Total | ||||||||||||||||||||||||||||||||||
| Shares | Common | Shares | Convertible | Paid In | Comprehensive | (Accumulated | Stockholders’ | Noncontrolling | Stockholders’ | |||||||||||||||||||||||||||||||
| Predecessor (NPS) | Outstanding | Stock | Outstanding | Shares | Capital | Income (Loss) | Deficit) | Equity | Interests | Equity | ||||||||||||||||||||||||||||||
| Balance at January 1, 2017 | 342,250,000 | $ | 342,250 | 27,750,000 | $ | 27,750 | $ | 3,345 | $ | (391 | ) | $ | 8,814 | $ | 381,768 | 313 | 382,081 | |||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | - | 30,626 | 30,626 | (2,273 | ) | 28,353 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (45 | ) | - | (45 | ) | - | (45 | ) | |||||||||||||||||||||||||||
| Dividends paid | - | - | - | - | - | - | (20,000 | ) | (20,000 | ) | - | (20,000 | ) | |||||||||||||||||||||||||||
| Amount of Provision for Zakat | - | - | - | - | - | - | (960 | ) | (960 | ) | - | (960 | ) | |||||||||||||||||||||||||||
| Balance at December 31, 2017 | 342,250,000 | $ | 342,250 | 27,750,000 | $ | 27,750 | $ | 3,345 | $ | (436 | ) | $ | 18,480 | $ | 391,389 | $ | (1,960 | ) | $ | 389,429 | ||||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US$ thousands)
| Successor (NESR) | Predecessor (NPS) | |||||||||||||||
| Period from | Period from | Period from | ||||||||||||||
| January 1 | June 7 | January 1 | Year ended | |||||||||||||
| to December 31, | to December 31, | to June 6, | December 31, | |||||||||||||
| 2019 | 2018 | 2018 | 2017 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income/(loss) | $ | 39,364 | $ | 34,980 | $ | 6,736 | $ | 28,353 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 88,111 | 42,416 | 17,284 | 38,408 | ||||||||||||
| Shares issued for transaction costs | - | 2,719 | - | - | ||||||||||||
| Stock-based compensation | 5,654 | 1,034 | - | - | ||||||||||||
| (Gain) on disposal of assets | (1,659 | ) | (986 | ) | - | (228 | ) | |||||||||
| Non-cash interest expense | 1,884 | 2,055 | 3,350 | 7,835 | ||||||||||||
| Deferred tax expense (benefit) | (3,935 | ) | (2,025 | ) | - | 598 | ||||||||||
| Allowance for doubtful receivables | 1,771 | 693 | 2,402 | 334 | ||||||||||||
| Provision for obsolete service inventories | 622 | 1,155 | - | |||||||||||||
| NPS equity stock-earn out | - | (5,723 | ) | - | - | |||||||||||
| Other operating activities, net | 90 | 796 | 1,442 | - | ||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| (Increase) decrease in accounts receivable | (39,176 | ) | 10,329 | (15 | ) | (5,000 | ) | |||||||||
| (Increase) in inventories | (21,312 | ) | 5,440 | (2,080 | ) | (8,118 | ) | |||||||||
| (Increase) in prepaid expenses | (2,573 | ) | 596 | (759 | ) | 2,070 | ||||||||||
| (Increase) in other current assets | 585 | (36,373 | ) | (16,257 | ) | 7,480 | ||||||||||
| (Increase) decrease in other long-term assets and liabilities | 8,623 | - | (544 | ) | - | |||||||||||
| Increase (decrease) in accounts payable and accrued expenses | 19,438 | (34,943 | ) | 7,335 | 9,172 | |||||||||||
| Increase (decrease) in other current liabilities | (8,396 | ) | 18,677 | 1,932 | 2,289 | |||||||||||
| Net cash provided by operating activities | 89,091 | 40,840 | 20,826 | 83,193 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Capital expenditures | (107,938 | ) | (23,211 | ) | (9,861 | ) | (48,657 | ) | ||||||||
| Proceeds from disposal of assets | 1,625 | 5,309 | - | 282 | ||||||||||||
| Proceeds from the Company’s Trust account | - | 231,782 | - | |||||||||||||
| Acquisition of business, net of cash acquired | - | (282,190 | ) | (1,098 | ) | (624 | ) | |||||||||
| Other investing activities | (1,025 | ) | 1,722 | 3,043 | (3,043 | ) | ||||||||||
| Net cash used in investing activities | (107,338 | ) | (66,588 | ) | (7,916 | ) | (52,042 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from long-term debt | 365,000 | 92,490 | 47,063 | - | ||||||||||||
| Repayments of long-term debt | (285,048 | ) | (61,606 | ) | - | - | ||||||||||
| Proceeds from short-term borrowings | 49,305 | - | - | - | ||||||||||||
| Repayments of short-term borrowings | (56,965 | ) | - | - | (7,871 | ) | ||||||||||
| Payments on capital leases | - | - | - | - | ||||||||||||
| Proceeds from issuance of shares | - | 48,294 | - | - | ||||||||||||
| Redemption of ordinary shares | - | (19,380 | ) | - | - | |||||||||||
| Payment of deferred underwriting fees | - | (9,070 | ) | (164 | ) | - | ||||||||||
| Dividend paid | - | - | (48,210 | ) | (20,000 | ) | ||||||||||
| Other financing activities, net | (5,717 | ) | (134 | ) | (4,429 | ) | (4,267 | ) | ||||||||
| Net cash provided by (used in) financing activities | 66,575 | 50,594 | (5,740 | ) | (32,138 | ) | ||||||||||
| Effect of exchange rate changes on cash | (19 | ) | - | (16 | ) | (45 | ) | |||||||||
| Net increase (decrease) in cash | 48,309 | 24,846 | 7,154 | (1,032 | ) | |||||||||||
| Cash and cash equivalents, beginning of period | 24,892 | 46 | 24,502 | 25,534 | ||||||||||||
| Cash and cash equivalents, end of period | 73,201 | 24,892 | 31,656 | 24,502 | ||||||||||||
| Supplemental disclosure of cash flow information (also refer Note 3): | ||||||||||||||||
| Interest paid | 17,290 | 8,812 | 3,636 | 7,989 | ||||||||||||
| Income taxes paid | 19,192 | 6,008 | 345 | 3,286 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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NATIONAL ENERGY SERVICES REUNITED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
National Energy Services Reunited Corp. (“NESR,” the “Company,” “we,” “our,” “us” or similar terms) is one of the largest oilfield services providers in the MENA region.
Formed in January 2017, NESR started as a special purpose acquisition company, SPAC, designed to invest in the oilfield services space globally. NESR filed a registration statement for its initial public offering in May 2017. In November 2017, NESR announced the acquisition of two oilfield services companies in the MENA region: NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES” and, together with NPS, the “Subsidiaries”). The formation of NESR as an operating entity was completed on June 7, 2018, after the transactions were approved by the SEC and NESR shareholders.
Revenues are primarily derived from helping customers unlock the full potential of their reservoirs by providing Production Services such as Cementing, Coiled Tubing, Filtration, Completions, Stimulation, Pumping and Nitrogen Services. The Company also helps its customers to access their reservoirs in a smarter and faster manner by providing Drilling and Evaluation Services such as Drilling Downhole Tools, Directional Drilling, Fishing Tools, Testing Services, Wireline, Slickline, Fluids and Rig Services. The Company has significant operations throughout the MENA region including Saudi Arabia, Oman, Qatar, Iraq, Algeria, and Kuwait.
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). All amounts are shown in U.S. dollars, except as noted.
On June 6, 2018, NESR acquired all of the issued and outstanding equity interests of the Subsidiaries (collectively, the “Business Combination”). 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. |
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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 consolidated financial statements, the successor periods are from June 7, 2018 to December 31, 2018 (“2018 Successor Period”) and January 1, 2019 to December 31, 2019 (“2019 Successor Period”), and the predecessor periods are from January 1, 2017 to December 31, 2017 (“2017 Predecessor Period”) and 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 consolidated 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 consolidated 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 consolidated 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 unrecognized tax benefits, recoverability of deferred taxes and contingencies and actuarial assumptions in employee benefit plans.
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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 consolidated 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
Consolidation
The Company consolidates entities in which the Company has a majority voting interest and entities that meet the criteria for variable interest entities for which the Company is deemed to be the primary beneficiary for accounting purposes. The Company eliminates intercompany transactions and accounts in consolidation. The Company applies the equity method of accounting for an investment in an entity if it has the ability to exercise significant influence over the entity that (a) does not meet the variable interest entity criteria or (b) meets the variable interest entity criteria, but for which the Company is not deemed to be the primary beneficiary. The Company applies the cost method of accounting for an investment in an entity if it does not have the ability to exercise significant influence over the unconsolidated entity. The Company separately presents within equity on the consolidated balance sheets the ownership interests attributable to parties with non-controlling interests in the Company’s consolidated subsidiaries, and separately presents net income attributable to such parties on the consolidated statements of operations.
Cash and cash equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents.
Supplemental cash flow information
Non-cash transactions were as follows for the 2019 Successor period:
| ● | Purchases of property, plant, and equipment in accounts payable, accrued expenses and short-term borrowings at December 31, 2019 of $21.7 million, $3.0 million, and $29.3 million, respectively, are not included under “Capital expenditures” within the consolidated statement of cash flows. | |
| ● | Non-cash additions to capital lease obligations of $33.7 million. | |
| ● | Purchases of property, plant, and equipment using seller-provided installment financing of $3.0 million included in Other current liabilities and $3.0 million in Other liabilities. |
Non-cash transactions were as follows for the 2018 Successor period:
| ● | In connection the Business Combination in 2018, the Company issued ordinary shares valued at $544.4 million. | |
| ● | In connection with the Hana Loan, which is described in Note 10, Debt, the Company paid a $0.6 million origination fee using ordinary shares. Additionally, in conjunction with the Hana Loan, as described in Note 15, Equity, the Company reimbursed Hana Investments for transaction fees and expenses in the amount of $2.1 million through the issuance of ordinary shares. | |
| ● | Purchases of property, plant, and equipment in accounts payable and short-term debt at December 31, 2018 of $20.8 million and $14.7 million, respectively, are not included under “Capital expenditures” within the consolidated statement of cash flows. |
Income taxes
The Company applies an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are computed for differences between the financial accounting and tax basis of assets and liabilities that will result in future deductible or taxable amounts and for carryforwards, based on enacted tax laws and rates applicable to the periods in which the deductible or taxable temporary differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount that is more likely than not to be realized.
The Company applies a recognition and measurement threshold for evaluating tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position, based solely on the technical merits, must be more-likely-than-not to be sustained upon examination by taxing authorities. Recognized tax positions are measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. The Subsidiaries operate in multiple tax jurisdictions in the Middle East, North Africa and Asia. The Company has provided for income taxes based on enacted tax laws and tax rates in effect in the countries where the Company operates and earns income. The income taxes in these jurisdictions vary substantially. The Company engages in transactions in which the tax consequences may be subject to uncertainty and examination by the varying taxing authorities. Significant judgment is required by the Company’s management in assessing and estimating the tax consequences of these transactions. While the Company prepares tax returns based on interpretations of tax laws and regulations, in the normal course of business the tax returns may be subject to examination by the various taxing authorities. Such examinations may result in future assessments of additional tax, interest and penalties. NESR classifies interest and penalties relating to an underpayment of income taxes within income tax expense in the Consolidated Statement of Operations. Considerable judgment is involved in determining which tax positions are more likely than not to be sustained.
Net income per ordinary share
Basic income per ordinary share was computed by dividing basic net income attributable to ordinary shareholders by the weighted-average number of ordinary shares outstanding. Diluted income per ordinary share was computed by dividing diluted net income attributable to ordinary shareholders by the weighted-average number of ordinary shares outstanding plus dilutive potential ordinary shares, if any. Dilutive potential ordinary shares include outstanding warrants or other contracts to issue ordinary stock and are determined by applying the treasury stock method or if-converted method, as applicable, if dilutive.
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Concentration of credit risk
The Company’s assets that are exposed to concentrations of credit risk consist primarily of cash and receivables from customers. The Company places its cash with financial institutions and limits the amount of credit exposure with any one of them. The Company regularly evaluates the creditworthiness of the issuers in which it invests. The Company minimizes this credit risk by entering into transactions with high-quality counterparties, limiting the exposure to each counterparty and monitoring the financial condition of its counterparties.
Fair value of financial instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable, loans and borrowings, contingent consideration and an embedded derivative. Other than the embedded derivative and contingent consideration, the fair value of the Company’s financial instruments under ASC Topic 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the accompanying consolidated balance sheet, primarily due to their short-term nature.
Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
| ● | Level 1 - Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. |
Accounts receivable and allowance for doubtful accounts
Trade accounts receivable are recorded at the invoiced amount. No interest is charged on past-due balances. The Company grants credit to customers based upon an evaluation of each customer’s financial condition. The Company periodically monitors the payment history and ongoing creditworthiness of customers. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowances management considers historical losses adjusted to take into account current market conditions and the customer’s financial conditions, the amount of receivable in dispute, current receivables ageing and current payment patterns. Significant accounts receivable balances and balances that have been outstanding greater than 90 days are reviewed for collectability. Account balances, when determined to be uncollectable, are charged against the allowance.
Service inventories
The Company’s service inventory consists of spare parts, chemicals and raw materials to support ongoing operations which are held for the purpose of service contracts and are measured at the lower of cost or net realizable value. The cost is based on the weighted average cost principle and includes expenditures incurred in acquiring the service inventories. Net realizable value is the estimated selling price less estimated costs of completion and selling expenses incurred in the ordinary course of business.
The Company determines reserves for service inventory based on historical usage of inventory on-hand, assumptions about future demand and market conditions and estimates about potential alternative uses, which are limited.
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Property, plant and equipment
Property, plant and equipment, inclusive of equipment under capital lease, is stated at cost less accumulated depreciation. The cost of ordinary maintenance and repair is charged to operating expense, while replacement of critical components and major improvements that extend the life of the related asset are capitalized. Capital work in progress mainly represents costs incurred on drilling rigs and equipment that are in transit at the reporting date. No depreciation is charged to capital work in progress. Depreciation of property, plant and equipment is calculated using the straight-line method over the asset’s estimated useful life as follows:
| Buildings and leasehold improvements | 5 to 25 years or the estimated lease period, whichever is shorter |
| Drilling rigs, plant and equipment | 3 to 15 years |
| Furniture and fixtures | 5 years |
| Office equipment and tools | 3 to 6 years |
| Vehicles and cranes | 5 to 8 years |
Equipment held under capital leases are generally amortized on a straight-line basis over the shorter of the estimated useful life of the underlying asset and the term of the lease.
Property, plant and equipment is reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an asset or asset group may not be recoverable. Events or circumstances that may indicate include, but are not limited to, matters such as a significant decline in market value or a significant change in business climate (“triggering events”). An impairment loss is recognized when the carrying value of an asset exceeds the estimated undiscounted future cash flows from the use of the asset and its eventual disposition.
The amount of impairment loss recognized is the excess of the asset’s carrying value over its fair value. In determining the fair market value of the assets, the Company considers market trends and recent transactions involving sales of similar assets, or when not available, discounted cash flow analysis. The Company has not recorded any impairment charges of property, plant and equipment in the accompanying consolidated statement of operations for any of the periods presented.
Assets to be disposed of are reported at the lower of the carrying value or the fair value less cost to sell. Upon sale or other disposition of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying value of the asset and the net proceeds received.
Leases
The Company leases certain facilities and equipment used in its operations. The Company evaluates and classifies its leases as operating or capital leases for financial reporting purposes. Assets held under capital leases are included in property, plant and equipment, net, on the consolidated balance sheets. Operating lease expense is recorded on a straight-line basis over the lease term in the consolidated statements of operation.
Goodwill
Goodwill is the excess cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination.
Goodwill is evaluated for impairment on an annual basis, or more frequently if circumstances require. The Company’s next annual test will occur on October 1, 2020. The Company performs a qualitative assessment to determine whether it is more-likely-than-not that the fair value of the applicable reporting unit is less than its carrying amount. If the Company determines, as a result of its qualitative assessment, that it is not more-likely-than-not that the fair value of the applicable reporting unit is less than its carrying amount, no further testing is required. If the Company determines, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of the applicable reporting unit is less than its carrying amount, a goodwill impairment assessment is performed using a two-step, fair-value based test. Under the first step, goodwill is reviewed for impairment by comparing the carrying value of the reporting unit’s net assets (including allocated goodwill) to the fair value of the reporting unit. The fair value of the reporting units is determined using a discounted cash flow approach. Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include revenue growth rates, discount rates, operating margins, weighted average costs of capital, market share and future market conditions, among others. If the reporting unit’s carrying value is greater than its fair value, a second step is performed whereby the implied fair value of goodwill is estimated by allocating the fair value of the reporting unit in a hypothetical purchase price allocation analysis. If the amount of goodwill resulting from this hypothetical purchase price allocation is less than the carrying value of the reporting unit’s goodwill, the recorded carrying value of goodwill is written down to the implied fair value. The Company has not recorded any impairment charge for goodwill in the accompanying consolidated statement of operations for any of the periods presented.
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Intangible assets
Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The Company’s intangible assets with finite lives consist of customer contracts, trademarks and trade names. The cost of intangible assets with finite lives is amortized over the estimated period of economic benefit on a straight line basis, ranging from eight to ten years. Asset lives are adjusted whenever there is a change in the estimated period of economic benefit. No residual value has been assigned to these intangible assets.
Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations. The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins and cash flows. If the sum of expected future cash flows (undiscounted) is less than the carrying amount, an impairment loss is recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flow models.
Employee benefits
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 statement of income. 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. 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 as incurred.
Commitments and contingencies
The Company accrues for costs relating to litigation claims and other contingent matters, including liquidated damage liabilities, when such liabilities become probable and reasonably estimable. In circumstances where the most likely outcome of a contingency can be reasonably estimated, the Company accrues a liability for that amount. Where the most likely outcome cannot be estimated, a range of potential losses is established and if no one amount in that range is more likely than others, the low end of the range is accrued. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate. Revisions to contingent liabilities are reflected in income in the period in which different facts or information become known or circumstances change that affect the Company’s previous judgments with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of contingent liabilities may be materially different from previous estimates and could require adjustments to the estimated reserves to be recognized in the period such new information becomes known.
Revenue recognition
Effective December 31, 2019, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). The Company adopted this ASU using the modified retrospective adoption method. There was no impact on the consolidated financial statements, no cumulative effect adjustment was recognized, and no contract assets or liabilities were recorded.
The Company recognizes revenue from contracts with customers upon transfer of control of promised services to customers at an amount that reflects the consideration it expects to receive in exchange of services. We typically receive “callouts” from our customers for specific services at specific customer locations, typically initiated by the receipt of a purchase/service order or similar document from the customer. Customer callouts request that the Company provide a “suite of services” to fulfill the service order, encompassing personnel, use of Company equipment, and supplies required to perform the work. Rates for these services are defined in the Company’s contracts with customers. The term between invoicing and when the payment is due is typically 30-60 days.
Revenue is recognized for each performance obligation when the customer obtains control of the service the Company is providing. For most services, control is obtained over time as (1) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as Company employees perform and (2) the Company’s performance creates or enhances an asset that the customer controls. Revenue is recorded based on daily drilling logs, recognized at the standalone selling price of the services provided as reduced proportionately for management’s estimate of volume or early pay discount where applicable.
Costs of obtaining a customer contract that are incremental and expected to be recovered are recognized as an asset. Costs are subsequently amortized over the term of the contract or less if circumstances indicate that a shorter deferral period better matches these costs with the revenue they generate.
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Segment information
An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses and about which separate financial information is regularly evaluated by the Company’s chief operating decision maker (“CODM”) in deciding how to allocate resources. Similar operating segments can be aggregated into a single operating segment if the businesses are similar. Management has determined that the Company has two operating segments and two reportable segments, which reflects the manner in which the CODM operates the Company. The Company’s CODM is its Chief Executive Officer.
Stock-based compensation arrangements
The Company provides stock-based compensation in the form of restricted stock awards to members of its Board of Directors and employees. Awards are issued pursuant to the terms of the Company’s 2018 Long Term Incentive Plan (“LTIP”) and valued at their grant date fair value. Such awards qualify as participating securities as they have the right to participate in dividends issued on the Company’s ordinary shares, if any. Grants to members of the Company’s Board of Directors are time-based and vest ratably over a 1-year period. Grants to Company employees are time-based and vest ratably over a 3-year period.
Functional and presentation currency
These consolidated financial statements are presented in U.S. Dollars (“USD”), which is the functional and reporting currency of the Company. The majority of the Company’s sales are denominated in USD. Each subsidiary of NESR determines its own functional currency and items included in the financial statements of each subsidiary are measured using that functional currency. All financial information presented in USD is rounded to the nearest thousand, unless otherwise indicated.
Transactions in foreign currencies are translated to the respective functional currency of the Company’s subsidiaries at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate as of the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the exchange rate when the fair value was determined. Foreign currency differences are generally recognized in profit or loss. Non-monetary items that are measured based on historical cost in a foreign currency are not translated.
The assets and liabilities of entities whose functional currency is not the USD are translated into the USD at the exchange rate as of the reporting date. The income and expenses of such entities are translated into the USD using average exchange rates for the reporting period. Exchange differences on foreign currency translations are recorded in other comprehensive income (loss).
Derivative financial instruments
The Company evaluates all of its financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as an embedded derivative. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as other income (expense).
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Recent accounting pronouncements
As an emerging growth company, the Company has elected the option to defer the effective date for adoption of new or revised accounting guidance. This option allows the Company to adopt new guidance on the effective date for entities that are not public business entities.
Recently issued accounting standards not yet adopted
The Securities and Exchange Commission permits qualifying Emerging Growth Companies (“EGC”) to defer the adoption of accounting standards updates until the time when a private company would adopt. The Company continues to qualify as an EGC as of December 31, 2019.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases,” a new standard on accounting for leases. This update increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In November 2019, the FASB issued ASU No. 2019-10, “Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates.” ASU No. 2019-10 deferred the Company’s adoption of ASU 2016-02, as amended, to fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The Company is currently evaluating the provisions of ASU 2016-02 and related interpretive amendments (ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842,” ASU 2018-10, “Codification Improvements to Topic 842, Leases,” ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” ASU 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” and ASU 2019-01, “Leases (Topic 842): Codification Improvements,” inclusive) and assessing the impact, if any, on its consolidated financial statements and related disclosures.
In February 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The ASU is effective for the Company’s annual or any interim goodwill impairment tests in fiscal years beginning 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.
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 December 18, 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which modifies ASC 740 to simplify the accounting for income taxes. The ASU’s amendments are based on changes that were suggested by stakeholders as part of the FASB’s simplification initiative (i.e., the Board’s effort to reduce the complexity of accounting standards while maintaining or enhancing the helpfulness of information provided to financial statement users). The guidance is effective for fiscal years beginning after December 15, 2021, and for interim periods beginning after December 15, 2022. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
All other new accounting pronouncements that have been issued but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our financial position or results of operations.
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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.
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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 unrecognized tax benefits.
The impact of these adjustments on the 2019 Successor Period was not material to the consolidated financial statements.
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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 December 31, 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 income 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 | Period from January 1 | |||||||
| to December 31, | to December 31, | |||||||
| 2018 | 2017 | |||||||
| Revenues | $ | 552,520 | $ | 457,888 | ||||
| Net income | $ | 52,667 | $ | 36,418 | ||||
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.
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Disaggregation of revenue
There is significant homogeneity amongst the Company’s revenue-generating activities. In all service lines, the Company provides a “suite of services” to fulfill a customer purchase/service order, encompassing personnel, use of Company equipment, and supplies required to perform the work. 99% of the Company’s revenue is from the MENA region with the majority sourced from governmental customers, predominantly in Oman and Saudi Arabia. Information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments is focused on the timing of when the services are performed during a well’s lifecycle. Production Services are services performed during the production stage of a well’s lifecycle. Drilling and Evaluation Services are services performed during the pre-production stages of a well’s lifecycle.
Based on these considerations, the following table provides disaggregated revenue data by the phase in a well’s lifecycle during which revenue has been recorded (in thousands):
| Successor (NESR) | Predecessor (NPS) | |||||||||||||||
| Period from | Period from | Period from | ||||||||||||||
| January 1 | June 7 | January 1 | Year ended | |||||||||||||
| to December 31, | to December 31, | to June 6, | December 31, | |||||||||||||
| 2019 | 2018 | 2018 | 2017 | |||||||||||||
| Revenue by Phase in Well’s Lifecycle: | ||||||||||||||||
| Production Services | $ | 405,654 | $ | 215,791 | $ | 112,295 | $ | 228,763 | ||||||||
| Drilling and Evaluation Services | 252,731 | 132,799 | 24,732 | 42,561 | ||||||||||||
| Total revenue by phase in well’s life cycle | $ | 658,385 | $ | 348,590 | $ | 137,027 | $ | 271,324 | ||||||||
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The following table summarizes the accounts receivables for the periods as set forth below (in thousands):
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Trade receivables | $ | 100,642 | $ | 63,329 | ||||
| Less: allowance for doubtful accounts | (1,843 | ) | (693 | ) | ||||
| Total | $ | 98,799 | $ | 62,636 | ||||
Trade receivables relate to the sale of services, for which credit is extended based on the Company’s evaluation of the customer’s credit-worthiness. The gross contractual amounts of trade receivables at December 31, 2019 and December 31, 2018 were $100.6 million and $63.3 million, respectively. Movement in the allowance for doubtful accounts is as follows (in thousands):
| Period from January 1, 2019 | Period
from June 7, 2018 | Period from January 1, 2018 | Period from January 1, 2017 | |||||||||||||
| to December 31, 2019 | to December 31, 2018 | to
June 6, 2018 | to December 31, 2017 | |||||||||||||
| Successor (NESR) | Predecessor (NPS) | |||||||||||||||
| Allowance for doubtful accounts at beginning of period | (693 | ) | - | (4,106 | ) | (3,772 | ) | |||||||||
| Add: additional allowance for the year | (1,771 | ) | (693 | ) | - | (1,605 | ) | |||||||||
| Less: bad debt expense | 621 | - | - | 1,271 | ||||||||||||
| Allowance for doubtful accounts at end of period | (1,843 | ) | (693 | ) | (4,106 | ) | (4,106 | ) | ||||||||
The following table summarizes the service inventories for the periods as set forth below (in thousands):
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Spare parts | $ | 39,428 | $ | 29,928 | ||||
| Chemicals | 22,852 | 14,803 | ||||||
| Raw materials | 2,441 | 200 | ||||||
| Consumables | 15,897 | 14,375 | ||||||
| Total | 80,618 | 59,306 | ||||||
| Less: allowance for obsolete and slow-moving inventories | (1,777 | ) | (1,155 | ) | ||||
| Total | $ | 78,841 | $ | 58,151 | ||||
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8. PROPERTY, PLANT, & EQUIPMENT
Property, plant and equipment, net of accumulated depreciation, of the Company consists of the following as of the period end dates set forth below (in thousands):
Estimated Useful Lives (in years) | December
31, 2019 | December
31, 2018 | ||||||||||
| Buildings and leasehold improvements | 5 to 25 | $ | 36,853 | $ | 21,572 | |||||||
| Drilling rigs, plant and equipment | 3 to 15 | 411,984 | 278,249 | |||||||||
| Furniture and fixtures | 5 | 3,720 | 1,348 | |||||||||
| Office equipment and tools | 3 to 6 | 35,991 | 31,568 | |||||||||
| Vehicles and cranes | 5 to 8 | 12,292 | 4,179 | |||||||||
| Less: Accumulated depreciation | (104,689 | ) | (32,522 | ) | ||||||||
| Land | 5,104 | 5,104 | ||||||||||
| Capital work in progress | 18,052 | 19,229 | ||||||||||
| Total | $ | 419,307 | $ | 328,727 | ||||||||
The Drilling rigs, plant and equipment balance as of December 31, 2019 included $29.5 million of hydraulic fracturing equipment under capital lease. Accumulated depreciation for the hydraulic fracturing equipment under capital leases was $5.2 million as of December 31, 2019.
The Company recorded depreciation expense of $72.2 million, $33.0 million, $17.3 million and $37.8 million, in the 2019 Successor Period, 2018 Successor Period, 2018 Predecessor Period, and 2017 Predecessor Period, respectively, in the Consolidated Statement of Operations.
9. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of goodwill of the Company between December 31, 2018 and December 31, 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 December 31, 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 | |||
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The details of the Company’s intangible assets subject to amortization are set forth below (in thousands):
| December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||||
| Customer contracts | $ | 121,500 | $ | (19,239 | ) | $ | 102,261 | $ | 121,500 | $ | (7,088 | ) | $ | 114,412 | ||||||||||
| Trademarks and trade names | 25,500 | (5,047 | ) | 20,453 | 25,500 | (1,860 | ) | 23,640 | ||||||||||||||||
| Total intangible assets | $ | 147,000 | $ | (24,286 | ) | $ | 122,714 | $ | 147,000 | $ | (8,948 | ) | $ | 138,052 | ||||||||||
The aggregate amortization expense for each of the five years subsequent to December 31, 2019 is $15.3 million.
Long-term debt
The Company’s long-term debt obligations consist of the following (in thousands):
| December
31, 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 | (4,436 | ) | (557 | ) | ||||
| Total loans and borrowings | 345,564 | 270,265 | ||||||
| Less: current portion of long-term debt | (15,000 | ) | (45,093 | ) | ||||
| Long-term debt, net of unamortized debt issuance costs and excluding current installments | $ | 330,564 | $ | 225,172 | ||||
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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 (“NPS Bahrain”) and its Kuwait branch, Gulf Energy SAOC and National Petroleum Technology Company as borrowers, and HSBC, Mashreqbank PSC, APICORP and Saudi British Bank, as the “Lenders.” Upon consummation of this transaction, with the exception of a $30.4 million working capital facility with HSBC, described below, the Company settled all of its existing debt obligations as of May 5, 2019 and wrote-off remaining unamortized debt issuance costs of $0.8 million as of that date.
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 due 2023 (“RCF” or “Secured Revolving Credit Facility”), 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 defined in the agreement. As of December 31, 2019, this results in an interest rate of 4.3%. The Company has drawn $300.0 million of the Term Loan and $50.0 million of the RCF as of December 31, 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 as defined in the agreement. The Company is permitted to make any prepayment under this RCF in multiples of $5.0 million during this 4-year period up to May 6, 2023. Any unutilized balances from the RCF can be drawn down again during the 4-year tenure at the same terms. As of December 31, 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 December 31, 2019, the Company had utilized $134.2 million under this working capital facility and the balance of $25.8 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 December 31, 2019, the Company had utilized $24.1 million under this working capital facility and the balance of $6.3 million was available to the Company.
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Utilization of the working capital facilities under both the legacy arrangement and Secured Facilities Agreement comprises letters of credit issued to vendors, guarantees issued to customers, vendors, and others, and short-term borrowings used to settle letters of credit. Once a letter of credit is presented for payment by the vendor, the Company at its election can settle the letter of credit from available cash or leverage short-term borrowings that will be repaid quarterly over a one-year period. Until a letter of credit is presented for payment by the vendor, it is disclosed as an off-balance sheet obligation. For additional discussion of outstanding letters of credit and guarantees, see Note 14, Commitments and Contingencies.
The Secured Facilities Agreement includes covenants that specify maximum leverage (Net Debt / EBITDA) up to 3.50, minimum debt service coverage ratio (Cash Flow / Debt Service) of at least 1.25, and interest coverage (EBITDA / Interest) of at least 4.00. The Company is in compliance with all financial covenants as of December 31, 2019.
Short-term debt
The Company’s short-term debt obligations consist of the following (in thousands):
| December
31, 2019 | December
31, 2018 | |||||||
| Modified Hana Loan | $ | - | $ | 10,000 | ||||
| Other short-term borrowings | 37,963 | 21,817 | ||||||
| Short-term debt, excluding current installments of long-term debt | $ | 37,963 | $ | 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 $10 million 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.
Other debt information
Scheduled principal payments of long-term debt for periods subsequent to December 31, 2019 are as follows (in thousands):
| 2020 | $ | 15,000 | ||
| 2021 | 37,500 | |||
| 2022 | 45,000 | |||
| 2023 | 95,000 | |||
| 2024 | 45,000 | |||
| 2025 | 112,500 | |||
| Thereafter | - | |||
| Total | $ | 350,000 |
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable, loans and borrowings and capital lease obligations. 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.
Defined benefit plans
The following tables set out the funded status of the end-of-service indemnities employees receive under one of the five benefit structures the Company and its subsidiaries offer to its employees and the amounts recognized in the Company’s financial statements as of December 31, 2019 and 2018 (in thousands).
| 101 |
| December 31, 2019 | December 31, 2018 | |||||||
| Change in benefit obligations | ||||||||
| Benefit obligations at the beginning of the year | $ | 16,122 | $ | 15,062 | ||||
| Actuarial (gain) / loss | 2,031 | 1,273 | ||||||
| Service cost | 2,680 | 2,250 | ||||||
| Interest cost | 655 | 444 | ||||||
| Benefits paid | (2,168 | ) | (2,491 | ) | ||||
| Other | - | (416 | ) | |||||
| Benefit obligations at the end of the year | 19,320 | 16,122 | ||||||
| Current benefit obligation | 2,575 | 2,620 | ||||||
| Non-current benefit obligation | 16,745 | 13,502 | ||||||
| Benefit obligation at the end of the year | 19,320 | 16,122 | ||||||
| Change in plan assets | ||||||||
| Fair value of plan assets at the beginning of the year | - | - | ||||||
| Employer contributions | 2,168 | 2,491 | ||||||
| Benefits paid | (2,168 | ) | (2,491 | ) | ||||
| Plan assets at the end of the year | - | - | ||||||
| Unfunded status | $ | 19,320 | $ | 16,122 | ||||
Net cost for the 2019 Successor Period, 2018 Successor Period, 2018 Predecessor Period, and 2017 Predecessor Period comprises the following components (in thousands):
| (NESR - Successor) | (NPS - Predecessor) | |||||||||||||||
| Year ended December 31, 2019 | Period from June 7 to December 31, 2018 | Period from January 1 to June 6, 2018 | Year ended December 31, 2017 | |||||||||||||
| Service cost | $ | 2,680 | $ | 1,412 | $ | 866 | $ | 1,964 | ||||||||
| Interest cost | 655 | 282 | 168 | 403 | ||||||||||||
| Actuarial (gain)/loss | 2,031 | 896 | 375 | 811 | ||||||||||||
| Other | - | (416 | ) | - | - | |||||||||||
| Net cost | $ | 5,366 | $ | 2,174 | $ | 1,409 | $ | 3,178 | ||||||||
| 102 |
The weighted-average assumptions used to determine benefit obligations as of December 31, 2019 and 2018 are set out below:
| December 31, 2019 | December 31, 2018 | |||||||
| Discount rate | 2.75 | % | 3.75 | % | ||||
| Rate of increase in compensation levels: | 3.00 | % | 3.00 | % | ||||
The discount rate has been selected by the Company in consultation with its third-party actuarial valuation specialist. The primary reference point in identifying the rate was the yield on high-quality U.S. corporate bonds per the FTSE Above Median Double-A Curve (as of December 31, 2019) of duration broadly consistent with the benefit obligations. The rate has been rounded to the nearest 0.25%. The selection of the rate is consistent with the year-ended December 31, 2018.
The weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2019 and 2018 are set out below:
| December 31, 2019 | December 31, 2018 | |||||||
| Discount rate | 3.75 | % | 3.00 | % | ||||
| Rate of increase in compensation levels: | 3.00 | % | 2.73 | % | ||||
The Company assesses these assumptions with its projected long-term plans of growth and prevalent industry standards.
The Company has no regulatory requirement to fund these benefits in advance and intends to pay benefits directly as they fall due. As of December 31, 2019, the Company has no plan assets to invest.
Accumulated benefit obligation was $16.1 million and $13.2 million as of December 31, 2019 and 2018, respectively.
The following reflect expected future benefit payments (in thousands):
| Year
ending December 31, | ||||
| 2020 | $ | 3,234 | ||
| 2021 | $ | 3,417 | ||
| 2022 | $ | 3,170 | ||
| 2023 | $ | 2,946 | ||
| 2024 | $ | 2,993 | ||
| Thereafter | $ | 13,658 | ||
The expected benefits are based on the same assumptions used to measure the Company’s benefit obligations as of December 31, 2019.
Defined contribution plans
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 consolidated statement of operations as incurred. Total contributions for the 2019 Successor Period and 2018 Successor Period were $3.1 million and $1.8 million, respectively.
| 103 |
On May 18, 2018, the NESR shareholders approved the 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 the Company’s Board of Directors are time-based and vest ratably over a 1-year period. Grants to the Company employees are time-based and vest ratably over a 3-year period.
The purpose of the LTIP is to enhance NESR’s ability to attract, retain and motivate persons who make (or are expected to make) important contributions to NESR by providing these individuals with equity ownership opportunities. The Company intends to use time-based restricted stock unit awards to reward long-term performance of the executive officers. The Company believes that providing a meaningful portion of the total compensation package in the form of share-based awards will align the incentives of its executive officers with the interests of its shareholders and serve to motivate and retain the individual executive officers.
The following tables set forth the LTIP activity for the periods indicated (in thousands, except share and per share amounts):
| 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 | (290,510 | ) | $ | 10.27 | ||||
| Forfeited | (116,000 | ) | $ | 10.59 | ||||
| Unvested at December 31, 2019 (NESR - Successor) | 1,502,690 | $ | 10.25 | |||||
Number of Restricted Shares | Weighted Average Grant Date Fair Value per Share | |||||||
| Unvested at June 7, 2018 (NESR - Successor) | - | $ | - | |||||
| Granted | 725,200 | $ | 10.94 | |||||
| Vested and issued | - | $ | - | |||||
| Forfeited | - | $ | - | |||||
| Unvested at December 31, 2018 (NESR - Successor) | 725,200 | $ | 10.94 | |||||
At December 31, 2019 and 2018, we had unrecognized compensation expense of $11.7 million and $6.9 million, respectively, related to unvested LTIP to be recognized on a straight-line basis over a weighted average remaining period of 2.0 years and 2.53 years, respectively. Stock-based compensation has been recorded in the Consolidated Statement of Operations as follows (in thousands):
| Cost of services | Selling, general and administrative expense |
Total | ||||||||||
| 2019 Successor Period | $ | 2,392 | $ | 3,262 | $ | 5,654 | ||||||
| 2018 Successor Period | 517 | 517 | 1,034 | |||||||||
There is no income tax impact of the stock-based compensation recorded by the Company.
| 104 |
14. COMMITMENTS AND CONTINGENCIES
Capital expenditure commitments
The Company was committed to incur capital expenditures of $22.1 and $25.9 million at December 31, 2019 and 2018, respectively. Commitments outstanding as of December 31, 2019 are expected to be settled during 2020.
Capital lease commitments
The Company leases certain hydraulic fracturing equipment under one capital lease that expires in 2021. The lease has a term of 24 months and the imputed interest rate for the lease is 6.5% per annum. The total remaining principal balance outstanding on this lease is $33.7 million as of December 31, 2019 with $20.5 million classified as a short-term obligation within Other current liabilities account and $13.1 million classified as a long-term obligation within Other liabilities account. Total interest expense incurred on this lease was $0.6 million for the year ended December 31, 2019. Depreciation of assets held under this capital lease is included within depreciation expense. See Note 8, Property, Plant, and Equipment, for further details.
Future minimum lease commitments under non-cancellable capital leases with initial or remaining terms of one year or more at December 31, 2019, are payable as follows (in thousands):
Future Minimum Lease Payments | Future Interest Payments | Total Payments | ||||||||||
| 2020 | $ | 22,930 | $ | 1,070 | $ | 24,000 | ||||||
| 2021 | 10,743 | 1,257 | 12,000 | |||||||||
| 2022 | - | - | - | |||||||||
| 2023 | - | - | - | |||||||||
| 2024 | - | - | - | |||||||||
| 2025 | - | - | - | |||||||||
| Thereafter | - | - | - | |||||||||
| Total | $ | 33,673 | $ | 2,327 | $ | 36,000 | ||||||
Operating lease commitments
Future minimum lease commitments under non-cancellable operating leases with initial or remaining terms of one year or more at December 31, 2019, are payable as follows (in thousands):
| 2020 | $ | 23,201 | ||
| 2021 | 18,560 | |||
| 2022 | 2,780 | |||
| 2023 | 2,291 | |||
| 2024 | 2,292 | |||
| 2025 | 2,296 | |||
| Thereafter | 1,629 | |||
| Total | $ | 53,049 |
| 105 |
The Company recorded rental expense of $114.9 million, $57.8 million, $19.5 million, and $36.9 million during the 2019 Successor Period, 2018 Successor Period, 2018 Predecessor Period, and 2017 Predecessor Period, respectively, in the consolidated statement of operations.
Other commitments
The Company purchased property, plant, and equipment using seller-provided installment financing during the fourth quarter of 2019. The amounts due to the vendor include $3.0 million presented in Other current liabilities and $3.0 million in Other liabilities as of December 31, 2019.
The Company has outstanding letters of credit amounting to $21.2 million and $10.3 million as of December 31, 2019 and 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 $99.1 million and $41.4 million as of December 31, 2019 and 2018, respectively. We have also entered into cash margin guarantees totaling $5.8 million at December 31, 2019. 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 the Company’s consolidated financial statements.
As of December 31, 2019, and 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.
| 106 |
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 December 31, 2019, there were 87,187,289 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 December 31, 2019, there were no preferred shares issued or outstanding.
Predecessor convertible shares
As part of NPS’s acquisition of NPS Bahrain in 2014, NPS issued a total of 37,000,000 convertible shares to two of NPS Bahrain’s shareholders, Mr. Abdulaziz Mubarak Al-Dolaimi and Mr. Fahad Abdulla Bindekhayel (selling shareholders). These shares were issued to provide security against certain tax and related indemnities given by the selling shareholders at the time of acquisition of NPS Bahrain. The convertible shares had the same rights and ranked pari passu with the NPS common shares, including the right to participate in any dividend declared for ordinary shares and valued at $1 per share.
Under the terms of the convertible shares, in the event any indemnity claims were settled by the selling shareholders by providing cash to NPS, an equivalent amount of convertible shares would be converted into NPS common shares. However, in the event the indemnity claims were not settled by the selling shareholders, an equivalent amount of convertible shares would be cancelled by NPS. These convertible shares are equity classified because the conversion to equity shares or the cancellation of the same is at the option of NPS. At the end of the June 2019, unless all indemnity claims were settled to the satisfaction of NPS, half of the convertible shares were to convert into NPS common shares and the balance on extinguishment of contingencies. The convertible shares were cancelled at closing of the Business Combination.
Prior to the Business Combination, the Predecessor (NPS) paid dividends per share of $0.13 per share in the 2018 Predecessor Period and $0.05 per share in 2017.
| 107 |
2019 and 2018 Successor Periods
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.
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 December 31, 2019 Weighted Average Ordinary Shares Outstanding |
|||||||
| December 31, 2018 | Beginning Balance | 85,562,769 | ||||||||
| January 9, 2019 | Other | 33,796 | 33,055 | |||||||
| February 19, 2019 | NPS equity stock earn-out (1) | 1,300,214 | 1,300,214 | |||||||
| August 14, 2019 | Restricted stock vesting | 250,310 | 96,009 | |||||||
| November 12, 2019 | Restricted stock vesting | 40,200 | 5,507 | |||||||
| December 31, 2019 | Ending Balance | 86,997,554 | ||||||||
| Date | Transaction Detail | Changes in Shares | Period from June 7, 2018 to December 31, 2019 Weighted Average Ordinary Shares Outstanding | |||||||
| June 7, 2018 | Beginning Balance | 11,730,425 | ||||||||
| June 7, 2018 | Backstop shares | 4,829,375 | 4,829,375 | |||||||
| June 7, 2018 | Underwriter shares | 307,465 | 307,465 | |||||||
| June 7, 2018 | Shares issued to NPS/GES | 53,690,315 | 53,690,315 | |||||||
| June 7, 2018 | Shares transferred to perm equity | 15,005,189 | 15,005,189 | |||||||
| December 31, 2018 | NPS equity stock earn-out (1) | 1,300,214 | 6,251 | |||||||
| December 31, 2018 | Ending Balance | 85,569,020 | ||||||||
| (1) | The NPS equity stock earn-out has been included in the computation of basic earnings per share (“EPS”) as the conditions for issuance were satisfied as of December 31, 2018. |
Period from January 1, 2019 to |
Period from June 7, 2018 to |
|||||||
| December 31, 2019 | December 31, 2018 | |||||||
| Shares for Use in Allocation | Shares for Use in Allocation | |||||||
| to
Participating Earnings |
to
Participating Earnings |
|||||||
| Weighted average ordinary shares outstanding | $ | 86,997,554 | $ | 85,569,020 | ||||
| Non-vested, participating restricted shares | 1,419,361 | 760,000 | ||||||
| Shares for use in allocation of participating earnings | $ | 88,416,915 | $ | 86,329,020 | ||||
| 108 |
Basic earnings per share (EPS):
|
Period from December 31, 2019 |
Period from June 7, 2018 to December 31, 2018 |
|||||||
| Net income | $ | 39,364 | $ | 35,143 | ||||
| Less dividends to: | - | - | ||||||
| Ordinary Shares | - | - | ||||||
| Non-vested participating shares | - | - | ||||||
| Undistributed Successor Period Earnings | $ | 39,364 | $ | 35,143 | ||||
| Allocation of earnings to Ordinary Shares | $ | 38,732 | $ | 34,834 | ||||
| Allocation of earnings to Nonvested Shares | 632 | 309 | ||||||
| Ordinary Shares | Ordinary Shares | |||||||
| Distributed Earnings | $ | - | $ | - | ||||
| Undistributed Earnings | 0.45 | 0.41 | ||||||
| Total | $ | 0.45 | $ | 0.41 | ||||
Diluted earnings per share (EPS):
| Period
from January 1 to December 31, 2019 |
Period
from June 7, 2018 to December 31, 2018 |
|||||||||||||||||||||||
| Ordinary shares | Undistributed & distributed earnings to ordinary shareholders | Ordinary shares | EPS | Undistributed & distributed earnings to ordinary shareholders | Ordinary shares | EPS | ||||||||||||||||||
| As reported — basic | $ | 38,732 | 86,997,554 | $ | 0.45 | $ | 34,834 | 85,569,020 | $ | 0.41 | ||||||||||||||
| Add-back: | ||||||||||||||||||||||||
| Undistributed earnings allocated to nonvested shareholders | 632 | - | 309 | - | ||||||||||||||||||||
| NPS equity stock earn-out | - | - | - | 1,293,963 | $ | (0.01 | ) | |||||||||||||||||
| 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 | (632 | ) | - | (305 | ) | - | ||||||||||||||||||
| Diluted EPS — Ordinary shares | $ | 38,732 | 86,997,554 | $ | 0.45 | $ | 34,838 | 86,862,983 | $ | 0.40 | ||||||||||||||
Warrants that could be converted into as many as 17,770,190 ordinary shares are excluded from diluted EPS at both December 31, 2019 and 2018 as they are anti-dilutive.
| 109 |
2018 and 2017 Predecessor Periods
The following table sets forth the calculation of basic and diluted earnings per common share for the periods presented:
| 2018 | 2017 | |||||||
| Period from | ||||||||
| January 1 to | Year Ended | |||||||
| June 6 | December 31 | |||||||
| Weighted average basic common shares outstanding | 348,524,566 | 342,250,000 | ||||||
| Dilutive potential common shares | 21,475,434 | 27,750,000 | ||||||
| Weighted average dilutive common shares outstanding | 370,000,000 | 370,000,000 | ||||||
| Basic: | ||||||||
| Net Income | 7,617 | 30,626 | ||||||
| Less: Earnings allocated to participating securities | (192 | ) | (39 | ) | ||||
| Net income available to basic common shares | 7,425 | 30,587 | ||||||
| Basic earnings per common share | 0.02 | 0.09 | ||||||
| Diluted: | ||||||||
| Net Income | 7,617 | 30,626 | ||||||
| Less: Earnings allocated to participating securities | (181 | ) | (36 | ) | ||||
| Net income available to diluted common shares | 7,436 | 30,590 | ||||||
| Diluted earnings per common share | 0.02 | 0.08 | ||||||
The Company operates in 15 countries where statutory rates generally vary from 0% to 35%. The domestic (British Virgin Islands) and foreign (all other jurisdictions except British Virgin Islands) components of income (loss) before income tax expense were as follows (in thousands):
| Year Ended | Period from | Period from | Year Ended | |||||||||||||
| January 1 to | June 7, 2018 to | January 1 to | January 1 to | |||||||||||||
| December 31, 2019 | December 31, 2018 | June 6, 2018 | December 31, 2017 | |||||||||||||
| Successor | Predecessor | |||||||||||||||
| Domestic | $ | (1,675 | ) | $ | (20,722 | ) | $ | - | $ | - | ||||||
| Foreign | 54,050 | 65,133 | 9,078 | 32,939 | ||||||||||||
| Income Before Income Tax | $ | 52,435 | $ | 44,411 | $ | 9,078 | $ | 32,939 | ||||||||
Income Tax Expense
The components of the income tax expense (benefit), all of which is foreign, are as follows (in thousands):
| Year Ended | Period from | Period from | Year Ended | |||||||||||||
| January 1 to | June 7, 2018 to | January 1 to | January 1 to | |||||||||||||
| December 31, 2019 | December 31, 2018 | June 6, 2018 | December 31, 2017 | |||||||||||||
| Successor | Predecessor | |||||||||||||||
| Current tax expense | $ | 17,006 | $ | 11,456 | $ | 2,342 | $ | 3,988 | ||||||||
| Deferred tax expense (benefit) | (3,935 | ) | (2,025 | ) | - | 598 | ||||||||||
| Income tax expense | $ | 13,071 | $ | 9,431 | $ | 2,342 | $ | 4,586 | ||||||||
| 110 |
Deferred taxes have been recognized for temporary differences that will result in taxes payable or receivable in future years. The components of net deferred tax liabilities and assets are as follows (in thousands):
| December 31, 2019 | December 31, 2018 | |||||||
| Deferred Tax Assets | ||||||||
| Property, plant and equipment | $ | 1,678 | $ | - | ||||
| Net operating loss carryforward | 6,932 | 3,184 | ||||||
| Total deferred tax assets | 8,610 | 3,184 | ||||||
| Less: valuation allowance | (4,886 | ) | (31 | ) | ||||
| Deferred tax assets, net of valuation allowance | $ | 3,724 | $ | 3,153 | ||||
| Deferred Tax Liabilities | ||||||||
| Property, plant and equipment | $ | (4,911 | ) | $ | (5,783 | ) | ||
| Intangible assets | (25,030 | ) | (28,126 | ) | ||||
| Total deferred tax liabilities | (29,941 | ) | (33,909 | ) | ||||
| Net deferred tax liability | $ | (26,217 | ) | $ | (30,756 | ) | ||
The Company’s has $45.7 million of operating loss carryforwards that expire between 2020 and 2025.
Deferred tax assets are shown less any valuation allowances. As of December 31, 2019, and 2018, valuation allowances of $4.9 million and $31 thousand relate to net operating loss carryforwards. Changes in the Company’s estimates and assumptions used to determine the valuation allowance, including any changes in applicable tax laws or tax rates, may impact the Company’s ability to recognize the underlying deferred tax assets and could require future adjustments to the valuation allowances. The $4.9 million increase in the valuation allowance is on account of operating loss carryforwards generated in the current year not qualifying for recognition as the Company does not believe these operating loss carryforwards will be utilized prior to expiration. Further, deferred tax assets for operating loss carryforwards in the table above have been shown net of an unrecognized tax benefit for likely disallowances of $1.7 million.
Deferred tax liabilities on Property, plant and equipment of $4.9 million at December 31, 2019 includes an unrecognized tax benefit of $3.6 million.
The Company generally does not recognize deferred tax liabilities related to its undistributed earnings because such earnings either would not be taxable when remitted or they are indefinitely reinvested. This position may change if the Company decides to distribute the earnings from its subsidiaries, which are subject to withholding taxes, or if there are any unfavorable changes in the tax laws in this regard. Accordingly, a determination of the amount of unrecognized deferred tax liability on such undistributed earnings is not practicable. Current tax expense will be incurred if/when the Company distributes earnings from its subsidiaries which are subject to withholding taxes.
Income Tax Rate Reconciliation
The difference between the reported amount of income tax expense and the amount that would result from applying from both the British Virgin Islands (Successor) as well as the United Arab Emirates (Predecessor) statutory rates are shown in the table below (in thousands). In the British Virgin Islands, the statutory rate is effectively 0% as tax is not applied on extra territorial activity. For the United Arab Emirates, the statutory rate on our operations is also 0%.
| Year Ended | Period from | Period from | Year Ended | |||||||||||||
| January 1 to | June 7, 2018 to | January 1 to | January 1 to | |||||||||||||
| December 31, 2019 | December 31, 2018 | June 6, 2018 | December 31, 2017 | |||||||||||||
| Successor | Predecessor | |||||||||||||||
| Income tax at statutory rate (BVI and UAE 0%) | - | - | - | - | ||||||||||||
| Foreign tax rate differential | $ | 12,848 | $ | 8,328 | $ | 2,147 | $ | 5,329 | ||||||||
| Non-deductible expenses | - | - | - | 110 | ||||||||||||
| Tax effect of adjustments to prior year tax provisions | (2,054 | ) | - | 195 | - | |||||||||||
| Effect of tax exemption | - | - | - | (1,189 | ) | |||||||||||
| Allocation of head office / corporate costs, net of unrecognized benefit | - | - | - | 161 | ||||||||||||
| Unrecognized tax benefits | 2,476 | 1,574 | - | - | ||||||||||||
| Other | (199 | ) | (471 | ) | - | 175 | ||||||||||
| Income Tax Expense | $ | 13,071 | $ | 9,431 | $ | 2,342 | $ | 4,586 | ||||||||
The foreign tax rate differential relates to differences between the income tax rates in effect in the foreign countries in which the Company operates, which can vary significantly, and the Company’s statutory tax rate of 0%. Income tax expense for the year ended December 31, 2019 includes $0.9 million of penalties and interest associated with the Company’s unrecognized tax benefits.
| 111 |
Unrecognized Tax Benefits
The Company records estimated accrued interest and penalties related to an underpayment of income taxes in income tax expense. As of December 31, 2019, the Company had $12.5 million of unrecognized tax benefits, excluding estimated accrued interest and penalties of $1.8 million, which are included in Other Long-Term Liabilities in the Consolidated Balance Sheet. As of December 31, 2018, the Company had $7.1 million of unrecognized tax benefits, including estimated accrued interest and penalties of $0.9 million, which are included in Other Long-Term Liabilities in the Consolidated Balance Sheet. There are no timing differences or other items that have indirect effects included in the unrecognized tax benefits and as such all $12.5 million of the net unrecognized tax benefits as of December 31, 2019 would affect the effective tax rate if recognized.
A summary of activity related to the net unrecognized tax benefits is as follows:
| Year Ended | Period from | Period from | Year Ended | |||||||||||||
| January 1 to | June 7, 2018 to | January 1 to | January 1 to | |||||||||||||
| December 31, 2019 | December 31, 2018 | June 6, 2018 | December 31, 2017 | |||||||||||||
| Successor | Predecessor | |||||||||||||||
| Balance at beginning of period | $ | 7,135 | $ | - | $ | 4,837 | $ | 3,703 | ||||||||
| Additions from tax positions adjusted in purchase accounting | 1,072 | 5,561 | - | - | ||||||||||||
| Additions from tax positions related to the current period | 1,376 | 1,324 | - | 1,134 | ||||||||||||
| Additions from tax positions related to prior periods | 4,700 | 250 | - | - | ||||||||||||
| Reductions from tax positions related to earlier periods | (873 | ) | - | - | - | |||||||||||
| Other | (877 | ) | - | |||||||||||||
| Ending unrecognized tax benefits | $ | 12,533 | $ | 7,135 | $ | 4,837 | $ | 4,837 | ||||||||
The Company does not anticipate the amount of the unrecognized tax benefits will change significantly over the next twelve months.
Unrecognized tax benefits may change from quarter-to-quarter based on various factors, including, but not limited to, favorable or unfavorable resolution of tax audits or disputes, expiration of relevant statutes of limitations, changes in tax laws or changes to the interpretation of existing tax laws due to new legislative guidance or court rulings, or new tax positions taken on recently filed tax returns. Although the Company has recorded unrecognized tax benefits for all tax positions which, in management’s judgment, are more likely than not to be successfully challenged by the relevant tax authorities in the future, the Company cannot provide assurance as to the final tax liability related to its tax positions as it is not possible to predict with certainty the ultimate outcome of any related tax disputes. Thus, it is reasonably possible that the ultimate tax liabilities related to such tax positions could substantially exceed recorded unrecognized tax benefits related to such tax positions, resulting in a material adverse effect on the Company’s earnings and cash flows from operations.
The Company’s tax returns for year 2011 and subsequent years for all major jurisdictions, i.e. Saudi Arabia, Oman, Iraq, and Algeria, remain subject to examination by tax authorities. The Company is currently subject to or expects to be subject to income tax examinations in various jurisdictions where the Company operates or has previously operated. If any tax authority successfully challenges the Company’s tax positions, including, but not limited to, tax positions related to the tax consequences of various intercompany transactions, the taxable presence of the Company’s subsidiaries in a given jurisdiction, the basis of taxation in a given jurisdiction (such as deemed profits versus net-filing basis), or the applicability of relevant double tax treaty benefits to certain transactions; or should the Company otherwise lose a material tax dispute in any jurisdiction, the Company’s income tax liability could increase substantially and the Company’s earnings and cash flows from operations could be materially adversely affected.
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18. RELATED PARTY TRANSACTIONS
Mubbadrah Investment LLC (“Mubbadrah”)
GES leases office space in a building it owns in Muscat, Oman to Mubbadrah along with other Mubbadrah group entities (collectively, the “Mubbadrah group entities”). GES charges rental income to the Mubbadrah group entities for the occupation of the office space, based on usage. Rental income charged by GES to the Mubbadrah group entities amounted to $0.2 million and $0.1 million in the 2019 Successor Period and 2018 Successor Period, respectively, in the Consolidated Statement of Operations. The outstanding balance of receivables from Mubbadrah group entities was $0.6 million at December 31, 2019. Mubbadrah is owned by Hilal Al Busaidy and Yasser Al Barami, and, collectively with Mubbadrah, they own 19.72% of the Company.
Heavy Equipment Manufacturing & Trading LLC (“HEMT”)
HEMT is a majority owned by Mubbadrah and Hilal Al Busaidy. HEMT is engaged by various subsidiaries of GES for services such as fabrication, manufacturing and maintenance of tools and equipment. HEMT has charged GES amounts of $0.5 million for the Successor Period ended December 31, 2018 in relation to these services and $0.1 million for the Successor Period ended December 31, 2019.
Esnaad Solutions LLC (“Esnaad”)
Esnaad is 99% owned by Mubbadrah and is a supply chain company involved in the sourcing and procurement of products for the oil and gas industry. Charges totaling $1.1 million and less than $0.1 million were recorded in the 2018 Successor Period and 2019 Successor Period, respectively, for the purchase of chemicals, drilling fluids, materials and supplies.
Prime Business Solutions LLC (“PBS”)
PBS is 100% owned by Mubbadrah 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. Charges totaling $0.8 million and $0 (zero) were recorded in the 2019 Successor Period and 2018 Successor Period, respectively, within the Consolidated Statement of Operations, for maintenance fees. As of December 31, 2019, $0.4 million remains payable to PBS.
Nine Energy Service, Inc. (“Nine”)
During the fourth quarter of 2019, the Company purchased coiled tubing equipment from Nine for $5.9 million. One of the Company’s directors also serves as a director of Nine. In 2019, the Company purchased $0.9 million of products and rentals from Nine. At December 31, 2019, there were liabilities totaling $6.8 million for the coiled tubing equipment and the products and services.
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.
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. The CODM evaluates the operating results of its reportable segments primarily based on revenue and Segment EBITDA. The Company defines Segment EBITDA as net income adjusted for interest expense, depreciation and amortization, and income tax benefit or expense. 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.
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.
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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.
Revenue from operations
| Successor (NESR) | Predecessor (NPS) | |||||||||||||||
| Period from | Period from | Period from | Year ended | |||||||||||||
| January 1 | June 7 | January 1 | December 31, | |||||||||||||
| to December 31, | to December 31, | to June 6, | 2017 | |||||||||||||
| 2019 | 2018 | 2018 | ||||||||||||||
| Reportable Segment: | ||||||||||||||||
| Production Services | $ | 405,654 | $ | 215,791 | $ | 112,295 | $ | 228,763 | ||||||||
| Drilling and Evaluation Services | 252,731 | 132,799 | 24,732 | 42,561 | ||||||||||||
| Total revenue | $ | 658,385 | $ | 348,590 | $ | 137,027 | $ | 271,324 | ||||||||
Long-lived assets
| December 31, 2019 | December 31, 2018 | |||||||
| Reportable Segment: | ||||||||
| Production Services | $ | 290,765 | $ | 219,278 | ||||
| Drilling and Evaluation Services | 115,241 | 98,163 | ||||||
| Total Reportable Segments | 406,006 | 317,441 | ||||||
| Unallocated assets | 13,301 | 11,286 | ||||||
| Total long-lived assets | $ | 419,307 | $ | 328,727 | ||||
Segment EBITDA
| Successor (NESR) | Predecessor (NPS) | |||||||||||||||
| Period from | Period from | Period from | ||||||||||||||
| January 1 | June 7 | January 1 | Year ended | |||||||||||||
| to December 31, | to December 31, | to June 6, | December 31, | |||||||||||||
| 2019 | 2018 | 2018 | 2017 | |||||||||||||
| Segment EBITDA: | ||||||||||||||||
| Production Services | $ | 130,839 | $ | 77,482 | $ | 36,836 | $ | 81,780 | ||||||||
| Drilling and Evaluation Services | 52,962 | 32,782 | 3,267 | 4,952 | ||||||||||||
| Total Segment EBITDA | 183,801 | 110,264 | 40,103 | 86,732 | ||||||||||||
| Unallocated Costs | (18,629 | ) | (8,013 | ) | (9,651 | ) | (8,665 | ) | ||||||||
| Interest expense, net | (18,971 | ) | (14,383 | ) | (4,090 | ) | (6,720 | ) | ||||||||
| Depreciation and amortization | (93,766 | ) | (43,457 | ) | (17,284 | ) | (38,408 | ) | ||||||||
| Income before income tax | $ | 52,435 | $ | 44,411 | $ | 9,078 | $ | 32,939 | ||||||||
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Revenue by geographic area
| Successor (NESR) | Predecessor (NPS) | |||||||||||||||
| Period from | Period from | Period from | ||||||||||||||
| January 1 | June 7 | January 1 | Year ended | |||||||||||||
| to December 31, | to December 31, | to June 6, | December 31, | |||||||||||||
| 2019 | 2018 | 2018 | 2017 | |||||||||||||
| Geographic area: | ||||||||||||||||
| MENA | $ | 647,434 | $ | 345,047 | $ | 134,479 | $ | 267,366 | ||||||||
| Rest of World | 10,951 | 3,543 | 2,548 | 3,958 | ||||||||||||
| Total revenue | $ | 658,385 | $ | 348,590 | $ | 137,027 | $ | 271,324 | ||||||||
Long-lived assets by geographic area
| December 31, 2019 | December 31, 2018 | |||||||
| Geographic area: | ||||||||
| MENA | $ | 409,139 | $ | 319,552 | ||||
| Rest of World | 10,168 | 9,175 | ||||||
| Total long-lived assets | $ | 419,307 | $ | 328,727 | ||||
Significant clients
Revenues from four customers of the Successor (NESR) individually accounted for 45%, 16%, 8% and 6% of the Successor’s (NESR’s) consolidated revenues in the year ended December 31, 2019, 42%, 17%, 10% and 5% of the Successor’s (NESR’s) consolidated revenues in the period from June 7 to December 31, 2018, 49%, 0%, 16% and 9% of Predecessor’s (NPS’) consolidated revenues in the period from January 1 to June 6, 2018, and 45%, 0%, 13% and 14% of the Predecessor’s (NPS’) consolidated revenues in the year ended December 31, 2017.
The Company evaluated subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are issued. Other than as described below, the Company did not identify any subsequent events that would have required adjustment or disclosure in the consolidated financial statements.
| ● | In February 2020, the Company announced an agreement to acquire Sahara Petroleum Services Company S.A.E (“SAPESCO”). The transaction, which is subject to standard regulatory approval and satisfaction of customary closing conditions, is expected to close in the second quarter of 2020 and will mark the entry of the NESR brand into Egypt, further expanding the Company’s presence in North Africa. Under the terms of the agreement, The Company will acquire all issued and outstanding shares of SAPESCO in a cash and stock transaction. The transaction is comprised of $27.0 million in cash paid to shareholders at closing, a $22 million payment of SAPESCO debt, and issuance of the Company’s shares in two tranches as earn-outs at a minimum price of $10.00 per share based on a portion of 2019 EBITDA and performance metrics, using a multiple of up to 4.35x. |
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Exhibit 8.1
Subsidiaries
All subsidiaries are, indirectly or directly, wholly-owned by National Energy Services Reunited Corp. except as indicated below.
| Entity | State of Incorporation/Formation | |
| NESR Limited | United Kingdom | |
| National Energy Services Reunited Corporation | Texas | |
| NPS Bahrain for Oil and Gas Well Services W.L.L. | Algeria | |
| NPS Bahrain for Oil and Gas Wells Services W.L.L. | Iraq | |
| National Petroleum Services Company Limited | KSA | |
| NPS Energy DMCC | UAE | |
| NPS Energy Holding W.L.L. | Bahrain | |
| National Petroleum Technology Company | KSA | |
| National Wells Drilling Company | KSA | |
| Specialised Oil Well Maintenance L.L.C. | UAE | |
| NOWMCO Petroleum Services L.L.C. | UAE | |
| NPS Holdings Limited | UAE | |
| National Gulf Petroleum Services | Kuwait | |
| National Oil Well Maintenance Company Limited | India | |
| NPS Energy Oilfield Supplies DMCC | UAE | |
| TAAQAAT Professional Service DMCC | UAE | |
| PT NPS Energy | Indonesia | |
| NPS (B) Sdn Bhd | Brunei | |
| NPS Bahrain for Oil and Gas Well Services W.L.L. | Bahrain | |
| NPS Energy Bahrain W.L.L. | Bahrain | |
| Fahud Energy Solutions L.L.C. | Oman | |
| PT DFI Asia Energi | Indonesia | |
| PT Tiger Energy Services | Indonesia | |
| NPS Energy Sdn Bhd | Malaysia | |
| NPS Malaysia-Labuan | Malaysia | |
| National Petroleum Services | Libya | |
| NPS Energy DMCC | Iraq | |
| NPS International LTD | Cayman Islands | |
| National Oil Well Maintenance Company L.L.C. | Qatar | |
| National Petroleum Services L.L.C. | Qatar | |
| Benon Oil Services, LLC | Oman | |
| Fishing and Remedial Experts Enterprise LLC | Oman | |
| Gulf Drilling Fluids Technology LLC | Oman | |
| Gulf Energy Services LLC | Oman | |
| Intelligent Drilling Services LLC | Oman | |
| Integrated Petroleum Services Company LLC | Oman | |
| Midwest Oilfield Services LLC | Oman | |
| Sino Gulf Energy Enterprises LLC | Oman | |
| Tamkeen Fracking LLC | Oman | |
| Well Maintenance Services LLC | Oman | |
| Well Solution Services LLC | Oman | |
| Makamen Petroleum LLC | Oman | |
| Tasneea Oil and Gas technology LLC | Oman |
Exhibit 12.1
CERTIFICATION
I, Sherif Foda, certify that:
| 1. | I have reviewed this Annual Report on Form 20-F of National Energy Services Reunited Corp.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; | |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c. | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the Annual Report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and | |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
| Date: March 17, 2020 | ||
| By: | /s/ Sherif Foda | |
| Name: | Sherif Foda | |
| Title: | Chief Executive Officer | |
Exhibit 12.2
CERTIFICATION
I, Christopher L. Boone, certify that:
| 1. | I have reviewed this Annual Report on Form 20-F of National Energy Services Reunited Corp.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; | |
| 4. | The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c. | Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d. | Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the Annual Report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and |
| 5. | The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and | |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
| Date: March 17, 2020 | ||
| By: | /s/ Christopher L. Boone | |
| Name: | Christopher L. Boone | |
| Title: | Chief Financial Officer | |
Exhibit 13.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Sherif Foda, Chief Executive Officer of National Energy Services Reunited Corp. (the “Company”), hereby certify, to my knowledge, that:
| 1. | the Company’s Annual Report on Form 20-F for the year ended December 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| 2. | the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: March 17, 2020 | ||
| By: | /s/ Sherif Foda | |
| Name: | Sherif Foda | |
| Title: | Chief Executive Officer | |
Exhibit 13.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Christopher L. Boone, Chief Financial Officer of National Energy Services Reunited Corp. (the “Company”), hereby certify, to my knowledge, that:
| 1. | the Company’s Annual Report on Form 20-F for the year ended December 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | |
| 2. | the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: March 17, 2020 | ||
| By: | /s/ Christopher L. Boone | |
| Name: | Christopher L. Boone | |
| Title: | Chief Financial Officer | |
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
National Energy Services Reunited Corp.
We consent to the incorporation by reference in Registration Statement no. 333-226813 on Form S-8 and Registration Statements nos. 333-226194, 333-229801, and 333-233422 on Form F-3, of National Energy Services Reunited Corp., of our report dated March 17, 2020, with respect to the consolidated balance sheets of National Energy Services Reunited Corp. and subsidiaries as of December 31, 2019 and 2018 (Successor Company balance sheets), the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year ended December 31, 2019 and the period from June 7, 2018 to December 31, 2018 (Successor Company operations), and of NPS Holdings Limited for the period from January 1, 2018 to June 6, 2018 and the year ended December 31, 2017 (Predecessor Company operations), and the related notes, which report appears in the December 31, 2019 Annual Report on Form 20-F of National Energy Services Reunited Corp.
/s/ KPMG
Mumbai, India
March 17, 2020