GES
Historical Balance Sheet as of March 31, 2018
|
|
As
of March 31, 2018
|
|
|
|
|
|
GES
(Historical) (in Rial Omani)
|
|
|
Conversion
from Rial Omani to U.S. Dollar
|
|
|
Adjustments
for US GAAP and IFRS Differences
|
|
|
GES
(Historical) (3)
|
|
|
Pro
Forma Balance Sheet Classification
|
|
|
(in
thousands)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
39,233
|
|
|
$
|
102,036
|
|
|
$
|
(203
|
)(a)
|
|
$
|
101,833
|
|
|
Property,
plant and equipment
|
Intangible
assets and goodwill
|
|
|
6
|
|
|
|
15
|
|
|
|
-
|
|
|
|
15
|
|
|
Intangible
assets
|
Capital
work in progress
|
|
|
718
|
|
|
|
1,869
|
|
|
|
-
|
|
|
|
1,869
|
|
|
Property,
plant and equipment
|
Deferred
tax asset
|
|
|
217
|
|
|
|
566
|
|
|
|
-
|
|
|
|
566
|
|
|
Other
assets
|
Investment
in joint venture and associate
|
|
|
1,539
|
|
|
|
4,002
|
|
|
|
-
|
|
|
|
4,002
|
|
|
Investments
in joint ventures
|
Total
non-current assets
|
|
|
41,713
|
|
|
|
108,488
|
|
|
|
(203
|
)
|
|
|
108,285
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
11,225
|
|
|
|
29,193
|
|
|
|
-
|
|
|
|
29,193
|
|
|
Inventories
|
Trade
and other receivables
|
|
|
36,665
|
|
|
|
95,359
|
|
|
|
(65,184
|
)(a)(2)
|
|
|
30,175
|
|
|
Accounts
receivable
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,026
|
(2)
|
|
|
50,026
|
|
|
Unbilled
revenue
|
|
|
|
-
|
|
|
|
-
|
|
|
|
365
|
(2)
|
|
|
365
|
|
|
Other
receivable
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,879
|
(2)
|
|
|
1,879
|
|
|
Prepaid
expenses
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,013
|
(2)
|
|
|
13,013
|
|
|
Advances
to suppliers and other current assets
|
Amounts
due from related parties
|
|
|
448
|
|
|
|
1,166
|
|
|
|
-
|
|
|
|
1,166
|
|
|
Due
from related parties, current
|
Cash
and cash equivalents
|
|
|
1,225
|
|
|
|
3,186
|
|
|
|
-
|
|
|
|
3,186
|
|
|
Cash
and cash equivalents
|
Total
current assets
|
|
|
49,563
|
|
|
|
128,904
|
|
|
|
99
|
|
|
|
129,003
|
|
|
|
Total
assets
|
|
|
91,276
|
|
|
$
|
237,392
|
|
|
$
|
(104
|
)
|
|
$
|
237,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
AND LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
capital
|
|
|
500
|
|
|
$
|
1,300
|
|
|
$
|
-
|
|
|
$
|
1,300
|
|
|
Common
stock
|
Legal
reserve
|
|
|
852
|
|
|
|
2,216
|
|
|
|
-
|
|
|
|
2,216
|
|
|
Accumulated
deficit
|
Retained
earnings
|
|
|
29,082
|
|
|
|
75,636
|
|
|
|
671
|
(a)
|
|
|
76,307
|
|
|
Accumulated
deficit
|
Shareholder’s
contribution
|
|
|
11,232
|
|
|
|
29,211
|
|
|
|
(93
|
)(a)
|
|
|
29,118
|
|
|
Additional
paid in capital
|
Equity
attributable to shareholders of parent company
|
|
|
41,666
|
|
|
|
108,363
|
|
|
|
578
|
|
|
|
108,941
|
|
|
|
Non-controlling
interest
|
|
|
979
|
|
|
|
2,547
|
|
|
|
(682
|
)(a)
|
|
|
1,865
|
|
|
Non-controlling
interests
|
Total
equity
|
|
|
42,645
|
|
|
|
110,910
|
|
|
|
(104
|
)
|
|
|
110,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
loans from related parties
|
|
|
171
|
|
|
|
445
|
|
|
|
-
|
|
|
|
445
|
|
|
Due
to related parties
|
Loans
and borrowings
|
|
|
9,679
|
|
|
|
25,174
|
|
|
|
-
|
|
|
|
25,174
|
|
|
Loans
and borrowings
|
Finance
lease liabilities
|
|
|
2
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
Capital
lease obligation
|
End
of service benefits
|
|
|
626
|
|
|
|
1,629
|
|
|
|
-
|
|
|
|
1,629
|
|
|
Liability
for pension benefits
|
Total
non-current liabilities
|
|
|
10,478
|
|
|
|
27,253
|
|
|
|
-
|
|
|
|
27,253
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term bank borrowings
|
|
|
2,757
|
|
|
|
7,170
|
|
|
|
-
|
|
|
|
7,170
|
|
|
Short-term
borrowings
|
Loans
and borrowings
|
|
|
7,434
|
|
|
|
19,334
|
|
|
|
-
|
|
|
|
19,334
|
|
|
Current
portion of loans and borrowings
|
Finance
lease liabilities
|
|
|
72
|
|
|
|
187
|
|
|
|
-
|
|
|
|
187
|
|
|
Capital
lease obligation, current
|
Trade
and other payables
|
|
|
20,806
|
|
|
|
54,112
|
|
|
|
(22,596
|
)
(2)
|
|
|
31,516
|
|
|
Accounts
payable
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,596
|
(2)
|
|
|
22,596
|
|
|
Accrued
expenses
|
Amounts
due to related parties
|
|
|
3,792
|
|
|
|
9,863
|
|
|
|
-
|
|
|
|
9,863
|
|
|
Due
to related parties, current
|
Income
tax payable
|
|
|
3,292
|
|
|
|
8,563
|
|
|
|
-
|
|
|
|
8,563
|
|
|
Income
taxes payable
|
Total
current liabilities
|
|
|
38,153
|
|
|
|
99,229
|
|
|
|
-
|
|
|
|
99,229
|
|
|
|
Total
liabilities
|
|
|
48,631
|
|
|
|
126,482
|
|
|
|
-
|
|
|
|
126,482
|
|
|
|
Total
equity and liabilities
|
|
|
91,276
|
|
|
$
|
237,392
|
|
|
$
|
(104
|
)
|
|
$
|
237,288
|
|
|
|
GES
Historical Statement of Operations for the Three Months Ended March 31, 2018
|
|
For
the Three Months Ended March 31, 2018
|
|
|
|
|
|
GES
(Historical)
(in Rial Omani)
|
|
|
Conversion
from Rial Omani to U.S. Dollar
|
|
|
Adjustments
for US GAAP and IFRS Differences
|
|
|
GES
(Historical)
(3)
|
|
|
Pro
Forma Statement of Operations Classification
|
|
|
(in
thousands)
|
|
|
|
Revenue
|
|
|
15,648
|
|
|
$
|
40,696
|
|
|
$
|
-
|
|
|
$
|
40,696
|
|
|
Revenues
|
Direct
costs
|
|
|
(6,006
|
)
|
|
|
(15,621
|
)
|
|
|
(17,774
|
)(2)
|
|
|
(33,395
|
)
|
|
Cost of services
|
Staff
costs
|
|
|
(4,886
|
)
|
|
|
(12,708
|
)
|
|
|
12,708
|
(2)
|
|
|
-
|
|
|
|
Depreciation
and Amortization
|
|
|
(1,948
|
)
|
|
|
(5,066
|
)
|
|
|
5,066
|
(2)
|
|
|
-
|
|
|
|
Gross
profit
|
|
|
2,808
|
|
|
|
7,301
|
|
|
|
-
|
|
|
|
7,301
|
|
|
|
Administrative
and general expense
|
|
|
(1,865
|
)
|
|
|
(4,851
|
)
|
|
|
-
|
|
|
|
(4,851
|
)
|
|
Selling,
general and administrative
|
Impairment
loss on trade and other receivables including contract assets
|
|
|
(38
|
)
|
|
|
(99
|
)
|
|
|
99
|
(a)
|
|
|
-
|
|
|
|
Finance
costs
|
|
|
(347
|
)
|
|
|
(902
|
)
|
|
|
-
|
|
|
|
(902
|
)
|
|
Interest
expense
|
Other
income
|
|
|
37
|
|
|
|
96
|
|
|
|
-
|
|
|
|
96
|
|
|
Other
income (expense), net
|
Share
of loss of equity-accounted investee, net of tax
|
|
|
(79
|
)
|
|
|
(206
|
)
|
|
|
-
|
|
|
|
(206
|
)
|
|
Other
income (expense), net
|
Profit
before taxation
|
|
|
516
|
|
|
|
1,339
|
|
|
|
99
|
|
|
|
1,438
|
|
|
|
Income
tax expense
|
|
|
(354
|
)
|
|
|
(920
|
)
|
|
|
-
|
|
|
|
(920
|
)
|
|
Provision
for income taxes
|
Net
profit and total comprehensive income for the year
|
|
|
162
|
|
|
|
419
|
|
|
|
99
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
profit and total comprehensive income attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
of the Company
|
|
|
141
|
|
|
|
368
|
|
|
|
99
|
|
|
|
467
|
|
|
|
Non-controlling
interest
|
|
|
21
|
|
|
|
51
|
|
|
|
-
|
|
|
|
51
|
|
|
Net
(income) loss attributable to non-controlling interests
|
Net
profit and total comprehensive income for the year
|
|
|
162
|
|
|
$
|
419
|
|
|
$
|
99
|
|
|
$
|
518
|
|
|
|
GES
Historical Statement of Operations for the Year Ended December 31, 2017
|
|
For
the Year Ended December 31, 2017
|
|
|
|
|
|
GES
(Historical)
(in Rial Omani)
|
|
|
Conversion
from Rial Omani to U.S. Dollar
|
|
|
Adjustments
for US GAAP and IFRS Differences
|
|
|
GES
(Historical)
(3)
|
|
|
Pro
Forma Statement of Operations Classification
|
|
|
(in
thousands)
|
Revenue
|
|
|
71,734
|
|
|
$
|
186,564
|
|
|
$
|
-
|
|
|
$
|
186,564
|
|
|
Revenues
|
Direct
costs
|
|
|
(20,902
|
)
|
|
|
(54,361
|
)
|
|
|
(73,901
|
)(2)
|
|
|
(128,262
|
)
|
|
Cost of services
|
Staff
costs
|
|
|
(19,869
|
)
|
|
|
(51,676
|
)
|
|
|
51,676
|
(2)
|
|
|
-
|
|
|
|
Depreciation
and Amortization
|
|
|
(8,546
|
)
|
|
|
(22,225
|
)
|
|
|
22,225
|
(2)
|
|
|
-
|
|
|
|
Gross
profit
|
|
|
22,417
|
|
|
|
58,302
|
|
|
|
-
|
|
|
|
58,302
|
|
|
|
Administrative
and general expense
|
|
|
(6,722
|
)
|
|
|
(17,483
|
)
|
|
|
-
|
|
|
|
(17,483
|
)
|
|
Selling,
general and administrative
|
Finance
costs
|
|
|
(1,487
|
)
|
|
|
(3,869
|
)
|
|
|
-
|
|
|
|
(3,869
|
)
|
|
Interest
expense
|
Finance
income
|
|
|
619
|
|
|
|
1,611
|
|
|
|
-
|
|
|
|
1,611
|
|
|
Interest
income
|
Other
income
|
|
|
1,622
|
|
|
|
4,217
|
|
|
|
-
|
|
|
|
4,217
|
|
|
Other
income (expense), net
|
Share
of profit of equity-accounted investee, net of tax
|
|
|
378
|
|
|
|
984
|
|
|
|
-
|
|
|
|
984
|
|
|
Other
income (expense), net
|
Profit
before taxation
|
|
|
16,827
|
|
|
|
43,762
|
|
|
|
|
|
|
|
43,762
|
|
|
|
Income
tax expense
|
|
|
(2,821
|
)
|
|
|
(7,337
|
)
|
|
|
-
|
|
|
|
(7,337
|
)
|
|
Provision
for income taxes
|
Net
profit and total comprehensive income for the year
|
|
|
14,006
|
|
|
|
36,425
|
|
|
|
-
|
|
|
|
36,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
profit and total comprehensive income attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
of the Company
|
|
|
12,348
|
|
|
|
32,115
|
|
|
|
-
|
|
|
|
32,115
|
|
|
|
Non-controlling
interest
|
|
|
1,658
|
|
|
|
4,310
|
|
|
|
-
|
|
|
|
4,310
|
|
|
Net
(income) loss attributable to non-controlling interests
|
Net
profit and total comprehensive income for the year
|
|
|
14,006
|
|
|
$
|
36,425
|
|
|
$
|
-
|
|
|
$
|
36,425
|
|
|
|
4.
Adjustments to Unaudited Pro Forma Condensed Combined Financial Information
Adjustments
to Unaudited Pro Forma Condensed Combined Balance Sheet
The
pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of March 31, 2018 are as follows:
(a)
|
Reflects
the elimination of the effect of GES adopting IFRS 9 during the first quarter of 2018, and the net effect from the historical
acquisition of a business from a third party by a related party of GES. Such business was later transferred to GES in a common
control transaction. These adjustment result from the difference in the basis of presentation of the historical financial
statements of GES, which are prepared in accordance with IFRS, and those of NESR, which are prepared in accordance with US
GAAP.
|
|
|
(b)
|
Represents
the use of the merger consideration to purchase all of the outstanding equity ownership of NPS and GES.
|
NESR
acquired NPS and GES, and the GES Investors opted for a share exchange for the interest portion of the Loan Contracts,
in exchange for the following:
|
|
NPS
|
|
|
GES
|
|
|
|
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Cash
consideration
|
|
$
|
319,015
|
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
319,015
|
|
Total
Merger Consideration – cash
|
|
|
319,015
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
319,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NESR
ordinary share consideration
|
|
|
255,412
|
|
|
|
25,077
|
|
|
|
257,781
|
|
|
|
25,310
|
|
|
|
513,193
|
|
Assumption
of Loan Contracts and related interest from NESR Holdings (including conversion into NESR ordinary shares)
|
|
|
-
|
|
|
|
-
|
|
|
|
30,925
|
|
|
|
3,036
|
|
|
|
30,925
|
|
Total
Merger Consideration – equity
|
|
|
255,412
|
|
|
|
|
|
|
|
288,706
|
|
|
|
|
|
|
|
544,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Earn-Out Mechanisms (2)
|
|
|
24,563
|
|
|
|
2,412
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Merger Consideration (1)
|
|
$
|
598,990
|
|
|
|
|
|
|
$
|
288,706
|
|
|
|
|
|
|
$
|
887,696
|
|
1)
|
For
pro forma purposes, the fair value of consideration given, and thus the purchase price was determined based upon the $10.185
per share closing price of NESR common stock on June 6, 2018.
|
The
following summarizes NESR’s ordinary share ownership subsequent to the Business Combination, the Backstop Commitment, and
the Hana Loan:
|
|
Shares
|
|
|
%
|
|
Closing
merger shares - issuable to Hana Investments
|
|
|
14,025,258
|
|
|
|
16
|
%
|
Closing
merger shares - issuable to the NPS Selling Stockholders
|
|
|
11,318,828
|
|
|
|
13
|
%
|
Closing
merger shares - issuable to the GES Investors
|
|
|
3,036,381
|
|
|
|
3
|
%
|
Closing
merger shares - issuable to SV3
|
|
|
6,825,000
|
|
|
|
8
|
%
|
Closing
merger shares - issuable to the GES Selling Stockholders
|
|
|
18,484,848
|
|
|
|
22
|
%
|
Closing
merger shares - issuable to the Underwriters
|
|
|
307,465
|
|
|
|
<1
|
%
|
Closing
merger shares
|
|
|
53,997,780
|
|
|
|
|
|
Founder shares
|
|
|
5,730,425
|
|
|
|
7
|
%
|
Shares
held by current NESR shareholders
|
|
|
21,005,189
|
|
|
|
25
|
%
|
Shares
prior to Backstop Commitment
|
|
|
80,733,394
|
|
|
|
|
|
Backstop
Commitment Shares (affiliated with NPS)
|
|
|
4,829,375
|
|
|
|
6
|
%
|
Total
NESR ordinary shares
|
|
|
85,562,769
|
|
|
|
100
|
%
|
2)
The terms of the NPS transaction include specific earn-out provisions which, if achieved, will be settled in NESR ordinary shares.
The first and second equity earn-outs are tied to 2018 EBITDA performance measures, with payments to be made in NESR ordinary
shares, and are quantified based on expected 2018 EBITDA targets being met. Based on the range of scenarios and probabilities
considered, NESR estimated equity earn-outs of 1.67 million shares at $10.185 per share (equal to $17.0 million) and 740,000 shares
at $10.185 per share (equal to $7.5 million) for the first and second equity earn-outs, respectively. Combining the equity earn-outs
of $17.0 million and $7.5 million, equals an estimated earn-out of $24.5 million.
(c)
|
Reflects
the acquisition method of accounting based on the estimated fair value of the acquired assets and assumed liabilities of NPS
and GES as discussed in Note 5 below. Additional information regarding the estimated fair value of identifiable intangible
assets acquired and the tax effect of the purchase accounting is discussed below. The pro forma combined provision for income
taxes does not necessarily reflect the amounts that would have resulted had the combined company filed a consolidated income
tax returns during the period presented.
|
|
|
NPS
|
|
|
GES
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Property,
plant and equipment - carrying value
|
|
$
|
264,203
|
|
|
$
|
103,702
|
|
|
$
|
367,905
|
|
Property,
plant and equipment - fair value
|
|
|
265,219
|
|
|
|
137,898
|
|
|
|
403,117
|
|
Net
purchase accounting adjustment
|
|
$
|
1,016
|
|
|
$
|
34,196
|
|
|
$
|
35,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets - carrying value
|
|
$
|
9,713
|
|
|
$
|
566
|
|
|
$
|
10,279
|
|
Other
assets - fair value
|
|
|
5,241
|
|
|
|
566
|
|
|
|
5,807
|
|
Net
purchase accounting adjustment
|
|
$
|
(4,472
|
)
|
|
$
|
-
|
|
|
$
|
(4,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles
- carrying value
|
|
$
|
-
|
|
|
$
|
15
|
|
|
$
|
15
|
|
Intangibles
- fair value
|
|
|
125,000
|
|
|
|
53,000
|
|
|
|
178,000
|
|
Net
purchase accounting adjustment
|
|
$
|
125,000
|
|
|
$
|
52,985
|
|
|
$
|
177,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill -
carrying value
|
|
$
|
182,053
|
|
|
$
|
-
|
|
|
$
|
182,053
|
|
Goodwill
- fair value
|
|
|
341,058
|
|
|
|
101,754
|
|
|
|
442,812
|
|
Net
purchase accounting adjustment
|
|
$
|
159,005
|
|
|
$
|
101,754
|
|
|
$
|
260,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
debt issuance / transaction costs - carrying value
|
|
$
|
(2,875
|
)
|
|
$
|
(435
|
)
|
|
$
|
(3,310
|
)
|
Unamortized
debt issuance / transaction costs - fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
purchase accounting adjustment
|
|
$
|
2,875
|
|
|
$
|
435
|
|
|
$
|
3,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities - carrying value
|
|
$
|
1,834
|
|
|
$
|
-
|
|
|
$
|
1,834
|
|
Deferred
tax liabilities - fair value
|
|
|
26,834
|
|
|
|
10,600
|
|
|
|
37,434
|
|
Net
purchase accounting adjustment
|
|
$
|
25,000
|
|
|
$
|
10,600
|
|
|
$
|
35,600
|
|
(d)
|
Reflects
the elimination of NPS’s and GES’s historical equity accounts.
|
|
|
NPS
|
|
|
GES
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Common
stock
|
|
$
|
(348,525
|
)
|
|
$
|
(1,300
|
)
|
|
$
|
(349,825
|
)
|
Convertible
redeemable shares
|
|
|
(21,475
|
)
|
|
|
-
|
|
|
|
(21,475
|
)
|
Additional
paid in capital
|
|
|
(3,345
|
)
|
|
|
(29,118
|
)
|
|
|
(32,463
|
)
|
Accumulated
deficit (Retained earnings)
|
|
|
24,294
|
|
|
|
(78,523
|
)
|
|
|
(54,229
|
)
|
Accumulated
other comprehensive (income)
|
|
|
435
|
|
|
|
-
|
|
|
|
435
|
|
Non-controlling
interests
|
|
|
2,300
|
|
|
|
(1,865
|
)
|
|
|
435
|
|
Total
equity
|
|
$
|
(346,316
|
)
|
|
$
|
(110,806
|
)
|
|
$
|
(457,122
|
)
|
(e)
|
Represents
the reclassification of $231.3 million of cash and cash equivalents held in a trust account that became available following
the Business Combination after giving effect to the redemption by NESR shareholders of 1,916,511 NESR ordinary shares. Ordinary
shares subject to possible redemption that were not redeemed were rolled over into NESR ordinary shares.
|
|
|
(f)
|
Reflects
the receipt of gross proceeds of $48.3 million from the sale of ordinary shares pursuant to the Backstop Commitment.
|
|
|
(g)
|
Reflects
the payment of $5.3 million in cash and $3.1 million in NESR ordinary shares as deferred underwriting fees contingent upon
completion of the Business Combination, and an adjustment of $0.6 million to deferred underwriting fees due to the redemption
by NESR shareholders of 1,916,511 NESR ordinary shares.
|
|
|
(h)
|
Reflects
adjustments to retained earnings and accrued liabilities of $13.6 million consisting of transaction costs expected
to be incurred in relation to the Business Combination.
|
|
|
(i)
|
Reflects
the redemption of 1,916,511 ordinary shares by shareholders pursuant to their redemption rights.
|
|
|
(j)
|
Reflects
the receipt of $50.0 million from Hana Investments pursuant to the Hana Loan,
and the issuance of $3.0 million of NESR ordinary shares, $0.6 million related to loan
origination costs and $2.4 million related to the relationship fee.
|
Adjustments
to Unaudited Pro Forma Condensed Combined Statement of Operations
The
pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the three months ended
March 31, 2018 and the year ended December 31, 2017 are as follows:
(aa)
|
Represents
the sum of the adjustments to record amortization expense related to acquired identifiable definite-lived intangible assets.
Such intangibles have been amortized using the straight-line method.
|
|
|
Pro
Forma Three Months Ended March 31, 2018
|
|
|
|
NPS
|
|
|
GES
|
|
|
|
Cost
of Services
|
|
|
Depreciation
and Amortization
|
|
|
Cost
of Services
|
|
|
Depreciation
and Amortization
|
|
|
Selling,
General and Administrative
|
|
|
|
(in
thousands)
|
|
Historical
depreciation and amortization expense recognized
|
|
$
|
10,287
|
|
|
$
|
91
|
|
|
$
|
5,066
|
|
|
$
|
-
|
|
|
$
|
303
|
|
Depreciation
and amortization expense after fair value adjustment
|
|
|
5,238
|
|
|
|
3,259
|
|
|
|
3,944
|
|
|
|
-
|
|
|
|
1,620
|
|
Depreciation
and amortization expense adjustment for the period
|
|
$
|
5,049
|
|
|
$
|
(3,168
|
)
|
|
$
|
1,122
|
|
|
$
|
-
|
|
|
$
|
(1,317
|
)
|
|
|
Pro
Forma Year Ended December 31, 2017
|
|
|
|
NPS
|
|
|
GES
|
|
|
|
Cost
of Services
|
|
|
Depreciation
and Amortization
|
|
|
Cost
of Services
|
|
|
Depreciation
and Amortization
|
|
|
Selling,
General and Administrative
|
|
|
|
(in
thousands)
|
|
Historical
depreciation and amortization expense recognized
|
|
$
|
37,801
|
|
|
$
|
607
|
|
|
$
|
22,225
|
|
|
$
|
-
|
|
|
$
|
1,205
|
|
Depreciation
and amortization expense after fair value adjustment
|
|
|
20,952
|
|
|
|
13,038
|
|
|
|
15,864
|
|
|
|
-
|
|
|
|
6,390
|
|
Depreciation
and amortization expense adjustment for the period
|
|
$
|
16,849
|
|
|
$
|
(12,431
|
)
|
|
$
|
6,361
|
|
|
$
|
-
|
|
|
$
|
(5,185
|
)
|
(bb)
|
Represents
an adjustment to income tax expense as a result of the tax impact on the pro forma adjustments related to purchase accounting
and pro forma adjustments for NPS and GES based on a blended statutory tax rate of 20%.
|
|
|
(cc)
|
In
conjunction with the Business Combination, the GES Founders have executed a Non-Compete and Non-Disclosure Agreement and have
agreed to provide advisory services to the combined company for five years. Pursuant to the agreement, the GES Founders will
each receive annual payments of $1 million over the course of five years.
|
|
|
(dd)
|
Reflects
the elimination of transaction costs of $4.8 million recorded in the NESR, NPS and GES historical financial statements for
the three months ended March 31, 2018, and $3.6 million recorded in the NESR historical financial statements for the year
ended December 31, 2017.
|
|
|
(ee)
|
Reflects
an adjustment to interest expense resulting from the Hana Loan.
|
|
|
(ff)
|
Earnings
per Share
|
Represents
the net income per share calculated using the historical weighted average NESR ordinary shares and the issuance of additional
shares in connection with the Business Combination, assuming the shares were outstanding since January 1, 2017. On a pro forma
basis, no potentially dilutive shares were outstanding during the three months ended March 31, 2018 or the year ended December
31, 2017. Therefore, basic and diluted weighted average shares were the same for the period presented. The pro forma basic and
diluted earnings per share amounts presented in the unaudited pro forma condensed combined statement of operations are based upon
the number of NESR’s shares outstanding, assuming the Business Combination, the Backstop Commitment, and the Hana Loan
occurred on January 1, 2017.
Combined
Pro Forma Basic and Diluted Weighted Average Shares
|
|
|
|
NESR
Public Shareholders
|
|
|
21,005,189
|
|
NESR
Founders
|
|
|
5,730,425
|
|
GES
Investors (GES Loan Contracts upon conversion into NESR ordinary shares)
|
|
|
3,036,381
|
|
Hana
Investments
|
|
|
25,334,086
|
|
GES
Shareholders
|
|
|
25,309,848
|
|
Underwriters
|
|
|
307,465
|
|
Backstop
Investor (affiliated to NPS)
|
|
|
4,829,375
|
|
Pro
forma weighted average shares (basic and diluted)
|
|
|
85,562,769
|
|
5.
|
Estimated
Fair Value of Assets Acquired and Liabilities Assumed
|
The
preliminary allocation of the consideration to the tangible and intangible assets acquired and liabilities assumed is based on
various preliminary estimates. Since this unaudited pro forma condensed combined financial information has been prepared based
on preliminary estimates the actual amounts recorded for the acquisition may differ from the information presented.
Allocation
of consideration
|
|
NPS
|
|
|
GES
|
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
$
|
27,857
|
|
|
$
|
3,186
|
|
Accounts
receivable
|
|
|
58,346
|
|
|
|
30,175
|
|
Unbilled
revenue
|
|
|
35,764
|
|
|
|
50,026
|
|
Inventories
|
|
|
32,664
|
|
|
|
29,193
|
|
Other
receivable
|
|
|
10,013
|
|
|
|
365
|
|
Prepaid
expenses
|
|
|
4,901
|
|
|
|
1,879
|
|
Due
from related parties, current
|
|
|
-
|
|
|
|
1,166
|
|
Advances
to suppliers and other current assets
|
|
|
561
|
|
|
|
13,013
|
|
Property,
plant and equipment
|
|
|
265,219
|
|
|
|
137,898
|
|
Other
assets
|
|
|
5,241
|
|
|
|
566
|
|
Intangible
assets
|
|
|
125,000
|
|
|
|
53,000
|
|
Investments
in joint ventures
|
|
|
-
|
|
|
|
4,002
|
|
Total
identifiable assets acquired
|
|
|
565,566
|
|
|
|
324,469
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(23,566
|
)
|
|
|
(31,516
|
)
|
Accrued
expenses
|
|
|
(25,246
|
)
|
|
|
(22,596
|
)
|
Current
portion of loans and borrowings
|
|
|
-
|
|
|
|
(19,334
|
)
|
Short-term
borrowings
|
|
|
(56,958
|
)
|
|
|
(7,170
|
)
|
Capital
lease obligation, current
|
|
|
-
|
|
|
|
(187
|
)
|
Due
to related parties, current
|
|
|
(25
|
)
|
|
|
(9,863
|
)
|
Current
end of service benefits
|
|
|
(2,691
|
)
|
|
|
-
|
|
Income
taxes payable
|
|
|
(3,231
|
)
|
|
|
(8,563
|
)
|
Loans
and borrowings
|
|
|
(150,000
|
)
|
|
|
(25,609
|
)
|
Other
liabilities
|
|
|
(4,472
|
)
|
|
|
-
|
|
Capital
lease obligation
|
|
|
-
|
|
|
|
(5
|
)
|
Long-term
income taxes payable
|
|
|
(3,530
|
)
|
|
|
-
|
|
Deferred
tax liabilities
|
|
|
(26,834
|
)
|
|
|
(10,600
|
)
|
Due
to related parties
|
|
|
-
|
|
|
|
(445
|
)
|
Employee
benefits
|
|
|
(11,081
|
)
|
|
|
(1,629
|
)
|
Net
identifiable liabilities acquired
|
|
|
(307,634
|
)
|
|
|
(137,517
|
)
|
Goodwill
|
|
|
341,058
|
|
|
|
101,754
|
|
Total
gross consideration
|
|
$
|
598,990
|
|
|
$
|
288,706
|
|
Intangible
assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The
preliminary allocation to intangible assets is as follows:
Intangible
assets
|
|
Fair
Value
|
|
|
|
|
|
NPS
|
|
|
GES
|
|
|
Total
|
|
|
Useful
Life
|
|
|
(in
millions)
|
|
|
|
Customer
contracts
|
|
$
|
110,000
|
|
|
$
|
43,000
|
|
|
$
|
153,000
|
|
|
10
years
|
Trademarks
and trade names
|
|
|
15,000
|
|
|
|
10,000
|
|
|
|
25,000
|
|
|
8
years
|
Total
intangible assets
|
|
$
|
125,000
|
|
|
$
|
53,000
|
|
|
$
|
178,000
|
|
|
|
Goodwill.
Approximately $442.8 million has been allocated to goodwill. Goodwill represents the excess of the gross consideration
transferred over the fair value of the underlying net tangible and identifiable definite-lived intangible assets acquired. 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 NPS and GES.
In
accordance with Financial Accounting Standards Board Accounting Standards Codification 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 of the combined company determines that the value of goodwill has become
impaired, an accounting charge for the amount of impairment during the quarter in which the determination is made may be recognized.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s
discussion and analysis of financial condition and results of operations of NPS and GES for the years ended December 31, 2015,
2016 and 2017 is included in the Proxy Statement in the sections entitled “NPS Management’s Discussion and Analysis
of Financial Condition and Results of Operations” beginning on page 148 and “GES Management’s Discussion and
Analysis of Financial Condition and Results of Operations” beginning on page 177, respectively, which are incorporated herein
by reference.
In
addition, management’s discussion and analysis of financial condition and results of operations of NPS and GES for the period
ended March 31, 2018 are provided below.
NPS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
The
following discussion and analysis should be read in conjunction with the financial statements and related notes of NPS included
elsewhere in this Report
. This discussion contains forward-looking statements reflecting
our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating
results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking
statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary
Note Regarding Forward-Looking Statements.”
References
in this section to the “Company,” “us” or “we” refer to NPS.
Overview
Description
of the Business
We
are a leading regional provider of products and services to the oil and gas industry in the Middle East and North Africa (“MENA”)
and Asia Pacific (“APAC”) regions. Through the company’s track record of delivering successful outcomes to its
customers during the drilling, completion and production phases of an oil or natural gas well, NPS has built strong positions
in its target markets and developed longstanding relationships with many of the world’s leading exploration and production
(“E&P”) companies.
Throughout
our nearly 40-year history, we have successfully grown and expanded our service lines and markets. We currently operate in 11
countries, with a strong presence in Saudi Arabia, Algeria, Qatar, UAE and Iraq. We have established a unique position in our
markets, competing effectively against the multinational oilfield service providers while providing scale that is superior to
local competition. As an independent, adaptive and regionally-focused firm, NPS can react and mobilize quickly as conditions change
and opportunities arise.
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. We provide an integrated service offering that includes:
Well Services and Intervention, Drilling and Workover, Wireline Logging and Testing.
Well
Services and Intervention include well cementing, coiled tubing, pressure pumping and stimulation operations. Drilling and Workover
Services include drilling and workovers for oil, gas and water wells. Wireline Logging and Testing include cased-hole logging,
slick-line services, surface well production testing and wellhead maintenance. NPS effectively delivers this broad range of services
by deploying one of the largest fleet of oilfield equipment among its regionally-based competitors, including cementing
units, coiled tubing units, stimulation units, nitrogen units and oil and water well drilling rigs.
We
operate in key geographies across the MENA and APAC regions, deriving more than 95% of our revenue from Saudi Arabia, Algeria,
Qatar, UAE and Iraq. 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.
Marketing
and customers
Over
our nearly 40 years in business, we have developed strong and longstanding relationships with our key customers: Saudi Aramco,
Qatar Petroleum, ADCO, ADMA and other National and International Oil Companies. These relationships have been built upon a track
record of offering a wide range of reliable and cost-effective services. NPS currently has over 29 active customers and operates
under fixed-term contracts ranging from 3 to 5 years.
Services
The
table below summarizes our existing service lines in the key markets in which we operate
:
|
|
|
Saudi
Arabia
|
|
|
|
Qatar
|
|
|
|
UAE
|
|
|
|
Iraq
|
|
|
|
India
|
|
|
|
Algeria
|
|
|
|
Malaysia
|
|
Stimulation
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
|
|
Coiled
tubing
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
Cementing
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
|
|
Wireline
logging
|
|
|
✓
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
testing
|
|
|
✓
|
|
|
|
|
|
|
|
✓
|
|
|
|
✓
|
|
|
|
|
|
|
|
✓
|
|
|
|
|
|
Industry
Trends
Cyclical
Nature of Sector
Our
company provides oilfield services to E&P companies with operations in the onshore and offshore oil and gas exploration and
production sectors. Demand for our services is mainly led by our customers’ operations and is therefore linked
to global oil prices, rig activity and other factors.
The
oilfield services sector is a highly cyclical industry, with the level of drilling activity by E&P companies being largely
linked to oil prices which in turn are driven by global supply and demand for oil. As a result, our operating results can fluctuate
from quarter to quarter. However, due to the low oil breakeven price in the MENA region and the need for infrastructure spending
by the governments of these oil rich countries, we believe that we are less affected by oil price shocks as compared to other
companies which operate in other regions.
Global
E&P Trends and Outlook
Since
the downturn in oil prices which commenced in 2014, many projects have been deferred by E&P companies, who have sought to
reduce oilfield service costs in an attempt to lower their break-even points. Pricing concessions were granted by service providers
in order to maintain their market share during these periods.
Global
E&P spending increased by approximately 4% in 2017, which was preceded by 2 years of double-digit declines. As recent oil
prices have started to rise, more projects will become economically viable and it is expected that onshore spending will increase.
Given
OPEC’s production cuts and the recent depletion of oil inventories, we expect that production will rise in order to meet
current estimated demand. With diminishing oil reserves, we also expect that any increase in oil supply will be weighted towards
replacing old wells and implementing new technologies.
Drilling
Types and Environments
Based
on Wood Mackenzie data (extracted 3/5/2018), offshore oil production currently provides an estimated 30% of all global oil supply.
Although this is a significant portion, the bulk of oil production comes from onshore activity.
NPS
has operations in both onshore and offshore drilling. Offshore drilling provides higher margins due to greater complexity, logistical
challenges and the need for innovative solutions. Our strategy going forward is to further target offshore drilling in the MENA
and APAC regions.
Middle
East Drilling
The
Middle East has almost half of the world’s proven oil reserves and accounts for almost a third of oil production, according
to the BP Statistical Review of World Energy. The countries in the Arabian Gulf account for around 23% 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 in shallow waters. These fields are largely engaged in 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 offshore rigs, with higher break-even prices, will be developed in
the future.
Key
Performance Indicators
NPS
uses a variety of operational and financial measures to assess its performance. Among the measures considered by management are
Revenue, Net income, and Adjusted EBITDA.
Revenue
NPS
analyzes its revenue by comparing actual monthly revenue to internal projections and prior periods in order to assess performance,
identify potential areas for improvement, and determine whether the business is meeting management’s expectations.
Net
Income
NPS
views net income as an important indicator to assess performance, identify potential areas for improvement and determine whether
the business is meeting management’s expectations.
Adjusted
EBITDA
NPS
views Adjusted EBITDA as an additional important indicator of performance. NPS defines Adjusted EBITDA as net income, plus interest
expense, taxes, depreciation, amortization, impairment and transaction expenses.
Transaction
expenses are defined as non-recurring expenses incurred in connection with the purchase of NPS shares by NESR
as detailed in Note 17 to the unaudited condensed consolidated financial statements of NPS for the
three months ended March 31, 2018.
Note
Regarding Non-GAAP Financial Measures
Adjusted
EBITDA is not a financial measure presented in accordance with GAAP. NPS believes that the presentation of this non-GAAP financial
measure will provide useful information to investors in assessing its financial performance and results of operations as NPS’s
board of directors, management and investors use Adjusted EBITDA to compare NPS’s operating performance on a consistent
basis across periods by removing the effects of its capital structure (such as varying levels of interest expense), asset base
(such as depreciation and amortization) and items outside the control of its management team. This non-GAAP financial measure
should not be considered as an alternative to the most directly comparable GAAP financial measure. This non-GAAP financial measure
has important limitations as an analytical tool because it excludes some but not all items that affect the most directly comparable
GAAP financial measure. You should not consider Adjusted EBITDA in isolation or as a substitute for an analysis of NPS’s
results as reported under GAAP. Because Adjusted EBITDA may be defined differently by other companies in its industry, NPS’s
definition of this non-GAAP financial measure may not be comparable to similarly titled measures of other companies, thereby diminishing
its utility. NPS’s financial statements in this Report
are presented in accordance with
U.S. GAAP.
Executive
Overview
During
the first quarter of 2017, we faced a challenging environment in many of our key end markets. Our primary focus was to grow market
share while expanding our service offering and advancing our long-term growth plans. Furthermore, we have been proactive in protecting
our profit margins by realigning our cost structure to the lower market pricing levels. These optimization strategies have enabled
us to benefit from the activity growth which we have seen in our key markets during the first quarter of 2018.
Our
results for the three months ended March 31, 2018 include:
|
●
|
An
increase in revenue of $22.1 million or 40% as compared to the prior year’s first quarter. The growth in revenue was
generated largely from Saudi Arabia (up $11.8 million), Iraq (up $5.7 million) and Qatar (up $0.8 million), all of which was
driven by higher Coiled Tubing and Well Testing activity in these markets and partially compensated by lower revenue in Algeria
due to reduced activity combined with discounted pricing on our new Coil Tubing contract.
|
|
|
|
|
●
|
An
increase in net income of $2.6 million or 92% from the prior year’s first quarter,
mostly due to an increase in gross profit generated from higher revenues combined with
an increase in revenue mix towards higher margin services.
|
|
|
|
|
●
|
An
increase in Adjusted EBITDA of $6.8 million or 47% as compared to the prior year’s first quarter. The increase was driven
by higher activity levels during the first quarter of 2018. As a percentage of revenue, Adjusted EBITDA remained approximately
the same during the first quarters of 2018 and 2017.
|
Since
2016, our key focus has been to maintain a proper balance between delivering solid operating results and advancing our strategic
goals. The following highlights a few examples of strategic actions which occurred during the first quarter of 2018 and which
we believe will help position us well for long-term value creation.
|
●
|
In
Saudi Arabia, we have deployed 2 additional CT units resulting in an increase in stimulation
revenue in rig-less activity. There has also been higher activity in Well Testing under
LSTK (Lump Sum Turnkey) contracts which were awarded last year, with two additional Testing
packages deployed in Q1 2018.
|
|
|
|
|
●
|
In
Algeria we commenced mobilization of a single Coiled Tubing package which is expected
to generate revenue in Q2 2018.
|
|
|
|
|
●
|
In
Oman, better drilling performance and an increase in footage drilled have resulted in higher revenues on our top hole drilling
contract.
|
|
|
|
|
●
|
In
Iraq, our Coiled Tubing packages are now working 24 hours which resulted in more well intervention activity as compared to
Q1 of last year. We have also deployed two additional Well Testing flare-less units.
|
|
|
|
|
●
|
In
Indonesia, we are staging our third Wireline Logging unit which is expected to generate revenue in late Q2 2018 and which
will capture future activity on geothermal wells.
|
|
|
|
|
●
|
In
the UAE, we have deployed an additional Coiled Tubing package, with a second package being prepared for deployment in Q2 2018.
|
We
believe that the demand for our services will increase in line with the market activity growth. While drilling and completions
activities have improved along with oil prices increasing from their lows in early 2016, we believe our long-term growth will
be driven by:
|
●
|
Increases
in customer drilling budgets, focused in our core service areas, and an expected increase in rig count in the MENA region;
|
|
|
|
|
●
|
Expanding
our service offerings in existing key markets and extending operations into new geographies;
|
|
|
|
|
●
|
Increasing
our services on more complex offshore as well as gas-wells related services; and
|
|
|
|
|
●
|
Shifting
focus towards higher margin and high technology service lines, including Wireline Logging and Testing services.
|
Results
of Operations
The
discussions below relating to significant line items from our consolidated statements of income (loss) are based on available
information and represents our analysis of significant changes or events that impact the comparability of reported amounts. Where
appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable,
have quantified the impact of such items. In addition, the discussions below for revenue and cost of revenue are on a total basis
as the business drivers for all services are similar. All dollar amounts in tabulations in this section are in thousands of dollars,
unless otherwise stated.
The
following is a comparison of our result of operations for the three months ended March 31, 2018 compared to the three months ended
March 31, 2017:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
As
% of Revenues
|
|
|
Variance
|
|
Description
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
76,842
|
|
|
$
|
54,739
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
22,103
|
|
|
|
40
|
%
|
Cost
of services
|
|
|
(58,172
|
)
|
|
|
(41,753
|
)
|
|
|
76
|
%
|
|
|
76
|
%
|
|
|
16,419
|
|
|
|
39
|
%
|
Gross
profit
(1)
|
|
|
18,670
|
|
|
|
12,986
|
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
5,684
|
|
|
|
44
|
%
|
Depreciation
and amortization
|
|
|
(91
|
)
|
|
|
(165
|
)
|
|
|
<1
|
%
|
|
|
<1
|
%
|
|
|
(74
|
)
|
|
|
(45
|
)%
|
Selling,
general and administrative expenses
|
|
|
(9,409
|
)
|
|
|
(7,603
|
)
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
1,806
|
|
|
|
24
|
%
|
Operating
income
|
|
|
9,170
|
|
|
|
5,218
|
|
|
|
12
|
%
|
|
|
10
|
%
|
|
|
3,952
|
|
|
|
76
|
%
|
Interest
expense, net
|
|
|
(2,825
|
)
|
|
|
(1,574
|
)
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
1,251
|
|
|
|
79
|
%
|
Other
income, net
|
|
|
91
|
|
|
|
109
|
|
|
|
<1
|
%
|
|
|
<1
|
%
|
|
|
(18
|
)
|
|
|
(17
|
)%
|
Income
before income taxes
|
|
|
6,436
|
|
|
|
3,753
|
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
2,683
|
|
|
|
72
|
%
|
Income
taxes
|
|
|
(
983
|
)
|
|
|
(
912
|
)
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
71
|
|
|
|
8
|
%
|
Net
income
|
|
$
|
5,453
|
|
|
$
|
2,841
|
|
|
|
7
|
%
|
|
|
5
|
%
|
|
|
2,612
|
|
|
|
92
|
%
|
(1)
Gross profit is defined as revenues less direct operating costs.
The
following is a non-GAAP measure used by the Company to assess its results of operations:
(In
thousands of Dollars)
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
As
% of Revenues
|
|
|
Variance
|
|
Description
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,453
|
|
|
$
|
2,841
|
|
|
|
7
|
%
|
|
|
5
|
%
|
|
|
2,612
|
|
|
|
92
|
%
|
Add:
Income taxes
|
|
|
983
|
|
|
|
912
|
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
71
|
|
|
|
8
|
%
|
Add:
Interest expense, net
|
|
|
2,825
|
|
|
|
1,574
|
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
1,251
|
|
|
|
79
|
%
|
Add:
Depreciation and amortization
(1)
|
|
|
10,378
|
|
|
|
9,197
|
|
|
|
14
|
%
|
|
|
17
|
%
|
|
|
1,181
|
|
|
|
13
|
%
|
Add:
Transaction expenses
|
|
|
1,702
|
|
|
|
-
|
|
|
|
3
|
%
|
|
|
N/A
|
|
|
|
1,702
|
|
|
|
N/A
|
|
Adjusted
EBITDA
|
|
$
|
21,341
|
|
|
$
|
14,524
|
|
|
|
28
|
%
|
|
|
27
|
%
|
|
|
6,817
|
|
|
|
47
|
%
|
(1)
The depreciation and amortization values in the above table include amounts recorded under cost of services.
Revenue.
Revenue is generated largely from Well Services, which represented 85.4% of total revenue in the three months ended March
31, 2018 and 83.35% in the three months ended March 31, 2017. Despite continued pressures on pricing, revenue in the three months
ended March 31, 2018 increased by $22.1 million, or 40%, to $76.8 million from $54.7 million in the equivalent period in 2017.
The increase is largely due to higher well services activity in Saudi Arabia (up $11.8 million) and Iraq (up $5.7 million) which
were partially offset by lower revenue in Algeria (down $2.7 million).
Cost
of Services
. Cost of services for the three months ended March 31, 2018 increased by $16.4 million, or 39%, to $58.2 million
from $41.8 million in the three months ended March 31, 2017. The increase was driven by higher customer activity levels. Total
cost of services as a percentage of total revenue in the first quarter of 2018 is 76%, which represented no change from the equivalent
period in 2017
Cost
of services includes depreciation of $10.3 million and $9.0 million in the three months ended March 31, 2018 and 2017, respectively
relating to key equipment used in supporting and managing our operations.
Depreciation
and amortization
. Depreciation and amortization expense, as reported below Gross Margin, represents depreciation of head
office fixtures and fittings as well as amortization of acquired customer contracts. Depreciation and amortization expense decreased
by $0.07 million, or 45%, to $0.09 million for the three months ended March 31, 2018 from $0.16 million for the three months ended
March 31, 2017, largely due to lower cost of amortization of 0.06 million).
Selling,
general and administrative expense
. Selling, general and administrative (“SG&A”) expense, which represents
costs associated with managing and supporting our operations, increased $1.8 million, or 24%, to $9.4 million for the three months
ended March 31, 2018 from $7.6 million in the three months ended March 31, 2017. The increase in SG&A expense is due to higher
personnel compensation costs driven by an increase in staff headcount to support higher activity levels. As a percentage
of revenue, SG&A expense decreased to 12% of revenue in the three months ended March 31, 2018 as compared to 14% in
the equivalent period in 2017, both as a result of higher activity levels as well as continued cost control discipline across
all business functions.
Interest
expense, net.
Interest expense, net, in the three months ended March 31, 2018 increased by $1.3
million, or 79%, to $2.8 million from $1.6 million in the three months ended March 31, 2017. The increase 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 the new Bridge Loan facility which was drawn down in early February 2018.
Other
income, net.
Other income, net, in the three months ended March 31, 2018 decreased by $0.02 million, or 17%, to $0.09
million from $0.11 million in the three months ended March 31, 2017. The decrease is largely due to higher income from disposal
of fixed assets combined with lower bank charges in 2018.
Net
income.
Net income was $5.5 million for the three months ended March 31, 2018 as compared with net income of $2.8 million
in the three months ended March 31, 2017. The increase in net income was due to an increase in the gross margin generated as a
result of higher activity levels in the current quarter.
Liquidity
Our
objective in financing our business is to maintain sufficient liquidity, adequate financial resources and financial flexibility
in order to fund the requirements of our business. At March 31, 2018, we had cash and cash equivalents of $27.9 million compared
to $39.2 million of cash and cash equivalents at March 31, 2017.
At
March 31, 2018, $27.9 million of our cash and cash equivalents was held by foreign subsidiaries compared to $39.2 million at March
31, 2017. Cash and cash equivalents held by foreign subsidiaries includes amounts of $7.1 million and $7.3 million
held within the sub-holding company of NPS Bahrain at March 31, 2018 and 2017 respectively.
We
have a committed revolving credit facility (the “Credit Facility”) with commercial banks under which the maximum borrowing
at any time is $50.0 million. At March 31, 2018, we had borrowings under the credit facility of $7.0 million due within
one year. During the first quarter of 2018, we used cash to fund a variety of activities including certain working capital needs,
capital expenditures, repayment of short term borrowings, and the payment of employees’ end of service benefits.
A
substantial portion of the cash held by foreign subsidiaries at each of March 31, 2018 and March 31, 2017 was reinvested in our
international operations as our current intent is to use this cash to, among other things, fund the operations of our foreign
subsidiaries. If we decide at a later date to repatriate those funds to the United Arab Emirates, we may be required to pay withholding
tax on some of these funds, mainly in Saudi Arabia, Indonesia, Malaysia and Algeria. However, the repatriation of funds to the
UAE is largely in the form of settlement of inter-company balances relating to purchases of fixed assets and inventory by the
holding company, which is not subject to withholding taxes.
The
Company does not face any significant capital restrictions on cash outflows from foreign subsidiaries to the holding company or
other group companies.
We
believe that cash on hand, cash flows generated from operations, and liquidity available through our credit facility, including
the issuance of commercial papers will provide sufficient liquidity to manage our global cash needs.
Cash
Flows
Cash
flows provided by (used in) each type of activity were as follows for the three months ended March 31, 2018 compared to the three
months ended March 31, 2017:
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash
Provided by/(used in):
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$
|
10,959
|
|
|
$
|
25,122
|
|
Investing
Activities
|
|
|
(7,261
|
)
|
|
|
(7,626
|
)
|
Financing
Activities
|
|
|
(344
|
)
|
|
|
(3,876
|
)
|
Net
change in cash and cash equivalents
|
|
$
|
3,354
|
|
|
$
|
13,620
|
|
Operating
Activities
Cash
flows from operating activities provided cash of $11.0 million and $25.1 million for the three months ended March 31, 2018 and
2017, respectively. Cash flows from operating activities decreased $14.2 million in the first quarter of 2018 primarily due to
changes in the components of our working capital (unbilled revenues, receivables, inventories and accounts payable) compared to
the three months ended March 31, 2017.
Investing
Activities
Cash
flows used in investing activities was ($7.3) million and ($7.6) million for the three months ended March 31, 2018 and 2017, respectively.
The decrease of $0.4 million in cash used is primarily attributed to an increase of $2.7 million in the funding of capital assets
(funding was $10.3 million and $7.6 million for the three months ended March 31, 2018 and 2017, respectively) and an increase
of $3.0 million of investments in short-term deposits with banks. 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. The increase in capital expenditures was the result of our revenue growth.
There
were no disposal of assets for the three months ended March 31, 2018 nor 2017, respectively.
Financing
Activities
Cash
flows used in financing activities were $0.3 million and $3.9 million for the three months ended March 31, 2018 and 2017, respectively.
The decrease of $3.5 million in cash used was primarily due to increase in our borrowing activity, which was partially offset
by the payment of dividends to our shareholders. Our principal recurring financing activity is the borrowing and repayment of
debt to ensure that we have the appropriate levels of liquidity as well as the payment of dividends and Zakat on behalf
of our shareholders.
We
had net draws of commercial paper and other short-term debt of $50.0 million in the first quarter of 2018, and net repayments
of $3.8 million in the first quarter of 2017.
We
paid $48.2 million of dividends to our shareholders in the three months ended March 31, 2018.
Murabaha
Credit Facilities
$150
Million Facility
The
Company entered into a syndicated Murabaha facility (“the Facility”) for $150.0 million which was fully drawn by the
Company on November 26, 2014. Murabaha is an Islamic financing structure where a set fee is charged rather than interest. This
type of loan is legal in Islamic countries as banks are not authorized to charge interest on loans, hence banks charge
a flat fee for continuing daily operations of the bank, in lieu of interest.
The
Facility of $150.0 million is from a syndicate of three commercial banks. The Facility is repayable in semi-annual instalments
ranging from $7.5 million to $19.3 million commencing from May 26, 2017 with the last instalment due on November 26, 2020. The
Facility carries a set fee which equals to the stated interest rate of six months LIBOR plus a fixed profit margin of 2.9% per
annum. The Facility is partially secured by personal guarantees of two individual shareholders on a pro-rata basis with their
respective shareholding percentages. Letters of awareness have been executed by the corporate shareholders as credit support for
the Facility.
On
May 28, 2017, the Facility (“Amended Facility”) was amended to extend the maturity of the agreement. The Amended Facility
is repayable in quarterly installments ranging from $1.1 million to $57.9 million commencing from August 1, 2019 with the last
installment due on May 28, 2025. The Amended Facility carries a stated interest rate of three months LIBOR plus a fixed profit
margin of 3.25% per annum. The Amended Facility is partially secured by personal guarantee of one individual shareholder on a
pro-rata basis with his shareholding percentage. Letters of awareness have been executed by the corporate shareholders as credit
support for the Facility.
All
of the other terms of the Facility remained the same except the fixed interest charge was revised from 2.9% in 2014 to 3.25% in
2017. The costs of our loan arrangement fees increased to $0.10 million for the three months ended March 31, 2018 from $0.08 million
for the three months ended March 31, 2017.
The
Amended Facility contains certain covenants, which, among other things, require the maintenance of a total debt-to-total capitalization
ratio, restrict certain merger transactions or the sale of all or substantially all of our assets or a significant subsidiary
and limit the amount of subsidiary indebtedness. Upon the occurrence of certain events of default, our obligations under the Amended
Facility may be accelerated. Such events of default include payment defaults to lenders under the Amended Facility, covenant defaults
and other customary defaults. As of March 31, 2018, we were in compliance with all of the credit facility’s covenants.
$50
Million Facility
We
have a committed revolving credit facility with commercial banks under which the maximum borrowing at any time is $50.0
million. Borrowings under this facility are only used to fund capital expenditures. At March 31, 2018, we had borrowings under
the credit facility of $7.0 million due within one year. During the first quarter of 2018, we used cash generated by our operations
to fund a variety of activities including certain working capital needs, capital expenditures, repayment of short term borrowings,
and the payment of employees’ end of service benefits.
$50
Million Term Loan
The
Company entered into an additional $50.0 million term facility (“the Term Loan”) on February 4, 2018 with APICORP.
The loan is repayable by August 1, 2018. The facility carries a stated interest rate of one month LIBOR plus a fixed profit margin
of 1.50% per annum or $0.9 million until August 1, 2018. Borrowings under this facility were used to fund a special dividend issued
to our shareholders.
If
market conditions were to change and our revenue was reduced significantly, our cash flows and liquidity could be reduced. Should
this occur, we would seek alternative sources of funding, including additional borrowing under the credit facility.
Capital
Resources
In
the next twelve months, 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. If necessary, we may use short-term
debt to fund cash needs in various countries in excess of the cash generated in those specific countries.
Our
capital expenditures can be adjusted and managed by us to match market demand and activity levels. In light of the current market
conditions, capital expenditures in the next twelve months will be made as appropriate at a rate that we estimate would equal
$30 million to $35 million on an annualized basis. The expenditures are expected to be used primarily for normal, recurring items
necessary to support our business. We also anticipate making income tax payments in the range of $3 million to $5 million in the
next twelve months. For employees’ end of service benefits, we expect to pay between $1 million to $3 million to employees
in the next twelve months. See Note 9. “Employee benefits” of the notes to NPS’s consolidated financial statements
for further discussion.
As
discussed above, the Company’s total capital expenditures in the next twelve months is estimated to be equal to $30 million
to $35 million on an annualized basis. The expenditures are expected to be used primarily for normal, recurring items necessary
to support our business. Capital expenditures are financed through the Revolving Credit Facility. There is sufficient capacity
under this credit facility to meet our capital expenditure commitments.
Other
Factors Affecting Liquidity
Guarantee
agreements.
In the normal course of business with customers, vendors and others, the Company has entered into off-balance
sheet arrangements, such as surety bonds for performance, and other bank issued guarantees, which totaled $(Nil) million and $27.9
million as of March 31, 2018 and as of December 31, 2017, respectively. A liability is accrued when a loss is both probable and
can be reasonably estimated. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on
our consolidated financial statements.
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 adverse effect on our liquidity, consolidated results of operations
and consolidated financial condition. Two of our three largest customers, Saudi Aramco and Sonatrach, are owned by the governments
of Saudi Arabia and Algeria, respectively. It is customary for Saudi Aramco to delay payments of a portion (10%) of receivables
until all taxes due within the country are fully paid and settled.
Quantitative
and Qualitative Disclosure About Market Risk
Interest
Rate Risk
At
March 31, 2018, NPS had $150.0 million of long-term debt outstanding, with an interest rate of 3 months LIBOR plus
3.25%. Interest is calculated under the terms of NPS’s Murabaha agreement. Assuming no change in the amount outstanding,
the impact on interest expense of a 1% increase or decrease in the interest rate would be approximately $1.5 million per year.
NPS does not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates
applicable to NPS’ outstanding indebtedness.
Foreign
Currency Risk
NPS
is exposed to foreign currency risks that arise from normal business operations. These risks include transaction gains and losses
associated with Intercompany loans with foreign subsidiaries and transactions denominated in currencies other than a location’s
functional currency.
US
dollar balances in the UAE, KSA and Qatar entities are not considered to represent significant currency risk as the respective
currencies in these countries are pegged to the U.S. dollar. The company’s foreign currency risk arises from the settlement
of transactions in currencies other than the Company’s functional currency, specifically in Algerian Dinar, Libyan Dinar,
Indian Rupee and Indonesian Rupiah. However, customer contracts in these countries are largely denominated in US dollars.
Credit
Risk
Credit
risk is the risk that one party to a financial instrument may fail to discharge an obligation and cause the other party to incur
a financial loss. NPS is exposed to credit risk on its accounts receivable and other receivables and certain other assets as reflected
in our consolidated balance sheet.
The
Company seeks to manage its credit risk with respect to banks by only dealing with reputable banks and with respect to customers
by monitoring outstanding receivables and ensuring close follow-ups. 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 the customers operate.
The Company sells its products to a large number of customers, mainly to national oil companies in the GCC region. The Saudi Arabian
Oil Company (“Saudi Aramco”), owned by the government of Saudi Arabia, and Sonatrach, owned by the government of Algeria,
represented 33% (38% in 2017) and 22% (25% in 2017) of the Company’s accounts receivable balance at March 31, 2018. No other
customer accounted for greater than 10% of the Company’s accounts receivable balance.
With
respect to credit risk arising from the financial assets of the Company, including receivables and bank balances, the Company’s
exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these
assets in the consolidated balance sheet. Cash and cash equivalents are primarily held with banks and financial institution counterparties,
which are rated A1 to Baa3, based on Moody’s ratings.
Liquidity
risk
Liquidity
risk is the risk that the Company may not be able to meet its financial obligations as they fall due. The Company’s approach
to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities
when due, under both normal and stressed conditions, without incurring unacceptable losses, or risking its liabilities. The company
maintains cash flow forecasts to monitor its liquidity position.
Accounts
payable are normally settled within the terms of purchase from the supplier. As detailed on page 41, the company has
sufficient un-utilized capacity under its revolving credit facility to manage short term financing requirements in relation to
its capital expenditure.
Market
Risk
NPS
is exposed to market risks primarily from changes in interest rates on its long-term borrowings as well as fluctuations in foreign
currency exchange rates applicable to its foreign subsidiaries and where local exchange rates are not pegged to the US Dollar
(Algeria, Libya and Iraq). However, the foreign exchange risk is largely mitigated by the fact that all customer contracts are
denominated in US Dollars.
NPS
does not use derivatives for trading purposes, to generate income or to engage in speculative activity.
Off-Balance
Sheet Arrangements
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. It is not practicable to estimate the fair value of these financial
instruments. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on our consolidated
financial statements.
As
of March 31, 2018, we had no material off-balance sheet financing arrangements other than normal operating leases. As such, we
are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing
arrangements.
Related
Party Transactions
Related
parties include shareholders, key management personnel, and jointly controlled entities. In the ordinary course of business, such
related parties provide goods and render services to the Company at mutually agreed rates. In addition, certain shareholders received
short-term loans and or advances in connection with the sale of the business to the new shareholders in 2014, all of which were
subsequently fully settled by the respective parties. The transactions with related parties are made at mutually agreed terms.
Outstanding balances are unsecured, interest free and settlement occurs in cash.
For
further details about our transactions with related parties please refer to “Certain Relationships and Related Party Transactions”
and Note 12. “Related party transactions” of the notes to NPS’s consolidated financial statements for further
discussion.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenue and expenses and related disclosures as well as disclosures about any contingent assets and liabilities.
We base these estimates and judgments on historical experience and other assumptions and information that are believed to be reasonable
under the circumstances. Estimates and assumptions about future events and their effects are subject to uncertainty and, accordingly,
these estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the
business environment in which we operate changes.
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.
Our Board of Directors has reviewed our critical accounting estimates and the disclosure presented below. During the past two
fiscal years, we have not made any material changes in the methodology used to establish the critical accounting estimates, and
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 NPS’ consolidated financial statements
and related notes included in this document.
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 individual accounts receivable balances and balances
which have been outstanding greater than 90 days are reviewed individually for collectability.
Property,
plant and equipment
Property,
plant and equipment is stated at cost. 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 which are in transit at the reporting date. No depreciation is
charged to purchase capital work in progress. Depreciation or amortization of property 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
|
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. Indicative events or circumstances 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. 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.
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 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.
Intangible
assets
The
Company’s intangible assets with finite lives consist of customer contracts
acquired
in connection with the acquisition of NPS Bahrain in 2014.
The cost of intangible assets
with finite lives is amortized over the estimated period of economic benefit, ranging from 1 to 3 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.
Revenue
recognition
The
Company’s revenues are generated principally from providing services and the related equipment. Revenues are recognized
when the services are rendered and collectability is reasonably assured. Revenues from services and equipment are based on fixed
or determinable priced purchase orders or contracts with the customer and do not include the right of return. Rates for services
and equipment are priced on a per day, per unit of measure, per man hour or similar basis. Sales taxes collected from customers
and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated
statements of income. Services performed but not billed at the end of the reporting period are classified as unbilled revenues.
The unbilled revenues for services performed are calculated based on the rates stated in the purchase orders or contracts with
the customers. The unbilled revenues are typically billed within one to six months depending on the nature of customer contract.
Zakat
Zakat
is provided for Saudi Arabian subsidiaries in accordance with Saudi Arabian fiscal regulation. The provision is not charged through
consolidated statement of income but instead charged through equity. Zakat is a shareholder obligation and is computed on the
Saudi shareholders’ share of equity or net income using the basis defined under the Zakat regulations.
Income
taxes
The
Company is based in the Emirate of Dubai (“Dubai”) in the UAE, where no federal taxation exists. Dubai has issued
corporate tax decrees that theoretically apply to all businesses established in the UAE. However, in practice, these laws have
not been applied. The Company has not paid or accounted for any payment of income taxes since its inception. The Company is aware
of the risk that the tax decrees may be more generally applied in Dubai in the future and of the remote risk that they may be
applied retrospectively. The Company has provided for income taxes based on the tax laws and rates in effect in the foreign countries
where the Company operates and earns income. The income taxes in these jurisdictions vary substantially.
The
Company recognizes the amount of taxes payable or refundable for the year. In addition, deferred tax assets and liabilities are
recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns.
A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized.
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets are dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected future taxable income and tax-planning strategies in making this
assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which
the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits
of these deductible differences, net of the existing valuation allowances.
The
Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized
income tax positions are measured at the largest amount that is greater than 50% likely of being realized upon settlement. The
Company recognizes interest and penalties related to an underpayment of income taxes, where applicable, in its consolidated statements
of operations as a component of income tax expense.
Internal
Controls and Procedures
NPS
is not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes Oxley Act of 2002, and
is therefore not required to make a formal assessment of the effectiveness of NPS’s internal control over financial reporting.
Subsequent to becoming a subsidiary of a public company, NPS’s publicly traded parent company will be required to comply
with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which will require its management
to certify financial and other information in its quarterly and annual reports and provide an annual management report on the
effectiveness of NPS’s internal control over financial reporting.
GES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with the financial statements and related notes of GES included
elsewhere in this Report
. This discussion contains
forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends
that may affect our future operating results or financial position. Actual results and the timing of events may differ materially
from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections
entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
References
in this section to the “Company,” “Group,” “us” or “we” refer to GES.
Description
of the Business
GES
was incorporated in the Sultanate of Oman as a limited liability company on May 31, 2005. On June 20, 2013, GES became a closed
Omani joint stock company. The business activities of the Company and its subsidiaries (together referred to as “the Company”)
include providing drilling equipment on rental and related services, providing well engineering services, directional drilling
services, import and sale of oilfield equipment and rendering of specialized services to oil companies. The Company consists of
twelve locally incorporated subsidiaries.
GES
operates largely in the Sultanate of Oman. We also have operations in other key geographies across the Middle East and North Africa
(“MENA”) region.
GES
has established a solid position in Drilling Technology Solutions, Well Intervention and Fishing & Remedial services. GES
has expanded its services portfolio in recent years and now the Company provides a broad suite of product and service offerings
that are essential in the drilling and completion of new oil and natural gas wells and in the remedial work on existing wells.
GES operates through eight service lines: Well Intervention Services, Drilling Technology Solutions, Fishing & Remedial Services,
Work-over Services, Performance Drilling & Evaluation, Production & Completion Services, Drilling & Completion Fluids
Technology and Services, and Environmental Services.
Most
of Oman’s oil production is generated from technically challenging reservoirs. The country’s reservoir formations
are hard in nature, located in a wide range of depths and produce a wide range of American Petroleum Institute (API) gravity oil.
Due to these technical challenges, well rates and recovery factors are generally lower in the country as compared to regional
peers. GES has a strong fleet of tools and equipment and advanced API certified facilities for efficient maintenance and repair
of its tools and equipment. These facilities are located in each of Nizwa, to support operations in the North of Oman, and in
Nimr, to support operations in the South.
Marketing
and Customers
GES
has leveraged its technical abilities and track record of successful operations to establish long-tenured relationships with its
client base which includes the major operators in Oman, in particular Petroleum Development Oman (PDO), British Petroleum (BP),
Occidental Petroleum Corporation (OXY), and Medco Energy. We are also currently working to increase our operations with international
clients like Saudi Aramco, Sonatrach and Kuwait Oil Company. In our target regions, contract duration is typically at least three
years and customer retention rates are generally high as our clients do not switch oilfield service providers frequently. GES
has a successful track record of extending its contracts with a renewal rate greater than 90% over the past five years.
Products
and Services
Business
segment
|
|
Oman
|
|
Saudi
Arabia
|
|
Kuwait
|
|
Algeria
|
Well
Intervention
|
|
✓
|
|
|
|
|
|
|
Drilling
Technology Solutions
|
|
✓
|
|
✓
|
|
|
|
✓
|
Fishing
& Remedial
|
|
✓
|
|
✓
|
|
✓
|
|
✓
|
Work-over
|
|
✓
|
|
|
|
|
|
|
Cementing
|
|
✓
|
|
|
|
|
|
|
Performance
Drilling & Evaluation
|
|
✓
|
|
|
|
|
|
|
Performance
Drilling & Evaluation
|
|
✓
|
|
|
|
|
|
|
Production
& Completion
|
|
✓
|
|
|
|
|
|
|
Drilling
& Completion Fluids
|
|
✓
|
|
|
|
|
|
|
Industry
Trends
GES
operates in key geographies within the MENA region, which continues to be a vital source of global energy supply. According to
Douglas Westwood Onshore Drilling and Production Outlook dated Q4 2017, during the recent industry downturn the MENA region saw
less of a reduction in oil and gas activities than North America. In many MENA countries, the energy sector continues to serve
as the major source of national revenues. Even at lower oil and gas prices, such oil and gas dependent economies have continued
to maintain significant production activities. Further, the Middle East markets have among the lowest breakeven cost of oil and
natural gas production in the world, which enables them to continue to produce profitably at significantly lower commodity prices.
Projected
increases in energy demand are expected to lead to sustained capital expenditures on drilling, completion and production of oil
and natural gas wells in the MENA region. The rise in oil prices in the last six months has provided relative stability to the
market. However, the adherence of Oman to OPEC’s requirement to reduce production by an estimated 5% has affected activity
in certain areas of our business.
Key
Performance Indicators
GES
uses a variety of operational and financial measures to assess its performance. Among the measures considered by management are
Revenue, Net income, and Adjusted EBITDA.
Revenue
GES
analyzes its revenue by comparing actual monthly revenue to internal projections and prior periods in order to assess performance,
identify potential areas for improvement, and determine whether the business is meeting management’s expectations.
Net
Income
GES
views net income as an important indicator in order to assess performance, identify potential areas for improvement, and determine
whether the business is meeting management’s expectations.
Adjusted
EBITDA
GES
views Adjusted EBITDA as an additional important indicator of performance. GES defines Adjusted EBITDA as net income plus interest
expense, taxes, depreciation, amortization, impairment and transaction expenses.
Transaction
expenses are defined as non-recurring expenses incurred in connection with the purchase of GES shares by
NESR.
Note
Regarding Non-GAAP Financial Measures
Adjusted
EBITDA is not a financial measure presented in accordance with GAAP. GES believes that the presentation of this non-GAAP financial
measure will provide useful information to investors in assessing its financial performance and results of operations as GES’s
board of directors, management and investors use Adjusted EBITDA to assess its financial performance because it allows them to
compare GES’s operating performance on a consistent basis across periods by removing the effects of its capital structure
(such as varying levels of interest expense), asset base (such as depreciation and amortization) and items outside the control
of its management team. This non-GAAP financial measure should not be considered as an alternative to the most directly comparable
GAAP financial measure. This non-GAAP financial measure has important limitations as an analytical tool because it excludes some
but not all items that affect the most directly comparable GAAP financial measure. You should not consider Adjusted EBITDA in
isolation or as a substitute for an analysis of GES’s results as reported under GAAP. Because Adjusted EBITDA may be defined
differently by other companies in its industry, GES’s definition of this non-GAAP financial measure may not be comparable
to similarly titled measures of other companies, thereby diminishing its utility. GES’s financial statements in this Report
are
presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Executive
Overview
During
both the first quarter of 2018 and the first quarter of 2017, the industry faced a challenging environment in many of our key
markets. Our primary focus was to maintain our market share in Oman while expanding our geographical footprint and service offering
in order to sustain our long-term growth plans.
Our
results for the three months ended March 31, 2018 include:
|
●
|
A
decrease in net revenue of RO 2.4 million or 13% as compared to the prior year’s first quarter. The decrease was due
to the expiry of a significant client contract of RO 3.2 million, partially offset with higher activity under ongoing contracts
of RO 0.8 million, of which RO 0.3 million was generated from Oman operations and RO 0.5 million came from our MENA region
operations outside of Oman.
|
|
|
|
|
●
|
A
decrease in net income of RO 2.6 million or 94%, from 15% of revenue in the first quarter of 2017 to 1% of revenue in the
first quarter of 2018, mostly due to the termination of a significant international drilling equipment rental contract which
had higher profit margins relative to ongoing activities.
|
|
|
|
|
●
|
A
decrease in Adjusted EBITDA of RO 2.7 million or 47% as compared to the prior year’s first quarter. As a percentage
of revenue, Adjusted EBITDA decreased from 32% of revenue in the first quarter of 2017 to 20% of revenue in 2018, largely
due to a change in the revenue mix with the termination of a significant international drilling equipment rental contract
as explained above.
|
In
2018, our key focus was on client service delivery in order to enhance our market share. The following highlights a few examples
of strategic actions that occurred during the period which management believes will position the Company well for long-term value
creation:
|
●
|
In
Oman, we have secured a 4 year contract representing the Company’s first Integrated Services Project covering 19 services
and commencing in June 2018.
|
|
|
|
|
●
|
We
have been awarded an 8-year exclusive contract for downhole tool rentals in Upper Shuaiba, commencing in July 2018.
|
|
|
|
|
●
|
We
were awarded a 3 month extension to our Hoist Services contract, commencing in May 2018.
|
|
|
|
|
●
|
We
were awarded a new contract for 3 years covering Fishing Services and commencing in February 2018.
|
|
|
|
|
●
|
We
have secured a new contract for downhole tool rentals, covering a scope of 8 wells in 2018 and commencing from April 2018
|
Results
of Operations
The
discussions below relating to significant line items from our consolidated statements of income (loss) are based on available
information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where
appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable,
have quantified the impact of such items. In addition, the discussions below for revenue and cost of revenue are on a total basis
as the business drivers for all services are similar. All amounts in tabulations in this section are in Omani Rials, unless otherwise
stated.
The
following is a comparison of our result of operations for the three months ended March 31, 2018 compared to the three months ended
March 31, 2017:
(In
Omani Rials)
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
As
% of Revenues
|
|
|
|
|
|
|
|
Description
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Variance
|
|
|
%
|
|
|
|
RO
|
|
|
RO
|
|
|
|
|
|
|
|
|
RO
|
|
|
|
|
Net
revenue
|
|
|
15,647,618
|
|
|
|
18,065,353
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
(2,417,735
|
)
|
|
|
(13
|
)%
|
Direct
costs
|
|
|
(6,006,183
|
)
|
|
|
(5,600,783
|
)
|
|
|
38
|
%
|
|
|
31
|
%
|
|
|
405,400
|
|
|
|
7
|
%
|
Staff
costs
|
|
|
(4,886,045
|
)
|
|
|
(5,076,466
|
)
|
|
|
31
|
%
|
|
|
28
|
%
|
|
|
(190,421
|
)
|
|
|
(4
|
)%
|
Depreciation
and amortization
|
|
|
(1,947,924
|
)
|
|
|
(2,269,049
|
)
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
(321,125
|
)
|
|
|
(14
|
)%
|
Gross
profit
|
|
|
2,807,466
|
|
|
|
5,119,055
|
|
|
|
18
|
%
|
|
|
28
|
%
|
|
|
(2,311,589
|
)
|
|
|
(45
|
)%
|
Administrative
and general expense
|
|
|
(1,865,230
|
)
|
|
|
(1,663,814
|
)
|
|
|
12
|
%
|
|
|
9
|
%
|
|
|
201,416
|
|
|
|
12
|
%
|
Impairment
loss on trade and other receivables including contract assets
|
|
|
(37,880
|
)
|
|
|
-
|
|
|
|
<1
|
%
|
|
|
N/A
|
|
|
|
37,880
|
|
|
|
N/A
|
|
Finance
costs
|
|
|
(346,832
|
)
|
|
|
(318,986
|
)
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
27,846
|
|
|
|
9
|
%
|
Finance
income
|
|
|
-
|
|
|
|
156,258
|
|
|
|
N/A
|
|
|
|
1
|
%
|
|
|
(156,258
|
)
|
|
|
(100
|
)%
|
Other
income
|
|
|
36,931
|
|
|
|
57,326
|
|
|
|
<1
|
%
|
|
|
<1
|
%
|
|
|
(20,395
|
)
|
|
|
(36
|
)%
|
Share
of loss of equity-accounted investee (net of tax)
|
|
|
(79,366
|
)
|
|
|
(65,346
|
)
|
|
|
1
|
%
|
|
|
<1
|
%
|
|
|
14,020
|
|
|
|
21
|
%
|
Profit
before taxation
|
|
|
515,089
|
|
|
|
3,284,493
|
|
|
|
3
|
%
|
|
|
18
|
%
|
|
|
(2,769,404
|
)
|
|
|
(84
|
)%
|
Income
tax expense
|
|
|
(353,605
|
)
|
|
|
(565,868
|
)
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
(212,263
|
)
|
|
|
(38
|
)%
|
Net
profit and total comprehensive income for the period
|
|
|
161,484
|
|
|
|
2,718,625
|
|
|
|
1
|
%
|
|
|
15
|
%
|
|
|
(2,557,141
|
)
|
|
|
(94
|
)%
|
The
following is a non-GAAP measure used by the Company to assess its results of operations:
(In
Omani Rials)
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
As
% of
Revenues
|
|
|
Variance
|
|
Description
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
RO
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
161,484
|
|
|
|
2,718,625
|
|
|
|
1
|
%
|
|
|
15
|
%
|
|
|
(2,557,141
|
)
|
|
|
(94
|
)%
|
Add:
Income tax expense
|
|
|
353,605
|
|
|
|
565,868
|
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
(212,263
|
)
|
|
|
(38
|
)%
|
Less:
Finance income
|
|
|
-
|
|
|
|
(156,258
|
)
|
|
|
<1
|
%
|
|
|
1
|
%
|
|
|
(156,258
|
)
|
|
|
(100
|
)%
|
Add:
Finance costs
|
|
|
346,832
|
|
|
|
318,986
|
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
27,846
|
|
|
|
9
|
%
|
Add:
Depreciation and amortization
(1)
|
|
|
2,064,400
|
|
|
|
2,384,605
|
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
(320,205
|
)
|
|
|
(13
|
)%
|
Add:
Transaction expenses
|
|
|
168,226
|
|
|
|
-
|
|
|
|
1
|
%
|
|
|
N/A
|
|
|
|
168,226
|
|
|
|
N/A
|
|
Adjusted
EBITDA
|
|
|
3,094,547
|
|
|
|
5,831,826
|
|
|
|
20
|
%
|
|
|
32
|
%
|
|
|
(2,737,279
|
)
|
|
|
(47
|
)%
|
(1)
The depreciation and amortization value above includes amounts recorded under Administrative and General Expense.
Net
Revenue.
Net revenue is comprised of gross revenue from the sale of products and services less volume discounts. Net revenue
for the three months ended March 31, 2018 decreased by RO 2.4 million, or 13%, to RO 15.6 million from RO 18.1 million for the
three months ended March 31, 2017. The decrease was due to the expiry of a significant client contract of RO 3.2 million, partially
offset with higher activity under ongoing contracts of RO 0.8 million
Direct
Costs.
Direct costs for the three months ended March 31, 2018 increased by RO 0.4 million, or 7%, to RO
6.0 million from RO 5.6 million for the three months ended March 31, 2017. Direct costs as a percentage of total revenue
for the three months ended March 31, 2018 was 38% compared to 31% for the three months ended March 31, 2017, which represents
an increase of 7%. Such increases were mainly due to a change in revenue mix towards higher inventory or product intensive segments,
partially offset by the non-repeat of the reversal of excess inventory provisions which were recorded in the first quarter of
the prior year.
Staff
Costs.
Staff costs for the three months ended March 31, 2018 decreased by RO 0.2 million, or 4%, to RO 4.9
million from RO 5.1 million for the three months ended March 31, 2017 largely due to staff headcount reductions which were implemented.
Staff costs as a percentage of total revenue for the three months ended March 31, 2018 was 31% compared to 28% for the
three months ended March 31, 2017, which represents an increase of 3%. This increase as a percentage of total revenue was due
to the change in revenue mix resulting from the termination a significant equipment rental contract which had higher margins relative
to ongoing business operations.
Depreciation
and Amortization
. Depreciation and amortization for the three months ended March 31, 2018 decreased by RO 0.3 million,
or 14%, to RO 2.0 million from RO 2.3 million for the three months ended March 31, 2017. Depreciation and amortization as a percentage
of total revenue for the three months ended March 31, 2018 and 2017 was 12% and 13% respectively, which represents a decrease
of 1%. This decrease in depreciation and amortization was as a result of some fixed assets becoming fully depreciated during the
prior year.
Administrative
and general expense.
Administrative and general expense, which represents costs associated
with managing and supporting our operations, increased by RO 0.2 million, or 12%, to RO 1.9 million for the three months ended
March 31, 2018 from RO 1.7 million for the three months ended March 31, 2017. The increase in administrative and general expenses
is mostly due to an increase in professional fees and transaction expenses associated with the purchase of GES shares by SCF Partners
and NESR
.
Impairment
loss on trade and other receivables including contract assets.
Impairment loss on trade and other receivables including
contract assets increased by RO 0.04 million to RO 0.04 million for the three months ended March 31, 2018 from RO (Nil) million
for the three months ended March 31, 2017. The increase was due to impairment losses resulting from an assessment of collectability
of receivables during the first quarter of 2018.
Finance
Cost.
Finance cost increased by RO 0.03 million, or 9%, to RO 0.35 million for the three months ended March 31, 2018 from
RO 0.32 million for the three months ended March 31, 2017. The minor increase was due to higher utilization of the working capital
facility during the first quarter of 2018.
Finance
Income.
Finance income decreased by RO 0.2 million, or 100% to RO (Nil) million for the three months ended March 31, 2018
from RO 0.2 million for the three months ended March 31, 2017. This decrease is due to the full re-payment of the related party
receivables of Mubadarah during the year 2017.
Other
income, net.
Other income, net, decreased by RO 0.02 million, or 36% to RO 0.04 million for the three months ended March
31, 2018 from RO 0.06 million for the three months ended March 31, 2017. The decrease is due to the drop in office rent charged
to Mubadarah Investment LLC group related parties.
Share
of loss of equity-accounted investee, net of tax.
Share of loss of equity-accounted investee, net of tax increased by
RO 0.01 million, or 21% to RO 0.08 million loss for the three months ended March 31, 2018 from RO 0.07 million loss for the three
months ended March 31, 2017. The increase is due to higher losses of Tasneaa Oil and Gas Technology LLC.
Taxation.
Taxation decreased by RO 0.2 million, or 38%, to RO 0.4 million for the three months ended March 31, 2018 from RO 0.6
million for the three months ended March 31, 2017. This decrease is primarily due to lower profits in the first quarter of 2018.
Taxation charge did not decrease in proportion to the profits as certain Subsidiaries recorded profit during the three months
ended March 31, 2018 for which tax had to be provided in spite of losses in certain other Subsidiaries.
Net
Profit.
Net profit was RO 0.2 million for the three months ended March 31, 2018 as compared with net income of RO 2.7
million for the three months ended March 31, 2017.
Liquidity
Our
objective in financing our business is to maintain sufficient liquidity, adequate financial resources and financial flexibility
in order to fund the requirements of our business. During the first quarter of 2018 and the first quarter of 2017, we used cash
to fund a variety of activities including certain working capital needs, capital expenditures, repayment of short term borrowings,
and the payment of employees’ end of service benefits. We believe that cash flows generated from operations and the available
bank loans and bank overdraft facility, including the discounted bills, will provide sufficient liquidity to manage our cash needs.
We have obtained our bank loans from National Bank of Oman and Ahli Bank.
(i)
New term loan:
In
November 2015, the Company had re-financed all of its existing bank term loans with National Bank of Oman for a single term loan
of RO 23.10 million (“the new term loan”) (“Tranche A”). As on March 31, 2018, the outstanding amount
on this new term loan (“Tranche A”) was RO 12.8 million.
The
new term loan carries interest at the rate of LIBOR + 3.50% per annum and is repayable with quarterly instalments, starting 6
months from the drawdown in 18 equal instalments until July 2020.
During
2017, a new term loan (“Tranche B”) was availed by the Company to the extent of RO 1.96 million, out of which RO 1.8
million was outstanding at March 31, 2018. The “Tranche B” loan is repayable in equal quarterly installments starting
18 months from the first drawdown until June 2022.
The
new term loan (“Tranche A and Tranche B”) contain covenants which among others, require certain financial ratios to
be maintained which include maintaining a minimum debt service coverage ratio of 1.25.
Working
capital funded facilities including overdraft, bill discounting and loan against trust receipts (“LTR”) facility carry
an interest equal to US Dollar LIBOR for the applicable interest period, plus a margin of 3.50% per annum, and the bank overdraft
carries an interest rate of LIBOR plus 3.5% subject to a floor level of 5%.
(ii)
Other term loan:
The
Company has also availed a term loan to the extent of RO 1.7 million from Ahli Bank. This balance is repayable with nine quarterly
installment starting seven months from the first drawdown until December 2019 and carries interest at the rate 3 months / 6 months
LIBOR + 4% per annum. RO 1.5 million of this loan is outstanding at March 31, 2018.
This
other term loan has covenants which among others, certain financial ratios to be maintained including maintaining a minimum debt
service coverage ratio of 1.25.
Cash
Flows
Cash
flows provided by / (used in) each type of activity were as follows for the three months ended March 31, 2018, and 2017:
(In
Omani Rials)
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cash
Provided by/(used in):
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
512,949
|
|
|
|
3,835,715
|
|
Investing
Activities
|
|
|
(1,325,117
|
)
|
|
|
(423,900
|
)
|
Financing
Activities
|
|
|
(481,052
|
)
|
|
|
(2,955,635
|
)
|
Net
change in cash and cash equivalents
|
|
|
(1,293,220
|
)
|
|
|
456,180
|
|
Operating
Activities
Cash
flows from operating activities provided cash of RO 0.5 million and RO 3.8 million for the three months ended March 31, 2018 and
2017, respectively. Cash flows from operating activities decreased by RO 3.3 million in the first quarter of 2018 primarily due
to a decrease in profit before tax as well as changes in the working capital components (inventories, trade and other receivables
and trade payables) for the three months ended March 31, 2018.
Investing
Activities
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.
Cash
flows used in investing activities increased by RO 0.9 million during the three months ended March 31, 2018, as compared to the
three months ended March 31, 2017. Expenditures for capital assets including capital work in progress totaled RO 1.3 million and
RO 0.4 million for the first quarters of 2018 and 2017, respectively. The increase in capital expenditures (CAPEX) in the first
quarter of 2018 is due to ramp up of new equipment to service new contract awards as summarized in the Executive Overview above
and for which the Company anticipates an increase in activity and revenues largely in the second half of 2018 .
Proceeds
from the disposal of assets were RO 0.08 million and RO (null) million for the three months ended March 31, 2018 and 2017, respectively.
The disposals related to idle and obsolete tools and drilling equipment.
Financing
Activities
Cash
flows used in financing activities decreased by RO 2.5 million in the three months ended March 31, 2018, mainly as a result in
net cash outflow from repayment of borrowings of RO 2.2 million (RO 3.7 million in 2017), partially offset by net cash inflows
for related party balances of RO 0.8 million (outflow of RO 2.6 million in 2017), net cash inflow resulting from the net movement
in short term bank borrowings during the respective quarter of RO 0.4 million (RO 2.3 million in 2017) and net cash inflow from
bank borrowings availed of RO 0.6 million (RO 1.0 million in 2017).
Capital
Resources
For
the upcoming twelve month period, cash on hand, cash flows from operating activities and the available overdraft 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. If necessary, we
may use short-term debt to fund cash needs in excess of the cash generated from operations.
Our
objective when managing capital is to safeguard our ability to continue as a going concern in order to provide returns for shareholders
and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
In
order to maintain or adjust the capital structure, we may adjust the amount of dividends paid to shareholders, return capital
to shareholders, issue new shares or sell assets to reduce debt.
Capital
is monitored based on the “gearing ratio”. This ratio is calculated as net debt divided by total capital. Net debt
is calculated as total borrowings (including current and non-current borrowings as shown in the statement of financial position)
less cash and cash equivalents. Total capital is calculated as equity as shown in the statement of financial position plus net
debt.
Details
of the Company’s bank covenants and its compliance thereto are set out in Note 10 of the Financial Statements.
Market
Risk
Interest
rate risk is the risk associated with the fluctuations in market interest rates and the effect it has on the financial position
and cash flows of GES. The risk arises when interest-bearing financial assets and liabilities are affected by the interest rate
volatility within a specified period. GES is exposed to interest rate risk primarily on its long-term LIBOR based loan from the
National Bank of Oman SAOG and Ahli Bank.
Related
Party Transactions
Related
parties comprise the shareholders, key management personnel, subsidiary companies, jointly controlled entity, and associate, business
entities in which the Company has the ability to control of exercise significant influence in financial and operating decisions
and other related parties which are part of Mubadarah Investment LLC Group. In the ordinary course of business, such related parties
provide goods and render services to the Group at mutually agreed rates.
For
further details about our transactions with Related Parties please refer to “Certain Relationships and Related Party Transactions”
and Note 14 (Related Party Transactions) of GES’ financial statements.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments
that affect the application of accounting policies and reported amounts of assets, liabilities, revenue and expenses and related
disclosures as well as disclosures about any contingent assets and liabilities, the disclosure of contingent assets and liabilities
and the reported amounts of revenue and expenses.
We
base these estimates on historical experience and other assumptions and information that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Estimates
and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimate is revised and in any future periods affected. In particular, estimates that involve uncertainties and judgments
which have a significant effect on the consolidated financial statements include provisions for impairment of receivables and
inventories.
Impairment
of property, plant and equipment, intangible assets, and goodwill
GES
assesses assets or groups of assets, called cash-generating units (CGUs), for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset or CGU may not be recoverable; for example, changes in the Group’s business
plans, changes in the Group’s assumptions about commodity prices, low plant utilization, evidence of physical damage or,
for oil and gas assets, significant downward revisions of estimated oil and gas reserves or increases in estimated future development
expenditure or decommissioning costs. If any such indication of impairment exists, GES makes an estimate of the asset’s
or CGU’s recoverable amount. Individual assets are grouped into CGUs for impairment assessment purposes at the lowest level
at which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. A CGU’s
recoverable amount is the higher of its fair value less costs of disposal and its value in use. Where the carrying amount of a
CGU exceeds its recoverable amount, the CGU is considered impaired and is written down to its recoverable amount.
Fair
value less costs of disposal is the price that would be received to sell the asset in an orderly transaction between market participants
and does not reflect the effects of factors that may be specific to the Group and not applicable to entities in general. An assessment
is made at each year end as to whether there is any indication that previously recognized impairment losses may no longer exist
or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognized impairment loss
is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the
last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to the lower of its recoverable
amount and the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for
the asset in prior years. Impairment reversals are recognized in profit or loss. After a reversal, the depreciation charge is
adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis
over its remaining useful life.
Goodwill
is reviewed for impairment annually or more frequently if events or changes in circumstances indicate the recoverable amount of
the group of CGUs to which the goodwill relates should be assessed. In assessing whether goodwill has been impaired, the carrying
amount of the group of CGUs to which goodwill has been allocated is compared with its recoverable amount. Where the recoverable
amount of the group of CGUs is less than the carrying amount (including goodwill), an impairment loss is recognized. An impairment
loss recognized for goodwill is not reversed in a subsequent period.
Determination
as to whether, and by how much, an asset, CGU, or group of CGUs containing goodwill is impaired involves management estimates
on highly uncertain matters such as the effects of inflation and deflation on operating expenses, discount rates, production profiles,
reserves and resources, and future commodity prices, including the outlook for global or regional market supply-and-demand conditions
for crude oil, natural gas and refined products. Judgment is required when determining the appropriate grouping of assets into
a CGU or the appropriate grouping of CGUs for impairment testing purposes.
As
disclosed above, the recoverable amount of an asset is the higher of its value in use and its fair value less costs of disposal.
Fair value less costs of disposal may be determined based on similar recent market transaction data or, where recent market transactions
for the asset are not available for reference, using discounted cash flow techniques. Where discounted cash flow analyses are
used to calculate fair value less costs of disposal, accounting judgments are made about the assumptions market participants would
use when pricing the asset, CGU or group of CGUs containing goodwill and the test is performed on a post-tax basis.
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 Statement of profit and loss, 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 Statement of profit and loss 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. The Group’s 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 the Group is 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.
Deferred
tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or
the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet
date. Deferred tax assets and liabilities are not discounted. Deferred tax assets and liabilities are offset only when there is
a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred tax assets and
liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable
entities where there is an intention to settle the current tax assets and liabilities on a net basis or to realize the assets
and settle the liabilities simultaneously.
The
computation of GES’s 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 the Group, 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, the Group has 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.
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 Group grants credit
to customers based upon an evaluation of each customer’s financial condition. The Group periodically monitors the payment
history and ongoing creditworthiness of customers. An allowance for doubtful accounts is established at a level estimated by the
Group’s management to be adequate based upon various factors including historical experience, aging status of customer accounts,
payment history and financial condition of customers. Significant individual accounts receivable balances and balances which have
been outstanding greater than 90 days are reviewed individually for collectability. Account balances, when determined to be uncollectable,
are charged against the allowance.
Internal
Controls and Procedures
GES
is not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes Oxley Act of 2002, and
is therefore not required to make a formal assessment of the effectiveness of GES’ internal control over financial reporting
for that purpose. Subsequent to becoming a subsidiary of a public company, GES’ publicly traded parent company will be required
to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act of 2002, which will require its management
to certify financial and other information in its quarterly and annual reports and provide an annual management report on the
effectiveness of GES’ internal control over financial reporting.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information known to the Company regarding the beneficial ownership of our ordinary shares immediately
following consummation of the Business Combination by:
|
●
|
each
person who is the beneficial owner of more than 5% of the outstanding ordinary shares;
|
|
|
|
|
●
|
each
of our named executive officers and directors following the Business Combination;
|
|
|
|
|
●
|
all
named executive officers and directors of the following the Business Combination.
|
Beneficial
ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a
security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants
that are currently exercisable or exercisable within 60 days.
The
beneficial ownership percentages set forth in the table below with respect to NESR following the Business Combination are based
on 85,562,769 ordinary shares issued and outstanding upon closing, which number reflects: (i) the redemption of 1,916,511 shares
by shareholders, (ii) a total of $48,293,753 drawn down on the Backstop Commitment, (iv) a total of $50,000,000 drawn down on
the Hana Loan Agreement including $600,000 of an origination fee issued as ordinary shares of the Company at closing at
11.244 per share, a total of $2,400,000 paid under the Olayan Relationship Agreement and issued as ordinary shares of the Company
at closing at $11.244 per share, and (iii) interest totaling $4,700,000 paid to Hana Investments under the Shares Exchange Agreement.
Unless
otherwise indicated, we believe that all persons named in the table below have sole voting and investment power with respect to
all ordinary shares beneficially owned by them.
|
|
Number
of
|
|
|
|
|
|
|
Shares
|
|
|
%
|
|
Name
and Address of Beneficial Owners
|
|
|
|
|
|
|
|
|
Sherif
Foda
(1)
|
|
|
5,730,425
|
|
|
|
6.70
|
%
|
Melissa Cougle
|
|
|
-
|
|
|
|
-
|
|
Thomas
D. Wood
(1)
|
|
|
5,790,568
|
|
|
|
6.77
|
%
|
NESR
Holding Ltd
(1)
|
|
|
5,730,425
|
|
|
|
6.70
|
%
|
Antonio
J Campo Mejia
|
|
|
131,144
|
|
|
|
*
|
|
Hala
Zeibak
|
|
|
-
|
|
|
|
-
|
|
Salem
Al Noaimi
|
|
|
-
|
|
|
|
-
|
|
Mubadarah
Investment LLC
(5)
|
|
|
17,242,424
|
|
|
|
20.15
|
%
|
Nadhmi
Al-Nasr
|
|
|
-
|
|
|
|
-
|
|
Yasser
Al Barami
|
|
|
621,212
|
|
|
|
*
|
|
Andrew
Waite
|
|
|
-
|
|
|
|
-
|
|
Adnan
Ghabris
|
|
|
-
|
|
|
|
-
|
|
Backstop
Investor
(2)
|
|
|
4,829,375
|
|
|
|
5.64
|
%
|
Competrol
Establishment
(3)
|
|
|
3,000,000
|
|
|
|
3.51
|
%
|
Hana
Investments Co. WLL
(3)(4)
|
|
|
14,025,258
|
|
|
|
16.39
|
%
|
SV3
Holdings PTE Ltd.
(6)
|
|
|
6,825,000
|
|
|
|
7.98
|
%
|
Castle
SPC Ltd.
(7)
|
|
|
4,806,289
|
|
|
|
5.62
|
%
|
Al-Nowais
Investments LLC
(8)
|
|
|
4,806,289
|
|
|
|
5.62
|
%
|
All
directors and officers as a group (10 persons)
|
|
|
6,542,924
|
|
|
|
7.65
|
%
|
*less
than 1%.
(1)
Represents ordinary shares held directly by NESR Holdings Ltd., our Sponsor. Sherif Foda and Thomas Wood are shareholders
and directors of NESR Holdings Ltd. and share voting and dispositive control over the securities held by our Sponsor, and thus
share beneficial ownership of such securities. Each of Messrs. Foda and Wood disclaims beneficial ownership over any securities
owned by our Sponsor in which he does not have any pecuniary interest.
(2)
The Backstop Investor, MEA Energy Investment Company 2 Ltd, is wholly owned by Waha Capital.
(3)
Each of
Hana Investments
and
Competrol
Establishment are part of The Olayan Group.
(4)
Includes an aggregate of 418,001 shares issued to Hana Investments in lieu of a cash payment of $4,700,000in interest fees.
(5)
Hilal Al Busaidy and Yasser Al Barami control Mubadarah Investment LLC.
(6)
SV3 Holdings Pte Ltd is owned by two private equity funds: SCF-VIII, LP and Viburnum Funds Pty Ltd.
(7)
Castle SPC Limited is wholly owned by Waha Capital.
(8)
Hussain Al Nowais is the Chairman of Al-Nowais Investments LLC. He has a 7.56% ownership interest in Waha Capital.
Change
of Control
As
a result of the issuance of the shares pursuant to the Business Combination and related transactions, a change in control of the
Company occurred as of June 6, 2018. Except as described in this Report, no arrangements or understandings exist among present
or former controlling shareholders with respect to the election of members of our Board and, to our knowledge, no other arrangements
exist that might result in a change of control of the Company.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
In
connection with and effective as of the closing of the Business Combination, Thomas Wood resigned as Chief Financial Officer,
and Sherif Foda continues to serve as Chief Executive Officer and Chairman of the Company. Melissa Cougle was appointed
to be Chief Financial Officer of the Company on June 12, 2018
Additionally, between May 23, 2018 and June 12, 2018 the Board was expanded to nine directors in connection
with the completion of the Business Combination, and filled the vacancies created by the increase in board size with five persons,
two (2) of whom were nominated by NPS Selling Stockholders, one (1) of whom was nominated by GES Selling Stockholders with the
right to nominate one (1) additional director, and one (1) of whom was nominated by SV3, such that our post-closing Board of Directors
consist of four (4) existing NESR directors, Sherif Foda, Thomas Wood, Antonio J. Campo Mejia, and Hala Zeibak who is nominated
by and representing Olayan, and five (5) new directors, of which two (2) were nominated by NPS Selling Stockholders, Salim Al Noaimi
and Adnan Ghabris, one (1) was nominated by GES Selling Stockholders, Yasser Al Barami, one nominated by SV3, Andrew L. Waite,
and one (1) nominated by Olayan by agreement with management of the Company pursuant to the Olayan Relationship Agreement Nadhmi
Al-Nasr. Compared to the Board listed in the Proxy Statement, not made Nadhmi
Al-Nasr was added to increase the number of independent
directors on the Board.
NESR’s
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 (except for those directors appointed prior to our first annual meeting of stockholders) 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 2019.
As
of the date hereof, the Company’s officers and directors are as follows:
Name
|
|
Age
|
|
Class
|
|
Position
|
Sherif
Foda
|
|
48
|
|
II
|
|
Executive
Chairman of the Board and Chief Executive Officer
|
Melissa Cougle
|
|
41
|
|
|
|
Chief Financial Officer
|
Thomas
Wood
|
|
60
|
|
II
|
|
Director
|
Antonio
J Campo Mejia
|
|
60
|
|
I
|
|
Director
|
Hala
Zeibak
4
|
|
37
|
|
I
|
|
Director
|
Salem
Al Noaimi
1
|
|
42
|
|
I
|
|
Director
|
Yasser
Al Barami
2
|
|
46
|
|
II
|
|
Director
|
Andrew
Waite
3
|
|
57
|
|
I
|
|
Director
|
Adnan
Ghabris
1
|
|
56
|
|
II
|
|
Director
|
Nadhmi
Al-Nasr
(5)
|
|
63
|
|
I
|
|
Director
|
(1)
Following the completion of the Business Combination, two NPS Selling Stockholders, Al Nowais Investments LLC (“ANI”)
and WAHA Finance Company, separately and collectively are entitled to nominate one director (two in total) to our Board of Directors,
for so long as they or their affiliates hold at least 50% of the NESR ordinary shares acquired pursuant to the NPS Stock Purchase
Agreement. NESR nominated to its Board a person nominated by each of those two parties, and immediately after the Closing
Date, NESR shall invite a representative of both ANI and WAHA (“Board Observer”), as designated by the respective
company in its own discretion, to attend all meetings of the Board, in a non-voting observer capacity and shall give such Board
Observer copies of all notices, minutes, consents, and other materials that NESR provides to its Board as permitted by law. This
right to nominate a Board member and appoint a Board Observer shall be retained as long as the respective shareholder holds 50%
of the shares that it acquired pursuant to the NPS Stock Purchase Agreement.
(2)
This is the initial nominee of the GES Selling Stockholders, which are entitled to nominate a total of two directors
to our Board of Directors. The Company has agreed to such nomination and election.
(3)
This is the initial nominee of SV3. Following the completion of the Business Combination, SV3 is entitled to nominate one
director to our Board of Directors, for so long as they or their affiliates hold at least 60% of the Consideration Equity Stock
set out against the name of SV3 in the SV3 Contribution Agreement and pursuant to the respective SV3 Voting Agreements. Mr. Waite
shall be the principal director and he shall appoint Ms. Theresa Eaton to serve as his alternate, whereby Ms. Eaton shall be entitled
to attend meetings in the absence of Mr. Waite and to vote or consent in place of Mr. Waite until such appointment as alternate
lapses or is terminated.
(4)
This is one nominee of Olayan pursuant to the Olayan Relationship Agreement, which entitles Olayan to nominate
this director for as long as Olayan and its affiliates collectively hold at least 6,879,225 NESR ordinary shares. The Company has
agreed to such nomination and election.
(5)
This is a second independent director nominated by Olayan by agreement with management of the Company pursuant
to the Olayan Relationship Agreement. Olayan is entitled to nominate this director by agreement with management of the Company
for as long as Olayan and its affiliates collectively hold at least 6,879,225 NESR ordinary shares The Company has agreed to such
nomination and election.
Sherif
Foda
has served as our Chief Executive Officer and Chairman since our inception. He has more than 24 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 U.S. From June 2016 to January 2018, he served as Senior Advisor to the Chairman
of Schlumberger. From July 2013 through June 2016, he has served as an officer and the President for the Production Group of Schlumberger.
From June 2011 to June 2013, he served as the President of Schlumberger Europe and Africa. From June 2009 to June 2011, he served
as the Vice President and Managing Director of the Arabian market: Saudi Arabia, Kuwait and Bahrain. From July 2007 to May 2009,
he served as the Worldwide Vice President for Well Intervention. From 2005 to 2007, he was the Vice President for Europe, Caspian
and Africa. From 2002 to 2005, he served as the Managing Director of Schlumberger in Oman. In 2001, he served as the Operations
Manager for UAE, Qatar, Yemen and the Arabian Gulf. 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 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. He graduated in 1991 from Ain Shams University in Cairo, Faculty of Engineering,
and he holds a BSc double major in Electronics and Automatic control. Mr. Foda is a board member of Energy Recovery, Inc. (NASDAQ:
ERII), a technology company based in California. Also, he serves on the board of Trustees of Awty International School in Houston
and is a board member for Al Fanar Venture philanthropy in London.
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 24 years with Schlumberger and his extensive oil field services industry experience throughout the MENA
region and globally and as an executive and board member.
Melissa
Cougle
was appointed as Chief Financial Officer effective June 18, 2018. Ms. Cougle has
over 15 years of experience as a finance professional in the oil field services sector. She joins NESR from Ensco plc, the global
offshore drilling contractor, where she most recently served as Vice President-Integration having responsibility for global integration
activities. Prior to that role, Ms. Cougle served as Vice President-Treasury where she was responsible for all capital management
activities. During her career, Ms. Cougle served in many roles at Ensco and its predecessors including: Director-Finance and Administration,
Director-Internal Audit, Director-Management Reporting and Financial Systems, and Director-Corporate Accounting. Her tenure at
Ensco has brought her deep knowledge in the industry and capital markets as well as related to creating processes and systems
for supporting continuous improvement. Ms. Cougle founded the diversity support network at Ensco and is a passionate advocate
for the St. Baldrick's Foundation supporting childhood cancer research. Her career began with 6 years' experience through Manager
in the audit and consulting practices of Arthur Andersen LLP and Protiviti where she gained exposure to multiple industries. Ms.
Cougle is a Certified Public Accountant in the State of Texas and holds a Bachelor of Science Degree in Accounting from Louisiana
State University.
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 6, 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.
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,
his experience as an entrepreneur and building public companies and high growth organizations.
Antonio
J. Campo Mejia
, an independent director since May 12, 2017, 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, the world’s leading oilfield services
company, in a multitude of senior management positions in different parts of the world. Mr. Campo Mejia served as the President
of Latin America for Oilfield Services of Schlumberger from 2006 to 2008. Mr. Campo Mejia served as President of Europe &
Africa, Schlumberger Oilfield Services from 2003 to 2006. From 2000 to 2006, he was the President of Schlumberger’s Integrated
Project Management business responsible for the worldwide operations in this service line. From 1999 to 2000, Mr. Campo Mejia
served as Director of Personnel for the Reservoir Management Group in Houston, Texas. From 1997 to 1999, he was the 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.
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.
Hala
Zeibak
who has been an independent director 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, initially with 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.
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 MENA.
Salem
Al Noaimi
was elected to the Board as of June 12, 2018 and is Waha Capital’s Chairman of the Board. Mr. Al
Noaimi served as Waha Capital’s Chief Executive Officer & Managing Director from 2009 until March 2018 and lead the
company’s strategic transformation into a leading investment company, managing proprietary and third-party assets. Previously,
he served as the Deputy CEO of Waha Capital, and CEO of Waha Leasing. Additionally, Mr. Al Noaimi holds a number of board positions
with large public and private companies. He is Chairman of Seha, Dunia Finance and Anglo Arabian Healthcare. He also a board member
of New York-listed AerCap Holdings. Earlier in his career, Mr. Al Noaimi held various positions at Dubai Islamic Bank, the UAE
Central Bank, the Abu Dhabi Fund for Development, and Kraft Foods. Mr. Al Noaimi is a UAE national and holds a degree in Finance
and International Business from Northeastern University in Boston, USA.
We
believe that Mr. Noaimi is qualified to serve on our Board of Directors because of his extensive experience in investing in the
MENA region as well as experience as a Chief Executive Officer of a publicly listed company.
Yasser
Al Barami
was elected to the Board as of June 6, 2018. Mr. Al Barami has more than 22 years of professional experience
in the oil and gas industry. Mr. Al-Barami is the Chairman of GES which he co-founded in 2006 and holds the position of Chief
Commercial Officer for GES. Mr. Al Barami has benefited from significant exposure to both the services industry as well as E&P
industry which makes his experience unique in several aspects. Mr. Al Barami started his career in the drilling operations of
Petroleum Development Oman (PDO) and over the next 9 years worked in different positions in Well Engineering in the field before
progressing to PDO’s HQ where he was appointed to be a Team Leader for the same. Mr. Al Barami obtained his Bachelor’s
degree in Mechanical Engineering from the University of Brighton, United Kingdom in 1995, and thereafter completed his MBA from
the University of Lincoln, United Kingdom in 2003.
We
believe that Mr. Barami is qualified to serve on our Board of Directors because of his extensive entrepreneurial experience as
well as his E&P background and his knowledge of the MENA region and specifically Oman.
Andrew
Waite
was elected to the Board as of June 6, 2018. Mr. Waite is Co-President of LESA, the ultimate general partner
of SCF and the ultimate general partner of the majority shareholder of SV3, 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, is on the board of directors of Forum Energy Technologies, Inc. (NYSE: FET), a position he has
held since August 2010, and is on the board of directors of Atlantic Navigation Holdings (Singapore) Limited (SGX: 5UL), a position
he has held since January 2016. 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, and Oil States International, Inc.,
a diversified oilfield services and equipment company from August 1995 through April 2006. 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 true energy industry and evaluating potential transactions
make him well qualified to serve on our board of directors.
Adnan
Ghabris
was elected to the Board as of June 12, 2018. Mr. Ghabris has over 30 years of experience in the oil service
industry. Mr. Ghabris has served as Chief Executive Officer of NPS since 2008. Before serving as Chief Executive Officer of NPS,
Mr. Ghabris spent more than 20 years with Schlumberger, where he held several executive roles in operations, technical and marketing
in the following countries: Kuwait, Syria, Libya, Canada, Kingdom of Saudi Arabia and the United Arab Emirates from 1989 to 2008.
Mr.
Ghabris was the Vice President of Schlumberger Arabian Region from 1999 to 2004 covering Kingdom of Saudi Arabia, Kuwait, Bahrain
and Pakistan. Prior to his assignment as a Chief Executive Officer of NPS, he held the position of Integrated Project Manager
for Schlumberger Middle East and Asia based in Dubai. Mr. Ghabris holds a Master’s Degree in Chemical Engineering from Kuwait
University (Honors) and a Bachelor’s Degree in Chemical Engineering in Rutgers, the State University of New Jersey, United
States (Honors). He is a member of the Canadian Professional Engineers, American Institute for Chemical Engineers (AiChE) and
the Society of Petroleum.
We
believe that Mr. Ghabris is qualified to serve on our Board of Directors because of his extensive leadership experience in oilfield
services and the MENA region. Mr. Ghabris has a unique experience with both large multinationals and start-ups which will be beneficial
for the Board of Directors.
Nadhmi
Al-Nasr
was elected to the Board as of June 6, 2018. Mr. Al-Nasr is 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. 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 MENA region
oil exploration and production industry and his experience with a major national oil company.
Theresa
Eaton
is a Managing Director of SCF Partners, a leading oilfield services private equity investor where she is responsible
for sourcing acquisition opportunities at SCF as well as their ongoing strategic oversight and development. Ms. Eaton graduated
from Duke University with a Bachelor of Arts dual degree in International Relations and Asian Studies with a concentration in
Japanese. After graduating from Duke, she worked in the Institutional Securities Division and Private Wealth Management Division
at Morgan Stanley in Manhattan. She subsequently attended Duke University Law School where she earned her J.D. and later worked
in the Corporate and Securities group at Vinson & Elkins LLP. Prior to joining SCF Partners, Ms. Eaton worked at First Reserve
Corporation, an energy focused private equity firm. Ms. Eaton serves on Duke University’s Board of Entrepreneurship &
Innovation, the board of the Center for Hearing and Speech and the board of the Broach Foundation for Brain Cancer Research, an
organization she co-founded and has jointly raised more than $4 million for glioblastoma research.
We
believe that Ms. Eaton is qualified to serve as an alternate director because of her extensive investing experience with entrepreneurial
and high growth companies and we also believe her legal background will be beneficial for the Board of Directors.
Classified
Board of Directors
In
accordance with our Charter, our Board of Directors is divided into two classes with only one class of directors being elected
in each year at a meeting of shareholders, with each class serving a two-year term.
Director
Independence
NASDAQ
listing standards require that a majority of our Board of Directors be independent as long as we are not a controlled company.
As of the closing of the Business Combination, a majority of our Board of Directors are independent. An “independent director”
is defined under the NASDAQ rules generally as a person other than an officer or employee of the company or its subsidiaries or
any other individual having a relationship which in the opinion of the company’s Board of Directors, would interfere with
the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our Board of Directors
has determined that Messrs. Antonio J. Campo Mejia, Hala Zeibak, Thomas Wood, Salem Al Noaimi, Andrew Waite and Nadhmi
Al-Nasr are “independent directors” as defined in the NASDAQ listing standards and applicable SEC rules. Our independent
directors will have regularly scheduled meetings at which only independent directors are present.
Leadership
Structure and Risk Oversight
As
of the Business Combination, it is intended that Mr. Campo will be the lead independent director of the Board of Directors and
Mr. Sherif Foda continues to serve as our Chief Executive Officer and Chairman of the Board.
The
Board of Directors’ oversight of risk is administered directly through the Board of Directors, as a whole, or through its
audit committee. Various reports and presentations regarding risk management are presented to the Board of Directors including
the procedures that the Company has adopted to identify and manage risk. The audit committee addresses risks that fall within
the committee’s area of responsibility. For example, the audit committee is responsible for overseeing the quality and objectivity
of NESR’s financial statements and the independent audit thereof. The audit committee reserves time at each of its meetings
to meet with the Company’s independent registered public accounting firm outside of the presence of the Company’s
management.
Committees
of the Board of Directors
As
of the closing of the Business Combination, the standing committees of the Company’s Board consist of an audit committee
(the “Audit Committee”), a compensation committee (the “Compensation Committee”) and a nominating and
corporate governance committee (the “Nominating and Corporate Governance Committee”). Each of the committees reports
to the Board. The composition, duties and responsibilities of these committees are set forth below.
Audit
Committee
Our
Audit Committee consists of Mr. Al Noaimi, Mr. Campo, and Mr. Waite, with Mr. Al Noaimi serving as the chairman of the Audit Committee.
We believe that each of these individuals qualify as independent directors according to the rules and regulations of the SEC with
respect to audit committee membership. We also believe that Mr. Al Noaimi qualifies as an “audit committee financial expert,”
as such term is defined in Item 401(h) of Regulation S-K. Our Board of Directors has adopted a written charter for the Audit Committee,
which is available on our corporate website at
www.nesrco.com
.
Compensation
Committee
Our
Compensation Committee consists of Mr. Campo, Ms. Zeibak and Mr. Wood, with Mr. Wood serving as the chairman of the Compensation
Committee. Our Board of Directors has adopted a written charter for the Compensation Committee, which is available on our corporate
website at
www.nesrco.com
.
Corporate
Governance and Nominating Committee
A
Corporate Governance and Nominating Committee was appointed to be responsible for, among other matters: (1) identifying individuals
qualified to become members of our Board of Directors, consistent with criteria approved by our Board of Directors; (2) overseeing
the organization of our Board of Directors to discharge the board’s duties and responsibilities properly and efficiently;
(3) identifying best practices and recommending corporate governance principles; and (4) developing and recommending to our Board
of Directors a set of corporate governance guidelines and principles applicable to us.
Our
Corporate Governance and Nominating Committee consists of Mr. Wood, Mr. Al-Nasr and Mr. Campo, with Mr. Campo serving
as the chairman of the Corporate Governance and Nominating Committee. Our Board of Directors has adopted a written charter for
the Corporate Governance and Nominating Committee, which is available on our corporate website at
www.nesrco.com
.
Compensation
Committee Interlocks and Insider Participation
From
inception through March 31, 2018, no officer or employee served as a member of the Company’s Compensation Committee, except
for Mr. Thomas Wood, who served as NESR’s Chief Financial Officer from our inception until October 2, 2017 and from November
29, 2017 until June 6, 2018. None of our executive officers serve as a member of the Board of Directors or compensation committee
of any entity that has one or more executive officers serving on our Board of Directors or Compensation Committee.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act, requires our officers, directors and persons who beneficially own more than ten percent of our ordinary
shares to file reports of ownership and changes in ownership with the SEC. These reporting persons are also required to furnish
us with copies of all Section 16(a) forms they file. Based solely upon a review of such forms, we believe that during the year
ended December 31, 2017 there were no delinquent filers.
Code
of Ethics
We
have adopted a Code of Ethics that applies to all of our employees, including our chief executive officer, chief financial officer
and principal accounting officer. Our Code of Ethics is available on our corporate website, www.nesrco.com. If we amend or grant
a waiver of one or more of the provisions of our Code of Ethics, we intend to satisfy the requirements under Item 5.05 of Form
8-K regarding the disclosure of amendments to or waivers from provisions of our Code of Ethics that apply to our principal executive
officer, principal financial officer and principal accounting officer by posting the required information on our website at the
above address. Our website is not part of this proxy statement.
Along
with our guiding core ethical principles, our unwavering commitment to achieve responsible superior financial results, motivation
of our employees and diversity of our culture are three main pillars that defines our company. We emphasize honesty and integrity,
accountability, respect, fairness and confidentiality. We also take monitoring and compliance measures to ensure against discrimination,
fraud, theft, harassment, retaliation and conflict of interest.
This
Code of Conduct governs all sets of actions and applies to the behaviors of all employees socially and professionally throughout
their employment with the company irrespective of the place, time and situation.
Ethical
principles and our three main pillars combined are fundamental core values to the Company.
Director
Compensation
Our
compensation committee determines the annual compensation to be paid to the members of our Board of Directors. Directors’
fees after the Business Combination have yet to be determined but are expected to consist of two components: a cash payment and
the issuance of restricted shares.
Involvement
in Certain Legal Proceedings
No
executive officer or director of ours has been involved in the last ten years in any of the following:
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Any
bankruptcy petition filed by or against any business or property of such person, or of which such person was a general partner
or executive officer either at the time of the bankruptcy or within two years prior to that time;
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Any
conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other
minor offenses);
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Being
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities
or banking activities;
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Being
found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
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Being
the subject of or a party to any judicial or administrative order, judgment, decree or finding, not subsequently reversed,
suspended or vacated relating to an alleged violation of any federal or state securities or commodities law or regulation,
or any law or regulation respecting financial institutions or insurance companies, including, but not limited to, a temporary
or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist
order, or removal or prohibition order, or any law or regulation prohibiting mail, fraud, wire fraud or fraud in connection
with any business entity; or
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Being
the subject of or a party to any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory
organization (as defined in Section 3(a)(26) of the Exchange Act, any registered entity (as defined in Section 1(a)(29) of
the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority
over its members or persons associated with a member.
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EXECUTIVE
COMPENSATION
Pre-Closing
Compensation of Executive Officers
Prior
to consummation of the Business Combination, NESR had two executive officers, neither of whom was paid a salary by the Company.
The
compensation of NPS’s and GES’s named executive officers before the consummation of the Business Combination is set
forth in the Proxy Statement in the sections titled “Compensation of Directors and Executive Officers of NPS” and
“Compensation of Directors and Executive Officers of GES” beginning on page 144 and on page 174, respectively, which
is incorporated herein by reference.
Post-Closing
Compensation of Executive Officers
Overview
Following
the closing of the Business Combination, the Company intends to develop an executive compensation program that is consistent with
its existing compensation policies and philosophies, which are designed to align compensation with Target Companies’ business
objectives and the creation of shareholder value, while enabling Target Companies to attract, motivate and retain individuals
who contribute to the long-term success of Target Companies.
Decisions
on the executive compensation program will be made by the compensation committee. The following discussion is based on the present
expectations as to the executive compensation program to be adopted by the compensation committee. The executive compensation
program actually adopted will depend on the judgment of the members of the compensation committee and may differ from that set
forth in the following discussion.
We
anticipate that decisions regarding executive compensation will reflect our belief that the executive compensation program must
be competitive in order to attract and retain our executive officers. We anticipate that the compensation committee will seek
to implement our compensation policies and philosophies by linking a significant portion of our executive officers’ cash
compensation to performance objectives and by providing a portion of their compensation as long-term incentive compensation in
the form of equity awards (for more information relating to our intended equity compensation plan, please refer to the Incentive
Plan Proposal).
We
anticipate that compensation for our executive officers will have three primary components: base salary, an annual cash incentive
bonus and long-term incentive compensation in the form of share-based awards.
Base
Salary
It
has been Target Companies’ historical practice to assure that base salary is fair to the executive officers, competitive
within the industry and reasonable in light of Target Companies’ cost structure. Upon completion of the Business Combination,
our compensation committee will determine base salaries and manage the base salary review process, subject to existing employment
agreements.
Annual
Bonuses
The
Company intends to use annual cash incentive bonuses for the executive officers to tie a portion of their compensation to financial
and operational objectives achievable within the applicable fiscal year. The Company expects that, near the beginning of each
year, the Compensation Committee will select the performance targets, target amounts, target award opportunities and other term
and conditions of annual cash bonuses for the executive officers, subject to the terms of any employment agreement. Following
the end of each year, the Compensation Committee will determine the extent to which the performance targets were achieved and
the amount of the award that is payable to the executive officers.
Share-Based
Awards
On
May 18, 2018, the shareholders of the Company approved the NESR 2018 Long Term Incentive Plan (the “LTIP”), effective
upon the closing of the Business Combination. The description of the LTIP set forth in the Proxy Statement section titled “Proposal
No. 4 — NESR 2018 Long Term Incentive Plan” beginning on page 115 is incorporated herein by reference. A copy of the
full text of the LTIP is filed as Exhibit 10.10 to this Report on Form 8-K and is incorporated herein by reference.
The
Company intends to use share-based 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.
Employment
Agreements
One June 12, 2018 the
Company signed an offer letter with Melissa Cougle regarding her employment as Chief Financial Officer of the Company effective
June 18, 2018. The terms of Ms. Cougle’s employment are set forth in an offer letter dated June 12, 2018, a copy of which
is filed as Exhibit 10.18 to this Report. Pursuant to the terms of the offer letter, Ms. Cougle will serve as Chief Financial
Officer of the Company and will report to Sherif Foda, Chief Executive Officer of the Company. Ms. Cougle’s annual salary
will be $300,000 and she will be eligible for an annual performance bonus set at a target of 100% of her salary based on performance
of key performance indicators and she will receive a share-based incentive targeted at 200% of her base salary comprised of a
mix of restricted stock units, performance stock units and stock options as determined by the NESR Board.
Other
Compensation
The
Company expects to maintain various employee benefit plans, including medical, dental, life insurance and retirement plans, in
which the executive officers will participate.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The
following is a description of related party transactions involving NESR, NPS and GES in the last three years, other than as described
in Item 1.01 of this Report.
NESR
Related Person Transactions
Founder
Shares
On
February 9, 2017, the Company issued an aggregate of 5,750,000 ordinary shares to the Sponsor for an aggregate purchase price
of $25,000. On May 11, 2017, the Company effectuated a 1.05-for-1 subdivision of its ordinary shares, resulting in an aggregate
of 6,037,500 Founder Shares being held by the Sponsor of these 6,037,500 shares, an aggregate of up to 787,500 ordinary shares
were subject to forfeiture by the Sponsor to the extent that the underwriters’ over-allotment was not exercised in full
or in part, so that the Sponsor would own 20% of the Company’s issued and outstanding shares after the IPO. As a result
of the underwriters’ election to partially exercise their over-allotment option on May 30, 2017, 480,425 Founder Shares
are no longer subject to forfeiture. The underwriters elected not to exercise the remaining portion of the over-allotment option
and, therefore, 307,075 Founder Shares were forfeited.
Sponsor
maintained legal and voting rights to the Founder Shares while Mr. Foda and Mr. Wood maintained control of beneficial ownership.
The Sponsor has agreed that, subject to certain limited exceptions, its Founder Shares will not be transferred, assigned or sold
until one year after the date of the consummation of a Business Combination or earlier if, subsequent to a Business Combination,
the last sales 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 a Business Combination. Before the IPO, Mr. Foda and Mr. Wood, as beneficial owners of shares issued to Sponsor to
maintain voting control, assigned beneficial ownership to some Founder Shares to certain key persons facilitating the organization
of the IPO.
Private
Warrants
Simultaneously
with the consummation of the IPO, the Company consummated the private placement of 11,850,000 private warrants at a price of $0.50
per private warrant, generating total proceeds of $5,925,000. Additionally, on May 30, 2017, in connection with the underwriters’
election to partially exercise their over-allotment option in the IPO, the Company consummated the sale of an additional 768,680
private warrants at $0.50 per warrant, generating total gross proceeds of $384,340. The private warrants, which were purchased
by the Company’s Sponsor, are substantially similar to the public warrants, except that if held by the original holders
or their permitted assigns, they (i) may be exercised for cash or on a cashless basis, (ii) are not subject to being called for
redemption and (iii) subject to certain limited exceptions, will be subject to transfer restrictions until 30 days following the
consummation of the Company’s initial business combination. If the private warrants are held by holders other than its initial
holders, the private warrants will be redeemable by the Company and exercisable by holders on the same basis as the public warrants.
The proceeds from the private placement were added to the proceeds from our IPO held in the trust account.
Related
Party Advances
During
the period from January 23, 2017 (inception) through May 17, 2017, the Sponsor advanced the Company an aggregate of $193,899 for
costs associated with its IPO and for working capital purposes. The advances are non-interest bearing, unsecured and due on demand.
As of December 31, 2017, the company has repaid $192,910 of such advances. Advances amounting to $989 were outstanding as of December
31, 2017.
Promissory
Note — Related Party
On
February 10, 2017, the Company entered into a promissory note with the Sponsor, whereby the Sponsor agreed to loan the Company
up to an aggregate of $300,000 (the “Promissory Note”) to be used in part for expenses incurred in connection with
the IPO. The Promissory Note was non-interest bearing, unsecured and due on the earlier of June 30, 2017 or the closing of the
IPO. The Promissory Note was repaid upon the consummation of the IPO on May 17, 2017.
Administrative
Service Fee
The
Company entered into an agreement whereby, commencing on May 17, 2017 through the earlier of the consummation of a Business Combination
or the Company’s liquidation, the Company will pay the Sponsor a monthly fee of $10,000 for office space, utilities and
administrative support. For the period from January 23, 2017 (inception) through December 31, 2017, the Company incurred $80,000
in fees for these services, which such amount is included in operating costs in the accompanying condensed statements of operations
and in accrued expenses in the accompanying consolidated balance sheets at December 31, 2017.
Related
Party Loans
In
order to finance transaction costs in connection with the Business Combination, the Sponsor, the Company’s officers, directors
or their affiliates may, but are not obligated to, loan the Company funds from time to time or at any time, as may be required
(“Working Capital Loans”). Each Working Capital Loan would be evidenced by a promissory note. The Working Capital
Loans would either be paid upon consummation of a Business Combination, without interest, or, at the holder’s discretion,
up to $1,500,000 of the Working Capital Loans may be converted into Private Warrants at a price of $0.50 per warrant. There were
no Working Capital Loans outstanding as of December 31, 2017.
NPS
Related Person Transactions
Abdulaziz
Mubarak Al-Dolaimi is a former founding shareholder of NPS and a former member of its board of directors. Payments
of $1,200,000 were made in the 3 months ended March 31, 2017 towards settlement of receivables which were due from
the founding shareholder to NPS and which arose in connection with the previous sale of the NPS business to new
shareholders in 2014.
There
were no related party transactions during the first quarter of 2018.
GES
Related Person Transactions
GES
has relationships with the following entities who are considered to be related parties, as a result of common shareholding of
the involved entities. The related party relationships are documented in contractual agreements between GES and these entities.
Mubadarah
Investments LLC (“Mubadarah”)
Mubadarah,
a Selling Stockholder, was the former parent company of GES.
In
June 2012, Mubadarah obtained a loan from NBO amounting to 23.1 million Omani Riyals ($60.6 million) and for which GES was the
guarantor. Under a corresponding shareholder loan agreement with Mubadarah, GES was responsible for making debt service payments
towards the NBO bank loan. GES made payments to Mubadarah of $789,005 in 2015, $1,425,141 in 2016 and then a further $1,393,746
in 2017, as funds towards the repayment of the loan with NBO. The bank loan was fully repaid on 9 November 2017. GES is no longer
a guarantor nor is it responsible for any loan financing payments to Mubadarah.
In
2015, GES purchased an office building from Mubadarah Real Estate LLC, an affiliate of Mubadarah Investment LLC, for $9,750,000.
The building is occupied by GES along with other Mubadarah group entities. GES charges rental income to these group entities for
the occupation of office space, based on usage. Rental income charged by GES to Mubadarah group entities amounted to $76,613 and
$112,286 in the three months ended March 31, 2018 and March 31, 2017 respectively.
Heavy
Equipment Manufacturing & Trading LLC (“HEMT”)
HEMT
is 100% owned by Tasneea Oil & Gas Technology LLC, which is 80% owned by Mubadarah and 20% owned by GES. 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 $10,229 and $42,998 in the three months ended March 31, 2018 and 2017 respectively in relation to these services.
Prime
Business Solutions LLC (“PBS”)
PBS
is 100% owned by Mubadarah Business Solutions LLC and is involved in the development and maintenance of Enterprise Resource Planning
(“ERP”) systems.
PBS
has developed and implemented the GEARS (ERP) system for GES and is currently engaged to maintain it. GES has been charged maintenance
fees from PBS of $674,800 and $176,400 in the three months ended March 31, 2018 and 2017 respectively.
Esnaad
Solutions LLC (Esnaad)
Esnaad
is 100% owned by Mubadarah and is a supply chain company involved in the sourcing and procurement of products for the Oil &
Gas industry. Esnaad has charged GES amounts of $440,133 and $746,305 in the three months ended March 31, 2018 and 2017 respectively
against the purchase of chemicals, drilling fluids, materials and supplies.
Sadara
LLC
Sadara
is 51% owned by Mubadarah and is engaged in the sourcing and procurement of products for the Oil & Gas industry. Sadara has
charged GES amounts of to $nil and $38,060 in the three months ended March 31, 2018 and 2017 respectively against the
purchase of chemicals, drilling fluids and products.
Key
Management and Founders
Hilal
Al Busaidy and Yasser Al Barami are both founding shareholders of GES and key management of the company.
GES
has made advances to these key management members. The cumulative advances outstanding as at March 31, 2018 and December 31, 2017
were $4,573,966 and $4,518,338 respectively. Further details of these advances are provided in Note 14 (iii) of the Financial
Statements.
Falcon
Oil Services LLC Arbitration.
In 2017, an arbitration award of $875,000 was entered against GES. The arbitration relates to
a subcontract entered into between Falcon Oil Services LLC (“Falcon Oil Services”), a company in which Hilal Al Busaidy
owns a minority interest, and GES Oman in relation to services GES Oman had contracted to provide to Jannah Hunt in Yemen. Falcon
Oil Services abandoned the contract after four days, and claimed a lack of security for delay in GES Oman returning Falcon Oil
Services’ equipment. The arbitration award was brought against GES even though GES Oman was party to the original contract.
In addition, GES believes that the arbitration should have been brought in Dubai rather than in Oman pursuant to the underlying
contract. GES has been awarded a temporary stay on the enforcement of the award by the Omani courts. Mr. Hilal has a minority
ownership interest in Falcon Oil Services.
Policies
and Procedures for Related Person Transactions
Our
Code of Ethics will require us to avoid, wherever possible, all related party transactions that could result in actual or potential
conflicts of interests, except under guidelines approved by the Board of Directors (or the audit committee). Related-party transactions
are defined as transactions in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar
year, (2) we or any of our subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election
as a director, (b) greater than 5% beneficial owner of our ordinary shares, or (c) immediate family member of the persons referred
to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director
or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions
or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may
also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position.
We
also require each of our directors and executive officers to annually complete a directors’ and officers’ questionnaire
that elicits information about related party transactions.
These
procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents
a conflict of interest on the part of a director, employee or officer.
To
further minimize conflicts of interest, we have agreed not to consummate our initial business combination with an entity that
is affiliated with any of our Sponsor, officers or directors unless we have obtained an opinion from an independent investment
banking firm and the approval of a majority of our disinterested and independent directors (if we have any at that time) that
the Business Combination is fair to our unaffiliated shareholders from a financial point of view.
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price
Range of NESR Securities
Our
ordinary shares and warrants are currently listed on the NASDAQ Capital Market under the symbols “NESR” and “NESRW,”
respectively. Our ordinary shares and warrants each commenced separate public trading on June 5, 2017.
The
table below sets forth, for the calendar quarters indicated, the high and low bid prices of our ordinary shares and warrants as
reported on the NASDAQ for the period June 5, 2017 through March 31, 2018.
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|
Ordinary
Shares
|
|
|
Warrants
|
|
Period
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
June
5 through June 30, 2017
|
|
$
|
9.39
|
|
|
$
|
9.62
|
|
|
$
|
0.38
|
|
|
$
|
0.60
|
|
July
1 through September 30, 2017
|
|
$
|
9.51
|
|
|
$
|
9.68
|
|
|
$
|
0.40
|
|
|
$
|
0.60
|
|
October
1 through December 31, 2017
|
|
$
|
9.51
|
|
|
$
|
9.99
|
|
|
$
|
0.43
|
|
|
$
|
0.85
|
|
January
1 through March 31, 2018
|
|
$
|
9.89
|
|
|
$
|
9.98
|
|
|
$
|
0.77
|
|
|
$
|
1.10
|
|
April
1 through June 30, 2018
(1)
|
|
$
|
9.92
|
|
|
$
|
11.33
|
|
|
$
|
0.71
|
|
|
$
|
2.14
|
|
|
(1)
|
Through
June 8, 2018.
|
On
November 10, 2017, the trading date before the public announcement of the Business Combination, the closing sales price of the
Company’s ordinary shares and warrants were $9.79, and $0.59, respectively.
Holders
of NESR
As
of the date of this Report, there were 26 holders of record of our ordinary shares and 2 holders of record of our
warrants.
Dividend
Policy of NESR
We
have not paid any cash dividends on our ordinary shares to date and do not intend to pay cash dividends prior to the completion
of our initial Business Combination. The payment of cash dividends in the future will be dependent upon our revenues and earnings,
if any, capital requirements and general financial condition subsequent to completion of our initial Business Combination. The
payment of any cash dividends subsequent to our initial Business Combination will be within the discretion of our Board of Directors
at such time. In addition, our Board of Directors is not currently contemplating and does not anticipate declaring any stock dividends
in the foreseeable future. Further, if we incur any indebtedness in connection with our Business Combination, our ability to declare
dividends may be limited by restrictive covenants we may agree to in connection therewith.
Price
Range of NPS/GES Securities
Historical
market price information regarding each of NPS and GES is not provided because there is no public market for either NPS’
or GES’ capital stock.
Dividend
Policy of NPS
Prior
to the Business Combination, NPS was a privately held company and does not have a policy of paying regular dividends to its shareholders.
During the first quarter of 2018, NPS declared and paid $48.2 million in dividends to its shareholders to distribute the Receivables
Proceeds, in accordance with the NPS Stock Purchase Agreement. In 2017, NPS declared approximately $20 million in dividends
to its shareholders. No dividends were declared in 2015 and 2016. In future years subsequent to the Business Combination, NPS
intends to establish a policy to fund a portion of the dividend that may be paid to NESR’s public shareholders in line with
NESR’s dividend policy. Notwithstanding the foregoing, from time to time there may be certain contractual restrictions on
NPS’ ability to pay dividends. For instance, NPS has an existing syndicated loan facility, due in installments through 2025,
which restricts NPS ability to pay dividends if certain covenants, which include compliance with financial ratios, are not met.
Additionally, NPS also has a bridge loan facility due in August 2018 which does not permit dividend distributions until such bridge
loan is fully repaid.
Dividend
Policy of GES
Prior
to the Business Combination, GES was a privately held company and did not have a policy of paying regular dividends to its shareholders.
In 2017, GES declared approximately $90.2 million dividend to its shareholders. No dividends were declared in 2015, 2016,
and the first quarter of 2018. In future years subsequent to the Business Combination GES intends to establish a policy to
fund a portion of the dividend that may be paid to NESR’s public shareholders in line with NESR’s dividend policy.
Notwithstanding the foregoing, from time to time there may be certain contractual restrictions on GES’ ability to pay dividends.
For instance, GES has a bank loan facility which includes restrictions on the distribution of dividends unless GES is in compliance
with certain financial covenants required by such loan facility.
DESCRIPTION
OF SECURITIES
General
We
are a company formed in the British Virgin Islands as a BVI business company (company number 1935445) and our affairs are governed
by our Charter, the Companies Act and the common law of the British Virgin Islands. We are authorized to issue an unlimited number
of both ordinary shares of no par value and preferred shares of no par value. The following description summarizes certain terms
of our shares as set out more particularly in our Charter. Because it is only a summary, it may not contain all the information
that is important to you.
Ordinary
Shares
As
of the date of this Report, there were 85,562,769 ordinary shares outstanding.
Under
the Companies Act, the ordinary shares are deemed to be issued when the name of the shareholder is entered in our register of
members. Our register of members is maintained by our transfer agent Continental Stock Transfer & Trust Company. If (a) information
that is required to be entered in the register of members is omitted from the register or is inaccurately entered in the register,
or (b) there is unreasonable delay in entering information in the register, a shareholder of the company, or any person who is
aggrieved by the omission, inaccuracy or delay, may apply to the British Virgin Islands Courts for an order that the register
be rectified, and the court may either refuse the application or order the rectification of the register, and may direct the company
to pay all costs of the application and any damages the applicant may have sustained.
At
any general meeting on a show of hands every ordinary shareholder who is present in person (or, in the case of a shareholder being
a corporation, by its duly authorized representative) or by proxy will have one vote for each share held on all matters to be
voted on by shareholders. Voting at any meeting of the ordinary shareholders is by show of hands unless a poll is demanded. A
poll may be demanded by shareholders present in person or by proxy if the shareholder disputes the outcome of the vote on a proposed
resolution and the chairman shall cause a poll to be taken. Following the consummation of, or in connection with, our initial
business combination, the rights and obligations attaching to our ordinary shares and other provisions of our Charter may be amended
if approved by a majority of the votes of shareholders attending and voting on such amendment or by resolution of the directors.
Our Board of Directors is divided into two classes, each of which will generally serve for a term of two years with only one class
of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Our shareholders
are entitled to receive ratable dividends when, as and if declared by the Board of Directors out of funds legally available therefore.
We
intend that our first actual annual meeting of shareholders will be held in 2019. If our shareholders want us to hold a
meeting prior to that, they may requisition the directors to hold one upon the written request of members entitled to exercise
at least 30% of the voting rights in respect of the matter for which the meeting is requested. Under British Virgin Islands law,
we may not increase the required percentage to call a meeting above such 30% level.
Our
shareholders are entitled to receive ratable dividends when, as and if declared by the Board of Directors out of legally available
funds. In the event of a liquidation or winding up of the company after our initial business combination, our shareholders are
entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision
is made for each class of shares, if any, having preference over the ordinary shares. Our shareholders have no preemptive or other
subscription rights. There are no sinking fund provisions applicable to the ordinary shares, except that we will provide our shareholders
with the redemption rights set forth above.
Founder
Shares
The
Founder Shares held by Sponsor are identical to the other ordinary shares and have the same shareholder rights as public shareholders,
except that the Founder Shares are subject to certain transfer restrictions. Specifically, our Sponsor has agreed not to transfer,
assign or sell any of the Founder Shares (except to certain permitted transferees as described below) until the earlier of (i)
one year after the date of the consummation of our initial business combination or (ii) the date on which we complete a liquidation,
merger, stock exchange or other similar transaction after our initial business combination that results in all of our public shareholders
having the right to exchange their ordinary shares for cash, securities or other property. Notwithstanding the foregoing, if the
last sale price of our ordinary shares equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations,
recapitalizations and the like) for any 20 trading days within any 30-trading day period 150 days after our initial business combination,
the Founder Shares will be released and may be registered and sold. Pursuant to the NPS Stock Purchase Agreement and the ANI
Relationship Agreement and the WAHA Relationship Agreement, additional restrictions were imposed on Sponsor to prohibit selling
50% of its ordinary shares within the first year, permitting the sale of an additional 25% after the trading price exceeds $15.00,
and the final 25% after the trading price exceeds $17.50.
Preferred
Shares
Our
Charter authorizes the creation and issuance without shareholder approval of an unlimited number of preferred shares divided into
five classes, Class A through Class E each with such designation, rights and preferences as may be determined by a resolution
of our Board of Directors to amend the Charter to create such designations, rights and preferences. We have five classes of preferred
shares to give us flexibility as to the terms on which each Class is issued. Unlike Delaware law, all shares of a single class
must be issued with the same rights and obligations. Accordingly, starting with five classes of preference shares will allow us
to issue shares at different times on different terms. No preferred shares are currently issued or outstanding. Accordingly, our
Board of Directors is empowered, without shareholder approval, to issue preferred shares with dividend, liquidation, redemption,
voting or other rights, which could adversely affect the voting power or other rights of the holders of ordinary shares. The preferred
shares could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently
intend to issue any preferred shares, we may do so in the future.
The
rights of preferred shareholders, once the preferred shares are in issue, may only be amended by a resolution to amend our memorandum
and articles of association provided such amendment is also approved by a separate resolution of a majority of the votes of preferred
shareholders who being so entitled attend and vote at the class meeting of the relevant preferred class. If our preferred shareholders
want us to hold a meeting of preferred shareholders (or of a class of preferred shareholders), they may requisition the directors
to hold one upon the written request of preferred shareholders entitled to exercise at least 30% of the voting rights in respect
of the matter (or class) for which the meeting is requested. Under British Virgin Islands law, we may not increase the required
percentage to call a meeting above 30%.
Warrants
As
of the date hereof, we had 22,921,700 public warrants and 12,618,680 private warrants outstanding. Each warrant entitles the registered
holder to purchase one-half of one ordinary share at a price of $5.75 per half share, subject to adjustment as discussed below,
at any time commencing on July 6, 2018 (30 days after the completion of our initial business combination). For example,
if a warrant holder holds two warrants, such warrants will be exercisable for one ordinary share at a price of $11.50 per share.
Warrants must be exercised for whole ordinary shares. The warrants will expire on June 6, 2023 (five years after the completion
of an initial business combination).
Notwithstanding
the foregoing, no public warrants will be exercisable for cash unless we have 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.
Notwithstanding the foregoing, if a registration statement covering the ordinary shares issuable upon exercise of the public warrants
is not effective within a specified period following the consummation of our initial business combination, warrant holders may,
until such time as there is an effective registration statement and during any period when we shall have failed to maintain an
effective registration statement, exercise warrants on a “cashless basis” in the same manner as if we called the warrants
for redemption and required all holders to exercise their warrants on a “cashless basis.” In such event, each holder
would pay the exercise price by surrendering the warrants for that number of ordinary shares equal to the quotient obtained by
dividing (x) the product of the number of ordinary shares underlying the warrants, multiplied by the difference between the exercise
price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market
value” for this purpose will mean the average reported last sale price of the ordinary shares for the 10 trading days ending
on the trading day prior to the date of exercise. There will be no net cash settlement of the warrants under any circumstances.
The
private warrants are identical to the public warrants except that such warrants will be 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 by us, in each case so long as they are still held by the initial purchasers
or their affiliates.
We
may call the warrants for redemption (excluding the private warrants), in whole and not in part, at a price of $0.01 per warrant,
|
●
|
at
any time while the warrants are exercisable,
|
|
|
|
|
●
|
upon
not less than 30 days’ prior written notice of redemption to each warrant holder,
|
|
|
|
|
●
|
if,
and only if, the reported last sale price of the ordinary shares equals or exceeds $21.00 per share, for any 20 trading days
within a 30-day trading period ending on the third business day prior to the notice of redemption to warrant holders, and
|
|
|
|
|
●
|
if,
and only if, there is a current registration statement in effect with respect to the ordinary shares underlying such warrants
commencing five business days prior to the 30-day trading period and continuing each day thereafter until the date of redemption.
|
The
right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption.
On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price
for such holder’s warrant upon surrender of such warrant.
The
redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a substantial
premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant
exercise price so that if the share price declines as a result of our redemption call, the redemption will not cause the share
price to drop below the exercise price of the warrants.
If
we call the warrants for redemption as described above, our management will have the option to require all holders that wish to
exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering
the warrants for that number of ordinary shares equal to the quotient obtained by dividing (x) the product of the number of ordinary
shares underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market
value” (defined below) by (y) the fair market value. In this case, the “fair market value” shall mean the average
reported last sale price of the ordinary shares for the 10 trading days ending on the third trading day prior to the date on which
the notice of redemption is sent to the holders of warrants. Whether we will exercise our option to require all holders to exercise
their warrants on a “cashless basis” will depend on a variety of factors including the price of our ordinary shares
at the time the warrants are called for redemption, our cash needs at such time and concerns regarding dilutive stock issuances.
The
public warrants have been issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company,
as warrant agent, and us. The warrant agreement provides that the terms of the warrants may be amended without the consent of
any holder to cure any ambiguity or correct any defective provision, but requires the approval, by written consent or vote, of
the holders of a majority of the then outstanding warrants in order to make any change that adversely affects the interests of
the registered holders.
The
exercise price and number of ordinary shares issuable on exercise of the warrants may be adjusted in certain circumstances including
in the event of a share dividend (or bonus share issue), extraordinary dividend or our recapitalization, reorganization, merger
or consolidation. However, the warrants will not be adjusted for issuances of ordinary shares at a price below their respective
exercise prices.
The
warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant
agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied
by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised.
The warrant holders do not have the rights or privileges of holders of ordinary shares and any voting rights until they exercise
their warrants and receive ordinary shares. After the issuance of ordinary shares upon exercise of the warrants, each holder will
be entitled to one vote for each share held of record on all matters to be voted on by shareholders.
Except
as described above, no public warrants will be exercisable and we will not be obligated to issue ordinary shares unless at the
time a holder seeks to exercise such warrant, a prospectus relating to the ordinary shares issuable upon exercise of the warrants
is current and the ordinary shares have been registered or qualified or deemed to be exempt under the securities laws of the state
of residence of the holder of the warrants. Under the terms of the warrant agreement, we have agreed to use our best efforts to
meet these conditions and to maintain a current prospectus relating to the ordinary shares issuable upon exercise of the warrants
until the expiration of the warrants.
Warrant
holders may elect to be subject to a restriction on the exercise of their warrants such that an electing warrant holder would
not be able to exercise their warrants to the extent that, after giving effect to such exercise, such holder would beneficially
own in excess of 9.8% of the ordinary shares outstanding.
Dividends
We
have not paid any cash dividends on our ordinary shares to date and do not intend to pay cash dividends prior to the completion
of our initial business combination. The payment of cash dividends in the future will be dependent upon our revenues and earnings,
if any, capital requirements and general financial condition subsequent to completion of our initial business combination. The
payment of any dividends subsequent to our initial business combination will be within the discretion of our then Board of Directors.
It is the present intention of our Board of Directors to retain all earnings, if any, for use in our business operations and,
accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
Our
Transfer Agent, Warrant Agent, and Right Agent
The
transfer agent for our ordinary shares and warrant agent for our warrants is Continental Stock Transfer & Trust Company.
LEGAL
PROCEEDINGS
The
Company is not and has not been involved in any material legal proceedings, other than ordinary litigation incidental to its business.
Although no assurances can be given about the final outcome of pending legal proceedings, at the present time the Company is not
a party to any legal proceeding or investigation that, in the opinion of management, is likely to have a material adverse effect
on its business, financial condition or results of operations.
There
are no proceedings in which any of the Company’s directors, officers or any of their respective affiliates, or any beneficial
shareholder of more than five percent of voting securities, is an adverse party or has a material interest adverse to the above-mentioned
companies’ interest.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Our
charter, the BVI Business Companies Act, 2004, as amended and the common law of the British Virgin Islands allow us to indemnify
our officers and directors from certain liabilities. Our charter provides that the Company may indemnify, hold harmless and exonerate
against all direct and indirect costs, fees and expenses of any type or nature whatsoever, any person who (a) is or was a party
or is threatened to be made a party to any proceeding by reason of the fact that such person is or was a director, officer, key
employee, adviser of the Company or who at the request of the Company; or (b) is or was, at the request of the Company, serving
as a director of, or in any other capacity is or was acting for, another enterprise.
The
Company will only indemnify the individual in question if the relevant indemnitee acted honestly and in good faith with a view
to the best interests of the Company and, in the case of criminal proceedings, the indemnitee had no reasonable cause to believe
that his conduct was unlawful. The decision of the Board as to whether an indemnitee acted honestly and in good faith and with
a view to the best interests of the Company and as to whether such indemnitee had no reasonable cause to believe that his conduct
was unlawful is, in the absence of fraud, sufficient for the purposes of our charter, unless a question of law is involved.
The
termination of any proceedings by any judgment, order, settlement, conviction or the entering of a nolle prosequi does not, by
itself, create a presumption that the relevant indemnitee did not act honestly and in good faith and with a view to the best interests
of the Company or that such indemnitee had reasonable cause to believe that his conduct was unlawful.
The
Company may purchase and maintain insurance, purchase or furnish similar protection or make other arrangements including, but
not limited to, providing a trust fund, letter of credit, or surety bond in relation to any indemnitee or who at the request of
the Company is or was serving as a Director, officer or liquidator of, or in any other capacity is or was acting for, another
Enterprise, against any liability asserted against the person and incurred by him in that capacity, whether or not the Company
has or would have had the power to indemnify him against the liability as provided in our charter.