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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES

EXCHANGE ACT OF 1934

OR

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF

1934

For the fiscal year ended December 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

OR

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE

ACT OF 1934

 

Commission File Number: 001-38091

 

NATIONAL ENERGY SERVICES REUNITED CORP.

(Exact name of Registrant as specified in its charter)

 

Not Applicable

(Translation of registrant’s name into English)

 

British Virgin Islands

(Jurisdiction of incorporation or organization)

 

777 Post Oak Blvd., Suite 730

Houston, Texas 77056

(Address of principal executive office)

 

Stefan Angeli

Chief Financial Officer

777 Post Oak Blvd., Suite 730

Houston, Texas 77056

Phone (832) 925-3777

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act. None

 

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act. ordinary shares (1), warrants (1)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None.

 

(1) Our ordinary shares and warrants (as defined below) were delisted from Nasdaq effective as of April 28, 2023, and, on the date of this Annual Report, are quoted on the OTC Pink Market under the symbols “NESR” and “NESRW”, respectively, on an “unsolicited only” basis.

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:

 

As of December 31, 2023, there were [94,996,397] ordinary shares and [35,540,380] warrants outstanding.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D ☐

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP

 

International Financial Reporting Standards as issued by the International Accounting Standards Board ☐

 

Other ☐

 

If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

 

 

 

 
 

 

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS 5
BASIS OF THIS ANNUAL REPORT ON FORM 20-F 6
FINANCIAL INFORMATION AND CURRENCY OF FINANCIAL STATEMENTS 6
PART I 7
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 7
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 7
ITEM 3. KEY INFORMATION 7
A. [RESERVED] 7
B. CAPITALIZATION AND INDEBTEDNESS 7
C. REASONS FOR THE OFFER AND USE OF PROCEEDS 7
D. RISK FACTORS 7
ITEM 4. INFORMATION ON THE COMPANY 32
A. HISTORY AND DEVELOPMENT OF THE COMPANY 32
B. BUSINESS OVERVIEW 32
C. ORGANIZATIONAL STRUCTURE 39
D. PROPERTY, PLANTS, AND EQUIPMENT 39
ITEM 4A. UNRESOLVED STAFF COMMENTS 39
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 40
A. OPERATING RESULTS 40
B. LIQUIDITY AND CAPITAL RESOURCES 47
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. 52
D. TREND INFORMATION 52
E. CRITICAL ACCOUNTING ESTIMATES 52
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 54
A. DIRECTORS AND SENIOR MANAGEMENT 54
B. COMPENSATION 57
C. BOARD PRACTICES 60
D. EMPLOYEES 63
E. SHARE OWNERSHIP 64
F. DISCLOSURE OF A REGISTRANT’S ACTION TO RECOVER ERRONEOUSLY AWARDED COMPENSATION 64
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 64
A. MAJOR SHAREHOLDERS 64
B. RELATED PARTY TRANSACTIONS 65
C. INTERESTS OF EXPERTS AND COUNSEL 65
ITEM 8. FINANCIAL INFORMATION 65
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 65
B. SIGNIFICANT CHANGES 65

 

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ITEM 9. THE OFFER AND LISTING 65
A. OFFER AND LISTING DETAILS 65
B. PLAN OF DISTRIBUTION 65
C. MARKETS 66
D. SELLING SHAREHOLDERS 66
E. DILUTION 66
F. EXPENSES OF THE ISSUE 66
ITEM 10. ADDITIONAL INFORMATION 66
A. SHARE CAPITAL 66
B. MEMORANDUM AND ARTICLES OF ASSOCIATION 66
C. MATERIAL CONTRACTS 69
D. EXCHANGE CONTROLS 70
E. TAXATION 70
F. DIVIDENDS AND PAYING AGENTS 72
G. STATEMENT BY EXPERTS 72
H. DOCUMENTS ON DISPLAY 72
I. SUBSIDIARY INFORMATION 72
J. ANNUAL REPORT TO SECURITY HOLDERS 72
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 72
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 73
A. DEBT SECURITIES 73
B. WARRANTS AND RIGHTS 73
C. OTHER SECURITIES 73
D. AMERICAN DEPOSITORY SHARES 73
PART II 74
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 74
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 74
ITEM 15. CONTROLS AND PROCEDURES 74
ITEM 16. RESERVED 77
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 77
ITEM 16B. CODE OF ETHICS 77
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 77
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 78
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 78
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 78

 

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ITEM 16G. CORPORATE GOVERNANCE 78
ITEM 16H. MINE SAFETY DISCLOSURE 78
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 78
ITEM 16J. INSIDER TRADING POLICIES 78
ITEM 16K. CYBERSECURITY 78
PART III 79
ITEM 17. FINANCIAL STATEMENTS 79
ITEM 18. FINANCIAL STATEMENTS 79
ITEM 19. EXHIBITS 79
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 82
CONSOLIDATED BALANCE SHEETS 84
CONSOLIDATED STATEMENTS OF OPERATIONS 85
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 86
CONSOLIDATED STATEMENTS SHAREHOLDERS’ EQUITY 87
CONSOLIDATED STATEMENTS OF CASH FLOWS 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 89
1. DESCRIPTION OF BUSINESS 89
2. BASIS OF PRESENTATION 89
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 90
4. BUSINESS COMBINATIONS 98
5. REVENUE 101
6. ACCOUNTS RECEIVABLE 102
7. SERVICE INVENTORIES 102
8. PROPERTY, PLANT, & EQUIPMENT 103
9. GOODWILL, INTANGIBLE, AND OTHER ASSETS 103
10. LEASING 105
11. DEBT 106
12. EMPLOYEE BENEFITS 109
13. INCOME TAXES 111
14. COMMITMENTS AND CONTINGENCIES 114
15. SHARE-BASED COMPENSATION 114
16. EQUITY 116
17. EARNINGS PER SHARE 116
18. FAIR VALUE ACCOUNTING 118
19. RELATED PARTY TRANSACTIONS 119
20. REPORTABLE SEGMENTS 119
Exhibit 8.1  
Exhibit 12.1  
Exhibit 12.2  
Exhibit 13.1  
Exhibit 13.2  

 

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FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 20-F (this “Annual Report”) contains forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Any and all statements contained in this Annual Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and terms of similar import (including the negative of any of these terms) may identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Annual Report may include, without limitation, statements regarding our expectations related to our plans and ability to regain listing of our securities on Nasdaq or another national or international stock exchange, our ability to implement our remediation plan in connection with the material weakness in our internal control over financial reporting, the plans and objectives of management for future operations, projections of income or loss, earnings or loss per share, capital expenditures, dividends, capital structure or other financial items, our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), expansion plans and opportunities, completion and integration of acquisitions and the assumptions underlying or relating to any such statement.

 

The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over, including the impact of the extent of any material weakness or significant deficiencies in our internal control over financial reporting and any action taken by the SEC including potential fines or penalties arising out of the SEC inquiry. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the accuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation:

 

  Changing commodity prices, market volatility and other market trends that affect our customers’ demand for our services;
     
  Public health crises and other catastrophic events;
     
  The level of capital spending by our customers;
     
  Political, market, financial and regulatory risks, including those related to the geographic concentration of our operations and customers;
     
  Our operations, including maintenance, upgrades and refurbishment of our assets, may require significant capital expenditures, which may or may not be available to us;
     
  Operating hazards inherent in our industry and the ability to secure sufficient indemnities and insurance;
     
  Our ability to successfully integrate acquisitions;
     
  Competition, including for capital and technological advances; and
     
  Other risks and uncertainties set forth in Part I, Item 3D, “Risk Factors” included in this Annual Report.

 

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Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them and to the risk factors. We disclaim any obligation to update the forward-looking statements contained in this Annual Report to reflect any new information or future events or circumstances or otherwise, except as required by law. Readers should read this Annual Report in conjunction with the discussion under Part I, Item 3D, “Risk Factors” included in this Annual Report, our consolidated financial statements and the related notes thereto included in this Annual Report, other documents which we may furnish from time to time with the SEC, and other announcements we may make from time to time.

 

BASIS OF THIS ANNUAL REPORT ON FORM 20-F

 

On June 6, 2018, National Energy Services Reunited Corp. (“NESR,” the “Company,” “we,” “our,” “us” or similar terms) acquired all of the issued and outstanding equity interests of NPS Holdings Limited (“NPS”) and Gulf Energy S.A.O.C. (“GES” and, together with NPS, the “Subsidiaries”) (collectively, the “NPS/GES Business Combination”). On June 1, 2020, and May 5, 2021, respectively, NESR further expanded its footprint within the Middle East and North Africa (“MENA”) region when its NPS subsidiary acquired Sahara Petroleum Services Company S.A.E. (“SAPESCO”) and specific oilfield service lines of Action Energy Company W.L.L. (“Action”) (collectively with the NPS/GES Business Combination, the “Business Combinations”). On July 1, 2022, NESR acquired a minority stake in W. D. Von Gonten Engineering LLC (“WDVGE” or the “WDVGE Investment”) a premier Reservoir Characterization and Geological & Geophysical (“G&G”) laboratory and consulting business formed from the merger of W. D. Von Gonten Laboratories LLC and W. D. Von Gonten & Co. Petroleum Engineering Consulting. See Note 4, Business Combinations, and Note 9, Goodwill, Intangible, and Other Assets, to the consolidated financial statements included in Item 18, “Financial Statements,” of this Annual Report for further discussion of our most recent acquisitions and investments.

 

FINANCIAL INFORMATION AND CURRENCY OF FINANCIAL STATEMENTS

 

The financial statements included in Item 18, “Financial Statements,” of this Annual Report, have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Unless otherwise indicated, all references in this Annual Report to “dollars,” “$,” or “US$” are to U.S. dollars, which is the reporting currency of the consolidated financial statements.

 

6
 

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. [RESERVED]

 

B. CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

D. RISK FACTORS

 

An investment in our ordinary shares or warrants involves a high degree of risk. You should consider carefully the following risk factors, as well as the other information contained in this Annual Report, before making an investment in our ordinary shares or warrants. Any of the risk factors described below could significantly and negatively affect our financial position, results of operations or cash flows. In addition, these risks represent important factors that can cause our actual results to differ materially from those anticipated in our forward-looking statements.

 

Risk Factor Summary

 

Risks Related to Our Business and Operations

 

  Our securities were delisted from Nasdaq, which has had and may continue to have a material adverse effect on our business and the trading and price of our securities.
     
  Trends in oil and natural gas prices affect the level of exploration, development, and production activity of our customers and the demand for our services and products, which could have a material adverse effect on our business, results of operations, and financial condition.
     
  Our business is dependent on capital spending by our customers, and reductions in capital spending could have a material adverse effect on our business, results of operations, and financial condition.
     
  Our assets require capital for maintenance, upgrades and refurbishment and we may require significant capital expenditures for new equipment.
     
  The geographic concentration of our operations and customers exposes us to the risks of the regional economy and other regional adverse conditions.
     
  We operate in multiple countries across the Middle East, North Africa, and Asia. Therefore our operations will be subject to political and economic instability and risk of government actions that could have a material adverse effect on our business, results of operations, and financial condition.
     
 

Physical dangers are inherent in our operations and may expose us to significant potential liability and losses. Personnel and property may be harmed during the process of drilling for oil and natural gas.

     
 

If we do not effectively or efficiently integrate the operations of businesses or companies we acquire, including the integration of the operations of our Subsidiaries, our future growth will be limited.

     
  We compete in a highly competitive industry, and many of our competitors are larger than us and have greater resources than we do.
     
  The inability to keep pace with technology developments could adversely affect our ability to maintain or grow market share.

 

Financial, Regulatory, Legal and Compliance Risks

 

  The matters identified in our Annual Report on Form 20-F for the year ended December 31, 2022, relating to restatement of our previously issued audited financial statements as of and for the year-ended December 31, 2020, may affect investor confidence and raise reputational issues and may subject us to additional risks and uncertainties, including increased professional costs and the increased risk from legal proceedings and regulatory inquiries.
     
  We continue to have material weaknesses in our internal control over financial reporting which we are in the process of remediating. If the material weaknesses persist or if we fail to develop or maintain an effective system of internal control, we may not be able to report our financial results accurately or prevent fraud, which could have a material adverse effect on our business, ordinary shares, results of operations and/or financial condition.
     
  Impairment in the carrying value of goodwill could result in the incurrence of impairment charges.
     
  We may not be fully indemnified against financial losses in all circumstances where damage to or loss of property, personal injury, death or environmental harm occur.
     
  We operate in multiple countries and earn revenue in different currencies and as such may be exposed to risks arising from fluctuating exchange rates and currency control restrictions, which may limit our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries or to repatriate assets from some countries.
     
  Changes in or new interpretations of tax laws could impact the determination of our income tax liabilities for a tax year.
     
  Lack of consolidation of our fiscal results in a taxpaying jurisdiction prevents offsetting some losses against taxable profits.
     
  The owners of NESR ordinary shares are subject to tax risks due to the possibility of changes in tax rules and regulations in foreign countries.
     
  If our Subsidiaries are unable to comply with the restrictions and covenants in their debt agreements, they could default under the terms of such agreements, which could result in an acceleration of repayment.
     
  To service our indebtedness, we may require a significant amount of cash, and our ability to generate cash will depend on many factors beyond our control.
     
  Our borrowings under our various loan agreements and other financing arrangements expose us to interest rate risk and such arrangements also include restrictive covenants that may impact our Subsidiaries’ ability to make distributions to us.
     
 

We are exposed to the credit risk of our customers and counterparties, and delay, non-payment, and/or non-performance by our customers could have an adverse effect on our financial condition, results of operations, or cash flows.

     
  Limitations on our ability to protect our intellectual property rights, including our trade secrets, could cause a loss in revenue and any competitive advantage.
     
  We may be subject to litigation if another party claims that we have infringed upon such third party’s intellectual property rights.
     
  Environmental compliance costs and liabilities could reduce our earnings and cash available for operations.
     
  We could be subject to substantial liability claims, which could adversely affect our financial condition, results of operations, and cash flows.
     
  Demand for our products and services could be reduced by existing and future legislation or regulations.
     
  Increased attention to climate change, ESG matters and conservation measures by regulators and investors may adversely impact our business.
     
  Some of our customers require bids for contracts in the form of long-term, fixed pricing contracts that require us to assume additional risks associated with cost over-runs, operating cost inflation, labor availability and productivity, supplier and contractor pricing and performance, and potential claims for liquidated damages.
     
  Our failure to comply with complex United States of America (“U.S.”) and foreign laws and regulations could have a material adverse effect on our operations.
     
  We and U.S. persons working for us are subject to sanctions and export control regimes adopted by the United States and other jurisdictions.
     
  Our operations in the Middle East and other countries could require us to incur additional costs in order to comply with U.S., United Kingdom (“UK”) and European Union (“EU”) sanctions-related regulations restricting or prohibiting activities with certain individuals and entities.
     
  We are subject to litigation risks that may not be covered by insurance.
     
  We may be unable to obtain or renew permits necessary for our operations, which could inhibit our ability to do business.
     
  We might require additional equity or debt financing to fund operations and/or future acquisitions.

 

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Risks Related to Our Capital Structure

 

  The market price of our ordinary shares and warrants may decline.
     
  If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our securities adversely, the price and trading volume of our ordinary shares and warrants could decline.
     
  We are a holding company. Our sole material asset is our equity interest in our Subsidiaries and we are accordingly dependent upon distributions from them to cover our corporate and other overhead expenses.
     
  Future sales of our ordinary shares could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.
     
 

Because we currently have no plans to pay cash dividends on our ordinary shares, you may not receive any return on investment unless you sell your ordinary shares for a price greater than that what you paid for it.

     
  There is no guarantee that the Public Warrants will be in the money, and they may expire worthless.
     
  We may redeem Public Warrants prior to their exercise at a time that is disadvantageous to warrant holders, thereby making their warrants worthless.

 

Other Risks Associated with Our Business

 

  Cybersecurity risks and threats could adversely affect our business.
     
  We depend on our suppliers to provide services and equipment in a timely manner and any delays, interruptions or failures by suppliers could expose us to increased costs or inability to meet contractual obligations.
     
  We have engaged in related party transactions, the termination of which may inhibit business, and such transactions present possible conflicts of interest that could have an adverse effect on us.
     
  The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business.
     
  Our growth potential and ability to operate could be materially and adversely affected if we cannot employ and retain technical personnel at a competitive cost.
     
  An investment in our securities may result in uncertain U.S. federal income tax consequences.
     
  Substantially all of our assets are located outside the United States; therefore, investors may not be able to enforce U.S. federal securities laws or their other legal rights.
     
  As a foreign private issuer in the United States, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer.
     
  We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses to us.
     
  We are not subject to the supervision of the Financial Services Commission of the British Virgin Islands and so our shareholders are not protected by any regulatory inspections in the British Virgin Islands.
     
  Investors may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may be limited, because we are formed under British Virgin Islands law.
     
  Our amended and restated memorandum and articles of association permit the Board of Directors by resolution to create additional classes of securities, including shares with rights, preferences, designations and limitations as they determine which may have an anti-takeover effect.

 

Risk Factors

 

Risks Relating to Our Business and Operations

 

Our securities were delisted from Nasdaq, which has had and may continue to have a material adverse effect on our business and the trading and price of our securities.

 

Our ordinary shares and warrants were delisted from Nasdaq effective April 28, 2023. As at the date of the filing of this Annual Report, the Company’s securities are quoted on the OTC Markets Pink Open Market (“OTC Pink Market”) on an “unsolicited only” basis.

 

The OTC Pink Market is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in the over-the-counter equity securities and provides significantly less liquidity than a listing on the Nasdaq Stock Markets or other national securities exchange. OTC Pink Market securities are traded by a community of market makers that enter quotes and trade reports. This market is limited in comparison to the national stock exchanges and any prices quoted may not be a reliable indication of the value of our securities. Quotes for securities included on the OTC Pink Market are not listed in the financial sections of newspapers as are those for the Nasdaq Stock Market or the NYSE. Therefore, prices for securities traded solely on the OTC Pink Market may be difficult to obtain.

 

Trading on the OTC Pink Market as opposed to a national securities exchange had resulted and may continue to result in a reduction in some or all of the following, each of which could have a material adverse effect on the price of our securities and our company:

 

  liquidity of our securities;
     
  the market price of our securities;

 

8
 

 

  more difficult and more expensive financings in the future; our ability to obtain financing to support our operations and the implementation of our business plan;
     
  decreased ability to issue additional securities or obtain additional financing in the future;
     
  loss of exemption under U.S. state securities registration requirements, which may require us to comply with applicable U.S. state securities laws;
     
  the number of institutional and other investors that will consider investing in our securities;
     
  the number of market markers in our securities;
     
  the availability of information concerning the trading prices and volume of our securities; and
     
  the number of broker-dealers willing to execute trades in our securities.

 

In addition, the market price of our securities could be subject to wide fluctuations in response to:

 

  actual or anticipated fluctuations in our results of operations;
     
  the sale by us of our ordinary shares or other securities, or the anticipation of sales of such securities;
     
  the trading volume of our securities, particularly if such volume is light;
     
  the introduction of new products or services, or product or service enhancements by us or our competitors;
     
  announcements of significant acquisitions or other agreements by us or our competitors;
     
  sales or anticipated sales of our securities by our officers and directors;
     
  conditions and trends in our industry;
     
  changes in our pricing policies or the pricing policies of our competitors;
     
  changes in the estimation of the future size and growth of our markets; and
     
  general economic conditions.

 

The stock market in general, and the OTC Pink Market in particular, have experienced extreme price and volume fluctuations that in some cases may be unrelated or disproportionate to the operating performance of companies. These broad market and industry factors may materially harm the market price of our securities, regardless of our operating performance. In addition, this volatility could adversely affect an investor’s ability to sell our securities and/or the available price for such securities, at any given time.

 

We plan to seek to relist our ordinary shares and warrants on Nasdaq as soon as practicable through the normal relisting application process. However, we cannot assure you that we will list our securities successfully on Nasdaq or another national securities exchange, or that once listed, our securities will remain listed thereon. An active trading market for the Company’s securities may never develop or, if developed, it may not be sustained. You may be unable to sell your ordinary shares and/or warrants unless an active market for such securities can be established and sustained.

 

Trends in oil and natural gas prices affect the level of exploration, development, and production activity of our customers and the demand for our services and products, which could have a material adverse effect on our business, results of operations, and financial condition.

 

Demand for our services and products is sensitive to the level of exploration, development, and production activity of, and the corresponding capital spending by, oil and natural gas companies. The level of exploration, development, and production activity is directly affected by trends in oil and natural gas prices, which historically have been volatile and are likely to continue to be volatile. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty, and a variety of other economic factors that are beyond our control. The following table illustrates the high degree of variability in Europe Brent spot prices per barrel over the last three years:

 

   Highest Closing Price  Lowest Closing Price
2021  $85.76   $50.36 
2022   133.18    76.02 
2023   97.10    71.03 

 

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A prolonged reduction in oil and natural gas prices could lead to depressed levels of exploration, development, and production activity and could have a material adverse effect on our business, results of operations and financial condition. Even the perception of longer-term lower oil and natural gas prices by oil and natural gas companies can result in the reduction or deferral of major expenditures given the long-term nature of many large-scale development projects.

 

Factors affecting the prices of oil and natural gas include:

 

  the global and regional level of supply and demand for oil and natural gas including liquefied natural gas imports and exports;
     
  governmental regulations, including the policies of governments regarding the exploration for and production and development of their oil and natural gas reserves, including environmental regulations;
     
  increased attention to ESG matters and conservation measures may adversely impact the oil and natural gas industry;
     
  weather conditions, natural disasters, and public health crises and threats;
     
  worldwide political, military, and economic conditions;
     
  the ability or willingness of the Organization of the Petroleum Exporting Countries (“OPEC”) and the expanded alliance known as OPEC+ (“OPEC+”) to set and maintain oil production levels and quotas and member country compliance with quotas;
     
  the level of oil and natural gas production by non-OPEC+ countries;
     
  oil refining capacity and shifts in end-customer preferences toward fuel efficiency and the use of natural gas;

 

  the cost of producing and delivering oil and natural gas;
     
  technological advances affecting energy consumption; and
     
  potential acceleration of the development of alternative fuels.

 

10
 

 

Our business is dependent on capital spending by our customers, and reductions in capital spending could have a material adverse effect on our business, results of operations, and financial condition.

 

Our business is directly affected by changes in capital expenditures by our customers and reductions in our customers’ capital spending could reduce demand for our services and products and have a material adverse effect on our business, results of operations, and financial condition. Most of our contracts can be cancelled or renegotiated by our customers at any time. Some of the items that may impact our customer’s capital spending include:

 

  oil and natural gas prices, including volatility of oil and natural gas prices and expectations regarding future prices;
     
  changes in government incentives and tax regimes;
     
  the inability of our customers to access capital on economically favorable terms;
     
  customer personnel changes; and
     
  adverse developments in the business or operations of our customers, including write-downs of reserves and borrowing base reductions under customer credit facilities.

 

The oil and natural gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for our products and services and downward pressure on the prices that we are able to charge. Sustained market uncertainty can also result in lower demand and pricing for our products and services. A significant industry downturn, sustained market uncertainty, or increased availability of economical alternative energy sources could result in a reduction in demand for our products and services, which could adversely affect our business, financial condition, results of operations, cash flows and prospects. With respect to national oil company (“NOC”) customers, we are also subject to risk of policy, regime, currency and budgetary changes, all of which may affect our customers’ capital expenditures.

 

Our assets require capital for maintenance, upgrades and refurbishment and we may require significant capital expenditures for new equipment.

 

Our revenue is generated principally from providing services and related equipment as well as renting tools and equipment. Our tools and equipment require capital investment in maintenance, upgrades and refurbishment to maintain our competitiveness. To the extent we are unable to fund such projects, we may have less equipment available for service or our equipment may not be attractive to potential or current customers. Additionally, increased demand, competition, advances in technology within our industry, and/or new emissions control, safety or other regulatory requirements in the geographies that we operate in may require us to update or replace existing equipment. Such demands on our capital or reductions in demand for our equipment and the increase in cost to maintain labor necessary for such maintenance and improvement, in each case, could have a material adverse effect on our business, liquidity position, financial condition, prospects and results of operations.

 

The geographic concentration of our operations and customers exposes us to the risks of the regional economy and other regional adverse conditions. The credit risks of our concentrated customer base in the energy industry could result in losses. In addition, we depend on a small number of customers for a significant portion of our revenues. Therefore, the loss of any of these customers could result in a decline in our revenues and adversely affect our financial condition, results of operations or cash flows.

 

Our operations and our primary customers are located in the Middle East and North Africa and all are in the energy industry. Most of our customers are NOCs. Given the importance of NOCs, which dominate the petroleum industry in our countries of operation, our business is more susceptible to regional economic, budgetary and political conditions than other, more geographically diversified competitors. Any changes in market conditions, unforeseen circumstances, or other events affecting the area in which our assets are located could have a material adverse effect on our business, operating result, and financial condition.

 

11
 

 

Revenues from four customers individually accounted for 44%, 8%, 7% and 5% of the Company’s consolidated revenues in the year ended December 31, 2023, 40%, 9%, 7% and 7% of the Company’s consolidated revenues in the year ended December 31, 2022, and 51%, 10%, 7% and 4% of the Company’s consolidated revenues in the year ended December 31, 2021. Under the terms of our customer contracts, there is a risk of termination of one or more of such contracts and/or a lack of engagement in the same manner, or to the same level, as has been the case historically. The loss of all or even a portion of the business from a major customer, the failure to extend or replace the contracts with a major customer, or the extension or replacement of such contracts on less favorable terms, as a result of competition or otherwise, could adversely affect our financial condition, results of operations or cash flows.

 

We operate in multiple countries across the Middle East, North Africa, and Asia. Therefore, our operations will be subject to political and economic instability and risk of government actions that could have a material adverse effect on our business, results of operations, and financial condition.

 

We are exposed to risks inherent in doing business in each of the countries in which we operate. Our operations are subject to various risks unique to each country that could have a material adverse effect on our business, results of operations, and financial condition. With respect to any particular country, these risks may include but are not limited to:

 

  civil unrest, acts of terrorism, force majeure, war, other armed conflict, and sanctions;
     
  recent efforts toward modernization in the region could have unanticipated consequences to cause unrest or political change that could cause loss of contracts;
     
  inflation;
     
  currency fluctuations, devaluations, and conversion restrictions;
     
  government actions that may result in expropriation and nationalization of assets in that country;
     
  confiscatory taxation or other adverse tax policies;
     
  actions that limit or disrupt markets or our operations, restrict payments, limit the movement of funds or result in the deprivation of contract rights;
     
  actions that result in the inability to obtain or retain licenses required for operation; and
     
  retaliatory actions that may be taken by one country against other countries in the region.

 

Due to the unsettled political conditions in many oil-producing countries, our operations, revenue, and profits may be subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls, and governmental actions. These and other risks described above could result in the loss of our personnel or assets, cause us to evacuate our personnel from certain countries, cause us to increase spending on security, cause us to cease operating in certain countries, disrupt financial and commercial markets, including the supply of and pricing for oil and natural gas, disrupt the supply of equipment required to operate in a country, result in labor shortages and generate greater political and economic instability in some of the geographic areas in which we operate. Any possible reprisals as a consequence of military or other action, such as acts of terrorism in the Middle East, could have a material adverse effect on our business, results of operations, and financial condition.

 

12
 

 

Physical dangers are inherent in our operations and may expose us to significant potential liability and losses. Personnel and property may be harmed during the process of drilling for oil and natural gas.

 

Drilling for and producing hydrocarbons, and the associated products and services that we provide, include inherent dangers that may lead to property damage or damage to geological formations, personal injury or loss of life, or the discharge of hazardous materials into the environment. Many of these events are outside our control. Typically, we provide products and services at a well site where our personnel and equipment are located together with personnel and equipment of our customer and third parties, such as other service providers. At many sites, we depend on other companies and personnel to conduct drilling operations in accordance with appropriate safety standards. From time to time, personnel are injured or equipment or property is damaged or destroyed as a result of accidents, failed equipment, faulty products or services, failure of safety measures, uncontained formation pressures or other dangers inherent in drilling for oil and natural gas. Any of these events can be the result of human error. With increasing frequency, our products and services are deployed on more challenging prospects both onshore and offshore, where the occurrence of the types of events mentioned above can have an even more catastrophic impact on people, equipment and the environment. These risks could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages and could expose us to a variety of claims, losses and remedial obligations. In addition, interruption of customer activity as a result of such events could adversely affect our financial condition, results of operations and cash flows.

 

If we do not effectively or efficiently integrate the operations of businesses or companies we acquire, our future growth will be limited.

 

We may not achieve expected returns and other benefits as a result of various factors, including integration and collaboration challenges. The success of any acquisition is subject to various risks, including:

 

  the inability to integrate the operations of recently acquired assets;
     
  the diversion of management’s attention from other business concerns;
     
  the failure to realize expected volumes, revenues, profitability, or growth;
     
  the failure to realize any expected synergies and cost savings;
     
  the coordination of geographically disparate organizations, systems, and facilities;
     
  the assumption of unknown liabilities;
     
  the loss of customers or key employees; and
     
  potential environmental or regulatory liabilities and title problems.

 

The assessment by our management of these risks is inexact and may not reveal or resolve all existing and potential risks. Realization of any of these risks could adversely affect our financial condition, results of operations and cash flows.

 

We operate in a highly competitive industry, and many of our competitors are larger than us and have greater resources than we do.

 

Several of our primary competitors are diversified multinational companies with substantially larger operating staffs and greater capital resources. These larger competitors’ greater resources could allow them to better withstand industry downturns and to compete more effectively on the basis of technology, geographic scope and retained skilled personnel.

 

13
 

 

If we are unable to keep pace with technology developments in the industry, this could adversely affect our ability to maintain or grow market share.

 

The oilfield service industry is subject to the introduction of new drilling and completion techniques, services using new technologies, and emissions control requirements that could yield service innovations, some of which may be subject to patent or other intellectual property protections. Some of these new technologies may be disruptive and lead to the rapid replacement of existing technologies. We intend to introduce and integrate new technologies and procedures used by North American and European based oilfield service companies; however, we cannot be certain that we will be able to develop and implement new technologies or services on a timely basis or at an acceptable cost. The oilfield service industry is highly competitive and dominated by a few large players that have resources to invest in new technologies. Our ability to continually provide competitive technology and services can impact our ability to maintain or increase prices for our services, maintain market share, and negotiate acceptable contract terms with our customers. If we are unable to continue to acquire or develop competitive technology or deliver it to our customers in a timely and cost-competitive manner in the various markets we serve, it could adversely affect our financial condition, results of operations, and cash flows.

 

Financial, Regulatory, Legal and Compliance Risks

 

The matters identified in our Annual Report on Form 20-F for the year ended December 31, 2022, relating to restatement of our previously issued audited financial statements as of and for the year-ended December 31, 2020, may affect investor confidence and raise reputational issues and may subject us to additional risks and uncertainties, including increased professional costs and the increased risk from legal proceedings and regulatory inquiries.

 

As a consequence of the matters discussed in our Annual Report on Form 20-F for the year ended December 31, 2022, we have incurred, and may continue to incur, unanticipated costs for professional fees in connection therewith. We also have incurred significant costs in connection with or as a result of the delisting by Nasdaq of our securities in April 2023 (including in connection with communicating with Nasdaq and assessing alternatives for continued trading of our securities in the United States), and our remediation of our material weaknesses in internal control over financial reporting. See “Controls and Procedures” for additional information regarding such material weaknesses and such remediation process. We have become subject to a number of additional risks and uncertainties, including the increased risk from litigation and regulatory inquiries. For example, we are the subject of an ongoing SEC inquiry that could result in financial penalties. We have and will continue to fully cooperate with the SEC inquiry. The SEC advised us that the initiation of a request for information should not be construed as an indication by the SEC or its staff that any violation of the federal securities laws has occurred. At this stage, we are unable to predict when the SEC’s inquiry will conclude or what the consequences may be. Our management believes that the risk of loss in connection with this proceeding will not have a material adverse effect on our financial condition. Any of the foregoing may affect investor confidence in the accuracy of our financial disclosures and may raise reputational risks for our business, both of which could harm our business and financial results.

 

We continue to have material weaknesses in our internal control over financial reporting which we are in the process of remediating. If the material weaknesses persist or if we fail to develop or maintain an effective system of internal control, we may not be able to report our financial results accurately or prevent fraud, which could have a material adverse effect on our business, ordinary shares, results of operations and/or financial condition.

 

Effective internal control is necessary for us to provide reliable and accurate financial statements and to effectively prevent fraud. As described in Item 15, “Controls and Procedures,” we have concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2023, December 31, 2022, and December 31, 2021, due to material weaknesses in our internal control over financial reporting. Our Senior Management failed to set an appropriate tone at the top sufficient to ensure a culture of compliance with the Company’s accounting, finance and internal control policies, including through:

 

  Lack of an effective organizational structure to promote effective internal control:
  Lack of effective communication protocols to ensure timely escalation and resolving of accounting issues; and

 

14
 

 

  Insufficient technical accounting resources with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements to appropriately analyze, record and disclose accounting matters timely and accurately in accordance with U.S. GAAP.

 

Moreover, the material weakness described above contributed to the following additional material weaknesses:

 

  The Company’s period-end financial reporting controls, specifically those over account reconciliations, were not effectively designed and implemented to detect potential misstatements and correct identified misstatements to period-end financial statements.
  The Company did not design and maintain effective controls over certain accounts payable functions. Specifically, the Company did not maintain effective controls over the creation of purchase orders, the matching of goods of services received against purchase orders, and/or the review of the completeness and accuracy of accounts payable and accrued liabilities.
  The Company did not design and maintain effective information technology general controls over financial reporting as privileged access users were not appropriately provisioned and inadequate monitoring controls were in place to enforce appropriate system access and segregation of duties.

 

We are designing, implementing, and evaluating measures designed to remediate the material weaknesses. However, we cannot be certain that these measures will be successful or that we will be able to prevent future material weaknesses or significant deficiencies.

 

Furthermore, the efforts required to remediate those material weaknesses may cause a diversion of management’s time and attention, which could have a material adverse effect on our business, results of operations, financial position and cash flows.

 

Impairment in the carrying value of goodwill could result in the incurrence of impairment charges.

 

As of December 31, 2023, we had goodwill of $645.1 million. We review the carrying value of our goodwill for impairment annually or more frequently if certain indicators are present. In the event we determine that the value of goodwill has become impaired, an accounting charge for the amount of the impairment during the period in which the determination is made may be recognized. While we have not recorded any impairment charge for goodwill for the periods presented in this Annual Report, future changes in our business and operations or external market conditions, among other factors, could require us to record an impairment charge for goodwill, which could lead to decreased assets and reduced income. If a significant write-down is required, the charge could have a material adverse effect on our financial condition and results of operations.

 

We may not be fully indemnified against financial losses in all circumstances where damage to or loss of property, personal injury, death or environmental harm occur.

 

As is customary in our industry, our contracts typically require that our customers indemnify us for claims arising from the injury or death of their employees (and those of their other contractors), the loss or damage of their equipment (and that of their other contractors), damage to the well or reservoir and pollution originating from the customer’s equipment or from the reservoir (including uncontained oil flow from a reservoir) and claims arising from catastrophic events, such as a well blowout, fire, explosion and from pollution below the surface. Conversely, we typically indemnify our customers for claims arising from the injury or death of our employees, the loss or damage of our equipment (other than equipment lost in the hole) or pollution originating from our equipment above the surface of the earth or water.

 

Our indemnification arrangements may not protect us in every case. For example, from time to time we may enter into contracts with less favorable indemnities or perform work without a contract that protects us. Our indemnity arrangements may also be held to be overly broad in some courts and/or contrary to public policy in some jurisdictions, and to that extent unenforceable. Additionally, some jurisdictions which permit indemnification nonetheless limit its scope by statute. We may be subject to claims brought by third parties or government agencies with respect to which we are not indemnified. Furthermore, the parties from which we seek indemnity may not be solvent, may become bankrupt, may lack resources or insurance to honor their indemnities or may not otherwise be able to satisfy their indemnity obligations to us. The lack of enforceable indemnification could expose us to significant potential liability and losses.

 

Further, our assets generally are not insured against loss from political violence such as war, terrorism or civil commotion. If any of our assets are damaged or destroyed as a result of an uninsured cause, we could recognize a loss of those assets.

 

15
 

 

We operate in multiple countries and earn revenue in different currencies and as such may be exposed to risks arising from fluctuating exchange rates and currency control restrictions, which may limit our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries or to repatriate assets from some countries.

 

A portion of our consolidated revenue and consolidated operating expenses is in foreign currencies. As a result, we will be subject to risks, including:

 

  foreign currency exchange risks resulting from changes in foreign currency exchange rates and the implementation of exchange controls; and
     
  potential limitations that might be imposed on their ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries.

 

In the future, we may enter into foreign currency hedging contracts to reduce foreign currency volatility. However, we currently do not maintain foreign currency hedging contracts with respect to our foreign currencies, and any contracts we may enter into may not fully mitigate our foreign currency risk, may prove disadvantageous or may create additional risks.

 

Changes in or new interpretations of tax laws could impact the determination of our income tax liabilities for a tax year.

 

We have operations in 15 countries. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including income actually earned, income deemed earned, and revenue-based tax withholding. The final determination of our income tax liabilities involves the interpretation of local tax laws, tax treaties, and related regulations in each jurisdiction, as well as the significant use of estimates and assumptions regarding the scope of future operations and the nature of income earned and expenditures incurred. Changes in the operating environment, including changes in or new interpretations of tax laws, could impact the determination of our income tax liabilities for the year.

 

Effective January 1, 2018, the Gulf Cooperation Council (“GCC”) countries agreed to impose a value added tax (“VAT”) across the GCC, however, as of year-end 2023 only Bahrain, Saudi Arabia, the United Arab Emirates, and Oman formalized and/or implemented their plans. Under these VAT rules, most goods and services are taxed at rates ranging from 5-15%. Businesses subject to the VAT must keep detailed financial and business records. This includes collecting invoices and accounting for the goods or services bought and sold, as well as the VAT paid and charged going forward.

 

The Organization of Economic Cooperation and Development (“OECD”), which represents a coalition of member countries, issued various white papers addressing Tax Base Erosion and Jurisdictional Profit Shifting. The recommendations in these white papers are generally aimed at combating what they believe is tax avoidance. Numerous jurisdictions in which we operate have been influenced by these white papers as well as other factors and are increasingly active in evaluating changes to their tax laws. In addition, the OECD has advanced reforms focused on implementing a global minimum tax rate of at least 15% for large multinational corporations on a jurisdiction-by-jurisdiction basis, known as Pillar 2. On October 8, 2021, the OECD announced an accord endorsing and providing an implementation plan for Pillar 2 agreed upon by 136 nations. On December 15, 2022, the European Council formally adopted a European Union directive on the implementation of the plan by January 1, 2024. While the timing of the implementation of the accord is uncertain, when legislation is enacted to implement the accord in the jurisdictions in which we have operations, it could materially increase the amount of taxes we owe, thereby negatively affecting our results of operations and our cash flows from operations.

 

As noted above, Pillar 2 rules call for a global minimum tax of 15% on a per jurisdiction basis for multi-national enterprises with annual revenues of more than €750.0 million. Therefore, the Company will likely be subject to the global minimum tax but is still analyzing the impact of the new Pillar 2 rules to determine the overall impact to the Company going forward.

 

Lack of consolidation of our fiscal results in a taxpaying jurisdiction prevents offsetting some losses against taxable profits.

 

NESR is a British Virgin Islands corporation. NESR is not taxed by the British Virgin Islands on income generated outside of the British Virgin Islands. As a result of our legal entity structure, annual fiscal losses in one of our subsidiaries may not be eligible to be offset against profits in another subsidiary within the same jurisdiction to reduce consolidated tax liabilities.

 

The owners of NESR ordinary shares are subject to tax risks due to the possibility of changes in tax rules and regulations in foreign countries.

 

The British Virgin Islands does not impose income taxes on British Virgin Islands companies for dividends received or subsidiary operating profits generated outside of the British Virgin Islands. The law could change to impose such taxes. In addition, our Subsidiaries operate in many countries that have different tax rates and systems which may change including jurisdictions that currently do not impose tax on corporations. U.S. shareholders must report on their tax returns all investments in foreign stocks, including ordinary shares.

 

If our Subsidiaries are unable to comply with the restrictions and covenants in their debt agreements, they could default under the terms of such agreements, which could result in an acceleration of repayment.

 

If our Subsidiaries are unable to comply with the restrictions and covenants in their debt agreements, they could default under the terms of these agreements. Our Subsidiaries’ ability to comply with these restrictions and covenants, including meeting financial ratios and tests, may be affected by events beyond their control. As a result, we cannot assure that our Subsidiaries will be able to comply with these restrictions and covenants or meet such financial ratios and tests.

 

16
 

 

If our Subsidiaries are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium (if any), and interest on their indebtedness, or if they otherwise fail to comply with the various covenants, including financial and operating covenants in the instruments governing their indebtedness they could default under the terms of the agreements governing such indebtedness. In the event of such a default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our Subsidiaries’ debt agreements could terminate their commitments to lend, cease making further loans, seize collateral and institute foreclosure proceedings against their assets, and our Subsidiaries could be forced into bankruptcy or liquidation. If any of these events occur, the assets of our Subsidiaries might not be sufficient to repay in full all of their outstanding indebtedness and we may be unable to find alternative financing. Even if we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us or our Subsidiaries. Additionally, we may not be able to amend their debt agreements or obtain needed waivers on satisfactory terms.

 

To service our indebtedness, we may require a significant amount of cash, and our ability to generate cash will depend on many factors beyond our control.

 

Our ability to make payments on and to refinance our Subsidiaries’ indebtedness and to fund planned capital expenditures depends in part on our ability to generate cash in the future. Our growth and capital expenditure plan require substantial capital, and any inability to obtain such capital could lead to a decline in our ability to sustain our current business, access new service markets or grow our business. Our Subsidiaries’ debt is required to be repaid through an installment structure that may unduly strain our ability to meet our growth objectives. Our ability to service such indebtedness is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot provide assurance that we will generate sufficient cash flow from operations, that we will realize operating improvements on schedule, or that future borrowings will be available to us in an amount sufficient to enable us to service and repay our Subsidiaries’ indebtedness or to fund their other liquidity needs. If we are unable to satisfy our Subsidiaries’ debt obligations, we may have to undertake alternative financing plans, such as:

 

  refinancing or restructuring their debt;
     
  selling assets;
     
  reducing or delaying capital investments; or
     
  seeking to raise additional capital.

 

Collection of receivables from work performed may not be sufficient to fund working capital needs. We have arranged financing in anticipation of our projected cash requirements, but events beyond our control could cause cash collection to be less than projected and cause us not to meet our Subsidiaries’ debt obligations.

 

We cannot provide assurance that any additional refinancing or debt restructuring would be possible, that any assets could be sold or that, if sold, the timing of the sales and the amount of proceeds realized from those sales would be favorable to us or that additional financing could be obtained on acceptable terms. Our inability to generate sufficient cash flows to satisfy the debt obligations, or to obtain alternative financing, could materially and adversely affect our business, financial condition, results of operations and prospects. For more information on our outstanding indebtedness and the terms and conditions related thereto, please see Note 11, Debt, to the consolidated financial statements.

 

17
 

 

Our borrowings under our various loan agreements and other financing arrangements expose us to interest rate risk and such arrangements also include restrictive covenants that may impact our Subsidiaries’ ability to make distributions to us.

 

Our earnings are exposed to interest rate risk associated with $452.2 million in borrowings under our various loan agreements and other financing arrangements as of December 31, 2023. Each of these arrangements requires the payment of floating interest rates based upon short-term interest rate indices. If interest rates increase, so will our interest costs, which may have a material adverse effect on our financial condition and results of operations.

 

Additionally, the terms of these financing arrangements, including the restrictive covenants therein, may restrict the ability of our Subsidiaries to make distributions to us, which could materially adversely affect our liquidity and financial condition.

 

We are exposed to the credit risk of our customers and counterparties, and delay, non-payment, and/or non-performance by our customers could have an adverse effect on our financial condition, results of operations, or cash flows.

 

We are subject to risks of loss resulting from non-payment or non-performance by our customers and other counterparties. Customers may also delay payments by imposing complex administrative processes, by disputing or rejecting invoices, or through other means. Any increase in the non-payment and non-performance by our customers could adversely affect our financial condition, results of operations, or cash flows. Lower commodity prices may result in a significant reduction in the liquidity of our customers and their ability to make payment or perform on their obligations to us. Furthermore, some of our customers may be leveraged and subject to their own operating and regulatory risks, which increases the risk that they may default on their obligations to us.

 

18
 

 

Limitations on our ability to protect our intellectual property rights, including our trade secrets, could cause a loss in revenue and any competitive advantage.

 

Some of our products or services, and the processes they use to produce or provide products and services, constitute trade secrets and confidential know how. We may lose employees who have knowledge of important trade secrets and who may not be prohibited in the relevant countries in which they work from using such trade secrets to compete with us. Our business may be adversely affected if any acquired patents are unenforceable, the claims allowed under their patents are not sufficient to protect our technology, our patent applications are denied, or our trade secrets are not adequately protected. In addition, our competitors may be able to independently develop technology that is similar to the technology used by us without infringing on our patents or gaining access to our trade secrets, which could adversely affect our financial condition, results of operations, and cash flows.

 

We may be subject to litigation if another party claims that we have infringed upon such party’s intellectual property rights.

 

The tools, techniques, methodologies, programs and components that we use to provide our services may infringe upon the intellectual property rights of others. Infringement claims may result in significant legal and other costs and may distract our management from running our core business. Royalty payments under licenses from third parties, if available, and developing non-infringing technologies would increase our costs. If licenses were required and not available, we might not be able to continue providing a particular service or product, which could adversely affect our financial condition, results of operations, and cash flows.

 

Environmental compliance costs and liabilities could reduce our earnings and cash available for operations.

 

We are subject to increasingly stringent laws and regulations relating to the importation and use, storage, handling, transportation, and disposal of hazardous materials, radioactive materials, chemicals and explosives, and to environmental protection and health and safety, including laws and regulations governing air emissions, hydraulic fracturing, water and other discharges and waste management and natural resources. For more information, see our regulatory disclosures titled “Environmental Regulation” and “Health and Safety Regulation.” We expect to incur capital and operating costs to comply with environmental laws and regulations. The technical requirements of these laws and regulations are becoming increasingly complex, stringent and expensive to implement.

 

Our operations use and generate hazardous substances and wastes. Accordingly, we could become subject to material liabilities relating to the investigation and clean-up of potentially contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances or wastes. Applicable laws may provide for “strict liability” for remediation costs, damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and several liabilities for remediation of spills and releases of hazardous substances and wastes. Joint and several liability can render one party liable for all damages arising from a spill or release even if other parties also contributed to the spill or release.

 

19
 

 

In addition, stricter enforcement of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs, become the basis for new or increased liabilities, subject us to certain government-imposed penalties or result in certain licenses being revoked. Any of these developments could reduce our earnings and cash available for operations or otherwise result in interruptions or delays in our operations that could have an adverse effect on our financial position.

 

We could be subject to substantial liability claims, which could adversely affect our financial condition, results of operations, and cash flows.

 

The technical complexities of our operations expose us to a wide range of significant health, safety and environmental risks. Our products and service offerings involve production-related activities, radioactive materials, chemicals, explosives, and other equipment and services that are deployed in challenging exploration, development, and production environments. An accident involving these services or equipment, or a failure of a product, could cause personal injury, loss of life, damage to or destruction of property, equipment or the environment, or suspension of operations. Our insurance may not protect us against liability for certain kinds of events, including events involving pollution, or against losses resulting from business interruption. Moreover, we may not be able to maintain insurance for certain risks or at levels of risk coverage or policy limits that we deem adequate. Any damages caused by our services or products that are not covered by insurance or are in excess of policy limits or subject to substantial deductibles, could adversely affect our financial condition, results of operations, and cash flows.

 

Demand for our products and services could be reduced by existing and future legislation or regulations.

 

Environmental advocacy groups and regulatory agencies in the United States and other countries have been focusing considerable attention on the emissions of carbon dioxide, methane and other greenhouse gases and their role in climate change. Existing or future legislation and regulations related to greenhouse gas emissions and climate change, as well as government or private sector initiatives to conserve energy or promote the use of alternative energy sources, or reduce greenhouse gas emissions, may significantly curtail demand and production of fossil fuels such as oil and natural gas in areas of the world where our customers operate and thus adversely affect future demand for our services. For more information, see our regulatory disclosure titled “Environmental Regulation.” 

 

Some international, national and local governments and agencies have also adopted laws and regulations or are evaluating proposed legislation and regulations that are focused on the extraction of shale gas or oil using hydraulic fracturing. Hydraulic fracturing is a stimulation treatment routinely performed on oil and natural gas wells in low-permeability reservoirs. Specially engineered fluids with proppants are pumped at high pressure and rate into the reservoir interval to be treated, causing cracks in the target formation. Future hydraulic fracturing-related legislation or regulations could limit or ban hydraulic fracturing, or lead to operational delays and increased costs, including for the capture of fugitive methane emissions, and therefore reduce demand for our pressure pumping services. If such additional international, national, or local legislation or regulations are enacted, it could adversely affect our financial condition, results of operations, and cash flows.

 

20
 

 

Increased attention to climate change, ESG matters and conservation measures by regulators and investors may adversely impact our business.

 

Increasing attention to climate change, societal expectations on companies to address climate change, investor and societal expectations regarding voluntary ESG disclosures, and consumer demand for alternative forms of energy may result in increased costs, reduced demand for our services, reduced profits, increased investigations and litigation, and negative impacts on our stock price and access to capital markets. Increasing attention to climate change and environmental conservation, for example, may result in demand shifts for oil and natural gas products, additional governmental investigations, and private litigation against oil and natural gas operators. To the extent that societal pressures or political or other factors are involved, it is possible that such liability could be incurred without regard to our causation of or contribution to the asserted damage, or to other mitigating factors. All of these factors have the potential to adversely affect demand for our services, our financial condition, results of operations, and cash flows.

 

Moreover, while we may make voluntary statements regarding ESG matters from time to time, many of the statements in those voluntary disclosures are based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying, measuring and reporting on many ESG matters. Consequently, while we continue to examine potential ESG related risks and opportunities, set goals, and implement mitigation measures, we cannot guarantee that these efforts will be successful. In addition, as this is a continuously evolving area, we can provide no assurance that our current assessment of ESG-related risks and opportunities is comprehensive or that the risks we identify and our conclusions about their effects and potential mitigation will not be subject to change.

 

In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings and recent activism directed at shifting funding away from companies with energy-related assets could lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital. Also, institutional lenders may decide not to provide funding for fossil fuel energy companies based on climate change related concerns, which could affect our access to capital.

 

Some of our customers require bids for contracts in the form of long-term, fixed pricing contracts that require us to assume additional risks associated with cost over-runs, operating cost inflation, labor availability and productivity, supplier and contractor pricing and performance, and potential claims for liquidated damages.

 

Some of our customers, primarily NOCs, require bids for contracts in the form of long-term, fixed pricing contracts that require us to provide integrated project management services outside our normal discrete businesses acting as project managers as well as service providers, and require us to assume additional risks associated with cost over-runs. In addition, NOCs often operate in countries with unsettled political conditions, war, civil unrest, or other types of community issues that may also result in cost over-runs, delays, and project losses.

 

21
 

 

Providing services on an integrated basis or long-term may also require us to assume additional risks associated with operating cost inflation, labor availability and productivity, supplier pricing and performance, and potential claims for liquidated damages. We might rely on third-party subcontractors and equipment providers to assist our customers with the completion of these types of contracts. To the extent that we cannot engage subcontractors or acquire equipment or materials in a timely manner and on reasonable terms or on terms consistent with the customer contract, our ability to complete a project in accordance with stated deadlines or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price work, we could experience losses in the performance of these contracts. These delays and additional costs may be substantial, and we may be required to compensate our customers for these delays. This may reduce the profit to be realized or result in a loss on a project and adversely affect our financial condition, results of operations, and cash flows.

 

Our failure to comply with complex U.S. and foreign laws and regulations could have a material adverse effect on our operations.

 

We are subject to complex U.S. and foreign laws and regulations, such as the U.S. Foreign Corrupt Practices Act and various other anti-bribery and anti-corruption laws. At this time, the U.K. Bribery Act has not been adopted to apply to British Virgin Islands companies, but does apply to any employees of us or our Subsidiaries that are U.K. citizens or residents, including any British overseas territory citizens, and any subsidiaries formed in the U.K. We or our employees may also be subject to trade controls (including export controls) and trade sanctions laws and regulations that restrict the movement of certain goods and technologies to, and certain operations in, various countries or with certain persons. Thus, our ability to transfer people and products among certain countries and engage in certain transactions or activities will be subject to maintaining required licenses and complying with these laws and regulations. The internal controls, policies and procedures, and employee training and compliance programs we have implemented to deter prohibited practices may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies or violating applicable laws and regulations. Any determination that we have violated or are responsible for violations of anti-bribery, trade control, trade sanctions or anti-corruption laws could have a material adverse effect on our financial condition and may result in fines and penalties, administrative remedies or restrictions on business conduct, and could have a material adverse effect on our reputation and our business.

 

Regulatory enforcement and accountability mechanisms have steadily changed the financial landscape for companies organized in the British Virgin Islands. One major regulatory development came in 2014 following the enactment in the United States of the Foreign Account Tax Compliance Act (“FATCA”) which was designed primarily to reduce tax evasion by U.S. persons using overseas accounts and financial services entities or institutions. FATCA requires certain types of foreign entities to identify and report specific information to the United States Internal Revenue Service (“IRS”) about U.S. taxpayers holding foreign accounts and financial assets. The reporting obligations under FATCA were directly implemented into British Virgin Islands Law in 2014, in relation to BVI entities carrying on certain activities.

 

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Another key regulatory change came following the British Virgin Islands’ implementation of the “Common Reporting Standard” (“CRS”) into its financial services legislation and oversight. CRS reporting in the British Virgin Islands commenced during the second half of 2017. CRS obligations were specifically designed to fight against tax evasion, and, as with FATCA, the CRS system requires certain types of financial services entities or institutions established in the CRS jurisdiction to report certain financial account information to their national tax or other relevant authority, who then share that information automatically on an annual basis with other CRS partner jurisdictions. We are not currently required to comply with either CRS or FATCA.

 

We and U.S. persons working for us are subject to sanctions and export control regimes adopted by the United States and other jurisdictions.

 

We and U.S. persons working for us are subject to laws, reporting requirements and sanctions imposed by the United States or by other jurisdictions where we do business that may restrict or even prohibit us, U.S. persons, or certain of our affiliates from doing business in certain countries, with designated companies including in the oil and natural gas sector, or engaging in certain transactions or activities. Countries in the Middle East, Asia, and Africa are among the locations in which the United States, the United Nations, the United Kingdom and the European Union have imposed economic sanctions that restrict or impede contracting and other transactions involving identified sanctioned countries or parties. We cannot predict what sanctions might be imposed in the future against any country in which we or our Subsidiaries might operate or might receive contracts for performing services. In addition, the U.S. Commerce Department and State Department administer export controls that regulate the types of commodities and technologies that can be sold or provided to certain countries or recipients if those items are subject to U.S. jurisdiction, and such controls are modified from time to time. Trade restrictions, export controls and sanctions could adversely impact our potential income, or our ability to pursue new undeveloped business objectives.

 

The United States government has implemented mechanisms to collect information on companies registered on a U.S. stock exchange related to certain business activities that might be sanctionable under the various U.S. sanctions programs if the foreign companies or their subsidiaries are U.S. companies. Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 requires an annual or quarterly “219 Report” to be filed with the SEC by any company registered on a U.S. stock exchange, and requires the company to disclose, as if the listed company were a U.S. entity, certain business activities relating to U.S. sanctions, which includes certain activities involving the Iranian energy sector, even if the activity is not prohibited by U.S. sanctions for the foreign company. Such reporting of any future activities that we or our Subsidiaries may engage in, could initiate an investigation by the U.S. government and require us to engage counsel to monitor or respond to such investigations. A 219 Report is required for knowingly engaging in certain activities, including activities that constitute an investment in the Iranian energy sector of $5 million each, or in the aggregate of over $20 million in a 12-month period, among other types of transactions. A 219 Report is also required for knowingly engaging in any transaction with certain individuals or entities identified in the U.S. Department of the Treasury’s Office of Foreign Assets Control’s (“OFAC”) List of Specially Designated Nationals (“SDNs”) and Blocked Persons (“SDN List”), whether or not located in Iran, depending on the reason such persons were designated as SDNs. The risk of an investigation or inadvertent action that relates to sanctioned activity could increase costs and have an adverse impact on financial conditions and results of operations.

 

Our operations in the Middle East and other countries could require us to incur additional costs in order to comply with United States of America (“U.S.”), United Kingdom (“UK”) and European Union (“EU”) sanctions-related regulations restricting or prohibiting activities with certain individuals and entities.

 

The United States government, the UK government and the EU have established lists of corporations and people with which engaging in business by a person subject to the jurisdiction of such government authority is prohibited without a license. The property and interests in property of persons or entities identified on the SDN List, are blocked in the United States and when in the possession or control of U.S. persons. U.S. persons are broadly prohibited from engaging in transactions of any nature with persons on the SDN List or with entities owned 50 percent or more by persons on the SDN List. OFAC may designate an individual or entity on the SDN List for a variety of reasons, depending on the applicable sanctions program that serves as the authority for the designation. There is no advance notice or advance due process for the listed person. If any person were to be added to the SDN List, no U.S. persons can be involved in contracting or providing services to or with such listed person without a license. Disclosure in a 219 Report is also required for knowingly engaging in any transaction or dealing with certain SDNs.

 

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Similarly, the UK Government publishes a UK Sanctions List, which provides details of those persons or entities designated under the UK Sanctions and Anti-Money Laundering Act 2018, and the Office of Financial Sanctions Implementation (“OFSI”) also publishes a Consolidated List of Financial Sanction Targets, which covers all financial sanction designations imposed by the UK. UK financial sanctions apply to any individual or entity within the UK’s territory, or that carry out activities within the UK’s territory. UK nationals and entities, including their overseas branches, must comply with UK sanctions regardless of where they are located or where their activities take place. Financial sanction measures can include targeted asset freezes on individuals and entities, which may prohibit any persons or companies from (i) dealing with funds or economic resources belonging to, or controlled by, a designated person, or (ii) making any funds available, directly, indirectly or otherwise for the benefit of a designated person. Any suspected or actual breach must be reported to the OFSI, and breach of any financial sanctions may result in significant fines (or carry a penal sentence for individuals).

 

EU sanctions also target companies, groups, organizations, or individuals through similar measures including asset freezes or other economic measures. The European Commission similarly maintains an EU-specific consolidated list of persons, groups and entities subject to EU financial sanctions, with EU sanctions being binding on EU nationals or persons located in the EU or companies doing business in the EU.

 

Although we cannot be assured that no individual or entity in the Middle East or elsewhere with which we or our Subsidiaries have done business will not be identified on the SDN List or other relevant denied party lists in the future, we have confirmed that to the best of our knowledge none of our key employees, key vendors, or any companies with which we are currently conducting business, nor or any of our Subsidiaries, their key employees, key vendors, or any company with which they are currently conducting business are listed on the SDN List or similar lists in the EU and UK. If any customer, employee or vendor were to be listed on the SDN List in the future (or similar lists in the EU and UK), we will need to incur costs to seek legal advice to determine whether any further business could be conducted with such person or whether all business relationships with such person must cease.

 

We are subject to litigation risks that may not be covered by insurance.

 

In the ordinary course of business, we and our Subsidiaries may become the subject of various claims, lawsuits, and administrative proceedings seeking damages or other remedies concerning our commercial operations, employees, and other matters. We maintain insurance to cover certain potential losses and are subject to various self-insurance retentions and deductibles under our insurance policies. It is possible, however, that a judgment could be rendered against us in cases in which we could be uninsured and beyond the amounts that we currently have reserved or anticipate incurring for such matters. If we were made a party to lawsuits to which our Subsidiaries are currently a party, we could be exposed to one or more judgments that are in excess of what our management may believe that it should pay and would not likely be covered by insurance. In addition, insurance coverage is increasingly expensive, including with respect to directors’ and officers’ liability insurance, or “D&O insurance.” We may not be able to maintain D&O insurance at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

 

We may be unable to obtain or renew permits necessary for our operations, which could inhibit our ability to do business.

 

In order to perform our operations, we are required to obtain and maintain a number of government permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards. While this is a common scenario for foreign investors operating in the region, we must comply with relevant foreign ownership restrictions and/or applicable licenses, permits, and approvals for the operation of foreign owned entities in the jurisdictions of the GCC. The GCC has made efforts to increase local content and in country value requirements. All the permits, licenses, approval limits, and standards require a significant amount of monitoring, record keeping, and reporting in order to demonstrate compliance with the underlying permit, license, approval limit or standard. Noncompliance or incomplete documentation of our compliance status may result in the imposition of fines, penalties and injunctive relief. A decision by a government agency to deny or delay the issuance of a new or existing material permit or other approval, or to revoke or substantially modify an existing permit or other approval, could adversely affect our ability to initiate or continue operations at the affected location or facility. Furthermore, such a decision could adversely affect our financial condition, results of operations, and cash flows.

 

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We might require additional equity or debt financing to fund operations and/or future acquisitions.

 

We may need access to additional debt or equity capital to fund operations or to fund potential acquisitions. If additional capital is required, we may not be able to obtain debt and/or equity financing on terms favorable to us, or at all. The failure to obtain additional funding could result in a curtailment of our operations and future development, which in turn could adversely affect our business, results of operations, and financial condition.

 

The assessment by our management of these risks is inexact and may not reveal or resolve all existing and potential risks. Realization of any of these risks could adversely affect our financial condition, results of operations and cash flows.

 

Risks Related to Our Capital Structure

 

The market price of our ordinary shares and warrants may decline.

 

Fluctuations in the price of our ordinary shares and warrants could contribute to the loss of all or part of your investment. The trading price of our ordinary shares and warrants could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment and our ordinary shares and warrants may trade at prices significantly below the price you paid for them. In such circumstances, the trading price of our ordinary shares and warrants may not recover and may experience a further decline.

 

Factors affecting the trading price of our ordinary shares and warrants may include:

 

  actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
     
  changes in the market’s expectations about our operating results;
     
  success of competitors;
     
  our operating results failing to meet the expectation of securities analysts or investors in a particular period;
     
  changes in financial estimates and recommendations by securities analysts concerning us or the market in general;
     
  operating and stock price performance of other companies that investors deem comparable to us;
     
  our ability to market new and enhanced products on a timely basis;
     
  changes in laws and regulations affecting our business;
     
  commencement of, or involvement in, litigation or regulatory inquiries involving us;
     
  changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
     
  the volume of securities available for public sale;
     
  any major change in our board or management;
     
  the sale of a substantial amount of our ordinary shares and warrants by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
     
  general economic and political conditions such as recession, world health events, changes in interest rates, fuel prices, international currency fluctuations, and acts of war or terrorism.

 

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Many of the factors listed above are beyond our control. In addition, broad market and industry factors may materially harm the market price of our ordinary shares and warrants irrespective of our operating performance. The stock market in general, including the OTC Markets, has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of our ordinary shares and warrants, which currently trade on the OTC Pink Market, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to us could depress the price of our securities regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our ordinary shares and warrants also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our securities adversely, the price and trading volume of our ordinary shares and warrants could decline.

 

The trading market for our ordinary shares and warrants relies in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrade or provide negative outlook on our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our ordinary shares and warrants could decline. If one or more of these analysts cease coverage of our business or fail to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

 

We are a holding company. Our sole material asset is our equity interest in our Subsidiaries and we are accordingly dependent upon distributions from them to cover our corporate and other overhead expenses.

 

We are a holding company and have no material assets other than our equity interest in our Subsidiaries. We have no independent means of generating revenue. To the extent the Subsidiaries have available cash, we intend to cause them to make non-pro rata payments to us to reimburse us for our corporate and other overhead expenses. To the extent that we need funds and the Subsidiaries are restricted from making such distributions or payments under applicable law or regulation or under the terms of any financing arrangements due to restrictive covenants or otherwise, or are otherwise unable to provide such funds, our liquidity and financial condition could be materially adversely affected.

 

Future sales of our ordinary shares could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.

 

We may sell additional securities in subsequent public or private offerings. On December 31, 2023, 94,996,397 ordinary shares were outstanding and 35,540,380 Public Warrants were outstanding. Our outstanding ordinary shares do not include ordinary shares issuable upon exercise of the Public Warrants, which may be resold in the public market.

 

Downward pressure on the market price of our ordinary shares that likely will result from sales of our ordinary shares issued in connection with the exercise of the warrants could encourage short sales of our ordinary shares by market participants. Generally, short selling means selling a security, contract or commodity not owned by the seller. The seller is committed to eventually purchase the financial instrument previously sold. Short sales are used to capitalize on an expected decline in the security’s price. Such sales of ordinary shares could have a tendency to depress the price of the stock, which could increase the potential for short sales.

 

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We cannot predict the size of future issuances of our ordinary shares or the effect, if any, that future issuances and sales of shares of our ordinary shares will have on the market price of our ordinary shares. Sales of substantial amounts of our ordinary shares (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our ordinary shares.

 

Because we currently have no plans to pay cash dividends on our ordinary shares, you may not receive any return on investment unless you sell your ordinary shares for a price greater than that what you paid for it.

 

We currently do not expect to pay any cash dividends on our ordinary shares. Any future determination to pay cash dividends or other distributions on our ordinary shares will be at the discretion of the Board of Directors and will be dependent on our earnings, financial condition, operation results, capital requirements, and contractual, regulatory and other restrictions, including restrictions contained in the agreements governing any existing and future outstanding indebtedness we or our Subsidiaries may incur, on the payment of dividends by us or by our Subsidiaries to us, and other factors that our Board of Directors deems relevant.

 

As a result, you may not receive any return on an investment in our ordinary shares unless you sell the ordinary shares for a price greater than that what you paid for it.

 

There is no guarantee that the Public Warrants will be in the money, and they may expire worthless.

 

The exercise price for our warrants is $5.75 per one-half of an ordinary share. Warrants must be exercised for whole ordinary shares. The Public Warrants were initially set to expire on June 6, 2023 (five years after the completion of the NPS/GES Business Combination) but were subsequently extended to June 6, 2025, by vote of the Company’s Board of Directors during 2022. The warrants are not “in the money” as of December 31, 2023, and there is a risk that they may expire worthless. Furthermore, as long as our ordinary shares are not traded on a national securities exchange, or there is no currently effective registration statement covering the ordinary shares underlying the warrants, the ability of warrant holders to exercise and/or sell ordinary shares received upon exercise is limited.

 

We may redeem Public Warrants prior to their exercise at a time that is disadvantageous to warrant holders, thereby making their warrants worthless.

 

We have the ability to redeem the remaining Public Warrants prior to their expiration at a price of $0.01 per warrant, provided that (i) the last reported sale price of our ordinary shares equals or exceeds $21.00 per share for any 20 trading days within the 30 trading-day period ending on the third business day before we send the notice of such redemption and (ii) on the date we give notice of redemption and during the entire period thereafter until the time the warrants are redeemed, there is an effective registration statement under the Securities Act covering the ordinary shares issuable upon exercise of the Public Warrants and a current prospectus relating to them is available unless warrants are exercised on a cashless basis. Redemption of the outstanding Public Warrants could force holders of Public Warrants:

 

  to exercise their warrants and pay the exercise price therefor at a time when it may be disadvantageous for them to do so;
     
  to sell their warrants at the then-current market price when they might otherwise wish to hold their warrants; or
     
  to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of their warrants.

 

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Other Risks Associated with Our Business

 

Cybersecurity risks and threats could adversely affect our business.

 

We rely heavily on information systems to conduct our business. There can be no assurance that the systems we have designed to prevent or limit the effects of cyber incidents or attacks will be sufficient to prevent or detect such incidents or attacks, or to avoid a material impact on our systems when such incidents or attacks do occur. If our systems for protecting against cybersecurity risks are circumvented or breached, this could result in the loss of our intellectual property or other proprietary information, including customer data, and disruption of our business operations.

 

A cyber incident or attack could result in the disclosure of confidential or proprietary customer information, employee information, theft or loss of intellectual property, damage to our reputation with our customers and the market, failure to meet customer requirements or customer dissatisfaction, theft or exposure to litigation and enforcement actions including under data privacy laws and regulations, damage to equipment (which could cause environmental or safety issues) and other financial costs and losses. In addition, as cybersecurity threats continue to evolve, we may be required to devote additional resources to continue to enhance our protective measures or to investigate or remediate any cybersecurity vulnerabilities. We do not presently maintain insurance coverage to protect against cybersecurity risks and such insurance may not be available to us in the future on acceptable terms and with the desired coverage limits if we seek to acquire it. If we procure such coverage in the future, we cannot ensure that it will be sufficient to cover any particular losses we may experience as a result of such cyberattacks.

 

We depend on our suppliers to provide services and equipment in a timely manner and any delays, interruptions or failures by suppliers could expose us to increased costs or inability to meet contractual obligations.

 

We rely on suppliers of equipment and spare parts as well as suppliers of technical labor to perform certain contractual obligations with our customers. Failure by suppliers to provide goods and services in a timely manner could lead to delays by us in fulfilling contractual obligations, the inability to fulfill such obligations, or additional costs in seeking replacement suppliers.

 

We have engaged in a party transactions, the termination of which may inhibit business, and such transactions present possible conflicts of interest that could have an adverse effect on us.

 

We rely at times upon services and products supplied by related parties if no other suitable alternatives are available.

 

In addition, these related party transactions create the possibility of conflicts of interest. Such a conflict could cause such persons to seek to advance their economic interests above ours. Further, the appearance of conflicts of interest created by related party transactions could impair the confidence of our investors. While our Board of Directors regularly reviews these transactions, related party transactions presenting a conflict of interest could have a material adverse effect on our liquidity, results of operations and financial condition.

 

The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business.

 

We depend on the efforts of our executive officers and other key employees to manage our operations. The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business. Although we expect all of our key personnel to remain with us, it is possible that we will lose some key personnel, the loss of which could negatively impact our business operations and profitability. In addition, the delivery of our services and products requires personnel with specialized skills and experience. Our ability to be productive and profitable will depend upon our ability to employ and retain such skilled workers.

 

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Our growth potential and ability to operate could be materially and adversely affected if we cannot employ and retain technical personnel at a competitive cost.

 

Many of the products and services we provide and sell are complex and highly engineered and often must perform in harsh conditions. Our success depends upon our ability to employ and retain technical personnel with the ability to design, utilize, and enhance these services and products. A significant increase in the wages paid by competing employers could result in increased competition for the skilled labor force we require, increases in the wage rates that we must pay, or both. If either of these events were to occur, our cost structures could increase, our margins could decrease, and our growth potential, if any, could be impaired.

 

We are not subject to the supervision of the Financial Services Commission of the British Virgin Islands and so our shareholders are not protected by any regulatory inspections in the British Virgin Islands.

 

We are not an entity subject to any regulatory supervision in the British Virgin Islands by the Financial Services Commission. As a result, shareholders are not protected by any regulatory supervision or inspections by any regulatory agency in the British Virgin Islands and we are not required to observe any restrictions in respect of our conduct save as disclosed in this Annual Report or our amended and restated memorandum and articles of association.

 

An investment in our securities may result in uncertain U.S. federal income tax consequences.

 

An investment in our securities may result in uncertain U.S. federal income tax consequences. For example, the U.S. federal income tax consequences of a cashless exercise of warrants included in the units sold in our initial public offering is unclear under current U.S. law. Prospective investors are urged to consult their tax advisers with respect to these and other tax consequences when purchasing, holding or disposing of our securities.

 

Substantially all of our assets are located outside the United States; therefore, investors may not be able to enforce U.S. federal securities laws or their other legal rights.

 

Substantially all of our assets are located outside of the United States. Thus, it may be difficult, or in some cases not possible, for investors in the United States to enforce their legal rights or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties under United States laws.

 

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As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer.

 

We are a foreign private issuer under the Exchange Act and, as a result, are exempt from certain rules under the Exchange Act. Under the Exchange Act we are subject to reporting obligations that, in certain respects, permit less detailed and/or less frequent disclosures than those of U.S. domestic reporting companies, which may limit the information publicly available to our shareholders. The rules we are exempt from include the proxy rules that impose certain disclosure and procedural requirements for proxy solicitations. In addition, we are not required to file periodic reports and financial statements with the SEC as frequently, promptly or in as much detail as U.S. companies with securities registered under the Exchange Act. We are not required to comply with Regulation FD, which imposes certain restrictions on the selective disclosure of material information. Moreover, our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our ordinary shares. Although the Company currently prepares its financial statements in accordance with U.S. GAAP, it is not required to do so, or to reconcile to U.S. GAAP, if it instead elects to prepare its financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. As a result of such varied reporting obligations, shareholders should not expect to receive the same information at the same time as information provided by U.S. domestic companies.

 

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses to us.

As discussed above, we are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to us on June 28, 2024. In the future, we would lose our foreign private issuer status if (1) more than 50% of our outstanding voting securities are owned by U.S. residents and (2) a majority of our directors or executive officers are U.S. citizens or residents, or we fail to meet additional requirements necessary to avoid the loss of foreign private issuer status. If we lose our foreign private issuer status, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to comply with U.S. federal proxy requirements, and our officers, directors and 10% shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the listing rules of the exchanges. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer.

 

Investors may face difficulties in protecting their interests, and their ability to protect their rights through the U.S. federal courts may be limited, because we are formed under British Virgin Islands law.

 

We are a company formed under the laws of the British Virgin Islands. As a result, it may be difficult for investors to enforce judgments obtained in the United States courts against some of our directors or officers.

 

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Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Companies Act and the common law of the British Virgin Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under British Virgin Islands law are governed by the Companies Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived from English common law, and while the decisions of the English courts are of persuasive authority, they are not binding on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law may not be as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, while statutory provisions do exist in British Virgin Islands law for derivative actions to be brought in certain circumstances, shareholders in British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred.

 

The British Virgin Islands Courts are also unlikely:

 

  to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws where that liability is in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company; and
     
  to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature.

 

There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will in certain circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary provided that:

 

  the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process;
     
  the judgment is final and for a liquidated sum;
     
  the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company;
     
  in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the court;
     
  recognition or enforcement of the judgment would not be contrary to public policy in the British Virgin Islands; and
     
  the proceedings pursuant to which judgment was obtained were not contrary to natural justice.

 

In appropriate circumstances, a British Virgin Islands Court may give effect in the British Virgin Islands to other kinds of final foreign judgments such as declaratory orders, orders for performance of contracts and injunctions.

 

As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management or controlling shareholders than they would as public shareholders of a U.S. company.

 

Our amended and restated memorandum and articles of association permit the Board of Directors by resolution to create additional classes of securities, including shares with rights, preferences, designations and limitations as they determine which may have an anti-takeover effect.

 

Our amended and restated memorandum and articles of association permits the Board of Directors by resolution to amend the memorandum and articles of association to designate rights, preferences, designations and limitations attaching to the preferred shares as they determine in their discretion, without shareholder approval with respect to the terms or the issuance. If issued, the rights, preferences, designations and limitations of the preferred shares would be set by the Board of Directors and could operate to the disadvantage of the outstanding ordinary shares the holders of which would not have any pre-emption rights in respect of such an issue of preferred shares. Such terms could include, among others, preferences as to dividends and distributions on liquidation, or could be used to prevent possible corporate takeovers.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. HISTORY AND DEVELOPMENT OF THE COMPANY

 

The Company

 

National Energy Services Reunited Corp. is a British Virgin Islands corporation headquartered in Houston, Texas. The Company, through its wholly-owned subsidiaries, NPS and GES, is a regional provider of products and services to the oil and natural gas industry primarily in the MENA region. Our principal executive offices are located at 777 Post Oak Blvd., Suite 730, Houston, Texas 77056 and our telephone number is +1 (832) 925 3777. Our registered agent in the British Virgin Islands is Intertrust Corporate Services (BVI) Limited, which is located at Luna Tower, Waterfront Drive, Road Town, Tortola, VG1110, British Virgin Islands.

 

History and Business Development

 

Formed in January 2017, NESR started as a special purpose acquisition company (“SPAC”) designed to invest in the oilfield services space globally. NESR filed a registration statement for its initial public offering in May 2017. In November 2017, NESR announced the acquisition of two oilfield services companies in the MENA region: NPS and GES. The formation of NESR as an operating entity was completed on June 7, 2018, after the transactions were approved by NESR shareholders. On June 1, 2020, NESR further expanded its footprint within the MENA region when its NPS subsidiary acquired SAPESCO. On May 5, 2021, NESR again expanded its footprint within the MENA region when its NPS subsidiary acquired specific oilfield service lines of Action. On July 1, 2022, NESR acquired a minority stake in WDVGE, a premier Reservoir Characterization and G&G laboratory and consulting business.

 

NESR’s revenues are primarily derived by providing production services (“Production Services”) such as hydraulic fracturing, coiled tubing, stimulation and pumping, cementing, nitrogen services, filtration services, pipelines and industrial services, production assurance, artificial lift services, completions and integrated production management. NESR also provides drilling and evaluation services (“Drilling and Evaluation Services”) such as rigs and integrated services, fishing and downhole tools, thru-tubing intervention, tubular running services, directional drilling, drilling fluids, pressure control, well testing services, wireline logging services, and slickline services. NESR has significant operations throughout the MENA region including Saudi Arabia, Oman, Kuwait, United Arab Emirates, Algeria, Egypt, Libya, Iraq and Qatar.

 

Emerging growth company

 

The Company qualified as an “emerging growth company (“EGC”),” as defined in Section 2(a) of the U.S. Securities Act of 1933 as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”) until December 31, 2022, the last day of the fiscal year in which the fifth anniversary (May 17, 2022) of our initial public offering occurred. As an EGC, we were able to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and not being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934) are required to comply with the new or revised financial accounting standards. The Company had adopted all deferred accounting standards in its Annual Report on Form 20-F for the year ended December 31, 2022. We expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC.

 

Capital Expenditures

 

During the three most recent fiscal years, the Company’s capital expenditures were $297.7 million in the aggregate, comprising $68.2 million during the year ended December 31, 2023, $122.4 million during the year ended December 31, 2022, and $107.1 million during the year ended December 31, 2021. The primary geographies for the Company’s capital expenditures were Saudi Arabia, Oman, Kuwait, and United Arab Emirates. The Company has utilized these capital expenditures to purchase equipment to support ongoing revenue growth. For more information on our capital expenditures and requirements, see Item 5B, “Liquidity and Capital Resources.”

 

Additionally, the Company’s Integrated Production Management (“IPM”) projects are focused on developing and managing production on behalf of the Company’s customers under long-term agreements. The Company invests its own services and products, and in some cases cash, into the field development activities and operations. Although in certain arrangements the Company is paid for a portion of the services or products it provides, generally the Company is not paid at the time of providing its services or upon delivery of its products. Instead, the Company is compensated based upon cash flow generated. The Company invested $16.0 million and $17.4 million in IPM projects during the years ended December 31, 2023, and December 31, 2022, respectively.

 

During 2023, as a result of the need for extraordinary cash flow management processes during a period when the Company had restricted access to its full credit facilities, the Company’s CFO was given final responsibility for the Company’s capital expenditure process, under the supervision of the Board of Directors.

 

Electronic Information about the Company

 

The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Our Company website can be found at http://www.nesr.com. Information on our website is not incorporated into this Annual Report or otherwise made part of this Annual Report.

 

B. BUSINESS OVERVIEW

 

NESR is one of the largest oilfield services providers in the MENA region. The Company’s business consists of primarily upstream and midstream oilfield services with oil and natural gas companies as customers. The Company has organized its service lines into two reportable segments, Production Services and Drilling and Evaluation Services.

 

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Principal Activities

 

Production Services. Our Production Services segment includes the results of operations from services that are generally offered and performed during the production stage of a well’s lifecycle. These services include, but are not limited to, the following:

 

  Hydraulic Fracturing – Hydraulic fracturing services are performed to enhance production of oil and natural gas from formations with low permeability and restricted flow of hydrocarbons. The process of hydraulic fracturing involves pumping a highly viscous, pressurized fracturing fluid, typically a mixture of water, chemicals and proppant, into a well casing or tubing in order to fracture underground mineral formations. These fractures release trapped hydrocarbon particles and free a channel for the oil or natural gas to flow freely to the wellbore for collection. Fracturing fluid mixtures include proppant that becomes lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of hydrocarbons upward through the well.
     
  Coiled Tubing – We provide various coiled tubing services ranging from basic nitrogen lifting, fishing, milling, clean-out, scale removal and other complex well applications. We employ design software to predict the performance of coiled tubing string and fluid behavior. The work history and integrity of each coiled tubing work string is constantly monitored in real-time to allow our engineers to continually evaluate developments in coiled tubing applications. Our coiled tubing units are suitable for both onshore and offshore.
     
  Stimulation and Pumping – We employ stimulation and pumping services in our operations. We currently offer acidizing of wells, cleaning jobs, the release of stuck pipes during drilling, pressure testing wells and inhibition jobs on gas wells.
     
  Cementing – We have over 25 years of experience in primary and remedial cementing services across the MENA region. Our cementing solutions include cementing equipment with complete automated density control capabilities, large volume batch mixers allowing larger volume of slurries to be mixed and pumped at homogeneous density and customized cement systems for specific applications such as gas migration, ultra-light weight, flexible cement, HTHP (high-temperature/high-pressure) and self-healing cement. We also have an extensive database of knowledge and experience.
     
  Nitrogen Services – We offer a complete nitrogen service package through our nitrogen fleets. Our equipment incorporates a combination of low, intermediate, and high-rate units. Our operational capabilities range from stand-alone nitrogen services such as freeing stuck drill pipe and unloading or cleaning out wellbores, to supplying our coiled tubing, stimulation and cementing service with the essential gaseous components necessary for positive results in various applications.
     
  Filtration Services – We provide filtration services through our two-stage, skid mounted, easy to handle filtration vessels. The primary and secondary filtration stages are usually carried out together. We have filtered thousands of barrels on rig sites for reduced damage drilling as well as for UBD (Under Balanced Drilling) operations. We also provide frac tanks and pumping units as necessary.
     
  Pipelines and Industrial Services – We provide pipeline services to plants and refineries including water filling and hydro testing, nitrogen purging, de-gassing and pressure testing, as well as cutting/welding and cooling down piping/vessels systems. Our equipment and resources include an existing fleet of nitrogen pump units, pig launchers and receivers, intelligent pigs, high rate pumping units at high and low pressure, and pipeline inspection services.
     
  Production Assurance – Our fleet of water well drilling rigs and portfolio of water treatment technologies (chemicals and filtration) allow us to serve the full water cycle. This includes the sourcing and treatment of water for oil and natural gas, municipal and industrial use and the disposal of water into selected aquifers. We also provide a portfolio of production assurance chemicals to assist hydrocarbon production from a specific reservoir in meeting the desired production target. This is achieved by collaborating with selected chemical companies and academic institutes and establishing an in-house technical team of engineers and laboratory capabilities.
     
  Artificial Lift Services – We provide vertical, deviated and horizontal rod pumping systems, analysis and optimization recommendations for fluid level and dynamometer testing, artificial lift optimization and data interpretation, long term monitoring and optimization, and associated field services. We also provide gas lift systems and downhole monitoring systems. We maintain a downhole pump workshop that is equipped with up-to-date equipment and tools, including pump testers, barrel honing and API beam pump gauges.
     
  Completions – We provide surface and subsurface safety systems, high-pressure packer systems, flow controls, service tools, expandable liner technology, VIT (Vacuum Insulated Tubing) technology for steam applications, and engineering capabilities with manufacturing capacity and testing facilities. We focus on in-country value by taking a systems approach to well completions for maximum recovery in addition to intelligent completion architectures.
     
  Integrated Production Management – These projects are focused on developing and managing production on behalf of the Company’s customers under long-term agreements. The Company invests its own services and products, and in some cases cash, into the field development activities and operations. Although in certain arrangements the Company is paid for a portion of the services or products it provides, generally the Company is not be paid at the time of providing its services or upon delivery of its products. Instead, the Company is compensated based upon cash flow generated.

 

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Drilling and Evaluation Services. Our Drilling and Evaluation Services segment includes the results of operations from services that are generally offered and performed during pre-production stages of a well’s lifecycle and related mainly to the operation of oil rigs. These services include, but are not limited to, the following:

 

  Rigs and Integrated Services – Our fleet of rigs range from 200 horsepower (HP) to 1,500 HP and offer drilling capabilities for all type of wells with depths up to 4,000 meters. Our fleet includes 750 HP truck-mounted, fast moving rigs, which are ideal for both light and heavy work over campaigns as both rigs are equipped with full edge mud systems that can handle normal drilling activities. In addition, we provide a “One Stop Solution” that includes delivering and managing the full spectrum of services involved in the upstream sector from the provision of the rig to completion and testing of the well.
     
  Fishing and Downhole – We provide highly innovative and reliable drilling tools and machine shop services for conventional and unconventional drilling applications. Our manufacturing capabilities include manufacturing flanges, subs, pup joints, pony drill collars and all types of cross overs. We also have the provision of threading and repair services for the oil and natural gas industry including the re-cutting of tubing and casing, repair of drilling and production tubulars and well heads.
     
  Thru-Tubing Intervention – We provide comprehensive oilfield solutions for all thru-tubing intervention requirements, from milling to thru-tubing fishing and thru-tubing well intervention.
     
  Tubular Running Services – We provide traditional Tubular Running Services operated by highly trained personnel focused on safety, quality, efficiency and well integrity. Our Casing Running Tool service enables simultaneous connection make-up, break-out, circulation and rotation, increasing the chance of getting casing to total depth safely and efficiently the first time.
     
  Directional Drilling – Our directional drilling services provide a suite of solutions from conventional to unconventional drilling applications, including directional drilling, measurement while drilling, logging while drilling, drilling optimization, drilling engineering, borehole surveying, and surface mud logging.
     
  Drilling Fluids – We provide drilling fluid systems and related technologies for a number of projects, including development drilling, exploration drilling and High-Pressure High-Temperature drilling, in accordance with international standards and regulations for both onshore and offshore projects.
     
  Pressure Control – With a full range of wellhead products, flow control equipment and frac equipment, we can provide safe and efficient drilling and production. From pre-engineered products, to fully customized designs, we offer solutions for a wide variety of applications.
     
  Well Testing Services – Our well testing services are used to measure solids, gas, oil and water produced from a well. We offer integrated well testing services in the exploration, appraisal and development phases of oil and natural gas wells. Our aim is to provide newer, faster and more precise testing results though innovation and superior service quality, and our services include surface well testing onshore and offshore, flow back packages, sand management, burner boom stack for gas flaring, smokeless burner, multi-phase flow meters (MPFM), zero-flaring packages, and water treatment and filtration.
     
  Wireline Logging Services – Our fleet of logging trucks, offshore units, logging tools and pressure control equipment provides a wide variety of cased-hole logging services to our clients, including production and injection performance evaluation, stimulation performance evaluation, water shutoff determination, tubing and multiple casing integrity, acoustic leak detection, perforation, pipe recovery, cased hole formation evaluation, and interval isolation and borehole seal.
     
  Slickline Services – Our slickline services cover the basic removal of scale, wax and sand build-up, setting plugs, changing out gas lift valves, fishing and other complex well applications.

 

Portfolio enhancement within the Drilling and Evaluation Services continues to be a strategic focus for the Company. Since 2021, the Company has entered into several strategic Drilling and Evaluation Services’ partnerships with other service providers to bring enhanced technologies to its customers. Key partnerships within the Drilling and Evaluation Services segment include PHX Energy Services Corp., to bring leading directional drilling capabilities from North America to the MENA region; Beyond Energy Services & Technology, to offer managed pressure drilling services; Ulterra Drilling Technologies, L.P. to deploy polycrystalline diamond compact drill bits; and Kinetic Pressure Control, to develop and expand share of its unique Kinetic Blowout Stopper (“KBOS”) technology in the MENA region, through which the first KBOS was recently deployed commercially.

 

In 2023, the Company achieved market penetration of its expanding Drilling and Evaluation Services portfolio and ramped activity in several recently awarded Drilling and Evaluation Services contracts. Additionally, the Company, together with its technology partner, made strides in strategic Drilling and Evaluation Services technology development initiatives. In Oman, NESR and its technology partner completed several pivotal, successful field deployments of their under-development logging-while-drilling (“LWD”) tool, which confirmed its technical ability to deploy formation evaluation services commercially. NESR and its technology partner also tested its newly developed measurement-while-drilling (“MWD”) tool successfully in the U.S. and is currently in the process of field testing the tool in various countries in the Middle East. Additionally, in the field development of its rotary steerable (“RSS”) tool, NESR and its partner have achieved significant cumulative drilling footage across multiple countries and drilling environments. NESR and its partner’s aim is to complete field testing in 2024 and be in a position to deploy more tools within the scope of recently awarded Drilling and Evaluation Services contracts in the MENA region, where NESR will be the exclusive provider of these tools.

 

In February 2024, following the opening of the International Petroleum Technology Conference (“IPTC”) in Saudi Arabia, NESR launched its Roya™ advanced drilling platform, signaling the commercialization of cutting-edge technologies and services that had been in development for several years prior. The Roya™ platform of advanced drilling technologies, comprised of a RSS RoyaSteer™, MWD tool RoyaStream™, and LWD tool RoyaSeek™, paves the way for NESR to participate in all high-end drilling opportunities.

 

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ESG IMPACT. In 2021, NESR embarked upon a new Environmental, Social, and Corporate Governance IMPACT (“ESG IMPACT”) initiative to introduce innovative energy solutions and develop a portfolio of product lines and services aimed to mitigate climate change, enhance water management and conservation, and minimize environmental waste in the industry. Since the inauguration of ESG IMPACT, NESR has grown and cultivated strategic technology partnerships, invested in key research and development projects, and executed field deployments of innovative solutions in four focus areas: Water Treatment and Mineral Recovery, Emissions Detection and Control, Flare Mitigation and Carbon Capture, and Heat Capture and Geothermal.

 

In 2023, ESG IMPACT conducted a second successful pilot of its zero liquid discharge (“ZLD”) desalination solution in the region’s largest unconventional gas field to qualify another upstream circular water application and unlock the opportunity for commercial deployment of the technology. Additionally, NESR piloted its artificial intelligence-based, continuous emissions monitoring platform with a prominent, multinational customer in Oman, representing the largest NESR pilot deployment to-date. In Carbon Capture, NESR executed the next phase of its carbon dioxide (“CO2”) sequestration pilot expansion, with an expanded scope encompassing CO2 logistics, injection, and subsurface monitoring. In Flare Mitigation, the Company mobilized equipment to North Africa to execute its first commercial-scale gas capture project, and in conjunction with its Well Testing service, the Company rolled out key Zero Flare services to augment the emissions profile of well evaluation.

 

NESR Environmental and Decarbonization Applications. In the first quarter of 2024, NESR announced the rebranding of ESG IMPACT as NESR Environmental and Decarbonization Applications (“NEDA”) to signify the importance of industry action in decarbonizing the footprint of energy production. The NEDA initiative encompasses the growing portfolio of solutions that were previously launched under the ESG IMPACT initiative and that include a Carbon Light Brine Plant in North Rumaila, Iraq, providing for the utilization of brackish groundwater proximal to the plant to directly generate high-specification brine from a previously unusable water source, and the aforementioned ZLD pilot project in Saudi Arabia.

 

The results of NEDA or ESG IMPACT were not material to our Consolidated Statements of Operations for the years ended December 31, 2023, December 31, 2022, or December 31, 2021.

 

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Principal Markets

 

The Company’s operations and activities are located within certain geographies, primarily in the MENA region. The revenue earned by geographic area, based on drilling location, was as follows for the periods presented (in US$ thousands):

 

   Year ended 
  

December 31,

2023

  

December 31,

2022

  

December 31,

2021

 
Geographic Area:               
Domestic (British Virgin Islands)  $-   $-   $- 
MENA   1,132,321    893,635    865,917 
Rest of World   13,594    15,882    10,812 
Total revenue  $1,145,915   $909,517   $876,729 

 

Seasonality

 

Seasonal changes in weather and significant weather events affect the demand and price of oil and therefore the demand for our services. Furthermore, customer spending patterns for oilfield services and products generally result in higher activity in the fourth quarter of each year as clients seek to utilize their annual budgets.

 

Sources and Availability of Raw Materials

 

We purchase various component parts in connection with delivering our products and services. These materials are generally, but not always, available from multiple sources and may be subject to price volatility. While we generally do not experience significant long-term shortages of these materials, we have from time-to-time experienced temporary shortages of particular component parts. We are always seeking ways to ensure the availability of resources, as well as manage costs of component parts.

 

Marketing Channels

 

We sell to our customers through direct and indirect channels. Our primary sales channel is through our direct sales force, which has a strong country focus with local teams close to the customer.

 

Intellectual Property

 

We own and control a variety of intellectual property, including but not limited to proprietary information and software tools and applications that, in the aggregate, are material to our business. No individual instance of intellectual property is material to the Company.

 

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Customers

 

Revenues from four customers individually accounted for 44%, 8%, 7% and 5% of the Company’s consolidated revenues in the year ended December 31, 2023, 40%, 9%, 7% and 7% of the Company’s consolidated revenues in the year ended December 31, 2022, and 51%, 10%, 7% and 4%of the Company’s consolidated revenues in the year ended December 31, 2021.

 

Competition

 

We provide products and services in the MENA region in highly competitive markets, with competitors comprised of both small and large companies. Our revenues and earnings can be affected by several factors, including changes in competition, fluctuations in drilling and completion activity, perceptions of future prices of oil and natural gas, government regulation, disruptions caused by weather and general economic conditions. We believe that the principal competitive factors are price, performance, product and service quality, safety, response time and breadth of products and services.

 

Material Effects of Governmental Regulations

 

Our business is significantly affected by country, regional, local laws and other regulations. These laws and regulations relate to, among other things:

 

  worker safety standards;
     
  the protection of the environment and natural resources;
     
  the storage, handling, transportation, use and disposal of hazardous materials; and
     
  the mobilization of our equipment to, and operations conducted at, our work sites.

 

Numerous permits are required for the conduct of our business and operation of our various facilities and equipment. These permits can be revoked, modified or renewed by issuing authorities based on factors both within and outside our control.

 

We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings in the future. We also cannot predict whether additional laws and regulations will be adopted, including changes in regulatory oversight, increase of federal, state or local taxes, increase of inspection costs, or the effect such changes may have on us, our businesses or our financial condition. However, failure to comply with laws, regulations, or permits may result in fines, the imposition of remedial obligations, or other penalties that have a material impact on our operations, including (in some instances) the revocation of necessary authorizations.

 

Environmental Regulation

 

In the countries where we operate, we are subject to environmental laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection and occupational health and safety, including regulations related to greenhouse gas emissions and hydraulic fracturing. The trend in environmental regulation has been to place more restrictions and limitations on activities that may adversely affect the environment, and thus any changes in environmental laws and regulations or re-interpretation of enforcement policies that result in more stringent and costly regulatory requirements could have a material adverse effect on our business, liquidity position, financial condition, results of operations and prospects. We may be unable to pass on such increased compliance costs to our customers. Where applicable we have obtained and maintain licenses to operate through the local ministry of environment or similar governmental authority. We have established and implemented an environmental health and safety management system based on ISO 14001 and OHSAS 18001. In addition, we remain accountable to each customer or operator we service and ensure that compliance is maintained based on each customer’s requirements. Although our operations are subject to a variety of regulations across multiple jurisdictions, a summary of the most pertinent regulations affecting our operations is provided below.

 

Air and Climate

 

Certain of our operations result in the emissions of regulated air pollutants, which may require permits in certain jurisdictions where we operate. Many countries impose limitations on air emissions and require adherence to certain maintenance, work practice, reporting, recordkeeping, and other requirements. Failure to obtain a permit or to comply with permit or other regulatory requirements could result in the imposition of sanctions, including administrative, civil and criminal penalties. In addition, we or our customers could be required to shut down or retrofit existing equipment, leading to additional capital or operating expenses and operational delays.

 

Additionally, the threat of climate change continues to attract considerable attention in the United States and foreign countries. Numerous proposals have been made and could continue to be made at multiple levels of government to monitor, limit and disclose existing emissions of greenhouse gases as well as to restrict or eliminate such future emissions. As a result, our operations as well as the operations of our oil and natural gas exploration and production customers are subject to a series of risks associated with the production and processing of fossil fuels and emission of greenhouse gases.

 

Multiple jurisdictions have adopted laws that require the monitoring, reporting, disclosure or reduction of emissions of certain greenhouse gases from the oil and natural gas sector. Additionally, several jurisdictions have adopted policies to reduce the consumption of fossil fuels, which may ultimately result in decreased demand for our services. Internationally, the United Nations-sponsored Paris Agreement requires member states to submit non-binding, individually-determined reduction goals every five years after 2020. Most of the jurisdictions where we operate have ratified the Paris Agreement and, as a result, developed emissions reduction goals, several of which focus on reducing the emissions from the oil and natural gas sector or promoting the use of renewable energy or energy efficiency technologies.

 

Litigation risks are also increasing, as various parties (including individuals, local governments, and environmental activists) have brought suit in a number of jurisdictions. Although novel legal theories continue to be developed, many of these suits are brought on one of the following themes: (1) governments have a duty to reduce greenhouse gas emissions within their jurisdiction; (2) oil and natural gas companies are liable for various asserted damages associated with the production of fuels that contributed to climate change; or (3) oil and natural gas companies have been aware of the adverse effects of climate change for some time but failed to adequately disclose those impacts to investors or consumers.

 

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There are also increasing financial risks for fossil fuel companies. Shareholders may elect in the future to shift some or all of their investments into non-energy related sectors. Institutional lenders who provide financing to fossil fuel energy companies also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies. There is also a risk that financial institutions will be required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector. Multiple financial regulators have adopted, or are considering adopting, climate stress-testing or disclosure requirements.

 

The adoption and implementation of new or more stringent legislation, regulations or other regulatory initiatives that impose more stringent standards for greenhouse gas emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate greenhouse gas emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas, which could reduce demand for our services and products. Additionally, litigation and financial risks may result in our oil and natural gas customers restricting or cancelling production activities, incurring liability for infrastructure damages as a result of climatic changes, or impairing their ability to continue to operate in an economic manner, which also could reduce demand for our services and products.

 

Water

 

Most of the countries in which we operate have laws and regulations in place referencing water discharge particularly in the vicinity of inhabited areas or regulated waterways. Multiple jurisdictions also regulate the disposal of produced water associated with the hydraulic fracturing process. Restrictions and controls regarding the unauthorized discharge of pollutants, including produced waters and other oil and natural gas wastes, into regulated waters are in place but not always subject to formal assessments by the regulators. We are working to ensure that our facilities have adequate drainage, sumps, and appropriate sedimentation tanks where required, the integrity of primary and secondary containment systems, and that spill prevention controls and countermeasures plans are in place to minimize the impact of potential releases or spills.

 

Waste and Hazardous Materials

 

Our operations use and generate hazardous substances and wastes. Accordingly, we could become subject to material liabilities relating to the investigation and cleanup of potentially contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances or wastes. Applicable laws may provide for “strict liability” for remediation costs, damages to natural resources or threats to public health and safety. Some environmental laws provide for joint and several liability for remediation of spills and releases of hazardous substances and wastes. Joint and several liability can render one party liable for all damages arising from a spill or release even if other parties also contributed to the spill or release.

 

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Health and Safety Regulation

 

We are subject to certain requirements that regulate the protection of health and safety. We are committed to providing a safe workplace. Our health and safety (HSE) standards are influenced by a combination of the U.S. Occupational Safety and Health Act and the International Association of Oil and Gas Producers, a global forum whose members identify and share best practices to achieve improvements. Our HSE policy objectives include:

 

  identifying risks to health and safety and implementing measures to control risk to an acceptable level;
     
  periodically setting and publishing specific health and safety targets in consultation with employees and monitoring progress towards achieving such targets;
     
  providing appropriate financial and physical resources to implement our health and safety targets;
     
  recognizing that management of health and safety is a prime responsibility of line management;
     
  devoting sufficient resources to ensure environmentally friendly performance;
     
  encouraging full commitment of employees, by involving and consulting them on HSE matters;
     
  ensuring employees receive appropriate information and training;
     
  periodic reviewing and auditing our health and safety system to ensure its adequacy and effectiveness; and defining internal standards on HSE reporting, service quality reporting, injury and loss prevention, mechanical lifting, driving and journey management, hazard effects and management plan, environmental management, and audit and training.

 

We review and implement many practices to meet these objectives, but we cannot guarantee that we will implement every practice that we review or that these practices will fully achieve our stated objectives.

 

C. ORGANIZATIONAL STRUCTURE

 

For a full listing of our significant subsidiaries as of December 31, 2023, see Exhibit 8.1 to this Annual Report.

 

D. PROPERTY, PLANTS, AND EQUIPMENT

 

Properties

 

We have operations in 15 countries including Algeria, Bahrain, Chad, Egypt, India, Indonesia, Iraq, Kuwait, Libya, Malaysia, Oman, Qatar, Saudi Arabia, and United Arab Emirates (“UAE”). In most countries, we have localized support bases that house equipment and personnel that are used to deliver the services we provide. In early 2023, we opened the NESR Oilfield Research & Innovation (“NORI”) Center in Saudi Arabia’s Dharan Techno Valley (“DTV”). We expect that the NORI facility, located in the heart of Saudi Arabia’s industrial research, technology, and academic hub, will enhance NESR’s ability to drive energy sector research and innovation across the MENA region through activities such as providing advanced core analysis and reservoir studies for our customers. Our principal executive offices are in Houston, Texas, U.S., with our regional headquarters in Dubai, UAE. No single tangible fixed asset is individually material to our operations.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion and analysis should be read in conjunction with Item 3A, “Selected Financial Data” and the accompanying consolidated financial statements and related notes included in Item 18, “Financial Statements,” in this Annual Report.

 

A. OPERATING RESULTS

 

Overview

 

We are a provider of services to the oil and natural gas industry primarily in the MENA region. We currently operate in 15 countries, with a strong presence in Saudi Arabia, Oman, Kuwait, United Arab Emirates, Algeria, Egypt, Libya, Iraq and Qatar. Our company was founded with a vision of creating a regional provider for oilfield services that offers a full portfolio of solutions for our customers with a strong focus on supporting the economies in which we operate. ESG considerations are central to our company, and we believe that employing local staff and fully integrating with regional economies is a critical part of the social component of our ESG philosophy. In addition, we have found that promoting high local content in our operations optimizes our cost structure, enhancing our ability to generate free cash flow in various commodity price environments. With its vast reserves of oil and natural gas, the MENA region continues to dominate in its role as a vital source of global energy supply and stability. Our services include a broad suite of offerings that are essential in the drilling and completion of new oil and natural gas wells and in the remedial work on existing wells, both onshore and offshore, including completion services and equipment and drilling and evaluation services and equipment.

 

Factors Affecting our Results of Operations

 

Global E&P Trends

 

We provide oilfield services to exploration and production companies with operations in the onshore and offshore oil and natural gas sectors in the MENA region. Demand for our services is mainly driven by our customers’ operations and is therefore linked to global commodity prices and expectations about future prices, rig activity and other factors.

 

Cyclical Nature of Sector

 

The oilfield services sector is a highly cyclical industry. As a result, our operating results can fluctuate from quarter to quarter and period to period. However, due to the lower average cost of production per barrel in the Middle East and the need for infrastructure spending to sustain or increase current production levels of these oil rich countries, we believe that we are less affected by oil price volatility as compared to oilfield services companies that operate in other regions, as discussed below.

 

Drilling Environments

 

Based on energy industry data, the bulk of oil production comes from onshore activity while offshore oil production currently provides an estimated 30% of all global oil supply. We provide services to exploration and production (“E&P”) companies with both onshore and offshore drilling operations. Offshore drilling generally provides higher margins to service providers due to greater complexity, logistical challenges and the need for innovative solutions.

 

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Geographic Concentration; Middle Eastern Operations

 

During the years ended December 31, 2023, December 31, 2022, and December 31, 2021, 99%, 98%, and 98%, respectively, of our revenue came from the MENA region, particularly the Middle East. The Middle East accounts for almost a third of global oil production, according to the Energy Institute Statistical Review of World Energy 2023 (72nd edition). Given the low break-even price of production, it is a key region for oilfield service companies. Most oil and natural gas fields in the Middle East are legacy fields on land or in shallow waters. These fields are largely engaged in development drilling activity, driven by the need for redevelopment, enhanced oil recovery via stimulation and the drilling of new production wells. Further, a number of gas fields scheduled to be developed in the near future will require oilfield services. As a result, our capital expenditure and related financing needs may increase materially in the future.

 

In addition, regional drilling operations may be impacted by local political and economic trends. Due to the concentration of our operations in the MENA region, and particularly the Middle East, our financial condition and results of operations may be impacted by geopolitical, political or economic instability affecting the countries in which we operate, including reduced production and drilling activities, extended periods of low oil prices and decreased oil demand, armed conflict, imposition of economic sanctions, changes in governments and currency devaluations, among others.

 

Many MENA countries rely on the energy sector as the major source of national revenues. Even at lower oil and natural gas prices, such oil and natural gas dependent economies have continued to maintain significant production and drilling activities. Further, given that Middle East markets have among the lowest break-even prices of production, they can continue to produce profitably at significantly lower commodity prices.

 

Key Components of Revenues and Expenses

 

Revenues

 

We earn revenue from our broad suite of oilfield services, including coiled tubing, hydraulic fracturing, cementing, stimulation and pumping, well testing services, drilling services and rental, fishing and remediation, drilling and workover rigs, nitrogen services, wireline logging services, turbines drilling, directional drilling, filtration services and slickline services, among others. Revenues are recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered or rentals provided. A performance obligation arises under contracts with customers to render services or provide rentals and is the unit of account under Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The Company accounts for services rendered and rentals provided separately if they are distinct and the service or rental is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered or rentals provided on its own or with other resources that are readily available to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A contract’s standalone selling prices are determined based on the prices that the Company charges for its services rendered and rentals provided. Most of the Company’s performance obligations are satisfied over time, which is generally represented by a period of 30 days or less. The Company’s payment terms vary by the type of products or services offered. The term between invoicing and when the payment is due is typically 30-60 days per contract.

 

Cost of services

 

Cost of services primarily includes staff costs for service personnel, purchase of non-capitalized material, equipment and supplies (such as tools and rental equipment), depreciation relating to capital assets used in our operations, vehicle and equipment rental and maintenance and repair.

 

Selling, general and administrative (excluding Amortization) (“SG&A”) expense

 

SG&A expense, excluding Amortization as it is presented separately, primarily includes salary and employee benefits for non-production personnel (primarily management and administrative personnel), professional service fees, office facilities and equipment, office supplies and non-capitalized office equipment and depreciation of office furniture and fixtures.

 

Amortization

 

Amortization expense primarily includes amortization of intangible assets associated with acquired customer contracts, trademarks and tradenames.

 

41
 

 

Interest expense, net

 

Interest expense primarily consists of interest on outstanding debt, net of interest income.

 

Other income / (expense), net

 

Other income / (expense), net primarily consists bank charges and foreign exchange gains and losses.

 

Key Performance Indicators

 

Historically, we have tracked two principal non-financial performance indicators that are important drivers of our results of operations: oil price and rig count. Oil price is important because the level of spending by E&P companies, our principal customers, is significantly influenced by anticipated future prices of oil, which is typically indicative of expected supply and demand. Changes in E&P spending, in turn, typically result in an increased or decreased demand for our services. Rig count, particularly in the regions in which we operate, is an indicator of the level of activity and spending by our E&P customers and has historically been an important indicator of our financial performance and activity levels. More recently, our customers in certain parts of the MENA region have increased their efforts to commercialize natural gas, particularly from unconventional formations. Over time, we anticipate that the market for natural gas will also become a key performance indicator for the Company.

 

The following table shows rig count (Source: Baker Hughes Published Rig Count Data) and oil prices as of the dates indicated:

 

   As of December 31, 
   2023   2022   2021 
             
Rig count:               
MENA   379    358    332 
Rest of World – outside of North America   576    542    502 
Total International Rig Count   955    900    834 
                
Brent Crude (per barrel)  $77.69   $82.82   $77.24 

 

Basis of Presentation of Financial Information

 

Segments

 

We operate our business and report our results of operations through three operating and two reporting segments, Production Services and Drilling and Evaluation Services, which aggregate services performed during distinct stages of a typical life cycle of an oil well.

 

Production Services. Our Production Services segment includes the results of operations from services that are generally offered and performed during the production stage of a well’s lifecycle. These services mainly include hydraulic fracturing, coiled tubing, stimulation and pumping, cementing, nitrogen services, filtration services, pipelines and industrial services, production assurance, artificial lift services, completions and integrated production management. Our Production Services accounted for 69%, 62%, and 63%, of our revenues for the years ended December 31, 2023, 2022, and 2021, respectively.

 

Drilling and Evaluation Services. Our Drilling and Evaluation Services segment includes the results of operations from services that are generally offered and performed during pre-production stages of a well’s lifecycle and related mainly to the operation of oil rigs. The services mainly include rigs and integrated services, fishing and downhole tools, thru-tubing intervention, tubular running services, directional drilling, drilling fluids, pressure control, well testing services, wireline logging services and slickline services. Our Drilling and Evaluation Services accounted for accounted for 31%, 38%, and 37%, of our revenues for the years ended December 31, 2023, 2022, and 2021, respectively. Please see Item 4B, “Business Overview” in this Annual Report for a description of our reportable segments.

 

42
 

 

Results of Operations

 

The discussions below relating to significant line items from our consolidated statements of operations are based on available information and represent our analysis of significant changes or events that impact the fluctuations in or comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends. In addition, the discussions below for revenues are on an aggregate basis for each fiscal period, as the business drivers for all services are similar. All amounts in tables are in US$ thousands, except share data and per share amounts.

 

2023 compared to 2022

 

The following table presents our Consolidated Statements of Operations data for the periods indicated:

 

   Year ended 
Description  December 31,
2023
   December 31,
2022
 
         
Revenues  $1,145,915   $909,517 
Cost of services   (997,265)   (844,039)
Gross profit   148,650    65,478 
Selling, general and administrative expenses (excluding Amortization)   (49,173)   (47,530)
Amortization   (18,774)   (18,865)
Operating income / (loss)   80,703    (917)
Interest expense, net   (45,826)   (34,126)
Other (expense) / income, net   (5,031)   5,242 
Income / (Loss) before income tax   29,846    (29,801)
Income tax expense   (17,266)   (6,619)
Net income / (loss)  $

12,580

   $(36,420)

 

Revenue. Revenue was $1,145.9 million for the year ended December 31, 2023, compared to $909.5 million for the year ended December 31, 2022.

 

The table below presents our revenue by segment for the periods indicated:

 

   Year ended 
   December 31,
2023
   December 31,
2022
 
Reportable Segment:          
Production Services  $785,642   $567,249 
Drilling and Evaluation Services   360,273    342,268 
Total revenue  $1,145,915   $909,517 

 

Production Services revenue was $785.6 million for the year ended December 31, 2023, compared to $567.2 million for the year ended December 31, 2022. The change in revenue was primarily due to increased hydraulic fracturing activity in Saudi Arabia, and higher coiled tubing activity across most of the Company’s operating locations. Additionally, activity was higher in Egypt due to production chemical sales, in Algeria on cementing, and in Oman from IPM work.

 

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Drilling and Evaluation Services revenue was $360.3 million for the year ended December 31, 2023, compared to $342.3 million for the year ended December 31, 2022. The change in revenue was primarily due to higher activity in wireline logging in Saudi Arabia and Iraq.

 

Cost of services. Cost of services was $997.3 million for the year ended December 31, 2023, compared to $844.0 million for the year ended December 31, 2022. On a percentage basis, cost of services was 87.0% of revenue during the year ended December 31, 2023, as compared to 92.8% of revenue for the year ended December 31, 2022, a 577-basis point reduction. The reduction in cost of services (on a percentage basis) was primarily due to efficiencies in compensation, product costs, and base fixed operating costs brought about by higher activity in Saudi Arabia, Abu Dhabi, Oman, Algeria, and Kuwait, combined with the impact on cost percentages of a full year of unconventional hydraulic fracturing activity in 2023 versus a partial year in 2022 on contract transition. Cost of services included depreciation expense of $109.7 million and $97.0 million for the year ended December 31, 2023, and the year ended December 31, 2022, respectively.

 

Gross profit. Gross profit as a percentage of total revenue was 13.0% and 7.2% for the year ended December 31, 2023, and the year ended December 31, 2022, respectively. The reason for the change is described under “Revenue” and “Cost of services.”

 

SG&A expenses. SG&A expenses, which represent costs associated with managing and supporting our operations, were $49.2 million for the year ended December 31, 2023, compared to $47.5 million for the year ended December 31, 2022. SG&A increased year-over-year primarily due to an increase in professional fees associated with the preparation and audit of our Annual Report on Form 20-F for the year ended December 31, 2022, which was filed with the U.S. SEC on December 29, 2023, and higher spend on activities designed to facilitate remediation of the Company’s material weaknesses. SG&A as a percentage of total revenue was 4.3% and 5.2% for the year ended December 31, 2023, and the year ended December 31, 2022, respectively, as SG&A expenses did not grow as quickly as total revenue during 2023.

 

Amortization expense. Amortization expense was $18.8 million for the year ended December 31, 2023, compared to $18.9 million for the year ended December 31, 2022. Amortization expense is driven mainly by acquired intangible assets resulting from the acquisitions of GES and NPS in 2018, SAPESCO in 2020, and Action in 2021.

 

Interest expense, net. Interest expense, net, was $45.8 million for the year ended December 31, 2023, compared to $34.1 million for the year ended December 31, 2022. Interest expense, net, increased year-over-year due to higher interest rates across geographies as central banks sought to reduce inflationary pressures through the year.

 

Other (expense) / income, net. Other (expense) / income, net, was ($5.0) million for the year ended December 31, 2023, compared to $5.2 million for the year ended December 31, 2022. The difference between periods is primarily due to the other-than-temporary impairment recorded on the WDVGE investment during 2023 (see Note 9, Goodwill, Intangible, and Other Assets, to the consolidated financial statements included in Item 18, “Financial Statements,” of this Annual Report for further discussion).

 

Income tax expense. Income tax expense was $17.3 million for the year ended December 31, 2023, compared to $6.6 million for the year ended December 31, 2022. The change in the effective tax rate from 2022 to 2023 is primarily the result of positive earnings in 2023, resulting in taxable income in multiple countries in addition to additional provisions for unrecognized tax benefits. During 2022, income tax expense was largely driven by additional provisions for unrecognized tax benefits. See Note 13, Income Taxes, to our consolidated financial statements included in Item 18, “Financial Statements,” of this Annual Report.

 

Net (loss) / income. As a result of the foregoing, net income was $12.6 million for the year ended December 31, 2023, compared to a net loss of ($36.4) million for the year ended December 31, 2022.

 

Supplemental Segment Operating Income Discussion

 

   Year ended 
   December 31,
2023
   December 31,
2022
 
Reportable Segment(1):          
Production Services  $111,060   $28,717 
Drilling and Evaluation Services   36,461    33,473 

 

(1) See Note 20, Reportable Segments, to our consolidated financial statements included in Item 18, “Financial Statements,” of this Annual Report.

 

44
 

 

Production Services segment operating income was $111.1 million for the year ended December 31, 2023, compared to $28.7 million for the year ended December 31, 2022. The change in segment operating income was largely attributable to the revenue growth during 2023, coupled with efficiencies in compensation, product costs, and base fixed operating costs.

 

Drilling and Evaluation segment operating income was $36.5 million for the year ended December 31, 2023, compared to $33.5 million for the year ended December 31, 2022. Similar to Production Services, the change in segment operating income was largely attributable to the revenue growth during 2023.

 

2022 compared to 2021

 

The following table presents our Consolidated Statements of Operations data for the periods indicated:

 

   Year ended 
Description  December 31,
2022
   December 31,
2021
 
         
Revenues  $909,517   $876,729 
Cost of services   (844,039)   (873,948)
Gross profit   65,478    2,781 
Selling, general and administrative expenses (excluding Amortization)   (47,530)   (28,071)
Amortization   (18,865)   (18,042)
Operating loss   (917)   (43,332)
Interest expense, net   (34,126)   (15,174)
Other income / (expense), net   5,242    (2,073)
Loss before income tax   (29,801)   (60,579)
Income tax (expense) / benefit   (6,619)   (3,989)
Net loss   $(36,420)  $(64,568)

 

Revenue. Revenue was $909.5 million for the year ended December 31, 2022, compared to $876.7 million for the year ended December 31, 2021.

 

The table below presents our revenue by segment for the periods indicated:

 

   Year ended 
   December 31,
2022
   December 31,
2021
 
Reportable Segment:          
Production Services  $567,249   $554,097 
Drilling and Evaluation Services   342,268    322,632 
Total revenue  $909,517   $876,729 

 

Production Services revenue was $567.2 million for the year ended December 31, 2022, compared to $554.1 million for the year ended December 31, 2021. The change in revenue was primarily due to increased coiled tubing revenue across Oman, Algeria and United Arab Emirates where activity levels from existing customers were up on the strength of higher average oil prices in 2022 coupled with fewer lingering impacts from the COVID-19 pandemic and subsequent global economic recovery, partially offset by a reduction in hydraulic fracturing activity in Saudi Arabia during a transitory period between hydraulic fracturing contracts.

 

45
 

 

Drilling and Evaluation Services revenue was $342.3 million for the year ended December 31, 2022, compared to $322.6 million for the year ended December 31, 2021. The change in revenue was primarily due to higher activity in Algeria and Iraq on contract wins, higher activity volume in Kuwait, which includes the impact of a full year of the Action Business Combination, partially offset by lower Well Testing activity in Saudi Arabia.

 

Cost of services. Cost of services was $844.0 million for the year ended December 31, 2022, compared to $873.9 million for the year ended December 31, 2021. On a percentage basis, cost of services was 92.8% of revenue during the year ended December 31, 2022, as compared to 99.7% of revenue for the year ended December 31, 2021, a 690-basis point reduction. The reduction in cost of services was primarily due to (1) improved utilization on a more efficient operating cost structure, (2) fewer non-recurring costs year-over-year, (3) continued abatement of COVID-19 pandemic consequences such as supply chain disruption and inflationary pressure, and (4) lower depreciation expense because of a change in the ownership structure and thus depreciable life for a portion of the Company’s hydraulic fracturing fleet beginning in the fourth quarter of 2021. These cost improvements were partially offset by a higher cost structure maintained to support hydraulic fracturing during a transitory period between hydraulic fracturing contracts in Saudi Arabia and shortages in supply chain commodities such as chemicals leading to increases in the cost base. Cost of services included depreciation expense of $97.0 million and $104.1 million for the year ended December 31, 2022, and the year ended December 31, 2021, respectively.

 

Gross profit. Gross profit as a percentage of total revenue was 7.2% and 0.3% for the year ended December 31, 2022, and the year ended December 31, 2021, respectively. The reason for the change is described under “Revenue” and “Cost of services.”

 

SG&A expenses. SG&A expenses, which represent costs associated with managing and supporting our operations, were $47.5 million for the year ended December 31, 2022, compared to $28.1 million for the year ended December 31, 2021. SG&A increased year-over-year primarily due to professional fees incurred in relation to (1) the matters identified in our Annual Report on Form 20-F for the year ended December 31, 2022, relating to restatement of our previously issued audited financial statements as of and for the year-ended December 31, 2020, (2) costs related to the preparation and audit of our Annual Report on Form 20-F for the year ended December 31, 2022, including multiple audit firms; (3) costs associated with the third-party root cause analysis for the prior period errors; and (4) costs associated with the remediation efforts to ensure that such errors will not occur again. SG&A as a percentage of total revenue was 5.2% and 3.2% for the year ended December 31, 2022, and the year ended December 31, 2021, respectively.

 

Amortization expense. Amortization expense was $18.9 million for the year ended December 31, 2022, compared to $18.0 million for the year ended December 31, 2021. Amortization expense is driven mainly by acquired intangible assets resulting from the acquisitions of GES and NPS in 2018, SAPESCO in 2020, and the Action Business Combination in 2021.

 

Interest expense, net. Interest expense, net, was $34.1 million for the year ended December 31, 2022, compared to $15.2 million for the year ended December 31, 2021. Interest expense, net, increased year-over-year due to higher interest rates across geographies as central banks sought to reduce inflationary pressures through the year.

 

Other (expense) income, net. Other (expense) income, net, was $5.2 million for the year ended December 31, 2022, compared to ($2.1) million for the year ended December 31, 2021. The difference between periods is primarily due to a nonrecurring $4.2 million mark-to-market gain recognized at year-end 2022 in connection with on a derivative liability initially recognized at the time of the Company’s investment in WDVGE.

 

Income tax (expense) / benefit. Income tax (expense) / benefit was ($6.6) million for the year ended December 31, 2022, compared to ($4.0) million for the year ended December 31, 2021. The change in the effective tax rate from 2021 to 2022 is primarily the result of country mix. See Note 13, Income Taxes, to our consolidated financial statements included in Item 18, “Financial Statements,” of this Annual Report.

 

Net loss. As a result of the foregoing, net loss was ($36.4) million for the year ended December 31, 2022, compared to ($64.6) million for the year ended December 31, 2021.

 

Supplemental Segment Operating Income / (Loss) Discussion

 

   Year ended 
   December 31,
2022
   December 31,
2021
 
Reportable Segment(1):          
Production Services  $28,717   $(1,858)
Drilling and Evaluation Services   33,473    (1,238)

 

(1) See Note 20, Reportable Segments, to our consolidated financial statements included in Item 18, “Financial Statements,” of this Annual Report.

 

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Production Services segment operating income / (loss) was $28.7 million for the year ended December 31, 2022, compared to ($1.9) million for the year ended December 31, 2021. The change in segment operating income / (loss) was largely attributable to incremental revenue growth in 2022 coupled with an easing of the labor and supply chain cost pressures that existed during 2021.

 

Drilling and Evaluation segment operating income / (loss) was $33.5 million for the year ended December 31, 2022, compared to ($1.2) million for the year ended December 31, 2021. Similar to Production Services, the change in segment operating income / (loss) was largely attributable to incremental revenue growth in 2022 coupled with an easing of the labor and supply chain cost pressures that existed during 2021.

 

B. LIQUIDITY AND CAPITAL RESOURCES

 

Our objective is to maintain sufficient liquidity, adequate financial resources and financial flexibility to fund our operations. We had cash and cash equivalents of $67.8 million as of December 31, 2023, and $78.9 million as of December 31, 2022. Our outstanding borrowings were $452.2 million as of December 31, 2023, and $535.1 million as of December 31, 2022. Current available borrowing capacity totaled $153.1 million as of December 31, 2023. We believe that our cash on hand, cash flows generated from operations, and liquidity available through our credit facilities, including recently drawn facilities, will provide sufficient liquidity to manage our cash needs. See “Capital Resources” below.

 

Cash Flows

 

   (In US$ thousands) 
   Year ended 
   December 31, 2023    December 31, 2022   December 31, 2021 
              
Cash provided by (used in):                
Operating Activities  $176,959    $92,576   $127,743 
Investing Activities   (83,463)    (146,708)   (164,536)
Financing Activities   (104,528)    (72,795)   167,544 
Effect of exchange rate changes on cash   -     8    9 
Net change in cash and cash equivalents  $(11,032)   $(126,919)  $130,760 

 

Operating Activities

 

Cash flows provided by operating activities were $177.0 million for the year ended December 31, 2023, compared to cash flows provided by operating activities of $92.6 million for the year ended December 31, 2022. Cash flows from operating activities fluctuated by $84.4 million in the year ended December 31, 2023, compared to year ended December 31, 2022, primarily due to significantly improved operating results coupled with a reduction in inventory balances.

 

Investing Activities

 

Cash flows used in investing activities were $83.5 million for the year ended December 31, 2023, compared to cash flows used in investing activities of $146.7 million for the year ended December 31, 2022. The difference between periods was primarily due to reduced capital expenditures during 2023. Our principal recurring investing activity is the funding of capital expenditures to ensure that we have the appropriate levels and types of machinery and equipment in place to generate revenue from operations.

 

Financing Activities

 

Cash flows used in financing activities were $104.5 million for the year ended December 31, 2023, compared to cash flows used in financing activities of $72.8 million for the year ended December 31, 2022. The increase between 2022 and 2023 is primarily attributable to an increase in repayment of long term and short-term borrowings during 2023 as compared to 2022.

 

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Material Cash Requirements from Contractual Obligations

 

The table below summarizes the payments due by fiscal year for our material cash requirements from contractual obligations as of December 31, 2023. Certain amounts included in this table are based on our estimates and assumptions about these obligations, including their duration, anticipated actions by third parties and other factors. The contractual cash obligations we will actually pay in future periods may vary from those reflected in the table below because the estimates and assumptions are subjective.

 

Payments Due by Period
          Less than     1 – 3     3 – 5     More than  
(In thousands)   Total     1 year     years     years     5 years  
Principal payments for long-term debt(1)   $ 408,479       71,744       143,235       193,500       -  
Principal and interest payments for short-term debt (2)     50,722       50,722       -      

-

      -  
Estimated interest payments for long-term debt (3)     85,617       32,093       41,496       12,028       -  
Operating leases (4)     57,366       8,306       11,241       5,149       32,670  
Finance leases (5)     8,153       3,833       4,320       -       -  
Seller-provided installment financing for capital expenditures (6)     1,459       1,459       -       -       -  
Contractual commitments for capital expenditures (7)     15,400       15,400       -       -       -  
Employees’ end of service benefits (8)     53,056       6,538       11,037       10,851       24,630  
Total   $ 680,252       190,095       211,329      

221,528

     

57,300

 

 

(1) Amounts represent the cash payments for the principal amounts related to our long-term debt at December 31, 2023. Amounts for debt do not include any unamortized discounts or deferred issuance costs. Cash payments for interest are excluded from these amounts.

 

(2) Amounts represent the cash payments for the principal amounts and interest related to our short-term debt at December 31, 2023.

 

(3) Amounts represent the cash payments for interest on our long-term debt.

 

(4) Amounts represent the future minimum payments under non-cancelable operating leases with initial or remaining terms of one year or more. We enter into operating leases, some of which include renewal options; however, we have excluded renewal options from the table above unless it is anticipated that we will exercise such renewals.

 

(5) Represents gross future minimum payments under finance leases. We enter into finance leases for property, plant, and equipment when the terms of these leases are advantageous to immediate purchase or where other unique business factors exist.

 

(6) Represents future minimum under agreements to purchase capital assets using seller-provided installment financing.

 

(7) Contractual commitments for capital expenditures include agreements to purchase property, plant, and equipment that are enforceable and legally binding and specify all significant terms. Our performance is secured by letters of credit, as described in Item 5A, “Off- Balance Sheet Arrangements,” for $2.0 million of this balance.

 

(8) Amount represents the expected payments of employees’ end of service benefits.

 

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Credit Facilities

 

As of December 31, 2023, we had the following principal credit facilities and instruments outstanding or available:

 

2021 Secured Facilities Agreement

 

On November 4, 2021, the Company entered into a $860 million Secured Facilities Agreement (the “2021 Secured Facilities Agreement”) with Arab Petroleum Investments Corporation (“APICORP”), HSBC Bank Middle East Limited (“HSBC”), Mashreqbank PSC and Saudi British Bank acting as initial mandated lead arrangers, HSBC acting as bookrunner and global agent, HSBC and Mashreqbank PSC acting as coordinator, Saudi British Bank and Mashreqbank PSC acting as security agents, and NPS Bahrain for Oil & Gas Wells Services WLL, Gulf Energy SAOC, Energy Oilfield Supplies DMCC and National Petroleum Technology Company as borrowers. Effective September 2023, Sohar International Bank (‘Sohar’) acquired HSBC Oman, resulting in a transition of the lending facility from HSBC Oman to Sohar. Upon consummation of this transaction, the Company settled its existing debt obligations under the 2019 Secured Facilities Agreement. The refinancing was treated as a modification for accounting purposes with only third-party costs charged to the Consolidated Statements of Operations for the year ended December 31, 2021. Deferred debt issuance costs totaling $5.3 million and $8.6 million as of December 31, 2023, and December 31, 2022, respectively, have been assigned ratably to the term, revolving and working capital facilities and will be amortized to interest expense over periods of 6, 4, and 1 year(s), respectively. The amounts are shown as contra liabilities in the accompanying Consolidated Balance Sheets.

 

At inception, the $860 million Secured Facilities Agreement consisted of a $430 million term loan due by November 4, 2027 (the “Term Loan” or “Secured Term Loan”), a $80.0 million revolving credit facility due by November 4, 2025 (“RCF” or “Secured Revolving Credit Facility”), and a $350 million working capital facility that renews annually by mutual agreement of the Lenders and the Company.

 

Prior to September 2023, borrowings under the Term Loan and RCF facilities incurred interest at the rate of three-month LIBOR for U.S. dollar denominated borrowings or SIBOR for Saudi Arabia Riyal borrowings plus 2.6% to 3.0% per annum, varying based on the Company’s Net Debt / EBITDA ratio as defined in the 2021 Secured Facilities Agreement. Effective September 2023, the Company entered into an amendment to its Secured Facilities Agreement replacing LIBOR with the second overnight financing rate (“SOFR”) as the interest rate benchmark for U.S. dollar denominated borrowings. As of December 31, 2023, and December 31, 2022, this resulted in interest rates of 8.23% and 7.64%, respectively, for U.S. dollar denominated borrowings, and interest rates of 8.58% and 8.60%, respectively, for Saudi Arabian Riyal borrowings. No payments were due on the Term Loan until the first quarter of 2023 with final settlement by November 4, 2027. The Term Loan permits prepayment but once repaid, amounts may not be redrawn. As of December 31, 2023, and December 31, 2022, the Company had drawn $387.0 million and $430.0 million, respectively, of the Term Loan, and $10.0 million and $10.0 million, respectively, of the RCF.

 

The RCF was obtained for general corporate and working capital purposes including capital expenditure related requirements and acquisitions (including transaction related expenses). The RCF requires the payment of a commitment fee each quarter. The commitment fee is computed at the rate of 25% of the margin on the facility lender’s available commitment for the relevant quarter. Under the terms of the RCF, the final settlement is due by November 4, 2025. The Company is permitted to make any prepayment under this RCF in multiples of $5.0 million during this 4-year period up to November 4, 2025. Any unutilized balances from the RCF can be drawn down again during the 4-year tenure at the same terms. As of December 31, 2023, and December 31, 2022, the Company had $70.0 million and $70.0 million, respectively, available to be drawn under the RCF.

 

The 2021 Secured Facilities Agreement also includes a working capital facility of $325 million and $350 million as of December 31, 2023, and December 31, 2022, respectively, for issuance of letters of guarantee, letters of credit and refinancing letters of credit into debt over a period of no more than two years, which prior to September 2023 carried an interest rate equal to three-month LIBOR for U.S. dollar denominated borrowings or SIBOR for Saudi Arabia Riyal borrowings, for the applicable interest period, plus a margin of 1.25% to 1.5% per annum. Effective September 2023, the Company entered into an amendment to its Secured Facilities Agreement replacing LIBOR with the second overnight financing rate (“SOFR”) as the interest rate benchmark for U.S. dollar denominated borrowings. As of December 31, 2023, and December 31, 2022, this resulted in interest rates of 8.23% and 7.64%, respectively, for U.S. dollar denominated borrowings, and interest rates of 8.58% and 8.60%, respectively, for Saudi Arabian Riyal borrowings. The working facility requires the payment of a commitment fee each quarter. The commitment fee is computed at the rate of 0.3125% (25% of the margin) on the facility lender’s available commitment for the relevant quarter. As of December 31, 2023, and December 31, 2022, the Company had utilized $178.6 million and $252.9 million, respectively, under this working capital facility and the balance of $146.4 million and $97.1 million, respectively, was available to the Company.

 

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The Company has also retained legacy bilateral working capital facilities from HSBC totaling $10.6 million and $10.6 million at December 31, 2023 and December 31, 2022, respectively, in Qatar ($10.3 million at December 31, 2023, $10.3 million at December 31, 2022), in the UAE ($0.2 million at December 31, 2023, and $0.2 million at December 31, 2022) and in Kuwait ($0.1 million at December 31, 2023 and $0.1 million at December 31, 2022). As of December 31, 2023, and December 31, 2022, the Company had utilized $3.9 million and $4.7 million, respectively, under this working capital facility and the balance of $6.7 million and $5.9 million, respectively, was available to the Company.

 

Utilization of the working capital facilities under both the legacy HSBC arrangement and 2021 Secured Facilities Agreement comprises letters of credit issued to vendors, guarantees issued to customers, vendors, and others, and short-term borrowings used to settle letters of credit. Once a letter of credit is presented for payment by the vendor, the Company at its election can settle the letter of credit from available cash or leverage short-term borrowings available under both the legacy HSBC arrangement and 2021 Secured Facilities Agreement that will be repaid quarterly over a period of up to two years. Until a letter of credit is presented for payment by the vendor, it is disclosed as an off-balance sheet obligation. For additional discussion of outstanding letters of credit and guarantees, see Note 14, Commitments and Contingencies.

 

The 2021 Secured Facilities Agreement includes covenants that specify maximum leverage (Net Debt / EBITDA) up to 3.50, minimum debt service coverage ratio (Cash Flow / Debt Service) of at least 1.25, and interest coverage (EBITDA / Interest) of at least 4.00. As of December 31, 2023, the Company was in compliance with all financial and nonfinancial covenants under the 2021 Secured Facilities Agreement.

 

CIB Short-Term Debt

 

The Commercial International Bank Short-Term Debt facilities (collectively, “CIB Short-Term Debt”) include $2.8 million and $8.8 million in U.S. dollar letters of guarantee available at December 31, 2023, and December 31, 2022, respectively.

 

As of December 31, 2023, the Company had utilized $2.8 million in letters of guarantee with a balance of $0 (zero) million available to the Company. As of December 31, 2022, the Company had utilized $4.4 million in letters of guarantee with a balance of $4.4 million available to the Company.

 

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Off-Balance Sheet Arrangements

 

Letters of Credit

 

The Company had outstanding letters of credit amounting to $2.0 million and $26.4 million as of December 31, 2023 and December 31, 2022, respectively.

 

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 $122.8 million and $132.4 million as of December 31, 2023, and December 31, 2022, respectively. The Company has also entered into cash margin guarantees totaling $3.6 million and $3.6 million at December 31, 2023, and December 31, 2022, 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 the Company’s consolidated financial statements.

 

Capital Resources

 

For the foreseeable future, we believe cash on hand, cash flows from operating activities and available credit facilities, including those of our Subsidiaries, will provide us with sufficient capital resources and liquidity to manage our working capital needs, meet contractual obligations, fund capital expenditures, and support the development of our short-term operating strategies.

 

We plan to pursue strategic acquisitions as an element of our business strategy. The timing, size or success of any acquisition and the associated potential capital commitments are unpredictable and uncertain. We may seek to fund all or part of any such acquisition with proceeds from debt or equity issuances, or may issue equity directly to the sellers in any such acquisition, or any combination thereof. Our ability to obtain capital for strategic acquisitions will depend on our future operating performance, financial condition and, more broadly, on the availability of equity and debt financing. Capital availability will be affected by prevailing conditions in our industry, the global economy, the global financial markets and other factors, many of which are beyond our control. Any additional debt service requirements we take on could be based on higher interest rates and shorter maturities and could impose a significant burden on our results of operations and financial condition, and the issuance of additional equity securities could result in significant dilution to our shareholders.

 

Other Factors Affecting Liquidity

 

Customer receivables. In line with industry practice, we bill our customers for our services in arrears and are, therefore, subject to our customers delaying or failing to pay our invoices. In weak economic environments, we may experience increased delays and failures to pay our invoices due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to the credit markets as well as unsettled political conditions. If our customers delay paying or fail to pay us a significant amount of our outstanding receivables, it could have a material impact on our liquidity, results of operations and financial condition.

 

Shelf registration statement. The Company does not have any effective shelf registration statements as of December 31, 2023.

 

Nasdaq Delisting. Effective April 28, 2023, Nasdaq delisted the Company’s ordinary shares and warrants. The delisting of the ordinary shares and warrants has affected the liquidity of such securities and could inhibit or restrict our ability to raise additional financing, among other things.

 

We plan to seek to relist our ordinary shares and warrants on Nasdaq as soon as practicable through the normal relisting application process. However, we cannot assure you that we will list our securities successfully on Nasdaq or another national securities exchange, or that once listed, our securities will remain listed thereon. An active trading market for the Company’s securities may never develop or, if developed, it may not be sustained. You may be unable to sell your ordinary shares and/or warrants unless an active market for such securities can be established and sustained.

 

Capital Expenditure Commitments

 

The Company was committed to incur capital expenditures of $15.4 million and $38.4 million at December 31, 2023 and 2022, respectively. Substantially all of the commitments outstanding as of December 31, 2023, are expected to be settled during 2024.

 

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C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

 

We own and control a variety of intellectual property, including but not limited to proprietary information and software tools and applications that, in the aggregate, are material to our business. No individual instance of intellectual property is material to the Company. To date, the Company has not made significant expenditures on research and development activities aside from strategic investments and partnerships with companies to expand the NEDA and Drilling and Evaluation Services portfolios. Additionally, in early 2023, the Company opened NORI in Saudi Arabia’s DTV. We expect that the NORI facility, located in the heart of Saudi Arabia’s industrial research, technology and academic hub, will enhance NESR’s ability to drive energy sector research and innovation across the MENA region.

 

D. TREND INFORMATION

 

Global E&P Trends and Oil Prices

 

See “– Global E&P Trends and Oil Prices” included in Item 5A, “Operating Results”.

 

E. CRITICAL ACCOUNTING ESTIMATES

 

We have defined a critical accounting estimate as one that is both important to the portrayal of either our financial condition or results of operations and requires us to make difficult, subjective or complex judgments or estimates about matters that are uncertain. We believe that the following are the critical accounting estimates used in the preparation of our consolidated financial statements. There are other items within our consolidated financial statements that require estimation and judgment, but they are not deemed critical as defined above. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this Annual Report.

 

Goodwill

 

Goodwill is the excess cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is evaluated for impairment on an annual basis as of October 1, or more frequently if circumstances indicate an impairment may exist at the reporting unit level. When performing the annual impairment test we have the option of first performing a qualitative assessment to determine the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we would then be required to perform a quantitative impairment assessment of goodwill. A quantitative assessment for the determination of impairment is made by comparing the carrying amount of each reporting unit with its fair value. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions and typically requires analysis of discounted cash flows and other market information, such as trading multiples, and comparable transactions. Cash flow analysis requires judgment regarding many factors, such as management’s projections of future cash flows, weighted-average cost of capital, and long-term growth rates. Market information requires judgmental selection of relevant market comparables. We assess the valuation methodology based upon the relevance and availability of the data at the time the valuation is performed. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain, and actual results may differ from those assumed in our analysis. The determination of whether goodwill is impaired involves a significant level of judgment in these assumptions, and changes in our forecasts, business strategy, government regulations, or economic or market conditions could significantly impact these judgments, potentially decreasing the fair value of one or more reporting units. Any resulting impairment charges could have a material impact on our results of operations.

 

The Company estimated that the aggregate fair value of its two reporting units as of October 1, 2023, its most recent annual goodwill impairment test date, was $2.1 billion. The Company’s market capitalization as of October 1, 2023, was $533.6 million based on an October 1, 2023, share price of $5.74 and 94,996,397 common shares outstanding. It is the Company’s opinion that the share price was not representative of the implied fair value as of October 1, 2023, due to control premium, the Company’s strong operational performance in comparison to the prevailing trends in oil prices and the financial performance of industry peers, and non-public information of which management is privy but is not reflected in the share price. In determining the control premium, management has considered current and historical industry transactions prior to valuation.

 

In further assessing the valuation of the Company’s goodwill, management performs sensitivity analysis by reducing estimates of growth in the Company’s future cash flows. For the October 1, 2023 test date, these reductions ranged from 1% to 3% for Production Services and 3% and 8% for Drilling and Evaluation. The severity of the reductions is based on the management’s level of certainty and confidence in the estimates. As of October 1, 2023, the Company’s sensitized models continued to show fair value in excess of the carrying amount of equity for both reporting units.

 

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Intangible assets

 

Our intangible assets with finite lives consist of customer contracts, trademarks and trade names primarily acquired in connection with the Business Combinations. The cost of intangible assets with finite lives is amortized over the estimated period of economic benefit, ranging from eight to ten years. Asset lives are adjusted whenever there is a change in the estimated period of economic benefit. No residual value has been assigned to these intangible assets.

 

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations. We assess the recoverability of the carrying amount by preparing estimates of future revenue, margins, and cash flows. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the asset to its estimated fair value. The determination of future cash flows as well as the estimated fair value of assets involves significant estimates on the part of management. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, we could be required to recognize impairment charges in the future. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flow models.

 

Income taxes

 

Income tax (expense) / benefit represents the sum of current tax and deferred tax. Interest and penalties relating to income tax are also included in the income tax (expense) / benefit. Income tax is recognized in the statements of operations, except to the extent that it relates to items recognized in other comprehensive income or directly in equity, in which case the related tax is recognized in other comprehensive income or directly in equity. Current tax is based on the taxable profit for the period. Taxable profit differs from net profit as reported in the statements of operations because it is determined in accordance with the rules established by the applicable taxation authorities. It therefore excludes items of income or expense that are taxable or deductible in other periods as well as items that are never taxable or deductible. Our liability for current tax is calculated using tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

 

Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences except:

 

  where the deferred tax liability arises on the initial recognition of goodwill;
     
  where the deferred tax liability arises on the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit or loss; and
     
  In respect of taxable temporary differences associated with investments in subsidiaries and associates and interests in joint arrangements, where we are able to control the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.

 

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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 assets to be utilized.

 

The computation of our income tax (expense) / benefit and liability involves the interpretation of applicable tax laws and regulations in many jurisdictions. The resolution of tax positions taken by us, through negotiations with relevant tax authorities or through litigation, can take several years to complete and in some cases it is difficult to predict the ultimate outcome. Therefore, judgment is required to determine provisions for income taxes. In addition, we have carry-forward tax losses and tax credits in certain taxing jurisdictions that are available to offset against future taxable profit. However, deferred tax assets are recognized only to the extent that it is probable that taxable profit will be available against which the unused tax losses or tax credits can be utilized. Management judgment is exercised in assessing whether this is the case and estimates are required to be made of the amount of future taxable profits that will be available.

 

Recently Issued Accounting Pronouncements

 

Please refer to Note 3 to our consolidated financial statements included in Item 18, “Financial Statements,” of this Annual Report, for a discussion of recent accounting pronouncements and their anticipated impact.

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. DIRECTORS AND SENIOR MANAGEMENT

 

We rely on the Senior Management of our principal operating subsidiaries to manage our business. Our Senior Management team is responsible for the day-to-day management of our operations. Members of our senior management are appointed from time to time by vote of the Board of Directors and hold office until a successor is elected and qualified. Our current Chief Executive Officer, Chief Financial Officer and Chief Commercial Officer (collectively, our “Senior Management”) are:

 

Name   Age(1)   Position
Sherif Foda   54   Executive Chairman of the Board and Chief Executive Officer
Stefan Angeli   64   Chief Financial Officer
Dhiraj Dudeja   47   Chief Commercial Officer

 

  (1) As of December 31, 2023.

 

Sherif Foda has served as the Chairman and Chief Executive Officer of NESR since inception. He started the Company in 2017 as a SPAC to create the first and largest energy services company from the MENA region publicly listed on the Nasdaq Stock Market. He has more than 25 years of professional experience in the energy industry working primarily in his earlier career for Schlumberger Limited (NYSE: SLB) around the world, particularly in the Middle East, Europe and the US. He served as Senior Advisor to the Chairman of SLB, an officer and President of the Production Group, the President of Europe and Africa, Vice President, and Managing Director of the Arabian market, President of well intervention worldwide, Vice President of Europe, Caspian and Africa, and Managing Director of Oman, among other roles. He started his career in 1993 with SLB, working on the offshore fields in the Red Sea, then transferred to Germany and Europe before getting to multiple senior level positions. Prior to working in the oil and natural gas industry, he worked in the information technology and computer industry for two years after graduating from Ain Shams University in Cairo with double majors in Electronics Engineering and Automatic control. He attended various executive courses at HBS, Oxford and IMD and is a usual speaker in multiple forums. Mr. Foda used to serve as a board member of Energy Recovery, Inc. (Nasdaq: ERII), a technology company based in California and the Board of Trustees of Awty International School in Houston. He currently serves as the Chairman of the board of directors of WDVG Engineering based in Houston, GLC energy company in London and is a member of the Oxford Energy Policy Club in the UK. He is also a board member for Al Fanar Venture philanthropy in London.

 

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We believe that Mr. Foda is qualified to serve on our Board of Directors because of his extensive experience in the oil and natural gas industry, including approximately 25 years with Schlumberger and his extensive oil field services industry experience throughout the MENA region and globally as an executive and board member.

 

Stefan Angeli has been the Chief Financial Officer of NESR since February 8, 2022. Previously, Mr. Angeli was CFO for Stratum Reservoir – a private equity portfolio company involved in reservoir characterization, laboratory services and instrumentation for upstream, downstream and the mining sector. Mr. Angeli spent the majority of his career (30 years) at Schlumberger in diverse roles with his last 5 assignments being Group Controller for Integrated Project Management, Controller for the Reservoir Production Group, Area Controller for Latin America Oilfield Services, and Controller for Schlumberger Information Systems & Well Completion and Productivity Business Segments. During his career, Mr. Angeli has been based in Sydney, Singapore, Jakarta, Aberdeen, Luanda, London, Rio De Janeiro and Houston. He earned a Bachelor of Economics degree majoring in Economics and Accounting from the University of Sydney and then qualified as a chartered accountant. He has also attended advanced finance management courses at the International Institute for Management Development (IMD) and the Wharton School of the University of Pennsylvania.

 

Dhiraj Dudeja is the Chief Commercial Officer for NESR and leads the Merger and Acquisitions as well as Sales and Marketing functions at NESR and has more than 25 years of professional experience in the oil and natural gas industry. In his career, Mr. Dudeja has worked across a diverse group of roles and geographies with significant experience in executive management, operations, sales and marketing, mergers and acquisitions, venture capital, capital markets, investor relations, technology development, and personnel functions. His career has allowed him to work in various regions across the globe specifically South Asia, Southeast Asia, Middle East and Europe, and now in the U.S. where he has been with NESR since its inception in this role. As the first employee of NESR, Mr. Dudeja has been intimately involved with every aspect of the growth of the Company and in addition to his day-to-day role is heavily focused on all the growth and strategic initiatives including any technology or business partnerships and investments. Previously he also co-founded two startups in the education analytics field in India and the U.S., one of which he actively led from 2012 to 2014 as Chief Operating Officer. Mr. Dudeja also presently serves on the board of directors of ICE Thermal Harvesting, an ESG focused geothermal energy company, Kinetic Upstream Technologies, an innovator developer of drilling automation systems and WDVG Engineering, a premier petroleum engineering firm. Mr. Dudeja is also a founding supporter of The Nudge Institute, an action institute that works with governments, markets, and civil society to build resilient livelihoods for all in India. Mr. Dudeja graduated from the Indian Institute of Technology, Delhi (IIT-Delhi) and holds a Bachelor of Technology degree in Electrical Engineering with a minor in Management Studies.

 

Board of Directors

 

The Company’s Class I Directors were elected by the shareholders at the Company’s 2020 annual general meeting whereas Class II directors were elected by the shareholders at the Company’s 2021 annual general meeting. The Company did not hold an annual general meeting in 2022 or 2023 due to the ongoing activities associated with the matters identified in our Annual Report on Form 20-F for the year ended December 31, 2022, relating to restatement of our previously issued audited financial statements as of and for the year-ended December 31, 2020. Under the Company’s Memorandum and Articles of Association, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the second annual general meeting following their election. The Company expects that both Class I and Class II Director seats will next be up for election at the 2024 annual general meeting as over two years have elapsed since the most recent annual general meeting. Search efforts are currently underway to add additional independent directors to the Company’s Board including female and minority representation. Set forth below are the names, ages and positions of each of the individuals who currently serve or served during 2023 as directors of NESR:

 

Name   Age (3)   Class   Position
Antonio J. Campo Mejia   66   I   Lead Independent Director
Yousef Al Nowais(1)   69   II   Independent Director
Andrew Waite(2)   62   I   Independent Director
Thomas D. Wood   67   II   Independent Director
Sherif Foda   54   II   Executive Chairman of the Board and Chief Executive Officer

 

(1) Al Nowais Investments LLC (“ANI”) is entitled, pursuant to a Relationship Agreement dated June 6, 2018, to nominate one director to the Board of Directors for so long as it or its affiliates hold at least 50% of the NESR ordinary shares acquired pursuant to the NPS/GES Business Combination. Mr. Al Nowais represents ANI on the Board.

 

(2) SCF-VIII, L.P. (“SCF-VIII”) is entitled, pursuant to a Voting Agreement dated June 6, 2018, to nominate one director to the Board of Directors for so long as it or its affiliates hold at least 60% of the NESR ordinary shares acquired pursuant to the NPS/GES Business Combination. Mr. Waite represents SCF-VIII on the Board. Prior to restructuring during 2020, these shares held by SCF-VIII were held by SV3 Holdings, Pte Ltd.

 

(3) Age as of December 31, 2023.

 

Information regarding the business experience of each director is provided below. There are no family relationships among NESR’s executive officers and directors.

 

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Class I Directors

 

Antonio J. Campo Mejia has been an independent director of the Company since May 12, 2017, and is the Lead Director of the Board. Mr. Campo Mejia has been a non-executive director of the Supervisory Board and member of the Compensation and Nomination committees of Fugro N.V. (Euronext: FUR), a company providing geotechnical, survey, subsea and geosciences services since 2014 and Vice-Chairman and member of the Audit Committee of Basin Holdings, a global holding company focused on providing products and services to energy and industrial customers since 2012. From 2012 to 2013, Mr. Campo Mejia served as non-executive director at Integra Group, an oilfield services company, mainly active in Russia and the Commonwealth of Independent States and served as its Chief Executive Officer from 2009 to 2012. Mr. Campo Mejia also served as non-executive director at Basin Supply LP, Basin Tools LP and Basin Energy Services LP from 2009 to 2014. Prior to that, Mr. Campo Mejia spent 28 years of his professional career at Schlumberger, one of the world’s leading oilfield services companies, in a multitude of senior management positions in different parts of the world. In his various roles with Schlumberger, Mr. Campo Mejia served as the President of Latin America for Oilfield Services and President of Europe & Africa and was the President of Schlumberger’s Integrated Project Management business responsible for the worldwide operations in this service line. Prior to that, Mr. Campo Mejia served as Director of Personnel for the Reservoir Management Group in Houston, Texas and Vice President of Oilfield Services Latin America South, managing a full range of services in the region. In his career prior to 1997, Mr. Campo Mejia held a number of senior management and technical positions in Schlumberger’s wireline business. Mr. Campo Mejia received his bachelor’s degree in Electronic Engineering from Pontificia Universidad Javeriana in 1980.

 

We believe that Mr. Campo Mejia is qualified to serve on our Board of Directors because of his extensive experience in the oil and natural gas industry and his experience as an executive in oilfield services and board member of multinational companies.

 

Andrew Waite was elected to the Board as of June 6, 2018, and is an independent director. Mr. Waite is Managing Partner of SCF Partners, Inc., the ultimate general partner of SCF-VIII, L.P., 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. Mr. Waite previously served on the board of directors of Complete Production Services, Inc. (previously NYSE:CPX), a provider of specialized oil and natural gas completion and production services, from 2007 to 2009, Hornbeck Offshore Services, Inc. (previously NYSE:HOS), a provider of marine services to the energy sector and military customers, from 2000 to 2006, Oil States International, Inc. (NYSE:OIS), a diversified oilfield services and equipment company, from August 1995 through April 2006, Atlantic Navigation Holdings (Singapore) Limited (SGX: 5UL), a provider of marine logistic, ship repair, fabrication, and other marine services, from January 2016 to December 2018 and Forum Energy Technologies, Inc. (NYSE: FET), a provider of value added solutions and products to the energy industry, from 2010 to 2021. Mr. Waite received a Bachelor of Science degree in Civil Engineering from Loughborough University, a Master of Science in Environmental Engineering Science from California Institute of Technology, and an M.B.A., with high distinction, from Harvard Business School.

 

We believe that Mr. Waite is qualified to serve on our Board of Directors because of his extensive public company experience in the energy sector, in particular in the oilfield services industry, and his experience in identifying strategic growth trends in the energy industry and evaluating potential transactions.

 

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Class II Directors

 

Sherif Foda’s biographical information is set forth above.

 

Yousef Al Nowais was nominated by our Nominating and Governance Committee and Board of Directors on November 9, 2019, to serve as a Class II Director. He serves as the Chairman and Managing Director of Arab Development (“ARDECO”), a company he founded in his home city of Abu Dhabi, the United Arab Emirates. ARDECO is a large, diversified business and a leading player in the oil and natural gas and petrochemical sectors as well as power generation and distribution and other engineering and infrastructure project services. He served as the Co-Chairman of Al Nowais Investments LLC, a leading investment company based in Abu Dhabi with local and international holdings in a broad range of strategic investments and actively managed subsidiaries. Prior to founding ARDECO, Mr. Al Nowais joined Abu Dhabi National Oil Company (“ADNOC”) after graduating from the University of Arizona in 1979 and held many senior positions in the ADNOC group, including Finance Director and Managing Director of ADNOC’s subsidiary FERTIL. From 2007 to 2013, Mr. Al Nowais served as Managing Director of Al Maabar International, a leading UAE organization investing internationally in real estate projects in the MENA region, which was formed as a joint venture between Al Dar Properties, Mubadala, Al Qudra Holdings, Reem Investment and Reem International.

 

We believe that Mr. Al Nowais is qualified to serve on our Board of Directors because of his extensive experience in the oil and natural gas industry.

 

Thomas Wood has served as a director since our inception and served as our Chief Financial Officer from inception until October 2017 and from November 29, 2017, until June 2018. He is an entrepreneur with over 35 years of experience in establishing and growing public and private companies that provide or use oil and natural gas contract drilling services. During 2023, Mr. Wood joined Ecd Automotive Design, co-founded XtremeX Mining Technology where he serves as Chairman, and founded Advanced Mining Drilling Technology, a mining rig engineering and design corporation, where he serves as Executive Chairman. 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 coiled 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 natural 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 Bachelor of Arts in Economics from the 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 natural gas industry and his experience as an entrepreneur and building public companies and high growth organizations.

 

B. COMPENSATION

 

Senior Management

 

Members of our Senior Management receive compensation for the services they provide. Base compensation for each member of Senior Management has been comprised of cash salary and annual cash incentive bonus, the latter of which is dependent upon the achievement of Company financial targets and personal objectives. Additionally, certain members of our Senior Management have received compensation in the form of restricted stock units (“RSUs”), issued pursuant to our 2018 Long Term Incentive Plan (the “LTIP”), and retention arrangements. During the year ended December 31, 2023, the aggregate cash salary and annual cash incentive bonus compensation paid to all current members of our Houston, Texas-based Senior Management as a group was $1.8 million. The grant date fair value of LTIP grants to all current members of Senior Management totaled $0 (zero) million. Sherif Foda in his capacity as Chief Executive Officer (“CEO”) waived receiving stock awards from 2018 to 2023 in order to increase the number of shares available to grant to a broader pool of employees. Additionally, Mr. Foda waived his cash bonus for 2021 and 2022.

 

During 2023, in recognition of the extraordinary circumstances associated with the matters identified in our Annual Report on Form 20-F for the year ended December 31, 2022, related to restatement of our previously issued audited financial statements as of and for the year ended December 31, 2020, the Compensation Committee of the Board of Directors awarded key members of our Senior Management, excluding the CEO, retention agreements that provide for cash payments and future equity grants in exchange for continued service at the Company. The Company paid (in aggregate) cash retention totalling $0.4 million during 2023, with $0.6 million payable as of December 31, 2023, and an amount not to exceed $1.5 million available to be earned prior to the expiration of the retention provisions on January 15, 2025. In addition to cash payments, the retention agreements also provide for future equity awards of no more than 380,000 shares (in aggregate) issuable when the Company’s LTIP has sufficient shares to satisfy these grants. As of December 31, 2023, 59,999 of these shares were payable with the remainder to be earned ratably each March 15th until March 15, 2026. In the event the Company does not have sufficient shares available under the Company’s LTIP to satisfy these future equity grants prior to June 15, 2025, the amounts due are required to be settled in cash.

 

The compensation that we pay to our Senior Management is evaluated on an annual basis considering the following primary factors: position scope and responsibilities, experience and individual performance, market data, financial targets, personal objectives, and execution on longer-term financial and strategic goals that drive stockholder value creation and support the Company’s retention strategy. In addition, members of our Senior Management are eligible to participate in welfare benefit programs made available to our workforce generally, including medical, dental and vision benefits, medical and dependent care flexible spending accounts, short-term and long-term disability insurance, and life insurance. We believe that the compensation awarded to our Senior Management is consistent with that of our peers and similarly situated companies in the industry in which we operate.

 

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Directors

 

Our Director compensation philosophy is to appropriately compensate our non-employee Directors for their services as a Director of a complex multi-national company. The compensation structure should align the interests of Directors and shareholders. Directors who are also employees of NESR do not receive compensation for serving on the Board. We believe that our Director fee structure is customary and reasonable and consistent with that of our peers and similarly situated companies in the industry in which we operate.

 

All non-employee Directors receive an annual retainer of $50,000, paid in quarterly installments, and pro-rated for any partial year of service. In addition, the chairs of the Compensation and Nominating and Governance Committees receive an additional $15,000 annual retainer and the chair of the Audit Committee receives an additional annual retainer of $20,000, paid in quarterly installments, and pro-rated for any partial years of service. As of December 31, 2023, the Company has unpaid 2023 Director cash compensation of $200,000, respectively, which is expected to be settled in 2024.

 

Additionally, all non-employee Directors are also to receive an annual equity award with a grant date fair value of approximately $100,000, consisting of restricted shares that vest over one year. As the Company has substantially exhausted the 5,000,000 ordinary shares reserved for issuance under the 2018 LTIP, the Board expects to issue 2023 stock awards once the Company’s shareholders approve a new, long term incentive plan, and the shares therefrom are covered by an effective registration statement on file with the SEC. The actual number of restricted shares to be issued will be calculated by dividing $100,000 by the closing price of our common stock on the OTC Pink Market on the date of grant. Upon award, all shares will follow the terms and conditions of the long term incentive plan in effect at the time of grant.

 

Non-employee Directors are permitted to waive Director’s fees.

 

Director Compensation

 

The following table provides information on the compensation earned, paid or awarded to our current Directors for the year ended December 31, 2023.

 

   Fees Earned or   Stock     
Name  Paid in Cash   Awards   Total 
   ($)   ($)   ($) 
Antonio Campo Mejia   65,000    -    65,000 
Yousef Al Nowais(1)   -    -    - 
Andrew Waite   70,000    -    70,000 
Thomas D. Wood   65,000    -    65,000