National Energy Services Reunited (NESR) 8-K Entry into a Material Definitive Agreement

GULF ENERGY COMPANY SAOC

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION

as of March 31

	Notes		March 31, 2018		December 31, 2017
				RO		RO
ASSETS
Non-current assets
Property, plant and equipment		5		39,232,566		40,156,365
Intangible assets and goodwill				5,837		10,442
Capital work in progress				718,486		619,740
Deferred tax asset				217,442		171,379
Investments in joint venture and associate				1,538,794		1,618,160
Total non-current assets				41,713,125		42,576,086
Current assets
Inventories		7		11,224,577		10,934,286
Trade and other receivables		8		36,665,265		32,883,898
Amounts due from related parties		14		448,395		421,948
Cash and cash equivalents		9		1,224,967		2,597,832
Total current assets				49,563,204		46,837,964
Total assets				91,276,329		89,414,050
EQUITY:
Share capital				500,000		500,000
Legal reserve				852,043		852,043
Retained earnings				29,081,572		28,940,235
Shareholders’ contribution				11,231,640		10,235,089
Equity attributable to the Shareholders of the Company				41,665,255		40,527,367
Non-controlling interest				979,376		2,109,780
Total equity				42,644,631		42,637,147
LIABILITIES:
Non-current liabilities
Subordinated loan from a related party				171,000		171,000
Loans and borrowings		10		9,679,226		917,061
Finance lease liabilities				1,948		16,952
End of service benefits		11		626,229		604,385
Total non-current liabilities				10,478,403		1,709,398
Current liabilities
Short term bank borrowings		10		2,756,735		2,451,380
Loans and borrowings		10		7,433,701		17,878,738
Finance lease liabilities				71,831		72,837
Trade and other payables		12		20,806,093		18,428,579
Amounts due to related parties		14		3,792,417		2,933,140
Income tax payable		13		3,292,518		3,302,831
Total current liabilities				38,153,295		45,067,505
Total liabilities				48,631,698		46,776,903
Total equity and liabilities				91,276,329		89,414,050

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

GULF ENERGY COMPANY SAOC

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF PROFIT AND LOSS AND

OTHER COMPREHENSIVE INCOME

for the three months ended March 31

			Three months ended March 31, 2018			Three months ended March 31, 2017
	Notes		RO			RO
Revenue				15,647,618			18,065,353
Direct costs				(6,006,183	)		(5,600,783	)
Staff costs				(4,886,045	)		(5,076,466	)
Depreciation and amortization				(1,947,924	)		(2,269,049	)
Gross profit				2,807,466			5,119,055
Administrative and general expense				(1,865,230	)		(1,663,814	)
Impairment loss on trade and other receivables including contract assets				(37,880	)		-
Finance cost				(346,832	)		(318,986	)
Finance income				-			156,258
Other income				36,931			57,326
Share of loss of equity-accounted investee, net of tax				(79,366	)		(65,346	)
Profit before taxation				515,089			3,284,493
Income tax expense		13		(353,605	)		(565,868	)
Net profit and total comprehensive income for the period				161,484			2,718,625
Net profit and total comprehensive income attributable to:
Shareholders of the Company				141,337			2,432,457
Non-controlling interest				20,147			286,168
Net profit and total comprehensive income for the period				161,484			2,718,625

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

GULF ENERGY COMPANY SAOC

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

for the three months ended March 31

	Three months ended March 31, 2018			Three months ended March 31, 2017
	RO			RO
Profit before tax		515,089			3,284,493
Adjustments for:
Depreciation and amortization		2,064,400			2,384,605
Interest expense – net		346,832			162,728
End of service benefits		36,922			33,396
Impairment loss on trade and other receivables including contract assets		37,880			-
Reversal for provision of slow moving inventory		-			(217,751	)
Share of loss of equity-accounted investee, net of tax		79,366			65,346
Profit on disposal of property, plant and equipment		(63,625	)		-
Changes in working capital:
Inventories		(290,291	)		377,101
Trade and other receivables		(3,819,247	)		1,886,285
Trade and other payables		2,377,514			(1,210,918	)
End of service benefits paid		(15,078	)		-
Interest paid		(346,832	)		(162,728	)
Taxes paid		(409,981	)		(2,766,842	)
Net cash generated from operating activities		512,949			3,835,715
Investing activities:
Purchase of property, plant and equipment (including CWIP)		(1,250,864	)		(430,807	)
Proceeds from sale of property, plant and equipment		79,747			-
Acquisition of non-controlling interests		(154,000	)		-
Acquisition of a subsidiary		-			6,907
Net cash used in investing activities		(1,325,117	)		(423,900	)
Financing activities:
Repayment of finance lease liabilities		(16,010	)		(11,448	)
Net movement in related parties’ balances		832,830			(2,564,587	)
Repayment of loans and borrowings		(2,243,612	)		(3,690,698	)
Bank borrowings availed during the year		560,740			965,669
Net movement in short term bank borrowings		385,000			2,345,429
Net cash used in financing activities		(481,052	)		(2,955,635	)
Net change in cash and cash equivalents		(1,293,220	)		456,180
Cash and cash equivalents at the beginning of the period		2,502,652			(124,030	)
Cash and cash equivalents at the end of the period		1,209,432			332,150

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

GULF ENERGY COMPANY SAOC

CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY

	Share capital RO		Legal reserve RO		Retained earnings RO		Shareholder’s contribution RO		Total equity attributable to the equity holders of the Company RO		Non- controlling interest RO			Total RO
January 1, 2017		500,000		827,043		51,352,239		4,057,390		56,736,672		10,548,407			67,285,079
Net profit and total comprehensive income for the period		-		-		2,432,457		-		2,432,457		286,168			2,718,625
March 31, 2017		500,000		827,043		53,784,696		4,057,390		59,169,129		10,834,575			70,003,704
January 1, 2018		500,000		852,043		28,940,235		10,235,089		40,527,367		2,109,780			42,637,147
Net profit and total comprehensive income for the year						141,337				141,337		20,147			161,484
Acquisition of non-controlling interest (refer to Note 6)		-		-		-		996,551		996,551		(1,150,551	)		(154,000	)
March 31, 2018		500,000		852,043		29,081,572		11,231,640		41,665,255		979,376			42,644,631

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

1. Legal status and principal activities

Gulf Energy Company SAOC (“the Company”) (“GES SAOC”) was incorporated in the Sultanate of Oman as a limited liability company on May 31, 2005. On June 20, 2013, the Company became a closed Omani joint stock company.

The business activities of the Company and its subsidiaries (together referred to as “the Group”) include providing drilling equipment on rental and related services, providing well engineering services and directional drilling services and import and sale of oilfield equipment and rendering of specialized services to oil companies. Mubadarah Investment LLC (“Mubadarah”) is the Parent Company (“the Parent Company”) which holds 56.90% as at March 31, 2018 (December 31, 2017: 56.90%) shares in the Company. Also refer to Note 14.

The Group operates in the Sultanate of Oman, Kuwait, Algeria, Yemen, and the Kingdom of Saudi Arabia (“KSA”) and consists of the twelve companies which are incorporated in the Sultanate of Oman.

The consolidation incorporates the following subsidiaries in which the Group has a controlling interest:

Name of the Subsidiaries	Country of registration		March 31, 2018 Holding		December 31, 2017 Holding
				%		%
Sino Gulf Energy Enterprises LLC (“SGEE”)		Oman		100		95
Integrated Petroleum Services Company LLC (“IPS”)		Oman		97		97
Intelligent Drilling Services LLC (“IDS”)		Oman		99		99
Well Solutions Services LLC (“WSS”)		Oman		99.99		99.99
Well Maintenance Services LLC (“ WMS”)		Oman		99.99		99.99
Fishing and Remedial Expert Enterprises LLC (“FREE”)		Oman		99		99
Gulf Drilling Fluid Technology LLC (“GDFT”)		Oman		99		99
Gulf Energy Services LLC (“GES”)		Oman		99		99
Kuwait Gulf Petroleum services LLC		Kuwait		95		95
Midwest Oilfields Services LLC (“Midwest”)		Oman		99.99		99.99
Makamen Petroleum LLC (“Makamen”)		Oman		75		75

Integrated Petroleum Services LLC has a subsidiary Benon Oil Services LLC registered in Oman.

Gulf Energy Services LLC has a subsidiary, Tamkeen Fracking LLC, registered in Oman. Furthermore, Gulf Energy Services LLC also has branches in Kingdom of Saudi Arabia, Yemen, Algeria and Kuwait.

The following are entities where the Company has significant influence:

		Percentage of Share			Share capital held		Share capital paid up
Company	Activity	capital held			RO		RO
Joint Venture
Senergy Gulf Solutions LLC	Services ancillary to oil and gas extraction		50	%		75,000		75,000
Associate
Tasneea Oil and Gas Technology LLC	Fabrication, maintenance and overhaul of oilfield equipment		20	%		1,539,388		1,539,388

2. Basis of Preparation

a) Statement of compliance

The condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The Group’s accounting policies have been applied consistently to all periods presented within the condensed consolidated interim financial statements. The condensed consolidated interim financial statements correspond to the classification provision contained within IAS 1 (revised) presentation of financial statements.

b) Consistency of accounting policies

The accounting policies applied in the unaudited condensed consolidated interim financial information are consistent with the accounting policies applied to the audited consolidated financial statements of the Company for the year ended December 31, 2017. These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2017. Also refer to note 3.

c) Basis of preparation

The unaudited condensed consolidated interim financial information for the three-month period ended March 31, 2018 (“the period”) is prepared as per International Accounting Standard 34 - Interim Financial Reporting (IAS 34). These condensed consolidated interim financial statements are presented in Omani Rial (RO). All amounts have been rounded-off to the nearest Rial in two decimal places, unless otherwise indicated.

d) Use of estimates and judgements

The preparation of unaudited condensed consolidated interim financial information requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual figures may differ from these estimates and judgments. While preparing the unaudited condensed consolidated interim financial information, the significant judgments made by the management in applying the accounting policies and the key sources of estimation and uncertainty were the same as those that applied to the consolidated financial statements as at December 31, 2017.

e) Accounting estimates

The Company’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The condensed consolidated interim financial information does not include all financial risk management information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the annual consolidated financial statements as at December 31, 2017. There have been no changes in the risk management policies since December 31, 2017.

f) Common control transaction

The Group accounts for common control transactions using the fair value method.

3. New standards, interpretations and amendments adopted by the Group

The accounting policies adopted in the preparation of the condensed consolidated interim financial statements are consistent with those followed in the preparation of the Group’s annual consolidated financial statements for the year ended 31 December 2017, except for the adoption of new standards effective as of 1 January 2018. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

The Group applies, for the first time, IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments. As required by IAS 34, the nature and effect of these changes are disclosed below. Several other amendments and interpretations apply for the first time in 2018, but do not have an impact on the condensed consolidated interim financial statements of the Group.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract.

The Group has assessed the impact of IFRS 15 and concluded that the application of this standard does not have any material impact on Group’s financial statements.

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.

As allowed under transitional provisions of IFRS 9, the Company did not restate comparative periods and changes, if any have been affected through adjustment to the opening balances of retained earnings as at 1 January 2018.

The effect of adopting IFRS 9 is, as follows:

Classification and measurement of financial assets and financial liabilities

IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics.

On initial recognition, a financial asset is classified as measured at: amortized cost, FVOCI or FVTPL.

A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as at FVTPL:

● the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and

● the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A financial asset (unless it is a trade receivable without a significant financing component) that is initially measured at the transaction price) is initially measured at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition.

The following accounting policy applies to the subsequent measurement of financial assets:

Financial assets at amortized cost

These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.

The following table and the accompanying notes below explain the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Group’s financial assets as at 1 January 2018:

			Impact of IFRS 9
	Original classification under	New classification under	Original carrying amount		New carrying amount
	IAS 39	IFRS 9	RO		RO
Financial assets (a)
Cash and bank balances	Loans and receivables	Amortized cost		2,597,832		2,597,832
Trade and other receivables	Loans and receivables	Amortized cost		32,883,898		32,883,898
Due from related parties	Loans and receivables	Amortized cost		421,948		421,948

(a) Financial Assets that were classified as loans and receivables under IAS 39 are now classified at amortized cost. No difference in carrying amount is identified due to adoption of IFRS 9.

Financial liabilities

No change in reclassification and measurement of financial liabilities are identified due to adoption of IFRS 9.

Impairment

IFRS 9 replaces the “incurred loss” model in IAS 39 with “expected credit loss” (ECL) model. Under IFRS 9, credit losses are recognized earlier than under IAS 39.

The financial assets at amortized cost consist of trade and other receivables and cash and bank balances.

Under IFRS 9, loss allowances are measured on either of the following basis:

● 12 month ECLs: These are ECLs that result from possible default events within the 12 months after the reporting date; and

● Lifetime ECLs: These are ECLs that result from possible default events over the expected life of financial instrument; and

● The Group measures loss allowances at an amount equal to lifetime ECL.

The Group has elected to measure loss allowances for trade receivables at an amount equal to lifetime ECLs.

When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience, informed credit assessment security/guarantee provided by customers, if any, and including forward-looking information. The Group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due.

The Group considers a financial asset to be in default when:

- the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realizing security (if any is held).

Measurement of ECL

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). ECLs are discounted at the effective interest rate of the financial asset. The Company uses judgment in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s past history, customer’s creditworthiness, existing market conditions as well as forward looking estimates at the end of each reporting period.

Credit-impaired financial assets

At each reporting date, the Group assesses whether financial assets carried at amortized cost are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred.

Presentation of impairment

Loss allowances for financial assets measured at amortized cost are deducted from the gross carrying amount of the assets.

Impact of the new impairment model

For assets in the scope of the IFRS 9 impairment model, impairment losses are generally expected to increase and become more volatile. The Group has determined that the application of IFRS 9’s impairment requirements at 1 January 2018 results in same impairment loss on trade and other receivables.

The ECLs were calculated based on actual credit loss experience over the past three years. Actual credit loss experience was adjusted by scalar factors to reflect differences between economic conditions during the period over which the historical data was collected, current conditions and the Group’s view of economic conditions over the expected lives of the receivables. Scalar factors were based on GDP and industry outlook.

Transition

Comparative periods have not been restated. No differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are identified.

The assessment for the determination of the business model within which a financial asset is held has been made on the basis of the facts and circumstances that existed at the date of initial application.

4. Standards, amendments and interpretations issued that are not yet effective (and which have not yet been adopted) that are relevant for the Group’s operations

Following relevant new standards, amendments to standards and interpretations are not yet effective for the period ended March 31, 2018, and have not been applied in preparing these unaudited condensed consolidated interim financial statements as follows:

IFRS 16 –Leases

On January 13, 2016, the International Accounting Standards Board issued the final version of IFRS 16, Leases. IFRS 16 will replace the existing leases Standard, IAS 17 Leases, and related interpretations. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The Standard also contains enhanced disclosure requirements for lessees. The effective date for adoption of IFRS 16 is annual periods beginning on or after January 1, 2019, though early adoption is permitted for companies applying IFRS 15 Revenue from Contracts with Customers. The Group is currently assessing the impact of adopting IFRS 16 on the Group’s condensed consolidated interim financial statements.

5. Property, plant and equipment

During the three months ended March 31, 2018, the Group acquired assets with a cost of RO 1,250,864 (three months ended March 31, 2017: RO 430,807).

Assets with a carrying amount of RO 16,122 were disposed of during the three months ended March 31, 2018 (three-months ended March 31, 2017: RO Nil), resulting in a gain on disposal of RO 63,625 (period ended March 31, 2017: gain of RO Nil), which was included in ‘revenue’ in the unaudited condensed consolidated interim statement of profit or loss and other comprehensive income.

6. Acquisitions

a) Acquisition of NCI - Sino Gulf Energy Enterprises LLC

During the three months ended March 31, 2018, the Group acquired an additional 5% interest in Sino Gulf Energy Enterprises LLC, increasing its ownership interest from 95% to 100%.

The following table summarizes the effect of changes in the Group’s ownership interest in Sino Gulf Energy Enterprises LLC.

	Amounts in RO
Carrying amount of NCI acquired		1,150,551
Consideration paid		(154,000	)
Increase in owner equity attributable to the Shareholders of the Company (transferred to Shareholders’ contribution)		996,551

7. Inventories

	March 31, 2018			December 31, 2017
	RO			RO
Chemicals and other finished products		1,296,930			1,372,471
Consumables		4,655,470			4,257,223
Spares		5,811,364			5,843,779
Less: provision for obsolete and slow moving inventory		(539,187	)		(539,187	)
		11,224,577			10,934,286

The movement in the provision for slow moving and obsolete inventories balance was as follows:

	Three months ended March 31, 2018		Three months ended March 31, 2017
	RO		RO
1 January		539,187		856,714
Reversal during the period		-		(217,751	)
		539,187		638,963

8. Trade and other receivables

	March 31, 2018			December 31, 2017
	RO			RO
Trade receivables (1)		12,059,822			11,668,035
Trade receivables, current		12,059,822			11,668,035
Less: Impairment loss		(495,401	)		(457,521	)
		11,564,421			11,210,514
Unbilled revenue		19,234,788			17,132,262
Prepayments and other receivables (2)		5,866,056			4,541,122
		36,665,265			32,883,898

(1) Included in the trade receivables is a balance of RO 4.8 million (USD 12.5 Million) due from the same customer whose receivable balance was assigned to Mubadarah during the year ended 31 December 2017. Further, on March 23, 2018, Mubadarah, the Parent Company entered into an agreement with the Company wherein it agreed to:

● guarantee the payment of the amounts due from the customer to the Company for an amount equal to the lesser off (a) RO 2.3 million (US$ 6 million), or (b) any unpaid balance of the receivable from the customer (the “Guaranteed Amount”); and

● remit to the Company amounts it receives against Mubadarah’s outstanding receivable balance from the customer, until both the Guaranteed Amount and the remaining RO 2.5 million (USD 6.5 million) owed by the customer to the Company has been paid.

(2) Includes advances to key management personnel amounting to RO 1,760,977 as at 31 March 2018 (31 December 2017: RO 1,739,875). Also refer to note 14.

9. Cash and cash equivalents

	March 31, 2018			December 31, 2017
	RO			RO
Cash and cash equivalents – condensed consolidated interim statement of financial position		1,224,967			2,597,832
Bank overdraft *		(15,535	)		(95,180	)
Cash and cash equivalents – condensed consolidated interim statement of cash flows		1,209,432			2,502,652

* Refer to note 10 for securities and covenants against the Group’s bank borrowings. Call accounts carry interest at 0.1% per month (2017: 0.1% per month).

10. Loans and borrowings

(A) Bank loans		March 31, 2018			December, 31  2017
		RO			RO
Non-current liabilities
Secured bank loans			9,846,059			917,061
Less: unamortized transaction cost			(166,833	)		-
	(a)		9,679,226			917,061
Current liabilities
Secured bank loans			6,301,570			16,805,959
Loan against trust receipts (STL)			1,132,131			1,229,985
Less: unamortized transaction costs			-			(157,206	)
	(b)		7,433,701			17,878,738
	(c) = (a) + (b)		17,112,927			18,795,799

(i) New term loan:

In November 2015, the Group had re-financed all its existing bank term loans with National Bank of Oman for a single term loan of RO 23.10 million (“the new term loan”) (“Tranche A”). As on December 31, 2017, the outstanding amount on this new term loan (“Tranche A”) was RO 14.12 million, and as on March 31, 2018 RO 12.8 million. The loan will mature in 2020.

The new term loan carries interest at the rate of LIBOR + 3.50% per annum and is repayable with quarterly installments, starting 6 months from the drawdown in 18 equal instalments until July 2020.

During 2017, new term loan (“Tranche B”) was availed by the Company to the extent of RO 1.96 million, which was outstanding at the year-ended December 31, 2017. At March 31, 2018 RO 1.8 million of this loan is outstanding. The “Tranche B” loan is repayable in equal quarterly installments starting 18 months from the first drawdown until June 2022.

The new term loan (“Tranche A and Tranche B”) contain covenants which among others, require certain financial ratios to be maintained which include maintaining a minimum debt service coverage ratio of 1.25.

Working capital funded facilities including overdraft, bill discounting and loan against trust receipts facility carry an interest equal to US Dollar LIBOR for the applicable interest period, plus a margin of 3.50% per annum.

The new term loan (“Tranche A and Tranche B”) and the working capital facility which includes overdraft, letters of credit and trust receipts etc. are secured by:

i) First priority assignment of all existing contracts and of new contracts financed by the facilities;

ii) First priority commercial charge over;

● the existing fixed assets of the Company and each of the operating companies in the Group

● new equipment acquired by the Company and the operating companies in the Group

iii) Assignment of insurance policies covering above assets;

iv) Joint and several corporate guarantees of the Guarantors; and

v) Subordination of any shareholder loans to the Company and/or the operating companies in the Group.

As of December 31, 2017, the Company was in compliance with its financial covenants except for the covenant relating to the consolidated net worth of the Group. As a result, long-term portion of all the borrowings from the concerned bank amounting to RO 10.5 million had been classified as part of current borrowings as at December 31, 2017. However, subsequent to the year end, the bank has issued a formal letter waiving off this breach of covenant as at December 2017 and post year-end the Group’s facilities from the aforementioned bank continue uninterrupted as per the repayment plan outlined in the facility letter. Accordingly, the outstanding borrowings from this bank as at 31 March 2018 have been classified as non-current.

(ii) Other term loan:

The Group has also availed a term loan to the extent of RO 1.7 million in 2017 which was outstanding at the year-ended December 31, 2017. RO 1.5 million of this loan is outstanding at March 31, 2018. This balance is repayable with nine quarterly installment starting seven months from the first drawdown until December 2019 and carries interest at the rate 3 months / 6 months LIBOR + 4% per annum.

This loan is secured mainly by assignment of project contract proceeds, assignment of insurance proceeds and first exclusive charge over project assets, among others.

This other term loan has covenants which among others require, certain financial ratios to be maintained including maintaining a minimum debt service coverage ratio of 1.25.

(B) Bank borrowings

	March 31, 2018		December 31, 2017
	RO		RO
Bank overdraft		15,535		95,180
Short-term credit facility		2,741,200		2,356,200
Total bank borrowings		2,756,735		2,451,380

11. End-of-service benefits

Provisions were established for gratuity benefits provided to GES employees in Oman, KSA, and Kuwait. The net liability was accounted for as follows:

	March 31, 2018			December 31, 2017
	RO			RO
1 January		604,385			525,740
Charge for period / year		36,922			140,121
Payments during the three months ended / year		(15,078	)		(61,476	)
31 March / 31 December		626,229			604,385

Net cost for the year to date periods comprises the following components:

	Three months ended March 31, 2018		Three months ended March 31, 2017
Service cost		31,279		28,292
Interest cost		4,966		4,492
Actuarial loss		677		612
Net cost		36,922		33,396

12. Trade and other payables

	March 31, 2018		December 31, 2017
	RO		RO
Trade payables		9,892,776		7,972,509
Accruals and other payables		10,913,317		10,456,070
		20,806,093		18,428,579

13. Taxation

The Group’s consolidated effective tax rate in respect of operations for the three months ended March 31, 2018 was 69% (three months ended March 31, 2017: 17%). The change in effective rate was mainly due to profit recorded by certain subsidiaries during the three months ended 31 March 2018 on which tax had to be provided notwithstanding losses recorded in certain other subsidiaries

Deferred income taxes are calculated on all temporary differences under the liability method using a principal tax rate of 15%. Deferred tax liability in the unaudited condensed consolidated interim statement of financial position and the deferred tax credit in the unaudited condensed consolidated interim statement of comprehensive income relate to the tax effect of accelerated tax depreciation.

14. Related party transactions

Related parties comprise the shareholders, key management personnel, subsidiary companies, jointly controlled entity and associate, business entities in which the Company has the ability to control or exercise significant influence in financial and operating decisions and other related parties which are a part of Mubadarah Investment LLC Group. In the ordinary course of business, such related parties provide goods and render services to the Group and the Company provides advances to these related parties at mutually agreed rates.

During the year 2017 and the three months ended March 31, 2018, the values of balances due from / due to and significant transactions with related parties (other than those disclosed elsewhere in these condensed consolidated interim financial statements) are as follows:

(i) Amount due from related parties – Current

	March, 31 2018		December 31, 2017
	RO		RO
Due from other related parties
Heavy Equipment Maintenance & Trading Company LLC		27,851		21,479
Makamen Investment LLC		25,000		25,000
Vision Oil & Gas LLC		1,200		750
Rental Solution and Services LLC		31,250		14,351
Sadara Development and Investment LLC		108		108
Prime Business Solutions LLC		25,551		49,350
Mubadara Real Estate LLC		406		106
Colossal Engineering LLC		21,510		22,841
Isnaad Supplies LLC		114,423		88,466
Tasneea Oil and Gas Technology LLC		5,454		6,855
Senergy Gulf Solutions LLC		3,000		-
(a)		255,753		229,306
Due from Shareholders
Yasser Said Ahmed Al Barami		192,642		192,642
(b)		192,642		192,642
(c) = (a) + (b)		448,395		421,948

(ii) Amount due to related parties – Current

		March 31, 2018		December 31, 2017
		RO		RO
Due to the Parent
Mubadarah Investment LLC	(a)		1,917,432		1,532,731
Due to Associates
Tasneea Oil and Gas Technology LLC			98,227		110,015
Heavy Equipment Maintenance & Trading Company LLC			178,297		143,855
	(b)		276,524		253,870
Due to Jointly Controlled Entity
Senergy Gulf Solutions LLC	(c)		107,650		107,650
Due to other related parties
Rental Solution and Services LLC			24,848		24,848
Isnaad Supplies LLC			1,109,937		764,927
Prime Business Solutions LLC			238,430		131,518
	(d)		1,373,215		921,293
Due to shareholder
Hilal Hamed Saif Al Busaidy	(e)		117,596		117,596
(f) = (a) + (b) + (c) + (d) + (e)			3,792,417		2,933,140

Also, refer note 8 for details of assignment of a trade receivable to Mubadarah.

iii) Key management personnel transactions and balances:

	Three months ended March 31, 2018		Three months ended March 31, 2017
	RO		RO
Salaries and allowances
Yasser Said Ahmed Al Barami, Chief Commerical Officer		133,940		130,500
Hilal Hamed Saif Al Busaidy, Chief Executive Officer		136,245		134,500
Shaima Saif Hamed Al Busaidy Treasury Manager		10,796		17,950
Nayankumar Vora, Chief Financial Officer		33,399		23,346
Hamza Sayed Hameed Qarooni, Vice President		43,613		15,780
		357,993		322,076

	March 31, 2018		December 31, 2017
	RO		RO
Advances *
Yasser Said Ahmed Al Barami, Chief Commercial Officer		1,637,195		1,618,184
Hilal Hamed Saif Al Busaidy, Chief Executive Officer		123,782		121,376
Nayankumar Vora, Chief Financial Officer		-		315
		1,760,977		1,739,875

*These represent short-term advances to key management personnel for personal use. The advances are unsecured, non-interest bearing and are repayable on demand. These advances are to be settled on or prior to the closing of the NESR transaction as described in note 16. Also, refer to note 8

iv) Related party transactions

	Three months ended March 31, 2018		Three months ended March 31, 2017
	RO		RO
Finance income from the Parent Company*		-		155,753
Finance income from an Associate*		-		504
Rental income from other related parties		18,522		7,104
Rental income from the Parent Company		300		1,902
Rental income from an Associate		10,674		34,224
Purchases from other related party		429,249		369,894
Purchases from an associate		3,938		16,554
Sales to an associate		5,343		16,529

* Finance income comprises 6.5% per annum interest on related party receivables (net).

(v) Subordinated loans from related parties

	March 31, 2018		December 31, 2017
	RO		RO
Islamic Finance PJSC(1)		-		-
Mubadarah Investment LLC		171,000		171,000
		171,000		171,000

(1) One of the Subsidiaries, SGEE had obtained loans from its shareholders. These subordinated loans were not repayable until all liabilities to National Bank of Oman SAOG were settled in full. Management could obtain permission from National Bank of Oman SAOG for early settlement of subordinated loans. During 2017, on account of acquisition of the non-controlling interest in SGEE by GES, the subordinated loan provided by the erstwhile shareholders, Islamic Finance PJSC was replaced with loan from GES and Islamic Finance PJSC loan was paid. The loan from GES to SGEE is eliminated in these consolidated financial statements.

These subordinated loans are interest free and do not have any repayment schedule.

(vi)Shareholder’s contribution

Shareholder’s contribution includes a funding of RO 4,057,390 provided by the Parent Company. This balance is non-interest bearing and the Company has no obligation to repay this amount to the Parent Company. It can only be settled by issuing 4,057,390 number of equity shares at par value of RO 1 per share after completing the necessary legal formalities.

15. Contingent liabilities and commitments

Contingent liabilities

Litigations

a) The Group is involved in certain legal cases with some of its erstwhile employees for labor related matters that have arisen from time to time in the Sultanate of Oman. A number of these matters relate to claims for compensation for dismissal, payment of salary arrears, allowance of overtime hours, cancellation of decision to terminate and reinstatement of employment. These matters which are presently in different stages of legal proceedings in the Courts of the Sultanate of Oman are subject to uncertainties and therefore the probability of a loss, if any, being sustained and an estimate of the amount of any loss are difficult to ascertain. Consequently, for a majority of these claims, it is not possible to make a reasonable estimate of the expected financial effect, if any, that will result from ultimate resolution of these disputes. The Group is contesting these claims/disputes and the Group’s management believes that presently provision against these potential claims is not required as the ultimate outcome of these disputes would not have a material impact on the Group’s financial position.

b) The Company was defendant in a claim before a sole arbitrator in an arbitration initiated by a party, namely, Falcon Oil Services Company LLC (“Falcon”) (“the claimant”) requesting for USD 1.78 million for breach of contract and the amount of USD 1 million in compensation for damages and arbitration fees. In the year 2013, the Company had entered into a contract with a Yemen based company (“the customer”) and sub contracted the contract to Falcon. Falcon carried out the work in Yemen for a week and then cancelled the contract and sued the Company for not providing sufficient security in Yemen. The Arbitration award which was rendered on January 18, 2017 was in favor of the claimant in which the Arbitrator awarded them USD 0.871 million with an interest of 6% since the date of the Arbitration award until full payment of the award. The Company then filed a case against the Arbitration award before the Court of Appeal in Muscat, Sultanate of Oman on March 14, 2017 requesting to nullify the Arbitration award and to freeze its execution until the Court has reached a decision about the claim. The Court of Appeal rendered a decision on the 30 April 2017 in favor of the Company. The Claimant filed a Statement of Objection (“the SOA”) on May 29, 2017 objecting the decision from the Court of Appeal. On July 26, 2017, the Court rendered a decision to freeze the enforcement of the judgment until it has reached a final decision on the SOA. On September 21, 2017, the Company has submitted a final memorandum to the Supreme Court.

On March 20, 2018 Supreme Court overruled the Court of Appeal Judgment, and referred the nullified case back to the Court of Appeal for retrial through a different circuit. The next hearing date is yet to be communicated by the Court.

The management intends to contest this matter and believes that it has a strong case on the merits due to non-availability of evidence with the claimant. Further, the management believes that the ultimate outcome of this matter is unlikely to result in any liabilities for the Group.

c)SGEE, one of the subsidiaries, was a defendant in a claim before an appeal inMuscat Primary Court filed by a party, namely,Al-Nukhba Al-lthihadiya Trading LLC (“Al-Nukhba”)(“the claimant”) requesting for RO 3.0 million as a compensation for the loss of procurement and its resulting damages. Al-Nukhba was also seeking to nullify a contract betweenSchlumberger LLC and SGEE and subsequently seek to acquire the contract under its name.

The Court of Appeal rendered a decision on the November 5, 2017 in favor of SGEE, approving the Primary Court judgment which declined Al-Nukhba’s claim.

Recently SGEE found out that Al-Nukhba has filed an objection with the Supreme Court, the notice of which is yet to be served.

The management intends to contest this matter, when the formal notice is served by the Supreme Court and believes that the ultimate outcome of this matter is unlikely to result in any liabilities to SGEE.

Letter of guarantee

	March 31, 2018		December 31, 2017
	RO		RO
Letter of guarantee		4,483,376		3,805,339

Commitments

a)	Operating lease: the Company has taken land and building cancellable operating lease agreements that are renewable on a periodic basis at the option of both the lessor and the lessee. The operating lease agreements extend up to a maximum of 25 years from their respective dates of inception and some of these lease agreements have price escalation clause.
	Rental payments under such leases were RO 157,936 and RO 174,777 for the period ended March 31, 2018, and March 31, 2017, respectively.
b)	At March 31, 2018, there were capital commitments amounting to RO 2,448,668 (December 31, 2017: RO 1,734,863).
c)	The Group has outstanding letters of credit amounting to RO 566,985 as at March 31, 2018 (December 31, 2017: RO 482,025).

16. Subsequent events

Business acquisition

The Group evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the condensed consolidated interim financial statements are issued. Other than as described below, the Group did not identify any subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

On November 12, 2017, the Group entered into definitive agreement with National Energy Services Reunited Corp. (“NESR”) to effect a merger pursuant to which the Company will become a wholly-owned subsidiary of NESR. NESR will acquire the Company in two separate closings, in exchange for consideration valuation of $282,300 thousand by the issuance of NESR ordinary shares, valued at $10.00 per share. Potential earn-out mechanisms enable the Group’s shareholders to receive additional consideration after the NESR Closing Date, based on the financial results of the Group in fiscal year 2018. NESR is subject to certain penalties for delays in receiving shareholder approval to complete the transaction. The transaction obtained SEC approval on May 7, 2018, and was approved by NESR’s stockholders on May 18, 2018 and closed on June 6, 2018. Pursuant to the final closing of the Business Combination, total consideration of 28,346,229 NESR ordinary shares was paid to complete the closing.