| Summary of Significant Accounting Policies | 3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The Company consolidates
entities in which the Company has a majority voting interest and entities that meet the criteria for variable interest entities
for which the Company is deemed to be the primary beneficiary for accounting purposes. The Company eliminates intercompany transactions
and accounts in consolidation. The Company applies the equity method of accounting for an investment in an entity if it has the
ability to exercise significant influence over the entity that (a) does not meet the variable interest entity criteria or (b) meets
the variable interest entity criteria, but for which the Company is not deemed to be the primary beneficiary. The Company applies
the cost method of accounting for an investment in an entity if it does not have the ability to exercise significant influence
over the unconsolidated entity. The Company separately presents within equity on the consolidated balance sheets the ownership
interests attributable to parties with non-controlling interests in our consolidated subsidiaries, and separately presents net
income attributable to such parties on the consolidated statements of operations. Cash and cash equivalents The Company considers all
short-term investments with an original maturity of three months or less when purchased to be cash equivalents. Supplemental cash flow information Non-cash transactions were
as follows for the Successor periods:
● As described in Note 4, Business combination, the Company issued ordinary shares valued at $544.4 million in connection with the Business Combination.
● In connection with the Hana Loan, which is described in Note 9, Debt, the Company paid a $0.6 million origination fee using ordinary shares. Additionally in conjunction with the Hana Loan, as described in Note 14, Equity, the Company reimbursed Hana Investments for transaction fees and expenses in the amount of $2.1 million through the issuance of ordinary shares.
● Purchases of property, plant, and equipment in accounts payable and short-term debt at December 31, 2018 of $20.8 million and $14.7 million, respectively, are not included under “Capital expenditures” within the consolidated statement of cash flows. Income taxes The Company applies an
asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are computed
for differences between the financial accounting and tax basis of assets and liabilities that will result in future deductible
or taxable amounts and for carryforwards, based on enacted tax laws and rates applicable to the periods in which the deductible
or taxable temporary differences are expected to affect taxable income. Valuation allowances are established to reduce deferred
tax assets to the amount that is more likely than not to be realized. The Company applies a recognition
and measurement threshold for evaluating tax positions taken or expected to be taken in a tax return. For those benefits to be
recognized, a tax position, based solely on the technical merits, must be more-likely-than-not to be sustained upon examination
by taxing authorities. Recognized tax positions are measured as the largest amount of tax benefit that is greater than 50 percent
likely of being realized upon settlement. The Subsidiaries operate in multiple tax jurisdictions in the Middle East, North Africa
and Asia. The Company has provided for income taxes based on enacted tax laws and tax rates in effect in the foreign countries
where the Company operates and earns income. The income taxes in these jurisdictions vary substantially. The Company engages in
transactions in which the tax consequences may be subject to uncertainty and examination by the varying taxing authorities. Significant
judgment is required by the Company’s management in assessing and estimating the tax consequences of these transactions.
While the Company prepares tax returns based on interpretations of tax laws and regulations, in the normal course of business the
tax returns may be subject to examination by the various taxing authorities. Such examinations may result in future assessments
of additional tax, interest and penalties. NESR classifies interest and penalties relating to an underpayment of income taxes within
income tax expense in the Consolidated Statement of Operations. For purposes of the Company’s income tax expense, a tax benefit
is not recognized if the tax position is not more likely than not to be sustained based solely on its technical merits. Considerable
judgment is involved in determining which tax positions are more likely than not to be sustained. Net income per ordinary share Basic income per ordinary
share was computed by dividing basic net income attributable to ordinary shareholders by the weighted-average number of ordinary
shares outstanding. Diluted income per ordinary share was computed by dividing diluted net income attributable to ordinary shareholders
by the weighted-average number of ordinary shares outstanding plus dilutive potential ordinary shares, if any. Dilutive potential
ordinary shares include outstanding warrants or other contracts to issue ordinary stock and are determined by applying the treasury
stock method or if-converted method, as applicable, if dilutive. Concentration of credit risk The Company’s assets
that are exposed to concentrations of credit risk consist primarily of cash and receivables from customers. The Company places
its cash with financial institutions and limits the amount of credit exposure with any one of them. The Company regularly evaluates
the creditworthiness of the issuers in which it invests. The Company minimizes this credit risk by entering into transactions with
high-quality counterparties, limiting the exposure to each counterparty and monitoring the financial condition of its counterparties. Fair value of financial instruments The Company’s financial
instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable, loans and borrowings,
contingent consideration and an embedded derivative. Other than the embedded derivative and contingent consideration, the fair
value of the Company’s financial instruments under ASC Topic 820, “Fair Value Measurements and Disclosures,”
approximates the carrying amounts represented in the accompanying consolidated balance sheet, primarily due to their short-term
nature. Fair value is estimated
by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization
within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
● Level 1 - Quoted prices in active markets for identical assets or liabilities.
● Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
● Level 3 - Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. Accounts receivable and allowance for doubtful
accounts Trade accounts receivable
are recorded at the invoiced amount. No interest is charged on past-due balances. The Company grants credit to customers based
upon an evaluation of each customer’s financial condition. The Company periodically monitors the payment history and ongoing
creditworthiness of customers. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts
receivable portfolio. In establishing the required allowances management considers historical losses adjusted to take into account
current market conditions and the customer’s financial conditions, the amount of receivable in dispute, current receivables
ageing and current payment patterns. Significant accounts receivable balances and balances that have been outstanding greater than
90 days are reviewed for collectability. Account balances, when determined to be uncollectable, are charged against the allowance. Service inventories The Company’s service
inventory consists of spare parts, chemicals and raw materials to support ongoing operations which are held for the purpose of
service contracts and are measured at the lower of cost or net realizable value. The cost is based on the weighted average cost
principle and includes expenditures incurred in acquiring the service inventories. Net realizable value is the estimated selling
price less estimated costs of completion and selling expenses incurred in the ordinary course of business. The Company determines
reserves for service inventory based on historical usage of inventory on-hand, assumptions about future demand and market conditions
and estimates about potential alternative uses, which are limited. Property, plant and equipment Property, plant and equipment
is stated at cost less accumulated depreciation. The cost of ordinary maintenance and repair is charged to operating expense, while
replacement of critical components and major improvements that extend the life of the related asset are capitalized. Capital work
in progress mainly represents costs incurred on drilling rigs and equipment that are in transit at the reporting date. No depreciation
is charged to capital work in progress. Depreciation of property, plant and equipment is calculated using the straight-line method
over the asset’s estimated useful life as follows:
Buildings and leasehold improvements 5 to 25 years or the estimated lease period, whichever is shorter
Drilling rigs, plant and equipment 3 to 15 years
Furniture and fixtures 5 years
Office equipment and tools 3 to 6 years
Vehicles and cranes 5 to 8 years Property, plant and equipment
is reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value of an
asset or asset group may not be recoverable. Events or circumstances that may indicate include, but are not limited to, matters
such as a significant decline in market value or a significant change in business climate (“triggering events”). An
impairment loss is recognized when the carrying value of an asset exceeds the estimated undiscounted future cash flows from the
use of the asset and its eventual disposition. The amount of impairment
loss recognized is the excess of the asset’s carrying value over its fair value. In determining the fair market value of
the assets, the Company considers market trends and recent transactions involving sales of similar assets, or when not available,
discounted cash flow analysis. The Company has not recorded any impairment charges of property, plant and equipment in the accompanying
consolidated statement of operations for any of the periods presented. Assets to be disposed of
are reported at the lower of the carrying value or the fair value less cost to sell. Upon sale or other disposition of an asset,
the Company recognizes a gain or loss on disposal measured as the difference between the net carrying value of the asset and the
net proceeds received. Goodwill Goodwill is the excess
cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. Goodwill is evaluated for
impairment on an annual basis, or more frequently if circumstances require. Our next annual test will occur in the third quarter
of 2019. The Company performs a qualitative assessment to determine whether it is more-likely-than-not that the fair value of the
applicable reporting unit is less than its carrying amount. If the Company determines, as a result of its qualitative assessment,
that it is not more-likely-than-not that the fair value of the applicable reporting unit is less than its carrying amount, no further
testing is required. If the Company determines, as a result of its qualitative assessment, that it is more-likely-than-not that
the fair value of the applicable reporting unit is less than its carrying amount, a goodwill impairment assessment is performed
using a two-step, fair-value based test. Under the first step, goodwill is reviewed for impairment by comparing the carrying value
of the reporting unit’s net assets (including allocated goodwill) to the fair value of the reporting unit. The fair value
of the reporting units is determined using a discounted cash flow approach. Determining the fair value of a reporting unit requires
judgment and the use of significant estimates and assumptions. Such estimates and assumptions include revenue growth rates, discount
rates, operating margins, weighted average costs of capital, market share and future market conditions, among others. If the reporting
unit’s carrying value is greater than its fair value, a second step is performed whereby the implied fair value of goodwill
is estimated by allocating the fair value of the reporting unit in a hypothetical purchase price allocation analysis. If the amount
of goodwill resulting from this hypothetical purchase price allocation is less than the carrying value of the reporting unit’s
goodwill, the recorded carrying value of goodwill is written down to the implied fair value. The Company has not recorded any impairment
charge for goodwill in the accompanying consolidated statement of operations for any of the periods presented. Intangible assets Intangible assets were
identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The Company’s
intangible assets with finite lives consist of customer contracts, trademarks and trade names. The cost of intangible assets with
finite lives is amortized over the estimated period of economic benefit on a straight line basis, ranging from eight to ten years.
Asset lives are adjusted whenever there is a change in the estimated period of economic benefit. No residual value has been assigned
to these intangible assets. Intangible assets with
finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.
These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations.
The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins and cash flows.
If the sum of expected future cash flows (undiscounted) is less than the carrying amount, an impairment loss is recognized. The
impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these assets may be
determined by a variety of methodologies, including discounted cash flow models. Employee benefits. The Company provides defined
benefit plan of severance pay to the eligible employees. The severance pay plan provides for a lump sum payment to employees on
separation (retirement, resignation, death while in employment or on termination of employment) of an amount based upon the employees
last drawn salary and length of service, subject to the completion of minimum service period (1-2 years) and taking into account
the provisions of local applicable law or as per employee contract. The Company records annual amounts relating to these long-term
employee benefits based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality,
assumed rates of return, compensation increases and turnover rates. The Company reviews its assumptions on an annual basis and
makes modifications to the assumptions based on current rates and trends when it is appropriate to do so. The effect of modifications
to those assumptions is recorded in the statement of income. The Company believes that the assumptions utilized in recording its
obligations under its plans are reasonable based on its experience and market conditions. The net periodic costs are recognized
as employees render the services necessary to earn these benefits. Contributions to a defined contribution retirement plan and
occupational hazard insurance for Omani employees in accordance with the Omani Social Insurances Law are recognized as an expense
as incurred. Commitments and contingencies The Company accrues for
costs relating to litigation claims and other contingent matters, including liquidated damage liabilities, when such liabilities
become probable and reasonably estimable. In circumstances where the most likely outcome of a contingency can be reasonably estimated,
the Company accrues a liability for that amount. Where the most likely outcome cannot be estimated, a range of potential losses
is established and if no one amount in that range is more likely than others, the low end of the range is accrued. Such estimates
may be based on advice from third parties or on management’s judgment, as appropriate. Revisions to contingent liabilities
are reflected in income in the period in which different facts or information become known or circumstances change that affect
the Company’s previous judgments with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution
of contingent liabilities may be materially different from previous estimates and could require adjustments to the estimated reserves
to be recognized in the period such new information becomes known. Revenue recognition The Company’s revenues
are generated principally from providing services and related equipment as well as renting tools and equipment. Revenues associated with
services are recognized when the services are rendered and collectability is reasonably assured. Revenues from services and equipment
are based on fixed or determinable priced purchase orders or contracts with the customer and do not include the right of return.
Rates for services and equipment are priced on a per day, per unit of measure, per man hour or similar basis. Sales taxes collected
from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues
in the consolidated statements of operations. Services performed but not billed at the end of the reporting period are classified
as unbilled revenues. Unbilled revenues for services performed are calculated based on the rates stated in the purchase orders
or contracts with the customers. Unbilled revenues are typically billed upon customer approval and generally billed and collected
within one to three months depending on the nature of customer contract. Revenue associated with
the rental of tools and equipment is recorded on the basis of daily hire rates applicable under the relevant agreement on a straight-line
basis. Segment information An operating segment is
defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses
and about which separate financial information is regularly evaluated by the Company’s chief operating decision maker (“CODM”)
in deciding how to allocate resources. Similar operating segments can be aggregated into a single operating segment if the businesses
are similar. Management has determined that the Company has two operating segments and two reportable segments, which reflects
the manner in which the CODM operates the Company. The Company’s CODM is its Chief Executive Officer. Stock-based compensation arrangements The Company provides stock-based
compensation in the form of restricted stock awards to members of our Board of Directors and employees. Awards are issued pursuant
to the terms of our 2018 Long Term Incentive Plan (“LTIP”) and valued at their grant date fair value. Such awards qualify
as participating securities as they have the right to participate in dividends issued on our ordinary shares, if any. Grants to
members of our Board of Directors are time-based and vest ratably over a 1 year period. Grants to our employees are time-based
and vest ratably over a 3 year period. Functional and presentation currency These consolidated financial
statements are presented in US Dollars (“USD”), which is the functional currency of the Company. The majority of the
Company’s sales are denominated in USD. Each subsidiary of NESR determines its own functional currency and items included
in the financial statements of each subsidiary are measured using that functional currency. These consolidated financial statements
are presented in USD, which in the opinion of management is the most appropriate presentation currency of the Company in view of
the Company. All financial information presented in USD is rounded to the nearest thousand, unless otherwise indicated. Transactions in foreign
currencies are translated to the respective functional currency of the Company’s subsidiaries at exchange rates at the dates
of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency
at the exchange rate as of the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign
currency are translated to the functional currency at the exchange rate when the fair value was determined. Foreign currency differences
are generally recognized in profit or loss. Non-monetary items that are measured based on historical cost in a foreign currency
are not translated. The assets and liabilities
of entities whose functional currency is not the USD are translated into the USD at the exchange rate as of the reporting date.
The income and expenses of such entities are translated into the USD using average exchange rates for the reporting period. Exchange
differences on foreign currency translations are recorded in other comprehensive income (loss). Derivative financial instruments The Company evaluates all
of its financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features
that qualify as an embedded derivative. For derivative financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value
reported as other income (expense). Recent accounting pronouncements As an emerging growth company,
the Company has elected the option to defer the effective date for adoption of new or revised accounting guidance. This option
allows the Company to adopt new guidance on the effective date for entities that are not public business entities. Recently issued accounting standards not
yet adopted On August 28, 2018 the
Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No 2018-14, “Compensation—Retirement
Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to The Disclosure Requirements
for Defined Benefit Plans.” ASU No. 2018-14 amends ASC 715 to add, remove, and clarify disclosure requirements related to
defined benefit pension and other postretirement plans. The update is effective for the Company for fiscal years ending after December
15, 2021. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements. On August 28, 2018 the
FASB issued ASU No 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement.” ASU No. 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820.
The amendments in ASU No. 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. The Company does not expect the adoption of this standard to have a material impact on its consolidated
financial statements. On August 6, 2018 the FASB
issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”. This ASU is intended to reduce costs and ease
implementation of the leases standard for financial statement preparers. ASU 2018-11 provides a new transition method and a practical
expedient for separating components of a contract. Under this new transition method, an entity initially applies the new leases
standard at the adoption date and recognizes a cumulative effect adjustment to the opening balance of retained earnings in the
period of adoption. Additionally, the amendments in ASU 2018-11 provide lessors with a practical expedient, by class of underlying
asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as
a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606). This
update is effective for the Company’s consolidated financial statements as of and for the year ended December 31, 2020 and
for interim periods beginning in 2021. The Company is currently evaluating the provisions of the pronouncement and assessing the
impact, if any, on its consolidated financial statements and related disclosures. In June 2018, the FASB
issued ASU No. 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.”
ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments
to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based
payments to nonemployees and employees will be substantially aligned. The amendments are effective for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU on
its consolidated financial statements. In March 2017, the FASB
issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost”, which amends the presentation of net periodic pension and postretirement
benefit cost (“net benefit cost”). The service cost component of net benefit cost will be bifurcated and presented
with other employee compensation costs, while other components of net benefit costs will be presented separately outside of income
from operations. The standard is required to be applied on a retrospective basis and will be for annual periods beginning after
December 15, 2018, and interim periods within those fiscal years. The adoption of this standard will not have a material impact
on its consolidated financial statements. In January 2017, the FASB
issued ASU No. 2017-04 “Simplifying the Test for Goodwill.” The update amends Accounting Standard Codification No.
350 Intangibles - Goodwill and Other, provides guidance that simplifies the accounting for goodwill impairment for all entities
by requiring impairment charges to be based on the first step in today’s two-step impairment test under accounting topic
350. The amendments in this update will be applied prospectively and is effective for annual and interim impairment tests performed
in periods beginning after December 15, 2021. The Company does not expect the adoption of this standard to have an impact on its
consolidated financial statements. In January 2017, the FASB
issued ASU No. 2017-01, “Clarifying the Definition of a Business”. This standard clarifies the definition of a business
with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions
(or disposals) of asset or business. This update is effective for fiscal years beginning after December 15, 2018, and interim periods
within those fiscal years and should be applied prospectively. Early adoption is allowed for transactions that occurred before
the issuance date or effective date of the amendments only when the transaction has not been reported in the financial statements
previously issued. The adoption of this standard will not have a material impact on its consolidated financial statements. In June 2016, the FASB
issued ASU No. 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments”.
The new standard amends the impairment model for trade receivables, net investments in leases, debt securities, loans and certain
other instruments to utilize an expected loss methodology in place of the currently used incurred loss methodology. This pronouncement
is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. The Company
is currently evaluating the provisions of the pronouncement and assessing the impact, if any, on its consolidated financial statements
and related disclosures. In February 2016, the FASB
issued ASU No. 2016-02, “Leases”, a new standard on accounting for leases. This update increases transparency and comparability
among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about
leasing arrangements. This update is effective for the Company’s consolidated financial statements as of and for the year
ending December 31, 2020 and for interim periods beginning in 2021. The Company is currently evaluating the provisions of the pronouncement
and assessing the impact, if any, on its consolidated financial statements and related disclosures. In January 2016, the FASB
issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities”. This update requires equity investments that do not result in consolidation and are not accounted
for under the equity method to be measured at fair value with changes recognized in net income. However, an entity may elect to
measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This
update is effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. The adoption will not have a material impact on the Company’s consolidated financial statements. In May 2014, the FASB
issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which outlines a single
comprehensive model for entities to use in accounting for revenue. ASU 2014-09 supersedes the revenue recognition requirements
in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 sets forth a five-step
model for determining when and how revenue is recognized. Under the model, an entity will be required to recognize revenue to
depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange
for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers”
(“ASU 2015-14”), which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for
the Company’s consolidated financial statements as of and for the year ending December 31, 2019 and for interim periods
beginning in 2020. The Company is currently analyzing the provisions of the pronouncement and assessing the impact of the new
standard on revenue contracts and expects to complete its evaluation by the second quarter of fiscal 2019. The Company anticipates
utilizing the modified retrospective approach for adopting the new standard. |
