National Energy Services Reunited Corp. annual report, FY2017

Business context and reporting period

National Energy Services Reunited Corp. (NESR) filed this Form 10-K for the fiscal year ended December 31, 2017. The company was formed on January 23, 2017 as a British Virgin Islands blank-check company and had not begun commercial operations by year-end. Its activity was limited to formation, its May 2017 IPO, and work toward a proposed acquisition of NPS Holdings Limited (NPS) and Gulf Energy S.A.O.C. (GES). Accordingly, the financial statements cover inception through December 31, 2017, not a full year of operations.

Financial results and liquidity

Net loss reflected $4.215 million of operating costs, partly offset by $1.344 million of interest income. NESR reported no long-term debt, capital lease obligations, or operating lease obligations; it had a $10,000 monthly related-party fee for office and administrative support. No prior comparable operating period is presented.

Material developments and proposed transaction

• NESR raised $229.217 million for its trust account through its IPO and partial over-allotment exercise, and sold private warrants for additional proceeds. IPO-related costs were $13.761 million. The trust balance had grown to $230.554 million by year-end.
• On November 12, 2017, NESR agreed to acquire NPS and GES, subject to shareholder approval, redemption and other closing conditions. The deals were proposed, not completed, as of this filing.
• For NPS, the agreements contemplated cash consideration of $442.8 million plus 11,318,827 NESR shares valued at $10 per share for selling shareholders, with Hana Investments having separately paid $150 million for NPS shares and agreeing to exchange those shares for NESR stock. Additional interest, cash and equity earn-outs, and a transaction-delay fee could apply. The filing estimated the delay fee at approximately $11.2 million under stated timing assumptions.
• For GES, NESR agreed to acquire 61% for $184.8 million in NESR shares, subject to specified net-debt and leakage adjustments; additional agreements contemplated obtaining the remaining 39% through a contribution and share-exchange arrangements. The related share consideration was generally valued at $10 per share.
• NESR was negotiating, but had not finalized, a forward purchase/backstop arrangement of up to $150 million: a minimum $70 million at $10 per share and an option for up to $80 million at $11.244 per share. No investor was obligated to fund until definitive agreements were executed.

Outlook, risks, contingencies, and unusual items

Management intended to complete the NPS and GES combination and expected to incur substantial additional transaction costs. The company had until May 17, 2019 to complete a business combination; failure to do so would generally require redemption of public shares and liquidation, with warrants expiring worthless. The proposed backstop, transaction terms, redemptions, shareholder approval, and funding needs remained subject to conditions and could change.

• The auditor issued an unqualified opinion on the financial statements but included a going-concern explanatory paragraph. The company’s cash and working capital were insufficient to fund planned activities, and neither its sponsor nor other potential lenders were obligated to provide financing. The statements include no adjustments that might result if NESR could not continue as a going concern.
• Approximately $1.382 million of transaction-related service-provider fees were contingent on completing a business combination. The company also had $3.474 million of accounts payable and accrued expenses at year-end.
• Trust assets could be exposed to creditor claims, potentially reducing shareholder redemption proceeds below $10 per share. The sponsor’s stated indemnity is limited, and NESR had not verified the sponsor’s ability to satisfy it.
• Key risks include deal execution and financing, shareholder redemptions, dilution from substantial share issuance and warrants, dependence on a single combined business, oilfield-services market conditions, international operations and political/currency risks, conflicts of interest, and continued NASDAQ listing.
• NESR identified itself as an emerging growth company and elected the extended transition period for new accounting standards. Management concluded disclosure controls were effective; management’s internal-control assessment and auditor attestation were not included under the newly public company transition provisions.

Most important facts for investors to verify

1. Whether the NPS and GES transactions closed, and the final cash, share, earn-out, debt, and net-debt terms.
2. Whether the proposed $150 million backstop was finalized and funded, and how redemptions affected available closing cash and dilution.
3. The final transaction-delay fee and other contingent transaction expenses, compared with the filing’s estimates.
4. Whether NESR obtained sufficient working capital or other financing given its $741,096 of unrestricted cash, $2.606 million working-capital deficit, and going-concern warning.
5. Whether trust-account claims, taxes, or liquidation costs could reduce public shareholders’ redemption proceeds.
6. The acquired businesses’ audited financial performance, debt, cash flows, customer concentration, and exposure to regional and oilfield-services risks; this filing’s financial statements do not report their consolidated results.