Business context and reporting period
This is Harmony Merger Corp.’s unaudited Form 10-Q for the quarter ended March 31, 2017—not an operating-company 10-Q filed by NextDecade Corp. Harmony was a blank-check company seeking a business combination and had no operating revenue. On April 17, 2017, after quarter-end, Harmony agreed to combine with NextDecade, an LNG development company; the transaction had not closed when this report was filed.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable / December 31, 2016 |
|---|---|---|
| Revenue | None | None |
| Net loss | $182,212; $0.04 per share | Q1 2016: $156,205; $0.03 per share |
| Operating costs | $317,306 | Q1 2016: $202,301 |
| Interest income | $135,094 | Q1 2016: $46,096 |
| Operating cash flow | $(114,280) | Q1 2016: $(167,569) |
| Cash outside trust | $196,517 | $23,865 |
| Trust assets | $112,865,059 | $117,507,609 |
| Total liabilities | $5,330,114, including $4,325,000 deferred underwriting fee | $4,515,900 |
Operating costs exceeded interest income, leaving a net loss. The loss increased about 17% year over year as costs rose, partly offset by higher interest income. There are no meaningful operating margins for this pre-combination shell. Current assets were $255,501 against current liabilities of $372,495, a working-capital deficit of $116,994. Notes payable and notes payable to stockholders totaled $632,619. The trust account was restricted; it is not ordinary operating liquidity.
Cash provided by investing activities was $4,777,644, including $5,080,272 withdrawn from the trust and $302,628 added to trust principal. Financing activities used $4,490,712, including $5,063,331 for share redemptions and $572,619 of note proceeds. Cash increased by $172,652 over the quarter.
Material changes and transaction developments
- At the March 27 shareholder meeting, holders converted 495,335 shares for approximately $5.063 million, or about $10.22 per share. The trust balance declined from year-end.
- Shareholders extended Harmony’s business-combination deadline to July 27, 2017. Insiders and NextDecade agreed to provide monthly, non-interest-bearing trust contributions of $0.0275 per unconverted public share, subject to the board’s decision to continue extensions.
- Harmony’s prior proposed combination with Customer Acquisition Network (Canada) Inc. was terminated effective February 23, 2017, following resolution of a dispute.
- The April 17 NextDecade agreement contemplated issuance of 97,866,510 Harmony shares to former NextDecade and blocker-interest holders, approximately 87% of post-merger shares assuming no public-share conversions; existing Harmony holders would own approximately 13%. Additional shares of up to 19,573,304 were tied to specified project milestones. Closing was expected in Q3 2017, subject to shareholder approval and other conditions.
Outlook, risks and unusual items
Management stated that cash and working capital were insufficient to fund planned activities through the July 27 deadline and disclosed substantial doubt about Harmony’s ability to continue as a going concern. It expected to use remaining non-trust funds and permitted trust interest, and might seek contingent vendor arrangements or additional loans or investments; no insiders were obligated to provide further financing. Failure to complete a combination by the deadline would trigger winding up and redemption of public shares, while warrants would expire worthless.
The trust funds could be exposed to creditor claims, including in bankruptcy; the CEO’s indemnity for certain claims may not be sufficient or collectible. Harmony estimated a possible $10.32 per-share redemption amount if it used remaining non-trust proceeds and did not liquidate early, but actual proceeds could be lower. The proposed NextDecade transaction and its project milestones were forward-looking and not assured. Management reported effective disclosure controls and no material change in internal control; it reported no off-balance-sheet arrangements and no material interest-rate exposure from its short-term trust investments.
Important facts for investors to verify
- Confirm the correct issuer and filing: this report is Harmony Merger Corp.’s, with NextDecade discussed as a proposed merger target.
- Check subsequent filings for whether the merger closed, final ownership and share consideration, shareholder redemptions, and any milestone earnout adjustments.
- Verify available operating liquidity, additional financing or vendor arrangements, and the board’s extension decisions against the July 27, 2017 deadline.
- Review trust-account balances, redemption terms, creditor-claim exposure, and the collectibility and scope of the CEO’s indemnity.
- Assess NextDecade’s permitting, commercial contracts, construction arrangements, and funding status independently; the filing describes anticipated approvals and non-binding customer commitments, not completed project financing or construction.