Business context and reporting period
National Energy Services Reunited Corp. (NESR) filed this unaudited Form 10-Q for the quarter ended March 31, 2018. It was a blank-check company formed to pursue a business combination, with a stated focus on global oilfield services. It had not begun operating activities or generated revenue. The cover identifies the company as a shell company.
NESR was pursuing acquisitions of NPS Holdings and Gulf Energy, subject to shareholder approval and other closing conditions. The filing describes the transactions as proposed; it does not report their completion in Q1.
Financial results and position
| Metric | Q1 2018 / March 31, 2018 | Comparison or context |
|---|---|---|
| Revenue | None | No operating revenue expected before a business combination |
| Operating costs / operating loss | $2.56 million / $(2.56) million | Prior comparable information is for inception through March 31, 2017, when costs and loss were $5,744; periods are not comparable |
| Net loss | $(1.85) million; $(0.20) per basic and diluted share | Prior inception-period loss: $(5,744) |
| Interest income | $733,794 | Earned on trust assets |
| Cash flow from operations | $(620,620) | Cash declined from $741,096 at year-end to $120,476 |
| Trust assets | $231.26 million | Primarily cash and U.S. Treasury bills; restricted for a business combination or related redemptions |
| Working capital | Deficit of $5.17 million | Accounts payable and accrued expenses were $5.44 million |
| Debt and other obligations | No long-term debt reported | Liabilities included $9.02 million of deferred underwriting fees, payable upon a business combination |
Margins are not meaningful because NESR had no revenue. Total assets were $231.53 million and total liabilities were $14.46 million at March 31, 2018. The company reported a substantial doubt about its ability to continue as a going concern because it had limited cash outside the trust and no committed source of additional funding.
Changes, outlook, risks and unusual items
- Operating costs increased from the small inception-period amount reported for Q1 2017, but the periods are not like-for-like: the company had been formed only in January 2017 and had not yet completed its IPO.
- After quarter-end, on April 27, 2018, NESR entered a forward purchase agreement for up to $150 million of shares: a $70 million primary placement and an optional secondary placement of up to $80 million. Proceeds were intended to help fund transaction costs and consideration, offset redemptions, or meet minimum cash needs. Funding depends on the business combination and applicable draw conditions.
- The proposed NPS consideration included $442.8 million in cash plus shares, subject to adjustments, as well as potential earn-outs. A proposed Gulf Energy acquisition and related share exchanges were also described. The filing estimated an NPS “Ticker Fee” of about $11.2 million if closing occurred May 15, 2018, based on a proposed suspension of the fee; the amount and terms were still under discussion.
- Other potential transaction costs included approximately $1.38 million of contingent service-provider fees, payable only if a business combination closes, and deferred underwriting fees. The filing anticipated significant additional closing and securities-filing costs.
- NESR had until 24 months after its May 2017 IPO closing to complete a business combination; otherwise, it generally would have to redeem public shares and liquidate. Public-shareholder redemptions could reduce funds available to close the transactions, and financing was not assured. Warrants could expire worthless if no combination is completed.
- Management gave no operating revenue or earnings guidance. It expected to incur ongoing public-company and transaction expenses. Management said disclosure controls were effective and reported no material change in internal control over financial reporting; no legal proceedings were reported.
Important facts for investors to verify
- Whether shareholders approved and the parties completed the NPS and Gulf Energy transactions, and the final purchase consideration, adjustments, earn-outs, and closing fees.
- Whether the forward purchase agreement was funded, how much was drawn, and the resulting dilution and post-closing liquidity after redemptions and transaction expenses.
- The source and timing of cash needed before closing: the company reported only $120,476 outside the trust and a $5.17 million working capital deficit, and said sponsor or other financing was not committed.
- A balance-sheet note states operating bank cash of $120,746, while the balance sheet and MD&A report $120,476; confirm the correct amount. Also confirm the reported working-capital deficit and payable balances.
- The amount and status of the NPS Ticker Fee and contingent service-provider fees, and any other liabilities or costs that became payable upon closing.