UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

  

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

Or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                     

 

Commission file number: 001-38271

  

SENTINEL ENERGY SERVICES INC.

(Exact name of registrant as specified in its charter)

 

Delaware   98-1370747

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

700 Louisiana Street, Suite 2700

Houston, Texas 77002

(281) 407-0686

(Address (including zip code) and telephone number (including area code) of principal executive offices

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐ Accelerated filer  ☒
Non-accelerated filer  ☐ Smaller reporting company  ☒
  Emerging growth company ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☒ No ☐

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class:   Trading Symbol:   Name of Each Exchange on Which Registered:
Class A Common Stock, par value $0.0001 per share   STNL   The Nasdaq Stock Market LLC
Warrants to purchase one share of Class A Common Stock   STNLW   The Nasdaq Stock Market LLC
Units, each consisting of one share of Class A Common Stock and one-third of one Warrant   STNLU   The Nasdaq Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

As of November 12, 2019, 34,500,000 shares of Class A common stock, par value $0.0001 per share (“Class A Common Stock”) and 8,625,000 shares of Class B common stock, par value $0.0001 per share (“Class B Common Stock”) were issued and outstanding.

 

 

  

 

 

 

TABLE OF CONTENTS

 

  Page
   
Part I. Financial Information 1
   
Item 1. Financial Statements (unaudited) 1
   
Condensed Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 1
   
Condensed Interim Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited) 2
   
Condensed Interim Statements of Changes in Stockholders’ Equity for the three months ended September 30, 2019 and 2018 (unaudited) 3
   
Condensed Interim Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2019 and 2018 (unaudited) 4
   
Condensed Interim Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited) 5
   
Notes to Condensed Interim Financial Statements (unaudited) 6
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
   
Item 4. Controls and Procedures 20
   
Part II. Other Information 21
   
Item 1. Legal Proceedings 21
   
Item 1A. Risk Factors 21
   
Item 6. Exhibits 21

 

i 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Sentinel Energy Services Inc.

CONDENSED BALANCE SHEETS

 

    September 30,
2019 		    December 31,
2018 		 
    (unaudited)        
ASSETS            
Current assets:            
Cash and cash equivalents   $ 180,013     $ 145,699  
Prepaid expenses     28,750       92,500  
Total current assets     208,763       238,199  
                 
Investments held in Trust Account     356,228,094       350,123,005  
Total assets   $ 356,436,857     $ 350,361,204  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable and accrued expenses   $ 4,706,566     $ 2,811,661  
Accrued income and franchise taxes     252,640       8,840  
Convertible promissory note payable - Sponsor     999,640       -  
Total current liabilities     5,958,846       2,820,501  
                 
Deferred underwriting compensation     12,075,000       12,075,000  
Total liabilities     18,033,846       14,895,501  
                 
Class A common stock subject to possible redemption (33,340,301 and 33,046,570 shares at approximately $10.00 per share as of September 30, 2019 and December 31, 2018, respectively)     333,403,010       330,465,700  
                 
Stockholders’ equity:                
Preferred shares, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding     -       -  
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 1,159,699 and 1,453,430 shares issued and outstanding (excluding 33,340,301 and 33,046,570 shares subject to possible redemption) at September 30, 2019 and December 31, 2018, respectively     116       145  
Class B common stock, $0.0001 par value, 20,000,000 shares authorized, 8,625,000 shares issued and outstanding     863       863  
Additional paid-in capital     662,790       3,600,071  
Retained earnings     4,336,232       1,398,924  
Total stockholders’ equity     5,000,001       5,000,003  
Total liabilities and stockholders’ equity   $ 356,436,857     $ 350,361,204  

 

See accompanying notes to unaudited condensed interim financial statements

 

1

 

 

Sentinel Energy Services Inc.
CONDENSED Interim StatementS of Operations
(unaudited)

 

    For the Three Months Ended
September 30, 		    For the Nine Months Ended
September 30, 		 
    2019     2018     2019     2018  
                         
REVENUE   $ —     $ —     $ —     $ —  
                                 
EXPENSES                                
General and administrative     (780,573 )(1)     957,741       3,233,293 (1)     1,272,615  
TOTAL EXPENSES     (780,573 )     957,741       3,233,293       1,272,615  
                                 
OTHER INCOME                                
Investment income from Trust Account     1,756,104       1,562,392       6,274,798       3,956,985  
TOTAL OTHER INCOME     1,756,104       1,562,392       6,274,798       3,956,985  
                                 
INCOME BEFORE INCOME TAX PROVISION     2,536,677       604,651       3,041,505       2,684,370  
                                 
Income tax provision     104,197       -       104,197       -  
                                 
Net income attributable to common shares   $ 2,432,480     $ 604,651     $ 2,937,308     $ 2,684,370  
                                 
Weighted average number of Class A common stock outstanding, basic and diluted     34,500,000       34,500,000       34,500,000       34,500,000  
Basic and diluted net income per Class A common stock   $ 0.05     $ 0.05     $ 0.18     $ 0.18  
                                 
Weighted average number of Class B common stock outstanding, basic and diluted     8,625,000       8,625,000       8,625,000       8,625,000  
Basic and diluted net income (loss) per Class B common stock   $ 0.09     $ (0.11 )   $ (0.37 )   $ (0.15 )

 

(1) See Note 5.

 

See accompanying notes to unaudited condensed interim financial statements

 

2

 

  

Sentinel Energy Services Inc.

CONDENSED Interim StatementS of Changes in STOCKHOLDERS’ Equity

(unaudited)

 

For the three months ended September 30, 2019 

 

    Class A
Common Stock 		    Class B
Common Stock 		    Additional Paid-in     Retained     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Earnings     Equity  
                                           
Balance as of June 30, 2019     1,402,947     $ 140       8,625,000     $ 863     $ 3,095,246     $ 1,903,752     $ 5,000,001  
                                                         
Change in Class A common stock subject to possible redemption     (243,248 )     (24 )     -       -       (2,432,456 )     -       (2,432,480 )
                                                         
Net income     -       -       -       -       -       2,432,480       2,432,480  
Balance as of September 30, 2019     1,159,699     $ 116       8,625,000     $ 863     $ 662,790     $ 4,336,232     $ 5,000,001  

     

For the three months ended September 30, 2018

 

    Class A
Common Stock 		    Class B
Common Stock 		    Additional Paid-in     Retained     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Earnings     Equity  
                                           
Balance as of June 30, 2018     1,393,989     $ 139       8,625,000     $ 863     $ 3,005,667     $ 1,993,335     $ 5,000,004  
                                                         
Change in Class A common stock subject to possible redemption     (60,465 )     (6 )     -       -       (604,644 )     -       (604,650 )
                                                         
Net income     -       -       -       -       -       604,651       604,651  
Balance as of September 30, 2018     1,333,524     $ 133       8,625,000     $ 863     $ 2,401,023     $ 2,597,986     $ 5,000,005  

  

See accompanying notes to unaudited condensed interim financial statements

 

3

 

 

Sentinel Energy Services Inc.

CONDENSED Interim StatementS of Changes in STOCKHOLDERS’ Equity

(unaudited)

 

For the nine months ended September 30, 2019 

 

    Class A
Common Stock 		    Class B
Common Stock 		    Additional Paid-in     Retained     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Earnings     Equity  
                                           
Balance as of December 31, 2018     1,453,430     $ 145       8,625,000     $ 863     $ 3,600,071     $ 1,398,924     $ 5,000,003  
                                                         
Change in Class A common stock subject to possible redemption     (293,731 )     (29 )     -       -       (2,937,281 )     -       (2,937,310 )
                                                         
Net income     -       -       -       -       -       2,937,308       2,937,308  
Balance as of September 30, 2019     1,159,699     $ 116       8,625,000     $ 863     $ 662,790     $ 4,336,232     $ 5,000,001  

 

For the nine months ended September 30, 2018

 

    Class A
Common Stock 		    Class B
Common Stock 		    Additional Paid-in     Retained Earnings (Accumulated     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit)     Equity  
                                           
Balance as of December 31, 2017     1,601,961     $ 160       8,625,000     $ 863     $ 5,085,366     $ (86,384 )   $ 5,000,005  
                                                         
Change in Class A common stock subject to possible redemption     (268,437 )     (27 )     -       -       (2,684,343 )     -       (2,684,370 )
                                                         
Net income     -       -       -       -       -       2,684,370       2,684,370  
Balance as of September 30, 2018     1,333,524     $ 133       8,625,000     $ 863     $ 2,401,023     $ 2,597,986     $ 5,000,005  

  

 See accompanying notes to unaudited condensed financial statements.

 

4

 

 

Sentinel Energy Services Inc.

CONDENSED Interim StatementS of Cash Flows

(unaudited)

 

    For the Nine Months
Ended September 30, 		 
    2019     2018  
Cash Flows From Operating Activities:            
Net income   $ 2,937,308     $ 2,684,370  
Adjustments to reconcile net income to net cash used in operating activities:                
Investment income earned on marketable securities held in Trust Account     (6,274,798 )     (3,956,985 )
Changes in operating assets and liabilities:                
Prepaid expenses     63,750       54,689  
Accounts payable and accrued expenses     1,894,905       881,246  
Accrued income and franchise taxes     243,800       -  
Net Cash Used In Operating Activities     (1,135,035 )     (336,680 )
                 
Cash Flows From Investing Activities:                
Investment income released from Trust Account     169,709       -  
Net Cash Provided By Investing Activities     169,709       -  
                 
Cash Flows From Financing Activities:                
Proceeds from convertible promissory note payable - Sponsor     999,640       -  
Net Cash Provided By Financing Activities     999,640       -  
                 
Net increase (decrease) in cash and cash equivalents     34,314       (336,680 )
                 
Cash and cash equivalents at beginning of period     145,699       891,952  
                 
Cash and cash equivalents at end of period   $ 180,013     $ 555,272  
                 
Supplemental disclosure of non-cash financing activities:                
                 
Change in value of common stock subject to possible redemption   $ 2,937,310     $ 2,684,370  

 

See accompanying notes to unaudited condensed interim financial statements

 

5

 

 

SENTINEL ENERGY SERVICES INC.

NOTES TO CONDENSED Interim FINANCIAL STATEMENTS

(unaudited)

 

1. Description of Organization and Business Operations

 

Organization and General

 

Sentinel Energy Services Inc. (the “Company”) was incorporated in the Cayman Islands on June 5, 2017 (date of inception). The Company was formed for the purpose of effecting a merger, amalgamation, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the “Securities Act,” as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

 

On December 28, 2018, the Company changed its jurisdiction of incorporation from the Cayman Islands (“Sentinel Cayman”) to the State of Delaware (“Sentinel Delaware”), as described further below (the “Domestication”) and continued to be named Sentinel Energy Services Inc. As a result of the Domestication, each of Sentinel Cayman’s issued and outstanding Class A ordinary shares (the “Class A ordinary shares”) and Class B ordinary shares (the “Class B ordinary shares”) automatically converted by operation of law into one share of Class A common stock (“Class A common stock”) and Class B common stock (“Class B common stock”), of Sentinel Delaware, respectively. Similarly, each of Sentinel Cayman’s outstanding units and warrants automatically converted by operation of law, on a one-for-one basis, into units of Sentinel Delaware and warrants to acquire the corresponding number of shares of Class A common stock, respectively. Accordingly, all references to the Company’s capital stock both before and after the Domestication are referred to as shares of “common stock” in this Quarterly Report on Form 10-Q.

 

At September 30, 2019, the Company had not yet commenced operations. All activity through September 30, 2019 relates to the Company’s formation and initial public offering (the “Public Offering”) described below, and since the closing of the Public Offering, a search for a business combination candidate, including activities in connection with the announced and subsequently terminated proposed business combination with Strike Capital, LLC (“Strike”) (as described in Note 5). The Company will not generate any operating revenues until after completion of its initial business combination, at the earliest. The Company generates non-operating income in the form of interest income on cash and cash equivalents from the proceeds derived from the Public Offering. The Company has selected December 31st as its fiscal year end.

 

The Company intends to finance its initial business combination with proceeds from the Public Offering (Note 3) and sale of the Private Placement Warrants (as defined in Note 3), the Company’s capital stock, debt or a combination of the foregoing. Upon the closings of the Public Offering and the sale of the Private Placement Warrants, approximately $345,000,000 was placed in a trust account (the “Trust Account”) (discussed below).

 

The registration statement for the Company’s Public Offering (Note 3) was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on November 2, 2017.

 

Trust Account

 

The proceeds held in the Trust Account are invested only in U.S. government treasury bills with a maturity of one hundred eighty (180) days or less or in money market funds that meet certain conditions under Rule 2a-7 under the Investment Company Act of 1940 and that invest only in direct U.S. government obligations. Funds will remain in the Trust Account until the earlier of (i) the consummation of an initial business combination or (ii) the distribution of the Trust Account proceeds as described below. The remaining proceeds outside the Trust Account may be used to pay for business, legal and accounting due diligence on prospective acquisitions and continuing general and administrative expenses.

 

In accordance with the terms of the Investment Management Trust Agreement entered into by the Company in connection with the Public Offering, other than the withdrawal of interest to pay income taxes, if any, none of the funds held in the Trust Account will be released until the earlier of: (i) the completion of an initial business combination; (ii) the redemption of any shares of Class A common stock included in the Units (as defined in Note 3) sold in the Public Offering (the “Public Shares”) that have been properly tendered in connection with a stockholder vote to amend the Company’s certificate of incorporation (the “Charter”) to modify the substance or timing of its obligation to redeem 100% of such shares of Class A common stock if it does not complete an initial business combination by November 7, 2019; and (iii) the redemption of 100% of the Class A common stock included in the Units sold in the Public Offering if the Company is unable to complete an initial business combination by November 7, 2019 (subject to the requirements of law). The proceeds deposited in the Trust Account could become subject to the claims of the Company’s creditors, if any, which could have priority over the claims of the Company’s public stockholders. The Company was unable to complete an initial business combination by the November 7, 2019 deadline under its Charter and so it commenced the liquidation of the assets in the Trust Account on November 8, 2019 (See note 8).

 

6

 

 

SENTINEL ENERGY SERVICES INC.

NOTES TO CONDENSED Interim FINANCIAL STATEMENTS

(unaudited)

 

Initial Business Combination

 

The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Public Offering, although substantially all of the net proceeds of the Public Offering are intended to be generally applied toward consummating an initial business combination. The initial business combination must occur with one or more target businesses that together have an aggregate fair value of at least 80% of the assets held in the Trust Account (excluding the deferred underwriting commissions and taxes payable on income earned on the Trust Account) at the time of the agreement to enter into an initial business combination. Furthermore, there is no assurance that the Company will be able to successfully effect an initial business combination.

 

The Company, after signing a definitive agreement for an initial business combination, will either (i) seek stockholder approval of an initial business combination at a meeting called for such purpose in connection with which stockholders may seek to redeem their shares, regardless of whether they vote for or against an initial business combination, for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of an initial business combination, including interest but less taxes payable, or (ii) provide stockholders with the opportunity to sell their Public Shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote) for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of an initial business combination, including interest but less taxes payable. The decision as to whether the Company will seek stockholder approval of an initial business combination or will allow stockholders to sell their Public Shares in a tender offer will be made by the Company, solely in its discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would otherwise require the Company to seek stockholder approval, unless a vote is required by law or under The Nasdaq Stock Market (“Nasdaq”) rules. If the Company seeks stockholder approval, it will complete its initial business combination only if a majority of the outstanding shares of common stock of the Company voted are voted in favor of an initial business combination. However, in no event will the Company redeem its Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001. In such case, the Company would not proceed with the redemption of its Public Shares and the related initial business combination, and instead may search for an alternate initial business combination.

 

If the Company holds a stockholder vote or there is a tender offer for shares in connection with an initial business combination, a public stockholder will have the right to redeem its shares for an amount in cash equal to its pro rata share of the aggregate amount then on deposit in the Trust Account as of two business days prior to the consummation of an initial business combination, including interest but less taxes payable. As a result, such shares of Class A common stock are classified as temporary equity upon the completion of the Public Offering, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, “Distinguishing Liabilities from Equity.”

 

In the event of a liquidation, dissolution or winding up of the Company after an initial business combination, the Company’s stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of common stock, if any, having preference over the common stock. The Company’s stockholders have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the shares of common stock, except that the Company will provide its stockholders with the opportunity to redeem their Public Shares for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, upon the completion of an initial business combination, subject to the limitations described herein.

  

Mandatory Liquidation, Going Concern and Liquidity:

 

In accordance with the terms of its Charter, if the Company is unable to complete an initial business combination by November 7, 2019, it will (i) cease all operations except for the purpose of winding up; (ii) as promptly as reasonably possible, but not more than ten business days thereafter, redeem the Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned on the funds held in the Trust Account and not previously released to the Company to pay the Company’s income taxes (less up to $100,000 of such net interest to pay dissolution expenses), divided by the number of then outstanding Public Shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as possible following such redemption, subject to the approval of the Company’s remaining stockholders and the Company’s board of directors, dissolve and liquidate, subject in each case to the Company’s obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. The Sponsor and the Company’s officers and directors have entered into letter agreements with the Company, pursuant to which they have agreed to waive their rights to liquidating distributions from the Trust Account with respect to any Founder Shares (as defined below) held by them if the Company fails to complete the initial business combination by November 7, 2019. However, if the Sponsor or any of the Company’s directors, officers or affiliates acquire shares of Class A common stock in or after the Public Offering, they will be entitled to liquidating distributions from the Trust Account with respect to such shares if the Company fails to complete the initial business combination within the prescribed time period. The Company was unable to complete an initial business combination by the November 7, 2019 deadline under its Charter and so it commenced the liquidation of the assets in the Trust Account on November 8, 2019 (See note 8).

 

In the event of liquidation, it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per Unit in the Public Offering. For example, even though the Company will seek to have all third parties with which the Company does business (except their independent registered accounting firm) execute agreements with it waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account, such parties may not execute such agreements, or even if they execute such agreements, they may not be prevented from bringing claims against the Trust Account.

 

7

 

 

SENTINEL ENERGY SERVICES INC.

NOTES TO CONDENSED Interim FINANCIAL STATEMENTS

(unaudited)

 

In connection with the Company’s assessment of going concern considerations in accordance with FASB’s Accounting Standards Update (“ASU”) 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” the Company determined that the mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after the end of business on November 7, 2019 (See note 8).

 

As of September 30, 2019, the Company did not have sufficient liquidity to meet its future obligations. As of September 30, 2019, the Company had a working capital deficit of approximately $5.8 million, current liabilities of $6.0 million and had cash of approximately $180,000.

 

In addition to the convertible promissory note payable issued on March 1, 2019 (see Note 4), the Company will need to raise additional capital through loans or additional investments from its stockholders, officers, directors, or third parties. The Sponsor will financially support the Company sufficient for the Company to satisfy its obligations as they come due until the earlier of the consummation of an initial business combination or up to the mandatory liquidation as stipulated in the Company’s Charter (See note 8).

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed interim financial statements of the Company are presented in U.S. dollars in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the accounting and disclosure rules and regulations of the SEC, and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position as of September 30, 2019 and the results of operations and cash flows for the periods presented. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. Interim results are not necessarily indicative of results for a full year.

 

The accompanying unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018 filed by the Company with the SEC on March 18, 2019.

 

Emerging Growth Company

 

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act, and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates.

 

8

 

 

SENTINEL ENERGY SERVICES INC.

NOTES TO CONDENSED Interim FINANCIAL STATEMENTS

(unaudited)

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentration of credit risk consist of a cash account in a financial institution which, at times may exceed the Federal depository insurance coverage of $250,000. At September 30, 2019 and December 31, 2018, the Company had not experienced losses on this account and management believes the Company is not exposed to significant risks on such account.

 

Financial Instruments

 

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheets.

 

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.

 

Redeemable Common Stock

 

As discussed in Note 1, all of the 34,500,000 Public Shares contain a redemption feature which allows for the redemption of such shares under the Company’s Charter. In accordance with FASB ASC Topic 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the Company’s equity instruments, are excluded from the provisions of FASB ASC Topic 480. Although the Company has not specified a maximum redemption threshold, its Charter provides that in no event will the Company redeem its Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001.

    

The Company recognizes changes in redemption value immediately as they occur and will adjust the carrying value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable shares of Class A common stock shall be affected by charges against additional paid in capital.

 

At September 30, 2019 and December 31, 2018, 33,340,301 and 33,046,570, respectively, of the 34,500,000 shares of Class A common stock were classified outside of permanent equity.

 

Net Income (Loss) Per Share of Common Stock

 

Net income (loss) per share of common stock is computed by dividing net income (loss) applicable to the shares of common stock by the weighted average number of shares outstanding for the period. The Company has not considered the effect of the warrants sold in the Public Offering and private placement to purchase an aggregate of 17,433,333 shares of Class A common stock in the calculation of diluted income (loss) per share, since their inclusion would be anti-dilutive under the Treasury Stock method. As a result, diluted net income (loss) per share of common stock is the same as basic net income per share of common stock for the periods as presented.

 

The Company’s condensed interim statements of operations includes a presentation of net income (loss) per share for common stock subject to redemption in a manner similar to the two-class method. Net income per share of common stock, basic and diluted for shares of Class A common stock is calculated by dividing the interest income earned on the trust account, less applicable income tax expense, by the weighted average number of shares of Class A common stock outstanding for the periods. Net loss per common stock, basic and diluted for shares of Class B common stock is calculated by dividing net income, less income attributable to the shares of Class B common stock, by the weighted average number of shares of Class B common stock outstanding for the periods.

 

Income Taxes

 

The Company follows the asset and liability method of accounting for income taxes under FASB ASC Topic 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

FASB Topic ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of September 30, 2019 and December 31, 2018. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at September 30, 2019 and December 31, 2018. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.

 

9

 

 

SENTINEL ENERGY SERVICES INC.

NOTES TO CONDENSED Interim FINANCIAL STATEMENTS

(unaudited)

 

The Company may be subject to potential examination by federal, state, and city taxing authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with federal, state, and city tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

 

As a result of the Domestication that took place on December 28, 2018 (as discussed in Note 1), the Company became subject to federal and state income tax purposes starting with the 2018 taxable year.

 

In connection with the Domestication and the termination of the proposed business combination with Strike (as discussed in Note 5), the Company may utilize certain previously recorded start-up costs as a deduction to their taxable income.

 

The Company’s current taxable income consists of interest income on the Trust Account net of franchise taxes and expenses of approximately $5.6 million related to the terminated business combination with Strike effective as of February 12, 2019 (as discussed in Note 5) and other tax deductible expenses in conjunction with the Company’s search for another business combination candidate. The Company’s costs are generally considered start-up costs and are not currently deductible. During the three and nine months ended September 30, 2019, the Company recorded income tax expense of approximately $104,000.

 

Related Parties

 

The Company follows FASB ASC 850-10 for the identification of related parties and disclosure of related party transactions.

 

Pursuant to ASC 850-10-20, the Company’s related parties include: (a) affiliates of the Company (“Affiliate” means, with respect to any specified person, any other person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such person, as such terms are used in and construed under Rule 405 under the Securities Act); (b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company; (e) management of the Company; (f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. 

 

Subsequent Events

 

The Company evaluates subsequent events and transactions that occur after the balance sheet date for potential recognition or disclosure. Any material events that occur between the balance sheet date and the date that the financial statements were issued are disclosed as subsequent events, while the financial statements are adjusted to reflect any conditions that existed at the balance sheet date.

 

Recent Accounting Pronouncements

  

The Company’s management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have an effect on the Company’s financial statements.

 

3. Public Offering

 

In November 2017, the Company closed its Public Offering of 34,500,000 units at a price of $10.00 per unit (the “Units”), with gross proceeds of $345,000,000 from the sale of Units. The closings occurred on November 7, 2017 with respect to 30,000,000 Units and on November 9, 2017 with respect to 4,500,000 Units related to the exercise of the underwriters’ overallotment option. 

 

Each Unit consists of one share of Class A common stock, $0.0001 par value, and one-third of one warrant (each, a “Public Warrant” and, collectively, the “Public Warrants”). Each whole Public Warrant entitles the holder to purchase one share of Class A common stock at a price of $11.50 per share. No fractional shares will be issued upon separation of the Units and only whole Public Warrants trade. Each Public Warrant will become exercisable on the later of 30 days after the completion of the Company’s initial business combination or 12 months from the closing of the Public Offering and will expire five years after the completion of the Company’s initial business combination or earlier upon redemption or liquidation. Once the Public Warrants become exercisable, the Company may redeem the outstanding Public Warrants in whole and not in part at a price of $0.01 per Public Warrant upon a minimum of 30 days’ prior written notice of redemption, if and only if the last sale price of the Company’s Class A common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sent the notice of redemption to the Public Warrant holders.

 

10

 

 

SENTINEL ENERGY SERVICES INC.

NOTES TO CONDENSED Interim FINANCIAL STATEMENTS

(unaudited)

 

Simultaneous with the closing of the Public Offering on November 7, 2017, Sentinel Management Holdings, LLC (the “Sponsor”) purchased an aggregate of 5,333,333 private placement warrants at a price of $1.50 per whole warrant (approximately $8,000,000 in the aggregate) in a private placement (the “Private Placement Warrants”). Simultaneously with the closing of the overallotment, the Company consummated the private placement of an additional 600,000 Private Placement Warrants to the Sponsor, generating gross proceeds of approximately $900,000.

 

The Company paid an underwriting discount of 2.0% of the per Unit offering price to the underwriters at the closing of the Public Offering, with an additional fee (the “Deferred Discount”) of 3.5% of the gross offering proceeds payable upon the Company’s completion of an initial business combination. The Deferred Discount was payable to the underwriters from the amounts held in the Trust Account solely in the event the Company completed its initial business combination. 

 

4. Related Party Transactions

 

Founder Shares

 

In June 2017, the Sponsor entered into an Amended and Restated Securities Purchase Agreement, for the purchase of 14,375,000 shares of Class B common stock (the “Founder Shares”) for $25,000, or approximately $0.002 per share. As used herein, unless the context otherwise requires, “Founder Shares” shall be deemed to include the shares of Class A common stock issuable upon conversion thereof. The Sponsor is a portfolio company of CSL Capital Management, L.P., an energy services-focused private equity fund.

 

The Founder Shares are identical to the shares of Class A common stock included in the Units sold in the Public Offering except that (1) holders of the Founder Shares have the right to vote on the election of directors prior to an initial business combination, (2) the Founder Shares are subject to certain transfer restrictions, as described in more detail below, (3) holders of the Founder Shares entered into letter agreements with the Company pursuant to which they agreed to waive their redemption rights with respect to any Founder Shares held by them in connection with the completion of an initial business combination, (4) the Founder Shares are shares of Class B common stock that will automatically convert into shares of Class A common stock at the time of an initial business combination and (5) the Founder Shares are subject to registration rights, as described below.

 

In August 2017, the Sponsor surrendered 5,750,000 shares of its Class B common stock for no consideration, resulting in the Sponsor holding an aggregate of 8,625,000 shares of Class B common stock. This forfeiture also adjusted the shares subject to forfeiture from 1,875,000 to 1,125,000, to the extent that the over-allotment option is not exercised in full by the underwriters so that the Founder Shares will represent 20.0% of the Company’s issued and outstanding shares after the Public Offering. As described above, the underwriters exercised their overallotment option in connection with the Public Offering in full, and therefore none of the Founder Shares were forfeited.

 

The Company’s initial stockholders have agreed, subject to limited exceptions, not to transfer, assign or sell any of their Founder Shares until the earlier to occur of: (A) one year after the completion of an initial business combination or (B) subsequent to an initial business combination, (x) if the last sale price of the Class A common stock equals or exceeds $12.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after an initial business combination, or (y) the date on which the Company completes a liquidation, merger, share exchange or other similar transaction that results in all of the Company’s stockholders having the right to exchange their common stock for cash, securities or other property.

 

In October 2017 and April 2018, the Sponsor transferred 37,500 Founder Shares to Marc Zenner and Jon A. Marshall, respectively, both of whom are independent directors of the Company, at the original purchase price. As a result of these transfers, the Sponsor holds 8,550,000 Founder Shares.

 

Private Placement Warrants

 

Upon the closing of the Public Offering on November 7, 2017 and November 9, 2017, the Sponsor purchased an aggregate of 5,933,333 Private Placement Warrants at a price of $1.50 per whole warrant (approximately $8,900,000 in the aggregate) in a private placement that occurred simultaneously with the closing of the Public Offering. Each whole Private Placement Warrant is exercisable to purchase one share of Class A common stock at a price of $11.50 per share. A portion of the purchase price of the Private Placement Warrants was added to the proceeds from the Public Offering held in the Trust Account. The remaining portion of the purchase price was held outside the Trust Account for transaction and working capital expenses. An initial business combination has not been completed by November 7, 2019, and therefore, the proceeds from the sale of the Private Placement Warrants held in the Trust Account will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law), and the Private Placement Warrants will expire worthless (see note 8). The Private Placement Warrants will be non-redeemable and exercisable on a cashless basis so long as they are held by the Sponsor or its permitted transferees.

 

The Sponsor and the Company’s officers and directors agreed, subject to limited exceptions, not to transfer, assign or sell any of the Private Placement Warrants until 30 days after the completion of an initial business combination.

 

11

 

 

SENTINEL ENERGY SERVICES INC.

NOTES TO CONDENSED Interim FINANCIAL STATEMENTS

(unaudited)

 

Registration Rights

 

The holders of Founder Shares, Private Placement Warrants and Public Warrants that may be issued upon conversion of working capital loans, if any, will be entitled to registration rights (in the case of the Founder Shares, only after conversion of such shares to shares of Class A common stock) pursuant to a registration rights agreement to be signed on or before the date of the prospectus for the Public Offering. These holders will be entitled to certain demand and “piggyback” registration rights.

 

However, the registration rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become effective until termination of the applicable lock-up period for the securities to be registered. The Company will bear the expenses incurred in connection with the filing of any such registration statements. 

 

Advances from Related Parties

 

During the three and nine months ended September 30, 2019, the Sponsor or an affiliate of the Sponsor incurred certain administrative expenses on behalf of the Company in the amount of $15,858 and $44,183, respectively. During the three and nine months ended September 30, 2018, the Sponsor or an affiliate of the Sponsor incurred certain administrative expenses on behalf of the Company in the amount of $4,793 and $94,168, respectively. These advances were due on demand and were non-interest bearing. The outstanding balance on the advances was repaid in full during the periods then ended.

 

Administrative Support Agreement

 

Commencing on the date the Units were first listed on the Nasdaq, the Company agreed to pay an affiliate of the Sponsor up to $10,000 per month for office space, utilities and secretarial and administrative support. Upon completion of the initial business combination or the Company’s liquidation, the Company will cease paying these monthly fees. The Company incurred $7,139 and $17,589 for such expenses under the administrative service agreement for the three and nine months ended September 30, 2019, respectively. The Company incurred $3,642 and $16,005 for such expenses under the administrative service agreement for the three and nine months ended September 30, 2018, respectively.

  

Option Agreement

 

On November 2, 2017, the Company entered into an option agreement (“Option Agreement”) pursuant to which CSL Energy Opportunities Fund III, L.P. and CSL Energy Holdings III, Corp, LLC (“Option Holders”) agreed to purchase an aggregate of up to 10,000,000 units (the “Co-Investment Units”), consisting of one share of Class A common stock (the “Co-Investment Shares”) and one-third of one warrant to purchase one share of Class A common stock (the “Co-Investment Warrants,” and together with the Co-Investment Shares, the “Co-Investment Securities”), for $10.00 per unit (the “Exercise Price”), or an aggregate maximum amount of $100,000,000, immediately prior to the closing of the Company’s initial business combination.

 

The Co-Investment Warrants will have the same terms as the Private Placement Warrants so long as they are held by the Option Holders or its permitted transferees, and the Co-Investment Shares will be identical to the shares of Class A common stock included in the Units, except that the Co-Investment Shares will be subject to transfer restrictions and certain registration rights, as described herein. Any Co-Investment Warrant held by a holder other than the Option Holders or their permitted transferees will have the same terms as the Public Warrants.

 

The Option Holders will have the right to transfer a portion of their option to purchase the Co-Investment Securities to third parties, subject to compliance with applicable securities laws. The Option Agreement also provides that the Option Holders and any permitted transferees will be entitled to certain registration rights with respect to their Co-Investment Securities, including the shares of Class A common stock underlying their Co-Investment Warrants.

 

Convertible Promissory Note Payable

 

On March 1, 2019, the Company issued a convertible promissory note in the amount of up to $1,500,000 with the Sponsor to fund the Company’s ongoing expenses. The convertible promissory note does not bear interest and all unpaid principal will be due and payable in full on the earlier of November 7, 2019 or the consummation of an initial business combination by the Company. The Sponsor had the option to convert any amounts outstanding under the convertible promissory note into warrants of the post-business combination entity to purchase shares, at a conversion price of $1.50 per warrant. As of September 30, 2019, the outstanding balance on convertible promissory note was $999,640.

 

5. Termination of Proposed Business Combination

 

On October 18, 2018, the Company entered into a transaction agreement and plan of merger (the “Transaction Agreement”) with Strike, OEP Secondary Fund (Strike), LLC, One Equity Partners Secondary Fund, L.P., the other equityholders of Strike party thereto, OEP-Strike Seller Representative, LLC and SES Blocker Merger Sub, LLC, relating to the proposed acquisition by the Company of a majority of the equity interests of Strike. For more information on the proposed transaction, please see the Definitive Proxy Statement filed by the Company with the SEC on January 18, 2019. On February 12, 2019, the Company and Strike entered into a termination agreement (the “Termination Agreement”), pursuant to which the parties agreed to mutually terminate the Transaction Agreement, effective as of February 12, 2019.

 

12

 

 

SENTINEL ENERGY SERVICES INC.

NOTES TO CONDENSED Interim FINANCIAL STATEMENTS

(unaudited)

 

As a result of the termination of the Transaction Agreement, each of (i) the purchase and contribution agreement, dated as of October 18, 2018 (the “Contribution Agreement”), by and among the Company, Strike, LLC, a wholly owned subsidiary of Strike, CSL Energy Holdings III Corp, LLC and Invacor Pipeline and Process Solutions, LLC, (ii) the subscription agreements, dated as of October 18, 2018, between the Company and each of CSL Capital Management, L.P. and certain funds and accounts managed by Fidelity Management & Research Company, and (iii) the Voting and Support Agreement, dated as of October 18, 2018, by and among the Company, the Sponsor and certain stockholders of the Company party thereto, which the Company entered into in connection with the proposed acquisition, was automatically terminated in accordance with its terms.

 

Pursuant to the Termination Agreement, all costs and expenses (including all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of the Transaction Agreement, the Contribution Agreement or the Termination Agreement and the transactions contemplated thereby are to be paid by the party incurring such expenses. The Company incurred approximately $4.2 million of costs related to the proposed business combination. For more information, please see the Current Report on Form 8-K filed by the Company with the SEC on February 13, 2019 relating to the termination of the proposed business combination.

 

Of the approximate $4.2 million in costs related to the business combination, the Company negotiated with certain vendors to reduce the amounts due. Accordingly, the Company recorded a reduction in accrued expenses of $950,000 and reversed approximately $950,000 of general and administrative expenses during the three and nine months ended September 30, 2019.

 

6. Stockholders’ Equity

 

Common Stock

 

The authorized common stock of the Company includes up to 200,000,000 shares of Class A common stock and 20,000,000 shares of Class B common stock. If the Company enters into an initial business combination, it may (depending on the terms of such an initial business combination) be required to increase the number of shares of Class A common stock which the Company is authorized to issue at the same time as the Company’s stockholders vote on an initial business combination to the extent the Company seeks stockholder approval in connection with an initial business combination. Holders of the Company’s common stock are entitled to one vote for each share of common stock held by them.

 

At September 30, 2019 and December 31, 2018, there were 34,500,000 shares of Class A issued and outstanding, of which 33,340,301 and 33,046,570, respectively, were classified outside of permanent equity, and 8,625,000 shares of Class B common stock issued and outstanding.

 

Preferred Stock

 

The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. At September 30, 2019 and December 31, 2018, there were no shares of preferred stock issued or outstanding. 

 

7. Fair Value Measurements

 

The following table presents information about the Company’s assets that are measured on a recurring basis as of September 30, 2019 and December 31, 2018 and indicates the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability.

 

Description   Fair Value     Quoted
Prices in
Active
Markets
(Level 1) 		    Significant
Other
Observable
Inputs
(Level 2) 		    Significant
Other
Unobservable
Inputs
(Level 3) 		 
Investments held in Trust Account                        
September 30, 2019   $ 356,228,094     $ 356,228,094     $ —     $ —  
December 31, 2018   $ 350,123,005     $ 350,123,005     $ —     $ —  

 

13

 

 

SENTINEL ENERGY SERVICES INC.

NOTES TO CONDENSED Interim FINANCIAL STATEMENTS

(unaudited)

 

8. Subsequent Events

 

Failure to Consummate an Initial Business Combination

 

The Charter and the prospectus that the Company filed in connection with its initial public offering provided that the Company had 24 months after the closing of its initial public offering, or until November 7, 2019, to complete a business combination. During the period since the Company’s initial public offering, the Company diligently searched for a business to combine with in a transaction that would generate value for the Company’s stockholders; however, over the same period, the energy sector experienced significant headwinds, which increased the challenges faced by the Company in sourcing a compelling target business. Despite the Company’s best efforts, it was not able to consummate a business combination prior to the November 7, 2019 deadline under its Charter. As a result, the Company has commenced the liquidation of the Trust Account and will return the funds held therein to its public stockholders by redeeming 100% of the Company’s Public Shares in accordance with the Charter, which will completely extinguish the public stockholders’ rights in the Company. 

 

Warrants and Founder Shares

 

In addition, the Company intends to propose to the holders of its Public Warrants an amendment to the Warrant Agreement, dated as of November 2, 2017 (the “Warrant Agreement”), between the Company and Continental Stock Transfer & Trust Company, to automatically convert each of the Company’s 11,500,000 outstanding Public Warrants into the right to receive $0.02 per whole Public Warrant, payable in cash. If the Warrant Agreement amendment is not approved, the Company will liquidate the Public Warrants and they will expire worthless.

 

The Sponsor has agreed to forfeit 90% of the 8,550,000 Founder Shares and all of the 5,933,333 Private Placement Warrants held by it for no consideration because the Company was unable to consummate an initial business combination by the November 7, 2019 deadline under its Charter.

 

Deferred Discount

 

In accordance with the terms of the underwriting agreement entered into in connection with the Public Offering, the underwriters forfeited any rights or claims to the Deferred Discount because the Company was unable to consummate an initial business combination by the November 7, 2019 deadline under its Charter.

 

Promissory Note

 

In addition, in accordance with the terms of the convertible promissory note, the unpaid principal of $999,640 became due on November 7, 2019. The Company and the Sponsor are currently evaluating the treatment of the convertible promissory note.

 

14

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Report”), including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our forward-looking statements include, but are not limited to, statements regarding our or our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. There can be no assurance that actual results will not materially differ from expectations. Such statements include, but are not limited to, any statements relating to our ability to consummate any acquisition or other business combination and any other statements that are not statements of current or historical facts. These statements are based on management’s current expectations, but actual results may differ materially due to various factors, including, but not limited to:

 

  ● our ability to select an appropriate target business or businesses;
     
  ● our ability to complete our initial business combination;
     
  ● our success in retaining or recruiting, or changes required in, our officers, key employees or directors following our initial business combination;
     
  ● our officers and directors allocating their time to other businesses and potentially having conflicts of interest with our business or in approving our initial business combination
     
  ● our potential ability to obtain additional financing to complete our initial business combination;
     
  ● our pool of prospective target businesses;
     
  ● failure to maintain the listing on, or the delisting of our securities from, Nasdaq or an inability to have our securities listed on Nasdaq or another national securities exchange following our initial business combination;
     
  ● the ability of our officers and directors to generate a number of potential acquisition opportunities;
     
  ● our public securities’ potential liquidity and trading;
     
  ● the lack of a market for our securities;
     
  ● the use of proceeds not held in the trust account or available to us from interest income on the trust account balance;
     
  ● the trust account not being subject to claims of third parties; or
     
  ● our financial performance.

 

The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under “Risk Factors” may not be exhaustive.

 

15

 

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods. 

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Please see “Cautionary Note Regarding Forward-Looking Statements.”

 

Overview

 

We are a blank check company originally incorporated in the Cayman Islands on June 5, 2017 for the purpose of effecting a merger, amalgamation, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On December 28, 2018, we changed our jurisdiction of incorporation from the Cayman Islands (“Sentinel Cayman”) to the State of Delaware (“Sentinel Delaware”) (the “Domestication”) and continued to be named Sentinel Energy Services Inc. As a result of the Domestication, each of Sentinel Cayman’s issued and outstanding Class A ordinary shares (the “Class A ordinary shares”) and Class B ordinary shares (the “Class B ordinary shares”) automatically converted by operation of law into one share of Class A common stock (“Class A common stock”) and Class B common stock (“Class B common stock”) of Sentinel Delaware, respectively. Similarly, each of Sentinel Cayman’s outstanding units and warrants automatically converted by operation of law, on a one-for-one basis, into units of Sentinel Delaware and warrants to acquire the corresponding number of shares of Class A common stock, respectively. Accordingly, all references to our capital stock before and after the Domestication are referred to as shares of “common stock” in this Report. We intend to effectuate our initial business combination using cash from the proceeds of our initial public offering and the private placement of the private placement warrants and Co-Investment Securities (to the extent subscribed for by CSL Energy Opportunities Fund III, L.P. and CSL Energy Holdings III, Corp, LLC), our capital stock, debt or a combination of the foregoing.

 

At September 30, 2019, we held cash of approximately $180,000, current liabilities of $5,959,000 and deferred underwriting compensation of $12,075,000.

 

Recent Developments

 

Failure to Consummate an Initial Business Combination

 

Our certificate of incorporation (our “Charter”) and the prospectus that we filed in connection with our initial public offering provided that we had 24 months after the closing of our initial public offering, or until November 7, 2019, to complete a business combination. During the period since our initial public offering, we diligently searched for a business to combine with in a transaction that would generate value for our stockholders; however, over the same period, the energy sector experienced significant headwinds, which increased the challenges faced by us in sourcing a compelling target business. Despite our best efforts, we were not able to consummate a business combination prior to the November 7, 2019 deadline under our Charter. As a result, we have commenced the liquidation of the trust account and will return the funds held therein to our public stockholders by redeeming 100% of the shares of Class A common stock (the “Public Shares”) included in the units sold in our initial public offering (the “Units”) in accordance with our Charter, which will completely extinguish our public stockholders’ rights in the Company. 

 

Warrants and Founder Shares

 

In addition, we intend to propose to the holders of the warrants sold as part of the Units (the “Public Warrants”) an amendment to the Warrant Agreement, dated as of November 2, 2017 (the “Warrant Agreement”), between the Company and Continental Stock Transfer & Trust Company, to automatically convert each of the 11,500,000 outstanding Public Warrants into the right to receive $0.02 per whole Public Warrant, payable in cash. If the Warrant Agreement amendment is not approved, we will liquidate the Public Warrants and they will expire worthless.

 

Sentinel Management Holdings, LLC (the “Sponsor”) has agreed to forfeit 90% of the 8,550,000 Founder Shares (as defined below) held by it and all of the 5,933,333 private placement warrants that it purchased at the time of our initial public offering in a private placement (the “Private Placement Warrants”) for no consideration because we were unable to consummate an initial business combination by the November 7, 2019 deadline under our Charter.

 

Deferred Discount

 

In accordance with the terms of the underwriting agreement entered into in connection with our initial public offering, the underwriters forfeited any rights or claims to the deferred underwriting commission because we were unable to consummate an initial business combination by the November 7, 2019 deadline under our Charter.

 

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Promissory Note

 

In addition, in accordance with the terms of the convertible promissory note, the unpaid principal of $999,640 became due on November 7, 2019. We and our Sponsor are currently evaluating the treatment of the convertible promissory note.

 

Results of Operations

 

We have not generated any revenues to date, and we will not be generating any operating revenues until the closing and completion of our initial business combination. Our entire activity up to September 30, 2019 was related to our company’s formation, the initial public offering, and since the closing of the initial public offering, a search for a business combination candidate.

 

For the three months ended September 30, 2019, we had net income of $2,432,480, which consisted of $(780,573) of general and administrative expenses and $1,756,104 of investment income on the trust account. During the three months ended September 30, 2019, general and administrative expense include an adjustment for legal fees of approximately $950,000 related to the termination of the Strike agreement. For the three months ended September 30, 2018, we had net income of $604,651, which consisted of $957,741 of general administrative expenses, offset by $1,562,392 of investment income on the trust account.

 

For the nine months ended September 30, 2019, we had net income of $2,937,308, which consisted of $3,233,293 of general and administrative expenses, offset by $6,274,798 of investment income on the trust account. For the nine months ended September 30, 2018, we had net income of $2,684,370, which consisted of $1,272,615 of general administrative expenses, offset by $3,956,985 of investment income on the trust account.

 

Liquidity and Capital Resources

 

Until the consummation of the initial public offering, our only source of liquidity was an initial sale of the Founder Shares to the Sponsor, and the proceeds of loans and advances from our Sponsor in the amount of $115,236. Upon the closing of the initial public offering, we repaid our Sponsor $115,236 in settlement of the outstanding loan and advances.

 

On November 7, 2017, we consummated our initial public offering of 30,000,000 units at a price of $10.00 per unit generating gross proceeds of $300,000,000 before underwriting discounts and expenses. On November 7, 2017, simultaneously with the consummation of our initial public offering, we completed the private sale of 5,333,333 private placement warrants at a purchase price of $1.50 per private placement warrant to our Sponsor, generating gross proceeds of approximately $8,000,000. In connection with the initial public offering, the underwriters were granted an option to purchase up to 4,500,00 over-allotment units. On November 9, 2017, we consummated the closing of the sale of 4,500,000 additional units upon receiving notice of the underwriters’ election to fully exercise their over-allotment option, generating additional gross proceeds of approximately $45,000,000. Simultaneously with the exercise of the over-allotment option, we consummated the private sale of an additional 600,000 private placement warrants to our Sponsor, generating gross proceeds of approximately $900,000.

 

An aggregate of $345,000,000 of the net proceeds from the initial public offering (including the over-allotment units) and the private placements with our Sponsor was deposited in the trust account. The $345,000,000 of net proceeds held in the trust account includes $12,075,000 of deferred underwriting discounts and commissions that would have been released to the underwriters of the initial public offering upon completion of our initial business combination. Of the gross proceeds from the initial public offering that were not deposited in the trust account, $6,900,000 was used to pay underwriting discounts and commissions in the initial public offering, $115,236 was used to repay loans and advances from our Sponsor, and the balance was reserved to pay accrued offering and formation costs, business, legal and accounting due diligence expenses on prospective acquisitions and continuing general and administrative expenses.

 

We presently have no revenue; our net income was $2,937,308 and $2,684,370 for the nine months ended September 30, 2019 and 2018, respectively, and consists primarily of administrative fees, professional fees and costs related to our search for a business combination offset by $6,274,798 of investment income on the trust account. Through September 30, 2019, our liquidity needs were satisfied through receipt of approximately $1,000,000 held outside of the trust account from the sale of units upon the closing of our initial public offering. In addition, on March 1, 2019, the Company issued a convertible promissory note in the amount of up to $1,500,000 with the Sponsor to fund the Company’s ongoing expenses. In the future, a portion of interest income on the funds held in the trust account may be released to us to pay tax obligations.

 

In addition, in order to finance transaction costs in connection with an intended initial business combination, our Sponsor or an affiliate of our Sponsor or certain of our officers and directors will loan us funds as may be required. If we complete our initial business combination, we would repay such loaned amounts. In the event that our initial business combination does not close, we may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds from our trust account would be used for such repayment. On March 1, 2019, we issued a convertible promissory note in the amount of up to $1,500,000 to our Sponsor to fund our ongoing expenses, which is convertible into warrants of the post-business combination entity to purchase shares, at a price of $1.50 per warrant at the option of the lender. Such warrants are identical to the private placement warrants. We do not expect to seek loans from parties other than our Sponsor or an affiliate of our Sponsor as we do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in our trust account. As of September 30, 2019, we have drawn $999,640 on the convertible promissory note.

 

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Liquidation and Going Concern

 

Our Charter and the prospectus that we filed in connection with our initial public offering provided that we had 24 months after the closing of our initial public offering, or until November 7, 2019, to complete a business combination. We were not able to consummate a business combination prior to the November 7, 2019 deadline under our Charter. As a result, we will (i) cease all operations except for the purpose of winding up; (ii) as promptly as reasonably possible, but not more than ten business days thereafter, redeem the Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account, including interest earned on the funds held in the trust account and not previously released to us to pay our income taxes (less up to $100,000 of such net interest to pay dissolution expenses), divided by the number of then outstanding Public Shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as  reasonably possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. Our Sponsor and our officers and directors have entered into a letter agreement with us, pursuant to which they have agreed to waive their rights to liquidating distributions from the trust account with respect to any shares of our Class B common stock (the “Founder Shares”) held by them if we fail to complete the initial business combination by November 7, 2019. However, if our Sponsor or any our directors, officers or affiliates acquire shares of Class A common stock in or after our initial public offering, they will be entitled to liquidating distributions from the trust account with respect to such shares if we fail to complete the initial business combination within the prescribed time period.

 

In the event of liquidation, it is possible that the per share value of the residual assets remaining available for distribution (including assets in the trust account we established in connection with our initial public offering) will be less than the initial public offering price per unit in our initial public offering.

 

This mandatory liquidation and subsequent dissolution raises substantial doubt about our ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should we be required to liquidate after November 7, 2019. As of September 30, 2019, we do not have sufficient liquidity to meet its future obligations. Our Sponsor will financially support us sufficient for us to satisfy our obligations as they come due.

 

In connection with our assessment of going concern considerations in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Updated (“ASU”) 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, we determined that the mandatory liquidation and subsequent dissolution raises substantial doubt about our ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should we be required to liquidate after the end of business on November 7, 2019.

  

As of September 30, 2019, we do not have sufficient liquidity to meet our future obligations. As of September 30, 2019, we had a working capital deficit of approximately $6.6 million, current liabilities of $6.8 million and had cash of approximately $180,000.

  

In addition to the convertible promissory note payable issued on March 1, 2019 (see Note 4 to our condensed interim financial statements), we will need to raise additional capital through loans or additional investments from our stockholders, officers, directors, or third parties. Our Sponsor will financially support us sufficient for us to satisfy our obligations as they come due until the earlier of the consummation of a business combination or up to the mandatory liquidation as stipulated in our Charter.

 

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Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

 

Common stock subject to possible redemption

 

We account for our common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Common stock subject to mandatory redemption (if any) is classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. Our common stock features certain redemption rights that is considered to be outside of our control and subject to occurrence of uncertain future events. Accordingly, at September 30, 2019 and December 31, 2018, the shares of our Class A common stock that are subject to possible redemption are presented as temporary equity, outside of the stockholders’ equity section of our Balance Sheets.

 

Net Income (Loss) Per Share of Common Stock

 

Net income (loss) per share of common stock is computed by dividing net income (loss) applicable to common shares by the weighted average number of shares outstanding for the period. The Company has not considered the effect of the warrants sold in the initial public offering and the private placement to purchase an aggregate of 17,433,333 shares of Class A common stock in the calculation of diluted income per share, since their inclusion would be anti-dilutive under the Treasury Stock method. As a result, diluted net income (loss) per share of common stock is the same as basic net income (loss) per share of common stock for the periods as presented.

 

The Company’s condensed interim statements of operations includes a presentation of net income (loss) per share for common stock subject to redemption in a manner similar to the two-class method. Net income per share of common stock, basic and diluted for shares of Class A common stock is calculated by dividing the interest income earned on the Trust Account, less applicable income tax expense, by the weighted average number of shares of Class A common stock outstanding for the periods. Net loss per common stock, basic and diluted for shares of Class B common stock is calculated by dividing net income, less income attributable to the shares of Class B common stock, by the weighted average number of shares of Class B common stock outstanding for the periods.

 

Recent Accounting Pronouncements

 

The Company’s management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our financial statements.

 

JOBS Act

 

The Jumpstart Our Business Startups Act (the “JOBS Act”) contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We qualify as an “emerging growth company” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies. We elected to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

 

Additionally, we are in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company”, we choose to rely on such exemptions we may not be required to, among other things, (i) provide an independent registered public accounting firm’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the independent registered public accounting firm’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our Chief Executive Officer’s compensation to median employee compensation. These exemptions are applicable to us for a period of five years from the date of completion of our initial public offering or until we are no longer an “emerging growth company,” whichever is earlier.

 

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Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements as of September 30, 2019 and December 31, 2018.

 

Contractual Obligations

 

We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an administrative agreement to pay monthly recurring expenses of up to $10,000 for office space, administrative and support services to our Sponsor. The agreement terminates upon the earlier of the completion of a business combination or our liquidation.

 

The underwriters were entitled to deferred underwriting commissions of $12,075,000. The deferred underwriting commissions was payable to the underwriters from the amounts held in the trust account solely in the event that we completed an initial business combination, subject to the terms of the underwriting agreement. The underwriters were not entitled to any interest accrued on the deferred underwriting commissions. Because we were unable to consummate an initial business combination by the November 7, 2019 deadline under our Charter, the underwriters forfeited any right or claim to the deferred underwriting commission.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

As a “smaller reporting company,” we are not required to provide disclosure pursuant to this Item.

 

Item 4. Controls and Procedures.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (the “SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were effective.

 

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 5. Other Information.

 

On November 6, 2019, our board of directors determined to delist our securities from The Nasdaq Stock Market LLC (“Nasdaq”) in connection with its decision to liquidate the trust account and redeem all of our outstanding Public Shares because we were unable to complete our initial business combination by the November 7, 2019 deadline under our Charter. On November 7, 2019, Nasdaq filed a Form 25 with the SEC to remove our securities from listing and registration on Nasdaq.

 

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PART II

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the period ended December 31, 2018.

 

Item 6. Exhibits, Financial Statement Schedules

 

EXHIBIT INDEX

 

Exhibit Number   Description
     
31.1   Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).
     
31.2   Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).
     
32.1   Certification of the Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
     
32.2   Certification of the Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Calculation Linkbase
     
101.LAB   XBRL Taxonomy Label Linkbase
     
101.PRE   XBRL Definition Linkbase Document
     
101.DEF   XBRL Definition Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

November 12, 2019

 

  SENTINEL ENERGY SERVICES INC.
     
  By: /s/ Krishna Shivram
    Krishna Shivram
    Chief Executive Officer and Director
    (Principal Executive Officer)
     
  By: /s/ Gerald Cimador
    Gerald Cimador
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

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