UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
For the quarterly period ended
OR
For the transition period from ________ to ________.
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
| | ||
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Units, each consisting of one Ordinary Share, one Right and one Warrant | ESSCU | The Nasdaq Stock Market LLC | ||
| The | ||||
| Rights, exchangeable into one-tenth of one Ordinary Share | ESSCR | The Nasdaq Stock Market LLC | ||
| Warrants, each exercisable for one-half of one Ordinary Share, each whole Ordinary Share exercisable for $11.50 per share | ESSCW | The Nasdaq Stock Market LLC |
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.
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).
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 | ☐ |
| ☒ | 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
As of December 6, 2021
there were
East Stone Acquisition Corporation
Quarterly Report on Form 10-Q
TABLE OF CONTENTS
i
EXPLANATORY NOTE
References throughout this Amendment No. 1 to the Quarterly Report on Form 10-Q to “we,” “us,” the “Company” or “our company” are to East Stone Acquisition Corporation, unless the context otherwise indicates.
This Amendment No. 1 (“Amendment No. 1”) to the Quarterly Report on Form 10-Q/A amends the Quarterly Report on Form 10-Q of the Company as of and for the period ended September 30, 2021, as filed with the Securities and Exchange Commission (“SEC”) on November 15, 2021 (the “Original Filing”).
The Company has re-evaluated the Company’s application of ASC 480-10-S99-3A to its accounting classification of the redeemable ordinary shares, no par value (the “Public Shares”), issued as part of the units sold in the Company’s initial public offering (the “IPO”) on February 24, 2020. Historically, a portion of the Public Shares was classified as permanent equity to maintain stockholders’ equity greater than $5 million on the basis that the Company will not redeem its Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001, as described in the Company’s Amended and Restated Memorandum and Articles of Association (the “Charter”). Pursuant to such re-evaluation, the Company’s management has determined that the Public Shares include certain provisions that require classification of all of the Public Shares as temporary equity regardless of the net tangible assets redemption limitation contained in the Charter.
Therefore, on November 23, 2021, the Company’s management and the audit committee of the Company’s board of directors concluded that (i) the Company’s audited financial statements as of December 31, 2020 in the Company’s Transition Report on Form 10-KT filed with the SEC on June 9, 2021, (ii) the Company’s unaudited financial statements as of March 31, 2021 contained in the Company’s Quarterly Report on Form 10-Q filed with the SEC on June 11, 2021, (iii) the Company’s unaudited financial statements as of June 30, 2021 contained in the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 16, 2021, and (iv) the Company’s unaudited financial statements as of September 30, 2021 in the Original Filing (collectively, the “Affected Periods”), should be restated to report all Public Shares as temporary equity and should no longer be relied upon. As such, the Company have restated its financial statements for the Affected Periods in this Amendment No. 1 to its Transaction Report on Form 10-KT/A (“Form 10-KT/A”) and this Amendment No. 1.
The restatement does not have an impact on its cash position and cash held in the trust account established in connection with the IPO (the “Trust Account”).
The Company’s management has concluded that a material weakness remains in the Company’s internal control over financial reporting and that the Company’s disclosure controls and procedures were not effective. The Company’s remediation plan with respect to such material weakness is described in more detail in this Amendment No. 1.
We are filing this Amendment No. 1 to amend and restate the Original Filing with modification as necessary to reflect the restatements. The following items have been amended to reflect the restatements:
Part I, Item 1, Financial Statements,
Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,
Part I, Item 4, Controls and Procedures, and
Part II, Item 1A, Risk Factors.
This Amendment No. 1 is also being amended to update for events related to the extension of the date by which Company has to consummate a Business Combination from November 24, 2021 to February 24, 2022. In addition, the Company’s Chief Executive Officer and Chief Financial Officer have provided new certifications dated as of the date of this filing in connection with this Amendment No. 1 (Exhibits 31.1, 31.2, 32.1 and 32.2).
Except as described above, no other information included in the Original Filing is being amended or updated by this Amendment No. 1 and, other than as described herein, this Amendment No. 1 does not purport to reflect any information or events subsequent to the Original Filing. This Amendment No. 1 continues to describe the conditions as of the date of the Original Filing and, except as expressly contained herein, we have not updated, modified or supplemented the disclosures contained in the Original Filing. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and with our filings with the SEC subsequent to the Original Filing.
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EAST STONE ACQUISITION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | (As Restated – See Note 2) | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Cash and investments held in Trust Account | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accrued expenses | $ | $ | ||||||
| Promissory note payable – related party | ||||||||
| Extension loans – related party | ||||||||
| Advance from related parties | ||||||||
| Total current liabilities | ||||||||
| Deferred underwriting commission | ||||||||
| Derivative warrant liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Ordinary shares subject to possible redemption, par value, | ||||||||
| Shareholders’ Deficit | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
EAST STONE ACQUISITION CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (As Restated – See Note 2) | ||||||||||||||||
| Operating costs | $ | $ | $ | $ | ||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative warrant liabilities | ( | ) | ||||||||||||||
| Interest earned on investments held in Trust Account | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Weighted average shares outstanding of redeemable ordinary shares | ||||||||||||||||
| Basic and diluted net (loss) income per ordinary share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Weighted average shares outstanding of non-redeemable ordinary shares | ||||||||||||||||
| Basic and diluted net (loss) income per ordinary share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
EAST STONE ACQUISITION CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 2021
| Ordinary Shares | Accumulated | Total Shareholders’ | ||||||||||||||
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Balance – December 31, 2020 (restated – See Note 2) | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||
| Balance – September 30, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||||||
NINE MONTHS ENDED SEPTEMBER 30, 2020
| Ordinary Shares | Retained earnings (Accumulated | Total Shareholders’ Equity | ||||||||||||||
| Shares | Amount | Deficit) | (Deficit) | |||||||||||||
| Balance – December 31, 2019 | $ | $ | ( | ) | $ | |||||||||||
| Sales of | — | |||||||||||||||
| Sales of | ||||||||||||||||
| Excess of cash received over fair value of private units | — | ( | ) | ( | ) | |||||||||||
| Issuance of Representative Shares and Warrants in connection with this sale of Units | ||||||||||||||||
| Accretion of ordinary shares to redemption value | — | ( | ) | ( | ) | |||||||||||
| Net income | — | |||||||||||||||
| Balance – September 30, 2020 | $ | $ | ( | ) | $ | ( | ) | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
EAST STONE ACQUISITION CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2021
| Ordinary Shares | Accumulated | Total Shareholders’ | ||||||||||||||
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Balance – June 30, 2021 (restated – See Note 2) | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||
| Balance – September 30, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||||||
THREE MONTHS ENDED SEPTEMBER 30, 2020
| Ordinary Shares | Accumulated | Total Shareholders’ | ||||||||||||||
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Balance – June 30, 2020 (restated – See Note 2) | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||
| Balance –September 30, 2020 (restated – See Note 2) | $ | $ | ( | ) | $ | ( | ) | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
EAST STONE ACQUISITION CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the nine months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Change in fair value of derivative warrant liabilities | ( | ) | ||||||
| Interest earned on investments held in Trust Account | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities | ||||||||
| Advance from related party | ( | ) | ||||||
| Accrued expenses | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Investment of cash into Trust Account | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Advance from related parties | ( | ) | ||||||
| Repayment of promissory note payable - related party | ( | ) | ||||||
| Proceeds from extension loans - related party | ||||||||
| Proceeds from sale of | ||||||||
| Proceeds from sale of | ||||||||
| Offering cost | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net Change in Cash | ||||||||
Cash - Beginning of period | ||||||||
| Cash - End of period | $ | $ | ||||||
| Non-Cash Investing and Financing Activities | ||||||||
| Accretion of ordinary shares to redemption value | $ | $ | ||||||
| Deferred underwriting commissions charged to equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
EAST STONE ACQUISITION CORPORATION
NOTES TO RESTATED UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Organization and General
East Stone Acquisition Corporation (“East Stone” or the “Company”) is a blank check company incorporated in the British Virgin Islands on August 9, 2018. The Company was incorporated for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation with, purchasing all or substantially all of the assets of, entering into contractual arrangements with, or engaging in any other similar business combination with one or more businesses or entities (the “Business Combination”). Although the Company is not limited to a particular industry or geographic region for purposes of consummating a Business Combination, the Company intends to focus on businesses primarily operating in the financial services industry or businesses providing technological services to the financial industry, commonly known as “fintech businesses” in the regions of North America and Asia-Pacific. The Company is an emerging growth company and, as such, the Company is subject to all of the risks associated with emerging growth companies.
As of September 30, 2021, the Company had not yet commenced any operations. All activity through September 30, 2021 relates to the Company’s formation, the initial public offering (“Initial Public Offering” or “IPO”), which is described below, and since the closing of IPO, the search for a target for its Business Combination and the potential acquisition, as more fully described below. The Company will not generate any operating revenues until after the completion of its initial Business Combination, at the earliest. The Company generates income in the form of interest income from the proceeds derived from the IPO and placed in Trust Account (as defined below) as described below.
Initial Public Offering
The registration statement
for the Company’s IPO was declared effective on February 19, 2020 (“Effective Date”). On February 24, 2020, the Company
consummated the IPO of
Simultaneously with the closing
of the IPO, the Company consummated certain private placements of an aggregate of
In connection with the Company’s
IPO, the Company issued an aggregate of
At the closing of the IPO,
the Company additionally granted to I-Bankers and its designee a total of
Total offering costs amounted
to $
6
Trust Account
Following the closing of the
IPO,
Business Combination
The Company’s management
has broad discretion with respect to the specific application of the net proceeds of the IPO and the sale of the Private Units, although
substantially all of the net proceeds are intended to be applied generally towards consummating a Business Combination. The Company’s
initial Business Combination must be with one or more operating businesses or assets with a fair market value equal to at least
The Company will proceed with
a Business Combination if the Company has net tangible assets of at least $
Notwithstanding the foregoing,
if the Company seeks shareholder approval of the Business Combination and the Company does not conduct redemptions pursuant to the tender
offer rules, the Company’s Amended and Restated Memorandum and Articles of Association provides that a public shareholder, together
with any affiliate of such shareholder or any other person with whom such shareholder is acting in concert or as a “group”
(as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted
from redeeming its shares with respect to more than an aggregate of
The Sponsor and the other
initial shareholders (collectively, “initial shareholders”) have agreed (A) to vote their Founder Shares, shares underlying
the Private Units (“private shares”) and any Public Shares held by them in favor of any proposed initial Business Combination,
(B) not to propose any amendment to the Company’s memorandum and articles of association (i) to modify the substance or timing of
the Company’s obligation to redeem
7
The Company had 15 months
from the closing of the IPO (or until May 24, 2021) to consummate a Business Combination (“Business Combination Date”). However,
if the Company is not able to consummate a Business Combination on or before the Business Combination Date, the Company, by resolutions
of the board of the Company, at the request of the initial shareholders, may extend the period of time to consummate a Business Combination
up to two times, each by an additional three months (for a total of up to 21 months to complete a Business Combination) (the “Combination
Period”), subject to the Company’s initial shareholders depositing additional funds into the Trust Account as set out below.
Pursuant to the terms of the Company’s Amended and Restated Memorandum and Articles of Association and the Investment Management
Trust Agreement entered into between the Company and Continental Stock Transfer & Trust Company, in order for the time available for
the Company to consummate a Business Combination to be extended, the Company’s initial shareholders and their affiliates or designees,
upon five days advance notice prior to the applicable deadline, must deposit into the Trust Account up to $
On May 21, 2021, an aggregate
of $
On November 15, 2021,
the Company filed an amendment to the definitive proxy statement to report the terms of the Backstop Arrangements described above. On
November 24, 2021, the Company held a special meeting of shareholders and approved to amend the Company’s amended and restated
memorandum and articles of association to extend the date by which the Company has to consummate an initial business combination from
November 24, 2021 to February 24, 2022. In connection with the approval of the extension, shareholders elected to redeem an aggregate
of
If the Company is unable to complete a Business Combination by November 24, 2021 and if the Company fails to receive an extension requested by the Company’s initial shareholders by or before November 24, 2021, the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but no more than five business days thereafter, redeem 100% of the outstanding Public Shares which redemption will completely extinguish public shareholders’ rights as shareholders (including the right to receive further liquidation distributions, if any), subject to applicable law and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining holders of ordinary shares and the Company’s board of directors, proceed to commence a voluntary liquidation and thereby a formal dissolution of the Company, subject (in the case of (ii) and (iii) above) to its obligations to provide for claims of creditors and the requirements of applicable law.
In connection with the redemption
of
The initial shareholders have agreed to waive their liquidation rights with respect to the Founder Shares and private shares if the Company fails to complete a Business Combination within the Combination Period. However, if the initial shareholders acquire Public Shares in or after the IPO, they will be entitled to liquidating distributions from the Trust Account with respect to such Public Shares if the Company fails to complete a Business Combination within the Combination Period.
8
In the event of such distribution,
it is possible that
Announcement of Business Combination Agreement
On February 15, 2021, the Company entered into a letter termination agreement with Ufin Holdings Limited, a Cayman Islands exempted company (“Ufin”), Ufin Tek Limited, a British Virgin Islands business company (“Ufin Pubco”), Ufin Mergerco Limited, a British Virgin Islands business company and a wholly-owned subsidiary of Pubco (“Ufin Merger Sub”), Xiaoma (Sherman) Lu, an individual, in the capacity as the Purchaser Representative thereunder, Yingkui Liu, in the capacity as the Seller Representative thereunder, and Ufin Investment Limited, a British Virgin Islands business company and the sole holder of Ufin’s outstanding capital shares (the “Ufin Seller”, together with the Company, Ufin, Ufin Pubco, Ufin Merger Sub, Sherman Xiaoma Lu, Yingkui Liu and Ufin Seller, the “Ufin Parties”) for a proposed business combination, as previously disclosed in the Current Report on Form 8-K of The Company, on November 9, 2020, The Company entered into that certain Amended and Restated Business Combination Agreement (the “Ufin Agreement”). In accordance with such letter agreement, upon execution and delivery of the letter agreement all of the rights and obligations of the Ufin Parties under the Ufin Agreement ceased (except for certain obligations related to publicity, confidentiality, fees and expenses, trust fund waiver, termination and general provisions) without any liability on the part of any party or any of their respective representatives.
On February 16, 2021, the Company entered into a Business Combination Agreement (the “Business Combination Agreement”) with Navy Sail International Limited, a British Virgin Islands company (“Navy Sail”), as Purchaser Representative, JHD Technologies Limited, a Cayman Islands company (“Pubco”), Yellow River MergerCo Limited, a British Virgin Islands company and a wholly-owned subsidiary of Pubco (“Merger Sub”), JHD Holdings (Cayman) Limited, a Cayman Islands company (“JHD”), Yellow River (Cayman) Limited, a Cayman Islands company (the “Primary Seller”), and each of the holders of JHD’s capital shares that become parties to the Business Combination Agreement after the date thereof by executing and delivering to the Purchaser, Pubco and JHD a joinder agreement (each individually, a “Seller”, and collectively with the Primary Seller, the “Sellers”), and, Double Ventures Holdings Limited, a British Virgin Islands business company and the Company’s sponsor (the “Sponsor”), solely with respect to Sections 10.3 and Articles XII and XIII thereof, as applicable.
Pursuant to the Business Combination Agreement, subject to the terms and conditions set forth therein, at the closing of the transactions contemplated by the Business Combination Agreement (the “Closing”), (a) Merger Sub will merge with and into the Company, with the Company continuing as the surviving entity (the “Merger”), as a result of which, (1) the Company shall become a wholly-owned subsidiary of Pubco and (ii) each issued and outstanding security of the Company immediately prior to the Effective Time (as defined in the Business Combination Agreement) shall no longer be outstanding and shall automatically be cancelled, in exchange for the right of the holder thereof to receive a substantially equivalent security of Pubco, and (b) Pubco will acquire all of the issued and outstanding capital shares of JHD from the Sellers in exchange for ordinary shares of Pubco (the “Share Exchange” and together with the Merger and the other transactions contemplated by the Business Combination Agreement, the “Transactions”).
9
The parties agreed that at
or prior to the Closing, Pubco, the Seller and Continental Stock Transfer & Trust Company (or another mutually acceptable escrow agent),
as escrow agent (the “Escrow Agent”), will enter into an Escrow Agreement, effective as of the Closing, in form and substance
reasonably satisfactory to the Company and JHD (the “Escrow Agreement” ), pursuant to which Pubco shall cause to be delivered
to the Escrow Agent a number of Exchange Shares (each valued at the Redemption Price) equal in value to ten percent (
If and when earned, the Sellers shall be entitled to receive from Pubco, as additional consideration for the purchase of the Purchased Shares, the Earned Escrow Shares together with the Other Escrow Property. To the extent that the amount of the Earned Escrowed Shares is less than the number of Escrow Share Number (as such terms are defined below), then the amount of Escrow Shares equal to such difference will be forfeited by the Sellers and released to Pubco for cancellation along with any accrued but unpaid dividends payable in respect of such Escrow Shares.
For the purposes of the calculating the Earned Earnout Shares, the following definitions shall apply:
“Earned Escrow Shares” means the result of the following equation: Escrow Share Number * (Revenue / Earnout Target).
“Earnout Target”
means an amount equal to One Hundred Forty Million U.S. Dollars ($
“Earnout Year” means the period commencing on the first day of the first fiscal quarter following Closing (but in any event no earlier than October 1, 2021) and ending on the twelve (12) month anniversary of such date.
“Escrow Share Number” means the number of Escrow Shares.
“Revenue” means the consolidated revenue of Pubco and its subsidiaries for the Earnout Year, as set forth in Pubco’s filings with the SEC; provided that in no event shall the Revenue exceed the Earnout Target.
The obligations of the parties to consummate the Transactions are subject to various conditions, including the following mutual conditions of the parties unless waived: (i) the approval of the Business Combination Agreement and the Transactions and related matters by the requisite vote of the Company’s shareholders; (ii) expiration of any waiting period under applicable antitrust laws; (iii) no law or order preventing or prohibiting the Transactions; (iv) the Company having at least $5,000,001 in net tangible assets as of the Closing, after giving effect to the completion of the Redemption and any private placement financing;(v) the effectiveness of the Registration Statement; (vi) amendment by the shareholders of Pubco of Pubco’s memorandum and articles of association; (vii) receipt by JHD and the Company of evidence reasonably satisfactory to each such party that Pubco qualifies as a foreign private issuer; (viii) the election or appointment of members to Pubco’s post-closing board of directors designated by JHD and the Company; and (ix) the Pubco securities have been approved for listing on Nasdaq.
In addition, unless waived by JHD, the obligations of JHD, Pubco, Merger Sub and the Sellers to consummate the Transactions are subject to the satisfaction of the following Closing conditions, in addition to customary certificates and other closing deliveries: (i) the representations and warranties of the Company being true and correct on and as of the Closing (subject to material adverse effect); (ii) the Company having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Business Combination Agreement required to be performed or complied with by it on or prior the date of the Closing; (iii) absence of any material adverse effect with respect to the Company since the date of the Business Combination Agreement which is continuing and uncured; (iv) receipt by JHD and Pubco of a Registration Rights Agreement, providing customary registration rights to the Seller with respect to the portion of the Exchange Shares delivered to the Seller at the Closing and any Earnout Escrow Shares that are released from escrow to the Sellers (the “Seller Registration Rights Agreement”); and (v) the Company having delivered to the Sellers and JHD, evidence that is reasonably satisfactory to the Seller Representative of the amount of cash and cash equivalents, including funds remaining in the trust account (after giving effect to the completion and payment of the Redemption) and the proceeds of any PIPE investment.
10
Unless waived by the Company, the obligations of the Company to consummate the Transactions are subject to the satisfaction of the following Closing conditions, in addition to customary certificates and other closing deliveries: (i) the representations and warranties of JHD, Pubco and the Sellers being true and correct on and as of the Closing (subject to Material Adverse Effect); (ii) JHD, Pubco, Merger Sub and Seller having performed in all material respects the respective obligations and complied in all material respects with their respective covenants and agreements under the Business Combination Agreement required to be performed or complied with on or prior the date of the Closing; (iii) absence of any Material Adverse Effect with respect to JHD or Pubco since the date of the Business Combination Agreement which is continuing and uncured; (iv) receipt by the Company of the Founders Registration Rights Agreement Amendment, each executed by Pubco; (v) receipt by the Company of share certificates and other documents evidencing the transfer of the Purchased Shares to Pubco; and (vi) receipt by the Company of the evidence of the termination of any outstanding options, warrants or other convertible securities of JHD, without any consideration or liability therefor.
The Parties agree that after
taking into consideration the Redemption, the Trust Account proceeds and the gross proceeds of any private placement, the amount of cash
available to the Company should amount to One Hundred and Ten Million Dollars ($
On September 13, 2021, the parties thereto the Business Combination Agreement entered into that certain Amended and Restated Business Combination Agreement (the “Amended Agreement”), which amended and restated the Business Combination Agreement in its entirety and provides, among other things, that (a) a revised Amended and Restated Memorandum and Articles of Association of Pubco that, among other things, set forth the proposed authorized share capital of Pubco following the consummation of the Business Combination, be appended to the Business Combination Agreement; (b) the principal amount of certain convertible notes of JHD which are convertible into shares of Pubco (the “2021 Convertible Notes”) and the aggregate cash proceeds of any future equity investments in JHD during the interim period that are convertible into shares of Pubco (the “Equity Investment”) will be counted towards the Company’s minimum cash condition under the Business Combination Agreement, consistent with the characterization of these instruments as a private equity investment to purchase ordinary shares of the Company or, after the Closing, ordinary shares of Pubco, and (c) the ordinary shares of Pubco received by the Sellers, the holders of the 2021 Convertible Notes (upon conversion of such promissory notes) and the holders of any future Equity Investment will be registered for resale, along with the ordinary shares of Pubco issued to the Company’s public shareholders. The Amended Agreement also provides that the ordinary shares of Pubco to be issued to the holders of the 2021 Convertible Notes and any future Equity Instrument are not part of the Exchange Consideration being distributed to the Sellers under the Business Combination Agreement.
On October 7, 2021, the parties
to the Amended Agreement entered into that certain Second Amended and Restated Business Combination Agreement, pursuant to which the Amended
Agreement was further amended and restated in its entirety to, among other things, (i) memorialize an agreement among the parties that
the vested options in the Primary Seller previously issued to senior executives and directors of the Primary Seller would be exchanged
for substitute options in Pubco exercisable into a pool of the ordinary shares, $
On February 23, 2021, the
Company issued an unsecured promissory note in the amount of up to $
On May 21, 2021 and August
20, 2021, an aggregate of $
On September 30, 2021, JHD
and the Company signed a promissory note in which Yellow River Asset Management, an affiliate of JHD (“Yellow River”), agreed
to loan to the Company a sum of $
Liquidity and Going Concern
The Company has principally
financed its operations from inception on August 9, 2018 using proceeds from the sale of its equity securities to its initial shareholders
prior to the IPO and from the sale of the Placement Units and the IPO that were placed in an account outside of the Trust Account for
working capital purposes. As of September 30, 2021, the Company had $
The Company intends to use
substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account (less
taxes payable and deferred underwriting commissions) to complete its initial Business Combination. To the extent necessary, the Company’s
Sponsor, officers and directors or their respective affiliates may, but are not obligated to, loan the Company funds as may be required
(the “Working Capital Loans”). As of September 30, 2021, Mr. Chunyi (Charlie) Hao, the Company’s Chairman of the Board
and Chief Financial Officer, has loaned the Company $
11
On May 21, 2021 and August 20,
2021, an aggregate of $
On November 5, 2021, the Company filed with the SEC its definitive proxy statement on Schedule 14A for a special meeting of shareholders to be held on November 24, 2021, which includes a proposal to amend the Company’s Amended and Restated Memorandum and Articles of Association to extend the date by which Company has to consummate a Business Combination from November 24, 2021 to February 24, 2022. On November 24, 2021, the shareholders approved the Company extension to February 24, 2022 by approving the amendment of the Company’s Amended and Restated Memorandum and Articles of Association.
If the Company completes a
Business Combination, the Company would repay the Working Capital Loans. In the event that a Business Combination does not close, the
Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans, but no proceeds held in the Trust
Account would be used to repay the Working Capital Loans. Such Working Capital Loans would be evidenced by promissory notes. The notes
would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, or converted
upon consummation of a Business Combination into additional Private Units at a price of $
In order to finance transaction
costs in connection with an initial Business Combination, the initial shareholders, the Company’s officers and directors or their
affiliates may, but are not obligated to, loan the Company funds as may be required. If the Company consummates its initial Business Combination,
the Company would repay such loaned amounts. In the event that the initial Business Combination does not close, the Company may use the
fund held outside the Trust Account to repay such loaned amounts but no proceeds from the Trust Account would be used to repay such loaned
amounts.
Until the consummation of a Business Combination, the Company will be using funds held outside of the Trust Account for identifying and evaluating target businesses, performing business due diligence on prospective target businesses, traveling to and from the offices, plants or similar locations of prospective target businesses or their representatives, reviewing corporate documents and material agreements of prospective target businesses, structuring, negotiating and completing a Business Combination.
If the Company’s estimates of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, the Company may have insufficient funds available to operate its business prior to a Business Combination. Moreover, the Company may need to obtain additional financing either to complete a Business Combination or because it becomes obligated to redeem a significant number of its Public Shares upon completion of a Business Combination, in which case the Company may issue additional securities or incur debt in connection with such Business Combination.
On November 24, 2021,
the Company called a shareholders meeting to approve the extension from November 24, 2021 to February 24, 2022. As the result of the
extension into February 24, 2022, the scheduled liquidation date of the Company, the Company will have close to three months to complete
Business Combination. With such extension approved, it is not guaranteed the Company may consummate a Business Combination by February
24, 2022. The liquidity condition and date for mandatory liquidation raise substantial doubt about the Company’s ability to continue
as a going concern through February 24, 2022, the scheduled liquidation date of the Company. These financial statements do not include
any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should
the Company be unable to continue as a going concern. On May 21, 2021 and August 20, 2021, the Company extended the date by
which the Company has to consummate a Business Combination from May 24, 2021 to August 24, 2021, and from August 24, 2021 to November
24, 2021, respectively. On November 24, 2021, the Company held a special meeting of shareholders and approved to amend the Company’s
amended and restated memorandum and articles of association to extend the date by which the Company has to consummate an initial business
combination from November 24, 2021 to February 24, 2022. In connection with the approval of the extension, shareholders elected to redeem
an aggregate of
In connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that if the Company is unable to complete a Business Combination by November 24, 2021, and if a further extension to February 24, 2022 is not approved by the Company’s shareholders, then the Company will cease all operations except for the purpose of liquidating. The date for mandatory liquidation and subsequent dissolution raise 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 November 24, 2021.
NOTE 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In connection with the
preparation of the Company’s financial statements as of September 30, 2021, the Company concluded it should revise its financial
statements to classify all Public Shares in temporary equity. In accordance with the SEC and its staff’s guidance on redeemable
equity instruments, ASC 480, paragraph 10-S99, redemption provisions not solely within the control of the Company require ordinary shares
subject to redemption to be classified outside of permanent equity. Previously, the Company considered redeemable shares as part of permanent
equity to the extent that such shares would cause equity to be not less than $
12
As a result, management recorded a reclassification adjustment related to temporary equity and permanent equity. This resulted in an adjustment to the initial carrying value of the ordinary shares subject to possible redemption with the offset recorded to additional paid-in capital (to the extent available), accumulated deficit and ordinary shares.
In connection with the change in presentation for the ordinary shares subject to redemption, the Company also restated its income (loss) per ordinary share calculation to allocated net income (loss) evenly to ordinary shares and non-redeemable ordinary shares. This presentation contemplates a Business Combination as the most likely outcome, in which case, both classes of ordinary share pro rata in the income (loss) of the Company.
There has been no change in the Company’s total assets, liabilities or operating results.
The Company will present this restatement in a prospective manner in all future filings. Under this approach, the previously issued IPO Balance Sheet and Form 10-Qs will not be amended, but historical amounts presented in the current and future filings will be recast to be consistent with the current presentation, and an explanatory footnote will be provided. The impact of the restatement on the Company’s financial statements is reflected in the following table.
| - | September 30, 2020 |
| Balance Sheet as of September 30, 2020 | As Previously Reported in Form 10-Q | Adjustment | As Restated | |||||||||
| Ordinary shares subject to possible redemption | $ | $ | $ | |||||||||
| Ordinary shares | $ | $ | $ | |||||||||
| Retained earnings (Accumulated deficit) | $ | $ | ( | ) | $ | ( | ) | |||||
| Total Shareholders’ Equity (Deficit) | $ | $ | ( | ) | $ | |||||||
| - | September 30, 2020 |
Statements of Operations for the three months ended September 30, 2020 | As Previously Reported in Form 10-Q | Adjustment | As Restated | |||||||||
| Basic and diluted net income (loss) per ordinary share – redeemable shares | $ | $ | ( | ) | $ | ( | ) | |||||
| Basic and diluted net loss per ordinary share – non-redeemable shares | $ | ( | ) | $ | $ | ( | ) | |||||
| - | December 31, 2020 |
| Balance Sheet as of December 31, 2020 | As Previously Revised in
Form 10-KT On June 9, 2021 | Adjustment | As Restated | |||||||||
| Ordinary shares subject to possible redemption | $ | $ | $ | |||||||||
| Ordinary shares | $ | $ | ( | ) | $ | |||||||
| Accumulated deficit | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Total Shareholders’ Equity (Deficit) | $ | $ | ( | ) | $ | ( | ) | |||||
| - | March 31, 2021 |
| Balance Sheet as of March 31, 2021 | As Previously Reported in Form 10-Q | Adjustment | As Restated | |||||||||
| Ordinary shares subject to possible redemption | $ | $ | $ | |||||||||
| Ordinary shares | $ | $ | ( | ) | $ | |||||||
| Accumulated deficit | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Total Stockholders’ Equity (Deficit) | $ | $ | ( | ) | $ | ( | ) | |||||
| Statements of Operations For the three months ended March 31, 2021 | As Previously Reported in Form 10-Q | Adjustment | As Restated | |||||||||
| Basic and diluted net income (loss) per ordinary share – redeemable shares | $ | $ | ( | ) | $ | ( | ) | |||||
| Basic and diluted net loss per ordinary share – non-redeemable shares | $ | ( | ) | $ | $ | ( | ) | |||||
13
| - | June 30, 2021 |
| Balance Sheet as of June 30, 2021 | As Previously Reported in Form 10-Q | Adjustment | As Restated | |||||||||
| Ordinary shares subject to possible redemption | $ | $ | $ | |||||||||
| Ordinary shares | $ | $ | ( | ) | $ | |||||||
| Accumulated deficit | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Total Stockholders’ Equity (Deficit) | $ | $ | ( | ) | $ | ( | ) | |||||
Statements of Operations For the three months ended June 30, 2021 | As Previously Reported in Form 10-Q | Adjustment | As Restated | |||||||||
| Basic and diluted net income (loss) per ordinary share – redeemable shares | $ | $ | ( | ) | $ | ( | ) | |||||
| Basic and diluted net loss per ordinary share – non-redeemable shares | $ | ( | ) | $ | $ | ( | ) | |||||
Statements of Operations For the six months ended June 30, 2021 | As Previously Reported in Form 10-Q | Adjustment | As Restated | |||||||||
| Basic and diluted net income (loss) per ordinary share – redeemable shares | $ | $ | ( | ) | $ | ( | ) | |||||
| Basic and diluted net loss per ordinary share – non-redeemable shares | $ | ( | ) | $ | $ | ( | ) | |||||
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the SEC. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed, consolidated or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-KT for the year ended December 31, 2020 as filed with the SEC on June 9, 2021, which contains the audited financial statements and notes thereto, and with the Company’s Annual Report on Form 10-KT/A for the year ended December 31, 2020 as filed with SEC on December 6, 2021, which contains restatement of previously issued misstated financial statements and notes thereto. The interim results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any future interim periods.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany balances and transactions have been eliminated on consolidation.
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, (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 non-binding advisory vote on executive compensation and shareholder 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) 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.
14
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires 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 revenues and expenses during the reporting periods.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. In these financial statements, management exercised a significant judgment in estimating the fair value of its warrant liabilities. The actual results could differ significantly from those estimates including the estimate of the fair value of its warrant liabilities.
Ordinary Shares Subject to Possible Redemption
The
Company accounts for its ordinary shares subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing
Liabilities from Equity.” Ordinary shares subject to mandatory redemption (if any) are classified as a liability instrument and
are measured at fair value. Conditionally redeemable ordinary shares (including ordinary shares that feature redemption rights that are
either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s
control) are classified as temporary equity. At all other times, ordinary shares are classified as stockholders’ equity. The Company’s
ordinary shares feature certain redemption rights that are considered to be outside of the Company’s control and subject to the
occurrence of uncertain future events. Accordingly, as of September 30, 2021 and December 31, 2020,
The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable ordinary shares to equal the redemption value at the end of each reporting period.
At September 30, 2021 and December 31, 2020, the ordinary shares reflected in the balance sheets is reconciled in the following table (See Note):
| Gross proceeds | $ | |||
| Less: proceeds allocated to public warrants | ( |
) | ||
| Less: ordinary share issuance costs | ( |
) | ||
| Add: Accretion of carrying value to redemption value | ||||
| Ordinary shares subject to possible redemption | $ |
Offering Costs
Total offering costs amounted
to $
15
Income Taxes
ASC Topic 740 “Income Taxes” 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. The Company’s management determined that the British Virgin Islands is the Company’s only major tax jurisdiction. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of September 30, 2021 and December 31, 2020, respectively. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.
There is currently no taxation imposed on income by the government of the British Virgin Islands. In accordance with British Virgin Islands federal income tax regulations, income taxes are not levied on the Company. Consequently, income taxes are not reflected in the Company’s unaudited condensed consolidated financial statements. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Net Income (Loss) per Ordinary Share
Net income (loss) per share
is computed by dividing net income (loss) by the weighted average number of ordinary shares outstanding for the period. The calculation
of diluted income (loss) per share does not consider the effect of the warrants issued in connection with the (i) initial public offering,
(ii) the exercise of the over-allotment option and (iii) private placement units, since the exercise of the warrants are contingent upon
the occurrence of future events. The warrants derived from the public units are exercisable to purchase
The Company’s unaudited condensed consolidated statement of operations includes a presentation of income (loss) per share for ordinary shares subject to redemption in a manner similar to the two-class method of income (loss) per share.
For the three months ended
September 30, 2021 and 2020, net income per ordinary share, basic and diluted for redeemable ordinary shares, is calculated as dividing
the allocated net income (loss) for the three months ended September 30, 2021 and 2020, by the weighted average number of
For the nine months ended
September 30, 2021 and 2020, net income (loss) per ordinary share, basic and diluted for redeemable ordinary shares, is calculated as
dividing the allocated net income (loss) for the nine months ended September 30, 2021 and 2020, by the weighted average number of
For the three months ended
September 30, 2021 and 2020, net loss per ordinary, basic and diluted for non-redeemable ordinary shares, is calculated by dividing the
allocated net loss by the weighted average numbers of
For the nine months ended September 30, 2021 and 2020, net income (loss)
per ordinary, basic and diluted for non-redeemable ordinary shares, is calculated by dividing the allocated net income (loss) by the weighted
average numbers of
16
Non-redeemable ordinary shares include the Founder Shares, Representative’s Shares and ordinary shares underlying the Private Placement Units, as these shares do not have any redemption features and do not participate in the income earned on the Trust Account.
Concentration of Credit Risk
Financial instruments that
potentially subject the Company to credit risk consist principally of cash and investment held in Trust Account. Cash is maintained in
accounts with financial institutions, which at times may exceed the federal depository insurance coverage limit of $
Financial Instruments
The Company analyses all financial
instruments with features of both liabilities and equity under ASC Topic 480 “Distinguishing Liabilities from Equity” and
ASC Topic 815 “Derivatives and Hedging”. Pursuant to its IPO,
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying balance sheet, primarily due to their short-term nature, other than the warrant liabilities.
Derivative Warrant Liabilities
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
Management evaluates all of its financial instruments, including issued warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815-15. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. In accordance with ASC 825-10 “Financial Instruments”, offering costs attributable to the issuance of the derivative warrant liabilities are recognized in the statement of operations as incurred.
The Company sold
Recently Issued Accounting Standards
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. The Company adopted ASU 2020-06 on January 1, 2021. Adoption of the ASU did not impact the Company’s financial position, results of operations or cash flows. There are no other ASUs being adopted.
Other than the above, there are no other recently issued accounting standards which are applicable to the Company.
17
NOTE 4. INITIAL PUBLIC OFFERING
Pursuant to the IPO, the Company
sold
NOTE 5. PRIVATE PLACEMENT
Simultaneously with the closing
of the IPO, the Sponsor, anchor investors and I-Bankers purchased an aggregate of
NOTE 6. RELATED PARTY TRANSACTIONS
Founder Shares
In October 2018, the Company
issued
Of the
Administrative Support Arrangement
The Company entered into an
administrative support agreement with an affiliate of the Company’s officers (the “Service Party”), commencing on February
19, 2020 through the earlier of the consummation of a Business Combination or the Company’s liquidation, the Company agreed to pay
the Service Party up to a maximum of $
18
Promissory Note — Related Party
In order to finance transaction costs in connection with a Business Combination, the Sponsor, officers and directors or their respective affiliates may, but are not obligated to, provide Working Capital Loans to the Company. If the Company completes a Business Combination, the Company would repay the Working Capital Loans. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans, but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. Such Working Capital Loans would be evidenced by promissory notes. The notes would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, or converted upon consummation of a Business Combination into additional Working Capital Units. The notes were non-interest bearing and were not secured.
On February 23, 2021, the
Company issued a promissory note for up to $
Promissory Note — Advance from Related Party
As of September 30, 2021,
the Company issued a promissory note for up to $
Related Party Extension Loans
As discussed in Note 1, the
Company may extend the period of time to consummate a Business Combination up to two times, each by an additional three months (for a
total of 21 months to complete a Business Combination). In order to extend the time available for the Company to consummate a Business
Combination, the initial shareholders and/or their affiliates or designees must deposit into the Trust Account up to an aggregate of $
NOTE 7. COMMITMENTS AND CONTINGENCIES
Risk and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, proposed business combination, and/or search for a target company, the specific impact is not readily determinable as of the date of these financial statements. A significant outbreak of COVID-19 and other infectious diseases could result in a widespread health crisis that could adversely affect the economies and financial markets worldwide, and potential target companies may defer or end discussions for a potential merger with us if COVID-19 is going on, and materially adversely affects their business operations and, therefore, the valuation of their business. The extent to which COVID-19 impacts our closing on the proposed business combination will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19 or other matters of global concern continue for an unexpectedly long period of time, our ability to consummate a Business Combination may be materially adversely affected. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
19
Registration Rights
Pursuant to a registration rights agreement entered into by and among the Company, the initial shareholders, anchor investors and I-Bankers on February 19, 2020, the holders of the Founder Shares, Private Units (and underlying securities), and Working Capital Units (and underlying securities) will be entitled to registration rights. The holders of a majority-in-interest of these securities are entitled to make up to three demands that the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the consummation of a Business Combination.
Business Combination Marketing Agreement
The Company has engaged I-Bankers
as an advisor in connection with the Company’s Business Combination to assist the Company in holding meetings with the Company’s
shareholders to discuss the potential Business Combination and the target business’ attributes, introduce the Company to potential
investors that are interested in purchasing the Company’s securities in connection with the Business Combination, assist the Company
in obtaining shareholder approval for the Business Combination and assist the Company with its press releases and public filings in connection
with the Business Combination.
Deferred Underwriting Commission
The deferred underwriting
commission of $
Representative’s Shares
On February 24, 2020, the
Company issued an aggregate of
Representative’s Warrants
On February 24, 2020, the
Company issued an aggregate of
The Representative’s Warrants grant to holders demand and “piggy back” rights for periods of five and seven years, respectively, from the Effective Date with respect to the registration under the Securities Act of the ordinary shares issuable upon exercise of the Representative’s Warrants. The Company will bear all fees and expenses attendant to registering the securities, other than underwriting commissions, which will be paid for by the holders themselves. The exercise price and number of ordinary shares issuable upon exercise of the Representative’s Warrants may be adjusted in certain circumstances including in the event of a share dividend, or the Company’s recapitalization, reorganization, merger or consolidation. However, the Representative’s Warrants will not be adjusted for issuances of ordinary shares at a price below its exercise price.
On February 24, 2020, the
date when the Representative Warrants were issued, the Company estimated the fair value of Representative’s Warrants to be approximately
$
20
NOTE 8. DERIVATIVE WARRANT LIABILITIES
As of September 30, 2021,
the Company had
The Private Warrants will be identical to the Public Warrants (see Note 10) underlying the Units being sold in the IPO, except that the Private Warrants and the ordinary shares issuable upon the exercise of the Private Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Warrants will be exercisable on a cashless basis and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The Representative Warrants
are different from Public and Private Warrants. The exercise price of Representative Warrants is $
NOTE 9. SHAREHOLDERS’ EQUITY
Preferred Shares — The Company is authorized to issue an unlimited number of preferred shares, no par value, divided into five classes, Class A through Class E, each with such designation, rights and preferences as may be determined by a resolution of the Company’s board of directors to amend the Amended and Restated Memorandum and Articles of Association to create such designations, rights and preferences. As of September 30, 2021 and December 31, 2020, there were no preferred shares designated, issued or outstanding.
Ordinary Shares
— The Company is authorized to issue an unlimited number of ordinary shares, no par value. Holders of the Company’s ordinary
shares are entitled to one vote for each share. As of September 30, 2021 and December 31, 2020, there were
NOTE 10. WARRANTS – PUBLIC AND PRIVATE
Warrant underlying units sold
in the IPO (the “Public Warrants”) may only be exercised for a whole number of shares. No fractional shares will be issued
upon exercise of the Public Warrants. The Public Warrants will become exercisable on the later of (a) the consummation of a Business Combination
or (b)
The Public Warrant exercise price is adjusted, if (x) the Company issues additional ordinary shares or equity-linked securities for capital raising purposes in connection with the closing of the initial Business Combination at an issue price or effective issue price of less than $9.50 per ordinary share (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of the initial Business Combination, and (z) the volume weighted average trading price of the ordinary shares during the 20 trading day period starting on the trading day prior to the day on which the Company consummates the initial Business Combination (such price, the “Market Price”) is below $9.50 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the Market Price, and the $18.00 per share redemption trigger price described above will be adjusted (to the nearest cent) to be equal to 180% of the Market Price.
21
The Company may call the warrants for redemption (excluding the Private Warrants, any outstanding Representative’s Warrants, and any warrants underlying units issued to the Sponsor, initial shareholders, officers, directors or their affiliates in payment of Working Capital Loans made to the Company), in whole and not in part, at a price of $0.01 per warrant:
| ● | at any time while the warrants are exercisable, |
| ● | upon not less than 30 days’ prior written notice of redemption to each warrant holder, |
| ● | if, and only if, the reported last sale price of the ordinary shares equals or exceeds $18.00 per share (as adjusted for share splits, share dividends, reorganizations and recapitalizations), for any 20 trading days within a 30 trading day period ending on the third trading business day prior to the notice of redemption to warrant holders, and |
If the Company calls the warrants for redemption as described above, management will have the option to require all holders that wish to exercise the warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of ordinary shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of ordinary shares at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with respect to such warrants. Accordingly, the warrants may expire worthless.
NOTE 11. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
| ● | Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
As of September 30, 2021 and December 31, 2020, the carrying values of prepaid expenses, accrued expenses, and loans and advances payable to related parties approximate their fair values due to the short-term nature of the instruments. The Company’s portfolio of investments held in the Trust Account is comprised of investments in U.S. Treasury securities with an original maturity of 185 days or less or investments in money market funds that invest in U.S. government securities, or a combination thereof. The fair value for trading securities is determined using quoted market prices in active markets.
As noted in Note 8, the Company has concluded that its Private Warrants and Representative’s Warrants should be presented as liabilities with subsequent fair value remeasurement. Accordingly the fair value of the Private Warrants and Representative’s Warrants were classified as a Level 3 measurement.
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The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020 and indicates the fair value of held to maturity securities as follows.
| Level | September 30, 2021 | ||||||
| Description | |||||||
| Assets: | |||||||
| Trust Account – U.S. Treasury Securities Money Market Fund | 1 | $ | |||||
| Liabilities: | |||||||
| Derivative Warrant Liability – Private Warrant | 3 | $ | |||||
| Derivative Warrant Liability – Representative Warrant | 3 | $ | |||||
| Level | December 31, | ||||||
| Description | |||||||
| Assets: | |||||||
| Trust Account – U.S. Treasury Securities Money Market Fund | 1 | $ | |||||
| Liabilities: | |||||||
| Derivative Warrant Liability – Private Warrant | 3 | $ | |||||
| Derivative Warrant Liability – Representative Warrant | 3 | $ | |||||
The fair value of the Private
Warrants and Representative Warrants were estimated using Black-Scholes model for the three and nine months ended September 30, 2020 and
2021, respectively. For the three months ended September 30, 2021 and 2020 on the statements of operations, the Company recognized a decrease
in the fair value of warrant liabilities of $
The estimated fair value of the Private Warrants and Representative Warrants is determined using Level 3 inputs. Inherent in these valuations are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its ordinary shares based on historical and implied volatilities of select peer companies as well as its own that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates remaining at zero.
The following table provides quantitative information regarding Level 3 fair value measurements inputs for the Company’s warrants at their measurement dates:
| As of September 30, 2021 | As of December 31, 2020 | |||||||
| Volatility | % | % | ||||||
| Stock price | ||||||||
| Expected life of the warrants to convert | ||||||||
| Risk free rate | % | % | ||||||
| Dividend yield | % | % | ||||||
The change in the fair value of the derivative warrant liabilities for the period from February 9, 2018 (inception) through September 30, 2020, and for the period from December 31, 2020 through September 30, 2021 are summarized as follows:
| Derivative warrant liabilities at February 9, 2018 (inception) | $ | |||
| Issuance of Private Warrants | ||||
| Issuance of Representative Warrants | ||||
| Change in fair value of derivative warrant liabilities | ||||
| Derivative Warrant Liabilities at September 30, 2020 | $ | |||
| Derivative Warrant Liabilities at December 31, 2020 | $ | |||
| Change in fair value of derivative warrant liabilities | ( | ) | ||
| Derivative Warrant Liabilities at September 30, 2021 | $ |
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NOTE 12. SUBSEQUENT EVENTS
On November 12, 2021, the Company
entered into certain forward share purchase agreements (the “Forward Share Purchase Agreements) with Sea Otter Securities (“Sea
Otter”), Stichting Juridisch Eigendom Mint Tower Arbitrage Fund (“Mint Tower”), Glazer Special Opportunity Fund I, LP
(“Glazer”) and Meteora Capital Partners, LP (“Meteora” and, together with Sea Otter, Mint Tower, and Glazer, the
“Backstop Investors”), which provide that such investors will not redeem shares that they each hold in connection with the
proposal to extend the date by which the Company has to consummate a Business Combination from November 24, 2021 to February 24, 2022
(the “February Extension”) and the proposed Merger with JHD, and instead would each either hold such shares for a period of
time following the consummation of the Merger, at which time they will each have the right to sell them to East Stone at $
In connection with the above-mentioned
arrangements, the Sponsor entered into certain share transfer agreements (the “Founder Share Transfer Agreements”) with the
Backstop Investors. Pursuant to the Founder Share Transfer Agreement with Meteora and Glazer on November 12, 2021, Meteora and Glazer
agreed not to sell, transfer or seek redemption of an aggregate of
In consideration of Meteora and Glazer’s agreement to abide by such restrictions on its public shares, the Sponsor agreed to transfer to the Glazer investors 44,444 Founder Shares for every 324,886 public shares not redeemed, for an aggregate of 133,332 Founder Shares. Of such amount, an aggregate of up to 45,000 Founder Shares will be transferred on or before the date of the special meeting of the shareholders of the Company to consider the Merger, and an aggregate of 88,332 Founder Shares will be transferred to the Glazer investors on or before the date of the Closing.
On November 12, 2021, the Business Combination Agreement (the “Business Combination Agreement Amendment”) was further amended to memorialize an agreement among the parties that any funds in the Trust Account that relate to ordinary shares of the Company held by the Backstop Investors shall not count toward the minimum cash condition contained in Section 9.2(d) of the Business Combination Agreement. In addition, Section 10.1(b) of the Business Combination Agreement was amended, contingent upon the effectiveness of the February Extension, to provide that the Business Combination Agreement may be terminated at any time prior to the Closing by either the Company or JHD, if the Closing does not occur by February 24, 2022.
On November 12, 2021, JHD, Pubco, Primary Seller, the Company, the Sponsor, Navy Sail, Chunyi (Charlie) Hao, and Xiaoma (Sherman) Lu (Messers Hao and Lu, collectively with Navy Sail and the Sponsor, the “Primary Initial Shareholders”) entered into an amendment (the “Letter Agreement Amendment”) to the Letter Agreement Regarding Forfeiture of Founder Shares, dated February 16, 2021 (the “Founder Share Letter”) by and among JHD, the Company, the Sponsor, Navy Sail, Chunyi (Charlie) Hao, and Xiaoma (Sherman) Lu.
The Founder Share Letter provided,
inter alia, that up to
The Forfeiture Replacement Shares being delivered to the Backstop Investors and to the Primary Seller are not subject to the forfeiture calculations under the Founder Share letter (as amended by the Letter Agreement Amendment), however the calculation of any Forfeiture Replacement Shares to be distributed to the shareholder of the Sponsor or to Charlie Hao, Sherman Lu and the Primary Seller under (C) above will be subject to the forfeiture calculations. To the extent that the forfeiture calculation results in less than all of the remaining Founder Shares subject to the arrangement (1,725,000) being distributed pursuant to the terms of the preceding paragraph, the remainder of such shares shall remain with the Primary Initial Shareholders.
On November 24,
2021, the Company held a special meeting of shareholders and approved to amend the Company’s Amended and Restated Memorandum and
Articles of Association to extend the date by which the Company has to consummate an initial business combination from November 24, 2021
to February 24, 2022. In connection with the approval of the extension, shareholders elected to redeem an aggregate of
Based upon this review, the Company did not identify any other subsequent events, other than previously disclosed, that would have required adjustment or disclosure in the unaudited condensed financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to East Stone Acquisition Corporation. References to our “management” or our “management team” refer to our officers and directors, and references to our “Sponsor” refer to Double Ventures Holdings Limited, a British Virgin Islands business company with limited liability. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company’s final prospectus for its initial public offering filed with the Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Overview
We are a blank check company incorporated in the British Virgin Islands with limited liability (meaning our shareholders have no liability, as members of the Company, for the liabilities of the Company over and above the amount already paid for their shares) formed for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination with one or more businesses or entities. 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 units, our shares, debt or a combination of cash, shares and debt.
The issuance of additional shares in our initial business combination:
| ● | may significantly dilute the equity interest of investors who do not have pre-emption rights in respect of any such issue; |
| ● | may subordinate the rights of holders of ordinary shares if the rights, preferences, designations and limitations attaching to the preferred shares are created by amendment of our memorandum and articles of association by resolution of the board of directors and preferred shares are issued with rights senior to those afforded our ordinary shares; |
| ● | could cause a change in control if a substantial number of ordinary shares are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors; |
| ● | may have the effect of delaying or preventing a change of control of us by diluting the share ownership or voting rights of a person seeking to obtain control of us; and |
| ● | may adversely affect prevailing market prices for our ordinary shares. |
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Similarly, if we issue debt securities or otherwise incur significant indebtedness, it could result in:
| ● | default and foreclosure on our assets if our operating revenues after our initial business combination are insufficient to repay our debt obligations; |
| ● | acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant; |
| ● | our immediate payment of all principal and accrued interest, if any, if the debt is payable on demand; |
| ● | our inability to obtain necessary additional financing if any document governing such debt contains covenants restricting our ability to obtain such financing while the debt security is outstanding; |
| ● | our inability to pay dividends on our ordinary shares; |
| ● | using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our ordinary shares if declared, expenses, capital expenditures, acquisitions and other general corporate purposes; |
| ● | limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate; |
| ● | increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and |
| ● | limitations on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of our strategy and other purposes and other disadvantages compared to our competitors who have less debt. |
We expect to continue to incur significant costs in the pursuit of our acquisition plans. Our plans to raise capital or to consummate our initial business combination may not be successful.
Recent Developments
Termination of Agreement with Ufin
On February 15, 2021, the Company entered into a letter termination agreement with Ufin Holdings Limited, a Cayman Islands exempted company (“Ufin”), Ufin Tek Limited, a British Virgin Islands business company (“Ufin Pubco”), Ufin Mergerco Limited, a British Virgin Islands business company and a wholly-owned subsidiary of Pubco (“Ufin Merger Sub”), Xiaoma (Sherman) Lu, an individual, in the capacity as the Purchaser Representative thereunder, Yingkui Liu, in the capacity as the Seller Representative thereunder, and Ufin Investment Limited, a British Virgin Islands business company and the sole holder of Ufin’s outstanding capital shares (the “Ufin Seller”, together with The Company, Ufin, Ufin Pubco, Ufin Merger Sub, Sherman Xiaoma Lu, Yingkui Liu and Ufin Seller, the “Ufin Parties”) for a proposed business combination, as previously disclosed in the Current Report on Form 8-K of The Company, on November 9, 2020, The Company entered into that certain Amended and Restated Business Combination Agreement (the “Ufin Agreement”). In accordance such letter agreement, upon execution and delivery of the letter agreement all of the rights and obligations of the Ufin Parties under the Ufin Agreement ceased (except for certain obligations related to publicity, confidentiality, fees and expenses, trust fund waiver, termination and general provisions) without any liability on the part of any party or any of their respective representatives.
Business Combination Agreement with JHD
On February 16, 2021, the Company entered into a Business Combination Agreement (the “Business Combination Agreement”) with Navy Sail International Limited, a British Virgin Islands company (“Navy Sail”), as Purchaser Representative, JHD Technologies Limited, a Cayman Islands company (“Pubco”), Yellow River MergerCo Limited, a British Virgin Islands company and a wholly-owned subsidiary of Pubco (“Merger Sub”), JHD Holdings (Cayman) Limited, a Cayman Islands company (“JHD”), Yellow River (Cayman) Limited, a Cayman Islands company (the “Primary Seller”), and each of the holders of JHD’s capital shares that become parties to the Business Combination Agreement after the date thereof by executing and delivering to the Purchaser, Pubco and JHD a joinder agreement (each individually, a “Seller”, and collectively with the Primary Seller, the “Sellers”), and, Double Ventures Holdings Limited, a British Virgin Islands business company, the Company’s sponsor, solely with respect to Sections 10.3 and Articles XII and XIII thereof, as applicable (the “Sponsor”).
Pursuant to the Business Combination Agreement, subject to the terms and conditions set forth therein, at the closing of the transactions contemplated by the Business Combination Agreement (the “Closing”), (a) Merger Sub will merge with and into the Company, with the Company continuing as the surviving entity (the “Merger”), as a result of which, (1) the Company shall become a wholly-owned subsidiary of Pubco and (ii) each issued and outstanding security of the Company immediately prior to the Effective Time (as defined in the Business Combination Agreement) shall no longer be outstanding and shall automatically be cancelled, in exchange for the right of the holder thereof to receive a substantially equivalent security of Pubco, and (b) Pubco will acquire all of the issued and outstanding capital shares of JHD from the Sellers in exchange for ordinary shares of Pubco (the “Share Exchange” and together with the Merger and the other transactions contemplated by the Business Combination Agreement, the “Transactions”).
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The total consideration to be paid by Pubco to the Sellers for their shares of JHD, shall be an aggregate number of Pubco ordinary shares (the “Exchange Shares”) with an aggregate value equal to (the “Exchange Consideration”) (i) One Billion U.S. Dollars ($1,000,000,000), plus (ii) the aggregate amount cash of JHD and its direct and indirect subsidiaries as of the Closing date, minus (iii) the aggregate indebtedness of JHD and its direct and indirect subsidiaries, and minus (iv) the amount of any unpaid transaction expenses of JHD in excess of $10,000,000 in aggregate, with each Pubco ordinary share valued at an amount equal to the price at which each Company ordinary share shall be redeemed or converted pursuant to the redemption of shares (the “Redemption Price”). The issuances of Pubco ordinary shares in connection with the Share Exchange will be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) thereof because securities of Pubco will issued to a limited number of Sellers without involving a public offering. Such issuances will also be exempted from registration in reliance upon Regulation S of the Securities Act with regard to certain Sellers receiving Pubco ordinary shares who are qualified as non-U.S. persons thereunder.
The parties agreed that at or prior to the Closing, Pubco, the Seller and Continental Stock Transfer & Trust Company (or another mutually acceptable escrow agent), as escrow agent (the “Escrow Agent”), will enter into an Escrow Agreement, effective as of the Closing, in form and substance reasonably satisfactory to the Company and JHD (the “Escrow Agreement” ), pursuant to which Pubco shall cause to be delivered to the Escrow Agent a number of Exchange Shares (each valued at the Redemption Price) equal in value to ten percent (10%) of the Exchange Consideration otherwise issuable to the Sellers at the Closing (together with any equity securities paid as dividends or distributions with respect to such shares or into which such shares are exchanged or converted, the “Escrow Shares”) to be held, along with any other dividends, distributions or other income on the foregoing (the “Other Escrow Property”, together with the Escrow Shares, the “Escrow Property”), in a segregated escrow account (the “Escrow Account”) and disbursed in accordance with the terms of the Business Combination Agreement and the Escrow Agreement.
If and when earned, the Sellers shall be entitled to receive from Pubco, as additional consideration for the purchase of the Purchased Shares, the Earned Escrow Shares together with the Other Escrow Property. To the extent that the amount of the Earned Escrowed Shares is less than the number of Escrow Share Number (as such terms are defined below), then the amount of Escrow Shares equal to such difference will be forfeited by the Sellers and released to Pubco for cancellation along with any accrued but unpaid dividends payable in respect of such Escrow Shares.
For the purposes of the calculating the Earned Earnout Shares, the following definitions shall apply:
“Earned Escrow Shares” means the result of the following equation: Escrow Share Number * (Revenue / Earnout Target).
“Earnout Target” means an amount equal to One Hundred Forty Million U.S. Dollars ($140,000,000).
“Earnout Year” means the period commencing on the first day of the first fiscal quarter following Closing (but in any event no earlier than October 1, 2021) and ending on the twelve (12) month anniversary of such date.
“Escrow Share Number” means the number of Escrow Shares.
“Revenue” means the consolidated revenue of Pubco and its subsidiaries for the Earnout Year, as set forth in Pubco’s filings with the SEC; provided that in no event shall the Revenue exceed the Earnout Target.
The obligations of the parties to consummate the Transactions are subject to various conditions, including the following mutual conditions of the parties unless waived: (i) the approval of the Business Combination Agreement and the Transactions and related matters by the requisite vote of the Company’s shareholders; (ii) expiration of any waiting period under applicable antitrust laws; (iii) no law or order preventing or prohibiting the Transactions; (iv) the Company having at least $5,000,001 in net tangible assets as of the Closing, after giving effect to the completion of the Redemption and any private placement financing;(v) the effectiveness of the Registration Statement; (vi) amendment by the shareholders of Pubco of Pubco’s memorandum and articles of association; (vii) receipt by JHD and the Company of evidence reasonably satisfactory to each such party that Pubco qualifies as a foreign private issuer; (viii) the election or appointment of members to Pubco’s post-closing board of directors designated by JHD and the Company; and (ix) the Pubco securities have been approved for listing on Nasdaq.
In addition, unless waived by JHD, the obligations of JHD, Pubco, Merger Sub and the Sellers to consummate the Transactions are subject to the satisfaction of the following Closing conditions, in addition to customary certificates and other closing deliveries: (i) the representations and warranties of the Company being true and correct on and as of the Closing (subject to material adverse effect); (ii) the Company having performed in all material respects its obligations and complied in all material respects with its covenants and agreements under the Business Combination Agreement required to be performed or complied with by it on or prior the date of the Closing; (iii) absence of any material adverse effect with respect to the Company since the date of the Business Combination Agreement which is continuing and uncured; (iv) receipt by JHD and Pubco of a Registration Rights Agreement, providing customary registration rights to the Seller with respect to the portion of the Exchange Shares delivered to the Seller at the Closing and any Earnout Escrow Shares that are released from escrow to the Sellers (the “Seller Registration Rights Agreement”); and (v) the Company having delivered to the Sellers and JHD, evidence that is reasonably satisfactory to the Seller Representative of the amount of cash and cash equivalents, including funds remaining in the trust account (after giving effect to the completion and payment of the Redemption) and the proceeds of any PIPE investment.
Unless waived by the Company, the obligations of the Company to consummate the Transactions are subject to the satisfaction of the following Closing conditions, in addition to customary certificates and other closing deliveries: (i) the representations and warranties of JHD, Pubco and the Sellers being true and correct on and as of the Closing (subject to Material Adverse Effect); (ii) JHD, Pubco, Merger Sub and Seller having performed in all material respects the respective obligations and complied in all material respects with their respective covenants and agreements under the Business Combination Agreement required to be performed or complied with on or prior the date of the Closing; (iii) absence of any Material Adverse Effect with respect to JHD or Pubco since the date of the Business Combination Agreement which is continuing and uncured; (iv) receipt by the Company of the Founders Registration Rights Agreement Amendment, each executed by Pubco; (v) receipt by the Company of share certificates and other documents evidencing the transfer of the Purchased Shares to Pubco; and (vi) receipt by the Company of the evidence of the termination of any outstanding options, warrants or other convertible securities of JHD, without any consideration or liability therefor.
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The Parties agreed that after taking into consideration the Redemption, the trust account proceeds and the gross proceeds of any private placement, the amount of cash available to the Company should amount to One Hundred and Ten Million Dollars ($110,000,000) or more at Closing.
The Transactions are subject to, among other things, the approval of the Transactions by the Company’s shareholders, satisfaction of the conditions stated in the Business Combination Agreement and other customary closing conditions, including that the SEC completes its review of the proxy statement/prospectus relating to the Transactions, the receipt of certain regulatory approvals, and the approval by The Nasdaq Stock Market to list the securities of the combined company.
On September 13, 2021, the parties thereto the Business Combination Agreement entered into that certain Amended and Restated Business Combination Agreement (the “Amended Agreement”), which amended and restated the Business Combination Agreement in its entirety and provides, among other things, that (a) a revised Amended and Restated Memorandum and Articles of Association of Pubco that, among other things, set forth the proposed authorized share capital of Pubco following the consummation of the Business Combination, be appended to the Business Combination Agreement; (b) the principal amount of certain convertible notes of JHD which are convertible into shares of Pubco (the “2021 Convertible Notes”) and the aggregate cash proceeds of any future equity investments in JHD during the interim period that are convertible into shares of Pubco (the “Equity Investment”) will be counted towards the Company’s minimum cash condition under the Business Combination Agreement, consistent with the characterization of these instruments as a private equity investment to purchase ordinary shares of the Company or, after the Closing, ordinary shares of Pubco, and (c) the ordinary shares of Pubco received by the Sellers, the holders of the 2021 Convertible Notes (upon conversion of such promissory notes) and the holders of any future Equity Investment will be registered for resale, along with the ordinary shares of Pubco issued to the Company’s public shareholders. The Amended Agreement also provides that the ordinary shares of Pubco to be issued to the holders of the 2021 Convertible Notes and any future Equity Instrument are not part of the Exchange Consideration being distributed to the Sellers under the Business Combination Agreement.
On October 7, 2021, the parties to the Amended Agreement entered into that certain Second Amended and Restated Business Combination Agreement, pursuant to which the Amended Agreement was further amended and restated in its entirety to, among other things, (i) memorialize an agreement among the parties that the vested options in the Primary Seller previously issued to senior executives and directors of the Primary Seller would be exchanged for substitute options in Pubco exercisable into a pool of the ordinary shares, $0.0001 par value per share, of Pubco, thereby reducing the Exchange Consideration that would otherwise have been issued to the Sellers and (ii) delete the text noting that the 2021 convertible notes and any equity investment would be treated as PIPE investments.
Related Party Loans
On February 23, 2021, March 3, 2021, June 23, 2021 and June 25, 2021, respectively, our Chief Financial Officer and one of the initial shareholders, Mr. Chunyi (Charlie) Hao, has loaned to the Company $200,000, the Working Capital Loans. If the Company completes a Business Combination, the Company would repay the Working Capital Loans. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans, but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. Such Working Capital Loans would be evidenced by promissory notes. The notes would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, or converted upon consummation of a Business Combination into additional Private Units at a price of $10.00 per Unit (the “Working Capital Units”).
Effective May 24, 2021 and August 24, 2021, the Company extended the date by which the Company has to consummate a business combination from May 24, 2021 to August 24, 2021, and from August 24, 2021 to November 24, 2021, respectively (the “Extensions”). The Extensions are up to two three-month extensions permitted under the Company’s governing documents and provides the Company with additional time to complete its proposed business combination with JHD. In accordance with the Business Combination Agreement, JHD has loaned to the Company a sum of $2,760,000 on the Sponsor’s behalf in order to support the Extension. Such loan is non-interest bearing and will be payable upon the consummation of the proposed business combination.
As of September 30, 2021, Yellow River Asset Management, an affiliate of JHD (“Yellow River”), and the Company signed a promissory note in which Yellow River agreed to loan to the Company a sum of $200,000. The note bears no interest and is repayable in full upon the earlier of consummation of the Company’s initial Business Combination and its winding up. As of September 30, 2021, the Company had drawn down an aggregate of $186,514.
Backstop Arrangements
On November 12, 2021, the Company entered into certain forward share purchase agreements (the “Forward Share Purchase Agreements) with Sea Otter Securities (“Sea Otter”), Stichting Juridisch Eigendom Mint Tower Arbitrage Fund (“Mint Tower”), Glazer Special Opportunity Fund I, LP (“Glazer”) and Meteora Capital Partners, LP (“Meteora” and, together with Sea Otter, Mint Tower, and Glazer, the “Backstop Investors”), which provide that such investors will not redeem shares that they each hold in connection with the proposal to extend the date by which the Company has to consummate a Business Combination from November 24, 2021 to February 24, 2022 (the “February Extension”) and the proposed Merger with JHD, and instead would each either hold such shares for a period of time following the consummation of the Merger, at which time they will each have the right to sell them to East Stone at $10.41 per share, or will sell such shares on the open market during such time period at a market price of at least $10.26 per share.
In connection with the above-mentioned arrangements, the Sponsor entered into certain share transfer agreements (the “Founder Share Transfer Agreements”) with the Backstop Investors. Pursuant to the Founder Share Transfer Agreement with Meteora and Glazer on November 12, 2021, Meteora and Glazer agreed not to sell, transfer or seek redemption of an aggregate of 974,658 public shares of Company and to vote such shares in favor of the February Extension and the Merger.
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In consideration of Meteora and Glazer’s agreement to abide by such restrictions on its public shares, the Sponsor agreed to transfer to the Glazer investors 44,444 Founder Shares for every 324,886 public shares not redeemed, for an aggregate of 133,332 Founder Shares. Of such amount, an aggregate of up to 45,000 Founder Shares will be transferred on or before the date of the special meeting of the shareholders of the Company to consider the Merger, and an aggregate of 88,332 Founder Shares will be transferred to the Glazer investors on or before the date of the Closing.
The Company has also entered into founder shares transfer agreements with identical terms to the Founder Share Transfer Agreement with Sea Otter (pursuant to which 133,332 founder shares will be transferred to Sea Otter) and with Mint Tower (pursuant to which 133,332 founder shares will be transferred to Mint Tower).
On November 12, 2021, the Business Combination Agreement (the “Business Combination Agreement Amendment”) was further amended to memorialize an agreement among the parties that any funds in the Trust Account that relate to ordinary shares of the Company held by the Backstop Investors shall not count toward the minimum cash condition contained in Section 9.2(d) of the Business Combination Agreement. In addition, Section 10.1(b) of the Business Combination Agreement was amended, contingent upon the effectiveness of the February Extension, to provide that the Business Combination Agreement may be terminated at any time prior to the Closing by either the Company or JHD, if the Closing does not occur by February 24, 2022.
On November 12, 2021, JHD, Pubco, Primary Seller, the Company, the Sponsor, Navy Sail, Chunyi (Charlie) Hao, and Xiaoma (Sherman) Lu (Messers Hao and Lu, collectively with Navy Sail and the Sponsor, the “Primary Initial Shareholders”) entered into an amendment (the “Letter Agreement Amendment”) to the Letter Agreement Regarding Forfeiture of Founder Shares, dated February 16, 2021 (the “Founder Share Letter”) by and among JHD, the Company, the Sponsor, Navy Sail, Chunyi (Charlie) Hao, and Xiaoma (Sherman) Lu.
The Founder Share Letter provided, inter alia, that up to 1,725,000 Ordinary Shares (the “Forfeiture Shares”) would be subject to forfeiture in the event that the Company did not have at least $100 million in cash at the Closing, with the number of such shares to be forfeit determined on a sliding scale depending upon the amount of the cash shortfall, if any, with the entire amount of the 1,725,000 shares subject to forfeiture if the Company’s cash at closing was $70 million or less. Under the terms of the Letter Agreement Amendment, the Company, the Primary Initial Shareholders, JHD Holdings Limited, Pubco and the Primary Seller have agreed that the 1,725,000 Forfeiture Shares would be exchanged for an equivalent number of Pubco ordinary shares (“Forfeiture Replacement Shares”) at the Closing and that such Forfeiture Replacement Shares would be distributed as follows: (A) 138,000 Forfeiture Replacement Shares to the Primary Seller, (B) to Glazer, Sea Otter and Mint Tower, up to 450,000 Forfeiture Replacement Shares in consideration for their having entered into the Forward Share Purchase Agreements and the Founder Share Transfer Agreements and (C) out of the remaining Forfeiture Replacement Shares, (i) to a shareholder of the Sponsor who is not a director or officer of the Purchaser) up to 500,000 Forfeiture Replacement Shares and (ii) to the extent of any remaining Forfeiture Replacement Shares (a) 50% to Charlie Hao and Xiaoma (Sherman) Lu and (b) 50% to the Primary Seller.
The Forfeiture Replacement Shares being delivered to the Backstop Investors and to the Primary Seller are not subject to the forfeiture calculations under the Founder Share letter (as amended by the Letter Agreement Amendment), however the calculation of any Forfeiture Replacement Shares to be distributed to the shareholder of the Sponsor or to Charlie Hao, Sherman Lu and the Primary Seller under (C) above will be subject to the forfeiture calculations. To the extent that the forfeiture calculation results in less than all of the remaining Founder Shares subject to the arrangement (1,725,000) being distributed pursuant to the terms of the preceding paragraph, the remainder of such shares shall remain with the Primary Initial Shareholders.
On November 5, 2021, the Company filed with the SEC a definitive proxy statement on Schedule 14A for a special meeting of shareholders, which is scheduled to be held on November 24, 2021, which includes a proposal to amend the Company’s Amended and Restated Memorandum and Articles of Association to extend the date by which Company has to consummate a Business Combination from November 24, 2021 to February 24, 2022. On November 15, 2021, the Company filed an amendment to the definitive proxy statement to report the terms of the Backstop Arrangements described above.
On November 24, 2021, the Company held a special meeting of shareholders and approved to amend the Company’s Amended and Restated Memorandum and Articles of Association to extend the date by which the Company has to consummate an initial business combination from November 24, 2021 to February 24, 2022. In connection with the approval of the extension, shareholders elected to redeem an aggregate of 10,534,895 ordinary shares, of which the Company paid cash from the trust account in the aggregate amount of approximately $108.1 million (approximately $10.26 per share) to redeeming shareholders.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date. Our only activities from August 9, 2018 (inception) through September 30, 2021 were organizational activities, those necessary to consummate the initial public offering, described below, and identifying a target company for a business combination. We do not expect to generate any operating revenues until after the completion of our initial business combination. We expect to generate non-operating income in the form of interest income on marketable securities held after the initial public offering. We expect to incur increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses.
For the nine months ended September 30, 2021 and 2020, respectively, we had net income (loss) of $(1,253,325) and $189,323, respectively, which consists of interest income on marketable securities held in a trust account in the United States at JPMorgan Chase Bank, N.A., maintained by Continental Stock Transfer & Trust Company, acting as trustee (“Trust Account”), offset by operating costs of $(1,309,878) and $(474,278), and change in fair value of derivative warrant liabilities of $46,100 and $(166,872) respectively.
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Liquidity and Capital Resources
On February 24, 2020, we consummated the initial public offering of 12,000,000 units (“Units”) and the sale of an additional 1,800,000 Units pursuant to the full exercise by the underwriters in the initial public offering (the “Underwriters”) of their over-allotment option at a price of $10.00 per Unit, generating aggregate gross proceeds of $138,000,000. Simultaneously with the closings of the initial public offering and the sale of the additional Units, we consummated the sales of an aggregate of 350,000 Units (the “Private Placement Units”) at a price of $10.00 per Private Placement Unit, generating gross proceeds of $3,500,000.
On February 24, 2020, in connection with the initial public offering, we issued to the representative of the Underwriters and its designee a total of 103,500 ordinary shares and 690,000 warrants, exercisable at $12.00 per full share (or an aggregate exercise price of $8,280,000) (“Representative’s Warrants”). A total of $138,000,000 of the net proceeds from the initial public offering and the Private Placement Units was placed in a U.S.-based trust account at J.P. Morgan Chase Bank, N.A., maintained by CST, acting as trustee.
On May 21, 2021 and August 20, 2021, an aggregate of $1,380,000 and $1,380,000, respectively, was deposited by JHD into the Trust Account for the Company’s public shareholders, representing $0.10 per public share, which enables the Company to extend the period of time it has to consummate its initial Business Combination by twice of three months to November 24, 2021, which is the scheduled liquidation date of the Company.
In connection with the initial public offering and the private placement, a total of $138,000,000 was placed in the Trust Account. The total transaction costs relating to the initial public offering amounted to $4,154,255, including value placed on the Representative’s Shares at $1,035,000, but excluding value placed Representative’s Warrants at $1,640,028 which is accounted for as derivative warrant liability on the Company’s balance sheet. Of the amount $4,154,255, $3,083,255 was cash costs of the transaction, consisting of $2,415,000 of underwriting fees, of which $402,500 has been deferred to the consummation of the Business Combination, and $668,255 of other offering costs.
As of September 30, 2021, we had marketable securities held in the Trust Account of $141,604,421 (including $2,760,000 deposited for the two three-month extensions from May 24, 2021 to November 24, 2021) consisting of U.S. government treasury bills, notes and bonds with a maturity of 185 days or less or in money market. Interest income on the balance in the Trust Account may be used by us to pay taxes. Through September 30, 2021, we did not withdraw any funds from the interest earned on the Trust Account.
We intend to use substantially all of the net proceeds of the initial public offering and the sale of the Private Placement Units, including the funds held in the trust account (excluding any deferred underwriting commissions and certain advisory fees to I-Bankers Securities, Inc., the representative of the Underwriter (“I-Bankers”)), to acquire a target business or businesses and to pay our expenses relating thereto. To the extent that our capital stock are used in whole or in part as consideration to effect our initial business combination, the remaining proceeds held in the Trust Account as well as any other net proceeds not expended will be used as working capital to finance the operations of the target business. Such working capital funds could be used in a variety of ways including continuing or expanding the target business’ operations, for strategic acquisitions and for marketing, research and development of existing or new products. Such funds could also be used to repay any operating expenses or finders’ fees which we had incurred prior to the completion of our initial business combination if the funds available to us outside of the Trust Account were insufficient to cover such expenses.
As of September 30, 2021, we had cash of $56,267 held outside of the Trust Account. We intend to use the funds held outside the Trust Account primarily to identify and evaluate prospective acquisition candidates, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses, review corporate documents and material agreements of prospective target businesses, select the target business to acquire and structure, negotiate and consummate an initial business combination.
In order to fund working capital deficiencies or finance transaction costs in connection with an initial business combination, the initial shareholders, the Company’s officers and directors or their affiliates may, but are not obligated to, loan us funds as may be required. 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. Up to $1,500,000 of such loans may be convertible into units at a price of $10.00 per unit (which, for example, would result in the holders being issued 150,000 ordinary shares if $1,500,000 of notes were so converted, as well as 150,000 rights to receive 15,000 ordinary shares and 150,000 warrants to purchase 75,000 shares) at the option of the lender. If we do not complete an initial business combination, the loans will only be repaid with funds not held in the Trust Account, and only to the extent available. We do not expect to seek loans from parties other than the initial shareholders, the Company’s officers and directors or their affiliates 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.
The liquidity condition and date for mandatory liquidation raise substantial doubt about the Company’s ability to continue as a going concern through November 24, 2021, the scheduled liquidation date of the Company. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern. On May 21, 2021 and August 20, 2021, the Company extended the date by which the Company has to consummate a Business Combination from May 24, 2021 to August 24, 2021, and from August 24, 2021 to November 24, 2021, respectively. On November 24, 2021, the Company held a special meeting of shareholders and approved to amend the Company’s Amended and Restated Memorandum and Articles of Association to extend the date by which the Company has to consummate an initial business combination from November 24, 2021 to February 24, 2022. In connection with the approval of the extension, shareholders elected to redeem an aggregate of 10,534,895 ordinary shares, of which the Company paid cash from the trust account in the aggregate amount of approximately $108.1 million (approximately $10.26 per share) to redeeming shareholders.
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In connection with the Company’s assessment of going concern considerations in accordance with FASB’s ASU 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that if the Company is unable to complete a Business Combination by November 24, 2021, and if a further extension to February 24, 2022 is not approved by the Company’s shareholders, then the Company will cease all operations except for the purpose of liquidating. The date for mandatory liquidation and subsequent dissolution raise 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 November 24, 2021.
We do not believe we will need to raise additional funds in order to meet the expenditures required for operating our business. However, if our estimate of the costs of undertaking in-depth due diligence and negotiating an initial business combination are less than the actual amounts necessary to do so, we may have insufficient funds available to operate our business prior to our initial business combination. Moreover, we may need to obtain additional financing either to consummate our initial business combination or because we become obligated to redeem a significant number of our public shares upon consummation of our initial business combination, in which case we may issue additional securities or incur debt in connection with such initial business combination. Subject to compliance with applicable securities laws, we would only complete such financing simultaneously with the consummation of our initial business combination, in which case we may issue additional securities or incur debt in connection with such initial business combination. Following our initial business combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements as of September 30, 2021. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay East Stone Capital Limited, an affiliate of our executive officers, a quarterly fee of $30,000 (up to $120,000 in the aggregate) for office space, utilities and secretarial and administrative services. We began incurring these fees on February 20, 2020 and will continue to incur these fees quarterly until the earlier of the consummation by the Company of an initial business combination or the Company’s liquidation (up to a maximum of $120,000 in the aggregate). As of September 30, 2021, the Company has fulfilled paying East Stone Capital Limited the aggregate $120,000 and has retired this contractual obligation.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. The Company has identified the following critical accounting policy:
Ordinary Shares Subject to Possible Redemption
The Company accounts for its ordinary shares subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Ordinary shares subject to mandatory redemption (if any) are classified as a liability instrument and are measured at fair value. Conditionally redeemable ordinary shares (including ordinary shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, ordinary shares are classified as shareholders’ equity. Certain of the Company’s ordinary shares feature redemption rights that are considered to be outside of the Company’s control and subject to the occurrence of uncertain future events. Accordingly, as of September 30, 2021, 13,800,000 ordinary shares subject to possible redemption are presented at redemption value as temporary equity, outside of the shareholders’ equity section of the Company’s condensed balance sheet.
The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable ordinary shares to equal the redemption value at the end of each reporting period.
Derivative Warrant Liabilities
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
Management evaluates all of its financial instruments, including issued warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815-15. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. In accordance with ASC 825-10 “Financial Instruments”, offering costs attributable to the issuance of the derivative warrant liabilities are recognized in the statement of operations as incurred.
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Public Shares Subject to Possible Redemption
We account for Public Shares subject to possible redemption in accordance with the guidance in FASB ASC 480 “Distinguishing Liabilities from Equity.” Public Shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. Conditionally redeemable Public Shares (including ordinary shares that feature 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) are classified as temporary equity. At all other times, Public Shares are classified as shareholders’ equity. Our Public Shares feature certain redemption rights that are considered to be outside of our control and subject to the occurrence of uncertain future events. Accordingly, as of September 30, 2021, 17,703,500 Public Shares subject to possible redemption are presented as temporary equity, outside of the shareholders’ equity section of the balance sheet.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity-linked contracts to qualify for the derivative scope exception, and it simplifies the diluted earnings per share calculation in certain areas. The Company adopted ASU 2020-06 on January 1, 2021. Adoption of the ASU did not impact the Company’s financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All activity from August 9, 2018 (inception) through September 30, 2021 relates to our formation, the preparation for our initial public offering and the search of targets for our initial business combination. We did not have any financial instruments that were exposed to market risks on September 30, 2021.
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 SEC’s 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.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer (together, the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were not effective as of September 30, 2021, due to the material weakness in our internal control over financial reporting described below in “Changes in Internal Control Over Financial Reporting.” In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this Amendment No. 1 present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2021 covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The material weakness discussed below was remediated during the quarter ended September 30, 2021.
Our Certifying Officers performed additional accounting and financial analyses and other post-closing procedures including consulting with subject matter experts related to the accounting for certain complex features of the Public Shares. The Company’s management has expended, and will continue to expend, a substantial amount of effort and resources for the remediation and improvement of our internal control over financial reporting. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we have expanded and will continue to improve these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in our Amendment No. 1 to the Transition Report on Form 10-KT/A and our preliminary prospectus/proxy statement in connection with the Business Combination with JHD filed with the SEC. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In October 2018, we issued an aggregate of 1,437,500 founder shares for an aggregate purchase price of $25,000, or approximately $0.017 per share, with 625,000 shares issued to our Sponsor, of which Mr. Chunyi (Charlie) Hao, our Chairman and Chief Financial Officer, is the sole director, 625,000 shares issued to Navy Sail International Limited, of which Mr. Hao is the sole director, and 187,500 shares issued to Mr. Hao. In January 2020, we performed a share split whereby each ordinary share was sub-divided into two shares, resulting in our initial shareholders holding an aggregate of 2,875,000 founder shares (up to 375,000 shares of which were subject to forfeiture to the extent that the underwriters’ over-allotment option was not exercised in full). In February 2020, we effected a 1.2 for 1 share dividend for each ordinary share outstanding, resulting in our initial shareholders holding an aggregate of 3,450,000 founder shares (up to 450,000 shares of which were subject to forfeiture to the extent to that the underwriters’ over-allotment option was exercised in full). Such securities were issued in connection with our organization pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act. Each of our initial shareholders is an accredited investor for purposes of Rule 501 of Regulation D. No underwriting discounts or commissions were paid with respect to such sales.
On February 24, 2020, we consummated the initial public offering of 12,000,000 Units. Each Unit consists of one ordinary share of the Company, no par value (the “Ordinary Shares”), one warrant of the Company (“Warrant”), with each Warrant entitling the holder thereof to purchase one-half of one Ordinary Share for $11.50 per whole share and one right to receive one-tenth (1/10) of one ordinary share upon consummation of the Company’s initial business combination. The Units were sold at a price of $10.00 per Unit, generating gross proceeds to the Company of $120,000,000.
Pursuant to that certain underwriting agreement, dated February 19, 2020, the Company granted the Underwriters a 30-day option to purchase up to 1,800,000 additional Units solely to cover over-allotments, if any (the “Over-Allotment Option”). Simultaneously with the consummation of the initial public, the Underwriters exercised the Over-Allotment Option in full.
On February 19, 2020, the Company issued an aggregate of 103,500 Ordinary Shares (the “Representative’s Shares”) to I-Bankers, and its designee, EarlyBirdCapital, Inc. (“EarlyBird”), in connection with their services as underwriters for the initial public offering and as a result of the full exercise of the Over-Allotment Option. Such Ordinary Shares were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
On February 24, 2020, the Company issued an aggregate of 690,000 Representative’s Warrants, exercisable at $12.00 per full share, to I-Bankers and its designee, EarlyBird, in connection with their services as underwriters for the initial public offering and as a result of the full exercise of the Over-Allotment Option.
Simultaneously with the closing of the initial public, pursuant to that certain unit subscription agreements, dated as February 20, 2020 (the “Private Placement Agreements”), by and between each of our Sponsor, I-Bankers, Hua Mao and Cheng Zhao, on the one hand, and the Company, on the other hand, completed the private sale of an aggregate of 350,000 Private Placement Units, at a purchase price of $10.00 per Private Placement Unit, generating gross proceeds to the Company of $3,500,000. Pursuant to the Private Placement Agreement, 167,000 Private Placement Units were purchased by the Sponsor, an aggregate of 108,000 Private Placement Units were purchased by Hua Mao and Cheng Zhao separately and not together, and 75,000 Private Placement Units were purchased by I-Bankers.
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The Private Placement Units are identical to the Units sold in the initial public offering, except that warrants that are part of the Private Placement Units are not redeemable by the Company so long as they are held by the original holders or their permitted transferees. In addition, for as long as the warrants that are part of the Private Placement Units are held by I-Bankers or its designees or affiliates, they may not be exercised after five years from the effective date of the Registration Statement. No underwriting discounts or commissions were paid with respect to such sales. The issuance of the Private Placement Units was made pursuant to the exemption from registration contained in Section 4(a)(2), Regulation D and/or Regulation S of the Securities Act.
A total of $138,000,000 of the net proceeds from the initial public offering and the Private Placement Units was placed in the Trust Account.
We paid a total of $2,012,500 in underwriting discounts and commissions excluding deferred underwriting discount $402,500 and $668,255 for other costs and expenses related to the initial public offering.
I-Bankers and EarlyBird agreed to defer $402,500 in underwriting commission (the “Deferred Commission”) until the completion of the Company’s initial business combination, if any, which Deferred Commission would be paid out of the Trust account to I-Bankers and EarlyBird. Such funds will be released only upon consummation of an initial business combination, as described in the Registration Statement. If the business combination is not consummated, such Deferred Commission will be forfeited. None of the underwriters will be entitled to any interest accrued on the Deferred Commission.
On May 24, 2021 and August 24, 2021, an aggregate of $2,760,000 (the “Extension Payment”) was deposited by JHD into the Trust Account for our public shareholders, representing $0.20 per public share, which enables us to extend the period of time it has to consummate its initial business combination by two three-month extensions to November 24, 2021 (the “Extensions”). The Extensions are up to two three-month extensions permitted under the Company’s governing documents and provides the Company with additional time to complete its proposed business combination with JHD.
In connection with the extension payments, we issued to JHD an unsecured promissory note having a principal amount equal to the amount of the extension payments. The note bears no interest and will be due and payable (subject to the waiver against trust provisions) on the earlier of (i) the date on which the Business Combination is consummated and (ii) the date of the liquidation of the Company.
On November 24, 2021, the Company held a special meeting of shareholders and approved to amend the Company’s Amended and Restated Memorandum and Articles of Association to extend the date by which the Company has to consummate an initial business combination from November 24, 2021 to February 24, 2022.
For a description of the use of the proceeds generated in our initial public offering, see Part I, Item 2 of this Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| * | Filed herewith. |
| ** | Furnished herewith. |
| (1) | Previously filed as an exhibit to our Current Report on Form 8-K filed on September 17, 2021 and incorporated by reference herein. |
| (2) | Previously filed as an exhibit to our Current Report on Form 8-K filed on October 14, 2021 and incorporated by reference herein. |
| (3) | Previously filed as an exhibit to our Current Report on Form 8-K filed on February 25, 2020 and incorporated by reference herein. |
| (4) | Previously filed as an exhibit to our Current Report on Form 8-K filed on August 25, 2021 and incorporated by reference herein. |
| (5) | Previously filed as an exhibit to our Current Report on Form 8-K filed on November 15, 2021 and incorporated by reference herein. |
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| East Stone Acquisition Corporation | |||
| Date: December 6, 2021 | By: | /s/ Xiaoma (Sherman) Lu | |
| Name: | Xiaoma (Sherman) Lu | ||
| Title: | Chief Executive Officer (Principal Executive Officer) | ||
| Date: December 6, 2021 | By: | /s/ Chunyi (Charlie) Hao | |
| Name: | Chunyi (Charlie) Hao | ||
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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