UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
25 Mall Road, Suite 330, Burlington, MA 01803
(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 June 8, 2022 there were
East Stone Acquisition Corporation
Quarterly Report on Form 10-Q
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
EAST STONE ACQUISITION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2022 | December 31, 2021 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | $ | ||||||
Prepaid expenses | ||||||||
Total current assets | ||||||||
Investments held in trust account | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
Current Liabilities | ||||||||
Accrued expenses | $ | $ | ||||||
Promissory note payable to shareholders | ||||||||
Promissory note payable | ||||||||
Extension loan | ||||||||
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 March 31, | ||||||||
2022 | 2021 | |||||||
Operating costs | $ | $ | ||||||
Loss from operations | ( | ) | ( | ) | ||||
Other income: | ||||||||
Change in fair value of derivative warrant liabilities | ||||||||
Extension incentive paid by Founder Shares transferred | ( | ) | ||||||
Change in fair value of FPA | ||||||||
Interest earned on investments held in the trust account | ||||||||
Total Other income, net | ||||||||
Net income (loss) | $ | $ | ( | ) | ||||
Weighted average shares outstanding of redeemable ordinary shares | ||||||||
Basic and diluted net income (loss) per ordinary share | $ | $ | ( | ) | ||||
Weighted average shares outstanding of non-redeemable ordinary shares | ||||||||
Basic and diluted net income (loss) 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’ DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2022
Ordinary Shares | Accumulated | Total Shareholders’ | ||||||||||||||
Shares | Amount | Deficit | Deficit | |||||||||||||
Balance – January 1, 2022 | $ | $ | ( | ) | $ | ( | ) | |||||||||
Net income | — | |||||||||||||||
Ordinary Shares – Fair value of Founder shares transferred by Sponsor for extension | — | |||||||||||||||
Balance – March 31, 2022 | $ | $ | ( | ) | ( | ) |
FOR THE THREE MONTHS ENDED MARCH 31, 2021
Ordinary Shares | Accumulated | Total Shareholders’ | ||||||||||||||
Shares | Amount | Deficit | Deficit | |||||||||||||
Balance – January 1, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||||||
Net loss | — | ( | ) | ( | ) | |||||||||||
Balance – March 31, 2021 | $ | $ | ( | ) | ( | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
EAST STONE ACQUISITION CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, | ||||||||
2022 | 2021 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | $ | ( | ) | ||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Change in fair value of derivative warrant liabilities | ( | ) | ( | ) | ||||
Change in fair value of forward purchase agreement | ( | ) | ||||||
Extension incentive paid by Founder Shares transferred | ||||||||
Interest earned on investments held in the 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: | ||||||||
Cash Withdrawn from Trust Account upon redemption of | ||||||||
Net cash provided by investing activities | ||||||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from promissory note | ||||||||
Redemption of | ( | ) | ||||||
Proceeds from promissory note – Shareholder | ||||||||
Repayment of promissory note – Shareholder | ( | ) | ||||||
Net cash provided by financing activities | ||||||||
Net Change in Cash | ( | ) | ||||||
Cash - Beginning of period | ||||||||
Cash - End of period | $ | $ |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
EAST STONE ACQUISITION CORPORATION
NOTES TO 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 March 31, 2022, the Company had not yet commenced any operations. All activity through March 31, 2022 relates to the Company’s formation, the initial public offering (“Initial Public Offering” or “IPO”), which is described below, and since the closing of the 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 the 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 $
5
Trust Account
Following
the closing of the IPO,
Business Combinations
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
6
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 August 23, 2021, in connection
with a second extension by three months to November 24, 2021, the Company issued to JHD an unsecured promissory note having a principal
amount of $
On November 15, 2021, the
Company filed an amendment to the definitive proxy statement to report the terms of the Backstop Arrangements described below. On November
24, 2021,
On February 24, 2022, 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 February 24, 2022 to August
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 August 24, 2022 and if the Company fails to receive an extension requested
by the Company’s initial shareholders by or before August 24, 2022, 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
7
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 by August 24, 2022 (the “Extended Combination Period”).
In the event of such distribution,
it is possible that the per share value of the residual assets remaining available for distribution (including trust account assets) will
be only $
Termination and Announcement of Business Combination Agreements
On September 20, 2020, the Company entered into a business combination agreement, as amended on November 9, 2020, (the “First Business Combination 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 Ufin 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”). On February 15, 2021, the Company and Ufin Parties entered into a letter termination agreement, upon execution and delivery of which, all of the rights and obligations of the Ufin Parties under the First Business Combination 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 “Second 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 (“JHD Pubco”), Yellow River MergerCo Limited, a British Virgin Islands company and a wholly-owned subsidiary of JHD Pubco, JHD Holdings (Cayman) Limited, a Cayman Islands company (“JHD”), Yellow River (Cayman) Limited, a Cayman Islands company (the “Primary Seller”), and the other parties thereto.
8
On April 15, 2022, the Company issued a press release on the termination of the Second Business Combination Agreement with JHD and its related parties. The Company also announced execution of a Business Combination agreement of the Company and ICONIQ Holding Limited, an exempted company incorporated with limited liability in the Cayman Islands (“ICONIQ”), under a new holding company named “NWTN Inc.”, an exempted company incorporated with limited liability in the Cayman Islands (“Pubco”) (the “Third Business Combination Agreement”). Please refer to “Note 11. Subsequent Events” below for more information on the Third Business Combination Agreement.
On February 23, 2021, the
Company issued the Hao Note (as defined in Note 5), an unsecured promissory note in the amount of up to $500,000 to Chunyi (Charlie) Hao,
the Chairman of the Board of Directors and Chief Financial Officer of the Company as a working capital loan. The Hao 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. The
Hao Note may also be converted into units at a price of $
On May 21, 2021 and August
20, 2021, an aggregate of $
On June 30, 2021, JHD and
the Company signed the Yellow River Note (as defined in Note 6), a promissory note in which Yellow River Asset Management, an affiliate
of JHD (“Yellow River”), agreed to loan to the Company a sum of $
On November 5, 2021, the Company filed with the SEC a definitive proxy statement on Schedule 14A for a special meeting of shareholders, which included a proposal to amend the Company’s Amended and Restated Memorandum and Articles of Association to extend the date by which Company had 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 below.
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 had 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.
Backstop Arrangements
On November 12, 2021, the Company entered into certain Forward Share Purchase Agreements (the “FPA”) 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 contemplated by the Second Business Combination Agreement (the “JHD Merger”), and instead would each either hold such shares for a period of time following the consummation of the JHD Merger, at which time they would each have the right to sell them to the Company at $10.41 per share, or would sell such shares on the open market during such time period at a market price of at least $10.26 per share.
9
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
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
Second Business Combination Agreement and Letter Agreement Amendments
On November 12, 2021, the Second Business Combination Agreement 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 Second Business Combination Agreement. In addition, Section 10.1(b) of the Second Business Combination Agreement was amended, contingent upon the effectiveness of the February Extension, to provide that the Second 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, 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 (
10
On January 31, 2022,
On February 10, 2022, the Company filed with the SEC its definitive proxy statement on Schedule 14A for a special meeting of shareholders to be held on February 24, 2021, which included 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 February 24, 2022 to August 24, 2022. On February 24, 2021, the shareholders approved the proposed extension to August 24, 2022 by approving the amendment of the Company’s Amended and Restated Memorandum and Articles of Association.
If the Company is unable to
complete a Business Combination by August 24, 2022 and if the Company fails to obtain another extension requested by the Company’s
initial shareholders by or before August 24, 2022, 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
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.
In the event of such distribution,
it is possible that the per share value of the residual assets remaining available for distribution (including trust account assets) will
be only $
11
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 Private Units and the IPO that were placed in an account outside of the trust account for working capital purposes. As of March
31, 2022, 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 March 31, 2022, Mr. Chunyi (Charlie) Hao, the Company’s
Chairman of the Board and Chief Financial Officer, has loaned the Company $
On May 21, 2021 and August
20, 2021, an aggregate of $
On November 24, 2021, the Company held a special meeting of shareholders to approve a proposed amendment to 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.
On February 10, 2022, the Company held a special meeting of shareholders to approve a proposed amendment to 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 February 24, 2022 to August 24, 2022. On February 24, 2022, the shareholders approved the Company extension to August 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 (see Note 5).
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.
12
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 February 24, 2022, the
Company called a shareholders’ meeting to approve the extension from February 24, 2022 to August 24, 2022. As the result of the
extension to August 24, 2022, the scheduled liquidation date of the Company, the Company will have close to six months to complete a
Business Combination. With such extension approved, it is not guaranteed the Company may consummate a Business Combination by August 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 August 24, 2022, the scheduled liquidation date of the Company. The accompanying unaudited condensed consolidated
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 and February 24, 2022, the Company held special meetings 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, and from February 24, 2022 to August
24, 2022, respectively. In connection with the approval of the extension on November 24, 2021, 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 August 24, 2022, then the Company will cease all operations except for the purpose of liquidating. The liquidity condition and 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 August 24, 2022. The Company intends to complete its Business Combination by the liquidation date.
NOTE 2. 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”) 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-K for the year ended December 31, 2021 as filed with the SEC on April 15, 2022, which contains the audited financial statements and notes thereto. The interim results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any future interim periods.
13
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 accompanying unaudited condensed consolidated financial financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Use of Estimates
The preparation of the accompanying 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 accompanying unaudited condensed consolidated 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 accompanying unaudited condensed consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. In the accompanying unaudited condensed consolidated 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 FASB Accounting
Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity” (“ASC 480”).
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. 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 March 31, 2022 and December 31, 2021,
14
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.
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 had 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
At March 31, 2022 and December 31, 2021, the ordinary shares subject to possible redemption reflected in the consolidated balance sheets are reconciled in the following table:
Ordinary shares subject to possible redemption as of January 1, 2021 | $ | |||
Add: accretion of carrying value of redemption value | ||||
Less: redemption of ordinary shares | ( |
) | ||
Ordinary shares subject to possible redemption as of December 31, 2021 | $ | |||
Less: redemption of ordinary shares | ( |
) | ||
Ordinary shares subject to possible redemption as of March 31, 2022 | $ |
Offering Costs
Total offering costs amounted
to $
15
Forward Share Purchase Agreements
On November 12, 2021, the
Company entered into the FPA with Sea Otter, Mint Tower, Glazer and Meteora, which provided that such investors would not redeem shares
that they each hold in connection with the proposal to extend the date by which the Company had to consummate a Business Combination from
November 24, 2021 to February 24, 2022 and the proposed Merger with JHD, and instead would each either hold such shares for a period of
time following the consummation of the JHD Merger, at which time they would each have the right to sell them to East Stone at $
The Company accounts for the FPA as embedded contracts to the share purchase contracts with these Backstop Investors, and classifies the FPA as a liability in accordance with the guidance in ASC 480, because the FPA embody an obligation to redeem the Company’s outstanding shares at fixed amount of cash.
The Company initially measures the financial liabilities at fair value, and changes in fair value of financial liabilities are subsequently charged to the consolidated statements of operations. The FPA automatically terminated when the Business Combination did not close by February 24, 2022. As such the FPA liability was derecognized on February 24, 2022.
Income Taxes
FASB 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 March 31, 2022 and December 31, 2021, 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 accompanying 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 loss per ordinary share
is computed by dividing net loss by the weighted average number of ordinary shares outstanding for the period. The calculation of diluted
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 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 statements of operations include 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
March 31, 2021, net loss per ordinary share, basic and diluted for redeemable ordinary shares, is calculated as dividing the allocated
net income for the three months ended March 31, 2021, by the weighted average number of
For the three months
ended March 31, 2022, net income per ordinary share, basic and diluted for redeemable ordinary shares, is calculated as dividing the
allocated net income for the three months ended March 31, 2022, by the weighted average number of
Non-redeemable ordinary shares include the Founder Shares, Representative’s Shares and ordinary shares underlying the Private Units, as these shares do not have any redemption features and do not participate in the income earned on the trust account.
16
Concentration of Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist of a cash account in a financial institution, which, at times, may exceed the Federal
Deposit Insurance Corporation coverage limit of $
Financial Instruments
The Company analyses all financial instruments with features of both liabilities and equity under ASC 480 and FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). Pursuant to its IPO, the Company sold 13,800,000 Units (including underwriters’ full exercise over-allotment option 1,800,000 Unit) consisting with one ordinary share, one right (“Public Right”), and one Public Warrant (as defined in Note 3). Simultaneously with the closing of the IPO, the Company sold 350,000 Private Units, consisting of 350,000 Private Shares (as defined in Note 4), 350,000 Private Warrants (as defined in Note 4) and 350,000 Private Rights (as defined in Note 4). As compensation to the IPO underwriters, the Company issued 690,000 Representative’s Warrants to the Company’s underwriters (see Note 6). The Company accounted for its Public Warrants, Public Rights and Private Rights as equity instruments. The Company accounted for the Private Warrants and Representative’s Warrants as liability instruments.
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying consolidated balance sheet, primarily due to their short-term nature, other than the warrant liabilities (see Note 10).
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 FASB ASC Topic 815-15, “Derivatives and Hedging—Embedded Derivatives Recognition”.” 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 FASB ASC Topic 825-10, “Financial Instruments”, offering costs attributable to the issuance of the derivative warrant liabilities are recognized in the consolidated statement of operations as incurred.
The Company sold
Derivative Liability of Forward Share Purchase
On November 12, 2021, the
Company entered into the FPA with Sea Otter, Mint Tower, Glazer and Meteora, which provided that such investors will not redeem shares
Recently Issued Accounting Standards
There have been no recently issued accounting standards that are applicable to the Company.
17
NOTE 3. INITIAL PUBLIC OFFERING
Pursuant to the IPO, the Company
sold
NOTE 4. PRIVATE PLACEMENT
Simultaneously with the closing
of the IPO, the Sponsor, anchor investors and I-Bankers purchased an aggregate of
NOTE 5. RELATED PARTY TRANSACTIONS
Founder Shares
In October 2018, the Company
issued
Of the
As of November 24, 2021, the
initial shareholders had transferred
18
On January 31, 2022,
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 $
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.
On February 23, 2021, the
Company issued a promissory note for up to $
19
NOTE 6. COMMITMENTS AND CONTINGENCIES
Risk and Uncertainties
In February 2022, the Russian Federation and Belarus commenced a military action with the country of Ukraine. As a result of this action, various nations, including the United States, have instituted economic sanctions against the Russian Federation and Belarus. Further, the impact of this action and related sanctions on the world economy is not determinable as of the date of the accompanying unaudited condensed consolidated financial statements. The specific impact on the Company’s financial condition, results of operations, and cash flows is also not determinable as of the date of the accompanying unaudited condensed consolidated financial statements.
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 the accompanying unaudited condensed consolidated 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 the Company 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 the Company’s 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, the Company’s 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.
Promissory Note
On December 31, 2021, the
Company issued a promissory note for up to $
Extension Loans
As discussed in Note 1, the
Company has extended the period of time to consummate a Business Combination twice, 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 $
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.
20
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
On February 24, 2020, the
date when the Representative’s Warrants were issued, the Company estimated the fair value of Representative’s Warrants to
be approximately $
21
NOTE 7. DERIVATIVE WARRANT LIABILITIES AND DERIVATIVE FORWARD SHARE PURCHASE LIABILITIES
The Company accounts for the Public Warrants, the Private Warrants and the Representative’s Warrants (together, the “Warrants”) and its FPA as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the Warrants and FPA and the applicable authoritative guidance in ASC 480 and ASC 815. The assessment considers whether the Warrants and FPA are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815, including whether the Warrants and FPA are indexed to the Company’s own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of issuance of the Warrants and execution of the FPA and as of each subsequent quarterly period end date while the Warrants and FPA are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, such warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, such warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of liability-classified warrants are recognized as a non-cash gain or loss on the statements of operations.
The Company accounts for the Warrants and FPA in accordance with ASC 815-40 under which the Warrants and FPA do not meet the criteria for equity classification and must be recorded as derivatives. The fair value of the Private Warrants has been estimated using the modified Black-Scholes-Merton model. The fair value of the FPA has been estimated using an adjusted net assets method. See Note 10 for further discussion of the fair value measurement.
Warrant Liabilities
As of March 31, 2022 and December
31, 2021, the Company had
The Private Warrants are identical to the Public Warrants (see Note 9) underlying the Units sold in the IPO, except that the Private Warrants and the Private Shares, ordinary shares issuable upon the exercise of the Private Warrants, are 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 are exercisable on a cashless basis and are 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 are redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The Representative’s
Warrants are different from the Public and Private Warrants. The exercise price of the Representative’s Warrants is $
Forward Share Purchase Liabilities
On November 12, 2021, the
Company entered into the FPA with Sea Otter, Mint Tower, Glazer and Meteora, which provided that such investors will not redeem
22
The Company has classified
the FPA as a derivative liability. This financial instrument is subject to re-measurement at each balance sheet date. With each such re-measurement,
the FPA asset or liability will be adjusted to fair value, with the change in derivative fair value recognized in the Company’s
consolidated statement of operations. As such, the Company recorded a $
Derivative liability - forward purchase agreement at November 24, 2021 | $ | |||
Change in fair value of derivate instrument related to forward share purchase | ( | ) | ||
Derivative liability - forward share purchase at December 31, 2021 | ||||
Derecognition and change in fair value of derivate instrument related to forward share purchase | ( | ) | ||
Derivative liability - forward share purchase at March 31, 2022 | $ |
NOTE 8. SHAREHOLDERS’ DEFICIT
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 March 31, 2022 and December 31, 2021, 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.
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 had 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
On February 24, 2022, 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 February 24, 2022 to August
24, 2022. In connection with the approval of the extension, shareholders elected to redeem an aggregate of
As of March 31, 2022 and December
31, 2021, there were
Rights
23
NOTE 9. WARRANTS – PUBLIC AND PRIVATE
The Public Warrants, warrants
underlying Units sold in the IPO, 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.
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.
24
NOTE 10. 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 March 31, 2022 and December 31, 2021, 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 presented at fair value 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 and are presented at fair value.
As noted in Note 7, 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.
The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021 and indicates the fair value of held to maturity securities as follows:
Level | March 31, 2022 | December 31, 2021 | ||||||||
Description | ||||||||||
Assets: | ||||||||||
Trust account – U.S. Treasury Securities Money Market Fund | 1 | $ | $ | |||||||
Liabilities: | ||||||||||
Derivative Warrant Liability – Private Warrant | 3 | $ | $ | |||||||
Derivative Warrant Liability – Representative’s Warrant | 3 | $ | $ | |||||||
Derivative Liability - Forward Share Purchase | 3 | $ | — | $ |
The fair value of the Private
Warrants and the Representative’s Warrants were estimated using Black-Scholes model for the period ended March 31, 2022 and December
31, 2021. For the period ended March 31, 2022 and December 31, 2021 on the statements of operations, the Company recognized an increase
in the fair value of warrant liabilities of $
25
The estimated fair value of
the Private Warrants and Representative’s 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. Significant increase and decreases in the volatility, in isolation, could lead to significant changes
in valuation. 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 estimated fair value of the forward share purchase is determined using Black-Scholes model for the period ended March 31, 2022 and December 31, 2021. For the period ended March 31, 2022 and December 31, 2021, on the consolidated statement of operations, the Company recognized a decrease in the fair value of forward share purchase of $
from November 24, 2021 to December 31, 2021, presented as change in fair value of derivative liabilities on the accompanying consolidated statement of operations. The FPA automatically terminated when the Second Business Combination did not close by February 24, 2022. As such the FPA liability was derecognized on February 24, 2022.
The following table provides quantitative information regarding Level 3 fair value measurements inputs for the Company’s warrants at their measurement dates:
As of March 31, 2022 | As of December 31, 2021 | |||||||
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 ended March 31, 2022 and 2021 is summarized as follows:
Derivative Warrant Liabilities at December 31, 2021 | $ | |||
Change in fair value of derivative warrant liabilities | ( | ) | ||
Derivative warrant liabilities at March 31, 2022 | $ |
Derivative Warrant Liabilities at December 31, 2020 | $ | |||
Change in fair value of derivative warrant liabilities | ( | ) | ||
Derivative warrant liabilities at March 31, 2021 | $ |
NOTE 11. SUBSEQUENT EVENTS
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the accompanying unaudited condensed consolidated financial statements were issued. Based upon this review, and other than below, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the accompanying unaudited condensed consolidated financial statements.
Termination of Previously Announced Original Agreement
On April 15, 2022, the Company terminated its Second Business Combination agreement with JHD and its related parties.
26
Execution of New Business Combination Agreement
On April 15, 2022, the Company, entered into a Business Combination agreement (the “ Third Business Combination Agreement”) with Navy Sail International Limited, a British Virgin Islands company, in the capacity as the representative of the Company and the shareholders of the Company immediately prior to Closing from and after the Closing (the “Purchaser Representative”), Pubco, Muse Merger Sub I Limited, an exempted company incorporated with limited liability in the Cayman Islands and a wholly-owned subsidiary of the Pubco (the “First Merger Sub”), Muse Merger Sub II Limited, a British Virgin Islands business company and a wholly-owned subsidiary of Pubco (the “Second Merger Sub”), and ICONIQ.
Pursuant to the Third Business Combination Agreement, subject to the terms and conditions set forth therein, at the closing of the transactions contemplated by the Third Business Combination Agreement (the “Closing”), which Closing is subject to, among other things, regulatory and shareholder approval, (a) the First Merger Sub will merge with and into ICONIQ (the “First Merger”), with ICONIQ surviving the First Merger as a wholly-owned subsidiary of Pubco and the outstanding shares of ICONIQ being converted into the right to receive shares of Pubco; and (b) the Second Merger Sub will merge with and into the Company (the “Second Merger”, and together with the First Merger, the “Mergers”), with the Company surviving the Second Merger as a wholly-owned subsidiary of the Pubco and the outstanding securities of the Company being converted into the right to receive substantially equivalent securities of the Pubco (the Mergers together with the other transactions contemplated by the Third Business Combination Agreement and other ancillary documents, the “Transactions”).
Under
the Third Business Combination Agreement, the Aggregate Merger Consideration Amount (as defined therein)to be paid to the shareholders
of ICONIQ is $
As
a result of the Mergers, (a) each of the Class A ordinary shares of ICONIQ that are issued and outstanding immediately prior to the time
when the First Merger becomes effective under the Companies Act (2022 Revision) of the Cayman Islands, as amended (the “First Merger
Effective Time”) will be cancelled and converted into (i) the right to receive
Promissory Note
In
connection with the execution of the Third Business Combination Agreement, on April 21, 2022, ICONIQ issued to the Company an unsecured
promissory note effective upon the execution thereof of up to an aggregate amount of $
27
PIPE Transaction
In
connection with the execution of the Third Business Combination Agreement, on April 21, 2022, the Company and the Pubco have entered into
a subscription agreement (the “PIPE Subscription Agreement”) with an investor (the “PIPE Investor”), pursuant
to which, among other things, the Pubco has agreed to issue and sell to the PIPE Investor, and the PIPE Investor has agreed to subscribe
for and purchase, certain ordinary shares of the Pubco for a purchaser price at the Per Share Price and at an aggregate purchase price
of $
Related Agreements and Documents
Lock-Up Agreements
Simultaneously
with the execution of the Third Business Combination Agreement,
Shareholder Support Agreement
Simultaneously with the execution of the Third Business Combination Agreement, the Company, ICONIQ, and certain shareholders of ICONIQ have entered into a Shareholder Support Agreement, pursuant to which, among other things, the shareholders of ICONIQ have agreed to support the adoption of the Third Business Combination Agreement and the approval of the Transactions, subject to certain customary conditions, and not to transfer any of their subject shares (or enter into any arrangement with respect thereto), subject to certain customary conditions.)
Insider Letter Amendment
Simultaneously with the execution of the Third Business Combination Agreement, the Company, ICONIQ, the Purchaser Representative, Double Ventures Holdings Limited, the Pubco, Xiaoma (Sherman) Lu and Chunyi (Charlie) Hao have entered into an amendment to that certain letter agreement, dated February 19, 2020, by and among the Company, the Sponsor and the directors, officers or other initial shareholders of the Company named therein, pursuant to which the Pubco is added as a Party to the Insider Letter, and the lock-up period set forth in the Insider Letter, as applied to the Primary Initial Shareholders (as defined therein) with respect to their Founder Shares after Closing, was amended to be identical to the lock-up period set forth in the lock up agreement for the Founders.
The foregoing descriptions of the Third Business Combination Agreement, Lock-Up Agreements, Shareholder Support Agreement and Insider Letter Agreement are subject to and qualified in their entirety by reference to the full text of the Third Business Combination Agreement, Lock-Up Agreements, Shareholder Support Agreement and Insider Letter Agreement, copies of which are attached as exhibits to this this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 (the “Quarterly Report”). Other than as specifically discussed, this Quarterly Report does not give effect to the proposed Transactions.
28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
References in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 (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.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the 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 “Item 2. 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 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 consummating a 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 (the “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; |
29
● | 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. |
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
Second Business Combination Agreement with JHD
On February 16, 2021, we entered into the Original 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, 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 Original Agreement after the date hereof 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 our Sponsor, solely with respect to Sections 10.3 and Articles XII and XIII thereof, as applicable. On September 13, 2021 and October 7, 2021, the parties to the Original Agreement entered into that certain Amended and Restated Second Business Combination Agreement and Second Amended and Restated Second Business Combination Agreement (as amended on November 12, 2021), respectively.
30
The Original Agreement and related agreements are further described in the current reports on Form 8-K filed by our Company on February 18, 2021, September 17, 2021, October 14, 2021 and November 26, 2021. The foregoing description of the Original Agreement is qualified in its entirety by reference to the complete text of the Original Agreement, a copy of which was attached as Annex A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on February 10, 2021 and is incorporated herein by reference.
The transactions contemplated by the Original Agreement (the “JHD Transactions”) are subject to, among other things, the approval of the JHD Transactions by the Company’s shareholders, satisfaction of the conditions stated in the Original Agreement and other customary closing conditions, including that the SEC completes its review of the proxy statement/prospectus relating to the JHD Transactions, the receipt of certain regulatory approvals, and the approval by The Nasdaq Stock Market to list the securities of the combined company.
Subsequent to the date of this Quarterly Report, on April 15, 2022, The Company terminated its Second Business Combination Agreement with JHD Holdings Limited and its related parties. The Company also announced execution of a Third Business Combination of the Company and ICONIQ Holding Limited, a Cayman Islands company, under the Pubco.
Execution of New Business Combination Agreement
On April 15, 2022, the Company, entered into the Third Business Combination Agreement with Navy Sail International Limited, a British Virgin Islands company, in the capacity as the representative of the Company and the shareholders of the Company immediately prior to Closing from and after the Purchaser Representative, the Pubco, the First Merger Sub, the Second Merger Sub, and ICONIQ.
Pursuant to the Third Business Combination Agreement, subject to the terms and conditions set forth therein, at the Closing, which Closing is subject to, among other things, regulatory and shareholder approval, (a) the First Merger, with ICONIQ surviving the First Merger as a wholly-owned subsidiary of Pubco and the outstanding shares of ICONIQ being converted into the right to receive shares of Pubco; and (b) the Second Merger” with the Company surviving the Second Merger as a wholly-owned subsidiary of the Pubco and the outstanding securities of the Company being converted into the right to receive substantially equivalent securities of the Pubco.
Under the Third Business Combination Agreement, the Aggregate Merger Consideration Amount to be paid to the shareholders of ICONIQ is $2,500,000,000 and will be paid entirely in shares, comprised of newly issued ordinary shares of the Pubco, with each share valued at the Per Share Price.
As a result of the Mergers, (a) each of the Class A ordinary shares of ICONIQ that are issued and outstanding immediately prior to the time when the First Merger becomes effective under the Companies Act (2022 Revision) of the Cayman Islands, as amended (the “First Merger Effective Time”) will be cancelled and converted into (i) the right to receive 90% of such number of Class A ordinary shares of the Pubco equal to the Exchange Ratio, and (ii) the contingent right to receive 10% of such number of Class A ordinary shares of the Pubco equal to the Exchange Ratio in accordance with the Third Business Combination Agreement. Each Class B ordinary share of ICONIQ that is issued and outstanding immediately prior to the First Merger Effective Time will be cancelled and converted into the right to receive the number of Class B ordinary shares of the Pubco equal to the Exchange Ratio; (b) each ordinary share of the Purchaser that is issued and outstanding immediately prior to the Effective Time shall be cancelled and converted automatically into the right to receive one Pubco Class B ordinary share. Each of outstanding Purchaser Public Warrant and Purchaser Private Warrant shall be converted into one Pubco Public Warrant and one Pubco Private Warrant, respectively. Each issued and outstanding Purchaser Right shall be automatically converted into one-tenth of one Pubco Class B ordinary share.
Related Party Loans
As of March 31, 2022, our Chief Financial Officer and one of the initial shareholders, Mr. Chunyi (Charlie) Hao, has loaned to the Company $427,027, 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.
31
Promissory Note
As of March 31, 2022, 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 March 31, 2022, the Company had drawn down an aggregate of $200,000.
Extension Loan
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. Effective February 24, 2022, the Company extended the date by which the Company has to consummate a Business Combination from February 24, 2022 to August 24, 2022 without involving cash payment into trust account.
Backstop and Founder Share Transfer Arrangements
On November 12, 2021, the Company entered into certain FPA with Sea Otter, Mint Tower, Glazer and Meteora, which provided that such investors will not redeem shares that they each hold up to an aggregate of 2,923,974 shares, connection with the proposal for the November 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 JHD Merger, at which time they will each have the right to sell them to the Company 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 Founder Share Transfer Agreements with the Backstop Investors to transfer to the Backstop Investors an aggregate of 399,996 Founder Shares to be transferred to such investors. Of such amount, an aggregate of 135,000 Founder Shares were transferred to the Backstop Investors in connection with the November Extension, and an aggregate of up to 264,996 Founder Shares will be transferred to the Backstop Investors contemporaneously with the Second Business Combination. Any Founder Shares transferred pursuant to these arrangements will be subject to the same rights and obligations as the remaining Founder Shares held by the Sponsor, including certain registration rights and the obligations to (a) vote any Founder Shares held by the Backstop Investors in favor of the Business Combination, and (b) subject any Founder Shares held by them to the same lock-up restrictions as the Founder Shares held by our Sponsor.
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 a Letter Agreement Amendment to 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 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 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 FPA 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 Chunyi (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 Chunyi (Charlie) Hao, Xiaoma (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.
32
On January 31, 2022, certain of the Backstop Investors entered into the February 2022 Founder Share Transfer Agreements with the Sponsor to support a proposal for the February Extension. Pursuant to February 2022 Founder Share Transfer Agreements, such Backstop Investors agreed to not request redemption of an aggregate of up to 600,000 ordinary shares of the Company in connection with the February Extension. In connection therewith, our Sponsor agreed to transfer to such Backstop Investors an aggregate of (i) 180,000 Founder Shares on or prior to the February 24, 2022 special meeting of shareholders to approve the February Extension, and (ii) 60,000 Founder Shares for each month past May 24, 2022 that the Third Business Combination has not yet closed, for a total of up to 360,000 Founder Shares to be received by such Backstop Investors to support the February Extension.
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.
On February 24, 2022, 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 February 24, 2022 to August 24, 2022. In connection with the approval of the extension, shareholders elected to redeem an aggregate of 361 ordinary shares, of which the Company paid cash from the trust account in the aggregate amount of approximately $3,704 (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 March 31, 2022 were organizational activities, those necessary to consummate the Initial Public Offering 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 generate non-operating income in the form of interest income on marketable securities held after the Initial Public Offering. We have been incurring 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 three months ended March 31, 2022 and 2021, respectively, we had net income (loss) of $216,865 and ($89,814), respectively, which consists of operating costs of $402,487 and $109,937, decrease in fair value of derivative warrant liabilities of $449,000 and decrease in fair value of $16,700, respectively, offset by decrease in fair value of derivative forward share purchase of $2,069,000, and interest income of $2,152 and $3,423 on marketable securities held in the trust account, a trust account in the United States at JPMorgan Chase Bank, N.A., maintained by Continental Stock Transfer & Trust Company, acting as trustee.
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 Private Units at a price of $10.00 per Private 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 Representative’s Warrants, which are exercisable at $12.00 per full share (or an aggregate exercise price of $8,280,000). A total of $138,000,000 of the net proceeds from the Initial Public Offering and the Private Units was placed in the trust account.
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 consolidated 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.
33
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. 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 had 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.
As of March 31, 2022, we had marketable securities held in the trust account of $33,503,273 (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. In November 2021, 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.
We intend to use substantially all of the net proceeds of the Initial Public Offering and the sale of the Private Units, including the funds held in the trust account (excluding any deferred underwriting commissions and certain advisory fees to 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 March 31, 2022, we had cash of $13,529 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 August 24, 2022, the scheduled liquidation date of the Company. The unaudited condensed financial statements disclosed in “Item 1. 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.
In connection with the Company’s assessment of going concern considerations in accordance with FASB 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 August 24, 2022, and if a further extension to February 24, 2023 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 on August 24, 2022.
34
In connection with the transactions contemplated by the Third Business Combination Agreement, ICONIQ issued to the Company an unsecured promissory note effective upon the execution thereof (the “ICONIQ Note”) of up to an aggregate amount of $1,000,000, which funds will solely be used to pay certain third party service fees and expenses of the Company in connection with this Third Business Combination. The first tranche of the ICONIQ Note of $300,000 will be disbursed to the Company within five calendar days of the execution of the Third Business Combination Agreement, and the second tranche of $700,000 will be drawn down and paid directly to the Company’s third-party service providers in connection with the consummation of the Transactions as such expenses are incurred. The ICONIQ Note bears no interest and will be due and payable (subject to the waiver against trust provisions) on the earlier of (i) the one year anniversary of the date of disbursing the first tranche of the ICONIQ Note, (ii) the date of closing of a Business Combination between the Company and a third party other than ICONIQ, (iii) the date of closing of the transactions contemplated by the Third Business Combination Agreement, (iv) the date of the occurrence of an Event of Default as described in the ICONIQ Note, and (v) the date of termination of the Third Business Combination Agreement. The ICONIQ Note may be repaid, at ICONIQ’s discretion, (i) in cash or (ii) in the Company’s ordinary shares, based on a conversion price of $10.26 per share, or, if lower, the then-applicable redemption price of the Company’s public shares, subject to the terms of the Third Business Combination Agreement.
With a minimum cash on our consolidated balance sheet, we do believe we will need to raise additional funds in order to meet the expenditures required for operating our business to consummate our initial Business Combination. Any additional funds raised prior to our initial Business Combination are liability of the surviving company upon Business Combination. However, we cannot ensure sufficient fund available to repay any such funding if large redemption occurs at our initial Business Combination. 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 March 31, 2022. 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 March 31, 2022, 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 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 policies:
35
Ordinary Shares Subject to Possible Redemption
The Company accounts for its ordinary shares subject to possible redemption in accordance with the guidance in ASC 480. 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 March 31, 2022 and December 31, 2021, 3,264,744 and 3,265,105 public ordinary shares, respectively, subject to possible redemption are presented at redemption value as temporary equity, outside of the shareholders’ (deficit) equity section of the Company’s consolidated 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.
Net Income (Loss) per Ordinary Share
Net loss per ordinary share is computed by dividing net loss by the weighted average number of ordinary shares outstanding for the period. The calculation of diluted 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 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 6,900,000 shares of ordinary shares and warrants derived from the Private Units are exercisable to purchase 175,000 shares of ordinary shares, together 7,075,000 in the aggregate.
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 March 31, 2021, 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 March 31, 2022, by the weighted average number of 13,800,000 and 3,903,500 redeemable ordinary shares outstanding for the periods, respectively, resulted in $(0.01) and $(0.01) per ordinary share, basic and diluted.
For the three months ended March 31, 2022, net income (loss) per ordinary share, basic and diluted for redeemable ordinary shares, is calculated as dividing the allocated net income (loss) for the three months ended March 31, 2022, by the weighted average number of 3,264,969 and 3,903,500 redeemable ordinary shares outstanding for the periods, respectively, resulted in net income of $0.03 and $0.03 per ordinary share, basic and diluted.
Non-redeemable ordinary shares include the Founder Shares, Representative’s Shares and ordinary shares underlying the Private Units, as these shares do not have any redemption features and do not participate in the income earned on the trust account.
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 FASB ASC Topic 825-10, “Financial Instruments”, offering costs attributable to the issuance of the derivative warrant liabilities are recognized in the condensed consolidated statement of operations as incurred.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed financial statements.
Factors That May Adversely Affect Our Results of Operations
Our results of operations and our ability to complete an initial Business Combination may be adversely affected by various factors that could cause economic uncertainty and volatility in the financial markets, many of which are beyond our control. Our business could be impacted by, among other things, downturns in the financial markets or in economic conditions, increases in oil prices, inflation, increases in interest rates, supply chain disruptions, declines in consumer confidence and spending, the ongoing effects of the COVID-19 pandemic, including resurgences and the emergence of new variants, and geopolitical instability, such as the military conflict in the Ukraine. We cannot at this time fully predict the likelihood of one or more of the above events, their duration or magnitude or the extent to which they may negatively impact our business and our ability to complete an initial Business Combination.
36
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management evaluated, with the participation of our principal executive officer and principal financial and accounting officer (our “Certifying Officers”), the effectiveness of our disclosure controls and procedures as of March 31, 2022, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officers concluded that our disclosure controls and procedures were not effective as of March 31, 2022, due solely 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 Report 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
Management has identified a material weakness in internal controls related to the accounting for complex financial instruments. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to continue to enhance our system of evaluating and implementing the accounting standards that apply to our financial statements, including through enhanced analyses by our personnel and third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
Except as stated above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
37
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to include risk factors in this Quarterly Report. However, as of the date of this Quarterly Report, other than as set forth below, there have been no material changes with respect to those risk factors previously disclosed in our (i) final prospectus dated February 19, 2020, as filed with the SEC on February 21, 2020 (the “Final Prospectus”), (ii) Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 as filed with the SEC on May 13, 2020 (the “2020 Q1 10-Q”), (iii) Annual Report on From 10-K for the fiscal year ended June 30, 2020 and (iv) Annual Report on From 10-K for the fiscal year ended December 31, 2021. 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. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.
Changes in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, including our ability to negotiate and complete our initial Business Combination and results of operations.
We are subject to laws and regulations enacted by national, regional and local governments. We will be required to comply with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our business, including our ability to negotiate and complete our initial Business Combination and results of operations.
On March 30, 2022, the SEC issued proposed rules relating to, among other items, disclosures in Business Combination transactions involving SPACs (as defined below) and private operating companies; the financial statement requirements applicable to transactions involving shell companies; the use of projections in SEC filings in connection with proposed Business Combination transactions; the potential liability of certain participants in proposed Business Combination transactions; and the extent to which special purpose acquisition companies (“SPACs”) could become subject to regulation under the Investment Company Act, including a proposed rule that would provide SPACs a safe harbor from treatment as an investment company if they satisfy certain conditions that limit a SPAC’s duration, asset composition, business purpose and activities. These rules, if adopted, whether in the form proposed or in a revised form, may increase the costs of and the time needed to negotiate and complete an initial Business Combination, and may constrain the circumstances under which we could complete an initial Business Combination.
Military conflict in Ukraine could make it more difficult for us to consummate a Business Combination.
Military conflict in Ukraine may lead to increased and price volatility for publicly traded securities, including ours, and to other national, regional and international economic disruptions and economic uncertainty, any of which could make it more difficult for us to identify a Business Combination partner and consummate a Business Combination on acceptable commercial terms or at all.
Recent increases in inflation in the United States and elsewhere could make it more difficult for us to consummate a Business Combination.
Recent increases in inflation in the United States and elsewhere may be leading to increased price volatility for publicly traded securities, including ours, and may lead to other national, regional and international economic disruptions, any of which could make it more difficult for us to consummate a Business Combination.
38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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.
On February 24, 2022, 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 February 24, 2022 to August 24, 2022. In connection with the approval of the extension, shareholders elected to redeem an aggregate of 361 ordinary shares, of which the Company paid cash from the trust account in the aggregate amount of approximately $3,704 (approximately $10.26 per share) to redeeming shareholders.
For a description of the use of the proceeds generated in our Initial Public Offering, see Part I, Item 2 of the 2020 Q1 10-Q. There has been no material change in the planned use of the proceeds from our IPO and private placement as is described in the Final Prospectus.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosure.
Not applicable.
Item 5. Other Information.
None.
39
Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report.
* | Filed herewith. |
** | Furnished herewith. |
(1) | The exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). The Company agrees to furnish supplementally a copy of all omitted exhibits and schedules to the SEC upon its request. |
(2) | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on April 21, 2022. |
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.
East Stone Acquisition Corporation | |||
Date: June 8, 2022 | By: | /s/ Xiaoma (Sherman) Lu | |
Name: | Xiaoma (Sherman) Lu | ||
Title: | Chief Executive Officer (Principal Executive Officer) | ||
Date: June 8, 2022 | By: | /s/ Chunyi (Charlie) Hao | |
Name: | Chunyi (Charlie) Hao | ||
Title: | Chief Financial Officer (Principal Financial and Accounting Officer) |
41