Business Context and Reporting Period
This Form 6-K filing by Aquasition Corp. (a Special Purpose Acquisition Company) covers the month of March 2014, with the report dated April 4, 2014. The filing announces the entry into a definitive Share Exchange Agreement on March 24, 2014, to acquire 100% of Hongri International Holdings Ltd. ("Target"), a fashion sportswear apparel business in China, from KBS International Holdings, Inc. ("KBS"). The transaction involves a reverse merger structure where Aquasition will acquire the Target, and KBS will subsequently dissolve.
Key Financial Metrics and Transaction Terms
The filing does not provide specific historical revenue, profit, or cash flow figures for Aquasition or the Target, noting that audited financial statements for the Target for the two years ended December 31, 2013, are to be provided by April 28, 2014. Key financial terms of the transaction include:
- Transaction Consideration: Calculated as (Target's 2013 Adjusted EBITDA x 6) minus (Target's Long Term Debt less Cash), divided by $10.30 per share.
- Minimum Ownership: The consideration must result in KBS holding at least 80% of the combined company's outstanding capital stock immediately following closing.
- Liquidity Requirement: The combined company must have at least $10 million available (excluding Target's cash/assets) immediately following closing.
- Dividend Policy: The combined company intends to distribute 20% of available profits as dividends for the first two fiscal years post-closing.
- Indemnification Caps: Indemnification obligations are capped at $1,000,000 with a minimum threshold of $200,000.
Material Changes and Corporate Actions
The primary material change is the proposed acquisition of the Target, which represents a complete change in the Company's business operations from a shell company to an operating apparel business. Other material changes include:
- Board Composition: Post-closing, the board will consist of seven directors: two designated by Principal Stockholders, one by Aquasition Investments Corp., and four independent directors (three designated by KBS, one by Aquasition Investments Corp.).
- Tender Offer: Aquasition will conduct a tender offer for public shares prior to closing, with a condition that no more than 90% of public shares are tendered.
- Nasdaq Deficiency: On March 26, 2014, the Company received a deficiency notice from the Nasdaq Stock Market.
Outlook, Risks, and Contingencies
The transaction is subject to numerous conditions, including the completion of the tender offer, regulatory approvals, and the absence of a material adverse effect. Key risks and contingencies identified include:
- Forward-Looking Statements: The filing contains substantial risks regarding the Target's ability to expand, consumer preferences in China, and geopolitical events.
- Termination Fees: A $4 million termination fee is payable to the Company if the Target's board accepts a superior proposal. The Company may also pay a fee to the Target if the tender offer cannot be completed due to reasons other than SEC review delays.
- Expiration: The agreement may be terminated if closing does not occur within 120 days of the agreement date (by July 22, 2014).
- Regulatory Compliance: Risks include compliance with Chinese government regulations, the Foreign Corrupt Practices Act, and Nasdaq listing requirements.
Investor Verification Checklist
- Verify the audited 2013 financial statements and EBITDA calculation for the Target to confirm the transaction valuation.
- Review the upcoming Schedule TO and tender offer documents for specific redemption terms and deadlines.
- Monitor the status of the Nasdaq deficiency notice and the Company's plan to maintain its listing.
- Confirm the retention of key personnel and the appointment of a Chief Financial Officer as required by the agreement.
- Assess the $10 million liquidity requirement and the source of funds to meet this threshold post-closing.