Kaixin Auto Holdings — Q1 2019 Form 10-Q
Period: Three months ended March 31, 2019. The filing reports the former CM Seven Star Acquisition Corporation, a special-purpose acquisition company, before its April 30, 2019 business combination with Kaixin Auto Group. Accordingly, Q1 results do not reflect Kaixin’s operating business.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Formation and operating costs | $464,129 | $111,785 |
| Operating loss | $464,129 | $111,785 |
| Interest income | $1,190,612 | $737,244 |
| Net income | $726,483 | $527,701 |
| Basic and diluted EPS | $0.03 | $0.02 |
| Cash used in operating activities | $(1,085,653) | $(81,757) |
Net income was generated by interest on trust investments, not operating revenue. Formation and operating costs rose substantially, which management attributed mainly to transaction-related professional fees; interest income also increased, reflecting higher yields and a larger trust balance. Operating margins are not meaningful because the company had no revenue.
Liquidity, assets and obligations
- At March 31, cash outside the trust account was $53,980, versus $39,643 at year-end. Trust assets were $213.7 million, generally unavailable for working capital before the business combination.
- Current liabilities totaled $3.88 million, including $2.61 million due to the sponsor and $1.05 million due to Kaixin. Shareholders’ equity was $5.00 million; $204.97 million of ordinary shares were classified as subject to possible redemption.
- Operating cash outflow was partly funded by $3.16 million in financing proceeds. Investing cash outflow of $2.06 million was the extension deposit to the trust account. The filing reported no long-term debt or off-balance-sheet arrangements at quarter-end.
Transaction, outlook and risks
- The company extended its business-combination deadline to April 30, 2019. Sponsor and Kaixin deposits totaling $2.06 million funded the extension and were recorded as promissory notes.
- On April 30, the company acquired Kaixin in a share exchange, issued approximately 28.3 million shares as consideration, and redeemed 20,403,667 public shares for approximately $10.37 each. The transaction is accounted for as a reverse merger; future reported operations are those of Kaixin.
- Kunlun Tech’s $23 million convertible loan to Kaixin had $20 million funded in January, with the remaining $3 million due by January 31, 2020. Upon the combination, outstanding amounts converted into company units at $10 per unit.
- Earnout shares are contingent on 2019 revenue and 2019–2020 adjusted EBITDA targets, with additional share-price-based triggers. These are transaction terms, not management guidance. The filing provides no standalone operating forecast for Kaixin in this quarter.
- After closing, the company agreed to a $1.6 million sponsor contribution and limits on certain cash and noncash liabilities; it also paid $2 million and issued a $1.5 million note for transaction fees. These subsequent events may affect post-combination liquidity.
Investor verification points
- Confirm post-combination cash available for operations after redemptions, transaction fees and settlement or restructuring of sponsor-related loans.
- Review Kaixin’s post-merger financial statements and operating results; this 10-Q contains no Kaixin operating revenue or profit data.
- Check the status and terms of the Kunlun loan’s remaining $3 million tranche and subsequent conversion, along with the April 2019 58.com loan.
- Verify whether earnout conditions are met and assess potential share dilution from earnouts, equity incentives, converted loans and warrants.
- Note that the quarter-end liquidity position depended on restricted trust assets and financing from related parties; the filing states disclosure controls were effective and reports no material change in internal control during the quarter.