Estrella Immunopharma / TradeUP Acquisition Corp. — Q2 2023 10-Q
Entity and period: The filing is by TradeUP Acquisition Corp. (UPTD), a SPAC proposing to merge with preclinical-stage Estrella Biopharma, Inc.; it is not an operating-company quarterly report for the combined Estrella Immunopharma business. The unaudited period ended June 30, 2023. Unless noted otherwise, amounts are U.S. dollars.
Financial results and position
| Metric | Three months ended June 30, 2023 | Six months ended June 30, 2023 |
|---|---|---|
| Operating revenue | None | None |
| Formation and operating costs | $155,295 | $291,845 |
| Operating loss | $169,237 | $318,887 |
| Trust-account investment income | $114,310 | $220,100 |
| Net loss | $76,004 | $139,329 |
| Net loss, comparable 2022 period | $359,586 | $500,838 |
| Operating cash used | Not stated for the quarter | $488,384 |
Lower losses year over year reflected lower formation and operating costs and higher trust-account income. Margins are not meaningful because the SPAC had no operating revenue. The reported Q2 and six-month earnings per share for redeemable shares were positive ($0.11 and $0.23), reflecting redemption-value accretion; net loss per share for non-redeemable shares was $0.13 and $0.24, respectively.
- June 30 balance sheet: Cash outside the trust was $34,688; prepaid expenses were $94,675; trust investments were $9,792,271; total assets were $9,921,634.
- Current liabilities were $1,431,332, including $273,066 of promissory notes and $658,600 of related-party working-capital loans. Total liabilities were $2,990,202, including $1,550,500 of deferred underwriters’ fees. Working-capital deficit was $1,301,969; stockholders’ deficit was $2,820,571.
- Cash fell from $40,802 at year-end 2022 to $34,688. Six-month investing activities provided $99,204 and financing activities provided $383,066.
Business combination, changes, and outlook
- TradeUP’s proposed merger with Estrella was approved by stockholders on July 31, 2023, after quarter-end; the filing does not report that the transaction had closed. Estrella shareholders were expected to receive 32.5 million common shares under the merger agreement.
- Following the July 2023 business-combination vote, 650,580 public shares were submitted for redemption, leaving 98,074 public shares. Earlier, 161,566 shares were redeemed at the July extension vote. The filing states the Combination Deadline was extended to July 14, 2024, with monthly extensions; a subsequent $37,433 deposit extended the current deadline to August 19, 2023.
- Estrella had funded $273,066 of extension payments through June 30 under non-interest-bearing notes repayable at closing, with conversion rights. A subsequent binding term sheet provides for an investor to waive $6.8 million of Estrella payables in exchange for 680,000 units at closing, subject to definitive documentation and completion of the merger.
- A post-combination equity purchase agreement gives the company the option, subject to conditions, to require White Lion Capital to purchase up to $50 million of shares. This is a potential financing source, not cash received in the quarter. An amendment also contemplated issuing White Lion 250,000 Estrella Series A preferred shares before closing.
- Management reported substantial doubt about the company’s ability to continue as a going concern, citing minimal operating cash, a working-capital deficit, ongoing public-company and transaction costs, and uncertainty completing a business combination by the deadline. Management expected to rely on related-party financing; failure to complete a combination would lead to liquidation.
Risks, contingencies, and controls
- Nasdaq had notified the company of deficiencies in minimum market value of listed securities and public-holder requirements. The respective deadlines to regain compliance were October 2 and October 16, 2023; continued listing was not assured.
- To mitigate potential Investment Company Act concerns, trust assets were to be held in cash beginning July 14, 2023. Management warned this could materially reduce interest earned and redemption proceeds.
- Redemptions or repurchases could trigger an estimated approximately $17,000 excise-tax exposure unless the merger consideration shares were issued in the same 2023 tax year. The filing also describes potential creditor claims against trust assets and a $1,550,500 deferred underwriters’ fee payable only if a business combination closes.
- Disclosure controls were deemed ineffective due to a material weakness in accounting for complex equity instruments and a prior restatement involving redeemable-share classification. Management described planned training and increased review, but gave no assurance of remediation.
- The company reported no material legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether and when the Estrella merger closed, its final terms, and the resulting fully diluted ownership and share count.
- Final redemptions, trust cash available after redemptions, extension deposits, transaction costs, taxes, and deferred underwriters’ fees.
- Whether the $6.8 million payable waiver and White Lion financing arrangements were completed, and the dilution and conditions associated with each.
- Whether TradeUP regained Nasdaq compliance and whether the material weakness in financial reporting controls was remediated.
- How the combined company will fund operations and development of Estrella’s preclinical therapies; this filing provides no operating-company revenue, product guidance, or development forecast.