Business context and reporting period
This is CM Seven Star Acquisition Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. Despite the request’s company label, the filing is for a blank-check acquisition company, not Kaixin Auto Group; it reports no Kaixin operating results. CM Seven Star had not commenced operations and was evaluating business-combination targets.
On November 2, 2018, after quarter-end, CM Seven Star signed a share exchange agreement to acquire all outstanding equity interests of Kaixin Auto Group from Renren Inc. The filing expected the transaction to close in Q1 2019, subject to completion.
Key financial metrics
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 |
|---|---|---|
| Revenue | None | None |
| Operating costs | $177,984 | $431,786 |
| Interest income | $1,006,088 | $2,675,310 |
| Realized investment loss | None | $97,758 |
| Net income | $828,104 | $2,145,766 |
| Operating cash flow | Not separately stated for the quarter | $(290,450) |
There are no meaningful operating margins because the company had no revenue or operating business. Nine-month investing cash flow was zero; financing provided $500,000, and cash outside the trust increased by $209,550 to $374,955. Cash and securities in the restricted trust account totaled $209,362,389 at September 30. Current liabilities were $620,384, including a $500,000 non-interest-bearing sponsor loan. The filing reported no long-term debt or lease obligations.
Changes versus the prior comparable period
For the quarter, net income of $828,104 compared with a $2,571 loss in 2017, primarily reflecting trust-account interest of $1,006,088 versus $41 of interest expense/income reported as a loss. Quarterly operating costs rose to $177,984 from $2,612. For nine months, net income of $2,145,766 compared with a $4,991 loss in 2017; 2018 results included substantially higher trust interest, operating costs, and a $97,758 realized investment loss. The prior-year periods preceded or largely preceded the October 2017 IPO, so comparisons reflect a different stage of the company’s activities.
From December 31, 2017 to September 30, 2018, trust assets increased from $206,785,848 to $209,362,389, while cash outside the trust rose from $165,405 to $374,955. Current liabilities increased from $19,859 to $620,384, mainly due to the sponsor loan.
Outlook, risks and unusual items
- The proposed Kaixin transaction consideration was to consist entirely of newly issued CM Seven Star shares. Kaixin shareholders were to receive approximately 28.3 million shares at closing, with up to approximately 19.5 million additional earnout shares; approximately 4.7 million shares were to be issued or reserved for Kaixin management. Remaining trust funds at closing were expected to support Kaixin’s growth.
- Earnouts included revenue and adjusted EBITDA targets for 2019 and 2020, as well as share-price triggers. These are transaction terms, not reported operating results or standalone guidance from Kaixin.
- The SPAC’s 15-month business-combination period ran to January 2019. It could extend by three months, but doing so required an insider deposit of $2,063,629 into the trust; insiders were not obligated to provide it. Failure to complete a combination would trigger winding up and liquidation.
- Management said available outside-trust cash was expected to be insufficient for operating and transaction costs. Additional financing might be needed, but sponsors, officers, and directors had no obligation to provide it, and financing availability was uncertain. The filing stated these conditions raised substantial doubt about the company’s ability to continue as a going concern.
- Public shareholders could redeem shares in connection with a business combination. Significant redemptions could affect available transaction funding. Trust assets were generally restricted before closing, and the sponsor loan would be forgiven if no business combination were completed.
- Unusual items included the $97,758 realized loss on sale of trust investments and the $500,000 sponsor loan. Management reported effective disclosure controls as of September 30, 2018 and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the Kaixin share exchange closed, on what terms, and with what post-redemption trust proceeds and ownership dilution.
- Kaixin’s audited operating results, financial condition, cash needs, and the assumptions supporting the transaction’s revenue and adjusted EBITDA earnout thresholds; these are not provided in this pre-combination filing.
- Whether the business-combination deadline was extended, whether the required deposit was funded, and whether any additional financing was raised.
- The final number of shares issued or reserved for Kaixin shareholders and management, and the conditions and potential dilution from earnouts, rights, warrants, and the underwriter’s unit purchase option.
- How transaction expenses, public-share redemptions, and repayment or forgiveness of the sponsor loan affected liquidity and the going-concern uncertainty.