Kaixin Holdings annual report, FY2018

Business context and reporting period

This is CM Seven Star Acquisition Corporation’s Form 10-K for the fiscal year ended December 31, 2018—not an operating-company 10-K for Kaixin Holdings. CM Seven Star was a blank-check company with no operating revenue. It had signed an agreement to acquire Kaixin Auto Group, but the transaction had not closed by year-end. The filing describes Kaixin’s business as a China used-car dealership and related-services network.

The proposed acquisition would issue approximately 28.3 million shares to Kaixin’s shareholders, with up to 19.5 million additional earnout shares and approximately 4.7 million shares for Kaixin management. The filing anticipated a reverse-merger accounting treatment, with Kaixin as the accounting acquirer.

Key financial metrics

Net income came from interest earned on trust-account investments, not operating activity; operating margins therefore are not meaningful. The filing does not provide Kaixin’s standalone revenue, profit, margins, or cash flow for these periods. Cash and securities in trust were $210.455 million at December 31, 2018, versus $206.786 million a year earlier, and were generally unavailable for corporate use before a business combination. Cash outside the trust was only $39,643. Total assets were $210.554 million; current liabilities were $1.306 million, including $500,000 due to the sponsor, $787,507 in accounts payable and accrued expenses, and $18,918 due to related parties. Shareholders’ equity was $5.000 million. The company reported no long-term debt or off-balance-sheet arrangements at year-end.

Material changes versus the prior comparable period

• Net income rose from $337,250 to $2.257 million, principally as trust-account interest increased by $3.346 million because 2018 included a full year of investment income; 2017 included only about two months.
• Formation and operating costs increased by $1.328 million, mainly due to professional fees for merger and acquisition work.
• Operating cash use increased from $124,905 to $625,762. Cash outside the trust fell from $165,405 to $39,643.
• Shares classified as subject to possible redemption increased to 20.425 million from 20.199 million.

Outlook, risks, contingencies, and unusual items

The company extended its business-combination deadline to April 30, 2019 after year-end. In January 2019, the sponsor and Kaixin deposited a combined $2.064 million into the trust account; corresponding non-interest-bearing notes are payable at a business-combination closing and may be converted into units. The sponsor also fully drew a separate $1.1 million working-capital note. The filing states that failure to complete a combination by April 30 would trigger winding up, dissolution, and liquidation unless shareholders approved another extension. The auditor highlighted substantial doubt about the company’s ability to continue as a going concern.

Completion of the Kaixin transaction remained conditional, including shareholder approval, at least $5 million in tangible assets at closing, and other customary and transaction-specific conditions. Public shareholders could redeem shares; substantial redemptions could reduce funds available to the combined company. If no combination closes, public shares are to be redeemed from the trust, subject to creditor claims, while warrants and rights would expire worthless. The filing also describes possible conflicts from management’s outside affiliations and competing obligations, as well as dilution from earnout shares, warrants, rights, convertible notes, and the proposed 750,000-unit subscription. A 3.5% fee on IPO gross proceeds is payable to the business-combination advisor upon closing.

The filing provides no operating guidance for Kaixin. Earnout thresholds include 2019 revenue of RMB 5.0 billion and specified 2019 and 2020 adjusted EBITDA targets; stock-price conditions may also trigger earnout issuance regardless of financial performance.

Most important facts for investors to verify

• Whether the Kaixin acquisition closed by the extended deadline, and the final shareholder redemptions and cash proceeds available to the combined company.
• Kaixin’s audited standalone operating results, liquidity, debt, and cash flows; these are not reported as historical results in this filing.
• The final treatment, conversion, repayment, and dilution effects of the sponsor, Kaixin, Kunlun, and subscription financing arrangements.
• Final earnout calculations, share issuance, transaction conditions, and any material changes to the share-exchange agreement.
• Potential trust-account creditor claims and the consequences of liquidation if a business combination is not completed.