Business Context and Reporting Period
Social Capital Hedosophia Holdings Corp. II filed this unaudited Form 10-Q for the quarter ended September 30, 2020. The registrant was a Cayman Islands blank-check company, not yet an operating real estate business, formed to complete a business combination. It had not commenced operations or generated operating revenue.
On September 15, 2020, the company entered into a merger agreement with Opendoor Labs Inc. through its wholly owned subsidiary, Hestia Merger Sub Inc. The proposed transaction contemplated valuing Opendoor at $5.0 billion, based on $10.00 per share, subject to closing conditions and shareholder approval.
Financial Results and Key Metrics
| Metric | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 |
|---|---|---|
| Operating revenue | $0 | $0 |
| Formation and operating costs | $6.1 million | $6.4 million |
| Interest income | $16,290 | $42,207 |
| Net loss | $6.0 million | $6.3 million |
| Basic and diluted loss per share | $0.50 | $0.63 |
| Net cash used in operating activities | Not separately provided | $2.4 million |
The company reported no operating margins because it had no operating revenue. Its losses primarily reflected public-company, formation, offering, and transaction-related costs.
At September 30, 2020, cash and marketable securities in the Trust Account totaled $414.0 million, including approximately $42,000 of interest income. Cash held outside the Trust Account was $250,461. The company reported a working capital deficit of $4.9 million.
Total liabilities were $20.0 million, including a $14.5 million deferred underwriting fee payable, $4.4 million of accrued expenses, and $1.1 million outstanding under a sponsor promissory note. Shareholders’ equity was $5.0 million, while $389.7 million of Class A ordinary shares were classified as subject to possible redemption.
Material Changes Versus the Prior Comparable Period
- The filing does not provide a prior-year quarterly operating comparison because the company was formed in October 2019 and had no operating activities.
- Compared with December 31, 2019, the company raised $414.0 million through its April 2020 initial public offering and $9.2 million through a private placement of warrants.
- Cash and marketable securities held in trust increased from zero at December 31, 2019 to $414.0 million at September 30, 2020.
- The company incurred $22.2 million of offering transaction costs, including the $14.5 million deferred underwriting fee.
- On September 30, 2020, the company issued a sponsor promissory note permitting borrowings of up to $4.0 million; $1.1 million was outstanding at quarter-end.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected to continue incurring significant costs while pursuing the Opendoor business combination. The company did not provide operating or financial guidance for Opendoor or the combined company in this filing.
- The company had until April 30, 2022 to complete a business combination. If unsuccessful, it was required to cease operations, redeem the public shares using the Trust Account, and liquidate, subject to applicable law and creditor claims.
- Management stated that the limited cash held outside the Trust Account and the working capital deficit created substantial doubt about the company’s ability to continue as a going concern for the next twelve months.
- Additional sponsor, officer, director, or third-party financing might be required, but such financing was not guaranteed. Failure to obtain financing could require curtailing operations or suspending the transaction search.
- The $14.5 million deferred underwriting fee would become payable from the Trust Account only if a business combination were completed, subject to the underwriting agreement.
- Public shareholders could redeem their shares for a pro rata portion of the Trust Account in connection with the business combination. Redemptions could reduce funds available to the combined company.
- COVID-19 could negatively affect the company’s financial position, operations, or search for a target, although the specific impact was not determinable at the reporting date.
- The company noted that negative interest rates on Trust Account investments could reduce the per-share redemption amount below $10.00.
- Founder shares, warrants, potential equity issuances, and any debt or equity financing in connection with the merger could create substantial dilution or affect investor rights.
- Disclosure controls and procedures were assessed as effective, and management reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the subsequent completion, amendment, or termination of the Opendoor merger agreement and the final transaction terms.
- Verify actual shareholder redemptions, financing arrangements, and the amount of cash ultimately available to the combined company.
- Review the treatment and payment of the $14.5 million deferred underwriting fee and other merger-related obligations.
- Assess the going-concern disclosure and whether sponsor or other financing was obtained after September 30, 2020.
- Review Opendoor’s separate financial statements, operating metrics, liquidity, housing-market exposure, and risk disclosures before evaluating the combined company.
- Confirm the conversion and dilution effects of founder shares, public warrants, private placement warrants, and any additional securities issued at or after the merger.