Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
All statements other than statements of historical fact included in this Report including, without limitation, statements under this Item regarding our financial position, business strategy and the plans and objectives of Management for future operations, are forward-looking statements. When used in this Report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or our Management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of our Management, as well as assumptions made by, and information currently available to, our Management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the SEC. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Report.
Overview
We are a blank check company incorporated on March 5, 2021, as a Cayman Islands exempted company, for the purpose of effecting Business Combination with one or more businesses or entities. We intend to effectuate our initial Business Combination using (i) cash from the proceeds of the Initial Public Offering and the Private Placement, (i) the proceeds of the sale of our shares in connection with our initial Business Combination (pursuant to any forward purchase agreements or backstop agreements we may enter into), (iii) shares issued to the owners of the target, debt issued to bank or other lenders or the owners of the target, (iv) or a combination of the foregoing or other sources.
The issuance of additional shares in a Business Combination:
may significantly dilute the equity interest of investors;
may subordinate the rights of holders of Class A Ordinary Shares if preference shares are issued with rights senior to those afforded our Class A Ordinary Shares;
could cause a change in control if a substantial number of our Class A Ordinary Shares are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors;
may have the effect of delaying or preventing a change of control of us by diluting the share ownership or voting rights of a person seeking to obtain control of us;
may adversely affect prevailing market prices for our Units, Public Shares and/or Public Warrants; and
may not result in adjustment to the exercise price of our Warrants.
Similarly, if we issue debt or otherwise incur significant debt, it could result in:
default and foreclosure on our assets if our operating revenues after an initial Business Combination are insufficient to repay our debt obligations;
acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;
our immediate payment of all principal and accrued interest, if any, if the debt is payable on demand;
our inability to obtain necessary additional financing if the debt contains covenants restricting our ability to obtain such financing while the debt is outstanding;
our inability to pay dividends on our Class A Ordinary Shares;
using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our Class A Ordinary Shares if declared, expenses, capital expenditures, acquisitions and other general corporate purposes;
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limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate;
increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and
limitations on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of our strategy and other purposes and other disadvantages compared to our competitors who have less debt.
As indicated in the financial statements and the notes thereto contained elsewhere in this Report, as of December 31, 2023, we had $436,317 of cash held outside of the Trust Account, and no deferred offering costs. Further, we expect to incur significant costs in the pursuit of our initial Business Combination. We cannot assure our shareholders that our plans to raise capital or to complete our initial Business Combination will be successful.
Recent Developments
On January 5, 2024, we received the remaining $500,000 of proceeds from the September 2023 Promissory Notes. On January 17, 2024, February 16, 2024, March 18, 2024 and April 17, 2024, we made the monthly deposit totaling $125,000 to extend the Combination Period until May 18, 2024.
On April 17, 2024, we received a notice from NYSE that the Company is not in compliance with Section 802.01E of the NYSE Listed Company Manual as a result of our failure to timely file our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 with the SEC. The NYSE Notice has no immediate effect on the listing of our Ordinary Shares on NYSE. The NYSE Notice informed us that, under NYSE rules, the Company has six months from April 16, 2024 to regain compliance with the NYSE listing standards by filing this Report with the SEC. If we fail to file this Report within the six-month period, NYSE may grant, in its sole discretion, an extension of up to six additional months for the Company to regain compliance, depending on the specific circumstances. The NYSE Notice also notes that NYSE may nevertheless commence delisting proceedings at any time if it deems that the circumstances warrant.
On April 24, 2024, Michael H. Liu notified the Board of his resignation as Chief Financial Officer and director of the Company, effective on April 23, 2024. On April 29, 2024, the Board appointed (i) Chunyi (Charlie) Hao, the Company’s President and Chairman of the Board, as the Chief Financial Officer of the Company, effective on April 29, 2024, and (ii) Xiaoma (Sherman) Lu, the Company’s Chief Executive Officer, as a director of the Company, to fill the vacancy left by Mr. Liu’s departure, effective on April 29, 2024.
On April 26, 2024, the Company entered into the Amended Lock-Up Agreements with two Helport Investors, pursuant to which the Helport Investors agreed not to execute a Prohibited Transfer during the Lock-Up Period, provided, however, (i) each Helport Investor would be permitted to transfer the Lock-Up Securities during the Lock-Up Period to certain other shareholders of Helport, subject to certain trading volume limitations, and (ii) if each Holder made a credit facility available to Helport of at least $2,000,000 and $4,000,000, respectively, the Lock-Up Securities would be subject to early release upon the twelve-month anniversary of the Closing.
On May 3, 2024, the Company issued the May 2024 Promissory Notes in connection with working capital loans to the Company, consisting of (i) an unsecured promissory note in the principal amount of up to $400,000 to Chunyi (Charlie) Hao, the Company’s President, Chief Financial Officer and Chairman of the Board of the Company, and (ii) an unsecured promissory note in the principal amount of up to $200,000 to Xiaoma (Sherman) Lu, the Company’s Chief Executive Officer and a director of the Company.
Helport Business Combination
On November 12, 2023, we entered into the Helport Business Combination Agreement with Pubco, the First Merger Sub, the Second Merger Sub, Helport, the Purchaser Representative and the Seller Representative. Pursuant to the Helport Business Combination Agreement, subject to the terms and conditions set forth therein. at the closing of the Helport Business Combination, (i) the First Merger Sub will merge with and into Helport with Helport surviving such merger as a wholly-owned subsidiary of Pubco and the outstanding securities of Helport being converted into the right to receive securities of Pubco; and (ii) subsequently, the Second Merger Sub will merge with and into our Company, with our Company surviving such merger as a wholly-owned subsidiary of Pubco and our outstanding securities being converted into the right to receive securities of Pubco.
On December 18, 2023, we entered into the Helport Business Combination Agreement Amendment with Pubco, the First Merger Sub, the Second Merger Sub, Helport, the Purchaser Representative and the Seller Representative, which amended the Helport Business Combination Agreement.
For a full description of the Helport Business Combination Agreement, the Helport Business Combination Agreement Amendment and the proposed Helport Business Combination, please see “Item 1. Business.”
Extension of Our Combination Period
We initially had until July 18, 2023, 21 months from the closing of the Initial Public Offering, to consummate our initial Business Combination. On June 18, 2023, we held the 2023 EGM, at which our shareholders approved the Memorandum Amendment Proposals. In connection with the shareholders’ approval of the Memorandum Amendment Proposals, the holders of 12,391,198 Public Shares properly exercised their right to redeem their Public Shares for cash at a redemption price of approximately $10.52 per share, for an aggregate redemption amount of approximately, $130,320,650 in the 2023 Redemptions, without taking into account additional allocation of payments to cover any tax obligation of our Company. Following the 2023 Redemptions, there were 10,608,802 Class A Ordinary Shares and 5,750,000 Class B Ordinary Shares issued and outstanding.
Sponsor Handover
On July 18, 2023, we entered into the Sponsor Handover Securities Transfer Agreement with the Prior Sponsor and the Sponsor Purchasers, whereby the Prior Sponsor agreed to transfer to the Sponsor Purchasers, 3,046,634 Class B Ordinary Shares and 4,961,250 Private Placement Warrants, which the Prior Sponsor purchased in connection with the Initial Public Offering and Private Placement. In addition, the Sponsor Handover Sellers transferred an aggregate of 1,380,866 Class B Ordinary Shares to Chunyi (Charlie) Hao, our President, Chief Financial Officer and Chairman of the Board of Directors, pursuant to the Sponsor Handover Share Transfer Agreements. In connection with the Sponsor Handover Securities Transfer Agreement, any accounts payable and accrued expenses in excess of $200,000 that were incurred by the Company prior to the Sponsor Handover was the responsibility of the Prior Sponsor to settle (the “Company Liability”). Following the transaction, any remaining liabilities incurred by the Company prior to the Sponsor Handover and any liabilities incurred post-the Sponsor Handover, continued as a liability to the Company. The Company incurred $191,628 in excess of the $200,000 Company Liability. The Prior Sponsor paid $191,628 for outstanding accounts payable and accrued expenses, which was recorded as additional paid-in capital for the year ended December 31, 2023. After the closing of the Sponsor Handover on July 18, 2023, the Sponsor Handover Sellers held an aggregate of 1,322,500 Class B Ordinary Shares, and the Prior Sponsor held 2,383,750 Private Placement Warrants.
For a full description of the Sponsor Handover, please see “Item 1. Business.”
Results of Operations
Our only activities since inception have been organizational activities, those necessary to prepare for our Initial Public Offering, which was consummated on October 18, 2021, and since the Initial Public Offering, searching for and consummating prospective initial Business Combination. We will not generate any operating revenues until after completion of our initial Business Combination. We will generate non-operating income in the form of interest income on cash and cash equivalents. There has been no significant change in our financial or trading position and no material adverse change has occurred since the date of our audited the financial statements and the notes thereto contained elsewhere in this Report.
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For the year ended December 31, 2023, we had net income of $7,120,609, which consists of operating costs of $(2,365,310) offset by interest income of $8,816,194, change in fair value of warrant liabilities of $188,450, and forgiveness of deferred underwriting fee payable totaling $481,275.
For the year ended December 31, 2022, we had net income of $11,758,533, which consists of operating costs of $(996,769), offset by interest earned of $3,636,252 and change in fair value of warrant liability totaling $9,119,050.
Factors That May Adversely Affect our Results of Operations
Our results of operations and our ability to complete an initial Business Combination may be adversely affected by various factors that could cause economic uncertainty and volatility in the financial markets, many of which are beyond our control. Our business could be impacted by, among other things, downturns in the financial markets or in economic conditions, increases in oil prices, inflation, increases in interest rates, supply chain disruptions, declines in consumer confidence and spending, public health considerations, and geopolitical instability, such as the military conflicts in Ukraine and the Middle East. We cannot at this time predict the likelihood of one or more of the above events, their duration or magnitude or the extent to which they may negatively impact our business and our ability to complete an initial Business Combination.
Liquidity, Capital Resources and Going Concern
As of December 31, 2023 and 2022, we had cash outside the Trust Account of $436,317 and $587,546 available for working capital needs, respectively. As of December 31, 2023 and 2022, we had cash held in the Trust Account of $115,166,848 and $235,933,496, respectively. All cash held in the Trust Account are generally unavailable for our use, prior to an initial Business Combination, and is restricted for use either in a Business Combination or to redeem Ordinary Shares. As of December 31, 2023 and December 31, 2022, none of the amount in the Trust Account was available to be withdrawn as described above.
On November 9, 2023, we instructed Continental to liquidate the investments held in the Trust Account and instead to hold the funds in the Trust Account in an interest-bearing demand deposit account at a bank, with Continental continuing to act as trustee, until the earlier of the consummation of our initial Business Combination or our liquidation. As a result, following the liquidation of investments in the Trust Account, the remaining proceeds from the Initial Public Offering and Private Placement are no longer invested in U.S. government securities or money market funds invested in U.S. government securities.
Until consummation of our Business Combination, we have used and will continue to use the funds not held in the Trust Account, and any additional Working Capital Loans for (i) identifying and evaluating prospective acquisition candidates, (ii) performing business due diligence on prospective target businesses, (iii) traveling to and from the offices, plants or similar locations of prospective target businesses, (iv) reviewing corporate documents and material agreements of prospective target businesses, (v) selecting the target business to acquire, and (vi) structuring, negotiating and consummating the Business Combination.
Going Concern
We have until October 18, 2024, the end of the Combination Period, to consummate a Business Combination. It is uncertain that we will be able to consummate a Business Combination by this time. If a Business Combination is not consummated by this date and a further extension is not approved by our shareholders, there will be a mandatory liquidation and subsequent dissolution of our Company. In connection with our assessment of going concern considerations in accordance with FASB ASU Topic 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” Management has determined that the mandatory liquidation, should a Business Combination not occur within the Combination Period, approval for extension of the Combination Period needed by our shareholders, and potential subsequent dissolution raises substantial doubt about our ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should we be required to liquidate after October 18, 2024.
Additionally, we may need to raise additional capital to operate our business prior to our initial Business Combination through loans or additional investments. Our officers, directors, Sponsor or affiliate of our Sponsor may, but are not obligated to loan the Company Working Capital Loans to meet our working capital needs. Accordingly, we may not be able to obtain additional financing. If we are unable to raise additional capital, we may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead expenses. We cannot provide any assurance that new financing will be available to us on commercially acceptable terms, if at all. These conditions raise substantial doubt about our ability to continue as a going concern. No adjustments have been made relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should we be unable to continue as a going concern.
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On June 12, 2023, we issued the Prior Sponsor WCL Promissory Note to the Prior Sponsor, whereby the Prior Sponsor agreed to loan us up to $250,000 to us for working capital needs as a Working Capital Loan. The Prior Sponsor has the option to convert all or any portion of such Working Capital Loan into Private Placement Warrants at a price of $1.00 per Private Placement Warrant. This Working Capital Loan accrues no interest on the unpaid principal balance and is due on demand by the Prior Sponsor. Drawdowns could be requested until December 31, 2023. During July 2023 we had drawdowns totaling $158,968 under the Prior Sponsor WCL Promissory Note. On September 6, 2023, the Prior Sponsor agreed to forgive the Prior Sponsor WCL Promissory Note balance due of $158,968, with the fair value on September 6, 2023 of $58,992. The initial difference between the cash value and fair value of the Working Capital Loan under the Prior Sponsor WCL Promissory Note totaling $99,976 is included in additional paid in capital for the year ended December 31, 2023 presented in the financial statements contained elsewhere in this Report. We accounted for the extinguishment of the fair value of such Working Capital Loan as additional paid in capital due to the related party relationship in accordance with FASB ASC Topic 470-50-40-2, ”Debt”.
On July 18, 2023, we issued the July 2023 Promissory Note in an amount of $375,000, to Chunyi (Charlie) Hao, our President, Chief Financial Officer and Chairman of the Board of Directors, for depositing $375,000 into the Trust Account to support the first three months of the extension of our Combination Period from July 18, 2023 to October 18, 2023 pursuant to the Extension Amendment Proposal. The July 2023 Promissory Note does not bear interest and is due and payable on the earlier of the date (i) that we consummate an initial Business Combination and (ii) of our liquidation. As of December 31, 2023, we had received $375,000 of the proceeds from the July 2023 Promissory Note.
On September 13, 2023, we issued the September 2023 Promissory Notes in an aggregate amount of $2,125,000 to our officers and their affiliates, for our working capital needs. The September 2023 Promissory Notes do not bear interest and mature upon the earlier of the date (i) that we consummate an initial Business Combination and (ii) of our liquidation. As of December 31, 2023, we had received $1,625,000 of the proceeds from the September 2023 Promissory Notes. On January 5, 2024, we received the remaining $500,000 of proceeds from the September 2023 Promissory Notes.
Off-Balance Sheet Arrangements; Commitments and Contractual Obligations; Quarterly Results
As of December 31, 2023, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments or contractual obligations. No unaudited quarterly operating data is included in this Report as we have not conducted any operations to date.
Forward Purchase Agreements
On June 21, 2021 and July 26, 2021, respectively, we entered into forward purchase agreements (the “Forward Purchase Agreements”), pursuant to which one Anchor Investor and one institutional accredited investor (the “Forward Purchase Investors”) that are not affiliated with the Prior Sponsor, Sponsor or any member of Management, subscribed to purchase from us an aggregate of 4,500,000 Class A Ordinary Shares at a price of $10.00 per share, each in a private placement that would close immediately prior to the closing of our initial Business Combination. On September 13, 2023 and September 14, 2023, we entered into agreements with the Forward Purchase Investors to mutually terminate and cancel the Forward Purchase Agreements.
Investment Banking Services Agreement
In February 2023, we entered into an agreement with a third-party investment banking company (the “Investment Banking Services Agreement”) to provide certain investment banking services in connection with a potential Business Combination of a privately held company and a possible private placement by us to one or more potential investors of our securities in connection with the potential Business Combination. Pursuant to the Investment Banking Services Agreement, we agreed, among other things, to reimburse the investment banking company for all reasonable out-of-pocket expenses, not to exceed $525,000, regardless of the consummation of a Business Combination. As of December 31, 2023 we had paid all outstanding reimbursable costs, totaling $98,089.
In July 2023, we terminated the Investment Banking Services Agreement for the provision of certain investment banking services in connection with a potential Business Combination, which included waiver of all potential fees and rights thereunder by the third-party investment banking company, excluding the above unbilled reimbursable costs noted above.
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Administrative Support Agreement
In connection with the Initial Public Offering, we entered into the Administrative Support Agreement with the Prior Sponsor, to pay a total of $10,000 per month for office space, secretarial and administrative services. Upon the completion of an initial Business Combination or liquidation, the Company would cease paying these monthly fees. As of June 30, 2023 and December 31, 2022, we owed the Prior Sponsor $204,516 and $144,516, respectively, under the Administrative Support Agreement. However, on June 30, 2023, in connection with the Sponsor Handover, the Administrative Support Agreement was terminated and the outstanding amount was cancelled.
Underwriting Agreement
Pursuant to the IPO Underwriting Agreement, we paid an underwriting discount of $0.20 per Unit Offering Price (as defined in the IPO Underwriting Agreement) to the underwriters at the closing of the Initial Public Offering. The underwriting discount was paid in cash. In addition, we agreed to pay deferred underwriting commissions of $0.45 per Unit, or $10,350,000 in the aggregate. The deferred underwriting commission would become payable to the underwriters from the amount held in the Trust Account solely in the event that we complete a Business Combination, subject to the terms of the IPO Underwriting Agreement, including the performance of services specified therein.
On June 23, 2023, in connection with the Sponsor Handover, the underwriters agreed to waive their entitlement to the deferred underwriting commission of $10,350,000 to which it became entitled upon completion of the Initial Public Offering. As a result, we derecognized the entire deferred underwriting fee payable of $10,350,000 and recorded $9,868,725 of the forgiveness of the deferred underwriting fee allocated to Public Shares to additional paid-in capital and the remaining balance of $481,275 was a gain from extinguishment of liability allocated to warrant liabilities.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. The critical accounting estimates, assumptions, judgements and the related policies that we believe have the most significant impact on our financial statements are described below:
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Prior Sponsor Working Capital Convertible Note
We utilized a third-party valuation firm to estimate the fair value of the Prior Sponsor WCL Promissory Note. A valuation approach utilizing a compound option valuation model was used to provide the estimated fair value. Some of the inputs utilized included the conversion Price, Private Placement Warrant price, volatility of the Ordinary Shares, risk-free rate, dividend yield, and probability of completing a Business Combination. The most significant estimate relates to the probability of completing a Business Combination which is based on the facts and circumstances at the time on whether the Business Combination would occur. The facts and circumstances contemplated included the communications with any targets and whether a Business Combination agreement had been signed yet.
Fair Value of Class B Ordinary Shares for Share-based Compensation
The Company utilized a third party valuation firm to estimate the fair value of the Class B Ordinary Shares in order to calculate the share-based compensation expense for the year ended December 31, 2023. Some of the inputs used to calculate included, the share price of the Class A Ordinary Shares at July 18, 2023, volatility of the Company’s ordinary shares, dividend yield and probability of completing a business combination. The most significant estimate related to the fair value of the Class B Ordinary Shares related to the probability of a business combination which was based on facts and circumstances at the time on whether the business combination would occur. The facts and circumstances contemplated included current pipeline of targets at July 18, 2023 and the current market regarding SPAC’s that were able to consummate a business combination.
Recent Accounting Pronouncements
For a detailed discussion of our significant accounting policies and related judgments, see Note 2 – Summary of Significant Accounting Policies, of the financial statements and notes thereto beginning on page F-1 of this Report.
