References in this report (the "Quarterly Report") to "we," "us" or the
"Company" refer to Mountain Crest Acquisition Corp. III. References to our
"management" or our "management team" refer to our officers and directors, and
references to the "Sponsor" refer to Mountain Crest Holdings III LLC. The
following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this Quarterly Report.
Certain information contained in the discussion and analysis set forth below
includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act
that are not historical facts and involve risks and uncertainties that could
cause actual results to differ materially from those expected and projected. All
statements, other than statements of historical fact included in this Form 10-Q
including, without limitation, statements in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
completion of the Proposed Business Combination (as defined below), the
Company's financial position, business strategy and the plans and objectives of
management for future operations, are forward-looking statements. Words such as
"expect," "believe," "anticipate," "intend," "estimate," "seek" and variations
and similar words and expressions are intended to identify such forward-looking
statements. Such forward-looking statements relate to future events or future
performance, but reflect management's current beliefs, based on information
currently available. A number of factors could cause actual events, performance
or results to differ materially from the events, performance and results
discussed in the forward-looking statements, including that the conditions of
the Proposed Business Combination are not satisfied. For information identifying
important factors that could cause actual results to differ materially from
those anticipated in the forward-looking statements, please refer to the Risk
Factors section of the Company's Annual Report on Form 10-K filed with the U.S.
Securities and Exchange Commission (the "SEC") on March 7, 2022. The Company's
securities filings can be accessed on the EDGAR section of the SEC's website at
www.sec.gov. Except as expressly required by applicable securities law, the
Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.
Overview
Mountain Crest Acquisition Corp. III (the "Company") was incorporated in
Delaware on March 2, 2021. The Company was formed for the purpose of entering
into a merger, share exchange, asset acquisition, stock purchase, reorganization
or other similar business transaction with one or more businesses that the
Company has not yet identified (a "Business Combination").
We expect to continue to incur significant costs in the pursuit of our
acquisition plans. We cannot assure you that our plans to complete a Business
Combination will be successful.
Recent Developments
The Merger Agreement
As previously disclosed in the Company's Current Report on Form 8-K, filed on
January 31, 2022, on January 27, 2022, the Company, entered into that certain
Agreement and Plan of Merger (as may be amended, supplemented or otherwise
modified from time to time, the "Merger Agreement"), by and among the Company,
Etao International Group, a Cayman Islands corporation (the "Target"), and
Wensheng Liu, in his capacity as Etao's Shareholders' Representative (the
"Shareholders' Representative"), pursuant to which, among other things, (1) the
Parent will merge with and into a to be formed Cayman Islands company
("Purchaser"), with the Purchaser being the surviving corporation in the merger
(the "Redomestication Merger") and (2) the Target will merge with and into a to
be formed Cayman Islands company named ("Merger Sub"), with the Target as the
surviving corporation in the merger (the "Acquisition Merger"), and, after
giving effect to the Acquisition Merger, the Target being a wholly owned
subsidiary of Purchaser and the Purchaser will change its name to Etao
International Co., Ltd. (collectively, the "Business Combination"). Following
the Business Combination, Purchaser expects to trade on the New York Stock
Exchange.
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Based upon the execution of the Merger Agreement, the period of time for the
Company to complete a business combination under its certificate of
incorporation was extended for a period of 6 months from May 20, 2022 to
November 20, 2022.
Joinder Agreement
On June 30, 2022, the Company formed ETAO International Co., Ltd., as a wholly
owned subsidiary and a Cayman Islands exempted company to be the Purchaser under
the Merger Agreement. Also on June 30, 2022, the Company formed ETAO Merger Sub,
Inc., as a wholly owned subsidiary of ETAO International Co., Ltd. and a Cayman
Islands exempted company to be the Merger Sub under the Merger Agreement. On
July 26, 2022, the Company, the Target, the Shareholders' Representative, ETAO
International Co., Ltd. and ETAO Merger Sub, Inc., entered into a Joinder
Agreement to the Merger Agreement (the "Joinder Agreement"), that expressly
amended and modified the Merger Agreement, by admitting ETAO International Co.,
Ltd. and ETAO Merger Sub, Inc. as parties to the Merger Agreement and fully
binding them to all of the covenants, terms, representation, warranties, rights,
obligations and conditions of the Merger Agreement applicable to such party as
though an original party thereto.
The Amendments to the Merger Agreement
On June 7, 2022, the Company, the Target and the Shareholders' Representative
entered into an Amendment to Agreement and Plan of Merger (the "Amendment") that
expressly amended and modified the Merger Agreement as follows:
1.The agreed value of the Company is reduced from $2,500,000,000 to
$1,000,000,000. Thus, in consideration of the Acquisition Merger, Purchaser will
issue 100,000,000 ordinary shares at a per share price of US$10.00 per share as
agreed by the parties to the shareholders of the Company in exchange for 100% of
the issued and outstanding ordinary shares of the Company.
2.In connection with the Sponsor's designation of a director to the Purchaser's
board of directors following the Acquisition Merger, the Sponsor, in its sole
discretion, shall determine whether its designee will be an independent or
dependent director. In the event that Sponsor's designee to the Purchaser's
board of directors is dependent, then the Company and such designee shall enter
into an agreement establishing the responsibilities and the compensation for
such director prior to the closing of the Acquisition Merger.
3.The Outside Date for the closing of the Business Combination is extended from
May 31, 2022 to October 5, 2022. In the event that the Business Combination
shall not be consummated prior to October 5, 2022, then either MCAE or the
Shareholders' Representative may terminate the Merger Agreement, provided that
such terminating party, MCAE, on the one hand, or the Company or the
Shareholders' Representative, on the other hand, has not otherwise failed to
materially perform its obligations under the Merger Agreement. If the parties do
not terminate the Merger Agreement within five business days of the Outside
Date, then the Company shall be responsible to pay all costs and expenses
incurred in connection with MCAE's obtaining any and all extensions to the
deadline in which MCAE is required to complete the Business Combination, which
is currently November 20, 2022.
4.The Company's failure to provide (i) its audited financial statements for the
years ended December 31, 2021 and 2020 or its reviewed condensed and
consolidated financial statements for the six month periods ended June 30, 2022
and 2021 or (ii) obtain approval or consent from any Governmental Authority,
including but not limited to the Cyberspace Administration of China or the China
Securities Regulatory Commission by the Outside Date shall constitute a material
failure by the Company and the Shareholders' Representative to perform its
obligations hereunder.
On October 17, 2022, MCAE, Etao and the Etao Shareholders' Representative
entered into a further amendment to the Agreement and Plan of Merger (the
"Amendment No. 2") that expressly amended and modified the Merger Agreement.
Specifically, the Amendment No. 2 extended the Outside Date for the closing of
the Business Combination from October 5, 2022 to February 20, 2023. In the event
that the Business Combination shall not be consummated prior to February 20,
2023, then either MCAE or the Etao Shareholders' Representative may terminate
the Merger Agreement, provided that such terminating party, MCAE, on the one
hand, or Etao or the Etao Shareholders' Representative, on the other hand, has
not otherwise failed to materially perform its obligations under the Merger
Agreement. If the parties do not terminate the Merger Agreement within five
business days of the Outside Date, then Etao shall be responsible to pay all
costs and expenses incurred in connection with MCAE's obtaining any and all
extensions to the deadline in which MCAE is required to complete the Business
Combination.
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The foregoing summary of Amendment No.2 does not purport to be complete and is
qualified in its entirety by reference to the actual Amendment No.2, a copy of
which was filed as Exhibit 2.1 to the Current Report on Form 8-K filed with the
SEC on October 19, 2022 and incorporated by reference herein.
On October 18, 2022, the Company filed a Definitive Proxy Statement seeking to
obtain shareholder approval to amend its certificate of incorporation to extend
the time period the Company has to consummate its Business Combination for
3-months from November 20, 2022 to February 20, 2023. On November 7, 2022, the
Company filed an Amendment to its Definitive Proxy Statement to (1) postpone the
Special Meeting from November 9, 2022 to November 17, 2022; (2) increase the
amount placed into the Trust Account from $150,000 to $250,000 in connection
with the proposal to amend the Company's amended and restated certificate of
incorporation, to extend the date by which the Company has to consummate a
business combination from November 20, 2022 to February 20, 2023 and (3) add a
new proposal to amend the Investment Management Trust Agreement, dated May 17,
2021 (the "Trust Agreement"), by and between the Company and Continental Stock
Transfer & Trust Company to provide that the time for the Company to complete
its Business Combination under the Trust Agreement shall be extended for a
period of 3 months from November 20, 2022 to February 20, 2023 and to be further
extended to the extent the Company's Amended and Restated Certificate of
Incorporation is amended to extend the the time for the Company to complete its
Business Combination.
Termination of the PIPE Subscription Agreement
On July 25, 2022, the Company and the Subscriber terminated the PIPE
Subscription Agreement by mutual consent by executing a Mutual Termination
Agreement, dated as of July 25, 2022. Pursuant to the Mutual Termination
Agreement, the PIPE Subscription Agreement is void and of no further force and
effect, and all rights and obligations of the parties thereunder have
terminated.
Results of Operations
As of September 30, 2022, the Company had not commenced any operations. All
activity through September 30, 2022 relates to the Company's formation and the
initial public offering ("Initial Public Offering"). The Company will not
generate any operating revenues until after the completion of a Business
Combination, at the earliest. The Company will generate non-operating income in
the form of interest income from the proceeds derived from the Initial Public
Offering.
For the three months ended September 30, 2022, we had a net loss of $7,198,
which consists of general and administrative expenses of $211,469 and a
provision for income taxes of $39,995, offset by interest income on marketable
securities held in the Trust Account of $244,266.
For the nine months ended September 30, 2022, we had a net loss of $212,770,
which consists of general and administrative expenses of $494,293 and a
provision for income taxes of $41,348, offset by interest income on marketable
securities held in the Trust Account of $322,871.
For the three months ended September 30, 2021, we had a net loss of $116,934,
which consisted of operating costs of $117,631, offset by interest income on
marketable securities held in the Trust Account of $697.
For the period March 2, 2021 (inception) through September 30, 2021, we had a
net loss of $210,567, which consisted of operating costs of $211,655, offset by
interest income on marketable securities held in the Trust Account of $1,088.
Liquidity and Capital Resources
The registration statement for the Company's Initial Public Offering was
declared effective on May 18, 2021. On May 20, 2021, the Company consummated the
Initial Public Offering of 5,000,000 units (the "Units") "and, with respect to
the shares of common stock included in the Units sold, the "Public Shares at
$10.00 per Unit, generating gross proceeds of $50,000,000, which is described in
Note 3.
Simultaneously with the closing of the Initial Public Offering, the Company
consummated the sale of 185,000 units (the "Private Units") at a price of $10.00
per Private Unit in a private placement to Mountain Crest Holdings III LLC (the
"Sponsor") and Chardan Capital Markets, LLC ("Chardan"), generating gross
proceeds of $1,850,000.
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Following the closing of the Initial Public Offering on May 20, 2021, an amount
of $50,000,000 ($10.00 per Unit) from the net proceeds of the sale of the Units
in the Initial Public Offering and the sale of the Private Units was placed in a
trust account (the "Trust Account").
On June 10, 2021, the underwriters exercised the over-allotment option in part,
and the closing of the issuance and sale of the additional Units occurred on
June 14, 2021. The total aggregate issuance by the Company of 417,193 units at a
price of $10.00 per unit resulted in total gross proceeds of $4,171,930. On June
14, 2021, simultaneously with the sale of the Over-Allotment Option Units, the
Company consummated the private sale of an additional 8,343 Private Units,
generating gross proceeds of $83,430.
For the nine months ended September 30, 2022, cash used in operating activities
was $499,752. Net loss of $212,770 was affected by interest earned on marketable
securities held in the Trust Account of $322,871 and changes in operating assets
and liabilities, which provided $35,889 of cash from operating activities.
For the period March 2, 2021 (inception) through September 30, 2021, cash used
in operating activities was $222,099. Net loss of $210,567 was affected by
interest earned on marketable securities held in the Trust Account of $1,088 and
changes in operating assets and liabilities, which used $10,444 of cash from
operating activities.
At September 30, 2022, we had investments held in the Trust Account of
$54,438,427. We intend to use substantially all of the funds held in the Trust
Account, including any amounts representing interest earned on the Trust Account
(less income taxes payable), to complete our Business Combination. Interest
earned on the balance in the Trust Account may be used by us to pay taxes.
Through September 30, 2022, we have withdrawn an amount of $58,607 to pay
franchise and income taxes on interest earned from the Trust Account. To the
extent that our capital stock or debt is used, in whole or in part, as
consideration to complete our Business Combination, the remaining proceeds held
in the Trust Account will be used as working capital to finance the operations
of the target business or businesses, make other acquisitions and pursue our
growth strategies.
As of September 30, 2022, we had cash of $284. We intend to use the funds held
outside the Trust Account primarily to identify and evaluate target businesses,
perform business due diligence on prospective target businesses, travel to and
from the offices, plants or similar locations of prospective target businesses
or their representatives or owners, review corporate documents and material
agreements of prospective target businesses, and structure, negotiate and
complete a Business Combination.
In order to fund working capital deficiencies or finance transaction costs in
connection with a Business Combination, the Sponsor, or certain of our officers
and directors or their affiliates may, but are not obligated to, loan us funds
as may be required. If we complete a Business Combination, we would repay such
loaned amounts. In the event that a Business Combination does not close, we may
use a portion of the working capital held outside the Trust Account to repay
such loaned amounts but no proceeds from our Trust Account would be used for
such repayment. Up to $1,500,000 of the Working Capital Loans may be converted
into Private Units at a price of $10.00 per unit. The Private Units would be
identical to the Private Units.
On June 15, 2022, the Company issued an unsecured promissory note in the
aggregate principal amount up to $100,000 (the "Note") to the Sponsor. Pursuant
to the Note, the Sponsor agreed to loan to the Company an aggregate amount up to
$100,000 that may be drawn down from time to time and payable on the earlier of:
(i) the date on which Company consummates an initial business combination with a
target business, or (ii) the date the Company liquidates if a business
combination is not consummated. The Note does not bear interest. In the event
that the Company does not consummate a business combination, the Note will be
repaid only from amounts remaining outside of the Company's trust account, if
any. In addition, the Note may be converted at the closing of a business
combination by the Company into private units of the Company identical to the
public units issued in the Company's initial public offering at a price of
$10.00 per unit. As of September 30, 2022 and December 31, 2021 there were
$100,000 and no Working Capital Loans outstanding, respectively.
On October 3, 2022, the Company issued an unsecured promissory note in the
aggregate principal amount up to $100,000 (the "Note") to the Sponsor. Pursuant
to the Note, the Sponsor agreed to loan to the Company an aggregate amount up to
$100,000 that may be drawn down from time to time and payable on the earlier of:
(i) the date on which Company consummates an initial business combination with a
target business, or (ii) the date the Company liquidates if a business
combination is not consummated. The Note does not bear interest. In the event
that the Company does not consummate a business combination, the Note will be
repaid only from amounts remaining outside of the Company's trust account, if
any. In addition, at the written election of the Sponsor the principal amount
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due under the Note may be converted at the closing of a business combination
into private units of the Company identical to the public units issued in the
Company's initial public offering at a price of $10.00 per unit.
If our estimate of the costs of identifying a target business, undertaking
in-depth due diligence and negotiating a Business Combination are less than the
actual amount necessary to do so, we may have insufficient funds available to
operate our business prior to our Business Combination. Moreover, we may need to
obtain additional financing either to complete our Business Combination or
because we become obligated to redeem a significant number of our Public Shares
upon consummation of our Business Combination, in which case we may issue
additional securities or incur debt in connection with such Business
Combination.
Going Concern
We have until November 20, 2022 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, there will be a
mandatory liquidation and subsequent dissolution. Management has determined that
the mandatory liquidation, should a Business Combination not occur, 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
November 20, 2022.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered
off-balance sheet arrangements as of September 30, 2022. We do not participate
in transactions that create relationships with unconsolidated entities or
financial partnerships, often referred to as variable interest entities, which
would have been established for the purpose of facilitating off-balance sheet
arrangements. We have not entered into any off-balance sheet financing
arrangements, established any special purpose entities, guaranteed any debt or
commitments of other entities, or purchased any non-financial assets.
Contractual obligations
We do not have any long-term debt, capital lease obligations, operating lease
obligations or long-term liabilities
The underwriters are entitled to a deferred fee of up to $0.35 per Unit, or
$1,896,018 based upon the partial exercise of the over-allotment option
The Company engaged BHTIC to act as its M&A Advisor to conduct local due
diligence for the Company on ETAO by entering into the M&A Advisory Agreement on
May 11, 2022. Pursuant to the M&A Advisory Agreement, as amended on June 14,
2022, the Company shall make a payment to BHTIC of an aggregate M&A Fee
equivalent to 3% of the pre-money equity value of ETAO in shares of the
post-transaction combined company to be issued upon closing of the Transaction
at $10 per share
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains
provisions that, among other things, relax certain reporting requirements for
qualifying public companies. We will qualify as an "emerging growth company" and
under the JOBS Act will be allowed to comply with new or revised accounting
pronouncements based on the effective date for private (not publicly traded)
companies. We are electing to delay the adoption of new or revised accounting
standards, and as a result, we may not comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required
for non-emerging growth companies. As such, our financial statements may not be
comparable to companies that comply with public company effective dates.
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Additionally, we are in the process of evaluating the benefits of relying on the
other reduced reporting requirements provided by the JOBS Act. Subject to
certain conditions set forth in the JOBS Act, if, as an "emerging growth
company," we choose to rely on such exemptions we may not be required to, among
other things, (i) provide an auditor's attestation report on our system of
internal controls over financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act, (ii) provide all of the compensation disclosure that may be
required of non-emerging growth public companies under the Dodd-Frank Wall
Street Reform and Consumer Protection Act, (iii) comply with any requirement
that may be adopted by the PCAOB regarding mandatory audit firm rotation or a
supplement to the auditor's report providing additional information about the
audit and the financial statements (auditor discussion and analysis) and (iv)
disclose certain executive compensation related items such as the correlation
between executive compensation and performance and comparisons of executive
compensation to median employee compensation. These exemptions will apply for a
period of five years following the completion of our initial public offering or
until we are no longer an "emerging growth company," whichever is earlier.
Critical Accounting Policies
The preparation of condensed consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America 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 have identified the following critical
accounting policies:
Common stock Subject to Possible Redemption
We account for our ordinary shares subject to possible redemption in accordance
with the guidance in Accounting Standards Codification ("ASC") Topic 480
"Distinguishing Liabilities from Equity." Common stock subject to mandatory
redemption is classified as a liability instrument and is measured at fair
value. Conditionally redeemable ordinary shares (including ordinary shares that
features redemption rights that is either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within
our control) is classified as temporary equity. At all other times, common stock
are classified as stockholders' equity. Our common stock features certain
redemption rights that are considered to be outside of our control and subject
to occurrence of uncertain future events. Accordingly, common stock subject to
possible redemption is presented as temporary equity, outside of the
stockholders' deficit section of our condensed consolidated balance sheets.
The Company recognizes changes in redemption value immediately as they occur and
adjusts the carrying value of redeemable common stock to equal the redemption
value at the end of each reporting period. Increases or decreases in the
carrying amount of redeemable common stock are affected by charges against
additional paid in capital and accumulated deficit.
Offering Costs
Offering costs were consisting principally of underwriting, legal, accounting
and other expenses incurred through the balance sheet date that are related to
the Public Offering and are charged to stockholders' equity upon the completion
of the Public Offering. The Company allocates offering costs between public
shares and public rights based on the relative fair values of public shares and
public rights.
Net Income (Loss) per Share
The Company complies with accounting and disclosure requirements of FASB ASC
260, Earnings Per Share. In order to determine the net income (loss)
attributable to both the redeemable shares and non-redeemable shares, the
Company first considered the undistributed income (loss) allocable to both the
redeemable shares and non-redeemable shares and the undistributed income (loss)
is calculated using the total net income (loss) less any dividends paid. We then
allocated the undistributed income (loss) ratably based on the weighted average
number of shares outstanding between the redeemable and non-redeemable shares.
Any remeasurement of the accretion to redemption value of the common shares
subject to possible redemption was considered to be dividends paid to the public
shareholders.
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Recent Accounting Standards
In August 2020, the FASB issued ASU 2020-06, Debt -- Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in
Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06") to simplify accounting for
certain financial instruments. ASU 2020-06 eliminates the current models that
require separation of beneficial conversion and cash conversion features from
convertible instruments and simplifies the derivative scope exception guidance
pertaining to equity classification of contracts in an entity's own equity. The
new standard also introduces additional disclosures for convertible debt and
freestanding instruments that are indexed to and settled in an entity's own
equity. ASU 2020-06 amends the diluted earnings per share guidance, including
the requirement to use the if-converted method for all convertible instruments.
ASU 2020-06 is effective December 15, 2023 and should be applied on a full or
modified retrospective basis, with early adoption permitted beginning on January
1, 2021. The Company is currently assessing the impact, if any, that ASU 2020-06
would have on its financial position, results of operations or cash flows.
Management does not believe that any other recently issued, but not yet
effective, accounting standards, if currently adopted, would have a material
effect on our condensed consolidated financial statements.
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