U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended
June 30, 2005
Commission file number: 000-51211
MERCATOR PARTNERS ACQUISITION CORP.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 20-2096338 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
One Fountain Square
11911 Freedom Drive, Suite 1080
Reston, Virginia 20190
(Address of Principal Executive Offices and Zip Code)
(703) 995-5533
(Registrant’s Telephone Number, Including Area Code)
Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by checkmark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act. Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at August 1, 2005 | |
Common Stock, par value $0.0001 per share | 1,150,100 | |
Class B Common Stock, par value $0.0001 per share | 10,580,000 |
Explanatory Note
This Amendment No. 1 on Form 10-Q/A (“Amendment No. 1”) amends and restates in its entirety our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2005 as initially filed with the Securities and Exchange Commission (the “SEC”) on August 12, 2005 (the “Form 10-Q”).
In August 2006, we determined that it was necessary to restate our financial results for the period from inception (January 3, 2005) to December 31, 2005 and for the interim period ended March 31, 2006. In September 2006 we further determined it was necessary to restate our financial results for the interim period ended June 30, 2005. The purpose of the restatements is to reflect liabilities and additional gains and losses related to the classification of and accounting for (1) the warrants to purchase common stock included in the Series A units and Series B units sold in our initial public offering and (2) the option to purchase Series A units and/or Series B units issued to the underwriters in connection with that offering. The condensed financial statements included in this Amendment No. 1 have been restated to effect the reclassification of such warrants and the purchase option as derivative liabilities rather than permanent equity, and the accompanying notes to the condensed financial statements have been revised to disclose certain information with respect thereto. Information with respect to the warrants, the purchase option and the restatement has also been added in the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Controls and Procedures” of the Form 10-Q.
This Amendment No. 1 speaks as of the end of our fiscal quarter ended June 30, 2005 or as of the date of the filing of the original Form 10-Q, as applicable. Except for the revisions described above and certain other clarifying changes, it does not update any of the condensed financial statements contained in the original Form 10-Q. This Amendment No. 1 contains forward-looking statements that were made at the time the original Form 10-Q was filed on August 12, 2005. It must be considered in light of any subsequent statements, including forward-looking statements, in any reports made by us subsequent to the filing of the original Form 10-Q, including financial statements made in subsequent filings on Form 8-K, on Form 10-K or on Form 10-Q.
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Mercator Partners Acquisition Corp.
Condensed Balance Sheet
June 30, 2005 (As Restated)
(Unaudited)
| ASSETS | ||||
Current Assets | ||||
Cash and cash equivalents | $ | 1,767,174 | ||
U.S. Government Securities held in Trust Fund | 53,733,905 | |||
Prepaid expenses and other current assets | 94,583 | |||
Total current assets | 55,595,662 | |||
Total assets | $ | 55,595,662 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
Current Liabilities | ||||
Accounts payable | $ | 66,342 | ||
Accrued expenses | 36,694 | |||
Income taxes payable | 67,000 | |||
Derivative liabilities | 7,055,250 | |||
Total current liabilities | 7,225,286 | |||
Common stock, subject to possible conversion to cash (2,114,942 shares at conversion value) | 10,741,407 | |||
Commitments | ||||
Stockholders’ Equity | ||||
Preferred stock, par value $.0001 per share, 5,000 shares authorized, no shares issued | — | |||
Common stock, par value $.0001 per share, 40,000,000 shares authorized, 1,150,100 shares issued and outstanding | 115 | |||
Common stock, Class B, par value $.0001 per share, 12,000,000 shares authorized, 8,465,058 shares issued and outstanding (excluding 2,114,942 shares subject to possible conversion to cash) | 847 | |||
Additional paid-in capital | 37,272,057 | |||
Retained earnings | 358,040 | |||
Accumulated other comprehensive loss | (2,090 | ) | ||
Total stockholders’ equity | 37,628,969 | |||
Total liabilities and stockholders’ equity | $ | 55,595,662 | ||
See Accompanying Notes to Condensed Financial Statements
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Mercator Partners Acquisition Corp.
Condensed Statements of Operations (As Restated)
(Unaudited)
| For the three months ended June 30, 2005 | From inception (January 3, 2005) to June 30, 2005 | |||||||
Revenue | $ | — | $ | — | ||||
Operating Expenses: | ||||||||
Formation and operating costs | 109,767 | 119,736 | ||||||
Loss from operations | (109,767 | ) | (119,736 | ) | ||||
Interest Income | 315,272 | 315,576 | ||||||
Gain on derivative liabilities | 229,200 | 229,200 | ||||||
Income before provision for income taxes | 434,705 | 425,040 | ||||||
Provision for income taxes | 67,000 | 67,000 | ||||||
Net Income | $ | 367,705 | $ | 358,040 | ||||
Weighted average number of shares outstanding: | ||||||||
Basic and diluted | 9,925,485 | 5,045,966 | ||||||
Net income per common share, basic and diluted | $ | 0.04 | $ | 0.07 | ||||
See Accompanying Notes to Condensed Financial Statements
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Mercator Partners Acquisition Corp.
Condensed Statement of Stockholders’ Equity
From inception (January 3, 2005) to June 30, 2005 (As Restated)
(Unaudited)
| Common Stock | Common Stock, Class B | Additional Capital | Retained Earnings | Accumulated Loss | Total | ||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||
Balance, January 3, 2005 (inception) | — | $ | — | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Issuance of common stock for cash | 100 | — | — | — | 500 | — | — | 500 | |||||||||||||||||
Issuance of 4,950,000 warrants for cash | — | — | — | — | 247,500 | — | — | 247,500 | |||||||||||||||||
Sale of 575,000 Series A units and 5,290,000 Series B units through public offering, net of underwriter’s discount and offering expenses and net proceeds of $10,680,457 allocable to 2,114,942 shares of common stock, Class B subject to possible conversion to cash | 1,150,000 | 115 | 8,465,058 | 847 | 44,369,457 | — | — | 44,370,419 | |||||||||||||||||
Recording of derivative liability for portion of proceeds from sale of units in public offering relating to warrants and for value of underwriter purchase option | — | — | — | — | (7,284,450 | ) | — | — | (7,284,450 | ) | |||||||||||||||
Allocation of value to Class B shares subject to possible conversion to cash | — | — | — | — | (60,950 | ) | — | — | (60,950 | ) | |||||||||||||||
Net income for the period | — | — | — | — | — | 358,040 | — | 358,040 | |||||||||||||||||
Change in unrealized loss on available-for-sale securities | — | — | — | — | — | — | (2,090 | ) | (2,090 | ) | |||||||||||||||
Comprehensive income | 355,950 | ||||||||||||||||||||||||
Balance, June 30, 2005 (unaudited) | 1,150,100 | $ | 115 | 8,465,058 | $ | 847 | $ | 37,272,057 | $ | 358,040 | $ | (2,090 | ) | $ | 37,628,969 | ||||||||||
See Accompanying Notes to Condensed Financial Statements
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Mercator Partners Acquisition Corp.
Condensed Statement of Cash Flows
From inception (January 3, 2005) to June 30, 2005 (As Restated)
(Unaudited)
| From inception (January 3, 2005) to June 30, 2005 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||
Net income | $ | 358,040 | ||
Adjustments to reconcile net income to net cash used in operating activities: | ||||
Amortization of discount on U.S. Government Securities held in Trust Fund | (306,995 | ) | ||
Gain on derivative liabilities | (229,200 | ) | ||
Changes in operating assets and liabilities: | ||||
Increase in prepaid expenses and other current assets | (94,583 | ) | ||
Increase in accounts payable | 66,342 | |||
Increase in accrued expenses | 36,694 | |||
Increase in income taxes payable | 67,000 | |||
Net cash used in operating activities | (102,702 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||
Purchases of U.S. Government Securities held in Trust Fund | (53,429,000 | ) | ||
Net cash used in investing activities | (53,429,000 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||
Proceeds from sales of common stock and warrants to initial stockholders | 248,000 | |||
Portion of net proceeds from sale of Series B units through public offering allocable to shares of common stock, Class B subject to possible conversion to cash | 10,680,457 | |||
Net proceeds from sale of units through public offering | 44,370,419 | |||
Net cash provided by financing activities | 55,298,876 | |||
Net increase in cash and cash equivalents | 1,767,174 | |||
CASH AND CASH EQUIVALENTS | ||||
Beginning of period | — | |||
End of period | $ | 1,767,174 | ||
See Accompanying Notes to Condensed Financial Statements
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NOTE 1 – ORGANIZATION AND ACTIVITIES
Mercator Partners Acquisition Corp. (the “Company”) was incorporated in Delaware on January 3, 2005 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with a currently unidentified operating business (a “Business Combination”). The Company is a “shell company” as that term is defined in Rule 405 promulgated under the Securities Act of 1933 and Rule 12b-2 promulgated under the Securities Exchange Act. As such, the Company is subject to rules recently adopted by the Securities and Exchange Commission applicable to shell companies. In particular, upon completion of a Business Combination which causes the Company to cease being a shell company, the Company will be obligated to disclose the same type of information it would be required to provide in registering a class of securities under the Securities Exchange Act of 1934. All activity from inception (January 3, 2005) through June 30, 2005 relates to the Company’s formation and capital raising activities.
As further discussed in Note 3, on April 11, 2005, the Company effected an initial public offering of its securities (the “Offering”) which closed on April 15, 2005.
Although substantially all of the proceeds of the Offering are intended to be utilized to effect a Business Combination, the proceeds are not specifically designated for this purpose. The gross proceeds from the Offering and sale of the Series B units of $53,429,000 are held in a trust fund (the “Trust Fund”) until the earlier of the completion of a Business Combination or the distribution of proceeds to Class B stockholders. If a Business Combination is consummated, the redemption rights afforded to the Class B stockholders may result in the redemption for cash of up to approximately 19.99% of the aggregate number of Class B shares sold as further described below. If a Business Combination is not consummated in 12 months, or within 18 months from April 11, 2005 if a letter of intent, agreement in principal or definitive agreement has been executed within 12 months after the Offering and the Business Combination has not been consummated within such 12 month period (the “Target Business Acquisition Period”), all of the proceeds of the Trust Fund will be returned to Class B stockholders.
As a result of its limited resources, the Company will, in all likelihood, have the ability to effect only a single Business Combination. Accordingly, the prospects for the Company’s success will be entirely dependent upon the future performance of a single business.
The Company will not effect a Business Combination unless the fair market value of the target, as determined by the Board of Directors of the Company in its sole discretion, based upon valuation standards generally accepted by the financial community including, among others, book value, cash flow, and both actual and potential earnings, is at least equal to 80% of the net assets of the Company at the time of such acquisition.
Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. As discussed previously, if the Company is unable to effect a Business Combination within 18 months of the consummation of the Offering, the Company’s Certificate of Incorporation provides for the Company’s automatic liquidation. If the Company were to expend all of the net proceeds of the Offering not held in the Trust Fund prior to liquidation, but recognizing that such net proceeds could become subject to the claims of creditors of the Company which could be prior to the claims of stockholders of the Company, it is possible that the Company’s liquidation value may be less than the amount in the Trust Fund, inclusive of any net interest income thereon. Moreover, all of the Company’s initial stockholders have agreed to waive their respective rights to participate in any such liquidation distribution on shares owned prior to the Offering.
The Company, after signing a definitive agreement for a Business Combination, is obliged to submit such transaction for approval by a majority of the Class B common stockholders of the Company. The information presented to the Class B stockholders will include substantially all of the information that the Company would be required to include in its filing on Form 8-K upon consummation of the proposed Business Combination. Class B stockholders that vote against such proposed Business Combination are, under certain conditions, entitled to convert their shares into a pro-rata distribution from the Trust Fund (the “Conversion Right”). In the event that holders of a majority of the outstanding shares of Class B common stock vote for the approval of the Business Combination and that holders owning 20% or more of the outstanding Class B common stock do not exercise their Conversion Rights, the Business Combination may then be consummated. Upon completion of such Business Combination and the payment of any Conversion Rights (and related cancellation of Class B common stock), the remaining shares of Class B common stock would be converted to common stock.
At the time the Company seeks Class B stockholder approval of any Business Combination, the Company will offer each Class B stockholder who acquired Class B shares through the Offering or subsequently in the after-market the right to exercise his or her Conversion Right if such Class B stockholder votes against the Business Combination and the Business Combination is approved and completed. The holders of the Company’s common stock are not entitled to seek conversion of their shares. The actual per-share conversion price will be equal to the
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amount in the Trust Fund (inclusive of any interest thereon) as of two business days prior to the proposed Business Combination, divided by the number of Class B shares sold in the Offering, or approximately $5.08 per share based on the value of the Trust Fund as of June 30, 2005. There will be no distribution from the Trust Fund with respect to the warrants included in the Series A Units (defined in Note 3 below) and Series B Units (defined in Note 3 below). A Class B stockholder may request conversion of his or her shares at any time prior to the vote taken with respect to a proposed Business Combination at a meeting held for that purpose, but such request will not be granted unless such Class B stockholder votes against the Business Combination and the Business Combination is approved and consummated.
It is anticipated that the funds to be distributed to Class B stockholders who have shares converted will be distributed promptly after consummation of a Business Combination. Any Class B stockholder who converts his or her stock into his or her share of the Trust Fund still has the right to exercise the Class W Warrants (defined in Note 6 below) and Class Z Warrants (defined in Note 6 below) that were received as part of the Series B Units. The Company will not consummate any Business Combination if 20% or more of the Class B stockholders exercise their conversion rights. Accordingly, the redemption value of $10,741,407 (2,114,942 shares, or 19.99% of the Class B shares sold in the public offering) has been included in the accompanying condensed balance sheet at June 30, 2005 as temporary capital.
NOTE 2 — RESTATEMENT AND RECLASSIFICATIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Summary of Restatement Items
In August 2006, the Company concluded that it was necessary to restate its financial results for the period from inception (January 3, 2005) to December 31, 2005 and for the interim period ended March 31, 2006. In September 2006, the Company further determined it was necessary to restate its financial results for the interim period ended June 30, 2005. The purpose of the restatement is to reflect liabilities and additional gains and losses related to the classification of and accounting for: (1) the warrants to purchase common stock included in the Series A units and Series B units sold in the Offering and (2) the option to purchase Series A Units and Series B Units issued to the underwriters in connection with the Offering (see Note 3). The Company had previously classified the value of the warrants to purchase common stock sold in the Offering and the option issued to the underwriters as permanent equity. After further review, the Company has determined that these instruments should have been classified as derivative liabilities and, therefore, the fair value of each instrument must be recorded as a derivative liability on the Company’s condensed balance sheet. Changes in the fair values of these instruments will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gain or loss will be recorded in the Company’s condensed statements of operations. At the date of the conversion of each respective instrument or portion thereof (or exercise of the options or warrants or portion thereof, as the case may be), the corresponding derivative liability will be reclassified as equity.
The Company had previously issued condensed financial statements which did not present the derivative liability. The accompanying June 30, 2005 condensed financial statements have been restated to effect the changes described above. The impact of the adjustments related to the classification of and accounting for the derivative liability on the previously reported condensed financial statements is as follows:
| For the period from inception (January 3, 2005) to June 30, 2005 | ||||||
| As Previously Reported | As Restated | |||||
Total assets | $ | 55,595,662 | $ | 55,595,662 | ||
Total liabilities | 170,036 | 7,225,286 | ||||
Common stock subject to conversion | 10,741,407 | 10,741,407 | ||||
Stockholders’ equity | 44,684,219 | 37,628,969 | ||||
Gain on derivative liabilities | — | 229,200 | ||||
Interest income | 315,576 | 315,576 | ||||
Income before provision for income taxes | 195,840 | 425,040 | ||||
Provision for income taxes | 67,000 | 67,000 | ||||
Net income | 128,840 | 358,040 | ||||
Weighted average shares: | ||||||
Basic and Diluted | 5,045,966 | 5,045,966 | ||||
Earnings per share: | ||||||
Basic and Diluted | $ | 0.03 | $ | 0.07 | ||
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| For the three months ended June 30, 2005 | ||||||
| As Previously Reported | As Restated | |||||
Total assets | $ | 55,595,662 | $ | 55,595,662 | ||
Total liabilities | 170,036 | 7,225,286 | ||||
Common stock subject to conversion | 10,741,407 | 10,741,407 | ||||
Stockholders’ equity | 44,684,219 | 37,628,969 | ||||
Gain on derivative liabilities | — | 229,200 | ||||
Interest income | 315,272 | 315,272 | ||||
Income before provision for income taxes | 205,505 | 434,705 | ||||
Provision for income taxes | 67,000 | 67,000 | ||||
Net income | 138,505 | 367,705 | ||||
Weighted average shares: | ||||||
Basic and Diluted | 9,925,485 | 9,925,485 | ||||
Earnings per share: | ||||||
Basic and Diluted | $ | 0.01 | $ | 0.04 | ||
NOTE 3 — PUBLIC OFFERING OF SECURITIES
In its initial public offering, effective April 11, 2005 (closed on April 15, 2005), the Company sold to the public 575,000 Series A Units (the “Series A Units” or a “Series A Unit”) and 5,290,000 Series B Units (the “Series B Units” or a “Series B Unit”) at a price of $10.50 and $10.10 per unit, respectively, inclusive of an over-allotment option issued to the underwriters to purchase additional Series A Units and Series B Units, which was exercised in full. Net proceeds from the initial public offering, including the exercise of the over allotment option, totaled $55,050,876 which was net of $4,415,624 in underwriting and other expenses. Each Series A Unit consists of two shares of the Company’s common stock, five Class W Warrants, and five Class Z Warrants. Each Series B unit consists of two shares of the Company’s Class B common stock, one Class W Warrant, and one Class Z Warrant.
Both the common stock and the Class B common stock have one vote per share. However, the Class B stockholders may, and the common stockholders may not, vote in connection with a Business Combination. Further, should a Business Combination not be consummated during the Target Business Acquisition Period, the Trust Fund would be distributed pro-rata to all of the Class B common stockholders and their Class B common shares would be cancelled and returned to the status of authorized but unissued shares. Any remaining net assets would be distributed to the holders of the Company’s common stock and the Company would be dissolved and liquidated.
Each Class W Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00, commencing on the later of (a) April 11, 2006 or (b) the completion of a Business Combination with a target business. The Class W Warrants will expire on April 11, 2010 or earlier upon redemption. Each Class Z Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00, commencing on the later of (a) April 11, 2006 or (b) the completion of a Business Combination with a target business. The Class Z Warrants will expire on April 11, 2012 or earlier upon redemption. The Company may redeem the outstanding Class W Warrants and/or Class Z Warrants with the prior consent of HCFP/Brenner Securities LLC (“HCFP”), the representative of the underwriters of the Offering, in whole and not in part, at a price of $.05 per warrant at any time after the warrants become exercisable, upon a minimum of 30 days’ prior written notice of redemption, and if, and only if, the last sale price of the Company’s common stock equals or exceeds $7.50 per share and $8.75 per share, for a Class W Warrant and Class Z Warrant, respectively, for any 20 trading days within a 30 trading day period ending three business days before the Company sends the notice of redemption.
Upon closing of the public offering, the Company issued an option, for $100, to HCFP (the “Underwriters Purchase Option” or “UPO”), to purchase up to 25,000 Series A units at an exercise price of $17.325 per unit and/or up to 230,000 Series B units at an exercise price of $16.665 per unit (Note 6).
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NOTE 4 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements — The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the period from inception (January 3, 2005) to April 15, 2005 included in the Company’s Form 8-K filed on April 15, 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management necessary for a fair presentation of the Company’s financial position and results of operations. The operating results for the period ended June 30, 2005 are not necessarily indicative of the results to be expected for any other interim period of any future year.
Cash and Cash Equivalents — Included in cash and cash equivalents are deposits with financial institutions as well as short-term money market instruments with maturities of three months or less when purchased.
Investments — Investments consist of investments acquired, which were included in the Trust Fund, with maturities exceeding three months but less than three years. Consistent with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, the Company classifies all debt securities and all investments in equity securities that have readily determinable fair values as available-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies. Such securities are reported at fair value, with unrealized gains or losses excluded from earnings and included in other comprehensive income, net of applicable taxes. Discounts from the face value of restricted investments are amortized using the interest method over the period from the date of purchase to maturity and are included in interest income on the accompanying condensed statement of operations.
The Company’s restricted investment held in trust at June 30, 2005 consists of an investment in United States of America government treasury securities, with a maturity date of July 14, 2005, and is stated at amortized cost. The fair market value of the restricted investment was $53,733,905 as of June 30, 2005, including $2,090 of unrealized losses, which are reported as a component of other comprehensive loss as of June 30, 2005. The Company recognized interest income of $306,995 from amortization of the discount on the investment during the period from inception (January 3, 2005) to June 30, 2005, which is included in interest income on the accompanying condensed statement of operations. There were no sales or maturities of investments during the period from inception (January 3,2005) to June 30, 2005.
Accounting for Derivative Instruments— SFAS No. 133“Accounting for Derivative Instruments and Hedging Activities,” as amended, requires all derivatives to be recorded on the balance sheet at fair value. However, paragraph 11(a) of SFAS No. 133 provides that contracts issued or held by a reporting entity that are both (1) indexed to its own stock and (2) classified as stockholders’ equity in its statements of financial position are not treated as derivative instruments. The Emerging Issues Task Force (“EITF”) 00-19,“Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”), provides criteria for determining whether freestanding contracts that are settled in a company’s own stock, including common stock warrants, should be designated as either an equity instrument, as an asset or as a liability under SFAS No. 133. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in a company’s results of operations. A contract designated as an equity instrument is included within equity, and no fair value adjustments are required from period to period. In accordance with EITF 00-19, the Company’s 8,165,000 Class W and 8,165,000 Class Z Warrants to purchase Common Stock included in the Series A Units and Series B Units sold in the Offering and the UPO to purchase up to 25,000 Series A units and/or up to 230,000 Series B units are separately accounted for as liabilities. The agreements related to the Class W Warrants and Class Z Warrants and the UPO provide for the Company to attempt to register and maintain the registration of the shares underlying the securities and are silent as to the penalty to be incurred in the absence of the Company’s ability to deliver registered shares to the holders upon exercise of the securities. Under EITF 00-19, registration of the common stock underlying the warrants and UPO is not within the Company’s control and, as a result, the Company must assume that it could be required to settle the securities on a net-cash basis, thereby necessitating the treatment of the potential settlement obligation as a liability. The fair values of these securities are presented on the Company’s condensed balance sheet as “Derivative liabilities” and the changes in the values of these derivatives are shown in the Company’s condensed statement of operations as “Gain (loss) on derivative liabilities.” Such gains and losses are non-operating and do not result in cash flows from operating activities.
Fair values for traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates. The Class W Warrants and Class Z Warrants sold in the Offering are publicly traded and, consequently, the fair value of these warrants are based on the market price of the applicable class of warrant at each period end. To the extent that the market price increases or decreases, the Company’s derivative liabilities will also increase or decrease, with a corresponding impact on the Company’s statement of operations.
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The UPO issued to the underwriters to purchase up to 25,000 Series A Units and/or up to 230,000 Series B Units is a derivative that is separately valued and accounted for on the Company’s balance sheet. While the underlying shares and warrants are indexed to the Company’s common stock, because the UPO contains certain registration rights with respect to the UPO and the securities issuable upon exercise of the UPO, the Company has classified these instruments as a liability in accordance with EITF 00-19. This derivative liability has been, and will continue to be, adjusted to fair value at each period end.
The pricing model the Company uses for determining the fair value of the UPO at the end of each period is the Black Scholes option-pricing model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates, market prices and volatilities. Selection of these inputs involves management’s judgment. The Company uses a risk-free interest rate, which is the rate on U.S. Treasury instruments, for a security with a maturity that approximates the estimated remaining contractual life of the derivative. The Company uses volatility rates based upon a sample of comparable special purpose acquisition corporations. If and when the Company consummates a Business Combination, the volatility rates will then be based on companies comparable to the acquired company. The volatility factor used in the Black Scholes model has a significant effect on the resulting valuation of the derivative liabilities on the Company’s balance sheet. The volatility for the calculation of the UPO was 41.64% as of June 30, 2005. This volatility rate will continue to change in the future. The Company uses the closing market price of the Company’s Series A units and Series B units at the end of a period in the Black Scholes model. The Company’s Series A Unit and Series B Unit prices will also change in the future. To the extent that the Company’s Series A Units and Series B Unit prices increase or decrease, the Company’s UPO derivative liability will also increase or decrease, absent any change in volatility rates and risk-free interest rates.
Concentration of Credit Risk — Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents. However, management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
Net Income Per Share — Net income per share is computed based on the weighted average number of shares of common stock and Class B common stock outstanding.
Basic earnings (loss) per share excludes dilution and is computed by dividing income (loss) available to common and common, Class B stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For all periods presented, since the effect of the assumed exercise of 21,280,000 of outstanding warrants to purchase common stock and the outstanding UPO to purchase 25,000 Series A Units and 230,000 Series B Units, is anti-dilutive, they have been excluded from the Company’s computation of fully diluted net income per share. Therefore, basic and diluted income per share were the same for the three months ended June 30, 2005 and for the period from inception (January 3, 2005) to June 30, 2005.
Fair Value of Financial Instruments — The fair values of the Company’s assets and liabilities that qualify as financial instruments under SFAS No. 107 approximate their carrying amounts presented in the balance sheet at June 30, 2005.
Use of Estimates and Assumptions — The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can, and in many cases will, differ from those estimates.
Income Taxes — Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.
New Accounting Pronouncements— The Company does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying condensed financial statements.
NOTE 5 — COMMITMENTS
The Company has agreed to pay Mercator Capital L.L.C. (“Mercator Capital”), an affiliate of certain stockholders, directors and officers, $7,500 per month, commencing on consummation of the Offering, for office, secretarial and administrative services. Through June 30, 2005 $22,500 was paid to Mercator Capital for such services.
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NOTE 6 — CAPITAL STOCK
Preferred Stock
The Company is authorized to issue up to 5,000 shares of Preferred Stock with such designations, voting, and other rights and preferences as may be determined from time to time by the Board of Directors.
Common Stock and Class B Common Stock
The Company is authorized to issue 40,000,000 shares of common stock and 12,000,000 shares of Class B common stock (Note 2). As of June 30, 2005, there are 1,150,100 shares of the Company’s common stock issued and outstanding and 10,580,000 shares of the Company’s Class B common stock issued and outstanding, including 2,114,942 Class B common shares subject to possible conversion to cash.
As of June 30, 2005, there are 5,769,900 and 960,000 authorized but unissued shares of the Company’s common stock and the Company’s Class B common stock, respectively, available for future issuance, after appropriate reserves for the issuance of common stock in connection with the Class W Warrants and Class Z Warrants, the Underwriters Purchase Option and the officers’ and directors’ Class W Warrants and Class Z Warrants.
The Company currently has no commitments to issue any shares of common stock other than as described herein; however, the Company will, in all likelihood, issue a substantial number of additional shares in connection with a Business Combination. To the extent that additional shares of common stock are issued, dilution to the interests of the Company’s stockholders who participated in the Offering will occur.
Warrants
In January 2005, the Company issued to its stockholders Class W Warrants (a “Class W Warrant”), to purchase 2,475,000 shares of the Company’s common stock, and Class Z Warrants (a “Class Z Warrant”) to purchase 2,475,000 shares of the Company’s common stock, for an aggregate purchase price of $247,500, or $0.05 per warrant.
Except as set forth below, the Class W Warrants are callable, subject to adjustment in certain circumstances, and entitle the holder to purchase shares at $5.00 per share for a period commencing on the later of: (a) completion of a Business Combination, or (b) April 11, 2006 and ending April 10, 2010. As of June 30, 2005, there were 10,640,000 Class W Warrants outstanding.
Except as set forth below, the Class Z Warrants are callable, subject to adjustment in certain circumstances, and entitle the holder to purchase shares at $5.00 per share for a period commencing on the later of: (a) completion of a Business Combination, or (b) April 11, 2006 and ending April 10, 2010. As of June 30, 2005, there were 10,640,000 Class Z Warrants outstanding.
The Class W warrants and Class Z warrants outstanding prior to the public offering, all of which are held by the Company’s officers and directors or their affiliates, shall not be redeemable by the Company as long as such warrants continue to be held by such individuals.
Purchase Option
Upon the closing of the Offering, the Company sold and issued the UPO, for $100, to purchase up to 25,000 Series A units and/or up to 230,000 Series B units. The Company accounted for the fair value of the UPO, inclusive of the receipt of the $100 cash payment, as an expense of the public offering. The Company estimated the fair value of this UPO at the date of issuance to be $752,450, using a Black Scholes option-pricing model. The fair value of the UPO granted was estimated as of the date of grant and issuance using the following assumptions: (1) expected volatility of 44.5%, (2) risk-free interest rate of 4.02% and (3) contractual life of 5 years. The UPO may be exercised for cash or on a “cashless” basis, at the holder’s option, such that the holder may use the appreciated value of the UPO (the difference between the exercise prices of the option and the underlying warrants and the market price of the units and underlying securities) to exercise the UPO without the payment of any cash. The Series A Units and Series B Units issuable upon exercise of this option are identical to those in the Offering, except that the exercise price of the warrants included in the units are $5.50 per share and the Class Z Warrants shall be exercisable for a period of only five years from the date of the Offering. The UPO is exercisable at $17.325 per Series A Unit and $16.665 per Series B Unit commencing on the later of (a) April 11, 2006 or (b) the completion of a Business Combination with a target business, and expires on April 11, 2010.
The UPO is classified as a derivative liability on the accompanying financial statements. Accordingly the Company uses the Black Scholes option-pricing model for determining fair value of the UPO at the end of each period. The fair value of the UPO at June 30, 2005 of $686,550 was estimated using the following assumptions: (1) quoted fair value of a Series A Unit of $9.40 and quoted fair value of a Series B Unit of $10.50, (2) expected volatility of 41.64%, (3) risk-free interest rate of 3.72% and (4) contractual remaining life of 4.79 years.
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NOTE 7 — DERIVATIVE LIABILITIES
The Company’s derivative liabilities are the following at June 30, 2005:
| At Issuance | At June 30, 2005 | |||||
Fair value of 8,165,000 Class W Warrants and 8,185,000 Class Z Warrants issued as part of Series A and Series B Units sold in the Offering | $ | 6,532,000 | $ | 6,368,700 | ||
Fair value of Underwriter Purchase Option | 752,450 | 686,550 | ||||
Total | $ | 7,284,450 | $ | 7,055,250 | ||
During the three months ended June 30, 2005 and for the period from inception (January 3, 2005) to June 30, 2005, the Company recognized gains of $229,200 on derivative liabilities as a result of a reduction in the fair value of the warrants and the UPO.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements and footnotes thereto contained in this report and the Company’s audited financial statements and footnotes thereto for the period from inception (January 3, 2005) to April 15, 2005 included in the Company’s Form 8-K filed on April 15, 2005.
Restatement of Financial Statements
We have restated our financial statements for the period from inception (January 3, 2005) to December 31, 2005 and for the interim period ended June 30, 2005. We restated the financial results to reflect additional gains and losses related to the classification of and accounting for: (1) the warrants to purchase common stock associated with the Series A and Series B Units sold in our initial public offering and (2) the option to purchase Series A Units and/or Series B Units issued to the underwriters in connection with our initial public offering. We had previously classified the value of these securities as equity. After further review, we have determined that these instruments should be classified as derivative liabilities and, therefore, the fair value of each instrument must be recorded as a derivative liability on our balance sheet. Changes in the fair value of these instruments will result in adjustments to the amount of the recorded derivative liabilities and the corresponding gains or loss will be recorded in our statement of operations. At the date of the conversion of each respective instrument or portion thereof (or exercise of the option or warrants or portion thereof, as the case may be), the corresponding derivative liability will be reclassified as equity.
The accompanying June 30, 2005 financial statements have been restated to effect the changes described above. See Note 2 to our accompanying Condensed Financial Statements for an explanation of these restatements. The following table sets forth the effects of the restatement adjustments on Company’s financial statements as of and for the period from inception (January 3, 2005) through June 30, 2005.
For the period from inception (January 3, 2005) to June 30, 2005 | ||||||
| As Previously Reported | As Restated | |||||
Total assets | $ | 55,595,662 | $ | 55,595,662 | ||
Total liabilities | 170,036 | 7,225,286 | ||||
Common stock subject to conversion | 10,741,407 | 10,741,407 | ||||
Stockholders’ equity | 44,684,219 | 37,628,969 | ||||
Gain on derivative liabilities | — | 229,200 | ||||
Interest income | 315,576 | 315,576 | ||||
Income before provision for income taxes | 195,840 | 425,040 | ||||
Provision for income taxes | 67,000 | 67,000 | ||||
Net income | 128,840 | 358,040 | ||||
Weighted average shares: | ||||||
Basic and Diluted | 5,045,966 | 5,045,966 | ||||
Earnings per share: | ||||||
Basic and Diluted | $ | 0.03 | $ | 0.07 | ||
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For the three months ended June 30, 2005 | ||||||
| As Previously Reported | As Restated | |||||
Total assets | $ | 55,595,662 | $ | 55,595,662 | ||
Total liabilities | 170,036 | 7,225,286 | ||||
Common stock subject to conversion | 10,741,407 | 10,741,407 | ||||
Stockholders’ equity | 44,684,219 | 37,628,969 | ||||
Gain on derivative liabilities | — | 229,200 | ||||
Interest income | 315,272 | 315,272 | ||||
Income before provision for income taxes | 205,505 | 434,705 | ||||
Provision for income taxes | 67,000 | 67,000 | ||||
Net income | 138,505 | 367,705 | ||||
Weighted average shares: | ||||||
Basic and Diluted | 9,925,485 | 9,925,485 | ||||
Earnings per share: | ||||||
Basic and Diluted | $ | 0.01 | $ | 0.04 | ||
Except as otherwise clearly stated, all financial information contained in this Quarterly Report on Form 10-Q/A gives effect to the restatements.
General
We were formed on January 3, 2005 to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with a currently unidentified operating business. On April 15, 2005, we completed our initial public offering (“IPO”) of 575,000 Series A Units (“Series A Units”) and 5,290,000 Series B Units (“Series B Units”), including 75,000 Series A Units and 690,000 Series B Units issued upon exercise of the underwriters’ over-allotment option. Each Series A Unit consists of two shares of Common Stock, $.0001 par value per share (“Common Stock”), five Class W Warrants (“Class W Warrants”), each to purchase one share of Common Stock, and five Class Z Warrants (“Class Z Warrants”), each to purchase one share of Common Stock. Each Series B Unit consists of two shares of Class B Common Stock, $.0001 par value per share, one Class W Warrant and one Class Z Warrant. Each Class W Warrant and Class Z Warrant entitles the holder to purchase one share of our common stock at a price of $5.00 per share. Our net proceeds from the initial public offering, including the exercise of the over-allotment option, totaled $55,050,876 which was net of $4,415,624 in underwriting and other expenses.
For a description of the proceeds generated in our IPO and a discussion of the use of such proceeds, we refer you to Notes 1 and 3 of the financial statements included in Part I, Item 1 of this Form 10-Q and Part II, Item 2 of this Form 10-Q.
Net Income for the three months ended June 30, 2005 of $367,705 consisted of interest income on the Trust Fund investment of $306,995, interest on cash and cash equivalents of $8,277, and a gain on derivative liabilities of $229,200 offset by formation and operating expenses of $109,767, consisting of $22,500 for a monthly administrative services agreement, $28,500 for professional fees, $22,917 for officer liability insurance, $2,497 for travel and $33,353 for other expenses, and $67,000 for income taxes.
Net Income for the period from January 3, 2005 (inception) to June 30, 2005 of $128,840 consisted of interest income on the Trust Fund investment of $306,995, interest on cash and cash equivalents of $8,581, and a gain on derivative liabilities of $229,200 offset by formation and operating expenses of $119,736, consisting of $22,500 for a monthly administrative services agreement, $38,000 for professional fees, $22,917 for officer liability insurance, $2,497 for travel and $33,822 for other expenses, and $67,000 for income taxes.
Through June 30, 2005, we did not engage in any significant operations. Our entire activity from inception through June 30, 2005 had been to prepare for and complete our IPO and conduct an initial review of candidates for a Business Combination.
We believe that we have sufficient available funds to complete our efforts to effect a business combination with an operating business.
Beginning April 15, 2005, we became obligated to pay Mercator Capital L.L.C., an affiliate of certain stockholders, directors and officers, a monthly fee of $7,500 for office, secretarial and administrative services. Through June 30, 2005, $22,500 was paid to Mercator Capital for such services.
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Forward Looking Statements
The statements discussed in this report include forward looking statements that involve risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plans,” and “continue” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other “forward-looking” information.
We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The cautionary language in this quarterly report provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence or non-occurrence of events described in this quarterly report or detailed from time to time in our filings with the Securities and Exchange Commission, could have a material adverse effect on our business, operating results and financial condition, including our ability to successfully consummate a business combination.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. We do not believe we are exposed to significant market risk.
Item 4. Control and Procedures
Our management carried out an evaluation, with the participation of H. Brian Thompson, our principal executive officer, and David Ballarini, our principal financial and accounting officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2005. Based upon that evaluation, Messrs. Thompson and Ballarini concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. However, based on a comment received from the Securities and Exchange Commission to the Form S-4 filed by us in connection with our proposed acquisitions of Global Internetworking, Inc. and European Telecommunications & Technology, Ltd., and based on further review of the relevant accounting literature and in consultation with our independent registered public accounting firm, J.H. Cohn LLP, we determined that we needed to reclassify certain amounts in our financial statements to report the warrants issued as part of the units in our initial public offering and the purchase option issued to the underwriters in our initial public offering as liabilities which are derivative instruments and are required to be reported at fair value at each period end. We addressed this by determining to restate our Form 10-Q for the period ended June 30, 2005 to reflect this reclassification.
There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the three months ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds
The effective date of our registration statement, filed on From S-1 under the Securities Act (File No. 333-122303) relating to the initial public offering of our Series A Units, Series B Units, Common Stock, Class B Common Stock, Class W Warrants and Class Z Warrants, was April 11, 2005. A total of 575,000 Series A Units and 5,290,000 Series B Units were registered and sold. The managing underwriter for the public offering was HCFP/Brenner Securities LLC.
The offering commenced on April 11, 2005 and closed on April 15, 2005. The Series A Units were sold at an offering price of $10.50 per unit and the Series B Units were sold at an offering price of $10.10 per unit. The aggregate offering price was $59,466,500. We incurred approximately $4,415,624 in underwriting and other expenses in connection with the offering. Our net proceeds totaled $55,050,876. Of such net proceeds, $53,429,000 are held in a trust fund maintained by American Stock Transfer & Trust Company, as trustee. We will use the net proceeds held in trust to enter into a business combination with an operating company. Such funds will not be released from the trust fund until the earlier of the completion of a business combination or the distribution of the proceeds to our Class B stockholders. The proceeds held in the trust fund may be used as consideration to pay the sellers of a target business with which we ultimately complete a business combination. Any amounts not paid as consideration to the sellers of the target business may be used to finance operations of the target business. The remaining net proceeds of $1,621,876 are not held in the trust fund and will be used to pay expenses which we may incur related to the investigation and selection of a target business and the negotiation of an agreement to acquire a target business, as well as for general working capital and the payment of income taxes if any.
Item 6. Exhibits
Exhibits
| Exhibit No. | Description | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification | |
| 32.1 | Section 1350 Certification | |
| 32.2 | Section 1350 Certification | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: September 28, 2006 | MERCATOR PARTNERS ACQUISITION CORP. | |||
By: | /s/ H. Brian Thompson | |||
H. Brian Thompson | ||||
Chairman and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
By: | /s/ David Ballarini | |||
David Ballarini | ||||
Chief Financial Officer and Treasurer | ||||
(Principal Financial and Accounting Officer) | ||||
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