References in this Quarterly Report on Form 10-Q (this "Quarterly Report") to
"we," "us" or the "Company" refer to DD3 Acquisition Corp. II. References to our
"management" or our "management team" refer to our officers and directors, and
references to the "Sponsor" refer to DD3 Sponsor Group, 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, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (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 Quarterly Report 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 and described 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 final prospectus for its initial public offering
("Initial Public Offering") filed with the U.S. Securities and Exchange
Commission (the "SEC"). 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
We are a blank check company formed under the laws of the State of Delaware on
September 30, 2020, for the purpose of entering into a merger, capital stock
exchange, asset acquisition, stock purchase, recapitalization, reorganization or
other similar business combination with one or more businesses or entities
("Business Combination"). We may consummate a Business Combination with a target
business in any geographic location or industry, although we initially focused
our search for target businesses in Mexico and Hispanic businesses in the United
States. We intend to effectuate our Business Combination using cash from the
proceeds of the Initial Public Offering and the sale of the private units
("Private Units") that occurred simultaneously with the consummation of the
Initial Public Offering (the "Private Placement"), our securities, debt or a
combination of cash, securities and debt.
We have incurred, and in the event the Proposed Business Combination is not
consummated, expect to continue to incur significant costs in the pursuit of our
acquisition plans. We cannot assure you that our plans to complete our initial
Business Combination, including the Proposed Business Combination, will be
successful.
Recent Developments
Proposed Business Combination
On June 21, 2021, we entered into the Business Combination Agreement (as may be
amended, supplemented, or otherwise modified from time to time, the "Business
Combination Agreement") with Codere Newco, S.A.U., a corporation (sociedad
anónima unipersonal) registered and incorporated under the laws of Spain
("Codere Newco"), Servicios de Juego Online S.A.U., a corporation (sociedad
anónima unipersonal) registered and incorporated under the laws of Spain
("SEJO") whose sole shareholder is Codere Newco, Codere Online Luxembourg, S.A.,
a limited liability company (société anonyme) governed by the laws of the Grand
Duchy of Luxembourg ("Holdco") whose sole shareholder is Codere Newco, and
Codere Online U.S. Corp., a Delaware corporation ("Merger Sub") whose sole
stockholder is Holdco, which provides for the Proposed Business Combination that
will result in the Company and SEJO becoming wholly-owned subsidiaries of
Holdco.
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In connection with the Proposed Business Combination, Holdco filed a
registration statement on Form F-4 (File No. 333-258759) with the SEC on August
12, 2021 (the "Form F-4") that includes a preliminary proxy statement with
respect to our special meeting of stockholders to approve the Business
Combination Agreement, among other matters, as well as a preliminary prospectus
of Holdco relating to the offer of the securities to be issued in connection
with the completion of the Proposed Business Combination. There can be no
assurance as to whether or when the Proposed Business Combination will be
completed.
Business Combination Agreement
Pursuant to the Business Combination Agreement, each of the following
transactions will occur in the following order: (i) pursuant to that certain
Contribution and Exchange Agreement, dated as of June 21, 2021, by and among
Holdco, SEJO and Codere Newco, effective on the effective time of the Exchange
(as defined below), Codere Newco will contribute its ordinary shares of SEJO
("SEJO Ordinary Shares"), constituting all the issued and outstanding share
capital of SEJO, to Holdco in exchange for additional ordinary shares of Holdco
("Holdco Ordinary Shares"), to be subscribed for by Codere Newco (such
contribution and exchange of SEJO Ordinary Shares for Holdco Ordinary Shares,
collectively, the "Exchange"); as a result of the Exchange, SEJO will become a
wholly-owned subsidiary of Holdco and Holdco will continue to be a wholly-owned
subsidiary of Codere Newco; (ii) after the Exchange and immediately prior to the
effective time of the Merger (as defined below) (the "Merger Effective Time"),
each share of our Class B common stock, par value $0.0001 per share ("Founder
Shares"), issued and outstanding immediately prior to the Merger Effective Time
will automatically be converted into and exchanged for one share of our Class A
common stock, par value $0.0001 per share ("Class A common stock," and such
conversion, the "Class B Conversion"); (iii) not earlier than one Business Day
(as defined in the Business Combination Agreement) following the consummation of
the Exchange, Merger Sub will merge with and into the Company, with the Company
surviving such merger and becoming a direct wholly-owned subsidiary of Holdco
(the "Merger") and, in connection therewith, the Company's corporate name will
change to "Codere Online U.S. Corp."; (iv) in connection with the Merger, all
shares of Class A common stock issued and outstanding immediately prior to the
Merger Effective Time, but after the Class B Conversion, will be contributed to
Holdco in exchange for one Holdco Ordinary Share for each share of Class A
common stock pursuant to a share capital increase of Holdco; and (v) as of the
Merger Effective Time, each of our warrants that is outstanding immediately
prior to the Merger Effective Time will no longer represent a right to acquire
one share of Class A common stock and will instead represent the right to
acquire one Holdco Ordinary Share on substantially the same terms (together with
the other transactions related thereto, the "Proposed Business Combination").
The Business Combination Agreement contains customary representations and
warranties, covenants and closing conditions, including, but not limited to,
approval by our stockholders of the Business Combination Agreement. The terms of
the Business Combination Agreement and other related ancillary agreements to be
entered into in connection with the closing of the Proposed Business Combination
(the "Closing") are summarized in more detail in our Current Report on Form 8-K
filed with the SEC on June 22, 2021 and in the Form F-4.
Subscription Agreements
Contemporaneously with the execution and delivery of the Business Combination
Agreement, we entered into two separate Subscription Agreements (collectively,
the "Subscription Agreements") with DD3 Capital Partners S.A. de C.V. ("DD3
Capital") and Larrain Investment Inc. ("Larrain", and together with DD3 Capital,
the "Susbcribers"), in each case to which Holdco is also a party, pursuant to
which we have agreed to issue and sell, in a private placement to close
immediately prior to the Closing, (i) an aggregate of 500,000 shares of Class A
common stock, for an aggregate purchase price of $5,000,000, at a price of
$10.00 per each share of Class A common stock, to DD3 Capital, and (ii) an
aggregate of 1,224,000 shares of Class A common stock, for an aggregate purchase
price of $12,240,000, at a price of $10.00 per each share of Class A common
stock, to Larrain (collectively, the "PIPE"), in each case which shares of Class
A common stock will become Holdco Ordinary Shares as a result of the Merger (the
"PIPE Shares").
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The closing of the PIPE (the "PIPE Closing") is contingent upon the
substantially concurrent consummation of the Proposed Business Combination. The
PIPE Closing will occur on the date of, and immediately prior to, the
consummation of the Proposed Business Combination, and will be subject to
customary conditions.
Pursuant to the Subscription Agreements, Holdco agreed that, within 30 calendar
days after the Closing, Holdco will file with the SEC a registration statement
registering the Holdco Ordinary Shares received by the Subscribers in connection
with the Proposed Business Combination (the "PIPE Registration Statement"), and
Holdco shall use its commercially reasonable efforts to have the PIPE
Registration Statement declared effective as soon as practicable after the
filing thereof; provided, however, that Holdco's obligations to include the
Holdco Ordinary Shares held by a Subscriber in the PIPE Registration Statement
will be contingent upon the respective Subscriber furnishing in writing to
Holdco such information regarding the Subscriber, such Holdco Ordinary Shares
held by such Subscriber and the intended method of disposition of such shares as
shall be reasonably requested by Holdco to effect the registration, and will
execute such documents in connection with such registration as Holdco may
reasonably request that are customary of a selling stockholder in similar
situations.
Each Subscriber also agreed to certain transfer restrictions with respect to its
PIPE Shares during the period commencing on the date of the Closing and
continuing until the earlier of 90 days after the date of the Closing and the
date when the PIPE Registration Statement is declared effective by the SEC.
Each Subscription Agreement will terminate upon the earlier to occur of (i) such
date and time as the Business Combination Agreement is terminated in accordance
with its terms without the Proposed Business Combination being consummated, (ii)
upon the mutual written agreement of each of the parties to the Subscription
Agreement or (iii) any of the conditions to the PIPE Closing are not satisfied
or waived on or prior to the PIPE Closing and, as a result thereof, the
transactions contemplated by the Subscription Agreement are not consummated at
the PIPE Closing.
Forward Purchase Agreements
In connection with the Proposed Business Combination, certain funds affiliated
with Baron Capital Group, Inc., which are members of the Sponsor (collectively,
"Baron"), and MG Partners Multi-Strategy Fund LP ("MG", and together with Baron,
the "Forward Purchase Investors") have elected to purchase an aggregate of
5,000,000 shares of Class A common stock ("Forward Purchase Shares") for an
aggregate purchase price of $50,000,000, at a price of $10.00 per Forward
Purchase Share, in a private placement to close immediately prior to the
Closing, pursuant to the terms of the contingent Forward Purchase Agreements
that we entered into with Baron and MG on November 17, 2020 and November 19,
2020, respectively, in connection with the Initial Public Offering, in each case
as amended on June 21, 2021 (as amended, the "Forward Purchase Agreements").
Pursuant to such amendments, among other matters, (i) we agreed not to enter
into any agreement with any other investor or prospective investor on terms that
are more favorable to such other investor or prospective investor than the terms
provided to Baron or MG, as applicable, and (ii) certain closing conditions were
amended in part to align with the closing conditions in the Business Combination
Agreement, including that the terms of the Business Combination Agreement (as
the same existed on the date of such amendments) shall not have been amended or
modified in a manner, and no waiver thereunder shall have occurred, that would
reasonably be expected to be materially adverse to the economic benefits that
Baron or MG would reasonably expect to receive under their respective Forward
Purchase Agreement, without Baron's or MG's written consent, as applicable.
Baron Support Agreement
Contemporaneously with the execution and delivery of the Business Combination
Agreement, we entered into the Investor Support Agreement with Baron (the "Baron
Support Agreement"), pursuant to which Baron irrevocably waived its redemption
rights with respect to 996,069 public shares acquired by Baron in the Initial
Public Offering (the "Baron IPO Shares") and agreed (a) that it will not redeem,
or exercise any of its redemption rights with respect to, any Baron IPO Shares
in connection with our special meeting of stockholders to approve the Business
Combination Agreement and the Proposed Business Combination and (b) to certain
transfer restrictions with respect to the Baron IPO Shares. The Baron Support
Agreement and the obligations of Baron under the Baron Support Agreement will
automatically terminate upon the earliest of the Closing and the termination of
the Business Combination Agreement in accordance with its terms. The Baron
Support Agreement is subject to customary conditions, covenants, representations
and warranties.
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Nasdaq Notice
On May 28, 2021, we received a notice (the "Notice") from the Listing
Qualifications Department of Nasdaq indicating that we were not then in
compliance with Nasdaq Listing Rule 5250(c)(1) due to a delay in filing our
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 (the
"Q2 Form 10-Q") with the SEC. The Notice had no immediate effect on the listing
or trading of our securities on the Nasdaq Capital Market, and the Q2 Form 10-Q
was subsequently filed with the SEC on June 15, 2021.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date.
Our only activities through June 30, 2021 were organizational activities, those
necessary to prepare for the Initial Public Offering, described below, and,
after the Initial Public Offering, identifying a target company for a Business
Combination. We do not expect to generate any operating revenues until after the
completion of our Business Combination. We generate non-operating income in the
form of interest income on marketable securities held in the trust account
established for the benefit of our public stockholders (the "Trust Account"). We
incur expenses as a result of being a public company (for legal, financial
reporting, accounting and auditing compliance), as well as for due diligence
expenses in connection with searching for, and completing, a Business
Combination. We are also incurring expenses in connection with the Proposed
Business Combination.
For the three months ended June 30, 2021, we had a net loss of $183,633, which
consisted of operating costs of $86,248, a change in fair value of warrant
liability of $96,200 and interest expense on marketable securities held in the
Trust Account of $15,702, offset by unrealized gain on marketable securities
held in our Trust Account of $14,517.
For the period from September 30, 2020 (inception) through June 30, 2021, we had
a net loss of $507,259, which consisted of operating costs of $368,585, a change
in fair value of warrant liability of $177,600 and an unrealized loss on
marketable securities held in our Trust Account of $4,937, offset by interest
income on marketable securities held in the Trust Account of $43,864.
Liquidity and Capital Resources
Until the consummation of the Initial Public Offering, our only source of
liquidity was an initial purchase of Founder Shares by the Sponsor and loans
from the Sponsor.
On December 10, 2020, we consummated the Initial Public Offering of 12,500,000
units ("Units"), at $10.00 per Unit, which included the partial exercise by the
underwriters of their over-allotment option in the amount of 1,500,000 Units,
generating gross proceeds of $125,000,000. Simultaneously with the closing of
the Initial Public Offering, we consummated the Private Placement of an
aggregate of 370,000 Private Units to the Sponsor and the Forward Purchase
Investors (as defined below) at a price of $10.00 per Private Unit, generating
gross proceeds of $3,700,000.
Following the Initial Public Offering, including the partial exercise of the
over-allotment option, and the Private Placement, a total of $125,000,000 was
placed in the Trust Account. We incurred $2,966,508 in transaction costs,
including $2,500,000 of underwriting fees and $466,508 of other offering costs.
For the period from September 30, 2020 (inception) through June 30, 2021, net
cash used in operating activities was $412,583. Net loss of $507,259 was
affected by interest earned on marketable securities held in the Trust Account
of $43,864, offset by an unrealized loss on marketable securities held in the
Trust Account of $4,937, a change in fair value of warrant liability of $177,600
and offering costs allocable to warrant liability of $396. Changes in operating
assets and liabilities used $44,394 of cash for the period.
As of June 30, 2021, we had marketable securities held in the Trust Account of
$125,038,926 (including approximately $39,000 of interest expense, net of
unrealized loss) consisting of securities held in a money market fund that
invests in U.S. Treasury securities with a maturity of 185 days or less.
Interest income on the balance in the Trust Account may be used by us to pay
taxes. Through June 30, 2021, we did not withdraw any interest earned on the
Trust Account to pay our taxes. 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 and to pay our expenses relating thereto, including a fee payable to
EarlyBirdCapital, Inc. ("EarlyBirdCapital") upon consummation of our Business
Combination for assisting us in connection with our Business Combination, as
described below. 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.
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As of June 30, 2021, we had cash of $385,909 held outside the Trust Account. 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 our initial stockholders,
officers, 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 the Trust Account would be used for
such repayment. Up to $1,500,000 of such loans may be convertible into units of
the post-Business Combination entity that would be identical to the Private
Units, at a price of $10.00 per unit, at the option of the lender.
We do not believe we will need to raise additional funds in order to meet the
expenditures required for operating our business. However, 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. Subject to compliance
with applicable securities laws, we would only complete such financing
simultaneously with the completion of our Business Combination. If we are unable
to complete our Business Combination because we do not have sufficient funds
available to us, we will be forced to cease operations and liquidate the Trust
Account. In addition, following our Business Combination, if cash on hand is
insufficient, we may need to obtain additional financing in order to meet our
obligations.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2021.
Contractual Obligations
We do not have any long-term debt obligations, capital lease obligations,
operating lease obligations, purchase obligations or other long-term
liabilities, other than an agreement to pay the Sponsor a monthly fee of $10,000
for office space, utilities and administrative support. We began incurring these
fees on December 7, 2020 and will continue to incur these fees monthly until the
earlier of the completion of the Business Combination and our liquidation.
We have engaged EarlyBirdCapital as an advisor in connection with our Business
Combination to assist us in holding meetings with our stockholders to discuss
the potential Business Combination and the target business' attributes,
introduce us to potential investors that are interested in purchasing our
securities in connection with our initial Business Combination, assist us in
obtaining stockholder approval for the Business Combination and assist us with
our press releases and public filings in connection with the Business
Combination. We will pay EarlyBirdCapital a cash fee for such services upon the
consummation of our initial Business Combination in an amount up to 3.5% of the
gross proceeds of the Initial Public Offering, or $4,375,000 (exclusive of any
applicable finders' fees which might become payable).
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We are also party to the Forward Purchase Agreements and have entered into the
Business Combination Agreement, the Subscription Agreements and the Baron
Support Agreement in connection with the Proposed Business Combination, as
described above.
Critical Accounting Policies
The preparation of condensed 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:
Warrant Liabilities
We account for the warrants underlying the Private Units sold in the Private
Placement (the "Private Warrants") in accordance with the guidance contained in
ASC 815 under which the Private Warrants do not meet the criteria for equity
treatment and must be recorded as liabilities. Under ASC 815-40, the Private
Warrants are not indexed to our common stock in the manner contemplated by ASC
815-40 because the holder of the instrument is not an input into the pricing of
a fixed-for-fixed option on equity shares. Accordingly, we classify the Private
Warrants as liabilities at their fair value and adjust the Private Warrants to
fair value at each reporting period. These liabilities are subject to
re-measurement at each balance sheet date until exercised, and any change in
fair value is recognized in our statement of operations. The Private Warrants
are valued using a binomial lattice model.
Class A Common Stock Subject to Possible Redemption
We account for our Class A common stock subject to possible redemption in
accordance with the guidance in Accounting Standards Codification ("ASC") Topic
480 "Distinguishing Liabilities from Equity." Shares of Class A common stock
subject to mandatory redemption is classified as a liability instrument and is
measured at fair value. Conditionally redeemable common stock (including common
stock that features redemption rights that are 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 is classified as stockholders' equity. Our Class A common
stock features certain redemption rights that are considered to be outside of
our control and subject to occurrence of uncertain future events. Accordingly,
Class A common stock subject to possible redemption is presented at redemption
value as temporary equity, outside of the stockholders' equity section of our
condensed balance sheet.
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Net Income (Loss) Per Common Share
We apply the two-class method in calculating earnings per share. Net income
(loss) per common share, basic and diluted, for Class A common stock subject to
possible redemption is calculated by dividing the interest income earned on the
Trust Account, net of applicable taxes, if any, by the weighted average number
of shares of Class A common stock subject to possible redemption outstanding for
the period. Net income (loss) per common share, basic and diluted, for and
non-redeemable common stock is calculated by dividing net income (loss) less
income attributable to Class A common stock subject to possible redemption, by
the weighted average number of shares of non-redeemable common stock outstanding
for the period presented.
Recent Accounting Standards
In August 2020, the Financial Accounting Standards Board issued ASU No. 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): Accounting for
Convertible Instruments and Contracts in an Entity's Own Equity" ("ASU
2020-06"), which simplifies accounting for convertible instruments by removing
major separation models required under current GAAP. ASU 2020-06 removes certain
settlement conditions that are required for equity contracts to qualify for the
derivative scope exception and it also simplifies the diluted earnings per share
calculation in certain areas. ASU 2020-06 is effective for fiscal years
beginning after December 15, 2023, including interim periods within those fiscal
years, with early adoption permitted. We are currently assessing the impact, if
any, that ASU 2020-06 would have on our 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 financial statements.
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