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SUMMIT HEALTHCARE ACQUISITION CORP.

(SMIH)
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SUMMIT HEALTHCARE ACQUISITION CORP. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/22/2021 | 07:26am EST
References to the "Company," "our," "us" or "we" refer to Summit Healthcare
Acquisition Corp. The following discussion and analysis of the Company's
financial condition and results of operations should be read in conjunction with
the unaudited condensed financial statements and the notes thereto contained
elsewhere in this report. Certain information contained in the discussion and
analysis set forth below includes forward-looking statements that involve risks
and uncertainties.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form
10-Q
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties and assumptions about us that may cause our actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may," "should," "could,"
"would," "expect," "plan," "anticipate," "believe," "estimate," "continue," or
the negative of such terms or other similar expressions. Such statements
include, but are not limited to, possible business combinations and the
financing thereof, and related matters, as well as all other statements other
than statements of historical fact included in this Form
10-Q.Factors
that might cause or contribute to such a discrepancy include, but are not
limited to, those described in our other Securities and Exchange Commission
("SEC") filings.
Overview
We are a blank check company incorporated on December 22, 2020 as a Cayman
Islands exempted company for the purpose of effecting a merger, share exchange,
asset acquisition, share purchase, reorganization or similar business
combination with one or more businesses or entities. We intend to effectuate our
initial business combination using cash from the proceeds of our initial public
offering ("Initial Public Offering") and the sale of the private placement
warrants and forward purchase securities, the proceeds of the sale of our shares
in connection with our initial business combination (pursuant to forward
purchase agreements or backstop agreements we may enter into following the
consummation of this offering or otherwise), shares issued to the owners of the
target, debt issued to bank or other lenders or the owners of the target, or a
combination of the foregoing or other sources.
The issuance of additional ordinary shares in a Business Combination:

    •     may significantly dilute the equity interest of investors in this
          offering, which dilution would increase if the anti-dilution provisions
          of the Class B ordinary shares resulted in the issuance of Class A
          ordinary shares on a greater than
          one-to-one
          basis upon conversion of the Class B ordinary shares;



    •     may subordinate the rights of holders of Class A ordinary shares if
          preferred shares are issued with rights senior to those afforded our
          Class A ordinary shares;



    •     could cause a change of control if a substantial number of our ordinary
          shares are issued, which may affect, among other things, our ability to
          use our net operating loss carry forwards, if any, and could result in
          the resignation or removal of our present officers and directors;



    •     may have the effect of delaying or preventing a change of control of us
          by diluting the share ownership or voting rights of a person seeking to
          obtain control of us; and



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    •     may adversely affect prevailing market prices for our Class A ordinary
          shares and/or warrants.

Similarly, if we issue debt securities, it could result in:

    •     default and foreclosure on our assets if our operating revenues after an
          initial business combination are insufficient to repay our debt
          obligations;



    •     acceleration of our obligations to repay the indebtedness even if we make
          all principal and interest payments when due if we breach certain
          covenants that require the maintenance of certain financial ratios or
          reserves without a waiver or renegotiation of that covenant;



    •     our immediate payment of all principal and accrued interest, if any, if
          the debt is payable on demand;



    •     our inability to obtain necessary additional financing if the debt
          contains covenants restricting our ability to obtain such financing while
          the debt is outstanding;



  •   our inability to pay dividends on our Class A ordinary shares;



    •     using a substantial portion of our cash flow to pay principal and
          interest on our debt, which will reduce the funds available for dividends
          on our Class A ordinary shares if declared, expenses, capital
          expenditures, acquisitions and other general corporate purposes;



    •     limitations on our flexibility in planning for and reacting to changes in
          our business and in the industry in which we operate;



    •     increased vulnerability to adverse changes in general economic, industry
          and competitive conditions and adverse changes in government regulation;
          and



    •     limitations on our ability to borrow additional amounts for expenses,
          capital expenditures, acquisitions, debt service requirements, execution
          of our strategy and other purposes and other disadvantages compared to
          our competitors who have less debt.


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.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date.
Our only activities from inception through September 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 initial Business
Combination. We generate
non-operating
income in the form of interest income on marketable securities. We are incurring
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 completing a Business Combination.
For the three months ended September 30, 2021, we had net income of $1,034,797,
which consists of operating and formation costs of $202,904, change in fair
value of FPA $561,983, offset by the change in fair value of warrant liabilities
of $1,797,111, and interest income on investments held in the Trust Account of
$2,573.
For the nine months ended September 30, 2021, we had net loss of $3,646,267,
which consists of operating and formation costs of $246,868, change in fair
value of FPA $2,807,021, change in fair value of warrant liabilities of $88,010,
transaction costs allocable to warrants $507,417, offset by interest income on
investments held in the Trust Account of $3,049.
Liquidity and Capital Resources
On June 11, 2021, we consummated our Initial Public Offering of 20,000,000
Units, at a price of $10.00 per Unit, generating gross proceeds of $200,000,000.
Simultaneously with the closing of the Initial Public Offering, we consummated
the sale of 6,000,000 Private Placement Warrants to our sponsor at a price of
$1.00 per warrant, generating gross proceeds of $6,000,000.

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Following our Initial Public Offering and the sale of the Private Placement
Warrants, a total of $200,000,000 was placed in the Trust Account. We incurred
$11,587,941 in transaction costs, including $4,000,000 of underwriting fees,
$7,000,000 of deferred underwriting fees and $587,941 of other cash offering
costs.
For the nine months ended September 30, 2021, cash used in operating activities
was $423,286. Net loss of $3,646,267 consists of an unrealized loss on change on
fair value of warrants and FPA warrants of $2,895,031, transaction costs
allocable to warrants of $507,417, offset by interest earned on investments held
in the Trust Account of $3,049, and changes in operating assets and liabilities,
which used $(176,418) of cash from operating activities.
As of September 30, 2021, we had investments held in the Trust Account of
$200,003,049. We intend to use substantially all of the funds held in the Trust
Account, including any amounts representing interest earned on the Trust Account
(which interest shall be net of taxes payable and excluding deferred
underwriting commissions) to complete our Business Combination. To the extent
that our share capital is used, in whole or in part, as consideration to
complete a 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, 2021, we had cash of $1,075,137 of cash for working capital
purpose, held in Trust Account temporarily. We intend to use the funds for
working capital purpose 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, structure, negotiate and complete a
Business Combination.
In order to fund working capital deficiencies or finance transaction costs in
connection with a Business Combination, our Sponsor or an affiliate of our
Sponsor or certain of our officers and directors 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 such loans may be
convertible into warrants, at a price of $1.00 per warrant unit at the option of
the lender. The warrants would be identical to the Private Placement Warrants.
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 initial 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 completion of our Business Combination, in which case we may issue
additional securities or incur debt in connection with such Business
Combination.
Off-balance
sheet financing arrangements
We have no obligations, assets or liabilities, which would be considered
off-balance
sheet arrangements as of September 30, 2021.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, other than an agreement to pay our sponsor
a monthly fee of up to $10,000 for office space, and administrative and support
services, provided to the Company. We began incurring these fees on June 8, 2021
and will continue to incur these fees monthly until the earlier of the
completion of a Business Combination and the Company's liquidation.
The underwriters are entitled to a deferred underwriting discount of 3.5% of the
gross proceeds of our Initial Public Offering upon the completion of our initial
Business Combination.

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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 our 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:
Derivative Financial Instruments
We evaluate our financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded derivatives in
accordance with ASC Topic 815, "Derivatives and Hedging". For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value on the grant date and is then
re-valued
at each reporting date, with changes in the fair value reported in the
statements of operations. The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as
equity, is evaluated at the end of each reporting period. Derivative liabilities
are classified in the balance sheet as current or
non-current
based on whether or not
net-cash
settlement or conversion of the instrument could be required within 12 months of
the balance sheet date.
Warrant Liability and Forward Purchase Agreement
We account for the 16,000,000 warrants issued in connection with the IPO (the
10,000,000 Public Warrants and the 6,000,000 Private Placement Warrants) and
Forward Purchase Agreement ("FPA") in accordance with the guidance contained in
FASB ASC 815 "Derivatives and Hedging" whereby under that provision the warrants
and FPA do not meet the criteria for equity treatment and must be recorded as
liabilities. Accordingly, we will classify warrants and FPA as liabilities at
their fair value. These liabilities are subject to
re-measurement
at each reporting period. With such
re-measurement,
the changes in fair value are recognized in the Statement of Operations in the
period of change. Derivative warrant liabilities and FPA are classified as
non-current
liabilities as their liquidation is not reasonably expected to require the use
of current assets or require the creation of current liabilities.
Class A Ordinary Shares Subject to Possible Redemption
We account for our Class A ordinary shares subject to possible redemption in
accordance with the guidance in ASC Topic 480 "Distinguishing Liabilities from
Equity." Ordinary shares subject to mandatory redemption (if any) are classified
as a liability instrument and measured at fair value. Conditionally redeemable
ordinary shares (including ordinary shares that feature 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) are classified as
temporary equity. At all other times, ordinary shares are classified as
shareholders' equity. Our Class A ordinary shares feature certain redemption
rights that are considered to be outside of our control and subject to the
occurrence of uncertain future events. Accordingly, at September 30, 2021 and
December 31, 2020, 20,000,000 and 0 Class A ordinary shares, respectively,
subject to possible redemption are presented at redemption value as temporary
equity, outside of the shareholders' (deficit) equity section of our balance
sheet.
Net Income (Loss) Per Share of Ordinary Shares
We have two classes of shares, which are referred to as Class A Ordinary Shares
and Class B Ordinary Shares. Earnings and losses are shared pro rata between the
two classes of shares. The 16,000,000 potential common shares for outstanding
warrants to purchase our stock were excluded from diluted earnings per share for
the three and nine months ended September 30, 2021 because the warrants are
contingently exercisable, and the contingencies have not yet been met. As a
result, diluted net income per common share is the same as basic net income per
common share for the periods.

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Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("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 January 1, 2024 for smaller reporting companies and should be
applied on a full or modified retrospective basis, with early adoption permitted
beginning on January 1, 2021. We are currently assessing the impact, if any,
that ASU
2020-06
would have on its financial position, results of operations or cash flows.
Our management does not believe that any other recently issued, but not yet
effective, accounting pronouncements, if currently adopted, would have a
material effect on our financial statements.
Restatement of Prior Period Financial Statements
During the preparation of the unaudited condensed financial statements as of and
for the quarterly period ended September 30, 2021, we concluded that we should
classify all Public Shares in temporary equity. In accordance with the SEC and
its staff's guidance on redeemable equity instruments, which has been codified
in ASC 480-10-S99, redemption provisions not solely within our control require
ordinary shares subject to redemption to be classified outside of permanent
equity. In our previously issued financial statements, a portion of the Public
Shares were classified as permanent equity to maintain net tangible assets
greater than $5,000,000 on the basis that we will consummate its initial
Business Combination only if we have net tangible assets of at least $5,000,001.
Thus, we have historically classified a portion of Class A common stock in
permanent equity to satisfy the $5,000,000 net tangible asset requirement.
Previously, we did not consider redeemable stock classified as temporary equity
as part of net tangible assets. Effective with these financial statements, we
revised this interpretation to include temporary equity in net tangible assets.
In connection with the change in presentation for the Class A ordinary shares
subject to possible redemption, we also restated its earnings per share
calculation to allocate income and losses shared pro rata between the two
classes of shares. This presentation contemplates a Business Combination as the
most likely outcome, in which case, both classes of shares share pro rata in our
income and losses.
In accordance with SEC Staff Accounting Bulletin No. 99, "Materiality," and SEC
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," we evaluated the changes and has determined that the related impact
was material to the previously issued (i) audited balance sheet as of June 11,
2021, included in exhibit 99.1 to our Form 8-K filed with the SEC on June 17,
2021 (the "Form 8-K") and (ii) unaudited interim financial statements included
in our Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2021, filed with the SEC on August 16, 2021 (together with the Form 8-K, the
"Affected Financial Statements") and such Affected Financial Statements should
no longer be relied upon. Therefore, we, in consultation with its Audit
Committee, concluded that our Affected Financial Statements should be restated
to report all Public Shares as temporary equity. As such we are reporting these
restatements to the Affected Financial Statements in this Quarterly Report on
Form 10-Q.
Our accounting for the Public Shares as temporary equity instead of permanent
equity and allocating income and losses pro rata for each class of its ordinary
shares result in non-cash financial statement corrections and will have no
impact on our current or previously reported cash position or total operating,
investing or financing cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule
12b-2of
the Exchange Act and are not required to provide the information otherwise
required under this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized,
and reported within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
company reports filed or submitted under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer, who is our
principal executive and financial officer, to allow timely decisions regarding
required disclosure.
Our principal executive officer and principal financial and accounting officer
evaluated the effectiveness of our disclosure controls and procedures and have
concluded that as of September 30, 2021, and during the period covered by this
report, our disclosure controls and procedures were not effective due to a
material weakness in internal controls over financial reporting related to the
failure to properly account for complex financial instruments.

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Changes in Internal Control over Financial Reporting
Except as set forth below, there was no change in our internal control over
financial reporting that occurred during the period from July 1, 2021 through
September 30, 2021 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management identified errors in its historical financial statements related to
the accounting for the Public Shares and earnings per share. Because the Public
Shares issued in the Initial Public Offering can be redeemed or become
redeemable subject to the occurrence of future events considered outside of the
Company's control, the Company should have classified all of these redeemable
shares in temporary equity and remeasured these redeemable shares to their
redemption value (i.e., $10.00 per share) as of the end of the first reporting
period after the date of the Company's Initial Public Offering. In addition, the
earnings per share calculation should have allocated income and losses pro rata
between the two classes of shares.
Therefore, in consultation with the audit committee of our board of directors,
we concluded that our previously filed (i) balance sheet as of June 11, 2021
included in exhibit 99.1 to our Form 8-K filed with the SEC on June 17, 2021 and
(ii) financial statement for the quarter ended June 30, 2021 included in the
Form 10-Q filed on August 16, 2021 should be restated to report all Public
Shares as temporary equity and earnings per share pro rata between the two
classes of shares and should no longer be relied upon. As such, we have restated
such financial statement in this quarterly report, as described in Note 2 of the
notes to the financial statements included herein.
In light of the identified material weakness, we performed additional analysis
as deemed necessary to ensure that our financial statements were prepared in
accordance with U.S. generally accepted accounting principles. Accordingly,
management believes that the financial statements and related financial
information included in this quarterly report fairly present, in all material
respects, our financial position, results of operations and cash flows as of and
for the periods covered in this report.
Remediation Plan
To address the material weakness, management has devoted, and plans to continue
to devote, significant effort and resources to the remediation and improvement
of its internal control over financial reporting and to provide processes and
controls over the internal communications within the Company, financial advisors
and other third-party professionals. While we have processes to identify and
appropriately apply applicable accounting requirements, we plan to enhance these
processes to better evaluate our research and understanding of the nuances of
the complex accounting standards that apply to our financial statements. We plan
to include providing enhanced access to accounting literature, research
materials and documents and increased communication among our personnel and
third-party professionals with whom we consult regarding complex accounting
applications. The elements of our remediation plan can only be accomplished over
time, and we can offer no assurance that these initiatives will ultimately have
the intended effects. Other than this issue, our disclosure controls and
procedures were effective at a reasonable assurance level and, accordingly,
provided reasonable assurance that the information required to be disclosed by
us in reports filed under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
As we continue to evaluate and improve our financial reporting process, we may
take additional actions to modify certain of the remediation measures described
above. We cannot assure you that the measures we have taken to date, or any
measures we may take in the future, will be sufficient to remediate the material
weakness we have identified or avoid potential future material weaknesses.

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