Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

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Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>The SPAC IPO market moves back into its shell.&nbsp;The SPAC IPO market remains on pause. Having seen four IPOs priced in the first 11 days of the month, the following 13 days have seen none. The IPO filings landscape indicates little or no enthusiasm for SPAC IPOs. There has been only one new S-1 filed so far this month, while 11 have been withdrawn or abandoned. This leaves 120 potential SPAC IPOs in the pipeline, an inventory figure well below the 269 that presented itself at the start of the year. A total of 141 filings have fallen by the wayside against 66 new filings. However, it should be noted that the traditional IPO market has fared much worse, with only 20 priced this year, heading for the slowest year for traditional IPOs in two decades. By comparison, priced SPAC IPOs in 2022 are holding at 74.</li>
<li>De-SPAC values bottoming?&nbsp;De-SPAC values appear to be making a good impression of bottoming out recently. Since the end of June, de-SPACs (as represented by the DSPC ETF) have bounced by ~35%, strongly outperforming the SPY (S&amp;P 500) ETF, QQQ (NASDAQ) ETF, and (traditional) IPO ETF. Have investors started to notice value among the de-SPACs?</li>
<li>Rising merger deal cancellations could court trouble.&nbsp;The rise in SPAC merger transaction terminations opens another front for potentially costly litigious activity or settlements. This has become a little more visible in recent months, although, for the most part, deal terminations have been mutually agreed. Nevertheless, there is a danger that the rise in deal terminations will create an environment where litigation arising from deal cancellations becomes more prevalent, adding to the regulatory inspired legal activity that proliferated over the past year.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/242/original/image_14443978921661472246873.png?1661472249" class="editor-image img-responsive" data-smartkarma-image-id="294242"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/243/original/image_50034789031661472259193.png?1661472260" class="editor-image img-responsive" data-smartkarma-image-id="294243"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/244/original/image_49806211641661472271887.png?1661472273" class="editor-image img-responsive" data-smartkarma-image-id="294244"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN AUGUST 2022</h2>
<p>Figure 1: IPO Pricings/Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/245/original/image_21753487351661472304859.png?1661472307" class="editor-image img-responsive" data-smartkarma-image-id="294245"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 2: IBC Announcements/Terminations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/246/original/image_13833909261661472327404.png?1661472330" class="editor-image img-responsive" data-smartkarma-image-id="294246"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 3: De-SPACings</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/247/original/image_19183053371661472349863.png?1661472352" class="editor-image img-responsive" data-smartkarma-image-id="294247"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC/DE-SPAC RETURNS</h2>
<p>Figure 4: Live IBCs (Initial Business Combinations)—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/248/original/image_83547565681661472382130.png?1661472383" class="editor-image img-responsive" data-smartkarma-image-id="294248"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 5: Top 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/249/original/image_65021076991661472409055.png?1661472411" class="editor-image img-responsive" data-smartkarma-image-id="294249"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 6: Bottom 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/250/original/image_842746095101661472436389.png?1661472438" class="editor-image img-responsive" data-smartkarma-image-id="294250"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 7: De-SPACs—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/251/original/image_284359600111661472461882.png?1661472463" class="editor-image img-responsive" data-smartkarma-image-id="294251"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 8: Top 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/252/original/image_256025179121661472489879.png?1661472490" class="editor-image img-responsive" data-smartkarma-image-id="294252"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 9: Bottom 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/294/253/original/image_686260897131661472515157.png?1661472516" class="editor-image img-responsive" data-smartkarma-image-id="294253"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>The Rise in Deal Cancellations Could Court Trouble</h2>
<p>As we have highlighted in previous commentary, SPAC land has become increasingly litigious, which is not particularly surprising given how events have unfolded over the past 12 to 15 months. Most of the litigation is in the form of class action suits, of which there are currently 66 ongoing cases that have been filed since 2019, with 65% of those cases filed since May 2021. Most of these cases are based on complaints regarding (1) material omissions or misstatements in the proxy statement, which include financial projections for the post-merger company, and (2) conflicts of interest and breach of fiduciary duty.</p>
<p>The rise in IBC deal cancellations has opened another front for potentially costly litigious activity or settlements. While most IBC deal cancellations have been mutually agreed, to date, there are a few that are being contested.</p>
<p>In the battered world of crypto, litigation involving two pending SPAC mergers is currently underway.</p>
<p>Dune Acquisition Corp. (NASDAQ: DUNE)/TradeZero:&nbsp;Within six months after agreeing on an IBC with crypto trading platform TradeZero, SPAC DUNE and its sponsors filed a complaint in April 2022 in a Delaware court alleging, among other things, that TradeZero had misled them into a $556 million IBC before “trying to run out the clock on the transaction”. In somewhat of a legal soap opera, DUNE subsequently announced, without terminating the transaction, that it had changed its recommendation to the SPAC’s stockholders and recommended that they vote against the business combination with TradeZero. Last month, DUNE received a notice from TradeZero that purported to terminate the merger agreement, to which the SPAC responded that TradeZero is not permitted to terminate the merger agreement because of TradeZero’s breaches of, and failure to perform under, the agreement, and as a result, deemed the termination notice invalid and unenforceable. DUNE intends to take all necessary steps to protect itself and its investors, and to continue to pursue its ongoing litigation against TradeZero.</p>
<p>Quantum Fintech Acquisition Corp. (NYSE: QFTA)/TradeStation:&nbsp;On August 2, 2022, QFTA received a notice from TradeStation that purported to terminate the merger agreement entered on November 4, 2021. Although the agreement allows either party to terminate the transaction if the merger is not consummated before August 1, 2022, QFTA quickly responded to TradeStation’s notice accusing the target as the primary cause of the failure to close the merger in a timely manner, and as such, the termination notice is invalid and unenforceable. It seems that QFTA, like DUNE, is readying itself to file a complaint in a Delaware court. Adding fuel to the fire in this case is that TradeStation’s parent company, Japan’s Monex, had subscribed to 5 million PIPE shares out of the total 12.5 million PIPE shares associated with the pending IBC.</p>
<p>However, deal cancellation associated litigation could be spreading.</p>
<p>Crown PropTech Acquisitions (NASDAQ: CPTK)/Brivo:&nbsp;On August 10, 2022, real estate-focused SPAC CPTK received a notice of termination from its pending IBC partner, building solutions provider Brivo, in response to which CPTK accused its target of breaching the business combination agreement prior to stating its intention to terminate the agreement. CPTK has provided no detail on what these alleged breaches are, but the SPAC has indicated that it intends to vigorously pursue its remedies again without offering detail. While this sort of language may indicate that a legal battle in Delaware may be brewing, CPTK’s hand does not appear to be that strong. It appears that this deal was in trouble prior to Brivo’s termination notice. In July, PIPE investor Golub Capital terminated its subscription agreement to PIPE because the business combination was not consummated by July 9. CPTK was then forced to seek additional financing to satisfy its minimum cash closing condition of at least $75 million. Additionally, following Brivo’s notice of termination, CPTK’s CFO resigned.</p>
<p>FAST Acquisition Corp. (NASDAQ: FST):&nbsp;In a different case from the others, FST agreed to terminate an IBC transaction with casino and hospitality company, Fertitta Entertainment, in December 2021 after negotiating a settlement of up to $33 million to the SPAC. On August 3, 2022, FST announced that it would liquidate its trust shortly after its August 25 transaction deadline but keep the Fertitta Entertainment termination fee. This elicited a class action lawsuit from FST shareholder Special Opportunities Fund (NYSE: SPE). On August 16, the parties announced an interim agreement The parties have agreed that FST’s sponsor will be allowed to use available funds to pay down $4.5 million in taxes, $3 million in professional fees, $1 million to pay back a working capital loan, $1 million in defense costs for the lawsuit itself, plus whatever expenses necessary to continue to bind Fertitta to the breakup fee terms. The agreement is interim until further details about the disbursement are smoothed out. Until then, SPE plans to continue to pursue the lawsuit, arguing that FAST’s board has a fiduciary duty to distribute all remaining net assets to all shareholders.</p>
<p>All the cases cited above have emerged in recent months. The rise in deal terminations potentially creates an environment where litigation arising from deal cancellations becomes more prevalent in addition to regulatory inspired legal activity.</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS


The SPAC IPO market moves back into its shell.&nbsp;The SPAC IPO market remains on pause. Having seen four IPOs priced in the first 11 days of the month, the following 13 days have seen none. The IPO filings landscape indicates little or no enthusiasm for SPAC IPOs. There has been only one new S-1 filed so far this month, while 11 have been withdrawn or abandoned. This leaves 120 potential SPAC IPOs in the pipeline, an inventory figure well below the 269 that presented itself at the start of the year. A total of 141 filings have fallen by the wayside against 66 new filings. However, it should be noted that the traditional IPO market has fared much worse, with only 20 priced this year, heading for the slowest year for traditional IPOs in two decades. By comparison, priced SPAC IPOs in 2022 are holding at 74.
De-SPAC values bottoming?&nbsp;De-SPAC values appear to be making a good impression of bottoming out recently. Since the end of June, de-SPACs (as represented by the DSPC ETF) have bounced by ~35%, strongly outperforming the SPY (S&amp;P 500) ETF, QQQ (NASDAQ) ETF, and (traditional) IPO ETF. Have investors started to notice value among the de-SPACs?
Rising merger deal cancellations could court trouble.&nbsp;The rise in SPAC merger transaction terminations opens another front for potentially costly litigious activity or settlements. This has become a little more visible in recent months, although, for the most part, deal terminations have been mutually agreed. Nevertheless, there is a danger that the rise in deal terminations will create an environment where litigation arising from deal cancellations becomes more prevalent, adding to the regulatory inspired legal activity that proliferated over the past year.

SPAC STATISTICS




Source: WTR

SPAC HAPPENINGS IN AUGUST 2022
Figure 1: IPO Pricings/Liquidations


Source: WTR Research

Figure 2: IBC Announcements/Terminations


Source: WTR Research

Figure 3: De-SPACings


Source: WTR Research

SPAC/DE-SPAC RETURNS
Figure 4: Live IBCs (Initial Business Combinations)—Key Stats


Source: WTR Research

Figure 5: Top 5 Live IBCs by Share Price


Source: WTR Research

Figure 6: Bottom 5 Live IBCs by Share Price


Source: WTR Research

Figure 7: De-SPACs—Key Stats


Source: WTR Research

Figure 8: Top 5 De-SPAC Performers by Share Price


Source: WTR Research

Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
The Rise in Deal Cancellations Could Court Trouble
As we have highlighted in previous commentary, SPAC land has become increasingly litigious, which is not particularly surprising given how events have unfolded over the past 12 to 15 months. Most of the litigation is in the form of class action suits, of which there are currently 66 ongoing cases that have been filed since 2019, with 65% of those cases filed since May 2021. Most of these cases are based on complaints regarding (1) material omissions or misstatements in the proxy statement, which include financial projections for the post-merger company, and (2) conflicts of interest and breach of fiduciary duty.
The rise in IBC deal cancellations has opened another front for potentially costly litigious activity or settlements. While most IBC deal cancellations have been mutually agreed, to date, there are a few that are being contested.
In the battered world of crypto, litigation involving two pending SPAC mergers is currently underway.
Dune Acquisition Corp. (NASDAQ: DUNE)/TradeZero:&nbsp;Within six months after agreeing on an IBC with crypto trading platform TradeZero, SPAC DUNE and its sponsors filed a complaint in April 2022 in a Delaware court alleging, among other things, that TradeZero had misled them into a $556 million IBC before “trying to run out the clock on the transaction”. In somewhat of a legal soap opera, DUNE subsequently announced, without terminating the transaction, that it had changed its recommendation to the SPAC’s stockholders and recommended that they vote against the business combination with TradeZero. Last month, DUNE received a notice from TradeZero that purported to terminate the merger agreement, to which the SPAC responded that TradeZero is not permitted to terminate the merger agreement because of TradeZero’s breaches of, and failure to perform under, the agreement, and as a result, deemed the termination notice invalid and unenforceable. DUNE intends to take all necessary steps to protect itself and its investors, and to continue to pursue its ongoing litigation against TradeZero.
Quantum Fintech Acquisition Corp. (NYSE: QFTA)/TradeStation:&nbsp;On August 2, 2022, QFTA received a notice from TradeStation that purported to terminate the merger agreement entered on November 4, 2021. Although the agreement allows either party to terminate the transaction if the merger is not consummated before August 1, 2022, QFTA quickly responded to TradeStation’s notice accusing the target as the primary cause of the failure to close the merger in a timely manner, and as such, the termination notice is invalid and unenforceable. It seems that QFTA, like DUNE, is readying itself to file a complaint in a Delaware court. Adding fuel to the fire in this case is that TradeStation’s parent company, Japan’s Monex, had subscribed to 5 million PIPE shares out of the total 12.5 million PIPE shares associated with the pending IBC.
However, deal cancellation associated litigation could be spreading.
Crown PropTech Acquisitions (NASDAQ: CPTK)/Brivo:&nbsp;On August 10, 2022, real estate-focused SPAC CPTK received a notice of termination from its pending IBC partner, building solutions provider Brivo, in response to which CPTK accused its target of breaching the business combination agreement prior to stating its intention to terminate the agreement. CPTK has provided no detail on what these alleged breaches are, but the SPAC has indicated that it intends to vigorously pursue its remedies again without offering detail. While this sort of language may indicate that a legal battle in Delaware may be brewing, CPTK’s hand does not appear to be that strong. It appears that this deal was in trouble prior to Brivo’s termination notice. In July, PIPE investor Golub Capital terminated its subscription agreement to PIPE because the business combination was not consummated by July 9. CPTK was then forced to seek additional financing to satisfy its minimum cash closing condition of at least $75 million. Additionally, following Brivo’s notice of termination, CPTK’s CFO resigned.
FAST Acquisition Corp. (NASDAQ: FST):&nbsp;In a different case from the others, FST agreed to terminate an IBC transaction with casino and hospitality company, Fertitta Entertainment, in December 2021 after negotiating a settlement of up to $33 million to the SPAC. On August 3, 2022, FST announced that it would liquidate its trust shortly after its August 25 transaction deadline but keep the Fertitta Entertainment termination fee. This elicited a class action lawsuit from FST shareholder Special Opportunities Fund (NYSE: SPE). On August 16, the parties announced an interim agreement The parties have agreed that FST’s sponsor will be allowed to use available funds to pay down $4.5 million in taxes, $3 million in professional fees, $1 million to pay back a working capital loan, $1 million in defense costs for the lawsuit itself, plus whatever expenses necessary to continue to bind Fertitta to the breakup fee terms. The agreement is interim until further details about the disbursement are smoothed out. Until then, SPE plans to continue to pursue the lawsuit, arguing that FAST’s board has a fiduciary duty to distribute all remaining net assets to all shareholders.
All the cases cited above have emerged in recent months. The rise in deal terminations potentially creates an environment where litigation arising from deal cancellations becomes more prevalent in addition to regulatory inspired legal activity.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

SPAC Talk: The Rise in Deal Cancellations Could Court Trouble