NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Hydra Industries Acquisition
Corp. (the “Company”) is a blank check company incorporated in Delaware on May 30, 2014. The Company was formed for
the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, recapitalization
or other similar business transaction, one or more operating businesses or assets (“Business Combination”).
At June 30, 2016,
the Company had not yet commenced operations. All activity through June 30, 2016 related to the Company’s formation, its
Initial Public Offering, which is described below, identifying a target company and engaging in due diligence for, and negotiating
the terms of, a potential Business Combination.
The registration statement
for the Company’s initial public offering (the “Initial Public Offering”) was declared effective on October 24,
2014. The Company consummated the Initial Public Offering of 8,000,000 units (“Units”) at $10.00 per unit on October
29, 2014, generating gross proceeds of $80,000,000, which is described in Note 4.
Simultaneously with
the closing of the Initial Public Offering, the Company consummated the private placement of 7,500,000 warrants (“Private
Placement Warrants”) at a price of $0.50 per warrant to certain of the Company’s stockholders, generating gross proceeds
of $3,750,000, which is described in Note 5.
Transaction costs
amounted to $5,223,296, inclusive of $2,000,000 of underwriting fees, $2,800,000 of deferred underwriting fees (which are held
in the Trust Account (defined below)) and $423,296 of Initial Public Offering costs. In addition, at October 29, 2014, cash of
$1,326,704 was placed in an account outside of the Trust Account to fund operations. As of June 30, 2016, cash held outside of
the Trust Account amounted to $216,796, which includes unused proceeds from convertible promissory notes in the aggregate amount
of $500,000 (see Note 6).
Following the closing
of the Initial Public Offering on October 29, 2014, an amount of $80,000,000 ($10.00 per Unit) from the net proceeds of the sale
of the Units in the Initial Public Offering and the Private Placement Warrants was placed in a trust account (“Trust Account”)
and subsequently invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company
Act of 1940, as amended (the “1940 Act”), with a maturity of 180 days or less or in any open-ended investment company
that holds itself out as a money market fund selected by the Company meeting the conditions of paragraphs (c)(2), (c)(3) and (c)(4)
of Rule 2a-7 of the 1940 Act, and will remain invested in U.S. government securities until the earlier of: (i) the consummation
of a Business Combination or (ii) the distribution of the Trust Account as described below.
The Company’s
management has broad discretion with respect to the specific application of the net proceeds of its Initial Public Offering and
Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward consummating
a Business Combination. The Company’s securities are listed on the Nasdaq Capital Market (“NASDAQ”). Pursuant
to the NASDAQ listing rules, the Company’s Business Combination must be with a target business or businesses whose collective
fair market value is equal to at least 80% of the balance in the Trust Account at the time of the execution of a definitive agreement
for such Business Combination. There is no assurance that the Company will be able to successfully effect a Business Combination.
The Company, after
signing a definitive agreement for the acquisition of one or more target businesses or assets, may either (i) seek stockholder
approval of a Business Combination at a meeting called for such purpose at which stockholders may seek to redeem their shares,
regardless of whether they vote for or against a Business Combination or (ii) provide its stockholders with the opportunity to
sell their shares to the Company by means of a tender offer (and thereby avoid the need for a stockholder vote). Stockholder approval
will be sought by the Company if required by law or applicable stock exchange rule or for business or other legal reasons. In the
event of a proposed merger of the Company with a target company, stockholder approval is required by Delaware law. Further, under
the NASDAQ listing rules, stockholder approval is required, if, for example, (a) the Company will issue common stock that will
be equal to or in excess of 20% of the number of shares of its common stock outstanding, (b) any of the Company’s directors,
officers or substantial stockholders (as defined by NASDAQ rules) has a 5% or greater interest (or such persons collectively have
a 10% or greater interest), directly, or indirectly, in the target business or assets to be acquired or otherwise and the present
or potential issuance of common stock could result in an increase in outstanding common shares or voting power of 5% or more, or
(c) the issuance or potential issuance of common stock will result in a change of control of the Company. The Business Combination
must be approved by the board of directors. In addition, the Company’s Business Combination must be approved by MIHI LLC
(the “Macquarie sponsor”) as a condition to the Contingent Forward Purchase Contract (as described in Note 7). In the
event that the Company seeks stockholder approval in connection with a Business Combination, the Company will proceed with a Business
Combination only if a majority of the outstanding shares that are voted are voted in favor of the Business Combination. In connection
with such vote, the Company will provide its stockholders with the opportunity to redeem their shares of the Company’s common
stock upon the consummation of a Business Combination for a pro-rata portion of the amount then in the Trust Account (initially
$10.00 per share, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to pay taxes).
However, in no event will the Company redeem its public shares in an amount that would cause its net tangible assets to be less
than $5,000,001. Hydra Industries Sponsor LLC (the “Hydra sponsor”) and the Macquarie sponsor (together with the Hydra
sponsor, the “Sponsors”) and the other initial stockholders of the Company have agreed, in the event the Company is
required to seek stockholder approval of its Business Combination, to vote their founders shares (as defined in Note 6) and any
public shares purchased, in favor of approving a Business Combination. Notwithstanding the foregoing redemption rights, if the
Company seeks stockholder approval of the Business Combination and it does not conduct redemptions in connection with the Business
Combination pursuant to the tender offer rules, the Company’s amended and restated certificate of incorporation provides
that a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is acting
in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), will be restricted from redeeming its shares with respect to an aggregate of 25% or more of the shares sold in the
Initial Public Offering.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
If the Company is
unable to complete a Business Combination within 24 months from the closing of the Initial Public Offering (the “Combination
Period”), the Company will (i) cease all operations except for the purposes of winding up its affairs; (ii) distribute the
aggregate amount then on deposit in the Trust Account, including a portion of the interest earned thereon (net of any taxes payable,
and less up to $50,000 of interest to pay dissolution expenses), pro rata to the Company’s public stockholders by way of
redemption of the Company’s public shares (which redemption would completely extinguish such holders’ rights as stockholders,
including the right to receive further liquidation distributions, if any); and (iii) as promptly as possible following such redemption,
dissolve and liquidate the balance of the Company’s net assets to its remaining stockholders, as part of the Company’s
plan of dissolution and liquidation.
The initial stockholders
have agreed to waive their redemption rights with respect to the founder shares (i) in connection with the consummation of a Business
Combination, (ii) if the Company fails to consummate a Business Combination within the Combination Period, and (iii) upon the Company’s
liquidation upon the expiration of the Combination Period. However, if the Company’s initial stockholders should acquire
public shares in or after the Initial Public Offering, they will be entitled to redemption rights with respect to such public shares
if the Company fails to consummate a Business Combination within the Combination Period. The underwriters have agreed to waive
their rights to their deferred underwriting commissions held in the Trust Account in the event the Company does not consummate
a Business Combination within the Combination Period and, in such event, such amounts will be included with the funds held in the
Trust Account that will be available to fund the redemption of the Company’s public shares. In the event of such distribution,
it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets)
will be less than the Initial Public Offering price per Unit in the Initial Public Offering ($10.00 per share). A. Lorne Weil,
the Company’s Chairman and Chief Executive Officer and the managing member of the Hydra sponsor, has agreed that he will
be liable to the Company, and the Macquarie sponsor has agreed to indemnify Mr. Weil for 50% of any such liability, if and to the
extent any claims by a vendor for services rendered or products sold to the Company, or by a prospective target business with which
the Company has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account to below $10.00
per share or such lesser amount per share of Common Stock held in the Trust Account as of the date of the liquidation of the Trust
Account, due to reductions in value of the trust assets other than due to the failure to obtain such waiver, in each case net of
the amount of interest which may be withdrawn to pay taxes, except as to any claims by a third party who executed a waiver of any
and all rights to seek access to the Trust Account and except as to any claims under the Company’s indemnity of the underwriters
of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”).
The Company will seek
to reduce the possibility that Mr. Weil will have to indemnify the Trust Account due to claims of creditors by endeavoring to have
all vendors, service providers (other than the Company’s independent auditors and the provider of the Company’s directors’
and officers’ liability insurance), prospective target businesses or other entities with which the Company does business,
execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account.
NOTE 2. LIQUIDITY AND GOING CONCERN
As of June 30, 2016,
the Company had $216,796 in its operating bank accounts, $80,031,319 in cash and securities held in the Trust Account to be used
for a Business Combination or to repurchase or convert its common stock in connection therewith and a working capital deficit of
$3,770,731. As of June 30, 2016, approximately $25,000 of the amount on deposit in the Trust Account represented interest income,
which is available to be withdrawn to pay the Company’s tax obligations. Since inception, the Company has withdrawn $47,348
in interest income from the Trust Account.
Until the consummation
of a Business Combination, the Company will be using the funds not held in the Trust Account for identifying and evaluating prospective
acquisition candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the
target business to acquire, structuring, negotiating and consummating the Business Combination and paying for public company expenses.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
For the six months
ended June 30, 2016, the Company used cash of $586,791 in operating activities. As of June 30, 2016, the Company had current liabilities
of $4,038,140, primarily representing amounts owed to lawyers, accountants and consultants who have advised the Company on matters
related to potential Business Combinations. There can be no assurances that the Company will be able to make payment in full of
the amounts due to said advisors. Funds in the Trust Account are not available for this purpose absent an initial Business Combination.
If a Business Combination is not consummated, the Company would lack the resources to pay all of the liabilities that have been
incurred by the Company to date or after and the Company may lack the resources needed to consummate another Business Combination.
The Company entered into fee arrangements with certain service providers and advisors in connection with a potential Business Combination
(“Terminated Business Combination”) pursuant to which certain fees were deferred and payable only if the Company consummated
such Terminated Business Combination (see Note 7). Effective October 26, 2015, all efforts related to such Terminated Business
Combination were terminated and, accordingly, all deferred contingent fees related to such Terminated Business Combination that
had been previously incurred are no longer due or payable. There can be no assurances that the Company will complete a Business
Combination.
The Company
may need to raise additional capital through loans or additional investments from its Sponsors, stockholders, officers, directors,
or third parties. On March 16, 2016, the Sponsors loaned the Company $250,000 each, for an aggregate of $500,000, to fund its expenses
prior to a Business Combination (see Note 6). In addition, the Company’s officers, directors and Sponsors may, but are not
obligated to, loan the Company funds, from time to time or at any time, in whatever amount they deem reasonable in their sole discretion,
to meet the Company’s working capital needs.
Other than as described
above, none of the Sponsors, stockholders, officers or directors, or third parties, are under any obligation to advance funds to,
or to invest in, the Company. Accordingly, the Company may not be able to obtain additional financing. If the Company is unable
to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include, but not
necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead expenses.
The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements
do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might
be necessary should the Company be unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
The accompanying unaudited
condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article
10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information or footnote disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules
and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes
necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management,
the accompanying unaudited condensed financial statements include all adjustments, consisting of a normal recurring nature, which
are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.
The accompanying unaudited
condensed financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December
31, 2015 as filed with the SEC, which contains the audited financial statements and notes thereto, together with Management's Discussion
and Analysis. The financial information as of December 31, 2015 is derived from the audited financial statements presented in the
Company's Annual Report on Form 10-K for the year ended December 31, 2015. The interim results for the six months ended June 30,
2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any future interim
periods.
Use of estimates
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the 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 revenues and expenses during the reporting period.
Making estimates requires
management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition,
situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating
its estimate, could change in the near term due to one or more future events. Accordingly, the actual results could differ significantly
from those estimates.
Cash and cash equivalents
The Company considers
all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company
did not have any cash equivalents as of June 30, 2016 and December 31, 2015.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
Cash and marketable securities held
in Trust Account
The amounts held in
the Trust Account represent substantially all of the proceeds of the Initial Public Offering and are classified as restricted assets
since such amounts can only be used by the Company in connection with the consummation of a Business Combination. As of June 30,
2016, cash and marketable securities held in the Trust Account consisted of $80,031,319 in United States Treasury Bills with a
maturity date of 180 days or less.
Common stock subject to possible redemption
The Company accounts
for its common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”)
Topic 480 “Distinguishing Liabilities from Equity.” Common stock subject to mandatory redemption (if any) 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 the Company’s control) is classified as temporary equity. At all other times, common stock is classified
as stockholders’ equity. The Company’s common stock features certain redemption rights that are considered to be outside
of the Company’s control and subject to occurrence of uncertain future events. Accordingly, at June 30, 2016 and December
31, 2015, common stock subject to possible redemption is presented as temporary equity, outside of the stockholders’ equity
section of the Company’s balance sheet.
Net loss per share
The Company complies
with accounting and disclosure requirements of ASC Topic 260, “Earnings Per Share.” Net loss per share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Shares of common stock
subject to possible redemption at June 30, 2016 and 2015 have been excluded from the calculation of basic loss per share since
such shares, if redeemed, only participate in their pro rata share of the Trust Account earnings. The Company has not considered
the effect of warrants to purchase 7,875,000 shares of common stock and rights that convert into 800,000 shares of common stock
in the calculation of diluted loss per share, since the exercise of the warrants and the conversion of the rights into shares of
common stock is contingent upon the occurrence of future events. As a result, diluted loss per share is the same as basic loss
per share for the periods presented.
Income taxes
The Company complies
with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability
approach to financial accounting and reporting for 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,
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 tax assets to the amount expected to be realized.
ASC Topic 740 prescribes a recognition
threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected
to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. There were no unrecognized tax benefits as of June 30, 2016. The Company is currently not aware
of any issues under review that could result in significant payments, accruals or material deviation from its position.
The Company is subject
to income tax examinations by various taxing authorities since its inception. These potential examinations may include questioning
the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state
tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change
over the next twelve months.
The Company’s
policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense.
There were no amounts accrued for penalties or interest as of June 30, 2016. Management is currently unaware of any issues under
review that could result in significant payments, accruals or material deviations from its position.
Concentration of credit risk
Financial instruments
that potentially subject the Company to concentration of credit risk consist of cash accounts in a financial institution which,
at times may exceed the Federal depository insurance coverage of $250,000. At June 30, 2016, the Company had not experienced losses
on these accounts and management believes the Company is not exposed to significant risks on such accounts.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
Fair value of financial instruments
The fair value of
the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurements
and Disclosures” (“ASC 820”), approximates the carrying amounts represented in the accompanying balance sheets,
primarily due to their short-term nature.
Recent Accounting Pronouncements
In August 2014, the
FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”
(“ASU 2014-15”). ASU 2014-15 provides guidance on management’s responsibility in evaluating whether there is
substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each
reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about
a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The
amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016, and for annual and interim
periods thereafter. Early adoption is permitted. The Company adopted the methodologies prescribed by ASU 2014-15 as of January
1, 2016. The adoption of ASU 2014-15 did not have a material effect on its financial position or results of operations.
NOTE 4. INITIAL PUBLIC OFFERING
On October 29, 2014,
the Company sold 8,000,000 Units at a purchase price of $10.00 per Unit in its Initial Public Offering. Each Unit consists of one
share of the Company’s common stock, $0.0001 par value (“Common Stock”), one right (“Public Right”)
and one redeemable common stock purchase warrant (“Public Warrant”). Each Public Right will convert into one-tenth
(1/10) of one share of Common Stock upon the consummation of a Business Combination. The Company did not register the shares of
Common Stock issuable upon exercise of the Public Warrants. However, the Company has agreed to use its best efforts to file within
15 business days of the closing of a Business Combination and have an effective registration statement within 60 business days
of the closing of a Business Combination covering the shares of Common Stock issuable upon exercise of the Public Warrants, to
maintain a current prospectus relating to those shares of Common Stock until the earlier of the date the Public Warrants expire
or are redeemed and, the date on which all of the Public Warrants have been exercised and to qualify the resale of such shares
under state blue sky laws, to the extent an exemption is not available. Each Public Warrant entitles the holder to purchase one-half
share of Common Stock at an exercise price of $5.75 ($11.50 per whole share). The Public Warrants may be exercised only for a whole
number of shares of Common Stock. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants
will become exercisable on the later of (a) 30 days after the consummation of a Business Combination, or (b) 12 months from the
closing of the Initial Public Offering. The Public Warrants will expire five years after the consummation of a Business Combination
or earlier upon redemption or liquidation. The Public Warrants will be redeemable by the Company at a price of $0.01 per warrant
upon 30 days’ prior written notice after the Public Warrants become exercisable, only in the event that the last sale price
of the Common Stock equals or exceeds $24.00 per share for any 20 trading days within a 30-trading day period ending on the third
trading day prior to the date on which notice of redemption is given. The Company will not redeem the Public Warrants unless an
effective registration statement under the Securities Act covering the shares of Common Stock issuable upon exercise of the Public
Warrants is effective and a current prospectus relating to those shares of Common Stock is available throughout the 30-day redemption
period except if the Public Warrants may be exercised on a cashless basis and such cashless exercise is exempt from registration
under the Securities Act. If and when the Public Warrants become redeemable by the Company, the Company may exercise its redemption
right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
If the Company calls
the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants
to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the Public
Warrants for that number of shares of Common Stock equal to the quotient obtained by dividing (x) the product of the number of
shares of Common Stock underlying the Public Warrants, multiplied by the difference between the exercise price of the Public Warrants
and the “fair market value” by (y) the fair market value. The “fair market value” shall mean the average
reported last sale price of the Common Stock for the 10 trading days ending on the third trading day prior to the date on which
the notice of redemption is sent to the holders of Public Warrants.
NOTE 5. PRIVATE PLACEMENT
Simultaneously with
the Initial Public Offering, Mr. Weil, the Macquarie sponsor and Martin E. Schloss, the Company’s Executive Vice President,
General Counsel and Secretary, purchased an aggregate of 7,500,000 Private Placement Warrants at a price of $0.50 per warrant ($3,750,000
in the aggregate) in a private placement. Each Private Placement Warrant is exercisable to purchase one-half share of Common Stock
at $5.75 per half share. The Private Placement Warrants may be exercised only for a whole number of shares of Common Stock. No
fractional shares will be issued upon exercise of the Private Placement Warrants. The purchase price of the Private Placement Warrants
was added to the net proceeds from the Initial Public Offering held in the Trust Account. If the Company does not complete a Business
Combination within the Combination Period, the proceeds of the sale of the Private Placement Warrants will be used, in part, to
fund the redemption of the Company’s public shares (subject to the requirements of applicable law). There will be no redemption
rights or liquidating distributions with respect to the Private Placement Warrants.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
The Sponsors have
agreed that the Private Placement Warrants and the Common Stock issuable upon exercise of the Private Placement Warrants will not
be transferable, assignable or salable until 30 days following consummation of a Business Combination, subject to certain limited
exceptions. Additionally, the Private Placement Warrants will be non-redeemable so long as they are held by the initial purchasers
or such purchasers’ permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers
or such purchasers’ permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable
by such holders on the same basis as the Public Warrants. If the Company does not complete a Business Combination, then the proceeds
will be part of the liquidating distribution to the public stockholders and the Private Placement Warrants will expire worthless.
NOTE 6. RELATED PARTY TRANSACTIONS
Founder Shares
On July 11, 2014,
the Company issued 2,875,000 shares of Common Stock to the Sponsors, of which an aggregate of 575,000 shares were returned to the
Company and subsequently cancelled (the “founder shares”) on October 24, 2014, for an aggregate purchase price of $25,000.
As a result of the underwriters’ determination not to exercise their over-allotment option, an additional 300,000 founder
shares were forfeited. The founder shares are identical to the shares of Common Stock included in the Units sold in the Initial
Public Offering, except that (1) the founder shares are subject to certain transfer restrictions, as described in more detail below,
and (2) the Company’s initial stockholders have agreed: (i) to waive their redemption rights with respect to their founder
shares in connection with the consummation of a Business Combination and (ii) to waive their redemption rights with respect to
their founder shares if the Company fails to complete a Business Combination within the Combination Period. However, the Company’s
initial stockholders will be entitled to redemption rights with respect to any public shares they hold by way of public market
purchase if the Company fails to consummate a Business Combination within such time period. If the Company submits a Business Combination
to its public stockholders for a vote, the initial stockholders have agreed to vote their founder shares and any public shares
purchased in favor of a Business Combination.
The Company’s
initial stockholders have agreed not to transfer, assign or sell any of their founder shares until the earlier to occur of: (1)
one year after a Business Combination or (2) the date on which the Company completes a liquidation, merger, stock exchange or other
similar transaction after a Business Combination that results in all of the Company’s stockholders having the right to exchange
their shares of Common Stock for cash, securities or other property (the “Lock Up Period”). Notwithstanding the foregoing,
if the last sale price of the Common Stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations,
recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after a Business
Combination, the founder shares will be released from the lock-up.
Convertible Promissory Notes
On March 16, 2016,
the Company entered into convertible promissory notes with the Sponsors, whereby the Sponsors loaned the Company an aggregate of
$500,000 (“Convertible Promissory Notes”) in order to finance transaction costs in connection with a Business Combination.
The Convertible Promissory Notes are non-interest bearing, and due on the date on which the Company consummates a Business Combination.
In the event that a Business Combination does not occur, the Sponsors would become general unsecured creditors of the Company.
Each of the Convertible Promissory Notes are convertible, in whole or in part, at the election of the Sponsor holding such note,
upon the consummation of a Business Combination. Upon such election, the Convertible Promissory Notes will convert into warrants,
at a price of $0.50 per warrant. These warrants will be identical to the Private Placement Warrants. As such, each warrant is exercisable
for one-half of one share of the Company’s common stock at an exercise price of $5.75 per half share.
The Convertible Promissory
Notes were issued pursuant to the Expense Advancement Agreement, dated as of October 24, 2014, by and among the Company and the
Sponsors, pursuant to which each Sponsor committed to fund up to $250,000 to the Company for the Company’s expenses relating
to investigating and selecting a target business and other working capital requirements. In the event that the Business Combination
does not close, the Company 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 may be used for such repayment.
As of June 30, 2016, $500,000 was outstanding
under the Convertible Promissory Notes.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
NOTE 7. COMMITMENTS & CONTINGENCIES
Terminated Transaction Fee Arrangements
The Company entered
into fee arrangements with certain service providers and advisors pursuant to which certain fees incurred by the Company in connection
with a Terminated Business Combination would be deferred and become payable only if the Company consummated such Terminated Business
Combination. If the Terminated Business Combination did not occur, the Company would not be required to pay these contingent fees.
Effective October 26, 2015, all efforts related to such Terminated Business Combination were terminated and, accordingly, all contingent
fees that had been previously incurred are no longer due or payable.
Potential Transaction Fee Arrangements
The Company has
entered into fee arrangements with certain service providers and advisors pursuant to which certain fees incurred by the
Company in connection with another potential Business Combination will be deferred and become payable only if the Company
consummates such potential Business Combination. If the potential Business Combination does not occur, the Company will not
be required to pay these contingent fees. As of June 30, 2016, the Company incurred approximately $811,000 of fees, of which
approximately $60,000 has been paid, approximately $495,000 is included in accounts payable and accrued expenses in the
accompanying condensed balance sheet and $256,000 has not been accrued since it is contingent upon the closing of the
proposed Business Combination. The Company anticipates incurring a significant amount of additional costs. There can be no
assurances that the Company will complete this or any other Business Combination.
Administrative
Services Agreement
The Company entered
into an Administrative Services Agreement commencing on October 24, 2014 pursuant to which the Company pays an affiliate of the
Hydra Sponsor a total of $10,000 per month for office space, utilities and secretarial support. Upon the completion of a Business
Combination or the Company’s liquidation, the Company will cease paying these monthly fees. The Company paid $30,000 in fees
during the three months ended June 30, 2016 and 2015 and paid $60,000 in fees during the six months ended June 30, 2016 and 2015.
Contingent Forward Purchase Contract
On October 24, 2014,
the Macquarie sponsor entered into a contingent forward purchase contract with the Company (the “Contingent Forward Purchase
Contract”) to purchase, in a private placement for gross proceeds of approximately $20,000,000 to occur concurrently with
the consummation of the Business Combination, 2,000,000 Units on the same terms as the sale of the Units in the Initial Public
Offering at $10.00 per Unit (which includes 2,000,000 rights which will be exchanged for 200,000 shares of Common Stock) (“Private
Placement Units”), and 500,000 shares of the Company’s Common Stock on the same terms as the sale of the founder shares
to the Sponsors prior to the Initial Public Offering (“Private Placement Shares”). The funds from the sale of the Private
Placement Units and the Private Placement Shares will be used as part of the consideration to the sellers in the Business Combination;
any excess funds from the Private Placement Units will be used for working capital in the post-transaction company. This commitment
is independent of the percentage of stockholders electing to redeem their public shares.
As a closing condition
to the Contingent Forward Purchase Contract, the Company has agreed not to consummate a Business Combination without the Macquarie
sponsor’s consent; provided, however, that if the Company fails to consummate a Business Combination within the Combination
Period, and the Company’s board of directors (other than the Macquarie sponsor designee) unanimously votes in favor of a
proposed Business Combination and the Macquarie sponsor decides to withhold its vote on the Business Combination, the Macquarie
sponsor will be, subject to customary conditions, obligated to pay a $740,000 fee to the Hydra sponsor. In such event, the Private
Placement Warrants purchased by the Macquarie sponsor and the Hydra sponsor will expire worthless. Notwithstanding the foregoing,
in the event the Macquarie sponsor withholds consent to consummate a Business Combination because of regulatory reasons or the
Business Combination involves a competitor to the Macquarie sponsor, its affiliates, or an entity in which the Macquarie sponsor
or an affiliate has an equity interest, then the Macquarie sponsor is not obligated to pay the $740,000 fee, the Company may proceed
with such Business Combination, the Macquarie sponsor will be permitted to sell its Private Placement Warrants and founder shares
(provided that the transferee agrees to be bound by the transfer restrictions, lock-up provisions, registration rights, voting
obligations and other such restrictions and rights of the transferred Private Placement Warrants and founder shares), the Hydra
sponsor will use its best efforts to facilitate a sale of the Macquarie sponsor’s Private Placement Warrants and founder
shares, and the term of the Macquarie sponsor’s nominee for the Board of Directors will automatically terminate and such
board seat will remain vacant until filled by a successor duly appointed by the Hydra sponsor.
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
Right of First Refusal
Pursuant to an agreement
dated October 24, 2014, the Company has granted Macquarie Capital (USA) Inc. (“Macquarie Capital”), an affiliate of
the Macquarie sponsor, a right of first refusal for a period of 36 months from the closing of the Initial Public Offering to provide
certain financial advisory, underwriting, capital raising, and other services for which they may receive fees. The amount of fees
the Company pays to Macquarie Capital will be based upon the prevailing market for similar services rendered by global full-service
investment banks for such transactions, and will be subject to the review of the Company’s Audit Committee pursuant to the
Audit Committee’s policies and procedures relating to transactions that may present conflicts of interest.
Registration Rights
Pursuant to a registration
rights agreement entered into on October 24, 2014 with the Company’s initial stockholders and purchasers of the Private Placement
Warrants and the Contingent Forward Purchase Contract, the Company is required to register certain securities for sale under the
Securities Act. Each of the sponsors will be entitled to make up to three demands, excluding short form registration demands, that
the Company register such securities for sale under the Securities Act and to have the securities covered thereby registered for
resale pursuant to Rule 415 under the Securities Act. In addition, these holders will have “piggy-back” registration
rights to include their securities in other registration statements filed by the Company. However, the registration rights agreement
provides that the Company will not permit any registration statement filed under the Securities Act to become effective until termination
of the applicable Lock Up Period. The Company will bear the expenses incurred in connection with the filing of any such registration
statements.
Underwriting Agreement
The underwriters were
entitled to an underwriting discount of up to 6.0%, of which two and one-half percent (2.5%), or $2,000,000, was paid in cash at
the closing of the Initial Public Offering on October 29, 2014, and up to three and one-half percent (3.5%), or $2,800,000, has
been deferred. The deferred fee will be payable in cash upon the closing of a Business Combination. The deferred fee will become
payable to the underwriters from the amounts held in the Trust Account solely in the event that the Company completes a Business
Combination, subject to the terms of the underwriting agreement.
NOTE 8. STOCKHOLDERS’ EQUITY
Preferred Stock
— The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share in one or
more series. The Company’s board of directors will be authorized to fix the voting rights, if any, designations, powers,
preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions
thereof, applicable to the shares of each series. At June 30, 2016, there were no shares of preferred stock issued or outstanding.
Common Stock
— The Company is authorized to issue 29,000,000 shares of Common Stock with a par value of $0.0001 per share. Holders of
the Company’s Common Stock are entitled to one vote for each common share. At June 30, 2016, there were 3,156,561 shares
of Common Stock issued and outstanding (excluding 6,843,439 shares of Common Stock subject to possible redemption).
NOTE 9. FAIR VALUE MEASUREMENTS
The Company follows
the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting
period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
The fair value of
the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have
received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction
between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities,
the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the
use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following
fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in
order to value the assets and liabilities:
|
|
Level 1:
|
Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
|
Level 2:
|
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
|
|
|
Level 3:
|
Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.
|
HYDRA INDUSTRIES ACQUISITION CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2016
(Unaudited)
The following table
presents information about the Company’s assets that are measured at fair value on a recurring basis at June 30, 2016 and
December 31, 2015, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
|
Description
|
|
Level
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and marketable securities held in Trust Account
|
|
1
|
|
$
|
80,031,319
|
|
|
$
|
80,009,479
|
|
NOTE 10. SUBSEQUENT EVENTS
The Company evaluates
subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements were issued
for potential recognition or disclosure. Other than as described below, the Company did not identify any subsequent events that
would have required adjustment or disclosure in the financial statements.
On July 13, 2016,
the Company entered into a definitive agreement to acquire London based Inspired Gaming Group and its affiliates (the “Inspired
Group”) from funds managed by Vitruvian Partners LLP (a London headquartered private equity firm) and its co-investors.
The Share Sale Agreement,
dated as of July 13, 2016, by and among the Company, the Vendors named on Schedule 1 thereto, DMWSL 633 Limited (“Target
Parent”), DMWSL 632 Limited and Gaming Acquisitions Limited (the “Sale Agreement”), provides for the acquisition
by the Company from the Vendors of all of the equity and shareholder loan notes of Target Parent and the Inspired Group (the “Inspired
Business Combination”).
The Sale
Agreement reflects a transaction value for the Inspired Business Combination of £200 million/$264 million, plus an
earn-out of up to $25 million (up to 2.5 million of the Company’s shares), expected to represent approximately
£96 million/$126 million of equity value after adjusting for the maintenance of debt and certain other liabilities (the
foregoing conversions from GBP to USD are based on the current USD/GBP exchange rate of $1.32/£1.00 as of July 13,
2016. Although equivalent amounts are also expressed in both UK pounds and US dollars, the payments will be made in UK
pounds in the amounts stated.). Exclusive of the potential earn-out, the consideration to be paid for the equity
and shareholder loan notes of the Target Parent and the Inspired Group will be the aggregate of the Base Consideration
(as defined below),
less
a fixed amount of Accruing Negative Consideration (£21,500 per day from but excluding
July 2, 2016 through and including the closing of the Inspired Business Combination).
The “Base
Consideration” to be paid for the equity and shareholder loan notes pursuant to the Sale Agreement will equal (i)
£100,363,394/$132,479,680,
plus
(ii) any amount by which the Company’s transaction expenses (“Purchaser
Costs”) referred to in Schedule 6 to the Sale Agreement exceeds £8,237,909/$10,874,040,
minus
(iii) certain expenses
of the Vendors noticed by the Institutional Vendors’ Representative, not to exceed £3,000,000/$3,960,000,
minus
(iv) certain excess interest payments owing on the Inspired Group’s existing financing arrangements.
The Vendors will be
paid the Base Consideration, adjusted for the Accruing Negative Consideration (the “Completion Payment”), partially
in cash (the “Cash Consideration”), to the extent available after the payment of transaction expenses and working
capital adjustments, if any, and partially in newly-issued shares of Company common stock (“Purchaser Shares”) at a
value of $10.00 per share (the “Stock Consideration”), as follows:
|
|
a.
|
The Cash Consideration represents the cash the Company will have available at closing to pay the
Completion Payment. The Cash Consideration will equal (i) the Company’s current cash in trust, the $20 million proceeds of
a private placement to Macquarie Capital, and any other available funds,
minus
(ii) an agreed amount of Purchaser Costs
(including expenses incurred in connection with the preparation of the proxy statement and meetings with the Company’s stockholders),
minus
(iii) an agreed amount of the Vendors’ transaction expenses,
minus
(iv) the amount of repayment required
under certain of the Inspired Group’s financing arrangements,
minus
(v) £5 million for the purposes of retaining
cash on the Company’s balance sheet.
|
|
|
b.
|
The Stock Consideration will equal the Completion Payment minus the Cash Consideration, divided
by $10.00 per share.
|
The earn-out payment
of up to $25,000,000 (the “Earn-out Consideration”) shall be paid to the Vendors exclusively in Purchaser Shares and
will be determined based on Inspired’s performance in certain jurisdictions through September 30, 2018 pursuant to a formula
set forth in Schedule 5 to the Sale Agreement.
The consummation of
the Inspired Business Combination is conditioned upon the approval of the Company’s stockholders, certain regulatory approvals
pertaining to the gaming industry and other customary closing conditions.