AtlasClear Holdings, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations References in this section of the Annual Report to “we,” “us” or the “Company” refer to Quantum FinTech Acquisition Corporation, a Delaware corporation. References to our “management” or our “management team” refer to our officers and directors. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the sections entitled “Risk Factors”,” “Business” and the audited financial statements, including the related notes, appearing elsewhere in this Annual Report. All references to years, unless otherwise noted, refer to our fiscal years, which end on December 31. Overview As of December 31, 2023, Quantum was a blank check company formed under the laws of the State of Delaware on October 1, 2020, for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities. Recent Developments Business Combination On February 9, 2024, we consummated the previously announced transactions contemplated by the Business Combination Agreement, by and among Calculator New Pubco, Inc. (“Calculator”), Quantum, Merger Sub 1, Merger Sub 2, Inc., AtlasClear, Atlas FinTech and Robert McBey. In connection with the consummation of the Business Combination, Calculator changed its name from “Calculator New Pubco, Inc.” to “AtlasClear Holdings, Inc.” As of December 31, 2023, AtlasClear Holdings was a wholly owned subsidiary of Quantum and had minimal activity since its inception. The discussion below is presenting the consolidated entity of Quantum. Prior to the Closing, (i) AtlasClear received certain assets from Atlas FinTech and Atlas Financial Technologies Corp., and (ii) AtlasClear completed the acquisition of broker-dealer, Wilson-Davis. At Closing, the Bank Acquisition Agreement, pursuant to 45 Table of Contents which AtlasClear has agreed to acquire Commercial Bancorp, continued to be in full force and effect. At Closing, AtlasClear stockholders received merger consideration in the form of 4,440,000 shares of Common Stock. In addition, the AtlasClear stockholders will receive up to 5,944,444 shares of Common Stock (the “Earn Out Shares”). The Earn Out Shares will be issued to AtlasClear stockholders upon certain milestones (based on the achievement of certain price targets of Common Stock following the Closing). In the event such milestones are not met within the first 18 months following the Closing, the Earn Out Shares will be cancelled. Atlas FinTech will also receive up to $20 million of New Pubco Common Stock (“Software Products Earn Out Shares”), which will be issued to Atlas FinTech upon certain milestones based on the achievement of certain revenue targets of software products contributed to AtlasClear by Atlas FinTech and Atlas Financial Technologies Corp. following the Closing. The revenue targets will be measured yearly for the five years following Closing, with no catch-up between the years. In connection with the stockholder vote to approve the Business Combination Agreement and the Business Combination, holders of an aggregate of 4,940,885 shares of Common Stock of Quantum properly exercised their right to have their shares redeemed for a full pro rata portion of the Trust Account, which was approximately $10.92 per share, or approximately $53.9 million in the aggregate. The remaining balance of the Trust Account immediately prior to the Closing of approximately $1.2 million was used to partially fund the Business Combination. As a result of such redemptions, a total of 109,499 public shares of Common Stock Quantum remained outstanding at the Closing. After giving effect to the Business Combination, the redemption of the public shares, the separation of the former units of Quantum, the issuance of shares of Common Stock as merger consideration and the issuance of shares of Common Stock pursuant to Expense Settlements (described below), as of the Closing date, there were 11,781,759 shares of Common Stock issued and outstanding. Non-Redemption Agreement On August 1, 2023, Quantum and Quantum Ventures entered into a non-redemption agreement (the “Non-Redemption Agreement”) with Funicular Funds, LP (the “Holder”) in exchange for the Holder agreeing either not to request redemption in connection with the Extension (as defined below) or to reverse any previously submitted redemption demand in connection with the Extension with respect to an aggregate of 2,351,800 shares of Common Stock at the special meeting of stockholders called by the Company to, among other things, approve an amendment to the Company’s amended and restated certificate of incorporation to extend the date by which the Company must consummate an initial business combination to up to February 9, 2024 or such earlier date as is determined by the board of directors of the Company to be in the best interests of the Company (the “Extension”). In consideration of the foregoing agreement, immediately prior to, and substantially concurrently with, the closing of an initial business combination, (i) Quantum Ventures agreed to surrender and forfeit to the Company for no consideration an aggregate of 235,180 shares of Common Stock held by Quantum Ventures (the “Forfeited Shares”) and an aggregate of 235,180 warrants held by Quantum Ventures to purchase 235,180 shares of Common Stock (the “Forfeited Warrants”) and (ii) the Company agreed to issue to the Holder a number shares of Common Stock equal to the number of Forfeited Shares and a number of warrants to purchase shares of Common Stock equal to the number of Forfeited Warrants. As of February 9, 2024, there are no further obligations under the Non-Redemption Agreement and the agreement is terminated. Amendments to Broker-Dealer Acquisition Agreement Prior to the Closing, AtlasClear and AltasClear Holdings entered into two amendments to the Broker-Dealer Acquisition Agreement with Wilson-Davis and the then-owners of Wilson-Davis (the “Wilson-Davis Sellers”), Amendment No. 8 dated January 9, 2024 (“Amendment No. 8”) and Amendment No. 9 dated February 7, 2024 (“Amendment No. 9” and, together with Amendment No. 8, the “Amendments”). Among other things, the Amendments reduced the total purchase price payable under the Broker- Dealer Acquisition Agreement by $5 million and reduced the cash payable at the Wilson-Davis Closing as part of the purchase price to $8 million, with the balance of the purchase price paid in the form of convertible promissory notes issued by AtlasClear to the Wilson-Davis Sellers, as follows: (i) $5,000,000 in aggregate principal amount of notes due 90 days after the Closing Date (the “Short-Term Notes”) and (ii) $7,971,000 in aggregate principal amount of notes due 24 months after the Closing Date (the “Long-Term Notes” and, together with the Short-Term Notes, the “Seller Notes”). The Short-Term Notes accrue interest at a rate of 9% per annum, payable quarterly in arrears, in shares of Common Stock at a rate equal to 90% of the trailing seven-trading day VWAP prior to payment (or, at the Company’s option, cash), and are convertible at the option of the holder at any time during the continuance of an event of default, at a rate equal to 90% of the trailing seven-trading day VWAP prior to conversion. The Long-Term Notes accrue interest at a rate of 13% per annum, payable quarterly in arrears, in shares of Common Stock at a rate equal to 90% of the trailing seven-trading day VWAP prior to payment (or, at the Company’s option, in cash), and are convertible at the option of the holder at any time commencing six months after the Closing Date, at a rate equal to 90% of the trailing seven-trading day VWAP prior to conversion (or 85% if an event of default occurs and is continuing). The first quarterly interest payments on the Seller Notes were paid on April 15, 2024 in the form of an aggregate of 145,210 shares of Common Stock. For more information about the Amendments to Broker-Dealer Acquisition Agreement, see Note 11 ( Subsequent Events ). 46 Table of Contents Convertible Note Financing On February 9, 2024, AtlasClear Holdings and Quantum entered into a securities purchase agreement (the “Funicular Purchase Agreement”) with Funicular, pursuant to which AtlasClear Holdings sold and issued to Funicular, on that date, a secured convertible promissory note in the principal amount of $6,000,000 for a purchase price of $6,000,000, in a private placement (the “Note Financing”). The proceeds raised in the Note Financing were used to pay a portion of the purchase price paid at Closing to the Wilson-Davis sellers. The Funicular Note has a stated maturity date of November 9, 2025. Interest accrues at a rate per annum equal to 12.5%, and is payable semi-annually on each June 30 and December 31. On each interest payment date, the accrued and unpaid interest shall, at the election of the Company in its sole discretion, be either paid in cash or paid in-kind by increasing the principal amount of the Funicular Note. In the event of an Event of Default (as defined in the Funicular Note), in addition to Funicular’s other rights and remedies, the interest rate would increase to 20% per annum. The Funicular Note is convertible, in whole or in part, into shares of Common Stock at the election of the holder at any time at an initial conversion price of $10.00 per share (the “Conversion Price”). The Conversion Price is subject to adjustment monthly to a price equal to the trailing five-day VWAP, subject to a floor of $2.00 per share (provided that if the Company sells stock at an effective price below $2.00 per share, such floor would be reduced to such effective price), and is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like. The Company has the right to redeem the Funicular Note upon 30 days’ notice after the earlier of August 7, 2024 and the effectiveness of the Registration Statement (as defined in the Funicular Note), and Funicular would have the right to require the Company to redeem the Note in connection with a Change of Control (as defined in the Note), in each case for a price equal to 101% of the outstanding principal amount of the Note plus accrued and unpaid interest. For more information about the Note Financing, see Note 11 ( Subsequent Events ). Expense Settlements In connection with the Closing, AtlasClear Holdings and Chardan agreed that the fee, in the amount of $7,043,750, payable by Quantum to Chardan upon the Closing pursuant to the terms of the business combination marketing agreement entered into in connection with Quantum’s IPO, would be waived in exchange for the issuance by AtlasClear Holdings to Chardan of a convertible promissory note in the aggregate principal amount of $4,150,000. The Chardan Note was issued by AtlasClear Holdings at the Closing. The Chardan Note has a stated maturity date of February 9, 2028. Interest accrues at a rate per annum equal to 13%, and is payable quarterly on the first day of each calendar quarter. On each interest payment date, the accrued and unpaid interest shall, at the election of AtlasClear Holdings, be either paid in cash or, subject to the satisfaction of certain conditions, in shares of Common Stock, at a rate equal to 85% of the VWAP for the trading day immediately prior to the applicable interest payment date. The Chardan Note is convertible, in whole or in part, into shares of Common Stock at the election of the holder at any time at a conversion price equal to 90% of the VWAP of the Common Stock for the trading day immediately preceding the applicable conversion date. In addition, on each conversion date AtlasClear Holdings is required to pay to Chardan in cash (or, at AtlasClear Holdings’s option and subject to certain conditions, a combination of cash and Common Stock) all accrued interest on the Chardan Note and all interest that would otherwise accrue on the amount of the Note being converted if such converted amount would be held to three years after the applicable conversion date. The first quarterly interest payment due on the Chardan Note has not been paid as of the date of this filing. Also in connection with the Closing, AtlasClear Holdings agreed to settle certain accrued expenses and other obligations to certain parties through the issuance of shares of Common Stock. Pursuant to such arrangements, on February 9, 2024, AtlasClear Holdings issued an aggregate of 2,201,010 shares of Common Stock in settlement of obligations in the aggregate amount of $5,448,933, including the issuance of 2,000,000 shares of Common Stock to Qvent, LLC, an affiliate of Quantum Ventures, in settlement of an aggregate of $4,633,833 advanced to Quantum through the Closing Date. Additionally, on the Closing Date, AtlasClear Holdings issued notes to settle other expenses of Quantum in the aggregate principal amount of approximately $3.3 million, some of which are convertible into shares of Common Stock. For more information about the Chardan Note and additional expense settlements, see Note 11 ( Subsequent Events ). Results of Operations We had neither engaged in any operations nor generated any revenues through December 31, 2023. Our only activities through December 31, 2023, were organizational activities, the IPO, which is described below, and subsequent to the IPO, identifying a target company for, and completing, a business combination. We do not expect to generate any operating revenues until after the completion of our business combination. We generate non-operating income in the form of income on marketable securities held in the trust account and change in fair value of derivative liabilities. We incur expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses. 47 Table of Contents For the year ended December 31, 2023, we had net income of $794,950, which consists of income earned on marketable securities held in trust account of $3,090,086, net gain on settlement of $829,853, change in fair value of non-redemption agreement liability of $439,787 and interest income from bank of $22,195, partially offset by change in fair value of warrant liability of $123,062, operating costs of $2,737,871 and provision for income taxes of $726,038. For the year ended December 31, 2022, we had a net income of $11,045,567, which consists of income earned on marketable securities held in trust account of $3,087,315, change in fair value of PIPE derivative liability of $4,566,000 and change in fair value of warrant liability of $6,953,336, partially offset by operating costs of $3,024,231 and provision for income taxes of $536,853. Liquidity and Capital Resources On February 9, 2021, we consummated our IPO of 17,500,000 units, each unit consisting of one share of Common Stock, par value $0.0001 per share, and one warrant to purchase one-half of one share of Common Stock at an exercise price of $11.50, at $10.00 per unit, generating gross proceeds of $175,000,000. Simultaneously with the closing of our IPO, we consummated the sale of 5,562,500 Private Warrants at a price of $1.00 per Private Warrant in a private placement to Quantum Ventures and Chardan Quantum LLC (the “Co-Sponsors”), generating gross proceeds of $5,562,500. On February 12, 2021, in connection with the underwriters’ exercise of their over-allotment option in full, we consummated the sale of an additional 2,625,000 units at a price of $10.00 per unit, generating total gross proceeds of $26,250,000. In addition, we consummated the sale of an additional 590,625 Private Warrants at $1.00 per Private Warrant, generating gross proceeds of $590,625. Following the IPO, the full exercise of the over-allotment option, and the sale of the Private Warrants, a total of $201,250,000 was placed in the trust account. We incurred $5,017,526 in IPO related costs, including $4,528,125 of underwriting fees and $489,401 of other costs. For the year ended December 31, 2023, net cash used in operating activities was $1,819,835. Net income of $794,950 was affected by income earned on marketable securities held in the trust account of $3,090,086, change in fair value of warrant liability of $123,062, and change in fair value of non-redemption agreement liability of $439,787. Changes in operating assets and liabilities provided $791,193 of cash for operating activities, primarily due to an increase in accounts payable and accrued expenses. For the year ended December 31, 2022, net cash used in operating activities was $1,084,259. Net income of $11,045,567 was affected by income earned on marketable securities held in the trust account of $3,087,315, change in fair value of PIPE derivative liability of $4,566,000 and the change in fair value of warrant liability of $6,953,336. Changes in operating assets and liabilities provided $2,476,825 of cash for operating activities, primarily due to an increase in accounts payable and accrued expenses. As of December 31, 2023, we had marketable securities of $54,799,478 (including $2,445,638 of income, net of amounts withdrawn to pay taxes) held in the trust account, invested in U.S. government treasury bills, notes or bonds having a maturity of 185 days or less and/or (ii) in money market funds meeting certain conditions under Rule 2a-7 of the Investment Company Act, as determined by us. Investment income on the balance in the trust account may be used by us to pay taxes, and dissolution expenses up to $100,000. During the year ended December 31, 2023, we withdrew an amount of $1,374,898 in income earned from the Trust Account. As of December 31, 2023, we had cash of $619,554 in our operating bank accounts ($619,554 of which is required to be used to pay taxes, as described below), $54,799,478 in marketable securities held in the Trust Account to be used for a Business Combination or to repurchase or redeem stock in connection therewith and working capital deficit of $11,386,299. As of December 31, 2023, $2,445,638 of the amount on deposit in the Trust Account represented income on marketable securities which is available to the Company to pay franchise and income taxes. In October 2021, Quantum Ventures committed to provide us up to $2,000,000 in working capital loans. In February 2022, Quantum Ventures committed to provide us up to an additional $1,000,000 for a total of $3,000,000 in working capital loans (the “Working Capital Loans”). Refer to Note 5 of our financial statements. On March 14, 2022, we issued an unsecured promissory note, effective as of January 3, 2022, in the amount of up to $480,000 to Quantum Ventures evidencing the Working Capital Loans. The note bears no interest and is payable in full upon the earlier (i) February 9, 2023 and (ii) the effective date of the consummation of our initial business combination. The note is past due and will be settled upon consummation of our initial business combination. The note is required to be repaid in cash at the Closing and is not convertible into Private Warrants. As of December 31, 2023, a principal balance of $480,000 has been advanced. The promissory note was past due as of December 31, 2023 and on February 9, 2024, during the Closing of the 48 Table of Contents Business Combination, the unsecured promissory note was settled (see Note 10.) Refer to Note 5 of our financial statements. As of December 31, 2023, a principal balance of $480,000 had been advanced to Quantum. Through the date of this filing, the Co-Sponsors have advanced an aggregate total of $3,116,097 to Quantum. In connection with Quantum’s assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Accounting Standards Codification Subtopic 205-40, “Presentation of Financial Statements – Going Concern,” the liquidity of Quantum raises substantial doubt about its ability to continue as a going concern through the twelve months following the issuance of the financial statements. If Quantum 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 and reducing overhead expenses. Quantum cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all. Off-Balance Sheet Arrangements We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2023. 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 Quantum Ventures a monthly fee of $10,000 for office space, utilities and secretarial support. We began incurring these fees on February 4, 2021. We cancelled this agreement effective May 9, 2023. We engaged Chardan as an advisor in connection with a business combination to assist us in holding meetings with our stockholders to discuss the potential business combination and the target business’s attributes, introduce us to potential investors that are interested in purchasing our securities in connection with the potential business combination, assist us in obtaining stockholder approval for the business combination and assist us with our press releases and public filings in connection with the business combination. We agreed to pay Chardan a marketing fee for such services upon the consummation of our initial business combination in an amount equal to, 7,043,750, or 3.5% of the gross proceeds of the initial public offering, including the proceeds from the full exercise of the over-allotment option. On February 9, 2024, upon the Closing of the Business Combination, the $7,043,750 fee was waived in exchange for the issuance by AtlasClear Holdings to Chardan of the Chardan Note, as discussed above. Critical Accounting Policies The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. Derivative Liabilities We account for derivative instruments as either equity-classified or liability-classified instruments based on an assessment of the derivative instruments’ specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the derivative instruments are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the derivative instruments meet all of the requirements for equity classification under ASC 815, including whether the derivative instruments are indexed to our own Common Stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of issuance and as of each subsequent quarterly period end date while the warrants and the PIPE derivatives are outstanding. We have concluded that the public warrants should be classified as equity instruments, and the PIPE derivatives and the Private Warrants should be classified as liability instruments. For issued or modified derivatives that meet all of the criteria for equity classification, the derivatives are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified derivatives that do not meet all the criteria for equity classification, the derivatives are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the derivatives are recognized as a non-cash gain or loss on the statements of operations. 49 Table of Contents Common Stock Subject to Possible Redemption We account for our Common Stock subject to possible redemption in accordance with the guidance in ASC 480. Common Stock subject to mandatory redemption is classified as a liability instrument and measured at fair value. Conditionally redeemable Common Stock (including Common Stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) is classified as temporary equity. At all other times, Common Stock is classified as stockholders’ equity. Our Common Stock features certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events. Accordingly, all shares of Common Stock subject to possible redemption are presented at redemption value as temporary equity, outside of the stockholders’ deficit section of our consolidated balance sheets. Net Income Per Common Share Net income per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Accretion associated with the redeemable shares of Common Stock is excluded from income per common share as the redemption value approximates fair value. Recent Accounting Standards In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Since June 2016, the FASB issued clarifying updates to the new standard including changing the effective date for smaller reporting companies. The guidance is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2016-13 on January 1, 2023. The adoption of ASU 2016-13 did not have an impact on its financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”), which will require the Company to disclose specified additional information in its income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require the Company to disaggregate its income taxes paid disclosure by federal, state and foreign taxes, with further disaggregation required for significant individual jurisdictions. ASU 2023-09 will become effective for Annual periods beginning after December 15, 2024. The Company is still reviewing the impact of ASU 2023-09. Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our consolidated financial statements. ​ Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, we are not required to provide the information required by this Item. ​ Item 8. Financial Statements and Supplementary Data The consolidated financial statements required pursuant to this item are included in Part IV, Item 15 of this Annual Report on Form 10-K, beginning on page F-1. ​ Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. ​ 50 Table of Contents