Stellar Acquisition III (STLR), announced a number of amendments to their merger agreement with Phunware, earlier this morning.  Presumably, to aid in completing their combination.  Stellar, which has until December 26th to wrap things up, currently has a little more than $19 million held in trust ($19.49 million per their latest 10-Q).  We’ve laid out the changes below and tried to simplify the legal language where possible.

MINIMUM CASH ASSET LEVEL

The first change in the amendment reduces the minimum cash asset level that Stellar is required to maintain at the consummation of the closing from $40,000,000 to $19,000,000. This minimum cash asset level is less any redemptions and liabilities, but can include any backstop financings. Given that their current trust value is $19.49 million, they’re almost certainly going to need a backstop.

FORWARD PURCHASE CONTRACTS

Which brings us to a related change – forward purchase agreements.  Either Stellar or Phunware may arrange one or more forward purchase contracts with one or more investors (subject to the consummation of the business combination).   Furthermore, Stellar will agree to pay for the commitment fees for any such forward purchase contract, up to a maximum of $600,000, by delivering their founder shares as payment.

MERGER CONSIDERATION

The amendment also revised the merger consideration that the stockholders of Phunware are to receive to exactly $301,000,000. Prior to the Amendment, the base merger consideration of $301,000,000 was “subject to adjustment for the cash and cash equivalents, net of indebtedness, of Phunware and its subsidiaries as of the date of the Closing.”

TRANSFERRED SPONSOR WARRANTS

This is a little confusing so let’s first lay out the particulars from the amendment and then try to simplify it below.

The amendment also increased the aggregate number of private warrants that are currently held by the Sponsors (the “Transferred Sponsor Warrants”) that Stellar’s stockholders may elect to receive as Merger consideration from 929,890 to up to an aggregate of 3,985,244, but in no event less than 2,450,000.  A few things to note first:  One, “Stellar” here is the merger sub of Stellar Acquisition III. Two, if you recall, Stellar’s sponsors originally purchased 7,970,488 warrants at $0.50 at IPO (their at-risk capital).

Now, prior to the effective time of the Merger, Stellar shall purchase from the Sponsors a number of Transferred Sponsor Warrants equal to the greater of (A) 2,450,000 and (B) the total number of Transferred Sponsor Warrants that the holders of Phunware stock elect to receive. Furthermore, as consideration for the transfer of the Transferred Sponsor Warrants, Stellar shall issue to the Sponsors unsecured promissory notes equal to the number of Transferred Sponsor warrants purchased multiplied by $0.50.  $1,225,000 of the Transferred Sponsor Warrant Notes will be repaid at the Closing and the remaining balance will accrue interest at the lowest applicable federal rate and shall be payable in full on the first anniversary of the date of the Closing.

However, at any time prior to one business day before the Closing the Sponsors have the right to convert all or a part of the outstanding balance of the Transferred Sponsor Warrant Note in excess of $1,225,000 into shares of Stellar common stock effective upon the Closing. The Stellar common stock that the Sponsors receive on conversion of the Transferred Sponsor Warrant Note will not be subject to lock-ups or other transfer restriction and will be considered registrable securities under Stellar’s registration rights agreement with the Sponsors.

The Cliff’s Notes Version

To cut through all the legal noise, let’s try this is layman’s language – Stellar (the SPAC, which is also the merger sub) is going to purchase an increased number of “Tranferred Sponsor Warrants”, which are the warrants that the sponsor originally purchased at IPO (their at-risk capital purchase).  These warrant are essentially being “transferred” to Phunware.  As consideration to the Sponsors for transferring all of those warrants (their at-risk capital) Stellar is going to issue them an unsecured promissory note for however many are transferred multiplied by $0.50 (which is what they originally paid for those warrants). $1,225,000 of that note is going to be repaid at closing and the balance is going to earn interest until one year post-closing, when the Sponsors get the balance paid back. HOWEVER, the balance above $1,225,000 (that was going to earn interest for a year), the Sponsors can instead opt to convert those warrants into Stellar stock one day prior to closing.  And, those shares will not be subject to lock-up or transfer restriction and will have registration rights.

BOARD APPOINTMENTS

Lastly, The Amendment also changed the appointment to the classes of Stellar’s post-closing board.  Prior to this amendment, Stellar could designate two directors prior to closing as Class III directors, the longest serving class before reelection.   Now, Stellar will get to appoint one director, who will serve as a Class III director, and another as a Class I director, the shortest serving class before reelection.

So, in essence there’s something for everybody in the amendment.  A little for Phunware, a little for Stellar and now they can go find a backstop to get this deal done.  They have roughly seven weeks left until they run up on their deadline, so additional news on any forward purchasers should be forthcoming.