Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
All statements other than statements of historical fact included in this Report including, without limitation, statements in this section regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward- looking statements. When used in this Report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings with the SEC. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Report.
Overview
We are a blank check company formed under the laws of the State of Delaware on August 24, 2020 for the purpose of effecting a business combination.
Recent Developments
On January 11, 2023, we issued the Convertible Note to the sponsor, pursuant to which we may borrow up to an aggregate maximum amount of $2,500,000 from the sponsor to pay fees and expenses and for other general corporate purposes. Any advances under the Convertible Note shall be made at the sole discretion of the sponsor. The Convertible Note matures upon the earlier of (a) the satisfaction of all conditions set forth in Article 7 of that certain UEI Merger and Share Acquisition Agreement other than those conditions set forth in Article 7 that by their nature cannot be satisfied other than at the Closing (as defined in the Merger Agreement) and (b) the date that the winding up of the Company is effective. The Convertible Note does not bear interest.
On January 5, 2023, we borrowed $1,000,000 available to us under the Convertible Note. On February 17, 2023, we borrowed the remaining $1,500,000 available under the Convertible Note. As of March 30, 2023, we have borrowed the maximum principal amount of $2,500,000 available under the Convertible Note.
For more information of the Convertible Note, see “Item 13. Certain Relationships and Related Transactions, and Director Independence.”
UEI Business Combination
On October 15, 2021, we entered into the UEI Merger and Share Acquisition Agreement, which was amended on February 15, 2022 and March 30, 2022.
The UEI Merger and Share Acquisition Agreement provides that, among other things and upon the terms and subject to the conditions thereof, the following transactions will occur, following the Reorganization and the Subscription:
(a) at the UEI Closing, upon the terms and subject to the conditions of the UEI Merger and Share Acquisition Agreement and in accordance with the DGCL, Merger Sub will merge with and into the Company, the separate corporate existence of Merger Sub will cease and the Company will be the surviving corporation and a wholly owned subsidiary of UEI; and
(b) as a result of the UEI Merger, among other things, all outstanding shares of common stock of the Company immediately prior to the UEI Closing (except with respect to certain specified shares) will be converted into and shall for all purposes represent only the right to subscribe for and purchase, pursuant to the Subscription Agreement and a letter of transmittal and subscription confirmation, one validly issued, fully paid and non-assessable common share of UEI upon the exercise of such subscription right.
Our board of directors has unanimously (a) approved and declared advisable the UEI Merger and Share Acquisition Agreement and the UEI Business Combination and (b) resolved to recommend approval of the UEI Merger and Share Acquisition Agreement and related matters by the stockholders of the Company.
We have incurred and expect to continue to incur significant costs in the pursuit of the UEI Business Combination. We cannot assure you that our plans to raise capital or to complete the UEI Business Combination will be successful. For a full description of the UEI Merger and Share Acquisition Agreement and the proposed UEI Business Combination, please see “Item 1. Business.”
Extension
We originally had up to 24 months from the closing of our initial public offering, or until January 20, 2023, to consummate an initial business combination. However, at the 2022 Special Meeting held on December 14, 2022, our stockholders approved an amendment to our amended and restated certificate of incorporation to extend the date by which we must consummate our initial business combination from January 20, 2023 to October 20, 2023 (or such earlier date as determined by our board of directors). In connection with the Extension, stockholders holding 24,069,772 public shares exercised their right to redeem such shares for a pro rata portion of the trust account. We paid cash in the aggregate amount of $242.7 million , or approximately $10.08 per share to such redeeming stockholders. After such redemptions, as of December 31, 2022, we had 3,430,228 shares of Class A common stock subject to possible redemption.
Results of Operations
Our entire activity since inception up to December 31, 2022 relates to our formation, the IPO and, since the closing of the IPO, a search for a business combination candidate. We will not be generating any operating revenues until the closing and completion of our initial business combination, at the earliest.
For the year ended December 31, 2022, we had a net income of $7,258,882, which was comprised of unrealized gain on change in fair value of warrants of $8,107,773, interest income from investments held in our trust account of $3,765,624, and an unrealized loss on change in fair value of the working capital loan of $90,819, partially offset by formation and operating costs of $3,836,745 and provision for income tax of $868,589.
For the year ended December 31, 2021, we had a net income of $7,152,775, which was comprised of unrealized gain on change in fair value of warrants of $13,719,533 and interest income from investments held in our trust account of $16,371, offset by loss on sale of private placement warrants of $2,422,739, offering expenses related to warrant issuance of $1,021,001, and formation and operating costs of $3,139,389.
Liquidity, Capital Resources and Going Concern
As of December 31, 2022, we had $770,820 in our operating bank account and working capital deficit of $4,147,087.
Prior to the completion of the IPO, our liquidity needs had been satisfied through a payment from the sponsor of $25,000 for the founder shares to cover certain offering costs and the loan under an unsecured promissory note from the sponsor of $275,000. The promissory note from the sponsor was paid in full as of January 20, 2021. Subsequent to the consummation of the IPO and private placement, our liquidity needs have been satisfied through the proceeds from the consummation of the private placement not held in the trust account.
In addition, in order to finance transaction costs in connection with a business combination, our sponsor or an affiliate of the sponsor or certain of our officers and directors may, but are not obligated to, provide us Working Capital Loans. On December 8, 2021, we received $1,500,000 from the sponsor under the Working Capital Loans.
In connection with our assessment of going concern considerations in accordance with ASU Topic 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that if we are unable to raise additional funds to alleviate liquidity needs as well as complete a business combination by October 20, 2023, then we will cease all operations except for the purpose of liquidating. If a business combination is not consummated by this date and an extension has not been requested by the sponsor and approved by our stockholders, there will be a mandatory liquidation and subsequent dissolution of the Company. Management has determined that the mandatory liquidation, should a business combination not occur and an extension not requested by the sponsor, and potential subsequent dissolution raise substantial doubt about our ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should we be required to after October 20, 2023. We intend to continue to search for and seek to complete a business combination before the mandatory date.
Critical Accounting Policies and Estimates
The preparation of the 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 periods.
Making estimates requires management to exercise significant judgement. 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 one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates. One of the more significant accounting estimates included in these financial statements is the determination of the fair value of warrant liabilities.
We have identified the following as our critical accounting policies:
Common Stock Subject to Possible Redemption
We account for our Class A common stock subject to possible redemption in accordance with the guidance in ASC Topic 480-10-S99, “Classification and Measurement of Redeemable Securities” (“ASC 480-10-S99”). 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 Class A common stock features certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events. Accordingly, at December 31, 2022 and 2021, Class A common stock subject to possible redemption is presented at redemption value as temporary equity, outside of the stockholders’ deficit section of our balance sheets.
Under ASC 480-10-S99, we have elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of each reporting period. This method would view the end of the reporting period as if it were also the redemption date for the security. Immediately upon the closing of the IPO, we recognized the accretion from initial book value to redemption amount value. The change in the carrying value of redeemable Class A common stock resulted in charges against additional paid-in capital and accumulated deficit.
Convertible Working Capital Loan
We have elected the fair value option to account for our working capital loan with our sponsor. As a result of applying the fair value option, our records each draw at fair value with a gain or loss recognized at issuance, and subsequent changes in fair value are recorded as change in the fair value of working capital loan-related party on the statements of operations. The fair value is based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s and, if applicable, an independent third-party valuation firm’s own assumption about the assumptions a market participant would use in pricing the asset or liability.
Net Income per Share of Common Stock
We have two classes of stock, Class A common stock and Class B common stock. Earnings and losses are shared pro rata between the two classes of stock. The 21,250,000 shares of potential common stock for outstanding warrants to purchase our common stock were excluded from diluted earnings per share for the years ended December 31, 2022 and 2021 because the warrants are contingently exercisable, and the contingencies have not yet been met. As a result, diluted net income per common stock is the same as basic net income per common stock for the periods presented.
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We qualify as an “emerging growth company” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies.
Factors That May Adversely Affect our Results of Operations
Our results of operations and our ability to complete an initial business combination may be adversely affected by various factors that could cause economic uncertainty and volatility in the financial markets, many of which are beyond our control. Our business could be impacted by, among other things, downturns in the financial markets or in economic conditions, increases in oil prices, inflation, increases in interest rates, supply chain disruptions, declines in consumer confidence and spending, the ongoing effects of the COVID-19 pandemic, including resurgences and the emergence of new variants, and geopolitical instability, such as the military conflict in Ukraine. We cannot at this time fully predict the likelihood of one or more of the above events, their duration or magnitude or the extent to which they may negatively impact our business and our ability to complete an initial business combination.
