ADER 26 Capital Acquisition Corp. - 10-K

Item 1A.  Risk Factors.

As a smaller reporting company under Rule 12b-2 of the Exchange Act, we are not required to include risk factors in this Report. However, below is a partial list of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:

we are a blank check company with no revenue or basis to evaluate our ability to select a suitable business target;

we may not be able to complete our initial business combination in the prescribed time frame;

our expectations around the performance of a prospective target business or businesses may not be realized;

we may not be successful in retaining or recruiting required officers, key employees or directors following our initial business combination;

our officers and directors may have difficulties allocating their time between the Company and other businesses and may potentially have conflicts of interest with our business or in approving our initial business combination;

we may not be able to obtain additional financing to complete our initial business combination or reduce the number of stockholders requesting redemption;

we may issue our shares to investors in connection with our initial business combination at a price that is less than the prevailing market price of our shares at that time;

you may not be given the opportunity to choose the initial business target or to vote on the initial business combination;

trust account funds may not be protected against third party claims or bankruptcy;

an active market for our public securities may not develop and you will have limited liquidity and trading;

the availability to us of funds from interest income on the trust account balance may be insufficient to operate our business prior to the business combination;

our financial performance following a business combination with an entity may be negatively affected by their lack an established record of revenue, cash flows and experienced management;

there may be more competition to find an attractive target for an initial business combination, which could increase the costs associated with completing our initial business combination;

changes in the market for directors and officers liability insurance could make it more difficult and more expensive for us to negotiate and complete an initial business combination;

in addition to, or in lieu of, the UEI Business Combination, we may also attempt to simultaneously complete additional business combinations with multiple prospective targets, which may hinder our ability to complete the UEI Business Combination, or any other initial business combination, which could give rise to increased costs and risks that could negatively impact our operations and profitability;

we may engage one or more of our underwriters or one of their respective affiliates to provide additional services to us after the initial public offering, which may include acting as a financial advisor in connection with an initial business combination or as placement agent in connection with a related financing transaction. Our underwriters are entitled to receive deferred underwriting commissions that will be released from the trust account only upon a completion of an initial business combination. These financial incentives may cause them to have potential conflicts of interest in rendering any such additional services to us after the initial public offering, including, for example, in connection with the sourcing and consummation of an initial business combination;

the UEI Business Combination is with a private company about which little information is available. As a result, the UEI Business Combination or another potential initial business combination may result in a business combination with a company that is not as profitable as we suspected, if at all;

our warrants are accounted for as derivative liabilities and are recorded at fair value upon issuance with changes in fair value each period reported in earnings, which may have an adverse effect on the market price of our common stock or may make it more difficult for us to consummate an initial business combination;

since our initial stockholders will lose their entire investment in us if our initial business combination is not completed (other than with respect to any public shares they may acquire during or after the initial public offering), and because our sponsor, officers and directors may profit substantially even under circumstances in which our public stockholders would experience losses in connection with their investment, a conflict of interest may arise in determining whether a particular business combination target is appropriate for our initial business combination;

changes in laws or regulations or how such laws or regulations are interpreted or applied, or a failure to comply with any laws or regulations, may adversely affect our business, including our ability to negotiate and complete our initial business combination, and results of operations;

the value of the founder shares following completion of our initial business combination is likely to be substantially higher than the nominal price paid for them, even if the trading price of our common stock at such time is substantially less than $10.11 per share;

resources could be wasted in researching acquisitions that are not completed, which could materially adversely affect subsequent attempts to locate and acquire or merge with another business. If we have not completed our initial business combination within the required time period, our public stockholders may receive only approximately $10.11 per share, or less than such amount in certain circumstances, on the liquidation of our trust account and our warrants will expire worthless;

in March 2022, the SEC issued proposed rules relating to certain activities of SPACs. Certain of the procedures that we, a potential business combination target, or others may determine to undertake in connection with such proposals may increase our costs and the time needed to complete our initial business combination and may constrain the circumstances under which we could complete an initial business combination. The need for compliance with such proposals may cause us to liquidate the funds in the trust account or liquidate the Company at an earlier time than we might otherwise choose;

if we are deemed to be an investment company for purposes of the Investment Company Act, we would be required to institute burdensome compliance requirements and our activities would be severely restricted. As a result, in such circumstances, unless we are able to modify our activities so that we would not be deemed an investment company, we may abandon our efforts to complete an initial business combination and instead liquidate the Company;

to mitigate the risk that we might be deemed to be an investment company for purposes of the Investment Company Act, in January 2023 we instructed the trustee to liquidate the investments held in the trust account and instead to hold the funds in treasury funds until the earlier of the consummation of our initial business combination or our liquidation. As a result, following the liquidation of investments in the trust account, we would likely receive less interest on the funds held in the trust account, which would likely reduce the dollar amount our public stockholders would receive upon any redemption or liquidation of the Company;

we may not be able to complete an initial business combination with certain potential target companies if a proposed transaction with the target company may be subject to review or approval by regulatory authorities pursuant to certain U.S. or foreign laws or regulations, including the Committee on Foreign Investment in the United States;

recent increases in inflation and interest rates in the United States and elsewhere could make it more difficult for us to consummate an initial business combination;

military conflict in Ukraine or elsewhere may lead to increased price volatility for publicly traded securities, which could make it more difficult for us to consummate an initial business combination;

a 1% U.S. federal excise tax may be imposed on us in connection with our redemptions of shares in connection with a business combination or other stockholder vote pursuant to which stockholders would have a right to submit their shares for redemption;

there is substantial doubt about our ability to continue as a “going concern;” and

we have identified a material weakness in our internal control over financial reporting as of December 31, 2022. If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business and operating results.

Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions, could adversely affect our business, financial condition or results of operations, or our prospects.

The funds in our operating account and our trust account are held in banks or other financial institutions. Our cash held in non-interest bearing and interest-bearing accounts would exceed any applicable Federal Deposit Insurance Corporation (“FDIC”) insurance limits. Should events, including limited liquidity, defaults, non-performance or other adverse developments occur with respect to the banks or other financial institutions that hold our funds, or that affect financial institutions or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, our liquidity may be adversely affected. For example, on March 10, 2023, the FDIC announced that Silicon Valley Bank had been closed by the California Department of Financial Protection and Innovation. Although we did not have any funds in Silicon Valley Bank or other institutions that have been closed, we cannot guarantee that the banks or other financial institutions that hold our funds will not experience similar issues.

In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on terms favorable to us in connection with a potential business combination, or at all, and could have material adverse impacts on our liquidity, our business, financial condition or results of operations, and our prospects.

For the complete list of risks relating to our operations, see the section titled “Risk Factors” contained in (i) our IPO Registration Statement, (ii) our Quarterly Report on Form 10-Q for the quarterly period ending September 30, 2022, as filed with the SEC on November 14, 2022, and (iii) our Definitive Proxy Statement on Schedule 14A, as filed with the SEC on November 22, 2022. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risks could arise that may also affect our business or ability to consummate an initial business combination. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

For risks relating to the UEI Business Combination, see the UEI Registration Statement once filed.

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 liquidate after October 20, 2023. We intend to continue to search for and seek to complete a business combination before the mandatory liquidation 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.