Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
References to the “Company”, “us”, “our”, or “we” refer to Blue World Acquisition Corporation. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes herein.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Special Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
We are a blank check exempted company incorporated in the Cayman Islands on July 19, 2021 with limited liability (meaning our public shareholders have no liability, as shareholders of the Company, for the liabilities of the Company over and above the amount paid for their shares) to serve as a vehicle to effect a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or similar business combination with one or more target businesses (the “Business Combination”). Our efforts to identify a prospective target business will not be limited to a particular industry or geographic location. We intend to utilize cash derived from the proceeds of our initial public offering (the “IPO”), our securities, debt or a combination of cash, securities and debt, in effecting a business combination.
We presently have no revenue, have had losses since inception from incurring formation and operating costs and have had no operations other than identifying and evaluating suitable acquisition transaction candidates. We have relied upon the working capital available to us following the consummation of the IPO and the Private Placement (as defined below) to fund our operations, as well as the funds loaned by the Sponsor (as defined below), our officers, directors or their affiliates.
On February 2, 2022, we consummated the IPO of 9,200,000 units (the “Units”), which included 1,200,000 Units issued upon the full exercise of the underwriter’s over-allotment option. Each Unit consists of one Class A ordinary share, $0.0001 par value per share (the “Class A Ordinary Share”), one-half of one redeemable warrant (the “Warrants”), each whole Warrant entitling the holder thereof to purchase one Class A Ordinary Share at an exercise price of $11.50 per share, and one right (the “Right”), each one Right entitling the holder thereof to exchange for one-tenth of one Class A Ordinary Share upon the completion of our initial Business Combination. The Units were sold at an offering price of $10.00 per Unit, generating gross proceeds of $92,000,000.
On February 2, 2022, simultaneously with the consummation of the IPO, we completed the private sale (the “Private Placement”) of 424,480 units (the “Private Units”) including 378,480 Private Units to our sponsor, Blue World Holdings Limited (the “Sponsor”), and 46,000 Private Units to Maxim Group LLC (“Maxim”), the sole underwriter of the IPO, respectively, at a purchase price of $10.00 per Private Unit, generating gross proceeds to us of $4,244,800.
The proceeds of $ 92,920,000 ($10.10 per Unit) in the aggregate from the IPO and the Private Placement, were placed in a trust account (the “Trust Account”) established for the benefit of our public shareholders and the underwriter of the IPO with Continental Stock Transfer & Trust Company acting as trustee.
Our management has broad discretion with respect to the specific application of the net proceeds of IPO and the Private Placements, although substantially all of the net proceeds are intended to be applied generally towards consummating a Business Combination.
Recent Development
We initially had until February 2, 2023 to consummate our initial Business Combination. Upon the notice of the Sponsor, we extended the period of time to consummate a Business Combination for additional three months till May 2, 2023 (the “First Extension”) and deposited $920,000 into the Trust Account in connection with this First Extension sourced from the loans provided by the Sponsor as evidenced by the Extension Note (as defined below). However, if we anticipate that we may not be able to consummate our initial Business Combination by May 2, 2023, we may, but are not obligated to, further extend the period of time to consummate a Business Combination another two times by an additional three months each time by depositing $920,000 into the Trust Account for each extension and may have until November 2, 2023 to consummate our initial Business Combination.
On May 2, 2023, the Company held a special meeting of shareholders (the “May 2023 Meeting”) at which the shareholders approved the adoption of the second amended and restated memorandum and articles of association of the Company, which provides that the Company has until May 2, 2023 to complete a Business Combination, and may elect to extend the period to consummate a Business Combination up to nine times, each by an additional one-month extension (the “Monthly Extension”), for a total of up to nine months to February 2, 2024 by depositing $0.0295 per public share into the Trust Account for each Monthly Extension. As a result of the May 2023 Meeting, upon the shareholders’ approval, on May 2, 2023, the Company and Continental Stock Transfer & Trust Company, as the trustee of the Trust Account, entered into the amendment to the Investment Management Trust Agreement dated January 31, 2022. In connection with the May 2023 Meeting, 2,612,769 Class A Ordinary Shares were rendered for redemption and approximately $27.4 million was released from the Trust Account to pay such redeeming stockholders.
On May 2, 2023, a total of $194,324 was deposited into the Trust Account for the public shareholders, representing $0.0295 per remaining public share, which enables the Company to extend the period of time it has to consummate its initial business combination by one month from May 2, 2023 to June 2, 2023.
On June 2, 2023, a total of $194,324 was deposited into the Trust Account for the public shareholders, representing $0.0295 per remaining public share, which enables the Company to extend the period of time it has to consummate its initial business combination by one month from June 2, 2023 to July 2, 2023.
On June 30, 2023, the Company held an extraordinary general meeting (the “June 2023 Meeting”), where the shareholders of the Company approved the adoption of the Third Amended and Restated Memorandum and Articles of Association of Bule World, which provides that the Company has until July 2, 2023 to complete a business combination, and may elect to extend the period to consummate a Business Combination up to nine times, each by an additional one-month extension, for a total of up to nine months to April 2, 2024, by depositing $60,000 each month to the Trust Account. As a result of June 2023 Meeting, upon the shareholders’ approval, on June 30, 2023, the Company and Continental Stock Transfer & Trust Company, as the trustee of the Trust Account entered into the amendment to the Trust Agreement. In connection with the June 2023 Meeting, 2,749,465 Class A Ordinary Shares were rendered for redemption, and approximately $29.3 million was released from the Trust Account to pay such redeeming shareholders.
On June 30, 2023, a total of $60,000 of the Monthly Extension Payment was deposited into the Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial business combination by one month from July 2, 2023 to August 2, 2023.
On July 31, 2023, a total of $60,000 of the Monthly Extension Payment was deposited into the Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial business combination by one month from August 2, 2023 to September 2, 2023.
On September 1, 2023, a total of $60,000 of the Monthly Extension Payment was deposited into the Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial business combination by one month from September 2, 2023 to October 2, 2023.
On September 27, 2023, a total of $60,000 of the Monthly Extension Payment was deposited into the Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial business combination by one month from October 2, 2023 to November 2, 2023.
At the June 2023 Meeting, among the other proposals, the shareholders of the Company also approved the release of the funds held in the Escrow Account pursuant to the D&O Indemnity Escrow Agreement, by and between the Company and Continental Stock Transfer & Trust Company, as escrow agent, on July 2, 2023 or such a later date immediately following the purchase of an alternative D&O insurance. Upon the approval of the shareholders of the Company to release the funds held in the Escrow Account pursuant to the D&O Indemnity Escrow Agreement, the Company secured an alternative D&O insurance, effective on July 1, 2023. On July 4, 2023, a total of $500,000 funds held in the Escrow Account was released to Blue World, a portion of which was used to purchase the alternative D&O insurance.
Merger Agreement
On August 10, 2023, the Company entered into an Agreement and Plan of Merger (as the same may be amended, restated or supplemented, the “Merger Agreement”) with TOYO Co., Ltd, a Cayman Islands exempted company (“PubCo”), TOYOone Limited, a Cayman Islands exempted company (“Merger Sub”), TOPTOYO INVESTMENT PTE. LTD., a Singapore private company limited by shares (“SinCo”), Vietnam Sunergy Cell Company Limited, a Vietnamese company, (the “Company”, together with PubCo, Merger Sub and SinCo, the “Group Companies”, or each individually, a “Group Company”), Vietnam Sunergy Joint Stock Company, a Vietnam joint stock company (“VSUN”), and Fuji Solar Co., Ltd, a Japanese company (“Fuji Solar”, together with VSUN, the “Shareholders”, or individually, a “Shareholder”).
Pursuant to the Merger Agreement, (a) the Group Companies, VSUN and Fuji Solar shall consummate a series of transactions involving the Group Companies, including (A) PubCo acquiring one hundred percent (100%) of the issued and paid-up share capital of SinCo from Fuji Solar in exchange for one (1) ordinary share of PubCo, par value US$0.0001 per share (the “PubCo Ordinary Shares” and such transaction, the “Share Exchange”), and (B) SinCo acquiring one hundred percent (100%) of the issued and outstanding shares of capital stock of the Company from VSUN at an aggregate consideration of no less than US$50,000,000 (the “SinCo Acquisition,” and together with the Share Exchange, the “Pre-Merger Reorganization”), as a result of which (i) SinCo shall become a wholly-owned subsidiary of PubCo, (ii) the Company shall become a wholly-owned subsidiary of SinCo; and (iii) immediately prior to the closing of the SinCo Acquisition, Fuji Solar (the “Seller”) shall hold an aggregate of 41,000,000 PubCo Ordinary Shares, representing all issued and outstanding share capital of PubCo, and (b) following the consummation of the Pre-Merger Reorganization, BWAQ shall merge with and into Merger Sub, with Merger Sub continuing as the surviving company (the “Merger”), as a result of which, among other things, all of the issued and outstanding securities of BWAQ immediately prior to the filing of the plan of merger with respect to the Merger (the “Plan of Merger”) to the Registrar of Companies of the Cayman Islands, or such later time as may be specified in the Plan of Merger (the “Merger Effective Time”) shall no longer be outstanding and shall automatically be cancelled, in exchange for the right of the holders thereof to receive substantially equivalent securities of PubCo, in each case, upon the terms and subject to the conditions set forth in the Merger Agreement and in accordance with the provisions of the Companies Act (Revised) of the Cayman Islands and other applicable laws.
Results of Operations
We have neither engaged in any operations nor generated any operating revenues to date. Our only activities from inception through June 30, 2023 were organizational activities and those necessary to prepare for the IPO, described below. We do not expect to generate any operating revenues until after the completion of our initial Business Combination. We expect to generate non-operating income in the form of interest income on marketable securities held after the IPO. We expect that we will incur increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses in connection with searching for, and completing, a Business Combination.
For the year ended June 30, 2023, we had a net income of $2,181,905, which mainly consisted of dividend earned on investment held in the Trust Account of $3,169,667 and interest income of $9 offset by formation and operations costs of $987,771.
For the period from July 19, 2021 (inception) through June 30, 2022, we had a net loss of $246,892, which consists of formation and operating costs of $230,926 and share-based compensation expense of $150,379, offset by dividend earned on marketable securities held in the Trust Account of $134,401 and interest income of $12.
Liquidity and Capital Resources
As of June 30, 2023, we had cash outside the Trust Account of $746 available for working capital needs. All remaining cash is held in the Trust Account and is generally unavailable for our use, prior to an initial Business Combination, and is restricted for use either in a Business Combination or to redeem the ordinary shares. As of June 30, 2023, none of the amount on deposit in the Trust Account was available to be withdrawn as described above.
For the year ended June 30, 2023, net cash used in operating activities was $778,975 resulted from non-cash dividend earned on investment held in Trust Account of $3,169,667 and increase in prepaid expenses of $1,916, and offset by net income of $2,181,905, increase in accounts payable and accrued expenses of $167,199, and increase in due to related parties of $43,504.
For the period from July 19, 2021 (inception) through June 30, 2022, net cash used in operating activities was $182,126 resulted from net loss of $246,892, non-cash dividend earned on investment held in Trust Account of $134,401, and increase in prepaid expenses of $33,946, and offset by share-based compensation expense of $150,379, increase in accounts payable and accrued expenses of $62,734, and increase in due to related parties of $20,000.
For the year ended June 30, 2023, net cash provided by investing activities was $26,037,507 resulted from the withdrawals of investment held in Trust Account of $1,368,648 offset by the purchases of investment held in Trust Account of $27,406,155.
For the period from July 19, 2021 (inception) through June 30, 2022, net cash used in investing activities was $92,920,000 resulted from the purchases of investment held in Trust Account.
For the year ended June 30, 2023, net cash used in financing activities was $25,534,070 resulted from the redemption of Class A Ordinary Shares of $27,406,155 offset by the proceeds from issuance of promissory notes to a related party of $1,872,085.
For the period from July 19, 2021 (inception) through June 30, 2022, net cash provided by financing activities was $93,378,410 resulted from proceeds from sale of Public Units through the IPO, net of underwriters’ discount of $90,160,000, proceeds from sale of Private Units of $4,244,800, proceeds from issuance of promissory notes to a related party of $287,547, offset by repayments of promissory note to a related party of $287,547, payments of offering costs of $526,390 and deposits made to an Escrow Account of $500,000.
Promissory Notes - Related Party
On November 30, 2022, the Company issued an unsecured promissory note (the “Sponsor Note 1”) in the principal amount of $400,000 to the Sponsor. The proceeds of the Sponsor Note 1 was used as general working capital purposes.
On January 31, 2023, the Company issued an unsecured promissory note (the “Extension Note 1”) in the principal amount of $920,000 to the Sponsor. The proceeds of the Extension Note 1 was deposited into the Company’s Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial Business Combination by three months from February 2, 2023 to May 2, 2023.
On May 2, 2023, the Company issued an unsecured promissory note (the “Extension Note 2”) in the principal amount of $194,324 to the Sponsor. The proceeds of the Extension Note 2 was deposited into the Company’s Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial Business Combination from May 2, 2023 to June 2, 2023.
On June 2, 2023, the Company issued an unsecured promissory note (the “Extension Note 3”) in the principal amount of $194,324 to the Sponsor. The proceeds of the Extension Note 3 was deposited into the Company’s Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial Business Combination from June 2, 2023 to July 2, 2023.
On June 30, 2023, the Company issued an unsecured promissory note (the “Extension Note 4”) in the principal amount of $60,000 to the Sponsor. The proceeds of the Extension Note 4 was deposited into the Company’s Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial Business Combination from July 2, 2023 to August 2, 2023.
On July 31, 2023, the Company issued an unsecured promissory note (the “Extension Note 5”) in the principal amount of $60,000 to the Sponsor. The proceeds of the Extension Note 5 was deposited into the Company’s Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial Business Combination from August 2, 2023 to September 2, 2023.
On July 31, 2023, the Company issued an unsecured promissory note (the “Sponsor Note 2,” together with the Sponsor Note 1, collectively, the “Sponsor Notes”) in the principal amount of $120,000 to the Sponsor. The proceeds of the Sponsor Note 2, which may be drawn down from time to time until the Company consummates its initial business combination, will be used as general working capital purposes. As of June 30, 2023, the Company has drawn down $103,437 prior to the issuance of the Sponsor Note 2 on July 31, 2023.
On September 1, 2023, the Company issued an unsecured promissory note (the “Extension Note 6”) in the principal amount of $60,000 to the Sponsor. The proceeds of the Extension Note 6 was deposited into the Company’s Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial Business Combination from September 2, 2023 to October 2, 2023.
On September 28, 2023, the Company issued an unsecured promissory note (the “Extension Note 7,” together with Extension Note 1, 2, 3, 4, 5 and 6, collectively, the “Extension Notes”) in the principal amount of $60,000 to the Sponsor. The proceeds of the Extension Note 7 was deposited into the Company’s Trust Account for the public shareholders, which enables the Company to extend the period of time it has to consummate its initial Business Combination from October 2, 2023 to November 2, 2023.
The Extension Notes together with the Sponsor Notes (collectively refer herein as “Promissory Notes”) issued to the Sponsor have the same payment and conversion term as discussed below.
The Promissory Notes bear no interest and are payable in full upon the earlier to occur of (i) the consummation of the Business Combination or (ii) the date of expiry of the term of the Company (the “Maturity Date”). The following shall constitute an event of default: (i) a failure to pay the principal within five business days of the Maturity Date; (ii) the commencement of a voluntary or involuntary bankruptcy action, (iii) the breach of the Company’s obligations thereunder; (iv) any cross defaults; (v) an enforcement proceedings against the Company; and (vi) any unlawfulness and invalidity in connection with the performance of the obligations thereunder, in which case the Promissory Notes may be accelerated.
The payee of the Promissory Notes, the Sponsor, has the right, but not the obligation, to convert the Promissory Notes, in whole or in part, respectively, into private units (the “Conversion Units”) of the Company, each consisting of one Class A Ordinary Share, one-half of one warrant, and one right to receive one-tenth (1/10) of one Class A Ordinary Share upon the consummation of a Business Combination, as described in the prospectus of the Company (File Number 333-261585), by providing the Company with written notice of the intention to convert at least two business days prior to the closing of the Business Combination. The number of Conversion Units to be received by the Sponsor in connection with such conversion shall be an amount determined by dividing (x) the sum of the outstanding principal amount payable to such Payee by (y) $10.00.
Until consummation of the Business Combination, we will be using the funds not held in the Trust Account, and any additional funding that may be loaned to us by the Sponsor, for identifying and evaluating prospective acquisition candidates, performing business due diligence on prospective target businesses, traveling to and from the offices, plants or similar locations of prospective target businesses, reviewing corporate documents and material agreements of prospective target businesses, selecting the target business to acquire and structuring, negotiating and consummating the Business Combination.
If our estimates of the costs of undertaking in-depth due diligence and negotiating Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to the Business Combination and will need to raise additional capital. In this event, our officers, directors or their affiliates may, but are not obligated to, loan us funds as may be required. If we consummate an initial Business Combination, we would repay such loaned amounts out of the proceeds of the Trust Account released to us upon consummation of the Business Combination, or, at the lender’s discretion, such loans may be convertible into units of the post Business Combination entity at a price of $10.00 per unit.
Moreover, we may need to obtain additional financing either to consummate our initial Business Combination or because we become obligated to redeem a significant number of our Public Shares upon consummation of our initial Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination. Subject to compliance with applicable securities laws, we would only consummate such financing simultaneously with the consummation of our initial Business Combination. Following our initial Business Combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations.
As of June 30, 2023 and 2022, the Company had borrowings of $1,872,085 and $0 under the Promissory Notes, respectively.
Due to Related Parties
From time to time, Mr. Liang Shi, the Company’s Director, Chief Executive Officer, Secretary and Chairman, would incur travel costs to search for targets. As of June 30, 2023, due to Mr. Liang Shi amounted to $3,504.
Administrative Services Agreement
The Company is obligated, commencing from the effective date of the Initial Public Offering to pay the Sponsor, a monthly fee of $10,000 for general and administrative services. This agreement was signed by the Company and the Sponsor on January 31, 2022 and it will terminate upon completion of the Company’s Business Combination or the liquidation of the Trust Account to public shareholders. The Company has recognized operating costs under the Administrative Services Agreement in the amount of $120,000 and $50,000 for the year ended June 30, 2023 and for the period from July 19, 2021 (inception) through June 30, 2022, respectively. As of June 30, 2023 and 2022, the Company had $60,000 and $20,000, respectively, accrued under the Administrative Services Agreement due to the Sponsor.
Off-Balance Sheet Financing Arraignments
We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements as of June 30, 2023. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Contractual Obligations
As of June 30, 2023, we do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities.
We are obligated to pay Maxim a deferred underwriters’ discount equal to 3.5% of the gross proceeds of the IPO and the underwriter’s full exercise of the over-allotment. The deferred underwriter’s discount of $3,220,000 will become payable to Maxim from the amounts held in the Trust Account solely in the event that we complete a Business Combination.
The founder shares, the Class A Ordinary Shares included in the Private Units, and any Class A Ordinary Shares that may be issued upon conversion of working capital loans (and any underlying securities) will be entitled to registration rights pursuant to a registration and shareholder rights agreement entered into in connection with the IPO. The holders of these securities are entitled to make up to three demands, excluding short form demands, that we register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to our completion of the initial Business Combination. We will bear the expenses incurred in connection with the filing of any such registration statements.
Critical Accounting Policies, Judgments and Estimates
Use of estimates
In preparing the financial statements in conformity with U.S. GAAP, management makes 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 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 confirming events. Accordingly, Actual results may differ from these estimates.
Investments held in Trust Account
As of June 30, 2023, the assets held in the Trust Account were held in money market funds, which are invested in U.S. Treasury securities.
We classify our U.S. Treasury and equivalent securities as held-to-maturity in accordance with ASC Topic 320 “Investments — Debt and Equity Securities.” Held-to-maturity securities are those securities which we have the ability and intent to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost on the accompanying balance sheet and adjusted for the amortization or accretion of premiums or discounts.
Convertible Promissory Note
We account for our convertible promissory notes as debt (liability) on the balance sheet based on an assessment of the embedded conversion feature (see Note 5 — Related Party Transactions) and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). The assessment considers the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity.
Class A ordinary shares subject to possible redemption
We account for our ordinary shares subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Ordinary shares subject to mandatory redemption are classified as a liability instrument and are measured at fair value. Conditionally redeemable ordinary shares (including ordinary shares that feature 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) are classified as temporary equity. At all other times, ordinary shares are classified as shareholders’ equity.
Warrants
We account for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity” (“ASC 480”), and ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of our control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of equity at the time of issuance. As our warrants meet all of the criteria for equity classification, so we will classify each warrant as its own equity.
Fair Value of Financial Instruments
The fair value of our assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheet, primarily due to its short-term nature.
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Our financial instruments are classified as either Level 1, Level 2 or Level 3. These tiers include:
Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Income Taxes
Income taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Our management determined that the Cayman Islands is our major tax jurisdiction. We recognize accrued interest and penalties related to unrecognized tax benefits, if any, as income tax expense.
We are considered to be an exempted Cayman Islands company, and are presently not subject to income taxes or income tax filing requirements in the Cayman Islands or the United States.
Net Income (Loss) per Share
We have two classes of shares, which are referred to as redeemable ordinary shares and non-redeemable ordinary shares. Earnings and losses are shared pro rata between the two classes of shares.
Recent Accounting Pronouncements
In August 2020, the FASB issued a new standard (ASU 2020-06) to reduce the complexity of accounting for convertible debt and other equity-linked instruments. For certain convertible debt instruments with a cash conversion feature, the changes are a trade-off between simplifications in the accounting model (no separation of an “equity” component to impute a market interest rate, and simpler analysis of embedded equity features) and a potentially adverse impact to diluted earnings per share by requiring the use of the if-converted method. The new standard will also impact other financial instruments commonly issued by both public and private companies. For example, the separation model for beneficial conversion features is eliminated simplifying the analysis for issuers of convertible debt and convertible preferred stock. Also, certain specific requirements to achieve equity classification and/or qualify for the derivative scope exception for contracts indexed to an entity’s own equity are removed, enabling more freestanding instruments and embedded features to avoid mark-to-market accounting. The new standard is effective for companies that are SEC filers (except for smaller reporting companies) for fiscal years beginning after December 15, 2021 and interim periods within that year, and two years later for other companies. Companies can early adopt the standard at the start of a fiscal year beginning after December 15, 2020. The standard can either be adopted on a modified retrospective or a full retrospective basis. The adoption of ASU 2020-06 on July 1, 2022 did not have a material effect on our financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on our financial statements.
