ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
We are a blank check company formed as a Delaware corporation for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.
Effective December 22, 2022, Ka Wai Cheung, Koon Lin Chan, and Koon Keung Chan, Fortune Rise Sponsor LLC (the “Sponsor”), and Water On Demand, Inc., a Nevada corporation that controls our Sponsor (“WODI”), entered into a Membership Interest Purchase and Transfer Agreement pursuant to which they sold to WODI all right, title and interest in and to the membership interests held by each of Messrs. Cheung, Chan, and Chan in the Sponsor (an aggregate of 100 membership interests) for $400,000.
In addition, effective December 22, 2022, our Sponsor entered into a Securities Transfer Agreement with each of US Tiger Securities, Inc. (as designee of Lei Huang), Lei Xu, Yuanmei Ma, Norman C. Kristoff, David Xianglin Li, Michael Davidov, and Christy Szeto (the “Sellers”), pursuant to which the Sellers sold to the Sponsor an aggregate of 343,750 shares of Class B Common Stock for the purchase price of $3,506.25. Out of the issued and outstanding shares of Class B Common Stock, an aggregate of 100,000 shares remain owned by former management.
Lastly, on December 22, 2022, each of Koon Keung Chan, Lei Xu, and US Tiger Securities, Inc. assigned each of their promissory notes issued on November 4, 2022 in the aggregate amount of $733,750 to the Sponsor.
Since our inception, we have been actively searching for a suitable business combination target, and on October 24, 2023, we entered into a Business Combination Agreement (as it may be amended, supplemented or otherwise modified from time to time, the “BCA”) with FRLA Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary (the “Merger Sub”) and WODI.
We will effectuate our business combination using cash (subject to potential reduction of the trust account for the benefit of our public stockholders (the “Trust Account”) by stockholder redemptions) derived from the proceeds of (i) our initial public offering (the “IPO”), (ii) the sale of Common Stock (the “Private Placement Shares”) in a private placement (the “Private Placement”) to the Sponsor, and/or (iii) the issuance of additional shares, debt or a combination of shares and debt.
We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete a business combination will be successful. Our management has broad discretion with respect to the specific application of the proceeds of the IPO and the Private Placement that are held outside of the Trust Account, although substantially all the net proceeds are intended to be applied generally towards consummating a business combination and working capital.
Since our IPO, our sole business activity has been identifying and evaluating suitable acquisition transaction candidates. We presently have no revenue and have had losses since inception from incurring formation and operating costs. We have relied upon the sale of our securities and loans from the Sponsor and other parties to fund our operations.
Recent Developments
Extension of the Company’s Time to Consummate its Initial Business Combination
On November 4, 2022, an aggregate of $977,500 (the “First Extension Payment”) was deposited into our Trust Account for the public stockholders, representing $0.10 per public share, which enabled us to extend the period of time we had to consummate our initial business combination by three months from November 5, 2022 to February 5, 2023 (the “First Extension”). The First Extension was the first of the two three-month extensions permitted under our Amended and Restated Certificate of Incorporation prior to its amendment in April 2023. In connection with the First Extension Payment, we issued unsecured promissory notes (the “First Extension Notes”) to certain Initial Stockholders including (i) a note of $413,750 to Mr. Koon Keung Chan, the former manager of the Sponsor, (ii) a note of $150,000 to US Tiger Securities, and (iii) a note of $170,000 to Dr. Lei Xu, our former President and Chairwoman. The First Extension Notes were later assigned to our Sponsor on December 22, 2022.
On February 6, 2023, $977,500 (the “Second Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.10 per public share, which enabled us to extend the period of time we had to consummate our initial business combination by three months from February 5, 2023 to May 5, 2023 (the “Second Extension”). The Second Extension was the second and final of the two three-month extensions permitted under our Amended and Restated Certificate of Incorporation prior to its amendment in April 2023. In connection with the Second Extension Payment, we issued an unsecured promissory note (the “Second Extension Note”) to WODI.
On May 5, 2023, $330,064.50 (the “Third Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.0625 per public share, which enabled us to extend the period of time we had to consummate our initial business combination by one month from May 5, 2023 to June 5, 2023 (the “Third Extension”). The Third Extension was the first of the six one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in April 2023. In connection with the Third Extension Payment, we issued an unsecured promissory note (the “Third Extension Note”) to WODI.
On June 5, 2023, $100,000 (the “Fourth Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.027 per public share, which enabled us to extend the period of time we had to consummate our initial business combination by one month from June 5, 2023 to July 5, 2023 (the “Fourth Extension”). The Fourth Extension was the second of the six one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in April 2023. In connection with the Fourth Extension Payment, we issued an unsecured promissory note (the “Fourth Extension Note”) to WODI.
On July 5, 2023, $100,000 (the “Fifth Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.027 per public share, which enabled us to extend the period of time we had to consummate our initial business combination by one month from July 5, 2023 to August 5, 2023 (the “Fifth Extension”). The Fifth Extension was the third of the six one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in April 2023. In connection with the Fifth Extension Payment, we issued an unsecured promissory note (the “Fifth Extension Note”) to WODI.
On August 4, 2023, $100,000 (the “Sixth Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.027 per public share, which enabled us to extend the period of time we have to consummate our initial business combination by one month from August 5, 2023 to September 5, 2023 (the “Sixth Extension”). The Sixth Extension was the fourth of the six one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in April 2023. In connection with the Sixth Extension Payment, we issued an unsecured promissory note (the “Sixth Extension Note”) to WODI.
On September 5, 2023, $100,000 (the “Seventh Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.027 per public share, which enabled us to extend the period of time we have to consummate our initial business combination by one month from September 5, 2023 to October 5, 2023 (the “Seventh Extension”). The Seventh Extension was the fifth of the six one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in April 2023. In connection with the Seventh Extension Payment, we issued an unsecured promissory note (the “Seventh Extension Note”) to WODI.
On October 5, 2023, $100,000 (the “Eighth Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.027 per public share, which enabled us to extend the period of time we have to consummate our initial business combination by one month from October 5, 2023 to November 5, 2023 (the “Eighth Extension”). The Eighth Extension was the sixth of the six one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in April 2023. In connection with the Eighth Extension Payment, we issued an unsecured promissory note (the “Eighth Extension Note”) to WODI.
On November 6, 2023, $100,000 (the “Ninth Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.032 per public share, which enabled us to extend the period of time we have to consummate our initial business combination by one month from November 5, 2023 to December 5, 2023 (the “Ninth Extension”). The Ninth Extension was the first of the twelve one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in October 2023. In connection with the Ninth Extension Payment, we issued an unsecured promissory note (the “Ninth Extension Note”) to WODI.
On December 6, 2023, $100,000 (the “Tenth Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.032 per public share, which enabled us to extend the period of time we have to consummate our initial business combination by one month from December 5, 2023 to January 5, 2024 (the “Tenth Extension”). The Tenth Extension was the second of the twelve one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in October 2023. In connection with the Tenth Extension Payment, we issued an unsecured promissory note (the “Tenth Extension Note”) to WODI.
On January 5, 2024, $100,000 (the “Eleventh Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.032 per public share, which enabled us to extend the period of time we have to consummate our initial business combination by one month from January 5, 2024 to February 5, 2024 (the “Eleventh Extension”). The Eleventh Extension was the third of the twelve one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in October 2023. In connection with the Eleventh Extension Payment, we issued an unsecured promissory note (the “Eleventh Extension Note”) to WODI.
On February 5, 2024, $100,000 (the “Twelfth Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.032 per public share, which enabled us to extend the period of time we have to consummate our initial business combination by one month from February 5, 2024 to March 5, 2024 (the “Twelfth Extension”). The Twelfth Extension was the fourth of the twelve one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in October 2023. In connection with the Twelfth Extension Payment, we issued an unsecured promissory note (the “Twelfth Extension Note”) to WODI.
On March 5, 2024, $100,000 (the “Thirteenth Extension Payment”) was deposited into the Trust Account, for the public stockholders, representing $0.032 per public share, which enabled us to extend the period of time we have to consummate our initial business combination by one month from March 5, 2024 to April 5, 2024 (the “Thirteenth Extension”). The Thirteenth Extension was the fifth of the twelve one-month extensions permitted under our Amended and Restated Certificate of Incorporation after its amendment in October 2023. In connection with the Thirteenth Extension Payment, we issued an unsecured promissory note (the “Thirteenth Extension Note,” collectively with the First Extension Notes, the Second Extension Note, the Third Extension Note, the Fourth Extension Note, the Fifth Extension Note, the Sixth Extension Note, the Seventh Extension Note, the Eighth Extension Note, the Ninth Extension Note, the Tenth Extension Note, the Eleventh Extension Note, and the Twelfth Extension Note, herein referred to as the “Extension Notes”) to WODI.
The Extension Notes are non-interest bearing and payable (subject to the waiver against trust provisions) on the earlier of (i) consummation of our initial business combination and (ii) the date of our liquidation. The principal balance may be prepaid at any time, at our election. The holders of the Extension Notes have the right, but not the obligation, to convert their Extension Notes, in whole or in part, respectively, into private shares of our Class A Common Stock (the “Conversion Shares”), as described in our IPO prospectus (File Number 333-256511). The number of Conversion Shares to be received by the holders in connection with such conversion shall be an amount, up to $3,000,000, determined by dividing (x) the sum of the outstanding principal amount payable to such holders by (y) $10.00.
Extension of Business Combination Deadline
On March 3, 2023, our board of directors approved a stockholder proposal to amend our Amended and Restated Certificate of Incorporation to extend, upon the request of our Sponsor and approval by our board of directors, the period of time for us to (i) consummate a business combination, (ii) cease our operations if we fail to complete such business combination, and (iii) redeem or repurchase 100% of the public shares, up to six times, each by an additional month, for an aggregate of six additional months (i.e., from May 5, 2023 to up to November 5, 2023) or such earlier date as determined by the board of directors.
At our April 10, 2023 special meeting of stockholders, our stockholders approved the filing of an amendment to the Amended and Restated Certificate of Incorporation (the “First Amendment”) to extend, upon the request of our Sponsor, and approval by our board of directors, the period of time for us to (i) consummate a business combination, (ii) cease our operations if we fail to complete such business combination, and (iii) redeem or repurchase 100% of the public shares, up to six times, each by an additional month, for an aggregate of six additional months (i.e., from May 5, 2023 to up to November 5, 2023) or such earlier date as determined by the board of directors. As a result, on April 11, 2023, we filed the First Amendment with the Delaware Secretary of State. The stockholder vote to approve the First Amendment also triggered a redemption right for the holders of the public shares of Class A Common Stock. As a result of the First Amendment, 4,493,968 shares of Class A Common Stock were redeemed for a total redemption amount of $47,501,242. We have effected all six of those permitted monthly extensions.
As a result of our June 2, 2023 special meeting of stockholders, we filed with the Secretary of State of the State of Delaware an amendment to our Amended and Restated Certificate of Incorporation to amend the monthly extension amounts to be paid by the Sponsor (or its affiliates), to extend the period of time for us to consummate a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination involving us to be made upon the request of the Sponsor, and approval by our board of directors, from a previously amended price per unredeemed share of Class A Common Stock of $0.0625 to the lower of $100,000 or $0.05 per unredeemed share of Class A Common Stock.
At that June 2, 2023 special meeting of stockholders, the holders of 1,666,080 public shares properly exercised their right to redeem their shares (and did not withdraw their redemption) for cash at a redemption price of approximately $10.76 per share, for an aggregate redemption amount of $17,927,021. Following such redemptions, 3,614,952 public shares of Class A Common Stock remained outstanding.
At our October 25, 2023 special meeting of stockholders, the holders of 452,404 public shares properly exercised their right to redeem their shares (and did not withdraw their redemption) for cash at a redemption price of approximately $10.96 per share, for an aggregate redemption amount of $4,958,347. Following such redemptions, 3,162,548 public shares of Class A Common Stock remain outstanding. As of the date of this filing, we have effected five of those permitted twelve monthly extensions.
Results of Operations
Our entire activity from inception to date was related to our formation, the IPO and general and administrative activities. Since the IPO, our activity has been limited to the evaluation of business combination candidates, and we will not generate any operating revenues, if any, until the closing and completion of our initial business combination. We generate non-operating income in the form of money market fund dividend income earned on investments held in the Trust Account. We are incurring expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses.
For the year ended December 31, 2023, we had a net loss of $351,705 which consisted of dividend earned on investment held in Trust Account of $2,342,684, offset by formation and operating costs $2,060,089, franchise tax expenses of $138,050 and income tax provision of $496,250.
For the year ended December 31, 2022, we had a net loss of $47,609 which consisted of dividend earned on investment held in Trust Account of $1,466,677, offset by formation and operating costs $959,457, franchise tax expenses of $199,759 and income tax provision of $355,070.
Liquidity and Capital Resources
As of December 31, 2023, we had cash outside the Trust Account of $12,910 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 public shares of Common Stock. As of December 31, 2023, none of the amount on deposit in the Trust Account was available to be withdrawn as described above except for tax payments.
For the year ended December 31, 2023, there was $3,186,843 of cash used in operating activities resulting from net loss of $351,705, dividend earned on investment held in Trust Account amounting to $2,342,684, non-cash deferred tax benefit of $83,724, increase in prepaid expenses of $102,658, decrease in income tax payable of $271,346 and decrease in franchise tax payable of $199,759, offset by decrease in prepaid expenses – related party of $25,000, increase in due to a related party of $2,903, and increase in accounts payable and accrued expenses of $137,130.
For the year ended December 31, 2022, there was $689,068 of cash used in operating activities resulting from net loss of $47,609, dividend earned on investment held in Trust Account amounting to $1,466,677, increase in prepaid expenses – related party of $25,000, offset by non-cash deferred tax expense of $83,724, decrease in prepaid expenses of $183,500, increase in accounts payable and accrued expenses of $147,850, increase in income tax payable of $271,346 and increase in franchise tax payable of $163,798.
For the year ended December 31, 2023, there was $69,434,064 of cash provided by investing activities resulting from the withdrawal of an investment held in the Trust Account amounting to $71,441,629, offset by the purchase of an investment held in Trust Account amounting to $2,007,565.
For the year ended December 31, 2022, there was $769,539 of cash used in investing activities resulting from the purchase of an investment held in Trust Account amounting to $977,500, offset by the withdrawal of an investment held in the Trust Account amounting to $207,961.
For the year ended December 31, 2023, there was $66,406,625 of cash used in financing activities resulting from the Class A common stock redemptions of $70,386,610, offset by the proceeds from the issuance of promissory notes to a related party amounting to $3,979,985.
For the year ended December 31, 2022, there was $783,750 of cash provided by financing activities resulting from the proceeds from the issuance of promissory notes to a related party amounting to $733,750 and advances from a related party amounting to $50,000.
Until consummation of the business combination, we will use the funds held outside the Trust Account, and any additional funding that may be loaned to us by our 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 a 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, up to $3,000,000 of such loans may be convertible into shares of Class A Common Stock of the post business combination entity at a price of $10.00 per share of Class A Common Stock. In the event that the initial business combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts, but no proceeds from our Trust Account would be used for such repayment. The terms of such loans by our Initial Stockholders, officers and directors, if any, have not been determined and no written agreements exist with respect to such loans.
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.
In connection with our assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Accounting Standards Update (ASU) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that these conditions raise substantial doubt about our ability to continue as a going concern. Management’s plan in addressing this uncertainty is through the Promissory Notes – related parties and the Working Capital Loans. In addition, if we are unable to complete a business combination within the Combination Period by April 5, 2024 (or up to November 5, 2024, if the Company extends the time to complete a Business Combination), our board of directors would proceed to commence a voluntary liquidation and thereby a formal dissolution of the Company. There is no assurance that our plans to consummate a business combination will be successful within the Combination Period. As a result, management has determined that this additional condition also raises substantial doubt about our ability to continue as a going . The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements as of December 31, 2023 and 2022. 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 December 31, 2023 and 2022, we do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities. As of December 31, 2023 and 2022, we have $2,903 and $50,000, respectively, payable due to a related party. As of December 31, 2023 and 2022, we have $4,763,735 and $733,750, respectively, promissory notes issued to related parties.
We are obligated to pay the underwriters a deferred underwriters’ discount equal to 3.5% of the gross proceeds of the IPO. The deferred underwriters’ discount of $3,421,250 will become payable to the US Tiger Securities and EF Hutton, a division of Benchmark Investment LLC, the representatives of the several underwriters of the IPO (each, a “Representative”), from the amounts held in the Trust Account solely in the event that we complete a business combination.
Critical Accounting Estimates
Use of Estimates
The preparation of financial statements in conformity with U.S. 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 expenses during the reporting period. Actual results could differ from those estimates. The Company does not have any critical accounting estimates.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40).” The amendment in this ASU is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, the Board decided to reduce the number of accounting models for convertible debt instruments and convertible preferred stock per this ASU. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with prior GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. The amendments in this ASU are effective for public business entities that meet the definition of a Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. We have not early adopted the ASU, and it will become for us on January 1, 2024, as we are an emerging growth company. We believe that the adoption of this ASU would not have a material effect on our consolidated financial statements.
In December 2023, the FASB issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our consolidated financial statements and related disclosures.
Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on our consolidated financial statements.
