You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our audited financial statements
and related notes included in Part II, Item 8 of this Annual Report on Form
10-K. This discussion and other parts of this report contain forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. Our actual results could differ
materially from those discussed in these forward-looking statements. See
"Cautionary Note Regarding Forward-Looking Statements." Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in Item 1A "Risk Factors."
Overview
We are a blank check company incorporated in Delaware on August 31, 2020 for the
purpose of effecting a merger, capital stock exchange, asset acquisition, stock
purchase, reorganization or similar business combination with one or more
businesses, which we refer to as the initial business combination. We are not
limited to a particular industry or sector for purposes of consummating a
business combination. We are an "emerging growth company," as defined in Section
2(a) of the Securities Act, as modified by the JOBS Act, and, as such, we are
subject to all of the risks associated with early stage and emerging growth
companies.
Our sponsor is 5:01 Acquisition LLC, an entity affiliated with two of our
directors. The registration statement for our initial public offering, or IPO,
was declared effective October 13, 2020 and on October 16, 2020, we issued
8,000,000 shares of our Class A common stock (each, a public share and
collectively, the public shares) in our IPO at $10.00 per share, generating
gross proceeds of $80.0 million, and incurring offering costs of approximately
$4.9 million, inclusive of $2.8 million in deferred underwriting commissions.
The underwriter was granted a 45-day option from the date of the final
prospectus relating to the IPO to purchase up to 1,200,000 additional shares to
cover over-allotments, if any, at $10.00 per share. The underwriters partially
exercised the over-allotment option and on November 12, 2020 purchased an
additional 256,273 shares of Class A common stock, generating gross proceeds of
approximately $2.6 million, and incurred additional offering costs of
approximately $141,000 in underwriting fees (inclusive of approximately $90,000
in deferred underwriting fees).
Simultaneously with the closing of the IPO, we consummated the private placement
of 360,000 shares of Class A common stock (each, a private placement share and
collectively, the private placement shares), at a price of $10.00 per share to
our sponsor, generating proceeds of $3.6 million. Simultaneously with the
closing of the underwriters' over-allotment on November 12, 2020, we consummated
the second closing of the private placement, resulting in the purchase of an
aggregate of an additional 5,126 private placement shares by our sponsor,
generating gross proceeds to us of approximately $51,000.
Upon the closing of the IPO, the private placement and the partial exercise of
the underwriters' over-allotment, approximately $82.6 million ($10.00 per share)
of the net proceeds of the sale of the public shares in the IPO and of the
private placement shares in the private placement and to the underwriters' upon
partial exercise of the over-allotment option were placed in a trust account
located in the United States, and invested only in U.S. government treasury
bills, notes and bonds with a maturity of 185 days or less or in money market
funds meeting certain conditions under Rule 2a-7 under the Investment Company
Act and which invest solely in U.S. Treasuries, as determined by us, until the
earlier of: (i) the completion of a business combination and (ii) the
distribution of the trust account.
In addition, our sponsor agreed to forfeit up to 300,000 Class B common stock,
par value $0.0001, or the founder shares to the extent that the over-allotment
option is not exercised in full by the underwriters. The underwriters partially
exercised their over-allotment option on November 12, 2020; thus, on November
30, 2020, the remaining 235,932 shares of Class B common stock subject to
forfeiture were forfeited.
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If we are unable to complete a business combination within 24 months from the
closing of the IPO, or October 16, 2022, we will (i) cease all operations except
for the purpose of winding up, (ii) as promptly as reasonably possible but not
more than ten business days thereafter, redeem 100% of the outstanding public
shares (including any public shares sold in the IPO or any public shares or
shares that the initial stockholders or their affiliates purchased in the IPO or
later acquired in the open market or in private transactions), which redemption
will completely extinguish public stockholders' rights as stockholders
(including the right to receive further liquidation distributions, if any),
subject to applicable law, and (iii) as promptly as reasonably practicable
following such redemption, subject to the approval of the remaining holders of
common stock and the board of directors, proceed to commence a voluntary
liquidation and thereby a formal dissolution of our company, subject (in the
case of (ii) and (iii) above) to our obligations to provide for claims of
creditors and the requirements of applicable law.
Risks and Uncertainties
The full long-term impact of the COVID-19 pandemic continues to evolve. The
impact of the COVID-19 pandemic on our results of operations, financial position
and cash flows will depend on future developments, including the duration and
subsequent waves, including due to variants of the virus, of the pandemic and
related advisories and restrictions. These developments and the long-term impact
of the COVID-19 pandemic on the financial markets and the overall economy are
highly uncertain and cannot be predicted. If the financial markets and/or the
overall economy are impacted for an extended period, our results of operations,
financial position and cash flows may be materially adversely affected.
Additionally, our ability to complete an initial business combination, may be
materially adversely affected due to significant governmental measures being
implemented to contain the COVID-19 pandemic or treat its impact, including
travel restrictions, the shutdown of businesses and quarantines, among others,
which may limit our ability to have meetings with potential investors or affect
the ability of a potential target company's personnel, vendors and service
providers to negotiate and consummate an initial business combination in a
timely manner. Our ability to consummate an initial business combination may
also be dependent on the ability to raise additional equity and debt financing,
which may be impacted by the COVID-19 pandemic and the resulting market
downturn.
Results of Operations
Our entire activity since inception up to December 31, 2021 has been related to
our formation, IPO, which was consummated on October 16, 2020, and since the
IPO, our activity has been limited to the search for a prospective initial
business combination, and we will not be generating any operating revenues until
the closing and completion of our initial business combination. We expect to
continue to 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.
For the year ended December 31, 2021, we had a net loss of approximately $1.0
million, which consisted of approximately $847,000 in general and administrative
expenses, $200,000 in franchise tax expense, offset by approximately $11,000 in
interest income from investments held in the trust account.
For the period from August 31, 2020 (inception) through December 31, 2020, we
had a net loss of approximately $209,000, which consisted of approximately
$163,000 in general and administrative expenses, approximately $47,000 in
franchise tax expense, offset by approximately $480 in interest income from
investments held in the trust account.
Liquidity, Capital Resources and Going Concern
As of December 31, 2021, we had approximately $331,000 cash outside of the trust
account, approximately $11,000 of interest income available in the trust account
to pay for tax obligations and working capital of approximately $212,000.
Our material cash requirements as of December 31, 2021 were expenses resulting
from being a public company (for legal, financial reporting, accounting and
auditing compliance), as well as from due diligence.
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We did not have any near-term contractual obligations as of December 31, 2021.
Our liquidity needs to date have been satisfied through a capital contribution
of $20,000 from our sponsor to purchase the founder shares, the loan under a
promissory note of $300,000, which was repaid in full on October 16, 2020, and
the net 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 officers, directors and initial stockholders
may, but are not obligated to, provide working capital. As of December 31, 2021
and 2020, there were no amounts outstanding under any working capital loans. On
February 14, 2022, we entered into a promissory note ("2022 Note"), in favor of
our sponsor. The 2022 Note has an original principal amount of $1,000,000, is
non-convertible, does not bear interest, and will mature on the earlier of (i)
the winding up of our Company if our initial potential business combination has
not been consummated on or before the 24 month anniversary of the closing of our
initial public offering (as the same may be extended from time to time by the
vote of our stockholders) or (ii) the closing of an initial business
combination. The 2022 Note may be prepaid in whole or in part at any time. The
Note contains customary events of default, including, among others, those
relating to our Company's failure to make a payment of principal when due and to
perform any other obligations that is not timely cured after written notice of
such default from the sponsor.
In connection with our assessment of going concern considerations in accordance
with Financial Accounting Standards Board's ("FASB") Accounting Standards
Codification ("ASC") Topic 205-40, "Presentation of Financial Statements - Going
Concern," management has determined that the mandatory liquidation and
subsequent dissolution raises substantial doubt about the Company's ability to
continue as a going concern. No adjustments have been made to the carrying
amounts of assets or liabilities should the Company be required to liquidate
after October 16, 2022. The financial statements do not include any adjustment
that might be necessary if the Company is unable to continue as a going concern.
See Item 1. Business "Acquisition Strategy" for our continued course of action
to consummate an anticipated initial business combination.
Commitments and Contingencies
Registration Rights
The holders of founder shares and private placement shares are entitled to
registration rights pursuant to a registration and stockholder rights agreement.
The holders of these securities are entitled to make up to three demands that we
register such securities, subject to specified conditions. In addition, the
holders have certain "piggy-back" registration rights with respect to
registration statements filed subsequent to the consummation of the business
combination. We will bear the expenses incurred in connection with the filing of
any such registration statements. However, the registration and stockholder
rights agreement will provide that we will not be required to effect or permit
any registration or cause any registration statement to become effective until
termination of the applicable lock-up period.
Underwriting Agreement
The underwriter was entitled to an underwriting discount of $0.20 per share, or
$1.7 million in the aggregate, paid upon the closing of the IPO and partial
exercise of the over-allotment option. In addition, $0.35 per share, or $2.9
million in the aggregate will be payable to the underwriter for deferred
underwriting commissions. The deferred fee will become payable to the
underwriter from the amounts held in the trust account solely in the event that
we complete a business combination, subject to the terms of the underwriting
agreement.
Critical Accounting Estimates
This management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with United States generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities in our
financial statements. On an ongoing basis, we evaluate our estimates and
judgments, including those related to fair value of financial instruments and
accrued expenses. We base our estimates on historical experience, known trends
and events and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We did not make any material changes to these
assumptions for the year ended December 31, 2021. We do not expect any material
changes in the near term to the underlying assumptions during the year ended
December 31, 2022. We have identified the following as its critical accounting
estimates:
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Investments held in Trust Account
Our portfolio of investments held in trust is comprised solely of U.S.
government securities, within the meaning set forth in Section 2(a)(16) of the
Investment Company Act, with a maturity of 185 days or less, or investments in
money market funds that invest in U.S. government securities and generally have
a readily determinable fair value, or a combination thereof. When our
investments held in the Trust Account are comprised of U.S. government
securities, the investments are classified as trading securities. When our
investments held in the Trust Account are comprised of money market funds, the
investments are recognized at fair value. Trading securities are presented on
the balance sheets at fair value at the end of each reporting period. Gains and
losses resulting from the change in fair value of these investments in interest
income held in Trust Account in the accompanying statements of operations. The
estimated fair values of investments held in the Trust Account are determined
using available market information.
Class A Common Stock Subject to Possible Redemption
We account for our Class A common stock subject to possible redemption in
accordance with the guidance in FASB ASC Topic 480, "Distinguishing Liabilities
from Equity." Class A common stock subject to mandatory redemption (if any) is
classified as liability instruments and are measured at fair value.
Conditionally redeemable Class A common stock (including Class A 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) are classified as temporary equity. At all other times,
Class A common stock is classified as stockholders' equity (deficit). As part of
the Private Placement, we issued 365,126 shares of Class A common stock to the
Sponsor. These Private Placement Shares will not be transferable, assignable or
salable until 30 days after the completion of the initial business combination,
as such are considered non-redeemable and presented as permanent equity in our
balance sheets. Our Public Shares feature certain redemption rights that are
considered to be outside of our control and subject to the occurrence of
uncertain future events. Accordingly, at December 31, 2021 and 2020, 8,256,273
shares of Class A common stock subject to possible redemption is presented at
redemption value as temporary equity, outside of the stockholders' equity
(deficit) section of our balance sheets.
We recognize changes in redemption value immediately as they occur and adjust
the carrying value of redeemable common stock to equal the redemption value at
the end of each reporting period. Effective with the closing of the Initial
Public Offering (including the sale of Additional Shares), we recognized the
remeasurement of the Class A common stock subject to possible redemption from
initial book value to redemption amount value. The change in the carrying value
of Class A common stock subject to possible redemption resulted in charges
against additional paid-in capital and accumulated deficit.
Income Taxes
Our taxable income primarily consists of interest income on the Trust Account
net of franchise tax expenses. Our general and administrative expenses are
generally considered start-up costs and are not currently deductible. For the
year ended December 31, 2021 and for the period from August 31, 2020 (Inception)
through December 31, 2020, income tax expense for the period was deemed to be
immaterial.
We follow the asset and liability method of accounting for income taxes under
FASB ASC Topic 740, "Income Taxes" ("ASC 740"). Deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that included the
enactment date. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. As of December 31,
2021 and 2020, we had deferred tax assets of approximately $262,000 and $44,000,
respectively, which are presented net of a full valuation allowance.
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ASC 740 prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. For those benefits to be recognized, a tax
position must be more likely than not to be sustained upon examination by taxing
authorities. There were no unrecognized tax benefits as of December 31, 2021 and
2020. We recognize accrued interest and penalties related to unrecognized tax
benefits as income tax expense. Our currently taxable income primarily consists
of interest and dividends earned and unrealized gains on investments held in the
Trust Account, net of franchise tax expenses. No amounts were accrued for the
payment of interest and penalties as of December 31, 2021 and 2020. We are
currently not aware of any issues under review that could result in significant
payments, accruals or material deviation from our position. We are subject to
income tax examinations by major taxing authorities since inception.
Net Loss Per Common Stock
We have two classes of shares, Class A common stocks and Class B common stock.
Income and losses are shared pro rata between the two classes of shares. Net
loss per share of common stock is computed by dividing net loss by the
weighted-average number of common shares outstanding during the periods.
Accretion associated with the Class A common stock subject to possible
redemption is excluded from earnings per share as the redemption value
approximates fair value.
Recent Accounting Pronouncements
Our management does not believe that there are any other recently issued, but
not yet effective, accounting pronouncements, that if currently adopted, would
have a material effect on our balance sheet.
JOBS Act
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. We are electing to delay the adoption of new or
revised accounting standards, and as a result, we may not comply with new or
revised accounting standards on the relevant dates on which adoption of such
standards is required for non-emerging growth companies. As a result, the
financial statements may not be comparable to companies that comply with new or
revised accounting pronouncements as of public company effective dates.
Additionally, we are in the process of evaluating the benefits of relying on the
other reduced reporting requirements provided by the JOBS Act. Subject to
certain conditions set forth in the JOBS Act, if, as an "emerging growth
company," we choose to rely on such exemptions we may not be required to, among
other things, (i) provide an auditor's attestation report on our system of
internal control over financial reporting pursuant to Section 404, (ii) provide
all of the compensation disclosure that may be required of non-emerging growth
public companies under the Dodd-Frank Wall Street Reform and
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Consumer Protection Act, (iii) comply with any requirement that may be adopted
by the PCAOB, regarding mandatory audit firm rotation or a supplement to the
auditor's report providing additional information about the audit and the
financial statements (auditor discussion and analysis) and (iv) disclose certain
executive compensation related items such as the correlation between executive
compensation and performance and comparisons of the chief executive officer's
compensation to median employee compensation. These exemptions will apply for a
period of five years following the completion of our IPO or until we are no
longer an "emerging growth company," whichever is earlier.
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