References in this report (the "Quarterly Report") to "we," "us" or the "Company" refer to AF Acquisition Corp. References to our "management" or our "management team" refer to our officers and directors, and references to the "Sponsor" refer to AF Sponsor LLC. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the unaudited condensed financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes "forward-looking statements" that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company's final prospectus for its Initial Public Offering (as defined below) filed with the U.S. Securities and Exchange Commission (the "SEC"). The Company's securities filings can be accessed on the EDGAR section of the SEC's website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.





Overview

We are a blank check company incorporated on January 12, 2021 as a Delaware corporation and formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. We have not selected any specific business combination target and we have not, nor has anyone on our behalf, engaged in any substantive discussions, directly or indirectly, with any business combination target with respect to an initial business combination with us. We intend to effectuate our initial business combination using cash from the proceeds of our Initial Public Offering and the sale of the private placement warrants, our capital stock, debt or a combination of cash, stock and debt.





Results of Operations

We have neither engaged in any operations nor generated any operating revenues to date. Our only activities for the period from January 12, 2021 (inception) through June 30, 2022 were organizational activities, those necessary to prepare for the Initial Public Offering, described below, and, after our Initial Public Offering, identifying a target company for a business combination. We intend to effectuate our initial business combination using cash from the proceeds of our Initial Public Offering and the private placement of the private placement warrants, the proceeds of the sale of our shares in connection with our initial business combination (pursuant to forward purchase agreements or backstop agreements we may enter into following the consummation of our Initial Public Offering or otherwise), shares issued to the owners of the target, debt issued to bank or other lenders or the owners of the target, or a combination of the foregoing.





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For the three months ended June 30, 2022, we had net income of $1,335,230, which resulted from a gain on the change in fair value of warrant liabilities of $1,389,533, unrealized gain on investments held in Trust Account of $319,683, and interest income of $3, partially offset by operating and formation costs of $324,204 and franchise tax expense of $49,785.

For the three months ended June 30, 2021, we had net income of $9,271,370, which resulted from a gain on the change in fair value of warrant liabilities of $9,517,801, unrealized gain on investments held in Trust Account of $2,500, and interest income of $30, partially offset by operating and formation costs of $202,513 and franchise tax expense of $46,448.

For the six months ended June 30, 2022, we had net income of $4,919,395, which resulted from a gain on the change in fair value of warrant liabilities of $5,334,133, unrealized gain on investments held in Trust Account of $360,163, and interest income of $10, partially offset by operating and formation costs of $675,894 and franchise tax expense of $99,017.

For the period from January 12, 2021 (inception) through June 30, 2021, we had net income of $6,745,017, which resulted from a gain on the change in fair value of warrant liabilities of $7,963,867, unrealized gain on investments held in Trust Account of $2,500, and interest income of $30, partially offset by expensed offering costs of $686,818, loss on sale of private placement warrants of $224,333, operating and formation costs of $221,158, and franchise tax expense of $89,071.

Liquidity and Capital Resources

On March 23, 2021, we consummated an Initial Public Offering of 22,400,000 units generating gross proceeds of $224,000,000. Simultaneously with the consummation of the Initial Public Offering, we completed the private sale of 4,486,667 warrants to the Sponsor at a purchase price of $1.50 per warrant (the "Private Placement Warrants"), generating gross proceeds of $6,730,000.

For the six months ended June 30, 2022, net cash used in operating activities was $808,429, which was due to a gain on the change in fair value of warrant liabilities of $5,334,133, unrealized gains on investments held in Trust Account of $360,163, and changes in working capital of $33,528, partially offset by our net income of $4,919,395.

For the period from January 12, 2021 (inception) through June 30, 2021, net cash used in operating activities was $583,140, which was due to a gain on the change in fair value of warrant liabilities of $7,963,867, changes in working capital of $272,941, and unrealized gains on investments held in Trust Account of $2,500, partially offset by our net income of $6,745,017, expensed offering costs of $686,818, and the loss on sale of private placement warrants of $224,333.

For the six months ended June 30, 2022, net cash provided by investing activities was $39,394, which was due to proceeds from the Trust Account to pay taxes of $39,394.

For the period from January 12, 2021 (inception) through June 30, 2021, net cash used in investing activities was $224,000,000, which was due to cash deposited in the Trust Account.

For the six months ended June 30, 2022, there were no net cash flows from financing activities.





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For the period from January 12, 2021 (inception) through June 30, 2021, net cash provided by financing activities was $225,648,180, which was due to proceeds from the Initial Public Offering, net of cash underwriter's discount paid, of $219,520,000, proceeds from the sale of private placement warrants of $6,730,000, proceeds from the issuance of a promissory note to our Sponsor of $125,000, and proceeds from the issuance of Class B common stock to our Sponsor of $25,000, partially offset by payments of offering costs of $626,820 and the prepayment of the promissory note with our Sponsor of $125,000.

As of June 30, 2022, we had cash of $12,267 held outside the Trust Account. We intend to use the funds held outside the Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review corporate documents and material agreements of prospective target businesses, and structure, negotiate and complete a business combination.

In order to fund working capital deficiencies or finance transaction costs in connection with an intended initial business combination, our Sponsor or an affiliate of our Sponsor or certain of our officers and directors may, but are not obligated to, loan us funds as may be required on a non-interest basis. If we complete our initial business combination, we would repay such loaned amounts. In the event that our 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. Up to $1,500,000 of such loans may be convertible into warrants of the post business combination entity at a price of $1.50 per warrant at the option of the lender. The warrants would be identical to the private placement warrants. The terms of such loans, if any, have not been determined and no written agreements exist with respect to such loans. Prior to the completion of our initial business combination, we do not expect to seek loans from parties other than our Sponsor or an affiliate of our Sponsor as we do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in our Trust Account. On July 12, 2022, the Company issued a promissory note (the "Sponsor Working Capital Loan") in the principal amount of up to $200,000 to the "Sponsor". On July 20, 2022, the Company drew $100,000 from the Working Capital Loan with the Sponsor.

We have incurred and expect to continue to incur significant costs in pursuit of our acquisition plans. We may have insufficient funds available to operate our business prior to our initial business combination. Moreover, we may need to obtain additional financing either to complete our initial business combination or because we become obligated to redeem a significant number of our public shares upon completion of our initial business combination, in which case we may issue additional securities or incur debt in connection with such business combination. In addition, we intend to target businesses with enterprise values that are greater than we could acquire with the net proceeds of this offering and the sale of the private placement warrants, if any, and, as a result, if the cash portion of the purchase price exceeds the amount available from the Trust Account, net of amounts needed to satisfy redemptions by public stockholders, we may be required to seek additional financing to complete such proposed initial business combination. We may also obtain financing prior to the closing of our initial business combination to fund our working capital needs and transaction costs in connection with our search for and completion of our initial business combination. There is no limitation on our ability to raise funds through the issuance of equity or equity-linked securities or through loans, advances or other indebtedness in connection with our initial business combination, including pursuant to forward purchase agreements or backstop arrangements we may enter into following the consummation of this offering. Subject to compliance with applicable securities laws, we would only complete such financing simultaneously with the completion of our business combination. If we are unable to complete our initial business combination because we do not have sufficient funds available to us, we will be forced to cease operations and liquidate the Trust Account. In addition, following our initial business combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations.





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Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2022 or December 31, 2021.





Contractual Obligations



Registration Rights

The holders of the founder shares, private placement warrants and warrants that may be issued upon conversion of Working Capital Loans (and any Class A common stock issuable upon the exercise of the private placement warrants) will have registration rights to require the Company to register a sale of any of its securities held by them pursuant to a registration rights agreement. The holders of these securities are entitled to make up to three demands, excluding short form demands, that the Company register such securities. In addition, the holders have certain "piggy-back" registration rights with respect to registration statements filed subsequent to the completion of a business combination. The Company will bear the expenses incurred in connection with the filing of any such registration statements.





Underwriting Agreement

The Company granted the underwriters a 45-day option to purchase up to 3,000,000 additional units to cover over-allotments at the Initial Public Offering price, less the underwriting discounts and commissions. On March 23, 2021 the underwriters purchased an additional 2,400,000 Units at an offering price of $10.00 per Unit, generating additional gross proceeds of $24,000,000 to the Company. On May 12, 2021, the remaining portion of the underwriters' over-allotment option expired.

The underwriters were paid a cash underwriting fee of $0.20 per Unit, or $4,480,000 in the aggregate. In addition, $0.35 per Unit, or $7,840,000 in the aggregate is payable to the underwriters for deferred underwriting commissions. The deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event that the Company completes a business combination, subject to the terms of the underwriting agreement.





Critical Accounting Policies

The preparation of condensed financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following critical accounting policies:





Warrant Liabilities

The Company accounts 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 ASC 480 and 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 the Company's own common stock, 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.





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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 additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statement of operations. The initial fair value of the public warrants was estimated using a Monte Carlo simulation approach and the recurring fair value of the private placement warrants was estimated using a Modified Black-Scholes model.

Class A Common stock subject to possible redemption

All of the 22,400,000 shares of Class A common stock sold as part of the units in the Initial Public Offering contain a redemption feature which allows for the redemption of such public shares in connection with the Company's liquidation, if there is a stockholder vote or tender offer in connection with the business combination and in connection with certain amendments to the Company's amended and restated certificate of incorporation. In accordance with SEC and its staff's guidance on redeemable equity instruments, which has been codified in ASC 480-10-S99, redemption provisions not solely within the control of the Company require common stock subject to redemption to be classified outside of permanent equity. Therefore, all Class A common stock has been classified outside of permanent equity.

The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable common stock to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock are affected by charges against additional paid in capital and accumulated deficit. As of June 30, 2022 and December 31, 2021, 22,400,000 shares of Class A common stock subject to possible redemption are presented at redemption value as temporary equity, outside of the stockholders' deficit section of the Company's balance sheet.

Net Income Per Common Share

Net income per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Accretion associated with the redeemable shares of Class A common stock is excluded from net income per share as the redemption value approximates fair value. Therefore, the earnings per share calculation allocates income shared pro rata between Class A and Class B common stock. As a result, the calculated net income per share is the same for Class A and Class B shares of common stock. The Company has not considered the effect of the Public Warrants and Private Placement Warrants to purchase an aggregate of 11,953,334 shares in the calculation of diluted net income per share, since the exercise of the warrants are contingent upon the occurrence of future events.





Recent Accounting Standards

Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company's condensed financial statements.

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 the 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.





Working Capital Loan

On July 12, 2022, the Company issued a promissory note in the principal amount of up to $200,000 to the "Sponsor". If the Company completes a Business Combination, the Company would repay the Sponsor Working Capital Loan out of the proceeds of the Trust Account released to the Company. Otherwise, the Sponsor Working Capital Loan would be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of the working capital held outside the Trust Account to repay the Note but no proceeds from the Trust Account would be used to repay the Note. At the election of the Sponsor, all or a portion of the unpaid principal amount of the Sponsor Working Capital Loan may be converted into warrants of the Company at a price of $1.50 per warrant. The Conversion Warrants and their underlying securities are entitled to the registration rights set forth in the Sponsor Working Capital Loan. On July 20, 2022, the Company drew $100,000 from the Working Capital Loan with the Sponsor.


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