The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the unaudited condensed financial
statements and the notes thereto included in this Quarterly Report under "Item 1
Financial Statements". 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 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 September 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.
For the three months ended September 30, 2022, we had net income of $1,749,331,
which resulted from a gain on the change in fair value of warrant liabilities of
$1,240,200, unrealized gain on investments held in Trust Account of $1,017,915,
and a change in fair value of convertible note of $3,000, partially offset by
operating and formation costs of $239,672, income tax expense of $221,839 and
franchise tax expense of $50,273.
For the three months ended September 30, 2021, we had net income of $3,637,293,
which resulted from a gain on the change in fair value of warrant liabilities of
$3,869,933, unrealized gain on investments held in Trust Account of $11,517,
dividend income of $4,265 and interest income of $18, partially offset by
operating and formation costs of $198,167 and franchise tax expense of $50,273.
20
Table of Contents
For the nine months ended September 30, 2022, we had net income of $6,668,726,
which resulted from a gain on the change in fair value of warrant liabilities of
$6,574,333, unrealized gain on investments held in Trust Account of $1,378,078,
a change in fair value of convertible note of $3,000, and interest income of
$10, partially offset by operating and formation costs of $915,566, income tax
expense of $221,839 and franchise tax expense of $149,290.
For the period from January 12, 2021 (Inception) through September 30, 2021, we
had net income of $10,382,310, which resulted from a gain on the change in fair
value of warrant liabilities of $11,833,800, unrealized gain on investments held
in Trust Account of $14,017, dividend income of $4,265, and interest income of
$48, partially offset by expensed offering costs of $686,818, loss on sale of
private placement warrants of $224,333, operating and formation costs of
$419,325, and franchise tax expense of $139,344.
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
private placement warrants to the Sponsor at a purchase price of $1.50 per
warrant, generating gross proceeds of $6,730,000.
For the nine months ended September 30, 2022, net cash used in operating
activities was $953,844, which was due to a gain on the change in fair value of
warrant liabilities of $6,574,333, unrealized gains on investments held in Trust
Account of $1,378,078, and a gain on change in fair value of convertible
promissory note - related party of $3,000, partially offset by our net income of
$6,668,726 and changes in working capital of $332,841.
For the period from January 12, 2021 (Inception) through September 30, 2021, net
cash used in operating activities was $724,407, which was due to a gain on the
change in fair value of warrant liabilities of $11,833,800, changes in working
capital of $165,786, unrealized gains on investments held in Trust Account of
$14,017, and dividend income of $4,265, partially offset by our net income of
$10,382,310, expensed offering costs of $686,818, and the loss on sale of
private placement warrants of $224,333.
For the nine months ended September 30, 2022, net cash provided by investing
activities was $39,393, which was due to proceeds from the Trust Account to pay
taxes of $39,393.
For the period from January 12, 2021 (Inception) through September 30, 2021, net
cash used in investing activities was $224,000,000, which was due to cash
deposited in the Trust Account as a result of gross proceeds of the Public
Offering.
For the nine months ended September 30, 2022, net cash flows from financing
activities were due to proceeds from convertible promissory note - related party
of $200,000.
For the period from January 12, 2021 (Inception) through September 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 September 30, 2022, we had cash of $66,851 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.
21
Table of Contents
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 in the principal amount of up to $200,000 to
the Sponsor. On July 21, 2022 and August 22, 2022 the Company drew $100,000 and
$100,000, respectively, under the Working Capital Loan. The fair value of the
$100,000 draw on July 21, 2022 was estimated by the Company to be $10,600 at
initial measurement and the fair value of the $100,000 draw on August 22, 2022
was estimated to be $9,700 at initial measurement. The aggregate fair value of
the Working Capital Loan was estimated to be $17,300 at September 30, 2022.
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.
Going Concern Consideration
As of September 30, 2022, the Company had $66,851 in cash held outside of the
Trust Account and working capital surplus, excluding income taxes and franchise
taxes which are paid out of the Trust Account, of $37,960.
The Company anticipates that the cash held outside of the Trust Account as of
September 30, 2022 will not be sufficient to allow the Company to operate for
the period from the issuance of the condensed financial statements through the
Combination Period, assuming that a Business Combination is not consummated
during that time. If a Business Combination is not consummated by March 23,
2023, there will be a mandatory liquidation and subsequent dissolution of the
Company. Over this time period, the Company will be using the funds held outside
of the Trust Account for paying existing accounts payable and accrued
liabilities, identifying and evaluating prospective initial Business Combination
candidates, performing due diligence on prospective target businesses, paying
for travel expenditures, selecting the target business to merge with or acquire,
and structuring, negotiating and consummating the Business Combination. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern for a period of time within one year after the date that the
condensed financial statements are issued. Management plans to address this
uncertainty through a Business Combination. In addition, the Sponsor or an
affiliate of the Sponsor, or certain of the Company's officers and directors
may, but are not obligated to, loan the Company funds as may be required under
the Working Capital Loans. There is no assurance that the Company's plans to
consummate the Business Combination will be successful or successful within the
Combination Period or that the Sponsor or an affiliate of the Sponsor, or
certain of the Company's officers and directors will loan the Company funds as
may be required under the Working Capital Loans.
22
Table of Contents
As a result of the above, in connection with the Company's assessment of going
concern, management has determined that the conditions described above raise
substantial doubt about the Company's ability to continue as a going concern
through approximately one year from the date the condensed financial statements
are issued. The condensed financial statements do not include any adjustments
relating to the recovery of the recorded assets or the classification of the
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 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 GAAP 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.
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.
23
Table of Contents
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 September 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.
Offering Costs associated with the Initial Public Offering
The Company complies with the requirements of ASC 340-10-S99-1 and SEC Staff
Accounting Bulletin Topic 5A - Expenses of Offering. Offering costs consist
principally of professional and registration fees incurred through the balance
sheet date that are related to the Initial Public Offering. Offering costs
directly attributable to the issuance of an equity contract to be classified in
equity are recorded as a reduction in equity. Offering costs for equity
contracts that are classified as assets and liabilities are expensed
immediately. The Company incurred offering costs amounting to $12,946,821 as a
result of the Initial Public Offering (consisting of $4,480,000 of cash
underwriting discounts, $7,840,000 of deferred underwriting discounts, and
$626,821 of other offering costs). As such, the Company recorded $12,260,003 of
offering costs as a reduction of temporary equity in connection with the shares
of Class A common stock included in the Units. The Company expensed $686,818 of
offering costs in connection with the Public Warrants and Private Placement
Warrants that were classified as liabilities.
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
In August 2020, the 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") to simplify accounting for
certain financial instruments. ASU 2020-06 eliminates the current models that
require separation of beneficial conversion and cash conversion features from
convertible instruments and simplifies the derivative scope exception guidance
pertaining to equity classification of contracts in an entity's own equity. The
new standard also introduces additional disclosures for convertible debt and
freestanding instruments that are indexed to and settled in an entity's own
equity. ASU 2020-06 amends the diluted earnings per share guidance, including
the requirement to use the if-converted method for all convertible instruments.
ASU 2020-06 is effective January 1, 2024 for emerging growth companies and
should be applied on a full or modified retrospective basis, with early adoption
permitted beginning on January 1, 2021. The Company is currently evaluating the
impact of this ASU on its financial position, results of operations, and cash
flows.
Management does not believe that any other recently issued, but not yet
effective, accounting standards, if currently adopted, would have a material
effect on the Company's condensed financial statements.
24
Table of Contents
Factors That May Adversely Affect Our Results of Operations
Our results of operations and our ability to complete an initial business
combination may be adversely affected by various factors that could cause
economic uncertainty and volatility in the financial markets, many of which are
beyond our control. Our business could be impacted by, among other things,
downturns in the financial markets or in economic conditions, increases in oil
prices, inflation, increases in interest rates, supply chain disruptions,
declines in consumer confidence and spending, the ongoing effects of the
COVID-19 pandemic, including resurgences and the emergence of new variants, and
geopolitical instability, such as the military conflict in Ukraine. We cannot at
this time fully predict the likelihood of one or more of the above events, their
duration or magnitude or the extent to which they may negatively impact our
business and our ability to complete initial business combination.
Convertible Promissory Note - Related Party
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 each of July 20, 2022 and August 22, 2022, the
Company drew $100,000 from the Working Capital Loan with the Sponsor.
© Edgar Online, source Glimpses
AF ACQUISITION CORP. 
