References in this Quarterly Report on Form 10-Q for the three months ended
September 30, 2022 (the "Quarterly Report") to "we," "our," "us" or the
"Company" refer to Arena Fortify Acquisition Corp. References to our
"management" or our "management team" refer to our officers and directors, and
references to the "Sponsor" refer to Arena Fortify 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, uncertainties and
assumptions. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed may not occur. See "Cautionary Statement
Regarding Forward-Looking Statements." Also, see the risk factors and other
cautionary statements described or referenced under the heading "Item 1A. Risk
Factors." We do not undertake any obligation to publicly update any
forward-looking statements except as otherwise required by applicable law.
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") as well as the risks described or referenced in our other
securities filings, including this Quarterly Report. 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 as a Delaware corporation on
January 26, 2021 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, which we refer to herein as our initial
business combination. We have not selected any specific business combination
target. We intend to effectuate our initial business combination using cash from
the proceeds of our initial public offering (the "Initial Public Offering"), the
Initial Stockholder Loans, and the private placement of the Private Placement
Warrants (as defined below), 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 the 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.
In February 2021, we issued 5,750,000 founder shares to our Sponsor for an
aggregate purchase price of $25,000 in cash, or approximately $0.004 per share.
In March 2021, our Sponsor sold 456,000 founder shares each to Cowen Investments
II LLC ("Cowen") and Intrepid Financial Partners, L.L.C. ("Intrepid" and with
the Sponsor and Cowen, the "Initial Stockholders"). On March 19, 2021, our
Sponsor transferred 25,000 shares to each of Marc McCarthy and James Crockard
III. On October 4, 2021, we effected a share contribution back to capital
resulting in our Initial Stockholders holding 4,312,500 shares of our Class B
common stock.
On November 15, 2021, we consummated the Initial Public Offering of 17,250,000
units (including 2,250,000 units issued upon exercise in full by the
underwriters of their option to purchase additional units), at $10.00 per unit,
generating gross proceeds of $172,500,000. Each unit consists of one share of
Class A common stock, $0.0001 par value, and one-half of one redeemable warrant
("Public Warrant"). Each Public Warrant entitles the holder to purchase one
share of Class A common stock at an exercise price of $11.50 per whole share.
Certain of our Initial Stockholders lent us an aggregate amount of $3,450,000 as
of the closing date of our Initial Public Offering at no interest pursuant to
those certain promissory notes (collectively, the "Initial Stockholder Loan
Notes"). The proceeds of the Initial Stockholder Loans were added to the trust
account and will be used to fund the redemption of our public shares (subject to
the requirements of applicable law). The Initial Stockholder Loans shall be
repaid in cash or converted into warrants (the "Initial Stockholder Loan
Warrants") at a conversion price of $1.00 per warrant, at each Initial
Stockholder's sole discretion. The Initial Stockholder Loan Warrants would be
identical to the Private Placement Warrants sold in connection with our Initial
Public Offering.
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Simultaneously with the closing of the Initial Public Offering, our initial
stockholders purchased an aggregate of 5,450,000 private placement warrants
(including 450,000 private placement warrants issued in connection with the
exercise in full by the underwriters of their option to purchase additional
units), at a price of $1.00 per private placement warrant (the "Private
Placement Warrants") ($5,450,000 in the aggregate) in a private placement (the
"Private Placement"). Each Private Placement Warrant is exercisable to purchase
one share of Class A common stock at a price of $11.50 per share.
Following our Initial Public Offering, the closing of the over-allotment option,
the sale of the Private Placement Warrants, and the receipt of proceeds from the
Initial Stockholder Loans, approximately $175.9 million was placed in a trust
account located in the United States with Continental Stock Transfer & Trust
Company acting as trustee, and invested only in U.S. "government securities"
within the meaning of Section 2(a)(16) of the Investment Company Act having a
maturity of 185 days or less or in money market funds meeting certain conditions
under Rule 2a-7 promulgated under the Investment Company Act which invest only
in direct U.S. government treasury obligations, as determined by us, until the
earlier of: (i) the completion of a business combination and (ii) the
distribution of the trust account.
If we are unable to complete an initial business combination within 15 months
from the closing of our Initial Public Offering, or February 15, 2023, 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 public shares, at a per-share price, payable in cash, equal to the
aggregate amount then on deposit in the trust account including interest earned
on the funds held in the trust account and not previously released to us to pay
our franchise and income taxes (less up to $100,000 of interest to pay
dissolution expenses), divided by the number of then outstanding public shares,
which redemption will completely extinguish public stockholders' rights as
stockholders (including the right to receive further liquidating distributions,
if any), subject to applicable law, and (iii) as promptly as reasonably possible
following such redemption, subject to the approval of our remaining stockholders
and our board of directors, dissolve and liquidate, subject in each case to our
obligations under Delaware law to provide for claims of creditors and the
requirements of other applicable law.
Results of Operations
Our entire activity from inception through September 30, 2022 related to our
formation, the preparation for our Initial Public Offering, and since the
closing of the Initial Public Offering, the search for a prospective initial
business combination. We have neither engaged in any operations nor generated
any revenues to date. We will not generate any operating revenues until after
completion of our initial business combination. We will generate non-operating
income in the form of interest income on cash and cash equivalents.
For the three months ended September 30, 2022, we had net income of $520,070
which was comprised of the change in the fair value of our warrants of $137,900,
interest earned on marketable securities held in the trust account of $806,243
and interest income of $274, partially offset by operating costs of $424,347.
For the three months ended September 30, 2021, we had net loss of $254, which
was comprised of operating costs of $254.
For the nine months ended September 30, 2022, we had net income of $5,829,573
which was comprised of the change in the fair value of our warrants of
$5,770,750, interest earned on marketable securities held in the trust account
of $1,115,036 and interest income of $294, partially offset by operating costs
of $1,056,507. For the period from January 26, 2021 (inception) through
September 30, 2021, we had net loss of $1,753, which was comprised of operating
costs of $1,753.
Liquidity and Capital Resources and Going Concern
As of September 30, 2022, we had approximately $367,437 in our operating bank
account, and working capital deficit of approximately $485,497. We intend to use
the funds held outside the trust account primarily to pay existing accounts
payable, identify and evaluate prospective initial business combination
candidates, perform due diligence on prospective target businesses, pay for
travel expenditures, select the target business or businesses to merge with or
acquire and structure, negotiate and consummate a business combination.
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Prior to the completion of our Initial Public Offering, our liquidity needs had
been satisfied through a payment from our Sponsor of $25,000 for the founder
shares to cover certain offering costs and the loan under an unsecured
promissory note from our Sponsor of $300,000. On November 15, 2021, we
consummated the Initial Public Offering of 17,250,000 units (including 2,250,000
units issued upon exercise in full by the underwriters of their option to
purchase additional units) at a price of $10.00 per unit. Certain of our initial
stockholders lent us an aggregate amount of $3,450,000 as of the closing date of
our Initial Public Offering at no interest. The proceeds of the Initial
Stockholder Loans were added to the trust account and will be used to fund the
redemption of our public shares (subject to the requirements of applicable law).
The Initial Stockholder Loans shall be repaid in cash or converted into Initial
Stockholder Loan Warrants at a conversion price of $1.00 per warrant, at each
Initial Stockholder's sole discretion. The Initial Stockholder Loan Warrants
will be identical to the Private Placement Warrants sold in connection with our
Initial Public Offering. Simultaneously with the closing of our Initial Public
Offering, we consummated the sale of 5,450,000 Private Placement Warrants at a
price of $1.00 per Private Placement Warrant in a private placement to our
Initial Stockholders. Among these Private Placement Warrants, 4,360,000 were
purchased by our Sponsor and 545,000 were purchased by each of Cowen and
Intrepid.
For the nine months ended September 30, 2022, net cash used in operating
activities was $589,604, consisting of net income of $5,829,573 which is
affected by a change in fair value of warrant liabilities of $5,770,750,
interest earned on marketable securities held in the trust account of
$1,115,036, and change in operating assets and liabilities net inflow of
$466,609. Cash flows from investing activities were $260,282 related to interest
withdrawn from the trust account to reimburse Delaware franchise taxes.
For the period from January 26, 2021 (inception) through September 30, 2021, net
cash used in operating activities was $0, consisting of net loss of $1,753, and
interest earned on marketable securities held in the trust account of $0.
Changes in operating assets and liabilities provided $0 of cash from operating
activities.
Following our Initial Public Offering, the closing of the over-allotment option,
the receipt of proceeds from the Initial Stockholder Loans and the sale of the
Private Placement Warrants, a total of $175,950,000 was placed in the trust
account. We incurred $4,675,360 in transaction costs, including $3,450,000 of
underwriting fees and $1,225,360 of other offering costs. The promissory note
from our Sponsor was paid in full on November 17, 2021. Subsequent to the
completion of our Initial Public Offering, the closing of the over-allotment
option, the receipt of proceeds from the Initial Stockholder Loans and the sale
of the Private Placement Warrants, our liquidity needs have been satisfied
through the 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 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,
provide us working capital loans. To date, there were no amounts outstanding
under any working capital loans.
Based on the foregoing, management believes that we will have sufficient working
capital and borrowing capacity to meet our needs through the earlier of the
completion of a business combination or one year from the date of the filing of
this Quarterly Report. We do not believe we will need to raise additional funds
in order to meet the expenditures required for operating our business. However
there is a risk that the company's liquidity may not be sufficient, which raises
substantial doubt about the Company's ability to continue as a going concern. As
indicated elsewhere in this Quarterly Report, we have until February 15, 2023 to
consummate a business combination. If our estimate of the costs of identifying a
target business, 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 our initial
business combination. Furthermore, if a business combination is not consummated
by this date and an extension is not requested by our Sponsor, there will be a
mandatory liquidation and subsequent dissolution of the company. Uncertainty
related to the consummation of a business combination 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 to reflect a required
liquidation after February 15, 2023.
On November 2, 2022, the Company filed a preliminary proxy statement on Schedule
14A relating to a special meeting of stockholders to potentially be held in 2022
to approve an amendment to the Company's amended and restated certificate of
incorporation (the "Charter Amendment") which, if implemented, would permit the
Company to liquidate and wind up early in advance of the mandatory termination
date of February 15, 2023. If implemented, the Charter Amendment would also
allow the Company to remove the Redemption Limitation (as defined in the
Company's amended and restated certificate of incorporation) to allow the
Company to redeem public shares notwithstanding the fact that such redemption
would result in the Company having net tangible assets of less than $5,000,001,
and to remove up to $100,000 of interest earned on the amount on deposit in the
trust account prior to redeeming the public shares in connection with the
special meeting in order to pay dissolution expenses.
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Off-Balance Sheet Arrangements
We do not currently have any off-balance-sheet arrangements; however, we do have
certain contractual arrangements that would require us to make payments if
certain circumstances occur; we refer to these arrangements as contingent
commitments. See Note 6, "Commitments and Contingencies," to our financial
statements included herein for further discussion of these matters.
Contractual Obligations
Promissory Note-Related Party
On February 22, 2021, the Company issued an unsecured promissory note (the
"Promissory Note"), pursuant to which the Company could borrow up to an
aggregate of $300,000 to cover expenses related to the Initial Public Offering.
The Promissory Note was non-interest bearing and was payable on the earlier of
(i) December 31, 2021 or (ii) the consummation of the Initial Public Offering.
On November 12, 2021, the Company repaid the outstanding balance under the
Promissory Note.
Business Combination Marketing Agreement
The underwriters of the Company's Initial Public Offering are entitled to a fee
of $0.35 per unit, or $6,037,500 in the aggregate (the "Marketing Fee"), which
will be payable to the underwriters pursuant to that certain Business
Combination Marketing Agreement (the "Business Combination Marketing
Agreement"). The Marketing 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 Business Combination
Marketing Agreement.
Critical Accounting Policies and Significant Estimates
The preparation of unaudited 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 unaudited
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:
Net Income (Loss) Per Common Share
The Company complies with accounting and disclosure requirements of FASB ASC
Topic 260, "Earnings Per Share." The Company has two classes of shares, which
are referred to as Class A common stock and Class B common stock. Income and
losses are shared pro rata between the two classes of shares. Net income (loss)
per share is computed by dividing net income (loss) by the weighted average
number of shares of common stock outstanding during the period. We have not
considered the effect of the warrants sold in the Initial Public Offering and
the private placement to purchase an aggregate of 14,075,000 shares of our
Class A common stock in the calculation of diluted income (loss) per share,
since their inclusion would be anti-dilutive under the treasury stock method.
For the three-month period ended September 30, 2021 and the period from
January 26, 2021 (inception) through September 30, 2021, the number of weighted
average shares of Class B common stock for calculating basic net income (loss)
per share was reduced for the effect of an aggregate of 562,500 shares of
Class B common stock that were subject to forfeiture if the over-allotment
option was not exercised in full or part by the underwriters. Since the
contingency was satisfied as of the beginning of the three-month period ended
September 30, 2022 and nine-month period ended September 30, 2022, diluted
income per share of common stock is the same as basic income per share of common
stock for the period. Additionally, for the three-month period ended
September 30, 2021 and the period from January 26, 2021 (inception) through
September 30, 2021, the calculation does not consider the effect of the shares
subject to forfeiture as they would be anti-dilutive given the net loss
position. As a result, for the three-month period ended September 30, 2021 and
the period from January 26, 2021 (inception) through September 30, 2021, diluted
loss per share of common stock and basic loss per share of common stock are the
same for the period. Accretion associated with the redeemable Class A common
stock is excluded from earnings per share as the redemption value approximates
fair value.
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Warrant Liabilities
The Company does not use derivative instruments to hedge exposures to cash flow,
market or foreign currency risks. 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 FASB ASC
480, Distinguishing Liabilities from Equity ("FASB ASC 480") and FASB ASC 815,
Derivatives and Hedging ("FASB ASC 815"). The assessment considers whether the
warrants are freestanding financial instruments pursuant to FASB ASC 480, meet
the definition of a liability pursuant to FASB ASC 480, and whether the warrants
meet all of the requirements for equity classification under FASB 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.
The Public Warrants and the Private Placement Warrants are recognized as
derivative liabilities in accordance with FASB ASC 815. Accordingly, the Company
recognizes the warrant instruments as liabilities at fair value and adjusts the
instruments to fair value at each reporting period until exercised. Changes in
the estimated fair value of the warrants are recognized as a non-cash gain or
loss on the statement of operations. Upon consummating the Initial Public
Offering on November 15, 2021, the company estimated the fair value of the
warrant derivative liabilities using a Binomial lattice model and subsequently
measured using a Monte Carlo simulation and the Black-Scholes Option Pricing
Model at period-end.
Subsequently, derivative warrant liabilities are classified as non-current as
their liquidation is not reasonably expected to require the use of current
assets or require the creation of current liabilities. The determination of fair
value for the warrant liabilities represents a significant estimate made by
management in the unaudited condensed financial statements.
Class A Common Stock Subject to Possible Redemption
The Company accounts for its shares of Class A common stock subject to possible
redemption in accordance with the guidance in FASB ASC 480. Shares of Class A
common stock subject to mandatory redemption (if any) are classified as
liability instruments and are measured at fair value. Conditionally redeemable
shares of common stock (including shares that feature redemption rights that are
either within the control of the holder or subject to redemption upon the
occurrence of uncertain events not solely within the Company's control) are
classified as temporary equity. At all other times, Class A shares of common
stock are classified as shareholders' equity. The Company's shares of Class A
common stock sold in the Initial Public Offering feature certain redemption
rights that are considered to be outside of the Company's control and subject to
the occurrence of uncertain future events. Accordingly, as of September 30,
2022, 17,250,000 shares of Class A common stock subject to possible redemption
are presented as temporary equity, outside of the stockholders' deficit section
of the Company's balance sheets. 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.
Such changes are reflected in additional paid-in capital, or in the absence of
additional capital, in accumulated deficit.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the "JOBS
Act") was signed into law. 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, our financial statements may not be comparable to companies that comply
with new or revised accounting pronouncements as of public company effective
dates.
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As an "emerging growth company," we are not required to, among other things,
(i) provide an auditor's attestation report on our system of internal controls
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 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 Initial Public Offering or until we are no
longer an "emerging growth company," whichever is earlier.
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