References in this report (this "Quarterly Report") to "we," "us" or the
"Company" refer to
Special Note Regarding Forward-Looking Statements
This Quarterly Report (including, without limitation, statements under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations,"includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Our forward-looking statements include, but are not limited to, statements regarding our or our management team's expectations, hopes, beliefs, intentions or strategies regarding the future and any other statements that are not statements of current or historical facts. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These forward-looking statements may be identified by the use of forward-looking terminology, including the words "anticipates," "believes," "continues," "could," "estimates," "expects," "intends," "plans," "may," "might," "plan," "possible," "potential," "projects," "predicts," "will," "would," or "should," or, in each case, their negative or other variations or comparable terminology, but the absence of these words does not mean that a statement is not forward-looking. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report, and undue reliance should not be placed on forward-looking statements. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods. The forward-looking statements contained in this Quarterly Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements.
These risks, uncertainties and assumptions include, but are not limited to, the following risks, uncertainties, assumptions and other factors:
? our ability to select an appropriate target business or businesses;
? our ability to complete our initial business combination (our "Business
Combination");
? our expectations around the performance of a prospective target business or
businesses;
? our success in retaining or recruiting, or changes required in, our officers,
key employees or directors following our initial Business Combination;
? our officers and directors allocating their time to other businesses and
potentially having conflicts of interest with our business or in approving our
initial Business Combination;
? our potential ability to obtain additional financing to complete our initial
Business Combination;
? our pool of prospective target businesses, including the location and industry
of such target businesses;
20
? the ability of our officers and directors to generate a number of potential
business combination opportunities;
? our public securities' potential liquidity and trading;
? the lack of a market for our securities;
? the availability to us of funds from interest income on the balance of the
trust account into which certain proceeds of our initial public offering were
placed (the "Trust Account");
? the Trust Account not being subject to claims of third parties;
? our financial performance; or
? the other risks and uncertainties discussed under the heading "Risk Factors"
and elsewhere in this Quarterly Report, in our Annual Report on Form 10-K for
the year ended
(File No. 333-254062) filed in connection with our initial public offering.
The foregoing risks and uncertainties may not be exhaustive. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Overview
We are an early-stage blank check company incorporated onJanuary 22, 2021 as aDelaware 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 are actively pursuing discussions with potential business combination partners, and we have not yet entered into a definitive business combination agreement with any specific business combination target. However, our management team has engaged in discussions with potential business combination partners in their capacity as officers of Hennessy Capital Investment Corp. V ("Hennessy V"), and we may pursue potential business combination partners that had previously been in discussions with Hennessy V's management team. 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.
The issuance of additional shares of our common or preferred stock in our initial Business Combination:
? may significantly dilute the equity interest of investors in our initial public
offering;
? may subordinate the rights of holders of common stock if preferred stock is
issued with rights senior to those afforded our common stock;
? could cause a change of control if a substantial number of shares of our common
stock are issued, which may affect, among other things, our ability to use our
net operating loss carry forwards, if any, and could result in the resignation
or removal of our present officers and directors; and
? may adversely affect prevailing market prices for our Class A common stock
and/or Public Warrants.
Similarly, if we issue debt securities or otherwise incur significant indebtedness to finance our initial Business Combination, it could result in:
? default and foreclosure on our assets if our operating revenues after an
initial Business Combination are insufficient to repay our debt obligations;
21
? acceleration of our obligations to repay the indebtedness even if we make all
principal and interest payments when due if we breach certain covenants that
require the maintenance of certain financial ratios or reserves without a
waiver or renegotiation of that covenant;
? our immediate payment of all principal and accrued interest, if any, if the
debt is payable on demand;
? our inability to obtain necessary additional financing if the debt contains
covenants restricting our ability to obtain such financing while the debt is
outstanding;
? our inability to pay dividends on our common stock;
? using a substantial portion of our cash flow to pay principal and interest on
our debt, which will reduce the funds available for dividends on our common
stock if declared, expenses, capital expenditures, acquisitions and other
general corporate purposes;
? limitations on our flexibility in planning for and reacting to changes in our
business and in the industry in which we operate;
? increased vulnerability to adverse changes in general economic, industry and
competitive conditions and adverse changes in government regulation; and
? limitations on our ability to borrow additional amounts for expenses, capital
expenditures, acquisitions, debt service requirements, execution of our
strategy and other purposes; and
? other disadvantages compared to our competitors who have less debt.
As ofSeptember 30, 2022 , we had cash of approximately$1,073,000 and working capital of approximately$592,000 . Further, we have begun to, and expect to continue to, incur significant costs in the pursuit of an initial Business Combination. We cannot assure you that our plans to raise capital or to complete our initial Business Combination will be successful.
Results of Operations and Known Trends or Future Events
We have neither engaged in any operations nor generated any revenues to date. Our only activities since inception have been organizational activities and those necessary to prepare for and consummate our initial public offering and, subsequent to completion of our initial public offering onOctober 1, 2021 , identifying and completing a suitable initial Business Combination. Following our initial public offering, we will not generate any operating revenues until after completion of our initial Business Combination, if at all. We currently generate non-operating income in the form of interest income on cash and cash equivalents after our initial public offering. Since our initial public offering, we have incurred increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for professional and consulting fees and travel associated with evaluating various initial Business Combination candidates, as well as costs in connection with negotiating and executing a definitive agreement and related agreements and proxy materials. Our expenses have, and will likely continue to, increase substantially since the closing of our initial public offering onOctober 1, 2021 . We account for the Public Warrants and Private Placement Warrants issued in connection with our initial public offering as warrant liabilities and not equity. As a result, we are required to measure the fair value of the Warrants when they are issued and then at the end of each reporting period and to recognize changes in the fair value from the prior period in our operating results for each current period. Such amounts can be material and can be either other income or other expense. We account for all of the Class A common stock issued in our initial public offering as redeemable stock and not permanent equity and so we report negative stockholders' equity and expect to continue to do so. 22 General and administrative expenses - For the three and nine months endedSeptember 30, 2022 , we had a loss from operations of approximately$580,000 and$1,736,000 , respectively, consisting primarily of costs for being a public company of approximately$183,000 and$546,000 , compensation of approximately$249,000 and$747,000 , respectively (approximately$122,000 and$365,000 , respectively, of which is deferred), approximately$50,000 and$150,000 , respectively, of franchise taxes, approximately$45,000 and$135,000 , respectively, of administrative fees to our Sponsor, approximately$28,000 and$97,000 , respectively, of costs associated with searching for a suitable business combination and other costs. For the three months endedSeptember 30, 2021 and the period fromJanuary 22, 2021 (inception) toSeptember 30, 2021 , our net loss and loss from operations was$4,000 and$6,000 , respectively, consisting primarily of formation costs since our activities were primarily devoted or organizational activities and those activities necessary to preparation for our Public Offering. Other income (expense) - In addition to operating costs, for the three and nine months endedSeptember 30, 2022 , we had other income of approximately$3,539,000 and$14,726,000 , respectively, representing the reduction in fair value of our warrant liability during the periods and interest income of approximately$1,496,000 and$1,908,000 , respectively. As a result of market conditions occurring in connection with the Covid-19 pandemic, low interest rates on available investments had been insufficient to cover our franchise tax obligations untilJune 30, 2022 after interest rates increased in 2022.
Liquidity and Capital Resources
Our liquidity needs prior to the completion of our initial public offering were satisfied through receipt of$25,000 from the sale of the founder shares and up to$500,000 in loans from our Sponsor under an unsecured promissory note,$195,000 of which was borrowed prior to, and then fully repaid at, theOctober 1, 2021 closing of our initial public offering. The net proceeds from: (1) the sale of our units in our initial public offering (including the additional units sold onOctober 21, 2021 pursuant to the partial exercise of the underwriters' over-allotment option), after deducting offering expenses of approximately$990,000 and underwriting commissions of approximately$6,819,000 (excluding total deferred underwriting commissions of$11,933,000 ), and (2) the sale of the Private Placement Warrants (including the additional Private Placement Warrants sold onOctober 21, 2021 in connection with the partial exercise of the underwriters' over-allotment option) for a purchase price of approximately$10,819,000 , was$343,940,000 . Of this amount, approximately$340,930,000 , which includes approximately$11,933,000 of total deferred underwriting commissions, was deposited into the Trust Account. The remaining approximately$3,010,000 will not be held in the Trust Account. The funds in the Trust Account will be invested only inU.S. government treasury bills with a maturity of 185 days or less or in money market funds that meet certain conditions under Rule 2a-7 under the Investment Company Act of 1940 and that invest only in directU.S. government obligations. We intend to use substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account (which interest shall be net of taxes payable), if any, to complete our initial Business Combination. We have made and will make withdrawals from the Trust Account to pay our taxes, including franchise taxes and income taxes.Delaware franchise tax is based on our authorized shares or on our assumed par and non-par capital, whichever yields a lower result. Under the authorized shares method, each share is taxed at a graduated rate based on the number of authorized shares with a maximum aggregate tax of$200,000 per year. Under the assumed par value capital method,Delaware taxes each$1,000,000 of assumed par value capital at the rate of$400 ; where assumed par value would be (1) our total gross assets divided by (2) our total issued shares of common stock, multiplied by (3) the number of our authorized shares. Based on the number of shares of our common stock authorized and outstanding and our total gross assets, our annual franchise tax obligation is expected to be capped at the maximum amount of annual franchise taxes payable by us as aDelaware corporation of$200,000 . Our annual income tax obligations will depend on the amount of interest and other income earned on the amounts held in the Trust Account. We expect the only taxes payable by us out of the funds in the Trust Account will be income and franchise taxes. To the extent that our capital stock or debt is used, in whole or in part, as consideration to complete our initial Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies. 23
Prior to the completion of our initial Business Combination, in addition to our costs associated with operating as a listed public company, our principal use of working capital will be to fund our activities to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel to and from the offices or similar locations of prospective target businesses or their representatives or owners, review corporate documents and material agreements of prospective target businesses, structure, negotiate and complete an initial Business Combination, and to pay taxes to the extent the interest earned on the Trust Account is not sufficient to pay our taxes. In addition, we may pay commitment fees for financing, fees to consultants to assist us with our search for a target business or as a down payment or to fund a "no-shop" provision (a provision designed to keep target businesses from "shopping" around for transactions with other companies or investors on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into an agreement where we paid for the right to receive exclusivity from a target business, the amount that would be used as a down payment or to fund a "no-shop" provision would be determined based on the terms of the specific business combination and the amount of our available funds at the time. Our forfeiture of such funds (whether as a result of our breach or otherwise) could result in our not having sufficient funds to continue searching for, or conducting due diligence with respect to, prospective target businesses. As indicated in the accompanying financial statements, atSeptember 30, 2022 , we had approximately$1,073,000 in cash and working capital of approximately$592,000 . Further, we have incurred and expect to continue to incur significant costs in pursuit of our financing and acquisition plans. We believe that we have sufficient working capital atSeptember 30, 2022 to continue our operations for at least 12 months. However, if the Company cannot complete a Business Combination beforeOctober 1, 2023 , it could be forced to wind up its operations and liquidate unless it receives an extension approval from its shareholders. This condition raises 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 financial statements are issued. The Company's plan to deal with this uncertainty is to complete a Business Combination prior toOctober 1, 2022 . There is no assurance that the Company's plan to consummate a Business Combination will be successful or successful within the required timeframe. The condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We cannot assure you that our plans to raise capital or to consummate an initial Business Combination will be successful.
Our Sponsor, an affiliate of our Sponsor or our officers and directors may, but none of them is obligated to, loan us funds as may be required to fund our working capital requirements. If we complete our initial Business Combination, we would repay such loaned amounts out of the proceeds of the Trust Account released to us. 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 at a price of$1.50 per Warrant at the option of the lender. The Warrants would be identical to the Private Placement Warrants issued to our Sponsor, our direct anchor investors and our other anchor investors. The terms of such loans by our Sponsor, an affiliate of our Sponsor or our officers and directors, if any, have not been determined and no written agreements exist with respect to such loans. We do not expect to seek loans from parties other than our Sponsor, an affiliate of our Sponsor or our officers and directors, if any, 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. 24 We do not believe we will need to raise additional funds following our initial public offering in order to meet the expenditures required for operating our business. However, if our estimates of the costs of identifying a target business, undertaking in-depth due diligence and negotiating an initial 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. 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 initial Business Combination. In addition, we intend to target businesses with enterprise values that are greater than we could acquire with the net proceeds of our initial public offering and the sale of the Private Placement Warrants, 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 our initial public offering. Subject to compliance with applicable securities laws, we would only complete such financing simultaneously with the completion of our initial 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.
Off-balance sheet financing arrangements
As ofSeptember 30, 2022 , we have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any agreements for non-financial assets.
Contractual obligations AtSeptember 30, 2022 , we did not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities. In connection with our initial public offering, we entered into an Administrative Support Agreement withHennessy Capital Group LLC , an affiliate of our Sponsor, pursuant to which the Company paysHennessy Capital Group LLC $15,000 per month for office space, utilities and secretarial and administrative support. Also, commencing onSeptember 29, 2021 , the date our securities were first listed on the Nasdaq Global Market, we have agreed to compensate each of our President and Chief Operating Officer as well as our Chief Financial Officer$29,000 per month prior to the consummation of our initial Business Combination, of which$14,000 per month is payable upon the completion of our initial Business Combination and$15,000 per month is payable currently for their services. SinceJanuary 1, 2022 , we have been compensating a Vice President at the rate of$25,000 per month,$12,500 of which is paid currently for his services and$12,500 of which is payable upon the closing of our initial Business Combination. An aggregate of approximately$249,000 and$747,000 , respectively, was charged for operations for the three and nine months endedSeptember 30, 2022 . Deferred compensation - related parties includes approximately$449,000 under this obligation for the period fromSeptember 29, 2021 toSeptember 30, 2022 .
Upon completion of the initial Business Combination or our liquidation, the Company will cease paying or accruing these monthly fees.
In connection with identifying an initial Business Combination candidate and negotiating an initial Business Combination, we may enter into engagement letters or agreements with various consultants, advisors, professionals and others in connection with an initial Business Combination. The services under these engagement letters and agreements can be material in amount and in some instances can include contingent or success fees. Contingent or success fees (but not deferred underwriting compensation) would be charged to operations in the quarter that our initial Business Combination is consummated. In most instances (except with respect to our independent registered public accounting firm), these engagement letters and agreements are expected to specifically provide that such counterparties waive their rights to seek repayment from
the funds in the Trust Account. 25
Critical Accounting Estimates and Policies
The preparation of financial statements and related disclosures in conformity withU.S. 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 financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting estimates and policies: Accounting estimates:
A critical accounting estimate to our financial statements is the estimated fair value of our warrant liability. Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date.U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
? Level 1, defined as observable inputs such as quoted prices (unadjusted) for
identical instruments in active markets;
? Level 2, defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable such as quoted prices for similar
instruments in active markets or quoted prices for identical or similar
instruments in markets that are not active; and
? Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions, such as
valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable. In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the
fair value measurement. The estimated fair value of the warrant liability at inception of the Warrants,October 1, 2021 , was determined using Level 3 inputs. AtOctober 1, 2021 , we utilized an independent valuation consultant that used a binomial lattice simulation methodology to value the Warrants. Inherent in a binomial options pricing model are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield. We estimate the volatility of our shares based on historical volatility that matches the expected remaining life of the Warrants. The risk-free interest rate is based on theU.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the Warrants. The expected life of the Warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which we anticipate to remain at zero.
Since the hierarchy gives the highest priority to unadjusted quoted prices in active markets, atSeptember 30, 2022 andDecember 31, 2021 , our Public Warrants were trading in an active market. As such, atSeptember 30, 2022 andDecember 31, 2021 , we valued our Public Warrants based on publicly observable inputs (Level 1 inputs) from the trading in the Public Warrants in an active market ($0.26 and$0.84 , respectively, per warrant onSeptember 30, 2022 andDecember 31, 2021 ). Since the Private Placement Warrants are substantially similar to the Public Warrants but do not trade, we valued them based on the value of the Public Warrants (significant other observable inputs - Level 2).
For reference, each
Mandatory Liquidation and Going Concern
With approximately$1,073,000 in cash and approximately$592,000 of working capital atSeptember 30, 2022 , the Company believes, but cannot assure, that it has the resources to continue its operations beyond one year plus the normal time to report its financial statements. However, if the Company cannot complete a Business Combination beforeOctober 1, 2023 , it could be forced to wind up its operations and liquidate unless it receives an extension approval from its shareholders. This condition raises 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 financial statements are issued. The Company's plan to deal with this uncertainty is to complete a Business Combination prior toOctober 1, 2022 . There is no assurance that the Company's plan to consummate a Business Combination will be successful or successful within the required timeframe. The condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty. 26
Net Income or Loss per Share of Common Stock:
We comply with accounting and disclosure requirements ofFinancial Accounting Standards Board ("FASB") ASC 260, "Earnings Per Share." Net income or loss per share of common stock is computed by dividing net income or loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period plus, to the extent dilutive, the incremental number of shares of common stock to settle Warrants, as calculated using the treasury stock method. We have not considered the effect of the Warrants sold in our initial public offering and private placement to purchase an aggregate of 18,576,712 shares of 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. As a result, diluted income (loss) per share of common stock is the same as basic income (loss) per share of common stock for the period presented. We have two classes of shares: our Class A common stock and our Class B common stock. Income and losses are shared pro rata among the two classes of common stock. Net income (loss) per share of common stock is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the respective period. The changes in redemption value that are accreted to Class A common stock subject to redemption (see below) are representative of fair value and therefore is not factored into the calculation of earnings per share.
The following table reflects the net income per share after allocating income between the shares based on outstanding shares.
Three months ended Nine months ended September 30, 2022 September 30, 2022 Class B Class A Class A Class B Numerator: Basic and diluted net income per share of common stock: Allocation of income - basic and diluted 1,994,000 665,000$ 9,503,000 $ 3,167,000 Denominator: Basic and diluted weighted average share of common stock: 34,093,000 11,364,000
34,093,000 11,364,000
Basic and diluted net income per share of common stock$ 0.06 $ 0.06 $ 0.28 $ 0.28 The Company did not have two classes of stock outstanding during the periods endedSeptember 30, 2021 and therefore net loss of approximately$4,000 and$6,000 , respectively, in the three months endedSeptember 30, 2021 and the period from January 22, 2021 (inception) to September 30 2021 was allocated 100% to Class B stockholders, net of shares that were subject to forfeiture, leading to net loss per share in that period of$0.00 and$0.00 respectively. 27
Fair Value of Financial Instruments:
The fair value of our assets and liabilities, which qualify as financial instruments under FASB ASC 820, "Fair Value Measurements and Disclosures," approximates the carrying amounts represented in the balance sheets primarily due to their short-term nature, except for derivative warrant liabilities (See Note 6). Offering Costs: We comply with the requirements of FASB ASC 340-10-S99-1 andSEC Staff Accounting Bulletin (SAB) Topic 5A - "Expenses of Offering." Costs incurred in connection with preparation for our initial public offering totaled approximately$19,741,000 including our costs of approximately$990,000 together with$18,750,000 of underwriters' discount, have been allocated to equity instruments ($19,018,000 ) and warrant liability ($722,000 ), based on their relative values, and charged to temporary equity or expense (in the case of the portion allocated to warrant liability) upon completion of our initial public offering. Income Taxes:
The Company follows the asset and liability method of accounting for income taxes under FASB ASC, 740, "Income Taxes." Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the balance sheet 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. The Company's currently taxable income consists of interest income on the Trust Account net of taxes. The Company's general and administrative costs are generally considered either start-up or business combination costs and are not currently deductible. Further, warrant costs and income from change in fair value of derivative warrant liabilities may not be deductible or includible in taxable income. During the three months endedSeptember 30, 2022 and 2021 and the nine months endedSeptember 30, 2022 and period fromJanuary 22, 2021 (inception) toSeptember 30, 2021 the Company recorded income tax expense of approximately$300,000 and$0 , respectively, and approximately$320,000 and$0 , respectively. This occurs because, in 2022, there is substantial taxable interest income earned on the Trust Account which, was partially offset by deductible franchise taxes, so there was income for tax purposes, and in 2021 there was no interest income. In the three months endedSeptember 30, 2021 and for the period fromJanuary 22, 2021 (inception) toSeptember 30, 2021 , there was no interest income because the Company's Public Offering had not happened at that time. The Company's effective tax rate for the three and nine months endedSeptember 30, 2022 was approximately 10% and 2%, respectively, which differs from the expected income tax rate primarily due to substantial income reported from warrant fair value adjustments which is not taxable, offset partially by the start-up costs (discussed above) which are not currently deductible and business combination costs which may not be deductible or taxable. AtSeptember 30, 2022 andDecember 31, 2021 , the Company has a deferred tax asset of approximately$440,000 and$80,000 , respectively, primarily related to start-up costs. Management has determined that a full valuation allowance of the deferred tax asset is appropriate at this time. FASB 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 ofSeptember 30, 2022 orDecember 31, 2021 . The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties atSeptember 30, 2022 orDecember 31, 2021 . The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing
authorities since inception. 28 Redeemable Common Stock: All of the 34,092,954 public shares sold as part of the units in our initial public offering contain a redemption feature which allows for the redemption of public shares if we hold a stockholder vote or if there is a tender offer for shares in connection with a business combination. In accordance with FASB ASC 480, "Distinguishing Liabilities from Equity" ("ASC 480"), redemption provisions not solely within our control requires the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity's equity instruments, are excluded from the provisions of ASC 480. Although we did not specify a maximum redemption threshold, our charter provides that in no event will we redeem our public shares in an amount that would cause our net tangible assets (i.e., total assets less intangible assets and liabilities) to be less than$5,000,001 upon the closing of a business combination. While redemptions cannot cause our net tangible assets to fall below$5,000,000 , all shares of Class A common stock are redeemable and classified as such on our balance sheet until such time as a redemption event takes place. The value of Class A common stock that may be redeemed is equal to$10.00 per share (which is the assumed redemption price) multiplied by 34,092,954 shares of Class A common stock. We recognize changes in redemption value immediately as they occur and adjust the carrying value of the securities at the end of each reporting period. Increases or decreases in the carrying amount of redeemable Class A common stock are affected by adjustments to additional paid-in capital. Accordingly, atSeptember 30, 2022 , all of the 34,092,954 public shares were classified outside of permanent equity. Class A common stock subject to redemption consist of: Gross proceeds of Public Offering$ 340,930,000 Less: Proceeds allocated to Public Warrants (11,935,000 ) Offering costs (19,018,000 ) Plus: Accretion of carrying value to redemption value
30,953,000
Subtotal at date of Public Offering andDecember 31, 2021
340,930,000
Plus: Accretion of carrying value to redemption value
1,241,000
Shares of Class A common stock subject to redemption at
$ 342,171,000
Derivative warrant liabilities
We account for Warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant's specific terms and applicable authoritative guidance FASB ASC 480 and ASC 815, Derivatives and Hedging ("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 our own shares, 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 statements of operations. Costs associated with issuing the Warrants accounted for as liabilities are charged to operations when the Warrants are issued. The fair value of the Warrants was estimated using a binomial lattice simulation approach. 29
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