References in this report (the "Quarterly Report") to "we," "us" or the
"Company" refer to Hudson Executive Investment Corp. III. References to our
"management" or our "management team" refer to our officers and directors, and
references to the "Sponsor" refer to HEIC Sponsor III, LLC. The following
discussion and analysis of the Company's financial condition and results of
operations should be read in conjunction with the condensed financial statements
and the notes thereto contained elsewhere in this Quarterly Report (the
"Financial Statements"). Capitalized terms used but not otherwise defined herein
have the meaning set forth in the 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" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act 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 Form 10-Q
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 Annual Report on Form 10-K filed with the U.S.
Securities and Exchange Commission (the "SEC") on March 31, 2022. 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 formed under the laws of the State of Delaware on
August 18, 2020 for the purpose of effecting the merger, capital stock exchange,
asset acquisition, stock purchase, reorganization or similar business
combination with one or more businesses (the "Business Combination"). We intend
to effectuate our Business Combination using cash from the proceeds of the
Initial Public Offering and the sale of the Private Units, our capital stock,
debt or a combination of cash, stock and debt. Based on our business activities
to date, the Company is a "shell company" as defined under the Exchange Act
because we have minimal operations and nominal assets consisting almost entirely
of cash held in a trust account.
We expect to continue to incur significant costs in the pursuit of our
acquisition plans. We cannot assure you that our plans to complete a Business
Combination will be successful.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date.
Our only activities from August 18, 2020 (inception) through September 30, 2022
were organizational activities, those necessary to prepare for the Initial
Public Offering, described below, and identifying a target company for a
Business Combination. We do not expect to generate any operating revenues until
after the completion of our Business Combination. We generate non-operating
income in the form of interest income on marketable securities held in the Trust
Account. We incur expenses as a result of being a public company (for legal,
financial reporting, accounting and auditing compliance), as well as for due
diligence expenses.
For the three months ended September 30, 2022, we had a net income of $936,086,
which consists of interest earned on marketable securities held in the Trust
Account of $2,883,040, offset by the change in the fair value of warrant
liabilities and FPA of $1,102,533, formation and operating costs of $254,295 and
a provision for income taxes of $590,126.
For the nine months ended September 30, 2022, we had a net income of
$15,641,579, which consists of the change in the fair value of warrant
liabilities and FPA of $13,521,334 and interest earned on marketable securities
held in the Trust Account of $3,851,866, offset by formation and operating costs
of $961,818 and a provision for income taxes of $769,803.
For the three months ended September 30, 2021, we had a net income of
$6,273,216, which consists of a gain on the change in the fair value of warrant
and FPA liabilities of $6,493,921 and interest income on marketable securities
held in the Trust Account of $53,160, offset by operating expenses of $273,865.
For the nine months ended September 30, 2021, we had net income of $8,663,458,
which consists of a gain from change in fair value of the warrant and FPA
liabilities of $10,400,334 and interest income on marketable securities held in
the Trust Account of $113,576, offset by operating costs of $1,850,452.
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Liquidity and Capital Resources
On February 26, 2021 the Company consummated the Initial Public Offering of
60,000,000 Units, which includes the partial exercise by the underwriter of its
over-allotment option in the amount of 7,500,000 Units, at $10.00 per Unit,
generating gross proceeds of $600,000,000 which is described in Note 3.
Simultaneously with the closing of the Initial Public Offering, we consummated
the sale of 9,333,334 Private Placement Warrants at a price of $1.50 per Private
Placement Warrant in a private placement to the Sponsor, generating gross
proceeds of $14,000,001, which is described in Note 4.
Following the Initial Public Offering, the partial exercise of the
over-allotment option, and the sale of the Private Placement Warrants, a total
of $600,000,000 was placed in the Trust Account. We incurred $33,493,009 in
Initial Public Offering related costs, including $12,000,000 in cash
underwriting fees, $21,000,000 of deferred underwriting fees and $493,009 of
other offering costs.
For the nine months ended September 30, 2022, cash used in operating activities
was $1,128,703. Net income of $15,641,579 was affected by non-cash charges
(income) related to the change in fair value of the warrant and FPA liabilities
of $13,521,334, and interest earned in marketable securities held in Trust
Account of $3,851,866. Changes in operating assets and liabilities provided
$602,918 of cash for operating activities.
For the nine months ended September 30, 2021, cash used in operating activities
was $759,908. Net income of $8,663,458 was affected by non-cash charges (income)
related to the change in fair value of the warrant and FPA liabilities of
$10,400,334, interest earned in marketable securities held in Trust Account of
$113,576 and transaction costs associated with the warrants of $878,490. Changes
in operating assets and liabilities provided $212,054 of cash for operating
activities.
As of September 30, 2022, we had cash and marketable securities held in the
Trust Account of $603,426,422 (including $4,018,551 of interest income)
consisting of U.S. Treasury Bills with a maturity of 185 days or less. Interest
income on the balance in the Trust Account may be used by us to pay taxes.
Through September 30, 2022, we have withdrawn an amount of $592,128 in the
interest earned from the Trust Account to pay franchise and income tax.
We intend to use substantially all of the funds held in the Trust Account,
including any amounts representing interest earned on the Trust Account (less
income taxes payable), to complete our Business Combination. To the extent that
our capital stock or debt is used, in whole or in part, as consideration to
complete our 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.
As of September 30, 2022, we had cash of $172,608. We intend to use the funds
held outside the Trust Account primarily to identify and evaluate target
businesses, perform business due diligence on prospective target businesses,
travel to and from the offices, plants or similar locations of prospective
target businesses or their representatives or owners, review corporate documents
and material agreements of prospective target businesses, and structure,
negotiate and complete a Business Combination.
In order to fund working capital deficiencies or finance transaction costs in
connection with a Business Combination, the Sponsor, or certain of our officers
and directors or their affiliates may, but are not obligated to, loan us funds
as may be required. If we complete a Business Combination, we would repay such
loaned amounts. In the event that a 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.
We do not believe we will need to raise additional funds in order to meet the
expenditures required for operating our business. However, 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 Business Combination. Moreover, we may need to obtain additional
financing either to complete our Business Combination or because we become
obligated to redeem a significant number of our Public Shares upon consummation
of our Business Combination, in which case we may issue additional securities or
incur debt in connection with such Business Combination.
Going Concern
We have until February 26, 2023 to consummate a Business Combination. It is
uncertain that we will be able to consummate a Business Combination by this
time. If a Business Combination is not consummated by this date, there will be a
mandatory liquidation and subsequent dissolution. Management has determined that
the mandatory liquidation, should a Business Combination not occur, and
potential subsequent dissolution raises substantial doubt about our ability to
continue as a going concern. No adjustments have been made to the carrying
amounts of assets or liabilities should we be required to liquidate after
February 26, 2023.
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In connection with our assessment of going concern considerations in accordance
with Financial Accounting Standard Board's Accounting Standards Update ("ASU")
2014-15, "Disclosures of Uncertainties about an Entity's Ability to Continue as
a Going Concern," management has determined that if we are unable to complete a
Business Combination by February 26, 2023, then we will cease all operations
except for the purpose of liquidating. The date for mandatory liquidation and
subsequent dissolution raises substantial doubt about our ability to continue as
a going concern. No adjustments have been made to the carrying amounts of assets
or liabilities should we be required to liquidate after February 26, 2023.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered
off-balance sheet arrangements as of September 30, 2022. 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 purchased any non-financial assets.
Contractual obligations
We do not have any long-term debt, capital lease obligations, operating lease
obligations or long-term liabilities, other than an agreement to pay an
affiliate of our Sponsor a monthly fee of $10,000 for office space, secretarial
and administrative services. We began incurring these fees on February 26, 2021
and will continue to incur these fees monthly until the earlier of the
completion of the Business Combination and our liquidation.
The underwriters are entitled to a deferred fee of $0.35 per Unit, or
$21,000,000 in the aggregate. The deferred fee will be forfeited by the
underwriters solely in the event that the Company fails to complete a Business
Combination, subject to the terms of the underwriting agreement,
Critical Accounting Policies
The preparation of condensed financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the condensed financial statements, and income and
expenses during the periods reported. Actual results could materially differ
from those estimates. We have identified the following critical accounting
policies:
Warrant Liabilities and Forward Purchase Agreement Derivative Asset
The Company accounts for the Warrants and FPA in accordance with the guidance
contained in ASC 815-40, under which the Warrants and FPA do not meet the
criteria for equity treatment and must be recorded as assets or liabilities.
Accordingly, the Company classifies the Warrants and FPA as assets or
liabilities at their fair value and adjust the Warrants and FPA to fair value at
each reporting period. These assets or liabilities are subject to re-measurement
at each balance sheet date until exercised, and any change in fair value is
recognized in the statements of operations. The fair value of the Public
Warrants has been estimated using the Public Warrants' quoted market price. The
Private Placement Warrants are valued using a Modified Black-Scholes Option
Pricing Model, and the FPA's fair value was estimated using the reconstructed
unit price, the net present value of per forward purchase unit commitment, and
the forward purchase unit.
Class A Common Stock Subject to Possible Redemption
We account for our Class A common stock subject to possible redemption in
accordance with the guidance in ASC Topic 480 "Distinguishing Liabilities from
Equity." Shares of Class A common stock subject to mandatory redemption, if any,
are classified as a liability instrument and are measured at fair value.
Conditionally redeemable common stock (including common stock that feature
redemption rights that is either within the control of the holder or subject to
redemption upon the occurrence of uncertain events not solely within our
control) is classified as temporary equity. At all other times, common stock is
classified as stockholders' equity. Our Class A common stock features certain
redemption rights that are considered to be outside of our control and subject
to occurrence of uncertain future events. Accordingly, shares of Class A common
stock subject to possible redemption are presented as temporary equity, outside
of the stockholders' deficit section of our condensed balance sheets.
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Net Income Per Common Share
We have two classes of common stock, which are referred to as Class A and
Class B common stock. Income and losses are shared pro rata between the two
classes of common stock. Net income per common share is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Accretion associated with the redeemable shares of Class A common stock
is excluded from income per common share as the redemption value approximates
fair value.
Recent Accounting Standards
In August 2020, the FASB issued 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): Accounting for Convertible Instruments
and Contracts in an Entity's Own Equity" ("ASU 2020-06"), which simplifies
accounting for convertible instruments by removing major separation models
required under current GAAP. ASU 2020-06 removes certain settlement conditions
that are required for equity contracts to qualify for the derivative scope
exception, and it also simplifies the diluted earnings per share calculation in
certain areas. ASU 2020-06 is effective for fiscal years beginning after
December 15, 2023, including interim periods within those fiscal years, with
early adoption permitted. The Company adopted ASU 2020-06 on February 26, 2021
(inception). Adoption of the ASU did not impact the Company's financial
position, results of operations or cash flows.
Management does not believe that any recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material effect on our
condensed financial statements.
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HUDSON EXECUTIVE INVESTMENT CORP. III 
