References to the "Company," "Minority Equality Opportunities Acquisition Inc.,"
"our," "us" or "we" refer to Minority Equality Opportunities Acquisition Inc.
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the unaudited interim
condensed consolidated financial statements and the notes thereto contained
elsewhere in this report. Certain information contained in the discussion and
analysis set forth below includes forward-looking statements that involve risks
and uncertainties.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act. We have based these forward-looking statements
on our current expectations and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions about us that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "should," "could," "would," "expect,"
"plan," "anticipate," "believe," "estimate," "continue," or the negative of such
terms or other similar expressions. Factors that might cause or contribute to
such a discrepancy include, but are not limited to, those described in our other
SEC filings. Except as required by law, we assume no duty to update or revise
any forward-looking statements.
Overview
We are a blank check company incorporated on February 18, 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 (the "Business Combination").
Our sponsor is Minority Equality Opportunities Acquisition Sponsor, LLC, a
Delaware limited liability company (the "Sponsor"). The registration statement
for our initial public offering was declared effective on August 25, 2021. On
August 30, 2021, we consummated our initial public offering (the "Initial Public
Offering") of 12,650,000 Units, which included the full exercise by the
underwriters of the over-allotment option to purchase an additional 1,650,000
Units, at $10.00 per Unit, generating gross proceeds of $126,500,000.
Transaction costs amounted to $8,998,713, consisting of $2,403,500 of
underwriting fees, $4,554,000 of deferred underwriting fees, $586,779 of other
offering costs, and $1,454,434 of the fair value of the representative's common
stock. Of the $8,998,713 aggregate transaction costs, $741,209 was allocated to
expense associated with the warrant liability.
We issued 158,125 shares of Class A common stock, with a fair value of
$1,454,434, to Maxim, the representative of the underwriters, which is deemed
compensation by FINRA and therefore subject to a lock-up for a period of 180
days immediately following the commencement of sales of the IPO. Additionally,
Maxim has agreed not to transfer, assign or sell any such shares until the
completion of our initial Business Combination. In addition, Maxim has agreed
(i) to waive its redemption rights with respect to such shares in connection
with the completion of our initial Business Combination and (ii) to waive its
rights to liquidating distributions from the trust account with respect to such
shares if we fail to complete our initial Business Combination within 12 months
from the closing of the IPO (or 21 months from the closing of the IPO if we
extend the period of time to consummate the initial Business Combination).
Simultaneously with the closing of the IPO, we consummated the sale of an
aggregate of 6,027,500 warrants (the "Private Placement Warrants") at a price of
$1.00 per warrant in a private placement to our Sponsor and to Maxim Partners
LLC, generating gross proceeds to us of $6,027,500. A total of 5,395,000 Private
Placement Warrants were issued to the Sponsor and a total of 632,500 Private
Placement Warrants were issued to Maxim Partners LLC.
Upon the closing of the Initial Public Offering and the Private Placement, an
amount of $128,397,500 ($10.15 per Unit) from the net proceeds of the sale of
the Units in the IPO and the sale of the Private Placement Warrants was placed
in a trust account (the "Trust Account") and will only be invested in U.S.
government treasury obligations with a maturity of 185 days or less or in money
market funds meeting certain conditions under Rule 2a-7 under the Investment
Company Act which invest only in direct U.S. government treasury obligations.
Except with respect to interest earned on the funds held in the Trust Account
that may be released to our company to pay our franchise and income tax
obligations (less up to $100,000 of interest to pay dissolution expenses), the
proceeds from the IPO and the sale of the Private Placement Warrants will not be
released from the Trust Account until the earliest of: (a) the completion of our
initial Business Combination; (b) the redemption of any public shares properly
submitted in connection with a stockholder vote to amend our certificate of
incorporation: (i) to modify the substance or timing of our obligation to redeem
100% of the public shares if we do not complete the initial Business Combination
within 12 months from the closing of the IPO (or 21 months from the closing of
the IPO if we extend the period of time to consummate a Business Combination);
or (ii) with respect to any other material provision relating to stockholders'
rights or pre-Business Combination activity; and (c) the redemption of the
public shares if we are unable to complete the initial Business Combination
within 12 months from the closing of the IPO (or 21 months from the closing of
the IPO if we extend the period of time to consummate a Business Combination),
subject to applicable law.
Our management has broad discretion with respect to the specific application of
the net proceeds of the Initial Public Offering and the sale of the Private
Placement Warrants, although substantially all of the net proceeds are intended
to be applied generally toward consummating a Business Combination.
17
We will have only 12 months from the closing of the IPO (or 21 months from the
closing of the IPO if we extend the period of time to consummate the initial
Business Combination) (the "Combination Period") to complete the initial
Business Combination. However, if we anticipate that we may not be able to
consummate the initial Business Combination within 12 months, we may extend the
period of time to consummate a Business Combination by up to three additional
three-month periods (up to a maximum of 21 months from the closing of the IPO).
Pursuant to the terms of our certificate of incorporation and the trust
agreement entered into between us and Continental Stock Transfer & Trust
Company, in order to extend the time available for us to consummate our initial
Business Combination, the sponsor or its affiliates or designees must deposit
into the trust account, for each additional three-month period, $1,265,000
($0.10 per share), on or prior to the date of the deadline with respect to such
three-month extension period. Our sponsor and its affiliates or designees are
not obligated to fund the trust account to extend the time for us to complete
our initial Business Combination. If we are unable to complete the initial
Business Combination within the Combination Period, 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 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 the 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 the 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. There will be no redemption rights or liquidating
distributions with respect to the warrants, which will expire worthless if we
fail to complete the initial Business Combination within the Combination Period.
Proposed Business Combination
On August 30, 2022, we entered into a Business Combination Agreement (as it may
be amended, supplemented or otherwise modified from time to time, the "Business
Combination Agreement") with MEOA Merger Sub, Inc., a Delaware corporation and
our wholly owned subsidiary of MEOA ("Merger Sub"), and Digerati Technologies,
Inc., a Nevada corporation ("Digerati"). The Business Combination Agreement and
the transactions contemplated thereby were approved by the board of directors of
each of MEOA and Digerati.
The Business Combination Agreement provides, among other things, that Merger Sub
will merge with and into Digerati, with Digerati as the surviving company in the
merger and, after giving effect to such merger, Digerati shall be a wholly-owned
subsidiary of our company (the "Merger"). In addition, our company will be
renamed Digerati Holdings, Inc. The Merger and the other transactions
contemplated by the Business Combination Agreement are hereinafter referred to
as the "Business Combination". Other capitalized terms used, but not defined,
herein, shall have the respective meanings given to such terms in the Business
Combination Agreement.
In accordance with the terms and subject to the conditions of the Business
Combination Agreement, at the effective time of the Merger (the "Effective
Time"), among other things: (i) each share of Digerati outstanding as of
immediately prior to the Effective Time will be exchanged for shares of our
common stock based upon the exchange ratio set forth in the Business Combination
Agreement (the "Exchange Ratio"); (ii) all vested and unvested stock options of
Digerati will be assumed by our company and thereafter be settled or exercisable
for shares of our common stock, as applicable, determined based on the Exchange
Ratio; (iii) each warrant of Digerati will be canceled in exchange for a warrant
to purchase shares of our common stock determined based on the Exchange Ratio;
(iv) any shares of the Series A Preferred Stock of Digerati outstanding as of
the Effective Time will thereafter be convertible into a number of shares of our
common stock determined by multiplying the number of shares of Digerati common
stock into which such preferred shares would have been convertible immediately
prior to the Effective Time by the Exchange Ratio; (v) certain convertible notes
of Digerati issued following the signing of the Business Combination Agreement
and outstanding as of the Effective Time will thereafter be convertible into a
number of our common stock determined by multiplying the number of shares of
Digerati common stock into which such convertible notes would have been
convertible immediately prior to the Effective Time by the Exchange Ratio; and
(vi) each share of our Class A common stock and each share of our Class B common
stock that is issued and outstanding immediately prior to the Effective Time
shall become one share of our common stock following the consummation of the
Business Combination.
The Business Combination is expected to close in the first calendar quarter of
2023, following the receipt of the required approval by the stockholders of our
company and of Digerati, approval by the Nasdaq Stock Market ("Nasdaq") of the
initial listing application of the combined company filed in connection with the
Business Combination, and the fulfillment of other customary closing conditions.
The Business Combination Agreement contains customary representations and
warranties for transactions of this type. In addition, the Business Combination
Agreement contains certain customary covenants for transactions of this type,
including, among others, covenants with respect to the conduct of Digerati and
its subsidiaries during the period between execution of the Business Combination
Agreement and the closing of the Merger. Each of the parties to the Business
Combination Agreement has agreed to use its reasonable best efforts to cause all
actions and things necessary to consummate and expeditiously implement the
Business Combination.
18
Under the Business Combination Agreement, the obligations of the parties to
consummate the Merger are subject to the satisfaction or waiver of certain
customary closing conditions of the respective parties, including, without
limitation: (i) the applicable waiting period, if any, under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and
regulations promulgated thereunder relating to the Business Combination having
expired or been terminated and any other required regulatory approvals
applicable to the transactions contemplated by the Business Combination
Agreement having been obtained and remaining in full force and effect; (ii) no
order or law issued by any court of competent jurisdiction or other governmental
entity or other legal restraint or prohibition preventing the consummation of
the transactions contemplated by the Business Combination being in effect; (iii)
the registration statement on Form S-4 containing the joint proxy
statement/prospectus to be filed by our company relating to the Business
Combination Agreement and the Merger (the "Registration Statement") becoming
effective in accordance with the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), no stop order being issued by Securities and
Exchange Commission (the "SEC") and remaining in effect with respect to the
Registration Statement, and no proceeding seeking such a stop order being
threatened or initiated by the SEC and remaining pending; (iv) the initial
listing application of the combined company with Nasdaq in connection with the
Business Combination having been approved; (v) the board of directors of the
combined company consisting of the number of directors, and comprising the
individuals, determined pursuant to the Business Combination Agreement; (vi) the
approval and adoption of the Business Combination Agreement and the transactions
contemplated thereby by the requisite vote of our stockholders (the "Required
MEOA Stockholder Consent"); (vii) the approval and adoption of the Business
Combination Agreement and the transactions contemplated thereby by the requisite
vote of Digerati's stockholders; (viii) the absence of a Company Material
Adverse Effect since the date of the Business Combination Agreement that is
continuing; (ix) we shall have repaid, or shall have irrevocably arranged to
have repaid upon the closing, any and all loans that have been made to our
company by our sponsor, or, in lieu thereof, and with the consent of our
sponsor, such loans have been converted into warrants to purchase shares of our
common stock; (x) Digerati shall have provided to us evidence reasonably
satisfactory to us of (A) the exchange, effective prior to the closing, of all
of the issued and outstanding shares of Digerati's Series C Convertible
Preferred Stock for restricted shares of Digerati's common stock, (B) the
redemption, effective prior to the closing, by Digerati of all of the issued and
outstanding shares of Digerati's Series F Preferred Stock, and (C) the exercise,
effective prior to the closing, of warrants currently held by Post Road Special
Opportunity Fund II LP and Post Road Special Opportunity Fund II Offshore LP for
shares of Digerati common stock; (xi) the delivery of waivers by certain
executives of Digerati on the date of the Business Combination Agreement whereby
such executives waive any entitlement to claim that the consummation of the
transactions contemplated by the Business Combination Agreement, including the
Merger, constitutes "Good Reason" as defined in the existing employment
agreements that such individuals have entered into with Digerati or any of its
subsidiaries, (xii) our receipt at or prior to the closing of a lock-up
agreement between certain Digerati stockholders and our company (which lock-up
period shall last for not less than 180 days from the date of the closing ); and
(xiii) the receipt, at or prior to closing, by us of a duly executed copy of an
agreement between Post Road Administrative LLC and certain of its affiliates
("Post Road", and such agreement, the "PRG Resolution Agreement"), pursuant to
which, among other things, the breaches, if any, of the covenants contained in
that certain credit agreement, as amended to the date hereof, between and among
Post Road and T3 Communications, Inc. (a majority owned subsidiary of Digerati)
and its subsidiaries are resolved to our reasonable satisfaction.
The Business Combination Agreement may be terminated under certain customary and
limited circumstances at any time prior to the closing, including, without
limitation, (i) by the mutual written consent of us and Digerati; (ii) by us,
subject to certain exceptions, if any of the representations or warranties made
by Digerati are not true and correct or if Digerati fails to perform any of its
covenants or agreements under the Business Combination Agreement (including an
obligation to consummate the closing) such that certain conditions to our
obligations could not be satisfied and the breach (or breaches) of such
representations or warranties or failure (or failures) to perform such covenants
or agreements is (or are) not cured or cannot be cured within the earlier of (A)
thirty (30) days after written notice thereof, and (B) February 25, 2023 (the
"Termination Date"); (iii) by Digerati, subject to certain exceptions, if any of
the representations or warranties made by our company or Merger Sub are not true
and correct or if we or Merger Sub fails to perform any of its covenants or
agreements under the Business Combination Agreement (including an obligation to
consummate the closing) such that the condition to the obligations of Digerati
could not be satisfied and the breach (or breaches) of such representations or
warranties or failure (or failures) to perform such covenants or agreements is
(or are) not cured or cannot be cured within the earlier of (A) thirty (30) days
after written notice thereof, and (B) the Termination Date; (iv) by either us or
Digerati, if the closing does not occur on or prior to the Termination Date,
unless the breach of any covenants or obligations under the Business Combination
Agreement by the party seeking to terminate proximately caused the failure to
consummate the transactions contemplated by the Business Combination Agreement;
(v) by either us or Digerati, if (A) any governmental entity shall have issued
an order or taken any other action permanently enjoining, restraining or
otherwise prohibiting the transactions contemplated by the Business Combination
Agreement and such order or other action shall have become final and
non-appealable; or (B) if the Required MEOA Stockholder Consent is not obtained;
(vi) by us, if (A) Digerati does not deliver, or cause to be delivered to us a
Transaction Support Agreement duly executed by certain Digerati stockholders or
(B) the Digerati stockholders meeting has been held, has concluded, the Digerati
stockholders have duly voted, and Digerati stockholder approval was not
obtained; (vii) by us, if Digerati does not deliver, or cause to be delivered,
to us a duly executed copy of the PRG Resolution Agreement on or prior to
October 15, 2022; (viii) by Digerati, should we not have timely taken such
actions as are reasonably necessary to extend the period of time to complete an
initial business combination for an additional period of three months from
November 30, 2022; provided, that it shall be the obligation of Digerati to
timely make the deposit into the Trust Account in connection with such
extension, and Digerati shall not have a right to terminate the Business
Combination Agreement as a result of Digerati's failure to make such deposit;
(ix) by us should Digerati not deposit into the Trust Account in a timely manner
the funds necessary to extend the period for our company to complete an initial
business combination for an additional period of three months from November 30,
2022, in accordance with, and as required pursuant to, the Business Combination
Agreement; and (x) by us should: (A) Nasdaq not approve the initial listing
application for the combined company with Nasdaq in connection with the Business
Combination; (B) the combined company not have satisfied all applicable initial
listing requirements of Nasdaq; or (C) the common stock of the combined company
not have been approved for listing on Nasdaq prior to the date of the closing.
19
If the Business Combination Agreement is validly terminated, none of the parties
to the Business Combination Agreement will have any liability or any further
obligation under the Business Combination Agreement other than customary
confidentiality obligations, except in the case of a willful breach of any
covenant or agreement under the Business Combination Agreement or
fraud, provided, that (A) if we terminate the Business Combination Agreement
pursuant to clauses (ii), (vi), (vii) or (viii) of the preceding paragraph,
Digerati shall pay to us, promptly following such termination, and in any event
within not less than five business days following delivery of notice of
termination, a termination fee in the amount of $2,000,000, (B) if Digerati
terminates the Business Combination Agreement pursuant to clauses (iii) or (ix)
of the preceding paragraph, we shall pay to Digerati promptly following such
termination, and in any event within not less than five business days following
delivery of notice of termination, a termination fee in the amount of $2,000,000
and (C) in the event of a termination by us pursuant to clauses (ix) or (x) of
the preceding paragraph, Digerati shall pay to us, promptly following such
termination, and in any event within not less than five business days following
delivery of notice of termination, a termination fee in the amount of
$1,265,000.
A copy of the Business Combination Agreement has been filed as Exhibit 2.1
hereto (the terms of which are incorporated herein by reference) and the
foregoing description of the Business Combination Agreement is qualified in its
entirety by reference thereto.
The Business Combination Agreement contains representations, warranties and
covenants that the respective parties made to each other as of the date of the
Business Combination Agreement or other specific dates. The assertions embodied
in those representations, warranties and covenants were made for purposes of the
contract among the respective parties and are subject to important
qualifications and limitations agreed to by the parties in connection with
negotiating such agreement. The representations, warranties and covenants in the
Business Combination Agreement are also modified in important part by the
underlying disclosure schedules which are not filed publicly and which are
subject to a contractual standard of materiality different from that generally
applicable to stockholders and were used for the purpose of allocating risk
among the parties rather than establishing matters as facts. We do not believe
that these schedules contain information that is material to an investment
decision.
Recent Developments
On August 30, 2022, an affiliate of our sponsor funded an extension loan in the
amount of $1,265,000 and caused such amount to be deposited into the trust
account maintained for our company by Continental Stock Transfer & Trust Company
in order provide additional time for our company to complete an initial business
combination. The loan is unsecured and non-interest bearing. If we complete an
initial business combination by November 30, 2022, or such later date as may be
determined in accordance with our Amended and Restated Certificate of
Incorporation, we will, at the option of our Sponsor (or its affiliate), (i)
repay the extension loan out of the proceeds of our trust account that are
released to our company, or (ii) convert a portion or all of the loan into
warrants to purchase shares of our common stock at a price of $1.00 per warrant,
which warrants will be identical to the private placement warrants issued to our
sponsor at the time of our initial public offering. If we do not complete our
initial business combination on or prior to November 30, 2022, or such later
date as may be determined in accordance with our Amended and Restated
Certificate of Incorporation, we will only repay the extension loan from funds
held outside of our trust account.
On September 3, 2021, an affiliate of our sponsor funded a working capital loan
in the amount of up to $500,000. The loan is unsecured and non-interest bearing.
If we complete an initial business combination by November 30, 2022, or such
later date as may be determined in accordance with our Amended and Restated
Certificate of Incorporation, we will, at the option of our Sponsor (or its
affiliate), (i) repay the loan out of the proceeds of our trust account that are
released to our company, or (ii) convert a portion or all of the loan into
warrants to purchase shares of our common stock at a price of $1.00 per warrant,
which warrants will be identical to the private placement warrants issued to our
sponsor at the time of our initial public offering. If we do not complete our
initial business combination on or prior to November 30, 2022, or such later
date as may be determined in accordance with our Amended and Restated
Certificate of Incorporation, we will only repay the working capital loan from
funds held outside of our trust account.
Liquidity, Capital Resources and Going Concern Considerations
As of September 30, 2022, we had $209,983 in cash and working capital deficit of
$1,810,933.
Based on the foregoing, management believes that we will not have sufficient
working capital and borrowing capacity to meet our needs through the earlier of
the consummation of a Business Combination or one year from IPO filing. Over
this time period, we will be using these funds for paying existing accounts
payable, 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.
Our liquidity needs up to September 30, 2022 had been satisfied through a
capital contribution from our Sponsor of $25,000 for the founder shares and the
loan under an unsecured promissory note from our Sponsor of up to $300,000.
After consummation of the IPO on August 30, 2021, we had approximately $1.6
million in our operating bank account, and working capital of approximately $0.8
million. On September 3, 2021, the Sponsor agreed to provide us with loans in
such amounts as may be required to fund our working capital requirements up to
an aggregate of $500,000. In addition, in order to finance transaction costs in
connection with a 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.
On February 28, 2022, March 21, 2022, and September 19, 2022, the Sponsor (or an
affiliate of the Sponsor) agreed to loan to us $174,000, $163,000, and $163,000,
respectively, as part of the Working Capital Loans. The promissory notes are
non-interest bearing and payable upon consummation of our initial Business
Combination. At the lender's discretion, the promissory notes may be repayable
in warrants of the post Business Combination entity at a price of $1.00 per
warrant. As of September 30, 2022 and December 31, 2021, there was $500,000 and
$0 of borrowings, respectively. We assessed the provisions of the convertible
promissory notes under ASC 815-15. The derivative component of the obligations
is initially valued and classified as derivative liabilities with an offset to a
discount on the promissory notes. To calculate the value of the embedded
derivative the Monte Carlo Model was utilized to fair value the underlying
warrants and the compound option. The fair value of the conversion feature was
zero at the dates of issuance and at September 30, 2022.
20
We are within 12 months of our mandatory liquidation date as of the time of
filing of this Quarterly Report on Form 10-Q. In connection with the Company's
assessment of going concern considerations in accordance with Accounting
Standards Update ("ASU") 2014-15, "Disclosures of Uncertainties about an
Entity's Ability to Continue as a Going Concern," the Company has until August
30, 2022 to consummate a Business Combination. It is uncertain that the Company
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 of the Company. Management has determined
that insufficient working capital and the mandatory liquidation, should a
Business Combination not occur, and potential subsequent dissolution raises
substantial doubt about the Company's ability to continue as a going concern.
These condensed consolidated 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 we be unable to continue as a going
concern.
Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic and the
Russian military action in Ukraine and has concluded that while it is reasonably
possible that the virus and/or such military action could have a negative effect
on our financial position, results of its operations, and/or search for a target
company, the specific impact is not readily determinable as of the date of the
condensed consolidated financial statements included in this report. The
condensed consolidated financial statements included in this report do not
include any adjustments that might result from the outcome of this uncertainty.
Inflation Reduction Act of 2022
On August 16, 2022, the Inflation Reduction Act of 2022 (the "IR Act") was
signed into federal law. The IR Act provides for, among other things, a new U.S.
federal 1% excise tax on certain repurchases of stock by publicly traded U.S.
domestic corporations and certain U.S. domestic subsidiaries of publicly traded
foreign corporations occurring on or after January 1, 2023. The excise tax is
imposed on the repurchasing corporation itself, not its shareholders from which
shares are repurchased. The amount of the excise tax is generally 1% of the fair
market value of the shares repurchased at the time of the repurchase. However,
for purposes of calculating the excise tax, repurchasing corporations are
permitted to net the fair market value of certain new stock issuances against
the fair market value of stock repurchases during the same taxable year. In
addition, certain exceptions apply to the excise tax. The U.S. Department of the
Treasury (the "Treasury") has been given authority to provide regulations and
other guidance to carry out and prevent the abuse or avoidance of the excise
tax.
Any redemption or other repurchase that occurs after December 31, 2022, in
connection with a Business Combination, extension vote or otherwise, may be
subject to the excise tax. Whether and to what extent the Company would be
subject to the excise tax in connection with a Business Combination, extension
vote or otherwise would depend on a number of factors, including (i) the fair
market value of the redemptions and repurchases in connection with the Business
Combination, extension or otherwise, (ii) the structure of a Business
Combination, (iii) the nature and amount of any "PIPE" or other equity issuances
in connection with a Business Combination (or otherwise issued not in connection
with a Business Combination but issued within the same taxable year of a
Business Combination) and (iv) the content of regulations and other guidance
from the Treasury. In addition, because the excise tax would be payable by the
Company and not by the redeeming holder, the mechanics of any required payment
of the excise tax have not been determined. The foregoing could cause a
reduction in the cash available on hand to complete a Business Combination and
in the Company's ability to complete a Business Combination.
Results of Operations
As of September 30, 2022, we had not commenced any operations. All activity for
the period from February 18, 2021 (inception) through September 30, 2022 relates
to our formation and the Initial Public Offering and search for a target for our
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 the completion of our initial Business Combination, at the earliest.
We will generate non-operating income in the form of interest income on cash and
cash equivalents from the proceeds derived from the Initial Public Offering. We
expect to incur increased 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 loss of $606,822,
which included formation and operating costs of $760,442, change in fair value
of derivative liability - conversion feature of $6,463, change in fair value of
convertible promissory note - conversion feature of $31,817, interest expense of
$766, change in fair value of warrant liabilities of $288,286, and provision for
income tax of $88,687, offset by interest income earned on cash held in Trust
Account of $569,639.
For the nine months ended September 30, 2022, we had a net income of $5,329,079,
which included a gain from the change in fair value of warrant liabilities of
$6,185,662, and interest income earned on cash held in Trust Account of
$746,121, offset by formation and operating costs of $1,473,873, change in fair
value of convertible promissory note - conversion feature of $31,817, interest
expense of $766, change in fair value of derivative liability - conversion
feature of $7,561, and provision for income tax of $88,687.
For the three months ended September 30, 2021, we had a net loss of $1,103,610,
which consisted of a loss from operations of $88,443, offering costs allocated
to warrants expense of $741,209 and a loss on change in fair value of warrant
liabilities of $273,958.
For the period from February 18, 2021 (inception) to September 30, 2021, we had
net loss of $1,104,242 million, which consisted of a loss from operations of
$89,075, offering costs allocated to warrants expense of $741,209 and a loss on
change in fair value of warrant liabilities of $273,958.
Contractual Obligations
We do not have any long-term debt obligations, capital lease obligations,
operating lease obligations, purchase obligations or long-term liabilities.
21
Administrative Services Agreement
Commencing on the date that our securities were first listed on the NASDAQ
Capital Market, pursuant to an Administrative Support Agreement (the "Support
Agreement") dated August 25, 2021 by and between our company and Sphere 3D Corp.
("Sphere"), an affiliate of our Sponsor, we agreed to pay to Sphere 3D Corp., an
affiliate of our Sponsor, $10,000 per month for office space, utilities and
secretarial and administrative support services. Upon the earlier of the
completion of the initial Business Combination or our liquidation, we will cease
paying such monthly fees. We and Sphere amended and restated the Support
Agreement on May 16, 2022 (the "Amendment"). Pursuant to the Amendment, we and
Sphere agreed that, notwithstanding anything in the Support Agreement to the
contrary, the monthly payment referenced in clause (i) of the Support Agreement
shall, beginning with respect to the monthly period that began on February 26,
2022, and continuing thereafter until the earlier of the consummation of our
initial Business Combination or the liquidation of our company, accrue without
interest thereon and be due and payable on the earlier of the consummation by
our company of an initial Business Combination or the liquidation of our
company.
Registration Rights
The holders of the founder shares, representative's common stock, Private
Placement Warrants and warrants that may be issued upon conversion of Working
Capital Loans (and any shares of Class A common stock issuable upon the exercise
of the Private Placement Warrants and warrants that may be issued upon
conversion of Working Capital Loans and upon conversion of the founder shares)
will be entitled to registration rights pursuant to a registration rights
agreement dated August 25, 2021, requiring us to register such securities for
resale (in the case of the founder shares, only after conversion to Class A
common stock). The holders of these securities will be entitled to make up to
three demands, excluding short form demands, that we register such securities.
In addition, the holders have certain "piggy-back" registration rights with
respect to registration statements filed subsequent to the completion of the
initial Business Combination. Notwithstanding the foregoing, the underwriters
may not exercise their demand and "piggyback" registration rights after five and
seven years after the effective date of the registration statement for the IPO
and may not exercise their demand rights on more than one occasion.
Underwriting Agreement
The underwriter had a 45-day option from the date of the IPO to purchase up to
an aggregate of 1,650,000 additional Units at the public offering price less the
underwriting commissions to cover over-allotments, if any. On August 30, 2021,
the underwriter fully exercised its over-allotment option.
The underwriter is entitled to a deferred underwriting discount of 3.6% of the
gross proceeds of the Initial Public Offering, which included the exercise of
the over-allotment option, or $4,554,000, held in the Trust Account upon the
completion of our initial Business Combination subject to the terms of the
underwriting agreement. On August 30, 2022, the Company amended the underwriting
agreement to reflect a commission value equal to the product of (i) $4,554,000
and (ii) 1 minus the quotient resulting by dividing the percentage of
redemptions by 2. Additionally, the payment of the deferred underwriting
commission shall be paid in cash but shall be subordinate to the payments of up
to $2,500,000 of Sponsor loans to the Company and up to $2,500,000 of debt
repayment to other parties.
Financial Advisory Agreements
In November 2021, we entered into agreements with PGP Capital Advisors and
Vaughan Capital Advisors whereby such entities would provide financial advisory
services to our company. Pursuant to such agreements, we would pay monthly fees
to such advisors in the aggregate amount of $25,000 and would reimburse such
advisors for their out-of-pocket costs and expenses. We also agreed to pay to
such advisors an aggregate success fee upon the closing of a business
combination transaction equal to the sum of: (i) three percent of the
transaction value of the target company in such business combination up to $100
million, plus (ii) two percent of the transaction value of the target company
greater than $100 million up to $200 million, plus (iii) one percent of the
transaction value of the target company above $200 million. The success fee
shall be reduced by the monthly fees previously paid to the financial advisors.
The financial advisors shall have the option to receive an equivalent dollar
amount of warrants and/or shares of our Class A common stock in lieu of cash up
to twenty percent of the success fee payable.
On August 30, 2022, we amended the agreements with our financial advisors to
provide for a $40,000 retainer payment to be paid within forty-five (45) days
following the amendment and to provide that if the proposed Business Combination
with Digerati closes, the advisors shall be entitled to an aggregate success fee
upon the closing of the Business Combination equal to two percent of the
transaction value of Digerati up to $100 million, with such success fee to be
reduced by the aggregate amount of all payments to the advisors prior to the
closing.
Recent Accounting Pronouncements
Management does not believe that any other recently issued, but not effective,
accounting standards, if currently adopted, would have a material effect on the
Company's condensed consolidated financial statements.
22
Critical Accounting Policies
Offering Costs
We comply with the requirements of ASC 340-10-S99-1. Deferred offering costs
consists of legal, accounting, underwriting fees and other costs incurred
through the balance sheet date that are directly related to the Public
Offering. Offering costs are allocated to the separable financial instruments
to be issued in the IPO based on a relative fair value basis, compared to total
proceeds received. Upon closing of the IPO on August 30, 2021, offering costs
associated with warrant liabilities were expensed, and offering costs associated
with the Class A common stock were charged to temporary equity. Transaction
costs amounted to $8,998,713, of which $741,209 were allocated to expense
associated with the warrant liability.
Convertible Instruments
The Company accounts for its promissory notes that feature conversion options in
accordance with ASC No. 815, Derivatives and Hedging Activities ("ASC No. 815").
ASC No. 815 requires companies to bifurcate conversion options from their host
instruments and account for them as freestanding derivative financial
instruments according to certain criteria. The criteria includes circumstances
in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics
and risks of the host contract, (b) a promissory note that embodies both the
embedded derivative instrument and the host contract is not re-measured at fair
value under otherwise applicable GAAP with changes in fair value reported in
earnings as they occur and (c) a separate instrument with the same terms as the
embedded derivative instrument would be considered a derivative instrument.
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 Accounting Standards Codification ("ASC") Topic
480 "Distinguishing Liabilities from Equity." Class A common stock subject to
mandatory redemption is classified as a liability instrument and is measured at
fair value. Conditionally redeemable common stock (including common stock that
features redemption rights that are either within the control of the holder or
subject to possible redemption upon the occurrence of uncertain events not
solely within our control) is classified in temporary equity. At all other
times, common stock is classified as stockholders' equity. Our Class A common
stock feature certain redemption rights that are considered to be outside of our
control and subject to occurrence of uncertain future events. Accordingly, at
September 30, 2022 and December 31, 2021, the 12,650,000 Class A common stock is
presented at redemption value as temporary equity, outside of the stockholders'
deficit section of our balance sheets. There was no change to redemption value
at September 30, 2022 since the incurred taxes exceed the interest earned
inception to date. The dissolution expense of $100,000 is not included in the
redemption value of the shares subject to possible redemption since it is only
taken into account in the event of the Company's liquidation.
Net Income (Loss) Per Common Stock
We have two classes of shares, Class A common stock and Class B common stock.
Earnings and losses are shared pro rata between the two classes of shares. We
have not considered the effect of the outstanding warrants to purchase
18,677,500 shares of Class A common stock in the calculation of diluted income
per share, since their exercise is contingent upon future events. As a result,
diluted net income per common stock is the same as basic net income per common
stock for the periods.
Derivative Financial Instruments
We evaluated the financial instruments to determine if such instruments are
derivatives or contain features that qualify as embedded derivatives in
accordance with ASC Topic 815, "Derivatives and Hedging". Derivative instruments
are initially recorded at fair value on the grant date and re-valued at each
reporting date, with changes in the fair value reported in the statements of
operations. Derivative assets and liabilities are classified in the balance
sheets as current or non-current based on whether or not net-cash settlement or
conversion of the instrument could be required within 12 months of the balance
sheet date.
Warrant Liability
We evaluated the Public Warrants and Private Placement Warrants to be issued in
the IPO (collectively, "Warrants") in accordance with ASC 815-40, "Derivatives
and Hedging - Contracts in Entity's Own Equity" and concluded that a provision
in the Warrant Agreement related to certain tender or exchange offers precludes
the Warrants from being accounted for as components of equity. As the Warrants
meet the definition of a derivative as contemplated in ASC 815, the Warrants
will be recorded as derivative liabilities on the balance sheets and measured at
fair value at inception (on the date of the IPO) and at each reporting date in
accordance with ASC 820, "Fair Value Measurement", with changes in fair value
recognized in the statements of operations in the period of change.
Off-Balance Sheet Arrangements
As of September 30, 2022 and December 31, 2021, we did not have any off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Inflation
We do not believe that inflation had a material impact on our business, revenues
or operating results during the period presented.
23
Emerging Growth Company Status
We are an "emerging growth company," as defined in Section 2(a) of the
Securities Act, as modified by the Jumpstart our Business Startups Act of 2012
(the "JOBS Act"), and may take advantage of certain exemptions from various
reporting requirements that are applicable to other public companies that are
not emerging growth companies including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in its periodic reports and proxy statements, and exemptions from
the requirements of holding a nonbinding advisory vote on executive compensation
and stockholder approval of any golden parachute payments not previously
approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies
from being required to comply with new or revised financial accounting standards
until private companies (that is, those that have not had a Securities Act
registration statement declared effective or do not have a class of securities
registered under the Exchange Act) are required to comply with the new or
revised financial accounting standards. The JOBS Act provides that a company can
elect to opt out of the extended transition period and comply with the
requirements that apply to non-emerging growth companies but any such election
to opt out is irrevocable. We have elected not to opt out of such extended
transition period which means that when a standard is issued or revised and it
has different application dates for public or private companies, the Company, as
an emerging growth company, can adopt the new or revised standard at the time
private companies adopt the new or revised standard. This may make comparison of
our condensed consolidated financial statements with another public company
which is neither an emerging growth company nor an emerging growth company which
has opted out of using the extended transition period difficult or impossible
because of the potential differences in accounting standards used.
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