PERSHING SQUARE TONTINE HOLDINGS, LTD. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the 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.
Overview
We are a blank check company incorporated 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 intend to effectuate our Initial Business Combination using cash from the proceeds of the initial public offering and the private placements of the Sponsor Warrants, Director Warrants and Forward Purchase Units, our capital stock, debt or a combination of cash, stock and debt. Our Initial Business Combination will be a negotiated transaction, not a hostile takeover.
The issuance of additional shares of our stock in a business combination,
including the
• significantly dilute the equity interest of investors;
• subordinate the rights of holders of our common stock if preferred stock
is issued with rights senior to those afforded our common stock;
• cause a change in control if a substantial number of shares of our common
stock is issued, which may affect, among other things, our ability to use
net operating loss carry forwards, if any, and could result in the
resignation or removal of our present directors and officers;
• have the effect of delaying or preventing a change of control of us by
diluting the stock ownership or voting rights of a person seeking to
obtain control of us; and
• adversely affect prevailing market prices for our shares of Class A
Common Stock and/or Redeemable Warrants.
Similarly, if we issue debt instruments or otherwise incur significant indebtedness, it could result in:
• default and foreclosure on our assets if our operating revenues after our
Initial Business Combination are insufficient to repay our debt
obligations;
• 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 security is payable on demand;
• our inability to obtain necessary additional financing if the debt
security contains covenants restricting our ability to obtain such
financing while the debt security 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 to pay
expenses, make capital expenditures and acquisitions, and fund 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;
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• increased vulnerability to adverse changes in general economic, industry
and competitive conditions and adverse changes in government regulation;
limitations on our ability to borrow additional amounts for expenses,
capital expenditures, acquisitions, debt service requirements, and
execution of our strategy; and
• other purposes and other disadvantages compared to our competitors who
have less debt.
We expect to continue to incur costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete our Initial Business Combination will be successful. Recent Developments
Proposed and Subsequent Cancellation of an Initial Business Combination
Below is a description of the proposed Initial Business Combination, which was ultimately not consummated.
OnJune 20, 2021 , the Company entered into a Share Purchase Agreement (the "Share Purchase Agreement") with Vivendi SE to purchase a number of ordinary shares, par value €10 per share (the "UMG Shares"), representing approximately 10% of the share capital and voting rights, on a fully diluted basis, of Universal Music Group ("UMG") for approximately$4 billion (the "Share Purchase"), with the expectation that the Company would distribute the UMG Shares to its Public Stockholders (the "Distribution" and together with the Share Purchase, the "Proposed IBC"). The Company expected that the Share Purchase would be consummated in the third quarter of 2021 and the Shares held in trust under the Distribution which would occur in November orDecember 2021 . In connection with the Proposed IBC, the Company and Vivendi also entered into an indemnification agreement pursuant to which the Company agreed to indemnify Vivendi and certain of its related parties for certain potential liabilities in connection with the Company's redemption tender offer, the warrant exchange offer and the Distribution (each as further described below). Also onJune 20, 2021 , the Company, the Sponsor, the Pershing Square Funds and the Company's independent directors entered into the Pershing Entities Letter Agreement, pursuant to which:
• The Company and the Pershing Square Funds agreed to amend and restate
the Forward Purchase Agreement concurrently with the closing of the
Proposed IBC, pursuant to which the Forward Purchasers would exercise
their right to purchase an aggregate amount of $1.6 billion of Forward
Purchase Units ($1.0 billion of Committed Forward Purchase Units and
$600 million of Additional Forward Purchase Units). The price
per share
at which the Pershing Square Funds would have exercised such amended
Forward Purchase Agreement would be equal to RemainCo's (defined below)
net asset value at the time of such purchase;
• The Company and the Sponsor agreed to amend the Sponsor Warrants
concurrently with the closing of the Proposed IBC, such that the Sponsor
Warrants would not be exercised or otherwise participate in the Proposed
IBC. Instead, they would remain in place, but the exercise price would
be adjusted to equal 120% of RemainCo's net asset valueimmediately
prior to the time it completed its anticipated future business
combination with an operating business; and
• The Company and its independent directors agreed that the Director
Warrants would not be exercised in connection with the Proposed IBC, and
would be amended concurrently with the closing of the Proposed IBC. The
result of such amendment would have been that, (i) the holders of the
Director Warrants would receive shares in the Company in exchange for
approximately 72% of the fair market value of the DirectorWarrants (as
determined by a third-party valuation firm), to compensate for the fact
that they would not participate in the Proposed IBC as originally
envisioned, (ii) such shares would participate in the Distribution and
(iii) the roughly 28% of the value of the Director Warrantswould remain
in place with their exercise price adjusted in the same manner as the
exercise price of the Sponsor Warrants as explained above.
The Company further announced that it expected to undertake a 1:4 reverse stock
split following the issuance of the Distributable Tontine Redeemable Warrants,
all warrants in respect of the Forward Purchase Agreement and Director Forward
Purchase Agreements and the Distribution to target a net asset value ("NAV") of
approximately $22 per share.
Pursuant to the Proposed IBC, following the Distribution, the Company would have
continued to exist and it would not have disappeared into UMG nor would it have
been liquidated. The Company that would have continued to exist is referred to
herein as "RemainCo". RemainCo would have been the same corporate entity and it
would have continued to be named Pershing Square Tontine Holdings, Ltd. The
Public Stockholders would have continued to own shares in RemainCo, and it was
intended that RemainCo would pursue a traditional business combination with an
operating business (RemainCo's "Future Business Combination").
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OnJuly 8, 2021 , the Company launched (i) a redemption tender offer which was intended to provide Public Stockholders with the opportunity to exercise their right to redeem their shares of Class A Common Stock in connection with the Proposed IBC and (ii) a warrant exchange offer which provided holders of the Company's currently outstanding Distributable Redeemable Warrants the opportunity to exchange those warrants for shares of Class A Common Stock at a ratio of 0.2650 shares per warrant. OnJuly 19, 2021 , the Company announced that its board of directors had unanimously determined not to proceed with the Proposed IBC and the Company had agreed to assign its rights and obligations under the Share Purchase Agreement with Vivendi to Pershing Square Holdings, Ltd. and certain of its affiliates (the "Assignees"). The Assignees agreed to purchase or cause to be purchased at least 5% of the share capital of UMG on the terms and subject to the conditions of the Share Purchase Agreement and Vivendi acknowledged that if the Assignees purchased at least 5% of the share capital of UMG, the Share Purchase Agreement would be of no further force with respect to remaining UMG shares to be purchased under the Share Purchase Agreement. In addition, the Assignees, severally in accordance with their obligations to purchase UMG shares, agreed to assume and reimburse the Company for out-of-pocket expenses incurred to that time by the Company in connection with transactions related to the Proposed IBC, which totaled$25.1 million . The Assignees also assumed, severally in accordance with their obligations to purchase UMG shares, the Company's obligations under the indemnification agreement, between the Company and Vivendi. OnJuly 21, 2021 , the Company terminated its redemption tender offer and warrant exchange offer, and no shares were redeemed from the Company. As a result of the termination of these offers and the cancellation of the Proposed IBC, the Pershing Entities Letter Agreement did not come into effect and there have been no changes to the instruments discussed as exhibits to such letter agreement. TheFPA , Sponsor Warrants and Director Warrants remain as initially issued as ofJune 21, 2020 andJuly 21, 2020 , respectively.
The Company continues to seek an initial business combination.
OnAugust 10, 2021 , the Assignees completed an initial closing under the Share Purchase Agreement, as a result of which the Company was released from its obligations under the Share Purchase Agreement and the indemnification agreement described above (which indemnity was allocated without the participation of the Company, among the Pershing Square Funds). Also onAugust 10, 2021 , the Company entered into an assignment of the registration rights agreement to the Assignees, at which time the registration rights agreement was amended to provide, among other things, the Assignees certain rights to register UMG shares for a public offering no earlier than 2023 rather than providing for the Distribution that the Company originally envisioned.
Certain Observations
During the first two months of 2022, we have continued to work on identifying a target for an Initial Business Combination. For the year endedDecember 31, 2021 , we recorded net income of$833,301,124 , which was primarily due to a non-cash GAAP gain of$836,147,258 related to the change in valuations of our Public Warrants, Sponsor Warrants, Director Warrants ("Private Placement Warrants", collectively with the Public Warrants, the "Outstanding Warrants") and the Forward Purchase Agreement and Director Forward Purchase Agreement (collectively, the "FPA"), each of which was previously accounted for as equity on our financial statements throughDecember 31, 2020 . The change in accounting was initiated following a statement by the Staff of theSecurities & Exchange Commission on accounting for SPAC warrants. Following theSEC's public statement, management along with the audit committee reconsidered accounting issues related to these instruments and restated our financial statements atDecember 31, 2020 to account for our Outstanding Warrants andFPA as derivative liabilities. For the year endedDecember 31, 2021 , this accounting treatment has required us to record a non-cash gain which we believe will not have any effect on our ability to consummate an initial business combination. Changes in our stock price could lead to large fluctuations of fair value as a result of this accounting treatment. If our stock price increases over a given measurement period, the fair values of our warrants andFPA will also increase in value and result in a liability being recorded on our balance sheet and a non-cash GAAP loss recorded in our earnings statement for the period, all other things being equal. Conversely, if our stock price declines over a measurement period, we will record a smaller liability or an asset on our balance sheet and report a non-cash GAAP gain in our earnings statement, notwithstanding that our stockholders will be holding shares that have declined in value over the measurement period. 53
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Non-cash
GAAP gains or losses due to changes in the fair value of such instruments have no impact on our cash balances - including the more than$4 billion we hold in a trust account at J.P. Morgan - and the minimum Committed FPA of$1 billion , nor do we expect the change in accounting to have any impact on our ability to consummate a potential initial business combination.
Results of Operations
All activities throughDecember 31, 2021 were related to the Company's organizational activities, preparation for the Company's initial public offering, identifying a target company for a business combination and activities in connection with the Proposed IBC and its subsequent cancellation. We will not generate any operating revenues until after completion of our Initial Business Combination. We generate non-operating income in the form of interest and dividends on cash and cash equivalents, and marketable securities held in the trust account. We incur ongoing expenses as a result of being a public company for legal, financial reporting, accounting and auditing compliance, as well as for due diligence and Initial Business Combination related transaction expenses. For the year endedDecember 31, 2021 , we had net income of$833,301,124 , which consisted of (i) non-cash gain related to change in the fair value of Forward Purchase Agreement liabilities/assets of$598,782,500 , (ii) non-cash gain related to change in the fair value of Outstanding Warrant liabilities of$237,364,758 , (iii) income earned on marketable securities held in the trust account of$1,850,026 , (iv) IBC related fees reimbursement of$1,343,817 , and (v) interest and dividends earned on marketable securities held in the operating account of$2,146 , offset by (a) legal, insurance, research, franchise tax and other expenses totaling$5,734,774 , and (b) provision for income taxes of$307,349 . For the period fromMay 4, 2020 (inception) throughDecember 31, 2020 , we had net loss of$954,881,205 , which consisted of (i) non-cash loss related to change in the fair value of Forward Purchase Agreement liabilities/assets of$593,893,320 , (ii) non-cash loss related to change in the fair value of Outstanding Warrant liabilities of$358,644,962 , (iii) offering costs attributed to Outstanding Warrant liabilities of$912,625 , (iv) legal, insurance, research, franchise tax and other expenses totaling$1,489,208 , (v) IBC related fees of$1,343,817 , and (vi) provision for income taxes of$289,155 , offset by (a) income earned on marketable securities held in the trust account of$1,690,454 , and (b) interest and dividends earned on marketable securities held in the operating account of$1,428 .
Non-GAAP
Financial Measures
As noted above, the Company was 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. As such, we believe the amount of committed capital available for an Initial Business Combination is critical to our success as a blank check company. See Liquidity and Capital Resources below for further information on our unrestricted cash balances and funds held in the trust account as ofDecember 31, 2021 . In addition, we report adjusted net loss, which is a non-GAAP financial measure that is not required by, or presented in accordance with, GAAP. Management uses this non-GAAP measure to evaluate results as it reduces the volatility of operations due to the accounting for our warrants and forward purchase agreements, which are more fully described in Note 2 of the Notes to Financial Statements included herein, and which do not have an impact on the funds held in the trust account or committed capital available for an Initial Business Combination. We believe this information is useful to investors for these reasons. This non-GAAP measure should not be considered a substitute for the most directly comparable GAAP measures, which are reconciled below. Further, this measure has limitations as an analytical tool, and when assessing our operating performance, you should not consider this measure in isolation or as a substitute for GAAP measures. We may calculate or present this non-GAAP financial measure differently than other companies who report measures with the same or similar names, and as a result, the non-GAAP measure we report may not be comparable. Adjusted net income/(loss) represents our net income/(loss) excluding the change in fair value of forward purchase agreement liabilities/assets and the change in fair value of Outstanding Warrant liabilities, which are non-cash items. As ofDecember 31, 2021 , our balance sheets reflect a net liability of$220,450,746 (net of Forward Purchase Agreement assets) (December 31, 2020 :$1,056,598,004 ) related to derivative liabilities/assets which do not impact the funding available for an Initial Business Combination. As can be observed, the value of the liabilities/assets relating to these instruments under GAAP (and the related income/(loss) that flows through the statements of operations) can swing significantly when in fact no economic changes have occurred. 54
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For the Period from May 4,
For the Year Ended 2020 (inception) through
December 31, 2021 December 31, 2020
Net income/(loss) )
$ 833,301,124 $ (954,881,205
Less:
Change in fair value of Forward
Purchase Agreement liabilities 598,782,500 (593,893,320 )
Change in fair value of Outstanding
Warrant liabilities 237,364,758 (358,644,962 )
Offering costs allocable to
Outstanding Warrant liabilities - (912,625 )
Adjusted net loss $ (2,846,134 ) $ (1,430,298 ) Liquidity and Capital Resources
Our liquidity needs had been satisfied prior to the consummation of the initial public offering through a capital contribution of$25,000 by our Sponsor in exchange for 100 shares of Class B Common Stock, and interest-bearing loans of$1,121,120 from our Sponsor under an unsecured promissory note covering expenses related to the initial public offering. The loan was repaid in full onJuly 24, 2020 , inclusive of interest. As ofDecember 31, 2021 andDecember 31, 2020 ,$378,880 was left under the promissory note to be drawn down, and there were no borrowings outstanding, respectively.
On
Following the initial public offering and the private placements of Sponsor Warrants and Director Warrants, a total of$4,000,000,000 was placed into the trust account. We incurred$94,623,187 in offering costs, including$35,000,000 of underwriting fees,$56,250,000 of deferred underwriting fees and$3,373,187 of other offering costs. The per share amount to be distributed to Public Stockholders who properly redeem their Public Shares will not be reduced by the deferred underwriting fees (further discussed below). As ofDecember 31, 2021 , we had an unrestricted cash balance of$23,156,677 in the operating account, held outside the trust account to fund our ongoing expenses, as well as cash and marketable securities held in the trust account of$4,002,943,971 . Interest and dividend income earned on the balance in the trust account will be used by us to pay taxes on such income. From our inception throughDecember 31, 2021 , we withdrew$596,509 of interest and dividends earned on the trust account to pay our income taxes, of which all were withdrawn during the year endedDecember 31, 2021 . We intend to use substantially all of the funds held in the trust account, including any amounts representing interest and dividends earned on the trust account (less taxes payable and deferred underwriting fees), and the proceeds from the sale of the Forward Purchase Units to complete an Initial Business Combination. To the extent that our capital stock or debt is used, in whole or in part, as consideration to complete the 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. In order to fund working capital deficiencies or finance transaction costs in connection with an Initial Business Combination, our Sponsor or an affiliate of our Sponsor or certain of our directors and officers may, but are not obligated to, loan us funds as may be needed. If we complete the Initial Business Combination, we would repay such loaned amounts. In the event that the 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. 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 estimates of the costs of identifying a target business, undertaking in-depth due diligence and negotiating our 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 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 the shares of our Public Shares upon completion of our Initial Business Combination, in which case we may issue additional securities or incur debt in connection with such business combination. 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. 55
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Contractual Obligations
We do not have any long-term debt, capital lease obligations or operating lease
obligations as of
The underwriters are entitled to a deferred fee of$0.28 per Unit, or$56,250,000 in the aggregate payable only upon the completion of our initial business combination. The aggregate deferred underwriting fees includes (i) the deferral of any underwriting fees, other than the retail selling concessions, in excess of$30,000,000 (a deferral of$12,500,000 ), plus (ii) a 2.0% rate applied to the gross offering proceeds, subject to a$56,250,000 cap on the amount of such aggregate deferred underwriting fees. If the amount of proceeds from the trust account paid in connection with the redemption rights of Public Stockholders, together with the amount of any capital raised in private placements in connection with the Initial Business Combination from investors other than Sponsor or its affiliates (the "Net Redemptions"), results in us having less than$2,000,000,000 of cash available upon consummation of the Initial Business Combination, only 25% of the aggregate deferred underwriting fees will be payable. If such amount of cash available is$2,000,000,000 or greater, 50% of the aggregate deferred underwriting fees will be payable, and the remaining 50% of the aggregate deferred underwriting fees will be subject to a pro-rata reduction based on the amount of Net Redemptions as a percentage of the total public proceeds of the initial public offering. The deferred underwriting fees will be waived by the underwriters solely in the event that we do not complete a business combination, subject to the terms of the underwriting agreement.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the 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:
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." The Company's conditionally redeemable Class A Common Stock features certain redemption rights that are considered to be outside of its control and subject to the occurrence of uncertain future events. Accordingly, atDecember 31, 2021 andDecember 31, 2020 , 200,000,000 shares of Class A Common Stock subject to possible redemption were presented at redemption value as temporary equity, outside of the stockholders' equity section of the Company's balance sheets. The Company adjusts the carrying value of redeemable common stock to equal the redemption value of the cash held in the Trust Account net of income taxes payable at the end of each reporting period.
Outstanding Warrants and FPA Liabilities/Assets
We account for our Outstanding Warrants andFPA in accordance with the guidance contained in ASC 815-40, under which the Outstanding Warrants andFPA do not meet the criteria for equity treatment and must be recorded as derivative liabilities or derivative assets. Accordingly, we classify the Outstanding Warrants andFPA as liabilities or assets with changes in fair value reflected on the Company's statements of operations at each reporting period. The fair value of the Public Warrants was initially measured using a modified Black-Scholes pricing model and subsequently measured at the closing quoted market price. The Private Placement Warrants andFPA are valued using a modified Black-Scholes pricing model. See Note 7 of the Notes to Financial Statements included herein for further information on the significant inputs to the models utilized to determine the fair values of the Outstanding Warrants andFPA liabilities/assets.
Net Income/(Loss) per Common Share
We apply the two-class method of calculating earnings per share. Net income/(loss) per common share, basic and diluted, for Class A Common Stock subject to possible redemption is calculated by dividing the allocable income earned on the Trust Account, net of applicable income taxes, by the weighted-average number of Class A Common Stock subject to possible redemption outstanding for the period. Net income/(loss) per share, basic and diluted, for Class B non-redeemable common stock is calculated by dividing the net income/(loss), adjusted for income/(loss) attributable to Class A Common Stock subject to possible redemption, by the weighted-average number of Class B non-redeemable common stock outstanding for the period.
Off-Balance
Sheet Arrangements.
As ofDecember 31, 2021 , we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. 56
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Recent Accounting Pronouncements.
Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material impact on the Company's financial statements.
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