Cautionary Note Regarding Forward-Looking Statements
All statements other than statements of historical fact included in this Report
including, without limitation, statements in this section regarding our
financial position, business strategy and the plans and objectives of management
for future operations, are forward- looking statements. When used in this
Report, words such as "anticipate," "believe," "estimate," "expect," "intend"
and similar expressions, as they relate to us or our management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of our management, as well as assumptions made by, and information
currently available to, our management. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of certain
factors detailed in our filings with the SEC. All subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf
are qualified in their entirety by this paragraph.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes thereto contained elsewhere in this Report.
Overview
We are a blank check company incorporated on August 10, 2020 as a Delaware
corporation and formed for the purpose of effectuating a business combination.
We intend to effectuate our initial business combination using cash from the
proceeds of the initial public offering and the private placement of the private
placement warrants, the proceeds of the sale of our shares in connection with
our initial business combination (pursuant to forward purchase agreements or
backstop agreements we may enter into following the consummation of the initial
public offering or otherwise), shares issued to the owners of the target, debt
issued to bank or other lenders or the owners of the target, or a combination of
the foregoing.
Quality Gold Business Combination
On October 20, 2022, we entered into Quality Gold Business Combination Agreement
with New Parent, the Merger Subs and the Quality Gold Companies, pursuant to
which the Company and the Quality Gold Companies will enter into a business
combination. The consideration payable under the Quality Gold Business
Combination Agreement to the equityholders of the Quality Gold Companies
29
Table of Contents
consists of a combination of cash and shares of New Parent and our stockholders
and warrant holders will receive shares and warrants of New Parent.
For a more detailed description of the Quality Gold Business Combination
Agreement and the transactions contemplated therein, please see "Item 1.
Business" and the Quality Gold Registration Statement.
Extension of our Combination Period
We originally had up to 24 months from the closing of our initial public
offering, or until January 12, 2023, to consummate an initial business
combination. However, at the Extension Special Meeting held on December 12,
2022, our stockholders approved the amendment to the articles of incorporation
to extend the end of the Combination Period from January 12, 2023 on a monthly
basis to July 12, 2023. In connection with the Extension Special Meeting,
stockholders holding 24,673,073 public shares exercised their right to redeem
their shares for a pro rata portion of the funds in the trust account. As a
result, approximately $251.6 million (approximately $10.20 per share) was
removed from the trust account and paid to such holders and approximately $29.8
million remained in the trust account. Following the redemptions, as of
December 31, 2022, we had 2,926,927 public shares outstanding.
Recent Developments
On January 11, 2023, we issued the Extension Promissory Note, a promissory note
in the principal amount of up to $878,078 to the sponsor, pursuant to which the
sponsor agreed to loan the company up to $878,078 in connection with the
extension of our time to consummate a business combination from January 12, 2023
on a monthly basis to July 12, 2023.
In connection with the approval of the additional Extension Period at the
Extension Special Meeting, we deposited $146,346, or approximately $0.05 per
public share that was not redeemed in connection with the Extension Special
Meeting, into the trust account in connection with the first drawdown under the
Extension Promissory Note. We will continue to deposit an additional $146,346
into the trust account for each calendar month (commencing on January 12, 2023
and ending on the 12th day of each subsequent month), or portion thereof, that
is needed for us to complete an initial business combination. Such amounts will
be distributed either to: (i) holders of shares of Class A common stock upon our
liquidation or (ii) holders of shares of Class A common stock who elect to have
their shares redeemed in connection with the consummation of our initial
business combination. The sponsor or its designee will have the sole discretion
whether to continue extending for additional calendar months until July 12, 2023
and if the sponsor determines not to continue extending for additional
calendar months, its obligation to make additional advances will terminate.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date.
Our only activities for the period from August 10, 2020 (inception) through
December 31, 2022 were formation and operational activities, and since the
closing of the initial public offering, those related to identifying a target
company for a business combination. We do not expect to generate any operating
revenues until after the completion of our initial business combination. We
generate non-operating income in the form of interest income on cash and cash
equivalents held after the initial public offering. 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 year ended December 31, 2022, we had net income of $7,097,636, which
primarily resulted from a gain in the change in fair value of warrant
liabilities of $7,875,000, interest income on the trust account of $3,862,680,
and interest income on the operating account of $5, partially offset by
operating costs of $3,713,371, income tax expense of $723,378, franchise tax
expense of $200,000, and a loss on the change in fair value of the convertible
promissory note to a related party of $3,300.
For the year ended December 31, 2021, we had net income of $8,634,557, which
resulted primarily from a gain on the change in fair value of warrant
liabilities of $10,350,006, and interest income of $60,347, partially offset by
operating and formation costs of $838,745, franchise tax expense of $200,424,
and expensed offering costs of $736,627.
Liquidity and Capital Resources
On January 12, 2021, we consummated our initial public offering of 27,600,000
units, including 3,600,000 units issued pursuant to the exercise of the
underwriters' over-allotment option in full, generating gross proceeds of
$276,000,000. Simultaneously with the
30
Table of Contents
consummation of the initial public offering, we completed the private sale of
8,700,000 private placement warrants to the sponsor at a purchase price of $1.00
per warrant, generating gross proceeds of $8,700,000.
For the year ended December 31, 2022, net cash used in operating activities was
$1,516,908, which was primarily due to operational costs, income taxes, and
franchise taxes paid during the period.
For the year ended December 31, 2021, net cash used in operating activities was
$1,048,019, which was due to a non-cash gain on the change in fair value of
warrant liabilities of $10,350,006, changes in working capital of $8,879, and
interest income on investments held in the trust account of $60,318 offset in
part by our net income of $8,634,557 and expensed offering costs added back to
net income of $736,627.
For the year ended December 31, 2022, net cash provided by investing activities
was $252,370,754, which resulted from cash withdrawn from trust account for
payment to redeeming stockholders of $251,600,365 and proceeds from the trust
account used to pay for franchise and income taxes of $770,389.
For the year ended December 31, 2021, net cash used in investing activities of
$278,760,000 was the result of the amount of net proceeds from our initial
public offering being deposited to the trust account.
For the year ended December 31, 2022, net cash used in financing activities was
$250,994,265, which was a result of payments made to redeeming stockholders of
$251,600,365 partially offset by proceeds from convertible promissory notes of
$520,000 and proceeds from promissory note of $86,100.
For the year ended December 31, 2021, net cash provided by financing activities
of $279,970,523 was comprised of $270,480,000 in proceeds from the issuance of
units in our initial public offering net of underwriter's discount paid,
$1,352,400 of reimbursed offering costs, and $8,700,000 in proceeds from the
issuance of warrants in a private placement to our sponsor, offset by the
payment of $366,877 for offering costs associated with the initial public
offering and repayment of the outstanding balance on the IPO Promissory Note to
our sponsor of $195,000.
As of December 31, 2022 and 2021, we had cash of $40,801 and $181,220,
respectively, held outside the trust account. 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 an intended initial business combination, our sponsor or an
affiliate of our sponsor or certain of our officers and directors may, but are
not obligated to, loan us funds as may be required on a non-interest basis. If
we complete our initial business combination, we would repay such loaned
amounts. In the event that our initial business combination does not close, we
may use a portion of the working capital held outside the trust account to repay
such loaned amounts but no proceeds from our trust account would be used for
such repayment. Up to $1,500,000 of such loans may be convertible into warrants
of the post business combination entity at a price of $1.00 per warrant at the
option of the lender. The warrants would be identical to the private placement
warrants. The terms of such loans, if any, have not been determined and no
written agreements exist with respect to such loans. Prior to the completion of
our initial business combination, we do not expect to seek loans from parties
other than our sponsor or an affiliate of our sponsor as we do not believe third
parties will be willing to loan such funds and provide a waiver against any and
all rights to seek access to funds in our trust account.
We anticipate that the cash held outside of the trust account as of December 31,
2022, will not be sufficient to allow us to operate for at least the next
12 months from the issuance of the financial statements, assuming that an
initial business combination is not consummated during that time. We have
incurred and expect to continue to incur significant costs in pursuit of our
acquisition plans. These conditions raise substantial doubt about our ability to
continue as a going concern from the date that the financial statements are
released to July 12, 2023, the date at which we must complete an initial
business combination, which is less than one year from the issuance of the
financial statements. If an initial business combination is not consummated by
July 12, 2023, there will be a mandatory liquidation and subsequent dissolution
of the Company. There is no assurance that our plans to consummate the initial
business combination will be successful or successful within the Combination
Period. The financial statements and the notes thereto contained elsewhere in
this Report do not include any adjustments that might result from the outcome of
this uncertainty.
31
Table of Contents
Contractual Obligations
Registration Rights
The holders of the founder shares, private placement warrants and warrants that
may be issued upon conversion of the Working Capital Loans (and any Class A
common stock issuable upon the exercise of the private placement warrants) have
registration rights to require us to register a sale of any of its securities
held by them pursuant to a registration rights agreement. The holders of these
securities are 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 a business combination. We will bear the
expenses incurred in connection with the filing of any such registration
statements.
Administrative Support Agreement
We entered into an agreement, commencing on the effective date of the initial
public offering, to pay the sponsor a total of $10,000 per month for secretarial
and administrative support. Upon completion of the business combination or our
liquidation, we will cease paying these monthly fees. During the years ended
December 31, 2022 and 2021, we incurred expenses of $120,000 and $108,000 under
this agreement.
Underwriting Agreement
We granted the underwriters of our initial public offering a 45-day option to
purchase up to 3,600,000 additional units to cover over-allotments at the
initial public offering price, less the underwriting discounts and commissions.
On January 12, 2021, the underwriters exercised the over-allotment option in
full and purchased 3,600,000 units at an offering price of $10.00 per unit,
generating additional gross proceeds for us of $36,000,000.
The underwriters were paid a cash underwriting fee of $0.20 per unit, or
$5,520,000 in the aggregate. In addition, $0.375 per unit, or $10,350,000 in the
aggregate will be payable to the underwriters for deferred underwriting
commissions. The deferred fee will become payable to the underwriters from the
amounts held in the trust account solely in the event that we complete an
initial business combination, subject to the terms of the underwriting
agreement.
On September 14, 2022, the Company entered into an agreement with the
underwriter to perform financial advisory services as needed by the Company in
connection with the initial business combination. Pursuant to this agreement,
the underwriter amended the terms of the deferred underwriting fees owed in
connection with the initial public offering. The underwriter agreed to waive the
$10,350,000 deferred underwriting commission payable by the Company pursuant to
the underwriting agreement, dated January 7, 2021, while the Company agreed to
pay the underwriter for its services as a financial advisor a cash acquisition
fee of $4,000,000 plus a $4,000,000 subordinated note (payable in cash or common
stock New Parent) to be issued by New Parent. As a result of the amended terms,
the aggregate fees payable to the underwriter that are contingent on the
completion of the initial business combination are approximately $8.0 million.
Additionally, the waiver of the $10,350,000 of deferred underwriting commission
payable is contingent on the completion of the initial business combination.
Vendor Agreements
On September 23, 2022, the Company entered into an agreement with a financial
advisor (the "First Financial Advisor") for capital market advisory services in
connection with an initial business combination, pursuant to which the Company
will pay the First Financial Advisor a fee of $700,000 contingent upon the
successful consummation of the initial business combination.
On October 11, 2022, the Company entered into an agreement with a financial
advisor (the "Second Financial Advisor") for capital market advisory services in
connection with an initial business combination, pursuant to which the Company
will pay the Second Financial Advisor a fee of $1,000,000 contingent upon the
successful consummation of the initial business combination.
32
Table of Contents
Related Party Loans
On March 22, 2022, we entered into the March Sponsor Working Capital Loan with
the sponsor in the amount of $150,000, pursuant to which we received proceeds of
$150,000. The March Sponsor Working Capital Loan is non-interest bearing and
payable upon the earlier of (i) completion of the initial business combination
or (ii) the date our winding up is effective. The unpaid principal balance on
the March Sponsor Working Capital Loan may be convertible into warrants at the
option of the sponsor at a price of $1.00 per warrant. The warrants would be
identical to the private placement warrants. As of December 31, 2022, the total
amount drawn on the March Sponsor Working Capital Loan was $150,000.
On July 21, 2022, we entered into the July Sponsor Working Capital Loan, a
separate working capital loan with the sponsor in the amount of $375,000. The
July Sponsor Working Capital Loan matures on the earliest to occur of (i) the
date on which we consummate our initial business combination and (ii) the date
that our winding up is effective. The promissory note in connection with the
July Sponsor Working Capital Loan is convertible into warrants at $1.00 per
warrant on terms identical to those of the private placement warrants. On
July 21, 2022, the Company drew $370,000 from the promissory note, which has not
yet been repaid as of December 31, 2022.
On December 9, 2022, the Company issued a promissory note (the "Second
Promissory Note") in the principal amount of up to $1,000,000 to the Sponsor.
The Second Promissory Note was issued in connection with advances the Sponsor
has made, and may make in the future, to the Company for working capital
expenses. The loan is non-interest bearing and payable upon the earlier of
(i) completion of the Initial Business Combination or (ii) the date the winding
up of the Company is effective. December 9, 2022, the Company drew $86,100 from
the Second Promissory Note, which has not yet been repaid as of December 31,
2022.
The fair value option was elected (see Note 10 of the financial statements and
the notes thereto contained elsewhere in this Report) and, as such, the fair
value of both of the Sponsor Working Capital Loans is shown on the balance
sheets as $77,900.
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:
Convertible Promissory Note - Related Party
We account for the convertible promissory notes in connection with the Sponsor
Working Capital Loans under ASC Topic 815, "Derivatives and Hedging" ("ASC
815"). We have made the election under ASC 815-15-25 to account for the notes
under the fair value option. Using the fair value option, the convertible
promissory notes are required to be recorded at their initial fair value on the
date of issuance, and each balance sheet thereafter. Differences between the
face value of the note and fair value at issuance are recognized as either an
expense in the statements of operations (if issued at a premium) or as a capital
contribution (if issued at a discount). Any material changes in the estimated
fair value of the notes are recognized as non-cash gains or losses in the
statements of operations.
Warrant Liabilities
We account for warrants as either equity-classified or liability-classified
instruments based on an assessment of the warrant's specific terms and
applicable authoritative guidance in ASC Topic 480, "Distinguishing Liabilities
from Equity" ("ASC 480") and ASC 815. The assessment considers whether the
warrants are freestanding financial instruments pursuant to ASC 480, meet the
definition of a liability pursuant to ASC 480, and whether the warrants meet all
of the requirements for equity classification under ASC 815, including whether
the warrants are indexed to our own common stock, among other conditions for
equity classification. This assessment, which requires the use of professional
judgment, is conducted at the time of warrant issuance and as of each subsequent
quarterly period end date while the warrants are outstanding. For issued or
modified warrants that meet all of the criteria for equity classification, the
warrants are required to be recorded as a component of additional paid-in
capital at the time of issuance.
33
Table of Contents
For issued or modified warrants that do not meet all the criteria for equity
classification, the warrants are required to be recorded at their initial fair
value on the date of issuance, and each balance sheet date thereafter. Changes
in the estimated fair value of the warrants are recognized as a non-cash gain or
loss on the statements of operations. The accounting treatment of derivative
financial instruments required that we record the warrants as derivative
liabilities at fair value upon the closing of the initial public offering. As of
December 31, 2022 and 2021, we estimated the fair value of the warrant
derivative liabilities to be $3,375,000 and $11,250,000, respectively.
Class A Common Stock Subject to Possible Redemption
All of the 27,600,000 shares of Class A common stock sold as part of the units
in the initial public offering contain a redemption feature which allows for the
redemption of such public shares in connection with our liquidation, if there is
a stockholder vote or tender offer in connection with the initial business
combination and in connection with certain amendments to the amended and
restated certificate of incorporation. In accordance with the SEC and its
staff's guidance on redeemable equity instruments, which has been codified in
ASC 480-10-S99, redemption provisions not solely within our control require
common stock subject to redemption to be classified outside of permanent equity.
Therefore, all Class A common stock has been classified outside of permanent
equity.
Net Income Per Share of Common Stock
Net income per share is computed by dividing net income by the weighted-average
number of shares of common stock outstanding during the period. Remeasurement
associated with the redeemable shares of Class A common stock is excluded from
net income per share as the redemption value approximates fair value. Therefore,
the earnings per share calculation allocates income shared pro rata between
Class A and Class B common stock.
As a result, the calculated net income per share is the same for Class A and
Class B shares of common stock. We have not considered the effect of the
warrants sold in the initial public offering and private placement to purchase
an aggregate of 22,500,000 shares in the calculation of diluted income per
share, since the exercise of the warrants are contingent upon the occurrence of
future events.
Recent Accounting Standards
Our management does not believe that any recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material effect on the
financial statements and the notes thereto contained elsewhere in this Report.
Factors That May Adversely Affect Our Results of Operations
Our results of operations and our ability to complete an initial business
combination may be adversely affected by various factors that could cause
economic uncertainty and volatility in the financial markets, many of which are
beyond our control. Our business could be impacted by, among other things,
downturns in the financial markets or in economic conditions, increases in oil
prices, inflation, increases in interest rates, supply chain disruptions,
declines in consumer confidence and spending, the ongoing effects of the
COVID-19 pandemic, including resurgences and the emergence of new variants, and
geopolitical instability, such as the military conflict in Ukraine. We cannot at
this time fully predict the likelihood of one or more of the above events, their
duration or magnitude or the extent to which they may negatively impact our
business and our ability to complete an initial business combination.
© Edgar Online, source Glimpses