References in this report (the "Quarterly Report") to "we," "us" or the
"Company" refer to Waldencast Acquisition Corp. References to our "management"
or our "management team" refer to our officers and directors, and references to
the "Sponsor" refer to Waldencast Long-Term Capital LLC. The following
discussion and analysis of the Company's financial condition and results of
operations should be read in conjunction with the unaudited condensed financial
statements and the notes thereto contained elsewhere in this Quarterly Report.
Certain information contained in the discussion and analysis set forth below
includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Exchange Act that are not historical facts, and involve
risks and uncertainties that could cause actual results to differ materially
from those expected and projected. All statements, other than statements of
historical fact included in this Form 10-Q including, without limitation,
statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding the Company's financial position, business
strategy and the plans and objectives of management for future operations, are
forward-looking statements. Words such as "expect," "believe," "anticipate,"
"intend," "estimate," "seek" and variations and similar words and expressions
are intended to identify such forward-looking statements. Such forward-looking
statements relate to future events or future performance, but reflect
management's current beliefs, based on information currently available. A number
of factors could cause actual events, performance or results to differ
materially from the events, performance and results discussed in the
forward-looking statements. For information identifying important factors that
could cause actual results to differ materially from those anticipated in the
forward-looking statements, please refer to the Risk Factors section of the
Company's final prospectus for its Initial Public Offering filed with the U.S.
Securities and Exchange Commission (the "SEC"). The Company's securities filings
can be accessed on the EDGAR section of the SEC's website at www.sec.gov. Except
as expressly required by applicable securities law, the Company disclaims any
intention or obligation to update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.
Overview
We are a blank check company incorporated in the Cayman Islands on December 8,
2020 formed for the purpose of effecting a merger, share exchange, asset
acquisition, share purchase, reorganization or similar Business Combination with
one or more businesses (a "Business Combination"). We intend to effectuate a
Business Combination using cash derived from the proceeds of the Initial Public
Offering and the sale of the Private Placement Warrants, our shares, debt or a
combination of cash, shares and debt.
We expect to continue to incur significant costs in the pursuit of our
acquisition plans. We cannot assure you that our plans to complete a Business
Combination will be successful.
Recent Developments - Obagi and Milk Business Combinations
Obagi Merger Agreement and Related Agreements
On November 15, 2021, the Company entered into an Agreement and Plan of Merger
(the "Obagi Merger Agreement"), by and among the Company, Obagi Merger Sub,
Inc., a Cayman Islands exempted company limited by shares and an indirect wholly
owned subsidiary of the Company ("Merger Sub"), and Obagi Global Holdings
Limited, a Cayman Islands exempted company limited by shares ("Obagi").
The Obagi Merger Agreement provides that, among other things and upon the terms
and subject to the conditions thereof, the following transactions will occur
(together with the other agreements and transactions contemplated by the Obagi
Merger Agreement, the "Obagi Transaction"):
(i) at the closing of the transactions contemplated by the Obagi Merger
Agreement (the "Obagi Closing"), upon the terms and subject to the conditions of
the Obagi Merger Agreement and in accordance with the Companies Act (As Revised)
of the Cayman Islands ("Cayman Act"), Merger Sub will merge with and into Obagi,
the separate corporate existence of Merger Sub will cease and Obagi will be the
surviving company and an indirect wholly owned subsidiary of the Company (the
"Merger");
(ii) as a result of the Merger, among other things, each share of common stock
of Obagi that is issued and outstanding immediately prior to the effective time
of the Merger (other than in respect of Excluded Shares (as defined in the Obagi
Merger Agreement)) will be cancelled and converted into the right to receive (i)
an amount in cash equal to (A) the Obagi Cash Consideration (as defined in the
Obagi Merger Agreement), subject to substitution for Obagi Stock Consideration
(as defined in the Obagi Merger Agreement) based on the amount of cash available
to the Company at the Closing (as defined below), taking into account, among
other things, the level of shareholder redemptions, divided by (B) the number of
Aggregate Fully Diluted Company Common Shares (as defined in the Obagi Merger
Agreement), and (ii) a number of shares of Company Common Stock equal to (A) the
Obagi Stock Consideration divided by (B) the number of Aggregate Fully Diluted
Company Common Shares; and
(iii) upon the effective time of the Domestication (as defined below), the
Company will immediately be renamed "Waldencast plc".
The Company's board of directors has unanimously (i) approved and declared
advisable the Obagi Merger Agreement, the Obagi Transaction and the other
transactions contemplated thereby and (ii) resolved to recommend approval of the
Obagi Merger Agreement and related matters by the shareholders of the Company.
21
Milk Equity Purchase Agreement
On November 15, 2021, the Company entered into an Equity Purchase Agreement (the
"Milk Equity Purchase Agreement" and together with the Obagi Merger Agreement,
the "Transaction Agreements"), by and among the Company, Obagi Holdco 1 Limited,
a limited company incorporated under the laws of Jersey ("Holdco Purchaser"),
Waldencast Partners LP, a Cayman Islands exempted limited partnership
("Waldencast LP" and together with Holdco Purchaser, the "Purchasers"), Milk
Makeup LLC, a Delaware limited liability company ("Milk"), certain members of
Milk (the "Milk Members"), and Shareholder Representative Services LLC, a
Colorado limited liability company, solely in its capacity as representative of
Milk's equityholders (the "Equityholder Representative").
The Milk Equity Purchase Agreement provides that, among other things and upon
the terms and subject to the conditions thereof, the following transactions will
occur (together with the other agreements and transactions contemplated by the
Milk Equity Purchase Agreement, the "Milk Transaction" and, together with the
Obagi Transaction, the "Obagi and Milk Business Combinations"):
(i) at the closing of the transactions contemplated by the Milk Equity Purchase
Agreement (the "Milk Closing" and together with the Obagi Closing, the
"Closing"), upon the terms and subject to the conditions of the Milk Equity
Purchase Agreement, the Purchasers will acquire from the Milk Members and the
Milk Members will sell to the Purchasers all of the issued and outstanding
membership units of Milk in exchange for the Milk Cash Consideration (as defined
in the Milk Equity Purchase Agreement), and the Milk Equity Consideration (as
defined in the Milk Equity Purchase Agreement), which consist of partnership
units of Waldencast LP exchangeable for Domesticated Acquiror Common Stock, and
the Domesticated Acquiror Non-Economic Common Stock (each as defined in the Milk
Equity Purchase Agreement);
(ii) as a result of the Milk Transaction, among other things, (i) Holdco
Purchaser will purchase from the Milk Members a percentage of the outstanding
membership units in exchange for the Milk Cash Consideration and the
Domesticated Acquiror Non-Economic Common Stock equal to the Milk Equity
Consideration and (ii) Waldencast LP will purchase from the Milk Members the
remainder of the outstanding membership units in exchange for the Milk Equity
Consideration;
(iii) upon the effective time of the Domestication, the Company will immediately
be renamed "Waldencast plc."
Immediately following consummation of the Milk Transaction, (i) Holdco Purchaser
will contribute its equity interest in (a) Milk to Waldencast LP in exchange for
limited partnership units in Waldencast LP and (b) Holdco 2 in exchange for
limited partnership units in Waldencast LP. The combined company will be
organized in an "Up-C" structure, in which the equity interests of Obagi and
Milk will be held by Waldencast LP. The Company will in turn hold its interests
in Obagi and Milk through Waldencast LP and Holdco Purchaser.
The Board has unanimously (i) approved and declared advisable the Milk Equity
Purchase Agreement, the Milk Transaction and the other transactions contemplated
thereby and (ii) resolved to recommend approval of the Milk Equity Purchase
Agreement and related matters by the shareholders of the Company.
Prior to the Closing, subject to the approval of the Company's shareholders, and
in accordance with the Cayman Act, the Companies (Jersey) Law 1991, as amended
(the "Jersey Companies Law") and the Company's amended and restated memorandum
and articles of association, the Company will effect a deregistration under the
Cayman Act and a domestication under Part 18C of the Jersey Companies Law (by
means of filing a memorandum and articles of association with the Registrar of
Companies in Jersey), pursuant to which the Company's jurisdiction of
incorporation will be changed from the Cayman Islands to Jersey (the
"Domestication").
In connection with the Domestication, (i) each of the then issued and
outstanding Class A ordinary shares, par value $0.0001 per share, of the
Company, will convert automatically, on a one-for-one basis, into an ordinary
share of common stock, par value $0.0001 per share, of the Company (following
its Domestication) (the "Waldencast Common Stock"), (ii) each of the then issued
and outstanding Class B ordinary shares, par value $0.0001 per share, of the
Company, will convert automatically, on a one-for-one basis, into a share of
Waldencast Common Stock, (iii) each then issued and outstanding warrant of the
Company will convert automatically into a warrant to acquire one share of
Waldencast Common Stock ("Domesticated Waldencast Warrant"), pursuant to the
Warrant Agreement, dated March 15, 2021, between the Company and Continental
Stock Transfer & Trust Company, as warrant agent, and (iv) each then issued and
outstanding unit of the Company shall be cancelled and will entitle the holder
thereof to one share of Waldencast Common Stock and one-third of one
Domesticated Waldencast Warrant.
On November 15, 2021, the Company entered into a Sponsor Support Agreement (the
"Obagi Sponsor Support Agreement"), by and among the Sponsor, Obagi, the Company
and the persons set forth on Schedule I attached thereto (the "Sponsor
Persons"), pursuant to which the Sponsor and the Sponsor Persons agreed to,
among other things, vote in favor of the Obagi Merger Agreement and the
transactions contemplated thereby, in each case, subject to the terms and
conditions contemplated by the Obagi Sponsor Support Agreement.
22
On November 15, 2021, the Company entered into a Sponsor Support Agreement (the
"Milk Sponsor Support Agreement"), by and among the Sponsor, the Equityholder
Representative, the Company and the Sponsor Persons, pursuant to which the
Sponsor and the Sponsor Persons agreed to, among other things, vote in favor of
the Milk Equity Purchase Agreement and the transactions contemplated thereby, in
each case, subject to the terms and conditions contemplated by the Milk Sponsor
Support Agreement.
On November 15, 2021, the Company also entered into a Stockholder Support
Agreement (the "Stockholder Support Agreement"), by and among the Company, Obagi
and Cedarwalk. Pursuant to the Stockholder Support Agreement, Cedarwalk agreed
to, among other things, within two (2) business days after the proxy
statement/prospectus relating to the approval by the Company shareholders of the
Obagi and Milk Business Combinations is declared effective by the SEC and
delivered or otherwise made available to the Company shareholders, execute and
deliver a written consent with respect to the outstanding ordinary shares of
Obagi held by Cedarwalk adopting the Obagi Merger Agreement and related
transactions and approving the Obagi and Milk Business Combinations.
The consummation of the proposed Obagi and Milk Business Combinations is subject
to certain conditions as further described in the Obagi Merger Agreement and the
Milk Equity Purchase Agreement.
For more information about the Obagi Merger Agreement and the Milk Equity
Purchase Agreement and the proposed Obagi and Milk Business Combinations, see
our Current Report on Form 8-K filed with the SEC on November 15, 2021. Unless
specifically stated, this Quarterly Report does not give effect to the proposed
Obagi and Milk Business Combinations and does not contain the risks associated
with the proposed Obagi and Milk Business Combinations.
Results of Operations
We have neither engaged in any operations nor generated any operating revenues
to date. Our only activities from for the three months and nine months ended
September 30, 2021 were organizational activities and those necessary to prepare
for the Initial Public Offering, the search for a prospective initial Business
Combination, and the negotiation and execution of the proposed Obagi and Milk
Business Combinations. We do not expect to generate any operating revenues until
after the completion of a Business Combination. We expect to generate
non-operating income in the form of interest income on marketable securities
held after the Initial Public Offering. We expect that we will 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 in
connection with searching for, and completing, a Business Combination.
For the nine months ended September 30, 2021, we had a net income of $5,021,944,
which consisted of operating costs of $964,205, a non-cash charge for offering
expenses related to issuance of warrants of $719,201, offset by a non-cash
change in fair value of warrant derivative liabilities and FPA liabilities of
$4,009,667 and $2,664,000, respectively, and interest income from operating bank
account of $698, and interest income on marketable securities held in the Trust
Account of $30,985.
For the three months ended September 30, 2021, we had a net income of $7,757,409
, which consisted of operating costs of $645,123 offset by a non-cash change in
fair value of warrant derivative liabilities and FPA liabilities of $5,055,667
and $3,330,000, respectively, interest income from operating bank account of
$256, and interest income on marketable securities held in the Trust Account of
$16,609.
23
Liquidity and Capital Resources
On March 18, 2021, we consummated the Initial Public Offering of 34,500,000
Units (and, with respect to the Class A ordinary shares included in the Units
being offered, the "public share"), at $10.00 per Unit, generating gross
proceeds of $345,000,000, which is discussed in Note 4. Simultaneously with the
closing of our Initial Public Offering, the Company consummated the sale of
5,933,333 warrants (the "Private Placement Warrants"), at a price of $1.50 per
Private Placement Warrant, which is discussed in Note 5.
Following the Initial Public Offering and the sale of the Private Placement
Warrants, a total of $345,000,000 was placed in the Trust Account. We incurred
$20,169,599 in transaction costs, including $6,900,000 of underwriting fees,
$12,075,000 of deferred underwriting fees and $1,194,599 of other costs.
For the nine months ending September 30, 2021 cash used in operating activities
was $1,168,310. Net income of $5,021,944 was affected by a non-cash change in
the fair value of warrant derivative liabilities, and FPA liabilities of
$4,009,667 and $2,664,000, respectively, and offering costs related to warrant
issuance of $719,201, and interest earned on marketable securities held in the
Trust Account of $30,985. Changes in operating assets and liabilities used
$180,210 of cash for operating activities.
As of September 30, 2021, we had marketable securities held in the Trust Account
of $345,030,985. We intend to use substantially all of the funds held in the
Trust Account, including any amounts representing interest earned on the Trust
Account, which interest shall be net of taxes payable and excluding deferred
underwriting commissions, to complete our Business Combination. We may withdraw
interest from the Trust Account to pay taxes, if any. Through September 30,
2021, we did not withdraw any interest earned on the Trust Account to pay our
taxes. To the extent that our share capital or debt is used, in whole or in
part, as consideration to complete a Business Combination (including the
proposed Obagi and Milk Business Combinations), the remaining proceeds held in
the Trust Account will be used as working capital to finance the operations of
the target business or businesses, make other acquisitions and pursue our growth
strategies.
As of September 30, 2021, we had cash of $335,058 and working capital of
$422,644. 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, structure, negotiate and complete a Business Combination (including
the proposed Obagi and Milk Business Combinations).
In order to fund working capital deficiencies or 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,
loan us funds as may be required. On October 28, 2021, the Sponsor funded
$1,500,000 to us. If we complete a Business Combination, we may repay such
loaned amounts out of the proceeds of the Trust Account released to us. In the
event that a Business Combination does not close, we may use a portion of the
working capital held outside the Trust Account to repay such loaned amounts, but
no proceeds from our Trust Account would be used for such repayment. Up to
$1,500,000 of such loans may be convertible into warrants, at a price of $1.50
per warrant, at the option of the lender. The warrants would be identical to the
Private Placement Warrants.
We do not believe we will need to raise additional funds in order to meet the
expenditures required for operating our business. However, if our estimate of
the costs of identifying a target business, undertaking in-depth due diligence
and negotiating a Business Combination are less than the actual amount necessary
to do so, we may have insufficient funds available to operate our business prior
to our initial Business Combination. Moreover, we may need to obtain additional
financing either to complete our Business Combination or because we become
obligated to redeem a significant number of our public shares upon completion of
our Business Combination, in which case we may issue additional securities or
incur debt in connection with such Business Combination.
24
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered
off-balance sheet arrangements as of September 30, 2021. We do not participate
in transactions that create relationships with unconsolidated entities or
financial partnerships, often referred to as variable interest entities, which
would have been established for the purpose of facilitating off-balance sheet
arrangements. We have not entered into any off-balance sheet financing
arrangements, established any special purpose entities, guaranteed any debt or
commitments of other entities, or purchased any non-financial assets.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease
obligations or long-term liabilities, other than an agreement to pay the Sponsor
a monthly fee of $10,000 for office space administrative and support services
provided to the Company. We began incurring these fees on March 15, 2021 and
will continue to incur these fees monthly until the earlier of the completion of
a Business Combination and the Company's liquidation.
The underwriter is entitled to a deferred fee of $0.35 per Unit, or $12,075,000
in the aggregate. The deferred fee will become payable to the underwriters from
the amounts held in the Trust Account solely in the event that we complete a
Business Combination, subject to the terms of the underwriting agreement.
Critical Accounting Policies
This management's discussion and analysis of our financial condition and results
of operations is based on our unaudited condensed financial statements, which
have been prepared in accordance with GAAP. The preparation of our unaudited
condensed financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities in our unaudited condensed
financial statements. On an ongoing basis, we evaluate our estimates and
judgments, including those related to fair value of financial instruments and
accrued expenses. We base our estimates on historical experience, known trends
and events and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We have identified the following as our critical
accounting policies:
Class A ordinary shares subject to possible redemption
The Company accounts for its ordinary shares subject to possible redemption in
accordance with the guidance in Accounting Standards Codification ("ASC") Topic
480, "Distinguishing Liabilities from Equity." Ordinary shares subject to
mandatory redemption is classified as a liability instrument and is measured at
fair value. Conditionally redeemable ordinary shares (including ordinary shares
that features redemption rights that are either within the control of the holder
or subject to redemption upon the occurrence of uncertain events not solely
within the Company's control) are classified as temporary equity. At all other
times, ordinary shares are classified as shareholders' equity. The Company's
ordinary shares feature certain redemption rights that are considered to be
outside of the Company's control and subject to occurrence of uncertain future
events. As of September 30, 2021 and December 31, 2020, 34,500,000 and no shares
of Class A ordinary shares subject to possible redemption are presented at
redemption value as temporary equity, outside of the shareholders' equity
section of the Company's balance sheet, respectively.
Warrant Liabilities
We account for the warrants issued in connection with our initial public
offering in accordance with ASC 815-40, "Derivatives and Hedging-Contracts in
Entity's Own Equity" ("ASC 815"), under which the warrants do not meet the
criteria for equity classification and must be recorded as liabilities. The
warrants meet the definition of a derivative as contemplated in ASC 815, and
therefore the warrants are measured at fair value at inception and at each
reporting date in accordance with ASC 820, "Fair Value Measurement," with
changes in fair value recognized in the condensed statement of operations in the
period of change.
25
Net Earnings (Loss) Per Ordinary Shares
Net earnings (loss) per share is computed by dividing net earnings by the
weighted-average number of shares of ordinary shares outstanding during the
period.
The Company's statement of operations includes a presentation of net earnings
(loss) per share for ordinary shares subject to possible redemption and applies
the two-class method in calculating net earnings (loss) per share. Net earnings
per ordinary share, basic and diluted, for Class A redeemable ordinary shares is
calculated by dividing the allocable interest income earned on the Trust
Account, net of applicable franchise and income taxes, by the weighted average
number of Class A ordinary shares subject to possible redemption outstanding
since original issuance. Net loss per share, basic and diluted, for Class A and
Class B non-redeemable ordinary shares is calculated by dividing the net loss,
adjusted for income attributable to Class A redeemable ordinary shares, by the
weighted average number of Class A and Class B non-redeemable ordinary shares
outstanding for the period. Class B non-redeemable ordinary shares include the
Founder Shares as these shares do not have any redemption features and do not
participate in the income earned on the Trust Account.
Recent Accounting Pronouncements
We do not believe that any recently issued, but not yet effective, accounting
pronouncements, if currently adopted, would have a material impact on our
unaudited condensed financial statements.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the "JOBS
Act") was signed into law. The JOBS Act contains provisions that, among other
things, relax certain reporting requirements for qualifying public companies. We
qualify as an "emerging growth company" under the JOBS Act and are allowed to
comply with new or revised accounting pronouncements based on the effective date
for private (not publicly traded) companies. We elected to delay the adoption of
new or revised accounting standards, and as a result, we may not comply with new
or revised accounting standards on the relevant dates on which adoption of such
standards is required for non-emerging growth companies. As a result, our
unaudited condensed financial statements may not be comparable to companies that
comply with new or revised accounting pronouncements as of public company
effective dates.
As an "emerging growth company", we are not required to, among other things, (i)
provide an auditor's attestation report on our system of internal controls over
financial reporting pursuant to Section 404, (ii) provide all of the
compensation disclosure that may be required of non-emerging growth public
companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act,
(iii) comply with any requirement that may be adopted by the Public Company
Accounting Oversight Board (the "PCAOB") regarding mandatory audit firm rotation
or a supplement to the auditor's report providing additional information about
the audit and the unaudited condensed financial statements (auditor discussion
and analysis), and (iv) disclose certain executive compensation related items
such as the correlation between executive compensation and performance and
comparisons of the CEO's compensation to median employee compensation. These
exemptions will apply for a period of five years following the completion of our
initial public offering or until we are no longer an "emerging growth company,"
whichever is earlier.
© Edgar Online, source Glimpses