26 Capital Acquisition Corp. - Quarter Report: 2023 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-39900
26 CAPITAL ACQUISITION CORP.
(Exact name of registrant as specified in its charter)
| Delaware | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Office Edge Miami 701 Brickell Avenue Suite 1550 Miami, Florida 33131 |
| (Address of Principal Executive Offices, including zip code) |
| (305) 709-6664 |
| (Registrant’s telephone number, including area code) |
| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Units, each consisting of one share of Class A Common Stock and one-half of one Redeemable Warrant | ADERU | The Nasdaq Stock Market LLC | ||
| Class A Common Stock, par value $0.0001 per share | ADER | The Nasdaq Stock Market LLC | ||
| Redeemable Warrants, each whole warrant exercisable for one share of Class A Common Stock at an exercise price of $11.50 | ADERW | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☐ Large accelerated filer | ☐ Accelerated filer | |
| ☒ Non-accelerated filer | ☒ Smaller reporting company | |
| ☒ Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☒ No ☐
As of August 14, 2023, there were 3,430,228 shares of Class A common stock, par value $0.0001 per share, and 6,875,000 shares of Class B common stock, par value $0.0001 per share, of the registrant issued and outstanding.
26 CAPITAL ACQUISITION CORP.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2023
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements.
26 CAPITAL ACQUISITION CORP.
CONDENSED BALANCE SHEETS
| June 30, 2023 | December 31, 2022 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 201,539 | $ | 770,820 | ||||
| Prepaid expenses | 336,827 | 34,358 | ||||||
| Total current assets | 538,366 | 805,178 | ||||||
| Cash and investments held in Trust Account | 36,820,259 | 34,706,732 | ||||||
| Total Assets | $ | 37,358,625 | $ | 35,511,910 | ||||
| Liabilities, Class A Common Stock Subject to Possible Redemption and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 6,140,497 | $ | 3,543,084 | ||||
| Convertible promissory notes – shares – related party | 9,500,000 | |||||||
| Convertible Working Capital Loan – related party | 730,130 | 1,409,181 | ||||||
| Income tax payable | 148,254 | 706,522 | ||||||
| Deferred income tax | 162,067 | |||||||
| Total current liabilities | 16,518,881 | 5,820,854 | ||||||
| Warrant liability | 1,431,570 | 6,069,621 | ||||||
| Deferred underwriting discount | 9,625,000 | 9,625,000 | ||||||
| Total liabilities | 27,575,451 | 21,515,475 | ||||||
| Commitments and Contingencies (Note 8) | ||||||||
| Class A common stock subject to possible redemption, $0.0001 par value; 3,430,228 shares at approximately $10.70 and $10.11 per share redemption value at June 30, 2023, and December 31, 2022, respectively | 36,696,766 | 34,687,764 | ||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, $0.0001 par value; 1,000,000 shares authorized; issued and outstanding at June 30, 2023 and December 31, 2022 | ||||||||
| Class A common stock, $0.0001 par value; 100,000,000 shares authorized; 0 shares issued and outstanding (excluding 3,430,228 shares at a redemption value of $10.70 and $10.11) at June 30, 2023, and December 31, 2022 | ||||||||
| Class B common stock, $0.0001 par value; 10,000,000 shares authorized; 6,875,000 shares issued and outstanding at June 30, 2023 and December 31, 2022 | 688 | 688 | ||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | (26,914,280 | ) | (20,692,017 | ) | ||||
| Total Stockholders’ Deficit | (26,913,592 | ) | (20,691,329 | ) | ||||
| Total Liabilities, Class A Common Stock Subject to Possible Redemption and Stockholders’ Deficit | $ | 37,358,625 | $ | 35,511,910 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
1
26 CAPITAL ACQUISITION CORP.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Formation and operating costs | $ | 2,536,499 | $ | 1,041,034 | $ | 9,908,884 | $ | 1,963,634 | ||||||||
| Loss from operations | (2,536,499 | ) | (1,041,034 | ) | (9,908,884 | ) | (1,963,634 | ) | ||||||||
| Other (expense) income: | ||||||||||||||||
| Unrealized gain on change in fair value of convertible working capital note – related party | 1,955 | 679,051 | ||||||||||||||
| Unrealized gain (loss) on change in fair value of warrants | (815,963 | ) | 4,649,796 | 4,638,051 | 7,719,927 | |||||||||||
| Interest earned on cash and investments held in Trust Account | 328,684 | 383,859 | 618,235 | 405,297 | ||||||||||||
| Total other (expense) income, net | (485,324 | ) | 5,033,655 | 5,935,337 | 8,125,224 | |||||||||||
| (Loss) Income before provision for income taxes | (3,021,823 | ) | 3,992,621 | (3,973,547 | ) | 6,161,590 | ||||||||||
| Provision for income taxes | (73,025 | ) | (49,066 | ) | (239,714 | ) | (49,066 | ) | ||||||||
| Net (loss) income | $ | (3,094,848 | ) | $ | 3,943,555 | $ | (4,213,261 | ) | $ | 6,112,524 | ||||||
| 3,430,228 | 27,500,000 | 3,430,228 | 27,500,000 | |||||||||||||
| $ | (0.30 | ) | $ | 0.11 | $ | (0.41 | ) | $ | 0.18 | |||||||
| 6,875,000 | 6,875,000 | 6,875,000 | 6,875,000 | |||||||||||||
| $ | (0.30 | ) | $ | 0.11 | $ | (0.41 | ) | $ | 0.18 | |||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
2
26 CAPITAL ACQUISITION CORP.
UNAUDITED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023
| Class B Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance as of January 1, 2023 | 6,875,000 | $ | 688 | $ | $ | (20,692,017 | ) | $ | (20,691,329 | ) | ||||||||||
| Accretion of Class A common stock subject to possible redemption (as restated) | — | (914,734 | ) | (914,734 | ) | |||||||||||||||
| Proceeds received in excess of initial fair value of Convertible Promissory Note - Shares at initial borrowing (as restated) | — | |||||||||||||||||||
| Net loss (as restated) | — | (1,118,413 | ) | (1,118,413 | ) | |||||||||||||||
| Balance as of March 31, 2023- As Restated (unaudited) | 6,875,000 | 688 | (22,725,164 | ) | (22,724,476 | ) | ||||||||||||||
| Accretion of Class A common stock subject to possible redemption | — | (1,094,268 | ) | (1,094,268 | ) | |||||||||||||||
| Net loss | — | (3,094,848 | ) | (3,094,848 | ) | |||||||||||||||
| Balance as of June 30, 2023 (unaudited) | 6,875,000 | $ | 688 | $ | $ | (26,914,280 | ) | $ | (26,913,592 | ) | ||||||||||
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022
Class B | Additional | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance as of January 1, 2022 | 6,875,000 | $ | 688 | $ | $ | (25,398,143 | ) | $ | (25,397,455 | ) | ||||||||||
| Net income | — | 2,168,969 | 2,168,969 | |||||||||||||||||
| Balance as of March 31, 2022 (unaudited) | 6,875,000 | $ | 688 | $ | $ | (23,229,174 | ) | $ | (23,228,486 | ) | ||||||||||
| Accretion for Class A common stock to redemption amount | — | (72,552 | ) | (72,552 | ) | |||||||||||||||
| Net income | — | 3,943,555 | 3,943,555 | |||||||||||||||||
| Balance as of June 30, 2022 (unaudited) | 6,875,000 | $ | 688 | $ | $ | (19,358,171 | ) | $ | (19,357,483 | ) | ||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
3
26 CAPITAL ACQUISITION CORP.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
| For the Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net (loss) income | $ | (4,213,261 | ) | $ | 6,112,524 | |||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Interest earned on cash and investments held in Trust Account | (618,235 | ) | (405,297 | ) | ||||
| Unrealized gain on change in fair value of warrants | (4,638,051 | ) | (7,719,927 | ) | ||||
| Unrealized gain on change in fair value of convertible working capital note – related party | (679,051 | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | (302,470 | ) | 73,397 | |||||
| Income tax payable | (720,335 | ) | 49,066 | |||||
| Due to related party | (326 | ) | ||||||
| Accounts payable and accrued expenses | 2,597,413 | 560,081 | ||||||
| Net cash used in operating activities | (8,573,990 | ) | (1,330,482 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Extension payments deposited into trust account | (1,650,000 | ) | ||||||
| Interest withdrawn from Trust Account to pay for franchise and federal income taxes | 154,709 | |||||||
| Net cash used in investing activities | (1,495,291 | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from issuance of promissory note | 9,500,000 | |||||||
| Net cash provided by financing activities | 9,500,000 | |||||||
| Net Change in Cash | (569,281 | ) | (1,330,482 | ) | ||||
| Cash – Beginning of period | 770,820 | 1,508,283 | ||||||
| Cash – End of period | $ | 201,539 | $ | 177,801 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for income taxes | $ | 960,049 | $ | |||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
4
26 CAPITAL ACQUISITION CORP.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 1 — Organization and Business Operations
Organization and General
26 Capital Acquisition Corp. (the “Company”) is a blank check company incorporated as a Delaware corporation on August 24, 2020. 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 (“Business Combination”).
As of June 30, 2023, the Company had not commenced any operations. All activity for the period from August 24, 2020 (inception) through June 30, 2023 relates to the Company’s formation and the initial public offering (“IPO”), which is described below, and, since the closing of the IPO, the search for a prospective initial Business Combination. The Company will not generate any operating revenues until after the completion of a Business Combination, at the earliest. The Company will generate non-operating income in the form of interest income on the proceeds derived from the IPO and will recognize changes in the fair value of warrant liability as other income (expense).
The Company’s sponsor is 26 Capital Holdings LLC, a Delaware limited liability company (the “Sponsor”).
Financing
The registration statement for the Company’s IPO (the “Registration Statement”) was declared effective on January 14, 2021 (the “Effective Date”). On January 20, 2021, the Company consummated the IPO of 27,500,000 units (including 3,500,000 units subject to the underwriters’ over-allotment option) (the “Units” and, with respect to the shares of common stock included in the Units being offered, the “Public Shares”), at $10.00 per Unit, generating gross proceeds of $275,000,000, which is discussed in Note 4.
Simultaneously with the closing of the IPO, the Company consummated the sale of 7,500,000 Private Placement Warrants (the “Private Placement Warrants”) at a price of $1.00 per Private Placement Warrant in a private placement to the Sponsor (“Private Placement”), generating total gross proceeds of $7,500,000.
Transaction costs amounted to $15,621,025, consisting of $5,500,000 of underwriting discount, $9,625,000 of deferred underwriting discount, and $496,025 of other offering costs.
Trust Account
Following the closing of the IPO on January 20, 2021, $275,000,000 ($10.00 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 may only be invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”) having a maturity of 185 days or less or in money market funds meeting certain conditions of Rule 2a-7 promulgated under the Investment Company Act which are 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 the Company to pay its tax obligations, the proceeds deposited in the Trust Account will not be released from the Trust Account until the earliest of (a) the completion of the Company’s initial Business Combination, (b) the redemption of any Public Shares properly submitted in connection with a stockholder vote to amend the Company’s amended and restated certificate of incorporation, and (c) the redemption of the Company’s Public Shares if the Company is unable to complete the initial Business Combination by, as such period was extended pursuant to the Extension (as defined below), October 20, 2023 (the “Combination Period”), subject to applicable law. The proceeds deposited in the Trust Account could become subject to the claims of the Company’s creditors which would have higher priority than the claims of the Company’s public stockholders.
5
Initial Business Combination
The Company’s management has broad discretion with respect to the specific application of the net proceeds of the IPO and the Private Placement Warrants, although substantially all of the net proceeds are intended to be generally applied toward consummating a Business Combination (less deferred underwriting commissions).
The Company’s Business Combination must be with one or more target businesses that together have a fair market value equal to at least 80% of the balance in the Trust Account (net of taxes payable) at the time of the signing an agreement to enter into a Business Combination. However, the Company will only complete a Business Combination if the post-Business Combination company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act. There is no assurance that the Company will be able to successfully effect a Business Combination.
The Company will provide its public stockholders with the opportunity to redeem all or a portion of their Public Shares upon the completion of the initial Business Combination either (i) in connection with a stockholder meeting called to approve the initial Business Combination or (ii) by means of a tender offer. The decision as to whether the Company will seek stockholder approval of a proposed initial Business Combination or conduct a tender offer will be made by the Company, solely in its discretion. The stockholders will be entitled to redeem their shares for a pro rata share of the aggregate amount then on deposit in the Trust Account (initially approximately $10.00 per share, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to the Company to pay its tax obligations).
If the Company is unable to complete a Business Combination within the Combination Period, the Company will redeem 100% of 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 the Company to pay its taxes (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding Public Shares, subject to applicable law and as further described in registration statement, and then seek to dissolve and liquidate.
The Sponsor, officers and directors have agreed to (i) waive their redemption rights with respect to their founder shares and Public Shares in connection with the completion of the initial Business Combination, (ii) waive their redemption rights with respect to their founder shares and Public Shares in connection with a stockholder vote to approve an amendment to the Company’s amended and restated certificate of incorporation, (iii) waive their rights to liquidating distributions from the Trust Account with respect to their founder shares if the Company fails to complete the initial Business Combination within the Combination Period, and (iv) not sell any of their founder shares or Public Shares to the Company in any tender offer the Company undertakes in connection with a proposed initial Business Combination.
The Company’s Sponsor has agreed that it will be liable to the Company if and to the extent any claims by a third party for services rendered or products sold to the Company, or a prospective target business with which the Company has entered into a written letter of intent, confidentiality or similar agreement or Business Combination agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.00 per public share and (ii) the actual amount per public share held in the Trust Account as of the date of the liquidation of the Trust Account, if less than $10.00 per share due to reductions in the value of the trust assets, less taxes payable, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to the monies held in the Trust Account (whether or not such waiver is enforceable) nor will it apply to any claims under the Company’s indemnity of the underwriters of the IPO against certain liabilities, including liabilities under the Securities Act. However, the Company has not asked its Sponsor to reserve for such indemnification obligations, nor has the Company independently verified whether its Sponsor has sufficient funds to satisfy its indemnity obligations and believe that the Company’s Sponsor’s only assets are securities of the Company. Therefore, the Company believes it is unlikely that its Sponsor would be able to satisfy those obligations.
On November 22, 2022, the Company filed a definitive proxy statement for a special meeting of stockholders (the “Meeting”), to, among other things, approve proposals to amend the Company’s charter and trust agreement to extend the date by which the Company would be required to consummate a business combination from January 20, 2023 to October 20, 2023 (the “Extension”). On December 20, 2022, the Extension was approved to extend the business combination period from January 20, 2023 to October 20, 2023. In connection with the Extension, holders of 24,069,772 shares of Class A common stock elected to redeem their shares for a total of $242,864,992. After the redemption the Company has outstanding 3,430,228 shares of Class A common stock subject to possible redemption.
In connection with the Extension, the Company has agreed to make monthly extension payments into the Trust Account in the amount of $275,000. During the three and six months ended June 30, 2023, the Company deposited $825,000 and $1,650,000, respectively, into the Trust Account.
6
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it 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. The Company has 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 the Company’s 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.
Liquidity, Capital Resources and Going Concern
As of June 30, 2023, the Company had $201,539 in its operating bank account and working capital deficit of $15,812,741.
Prior to the completion of the IPO, the Company’s liquidity needs had been satisfied through a payment from the Sponsor of $25,000 (see Note 6) for the founder shares to cover certain offering costs and the loan under an unsecured promissory note from the Sponsor of $275,000 (see Note 6). The promissory note from the Sponsor was paid in full as of January 20, 2021. Subsequent to the consummation of the IPO and Private Placement, the Company’s liquidity needs have been satisfied through the proceeds from the consummation of the Private Placement not held in the Trust Account.
In addition, in order to finance transaction costs in connection with a Business Combination, the Company’s Sponsor or an affiliate of the Sponsor or certain of the Company’s officers and directors may, but are not obligated to, provide the Company Working Capital Loans, as defined below (see Note 6). On December 8, 2021, the Company received $1,500,000 from the Sponsor in a Working Capital Loan. As of June 30, 2023, $730,130 is outstanding under the loan ($1,500,000 principal balance and $769,870 adjustment for fair value of the working capital loan as of June 30, 2023).
On January 5, 2023 and March 30, 2023, the Company issued unsecured convertible promissory notes (the “Convertible Promissory Notes - Shares”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $2,500,000 on each Convertible Promissory Notes - Shares from the Sponsor to pay fees and expenses and for other general corporate purposes, for a total available amount of $5,000,000. Any advances under the Convertible Notes – Shares shall be made at the sole discretion of the Sponsor. The Convertible Promissory Notes - Shares mature upon the earlier of (a) the satisfaction of all conditions set forth in Article 7 of the UEI Merger and Share Acquisition Agreement (as defined below) other than those conditions set forth in Article 7 of the UEI Merger and Share Acquisition Agreement that by their nature cannot be satisfied other than at the Closing (as defined in the UEI Merger and Share Acquisition Agreement) (such date, the “Pre-Closing Satisfaction Date”) and (b) the date that the winding up of the Company is effective. The Convertible Promissory Notes - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Notes - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Notes - Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to (i) portion of the principal amount of the Convertible Promissory Notes - Shares being converted divided by (ii) $2.50, rounded up to the nearest whole number; provided that the holder of the Convertible Promissory Notes - Shares shall not be entitled to receive more than 2,000,000 shares of common stock in the aggregate on account of (1) both Convertible Promissory Notes – Shares (i.e., 2,000,000 shares issuable in the aggregate in connection with both Convertible Promissory Notes – Shares) and (2) the conversion of any other note or other equity issuance made after March 30, 2023 in connection with the ongoing funding of the Company. As of June 30, 2023, $5,000,000 is outstanding under the Convertible Promissory Notes – Shares, no further borrowings are available under the Convertible Promissory Notes – Shares.
7
On April 28, 2023, the Company issued an unsecured convertible promissory note (the “Convertible Promissory Note 2 - Shares”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $4,000,000 from the Sponsor to pay fees and expenses and for other general corporate purposes. Any advances under the Convertible Promissory Note 2 – Shares shall be made at the sole discretion of the Sponsor. The Convertible Promissory Note 2 - Shares matures upon the earlier of (a) the Pre-Closing Satisfaction Date and (b) the date that the winding up of the Company is effective. The Convertible Promissory Note 2 - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Note 2 - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Note 2- Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to equal to (x) the portion of the principal amount of the promissory note being converted, divided by (y) the average closing price of the Class A Common Stock for the 30 consecutive Trading Days immediately preceding the Pre-Closing Satisfaction Date, rounded up to the nearest whole number. As of June 30, 2023, $4,000,000 is outstanding under the Convertible Promissory Note 2 – Shares, no further borrowings are available under the Convertible Promissory Note 2 – Shares.
On June 29, 2023, the Company issued a secured convertible promissory note (the “Secured Convertible Promissory Note – Shares,” and collectively with the Convertible Promissory Notes – Shares and the Convertible Promissory Note 2 – Shares, the “Convertible Promissory Notes – Shares – Related Party”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $2,000,000 from the Sponsor to pay fees and expenses and for other general corporate purposes. Any advances under the Secured Convertible Promissory Note - Shares shall be made at the sole discretion of the Sponsor. The Secured Convertible Promissory Note - Shares matures upon the earlier of (a) the Pre-Closing Satisfaction Date, (b) the date that the winding up of the Company is effective and (c) the one year anniversary of the issuance of the Secured Convertible Promissory Note - Shares. The Secured Convertible Promissory Note - Shares is secured by all of the assets of the Company except for the Trust Account, any funds, monies, or other property on deposit in the Trust Account, or any right, title, interest, or claim in or to any distribution from the Trust Account. The Secured Convertible Promissory Note - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Note 2 - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Note 2- Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to equal to (x) the portion of the principal amount of the promissory note being converted, divided by (y) the average closing price of the Class A Common Stock for the 30 consecutive Trading Days immediately preceding the Pre-Closing Satisfaction Date, rounded up to the nearest whole number. As of June 30, 2023, $500,000 has been borrowed against Secured Convertible Promissory Note - Shares, with $1,500,000 remaining available for borrowings.
In connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that if the Company is unable to raise additional funds to alleviate liquidity needs as well as complete a Business Combination by October 20, 2023, then the Company will cease all operations except for the purpose of liquidating. The liquidity condition and date for mandatory liquidation and subsequent dissolution raise substantial doubt about the Company’s ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after October 20, 2023.
Management plans to address this uncertainty through the Business Combination as discussed under Note 8. There is no assurance that the Company’s plans to consummate the Business Combination will be successful or successful within the Combination Period.
8
Note 2 — Restatement to Prior Period Financial Statements
During the course of preparing the quarterly report on Form 10-Q for the three and six months ended June 30, 2023, the Company identified a misstatement in its misapplication of accounting guidance related to the Company’s Convertible Promissory Notes – Shares – Related Party issued during the three months ended March 31, 2023. The fair value of the note was significantly below par value at initial borrowing, which resulted in an offsetting entry to additional paid in capital, further recording to additional paid in capital would be precluded under the related party guidance precludes the fair value option. The proper treatment is to analyze the Convertible Promissory Notes – Shares – Related Party under ASC 815 and results in no bifurcation of a derivative. Upon further analysis there would be a contingent beneficial conversion feature that would be recognized once the contingency is resolved. As such the Convertible promissory notes – shares – related party should have been booked at par value. The Company did determine this error was material to the Form 10Q for the three months ended March 31, 2023. The below tables represent the impacts and adjustments to the financial statements:
| As previously Reported | Adjustments | As Restated | ||||||||||
| Unaudited Condensed Balance sheet as of March 31, 2023 | ||||||||||||
| Convertible promissory notes – shares – related party | $ | 2,440,294 | $ | 2,559,706 | $ | 5,000,000 | ||||||
| Additional Paid in Capital | $ | 1,219,483 | $ | (1,219,483 | ) | $ | ||||||
| Accumulated Deficit | $ | (21,384,941 | ) | $ | (1,340,223 | ) | $ | (22,725,164 | ) | |||
| Total Liabilities | $ | 21,763,383 | $ | 2,559,706 | $ | 24,323,089 | ||||||
| Total Stockholders’ Deficit | $ | (20,164,770 | ) | $ | (2,559,706 | ) | $ | (22,724,476 | ) | |||
| As previously Reported | Adjustments | As Restated | ||||||||||
| Unaudited Condensed Statement of Operations for the Three Months Ended March 31, 2023 | ||||||||||||
| Unrealized (loss) gain on change in fair value of Convertible Note | $ | 1,102,585 | $ | (425,489 | ) | $ | 677,096 | |||||
| Total other income (expense) | $ | 6,846,150 | $ | (425,489 | ) | $ | 6,420,661 | |||||
| Income before provision for income taxes | $ | (526,235 | ) | $ | (425,489 | ) | $ | (951,724 | ) | |||
| Net loss | $ | (692,924 | ) | $ | (425,489 | ) | $ | (1,118,413 | ) | |||
| As previously Reported | Adjustments | As Restated | ||||||||||
| Unaudited Condensed Statements of Changes in Stockholders’ Deficit for the Three Months Ended March 31, 2023 | ||||||||||||
| Proceeds received in excess of initial fair value of Convertible Promissory Note | $ | 2,134,217 | $ | (2,134,217 | ) | $ | ||||||
| Net loss | $ | (692,924 | ) | $ | (425,489 | ) | $ | (1,118,413 | ) | |||
| Accretion for Class A common stock to redemption amount- Additional Paid in Capital | $ | (914,734 | ) | $ | 914,734 | $ | ||||||
| Accumulated Deficit | $ | (21,384,941 | ) | $ | (1,340,223 | ) | $ | (22,725,164 | ) | |||
| Total Stockholders’ Deficit | $ | (20,164,770 | ) | $ | (2,559,706 | ) | $ | (22,724,476 | ) | |||
| As previously Reported | Adjustments | As Restated | ||||||||||
| Unaudited Condensed Statements of Cash Flows for the Three Months Ended March 31, 2023 | ||||||||||||
| Net loss | $ | (692,924 | ) | $ | (425,489 | ) | $ | (1,118,413 | ) | |||
| Unrealized gain on change in fair value of convertible working capital note – related party and Convertible promissory note | $ | (1,102,585 | ) | $ | 425,489 | $ | (677,096 | ) | ||||
| Non Cash: | ||||||||||||
| Proceeds received in excess of initial fair value of Convertible Promissory Note - Shares at initial borrowing | $ | 2,134,217 | $ | (2,134,217 | ) | $ | ||||||
9
Additionally, due the recording of the change in fair value of the Convertible Promissory Notes – Shares – Related Party earnings per share was impacted. The impacts to earnings per share are shown below:
| As previously Reported | Adjustments | As Restated | ||||||||||
| Earnings per Share for the Three Months Ended March 31, 2023 | ||||||||||||
| Weighted average shares outstanding, Class A common stock | 3,430,228 | 3,430,228 | ||||||||||
| $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.11 | ) | ||||
| Weighted average shares outstanding, Class B common stock | 6,875,000 | 6,875,000 | ||||||||||
| $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.11 | ) | ||||
Note 3 — Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements are presented in U.S. dollars in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information or footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulation of the SEC for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP. In the opinion of management, the unaudited condensed financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected through December 31, 2023 or for any future interim periods.
The accompanying unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2022, filed by the Company with the SEC on April 17, 2023.
Use of Estimates
The preparation of the unaudited condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed financial statements and expenses for the period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates. A few of the more significant accounting estimates included in these unaudited condensed financial statements is the determination of the fair value of warrant liabilities and fair value of the Convertible Working Capital Loan.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company did not have any cash equivalents as of June 30, 2023 and December 31, 2022.
Cash and Investments Held in Trust Account
At June 30, 2023 and December 31, 2022, the Trust Account held $36,820,259 and $34,706,732 in cash and treasury funds, respectively. All of the Company’s investments held in the Trust Account are classified as trading securities. Trading securities are presented on the condensed balance sheets at fair value at the end of each reporting period. Gains and losses resulting from the change in fair value of investments held in Trust Account are included in other income (expenses) income in the accompanying condensed statements of operations. The estimated fair values of investments held in Trust Account are determined using available market information. On December 20, 2022, the Extension was approved to extend the business combination period from January 20, 2023 to October 20, 2023. In connection with the Extension, 24,069,772 holders of Class A common stock elected to redeem their shares for a total of $242,864,992. After the redemption, the Company has 3,430,228 shares of Class A common stock subject to possible redemption.
In January 2023, we instructed Continental Stock Transfer & Trust Company, the trustee with respect to the trust account (“Continental”), to liquidate the investments held in the trust account and instead to hold the funds in the trust account in an interest-bearing demand deposit account at Morgan Stanley, with Continental continuing to act as trustee, until the earlier of the consummation of our initial business combination or our liquidation. As a result, following the liquidation of investments in the trust account, the remaining proceeds from the initial public offering and private placement are no longer invested in U.S. government securities or money market funds.
10
Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
| ● | Level 1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets; |
| ● | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and |
| ● | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
The fair value of the Company’s certain assets and liabilities, which qualify as financial instruments under Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the condensed balance sheets. The fair values of cash and cash equivalents, prepaid expenses, accounts payable and accrued expenses are estimated to approximate the carrying values as of June 30, 2023 and December 31, 2022 due to the short maturities of such instruments.
The fair value of Private Placement Warrants is based on a valuation model utilizing management judgment and pricing inputs from observable and unobservable markets with less volume and transaction frequency than active markets. Significant deviations from these estimates and inputs could result in a material change in fair value. The fair value of the Private Placement Warrants is classified as Level 3. See Note 7 for additional information on assets and liabilities measured at fair value.
Convertible Working Capital Loan
The Company has elected the fair value option to account for the Working Capital Loan with the Sponsor as defined and more fully described in Note 6. As a result of applying the fair value option, the Company records each draw at fair value with a gain recorded to the condensed statement of operations or loss recorded to additional paid-in capital which is recognized at issuance (see Note 7), and subsequent changes in fair value are recorded as change in fair value of convertible working capital note on the condensed statements of operations. The fair value option was evaluated and deemed appropriate based on the fair value of the initial borrowing . The fair value is based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s and, if applicable, an independent third-party valuation firm’s own assumption about the assumptions a market participant would use in pricing the asset or liability.
Convertible Promissory Notes – Shares- Related Party
The Company analyzed the Convertible Promissory Notes – Shares - Related Party to assess if the fair value option was appropriate, due to fair value of the note being significantly below par value at initial borrowing, which results in an offsetting entry to additional paid in capital which precludes the fair value option it was determined the fair value option was not appropriate. As such, the Company analyzed the Convertible Promissory Notes – Shares – Related Party under ASC 815 and results in no bifurcation of a derivative due to the conversion feature impacting equity. Additionally, there is a contingent beneficial conversion feature that would be recognized once the contingency is resolved and does meet the scope exception under ASC 815, as such bifurcation is not required.
11
The Company reviews the terms of convertible debt issued to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value. The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of a cash account in a financial institution, which, at times, may exceed the Federal Deposit Insurance Corporation coverage limit of $250,000. At June 30, 2023 and December 31, 2022, the Company has not experienced losses on this account and management believes the Company is not exposed to significant risks on such account. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.
Common Stock Subject to Possible Redemption
The Company accounts for its Class A common stock subject to possible redemption in accordance with the guidance in ASC Topic 480, “Distinguishing Liabilities from Equity.” Shares of Class A common stock subject to mandatory redemption are classified as a liability instrument and are 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 redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The Company’s Class A common stock features certain redemption rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future events. Accordingly, at June 30, 2023 and December 31, 2022, shares of Class A common stock subject to possible redemption are presented at redemption value as temporary equity, outside of the stockholders’ deficit section of the Company’s condensed balance sheets.
Under ASC 480-10-S99, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of each reporting period (net of any available amounts for withdrawal to the Company for tax obligations). This method would view the end of the reporting period as if it were also the redemption date for the security. Immediately upon the closing of the IPO, the Company recognized the accretion from initial book value to redemption amount value. The change in the carrying value of redeemable Class A common stock resulted in charges against additional paid-in capital (to the extent available) and accumulated deficit.
At June 30, 2023 and December 31, 2022, the Class A common stock reflected in the condensed balance sheets is reconciled in the following table:
| Class A common stock subject to possible redemption, December 31, 2021 | $ | 275,000,000 | ||
| Less: | ||||
| Class A common stock redemption | (242,864,992 | ) | ||
| Add: | ||||
| Accretion of carrying value to redemption value | 2,552,756 | |||
| Class A common stock subject to possible redemption, December 31, 2022 | $ | 34,687,764 | ||
| Add: | ||||
| Accretion of carrying value to redemption value | 914,734 | |||
| Class A common stock subject to possible redemption, March 31, 2023 | $ | 35,602,498 | ||
| Add: | ||||
| Accretion of carrying value to redemption value | 1,094,268 | |||
| Class A common stock subject to possible redemption, June 30, 2023 | $ | 36,696,766 |
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Net (Loss) Income Per Share of Common Stock
The Company complies with accounting and disclosure requirements of FASB ASC Topic 260 “Earnings Per Share”. Net (loss) income per common stock is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding for the period. Accretion associated with the redeemable shares of Class A common stock is excluded from earnings per share as the redemption value approximates fair value.
The calculation of diluted (loss) income per share does not consider the effect of the warrants issued in connection with the (i) the IPO, and (ii) the private placement since the exercise of the warrants is contingent upon the occurrence of future events. The warrants are exercisable to purchase 21,250,000 shares of Class A common stock in the aggregate. As of June 30, 2023, and 2022, the Company did not have any other dilutive securities or other contracts that could, potentially, be exercised or converted into shares of common stock and then share in the earnings of the Company. As a result, diluted net (loss) income per share of common stock is the same as basic net (loss) income per common share for the periods presented.
The following table reflects the calculation of basic and diluted net (loss) income per common share (in dollars, except per share amounts):
| For the Three Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| Basic and diluted net (loss) income per share: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net (loss) income | $ | (1,030,160 | ) | $ | (2,064,688 | ) | $ | 3,154,844 | $ | 788,711 | ||||||
| Denominator: | ||||||||||||||||
| Weighted-average shares outstanding | 3,430,228 | 6,875,000 | 27,500,000 | 6,875,000 | ||||||||||||
| $ | (0.30 | ) | $ | (0.30 | ) | $ | 0.11 | $ | 0.11 | |||||||
| For the Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| Basic and diluted net (loss) income per share: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net (loss) income | $ | (1,402,438 | ) | $ | (2,810,823 | ) | $ | 4,890,019 | $ | 1,222,505 | ||||||
| Denominator: | ||||||||||||||||
| Weighted-average shares outstanding | 3,430,228 | 6,875,000 | 27,500,000 | 6,875,000 | ||||||||||||
| $ | (0.41 | ) | $ | (0.41 | ) | $ | 0.18 | $ | 0.18 | |||||||
Offering Costs Associated with the IPO
The Company complies with the requirements of the ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A - “Expenses of Offering”. Offering costs consist principally of professional and registration fees incurred through the condensed balance sheet date. Offering costs are allocated to the separable financial instruments issued in the IPO based on a relative fair value basis compared to total proceeds received. Offering costs associated with warrant liabilities are expensed, and offering costs associated with the Class A common stock were charged to temporary equity and accreted to additional paid-in capital (to the extent available) and shareholders’ deficit.
Derivative Financial Instruments
The Company evaluates its 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 recorded at fair value on the grant date and re-valued at each reporting date, with changes in the fair value reported in the condensed statements of operations. Derivative assets and liabilities are classified on the condensed 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. The Company has determined the warrants are a derivative liability.
FASB ASC 470-20, “Debt with Conversion and Other Options,” addresses the allocation of proceeds from the issuance of convertible debt into its equity and debt components. The Company applies this guidance to allocate IPO proceeds from the Units between Class A common stock and warrants, using the residual method by allocating IPO proceeds first to fair value of the warrants and then the Class A common stock.
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Income Taxes
The Company accounts for income taxes under ASC 740, “Income Taxes.” ASC 740, requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the unaudited condensed financial statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. As of June 30, 2023 and December 31, 2022, the Company’s deferred tax asset had a full valuation allowance recorded against it.
ASC 740-270-25-2 requires that an annual effective tax rate be determined, and such annual effective rate applied to year to date income in interim periods under ASC 740-270-30-5. The Company’s effective tax rate was 2.42% and 0.8% for the three months ended June 30, 2023 and 2022, respectively, (6.03)% and 0.8% for the six months ended June 30, 2023 and 2022, respectively. The effective tax rate differs from the statutory tax rate of 21% for the six months ended June 30, 2023 and 2022, due to changes in fair value in warrant liability and the valuation allowance on the deferred tax assets.
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of June 30, 2023 and December 31, 2022. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.
The Company has identified the United States as its only “major” tax jurisdiction. The Company has been subject to income taxation by major taxing authorities since inception. These examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations, cash flows and/or search for a target company, the specific impact is not readily determinable as of the date of the unaudited condensed financial statements. The unaudited condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The funds in the Company’s operating account and the Trust Account are held in banks or other financial institutions. The Company’s cash held in non-interest bearing and interest-bearing accounts would exceed any applicable Federal Deposit Insurance Corporation (“FDIC”) insurance limits. Should events, including limited liquidity, defaults, non-performance, or other adverse developments occur with respect to the banks or other financial institutions that hold the Company’s funds, or that affect financial institutions or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, the Company’s liquidity may be adversely affected. For example, on March 10, 2023, the FDIC announced that Silicon Valley Bank had been closed by the California Department of Financial Protection and Innovation. Although the Company did not have any funds in Silicon Valley Bank or other institutions that have been closed, including Signature Bank and First Republic Bank, the Company cannot guarantee that the banks or other financial institutions that hold its funds will not experience similar issues.
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.
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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.
Litigation Regarding UEI Merger and Share Acquisition Agreement
On February 2, 2023, the Company commenced an action against the UEI Parties (the “Delaware Action”) by filing a complaint (the “Complaint”) in the Delaware Court of Chancery (the “Delaware Court”). Specifically, the Complaint seeks a grant of specific performance ordering the UEI Parties to specifically perform their obligations under the UEI Merger and Share Acquisition Agreement, including using reasonable best efforts to consummate the UEI Business Combination in accordance with the terms of the UEI Merger and Share Acquisition Agreement.
On February 20, 2023, the UEI Parties filed an answer (the “Answer”) with affirmative defenses to the Complaint in the Delaware Action. The UEI Parties also asserted several counterclaims against the Company seeking declaratory relief for alleged breaches of the UEI Merger and Share Acquisition Agreement by the Company and recessionary damages. On March 3, 2023, the UEI Parties filed amendments to their counterclaims (the “Amended Counterclaims”) which, among other things, amends the prayer for relief set forth in the Answer to clarify that the UEI Parties seek an order terminating the UEI Merger and Share Acquisition Agreement. On March 9, 2023, the Company filed a response to the Amended Counterclaims, in which it asserted various affirmative defenses to the Amended Counterclaims. On April 24, 2023, the UEI Parties filed a motion to make additional amendments to their Amended Counterclaims, which amendments were granted by the Delaware Court on May 10, 2023, to add allegations that the Company materially breached section 6.16 of the Merger Agreement through failing to make reasonable best efforts to pursue a PIPE investment and Section 5.5 of the Merger Agreement through material omissions and misstatements in recent public filings, and that Company and the Sponsor fraudulently induced the UEI Parties into the October 15, 2021 Merger Agreement. Also, the Company Amended its Complaint on April 24, 2023 to clarify that it has an alternative claim for damages, in addition to its primary claim for specific performance of the merger agreement. On June 30, 2023, the UEI Parties purported to terminate the merger agreement. A trial was held from July 10-14, 2023, which will resolve the specific performance issue. The parties have filed post-trial briefing and await a decision. If that trial does not fully resolve all of the Parties’ claims, a second 1-2 day trial shall occur in September 2023 to address the alternative damages remedy.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2020-06”), to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. As a smaller reporting company, ASU 2020-06 is effective January 1, 2024 for fiscal years beginning after December 15, 2023 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company adopted ASU 2020-06 on January 1, 2023.
The Company’s management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if adopted, would have a material effect on the Company’s unaudited condensed financial statements.
Note 4 — Initial Public Offering
Pursuant to the IPO on January 20, 2021, the Company sold 27,500,000 Units (including 3,500,000 units subject to the underwriters’ over-allotment option) at a purchase price of $10.00 per Unit. Each Unit consists of one share of Class A common stock and one-half warrant to purchase one share of Class A common stock (“Public Warrant”). Each Public Warrant entitles the holder to purchase one share of Class A common stock at a price of $11.50 per share, subject to adjustment. Each Public Warrant will become exercisable on the later of 30 days after the completion of the initial Business Combination or 12 months from the closing of the IPO and will expire five years after the completion of the initial Business Combination, or earlier upon redemption or liquidation.
An aggregate of $10.00 per Unit sold in the IPO was held in the Trust Account and will be held as cash or invested in United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act having a maturity of 185 days or less or in money market funds meeting certain conditions of Rule 2a-7 promulgated under the Investment Company Act, which are only in direct U.S. government treasury obligations. As of June 30, 2023 and December 31, 2022, $36,820,259 and $34,706,732, respectively, of the IPO proceeds were held in the Trust Account.
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Public Warrants
Each whole warrant entitles the holder to purchase one share of the Company’s Class A common stock at a price of $11.50 per share, subject to adjustment as discussed herein. In addition, if (x) the Company issues additional shares of Class A common stock or equity-linked securities for capital raising purposes in connection with the closing of its initial Business Combination at an issue price or effective issue price of less than $9.20 per share of Class A common stock (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors and, in the case of any such issuance to the Company’s Sponsor or its affiliates, without taking into account any founder shares held by the Company’s Sponsor or its affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of the initial Business Combination on the date of the consummation of the initial Business Combination (net of redemptions), and (z) the volume weighted average trading price of the Company’s common stock during the 20 trading day period starting on the trading day prior to the day on which the Company consummates the initial Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the higher of the Market Value and the Newly Issued Price, and the $18.00 per share redemption trigger price described below under “Redemption of warrants” will be adjusted (to the nearest cent) to be equal to 180% of the higher of the Market Value and the Newly Issued Price.
The warrants will become exercisable on the later of 12 months from the closing of the IPO or 30 days after the completion of its initial Business Combination and will expire five years after the completion of the Company’s initial Business Combination, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation.
The Company will not be obligated to deliver any shares of Class A common stock pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act with respect to the shares of Class A common stock underlying the warrants is then effective and a prospectus relating thereto is current. No warrant will be exercisable, and the Company will not be obligated to issue shares of Class A common stock upon exercise of a warrant unless Class A common stock issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants. In no event will the Company be required to net cash settle any warrant. In the event that a registration statement is not effective for the exercised warrants, the purchaser of a unit containing such warrant will have paid the full purchase price for the unit solely for the share of Class A common stock underlying such unit.
Once the warrants become exercisable, the Company may call the Public Warrants for redemption:
| ● | in whole and not in part; |
| ● | at a price of $0.01 per warrant; |
| ● | upon not less than 30 days’ prior written notice of redemption (the “30-day redemption period”) to each warrant holder; and |
| ● | if, and only if, the reported last sale price of the Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like), for any 20 trading days within a 30-trading day period commencing once the warrants become exercisable and ending three business days before the Company sends the notice of redemption to the warrant holders. |
If the Company calls the warrants for redemption as described above, the management will have the option to require any holder that wishes to exercise its warrant to do so on a “cashless basis.” If the management takes advantage of this option, all holders of warrants would pay the exercise price by surrendering their warrants for that number of shares of Class A common stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A common stock underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the Class A common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants.
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Note 5 — Private Placement
Simultaneously with the closing of the IPO, the Sponsor purchased an aggregate of 7,500,000 Private Placement Warrants at a price of $1.00 per Private Placement Warrant, for an aggregate purchase price of $7,500,000, in a private placement (the “Private Placement”).
The Private Placement Warrants are identical to the Public Warrants except that, so long as they are held by the Sponsor or its permitted transferees, (i) they will not be redeemable by the Company, (ii) they (including the Class A common stock issuable upon exercise of these warrants) may not, subject to certain limited exceptions, be transferred, assigned or sold by the Sponsor until 30 days after the completion of the Company’s initial Business Combination, and (iii) they may be exercised by the holders on a cashless basis.
The Private Placement Warrants will be non-redeemable and exercisable on a cashless basis so long as they are held by the Sponsor or its permitted transferees. If the Private Placement Warrants are held by holders other than the Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by the holders on the same basis as the Public Warrants.
The Company’s Sponsor has agreed to (i) waive its redemption rights with respect to its founder shares and Public Shares in connection with the completion of the Company’s initial Business Combination, (ii) waive its redemption rights with respect to its founder shares and Public Shares in connection with a stockholder vote to approve an amendment to the Company’s amended and restated certificate of incorporation (A) to modify the substance or timing of the Company’s obligation to offer redemption rights in connection with any proposed initial Business Combination or to redeem 100% of the Company’s Public Shares if the Company does not complete its initial Business Combination within the Combination Period or (B) with respect to any other provision relating to stockholders’ rights or pre-initial Business Combination activity, (iii) waive its rights to liquidating distributions from the Trust Account with respect to its founder shares if the Company fails to complete its initial Business Combination within the Combination Period, and (iv) not sell any of its founder shares or Public Shares to the Company in any tender offer the Company undertakes in connection with a proposed initial Business Combination. In addition, the Company’s Sponsor has agreed to vote any founder shares held by them and any Public Shares purchased during or after the IPO (including in open market and privately negotiated transactions) in favor of the Company’s initial Business Combination.
Note 6 — Related Party Transactions
Founder Shares
In August 2020, the Sponsor paid $25,000 to cover certain offering costs of the Company in consideration for 5,750,000 shares of Class B common stock. In January 2021, the Company effected a stock dividend of 0.2 shares for each founder share outstanding, resulting in an aggregate of 6,900,000 founder shares outstanding and held by the Sponsor (up to 900,000 of which are subject to forfeiture by the Sponsor if the underwriters’ over-allotment option is not exercised in full). On January 20, 2021, the Sponsor forfeited 25,000 founder shares to the extent that the over-allotment option was not exercised in full by the underwriters, resulting in an aggregate of 6,875,000 founder shares outstanding.
The Sponsor has agreed not to transfer, assign or sell its founder shares until the earlier to occur of (A) one year after the completion of the Company’s initial Business Combination or (B) subsequent to the Company’s initial Business Combination, (x) if the last sale price of the Company’s Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Company’s initial Business Combination, or (y) the date on which the Company completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of its stockholders having the right to exchange their shares of common stock for cash, securities or other property.
Promissory Note — Related Party
On August 27, 2020, the Company issued an unsecured promissory note to the Sponsor, pursuant to which the Company may borrow up to an aggregate principal amount of $300,000 to be used for a portion of the expenses of the IPO. This loan is non-interest bearing, unsecured and due at the earlier of March 31, 2021 or the closing of the IPO. The loan would be repaid upon the closing of the IPO out of offering proceeds not held in the Trust Account. On January 20, 2021, the Company repaid $275,000 to the Sponsor. The facility is no longer available to the Company. As of June 30, 2023 and December 31, 2022, there were no outstanding amounts due under the promissory note.
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Convertible Working Capital Loan
In order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor or certain of the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of the working capital held outside the Trust Account to repay the Working Capital Loans but no proceeds from the Trust Account would be used to repay the Working Capital Loans. Up to $1,500,000 of such Working Capital Loans may be convertible into warrants at a price of $1.00 per warrant at the option of the lender. The warrants would be identical to the Private Placement Warrants, including as to exercise price, exercisability and exercise period.
On December 8, 2021, the Company received $1,500,000 from the Sponsor in a Working Capital Loan. This Working Capital Loan was valued using the fair value method. The fair value of the note as of December 8, 2021 and December 31, 2021 was $1,500,000. The fair value of the note as of June 30, 2023 and December 31, 2022 was $730,130 and $1,409,181, respectively (see Note 7).
Convertible Promissory Notes – Shares - Related Party
On January 5, 2023 and March 30, 2023, the Company issued the Convertible Promissory Notes - Shares to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $2,500,000 on each Convertible Promissory Notes - Shares from the Sponsor to pay fees and expenses and for other general corporate purposes, for a total available amount of $5,000,000. Any advances under the Convertible Note shall be made at the sole discretion of the Sponsor. The Convertible Promissory Notes - Shares mature upon the earlier of (a) the satisfaction of all conditions set forth in Article 7 of the UEI Merger and Share Acquisition Agreement other than those conditions set forth in Article 7 of the UEI Merger and Share Acquisition Agreement that by their nature cannot be satisfied other than at the Closing (as defined in the UEI Merger and Share Acquisition Agreement) and (b) the date that the winding up of the Company is effective. The Convertible Promissory Notes - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Notes - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Notes - Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to (i) portion of the principal amount of the Convertible Promissory Notes - Shares being converted divided by (ii) $2.50, rounded up to the nearest whole number; provided that the holder of the Convertible Promissory Notes - Shares shall not be entitled to receive more than 2,000,000 shares of common stock in the aggregate on account of (1) both Convertible Promissory Notes – Shares (i.e., 2,000,000 shares issuable in the aggregate in connection with both Convertible Promissory Notes – Shares) and (2) the conversion of any other note or other equity issuance made after March 30, 2023 in connection with the ongoing funding of the Company. As such, the Company analyzed the Convertible Promissory Notes – Shares – Related Party under ASC 815 and results in no bifurcation of a derivative due to the conversion feature impacting equity. Additionally, there is a contingent beneficial conversion feature that would be recognized once the contingency is resolved. As of June 30, 2023, $5,000,000 is outstanding under the Convertible Promissory Notes – Shares, and no further borrowings are available under the Convertible Promissory Notes – Shares.
On April 28, 2023, the Company issued an unsecured convertible promissory note (the “Convertible Promissory Note 2 - Shares”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $4,000,000 from the Sponsor to pay fees and expenses and for other general corporate purposes. Any advances under the Convertible Promissory Note 2 – Shares shall be made at the sole discretion of the Sponsor. The Convertible Promissory Note 2 - Shares matures upon the earlier of (a) the Pre-Closing Satisfaction Date and (b) the date that the winding up of the Company is effective. The Convertible Promissory Note 2 - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Note 2 - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Note 2- Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to equal to (x) the portion of the principal amount of the promissory note being converted, divided by (y) the average closing price of the Class A Common Stock for the 30 consecutive Trading Days immediately preceding the Pre-Closing Satisfaction Date, rounded up to the nearest whole number. The Convertible Promissory Note 2 – Shares were analyzed under ASC 815 and does meet the scope exception under ASC 815, as such bifurcation was not required. As of June 30, 2023, $4,000,000 is outstanding under the Convertible Promissory Note 2 – Shares, no further borrowings are available under the Convertible Promissory Note 2 – Shares.
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On June 29, 2023, the Company issued a secured convertible promissory note (the “Secured Convertible Promissory Note - Shares”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $2,000,000 from the Sponsor to pay fees and expenses and for other general corporate purposes. Any advances under the Secured Convertible Promissory Note - Shares shall be made at the sole discretion of the Sponsor. The Secured Convertible Promissory Note - Shares matures upon the earlier of (a) the Pre-Closing Satisfaction Date, (b) the date that the winding up of the Company is effective and (c) the one year anniversary of the issuance of the Secured Convertible Promissory Note - Shares. The Secured Convertible Promissory Note - Shares is secured by all of the assets of the Company except for the Trust Account, any funds, monies, or other property on deposit in the Trust Account, or any right, title, interest, or claim in or to any distribution from the Trust Account. The Secured Convertible Promissory Note - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Note 2 - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Note 2- Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to equal to (x) the portion of the principal amount of the promissory note being converted, divided by (y) the average closing price of the Class A Common Stock for the 30 consecutive Trading Days immediately preceding the Pre-Closing Satisfaction Date, rounded up to the nearest whole number. The Convertible Promissory Note 2 – Shares were analyzed under ASC 815 and does meet the scope exception under ASC 815, as such bifurcation was not required. As of June 30, 2023, $500,000 has been borrowed against Secured Convertible Promissory Note - Shares, with $1,500,000 remaining available for borrowings.
Administrative Service Fee
The Company has agreed to pay its Sponsor, commencing on January 14, 2021, a total of $10,000 per month for office space, utilities and secretarial and administrative support. Upon completion of the Company’s Business Combination or its liquidation, the Company will cease paying these monthly fees. For the three and six months ended June 30, 2023 and 2022, the Company has incurred $30,000 and $60,000, and $30,000 and $60,000 for these services, respectively, of which $90,000 and $0 are recorded on the condensed balance sheets in accounts payable and accrued expenses, respectively.
Note 7 — Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
| June 30, | Quoted Prices in Active Markets | Significant Other Observable Inputs | Significant Other Unobservable Inputs | |||||||||||||
| 2023 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Cash and marketable securities held in Trust Account | $ | 36,820,259 | $ | 36,820,259 | $ | $ | ||||||||||
| Liabilities: | ||||||||||||||||
| Convertible Working Capital Loan – related party | $ | 730,130 | $ | $ | $ | 730,130 | ||||||||||
| Warrant Liability- Public | $ | 907,500 | $ | 907,500 | $ | $ | ||||||||||
| Warrant Liability- Private Placement | $ | 524,070 | $ | $ | $ | 524,070 | ||||||||||
| December 31, | Quoted Prices In Active Markets | Significant Other Observable Inputs | Significant Other Unobservable Inputs | |||||||||||||
| 2022 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities held in Trust Account | $ | 34,706,732 | $ | 34,706,732 | $ | $ | ||||||||||
| Liabilities: | ||||||||||||||||
| Convertible Working Capital Loan – related party | $ | 1,409,181 | $ | $ | $ | 1,409,181 | ||||||||||
| Warrant Liability- Public | $ | 3,850,000 | $ | 3,850,000 | $ | $ | ||||||||||
| Warrant Liability- Private Placement | $ | 2,219,621 | $ | $ | $ | 2,219,621 | ||||||||||
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Initial Measurement — Public Warrants
The estimated fair value of the Public Warrants on January 20, 2021 was determined using Level 3 inputs. Inherent in a Monte-Carlo simulation model were assumptions related to expected stock-price volatility (pre-merger and post-merger), expected term, dividend yield and risk-free interest rate. The Company estimated the volatility of its common stock based on management’s understanding of the volatility associated with instruments of other similar entities. Significant increases (decreases) in the expected volatility in isolation would result in a significantly higher (lower) fair value measurement. The risk-free interest rate was based on the U.S. Treasury Constant Maturity similar to the expected remaining life of the warrants. The expected life of the warrants was simulated based on management assumptions regarding the timing and likelihood of completing a business combination. The dividend rate was based on the historical rate, which the Company anticipated to remain at zero. Once the warrants become exercisable, the Company may redeem the outstanding warrants when the price per common stock equals or exceeds $18.00. The assumptions used in calculating the estimated fair values represented the Company’s best estimate. However, inherent uncertainties were involved. If factors or assumptions change, the estimated fair values could be materially different.
Subsequent Measurement — Public Warrants
The Public Warrants are measured at fair value on a recurring basis. The subsequent measurement of the Public Warrants until December 31, 2022 were classified as Level 1 due to the use of an observable market quote in an active market. At June 30, 2023, the Public Warrants were transferred to a Level 1 from a Level 2 due to sufficient trade volume.
As of June 30, 2023 and December 31, 2022, the aggregate value of Public Warrants was $907,500 and $3,850,000, respectively.
Initial Measurement – Private Placement Warrants
The estimated fair value of the Private Placement Warrants on January 20, 2021 is determined using Level 3 inputs. Inherent in a Monte-Carlo simulation model are assumptions related to expected stock-price volatility (pre-merger and post-merger), expected term, dividend yield and risk-free interest rate. The Company estimates the volatility of its common stock based on management’s understanding of the volatility associated with instruments of other similar entities. Significant increases (decreases) in the expected volatility in isolation would result in a significantly higher (lower) fair value measurement. The risk-free interest rate is based on the U.S. Treasury Constant Maturity similar to the expected remaining life of the warrants. The expected life of the warrants is simulated based on management assumptions regarding the timing and likelihood of completing a business combination. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero. The assumptions used in calculating the estimated fair values represent the Company’s best estimate. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair values could be materially different.
Subsequent Measurement – Private Placement Warrants
The key inputs into the Monte-Carlo simulation model for the Private Placement Warrants were as follows at June 30, 2023 and December 31, 2022:
| Input | June 30, 2023 | December 31, 2022 | ||||||
| Expected term (years) | 1.05 | 0.7 | ||||||
| Expected volatility | 2.5 | % | 18.6 | % | ||||
| Risk-free interest rate | 5.37 | % | 4.75 | % | ||||
| Fair value of the common stock price | $ | 10.76 | $ | 10.14 | ||||
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The following tables set forth a summary of the changes in the fair value of the warrant liability for the six months ended June 30, 2023 and 2022:
| Private Placement Warrant | Public Warrant | Warrant Liability | ||||||||||
| Fair value as of December 31, 2022 | $ | 2,219,621 | $ | 3,850,000 | $ | 6,069,621 | ||||||
| Revaluation of warrant liability included in other expense within the condensed statement of operations for the three months ended March 31, 2023 | (1,983,514 | ) | (3,470,500 | ) | (5,454,014 | ) | ||||||
| Fair value as of March 31, 2023 | 236,107 | 379,500 | 615,607 | |||||||||
| Revaluation of warrant liability included in other expense within the condensed statement of operations for the three months ended June 30, 2023 | 287,963 | 528,000 | 815,963 | |||||||||
| Fair value as of June 30, 2023 | $ | 524,070 | $ | 907,500 | $ | 1,431,570 | ||||||
| Private Placement Warrant | Public Warrant | Warrant Liability | ||||||||||
| Fair value as of December 31, 2021 | $ | 5,103,769 | $ | 9,073,625 | $ | 14,177,394 | ||||||
| Revaluation of warrant liability included in other expense within the condensed statements of operations for the three months ended March 31, 2022 | (1,101,131 | ) | (1,969,000 | ) | (3,070,131 | ) | ||||||
| Fair value as of March 31, 2022 | 4,002,638 | 7,104,625 | 11,107,263 | |||||||||
| Revaluation of warrant liability included in other expense within the condensed statements of operations for the three months ended June 30, 2022 | (1,670,171 | ) | (2,979,625 | ) | (4,649,796 | ) | ||||||
| Fair value as of June 30, 2022 | $ | 2,332,467 | 4,125,000 | 6,457,467 | ||||||||
Convertible Working Capital Loan
The fair value of the option to convert the Convertible Working Capital Loan into private warrants was valued utilizing a Monte-Carlo model that values the embedded conversion feature. Inherent in a Monte-Carlo simulation model are assumptions related to expected stock-price volatility (pre-merger and post-merger), expected term, dividend yield and risk-free interest rate. The Company estimates the volatility of its common stock based on management’s understanding of the volatility associated with instruments of other similar entities. Significant increases (decreases) in the expected volatility in isolation would result in a significantly higher (lower) fair value measurement. The risk-free interest rate is based on the U.S. Treasury Constant Maturity similar to the term to conversion. The term to conversion is simulated based on management assumptions regarding the timing and likelihood of completing a business combination. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero. The assumptions used in calculating the estimated fair values represent the Company’s best estimate. However, inherent uncertainties are involved. If factors or assumptions change, the estimated fair values could be materially different.
The estimated fair value of the Convertible Working Capital Loan was based on the following significant inputs:
| June 30, 2023 | December 31, 2022 | |||||||
| Risk-free interest rate | 5.47 | % | 4.43 | % | ||||
| Weighted time to conversion (in years) | 5.50 | 0.26 | ||||||
| Expected volatility | 2.5 | % | 13.00 | % | ||||
| Fair value of the common stock price | $ | 10.76 | $ | 10.14 | ||||
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The following tables present the changes in the fair value of the Level 3 Convertible Working Capital Loan during the three and six months ended June 30, 2023 and 2022:
| Fair value as of December 31, 2022 | $ | 1,409,181 | ||
| Change in fair value | (677,096 | ) | ||
| Fair value as of March 31, 2023 | 732,085 | |||
| Change in fair value | 1,955 | |||
| Fair value as of June 30, 2023 | $ | 730,130 |
| Fair value as of December 31, 2021 | $ | 1,500,000 | ||
| Change in fair value | ||||
| Fair value as of March 31, 2022 | 1,500,000 | |||
| Change in fair value | ||||
| Fair value as of June 30, 2022 | $ | 1,500,000 |
There were no transfers in or out of Level 3 from other levels in the fair value hierarchy during the three and six months ended June 30, 2023 and 2022 for the Convertible Working Capital Loan.
Note 8 — Commitments and Contingencies
Registration Rights
The holders of the founder shares, Private Placement Warrants, and warrants that may be issued upon conversion of Working Capital Loans will have registration rights to require the Company to register a sale of any of its securities held by them pursuant to a registration rights agreement signed on January 14, 2021. These holders will be entitled to make up to three demands, excluding short form registration demands, that the Company registers such securities for sale under the Securities Act. In addition, these holders will have “piggyback” registration rights to include their securities in other registration statements filed by the Company.
Underwriting Agreement
The underwriters had a 45-day option beginning January 14, 2021 to purchase up to an additional 3,600,000 Units to cover over-allotments, if any.
On January 20, 2021, the underwriters partially exercised the over-allotment option to purchase 3,500,000 Units, and paid a fixed underwriting discount in aggregate of $5,500,000. Additionally, the underwriters were entitled to a deferred underwriting discount of 3.5% of the gross proceeds of the IPO held in the Trust Account, or $9,625,000, upon the completion of the Company’s initial Business Combination subject to the terms of the underwriting agreement.
UEI Merger and Share Acquisition Agreement
On October 15, 2021, the Company entered into an Agreement and Plan of Merger and Share Acquisition (the “UEI Merger and Share Acquisition Agreement”) with Tiger Resort Asia Ltd., a Hong Kong private limited company (“TRA”), Tiger Resort, Leisure and Entertainment Inc., a Philippine corporation (“TRLEI”), Okada Manila International Inc., a Philippine corporation which subsequently changed its name to UE Resorts International, Inc. (“UERI”), and Project Tiger Merger Sub, Inc., a Delaware corporation (“Merger Sub” and with TRA, TRLEI, and UERI, the “UEI Parties”). On February 15, 2022, the Company and the UEI parties entered into Amendment No. 1 to the UEI Merger and Share Acquisition Agreement. On March 30, 2022, the Company and the UEI parties entered into Amendment No. 2 to the UEI Merger and Share Acquisition Agreement. On June 28, 2022, and September 29, 2022, the Company and TRA entered into letter agreements that waived certain termination rights under the UEI Merger and Share Acquisition Agreement.
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The UEI Merger and Share Acquisition 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 UEI Merger and Share Acquisition Agreement, the “Transactions”), following the Reorganization and the Subscription (each as defined below) (collectively, the “UEI Business Combination”):
| (a) | at the closing of the transactions contemplated by the UEI Merger and Share Acquisition Agreement (the “Closing”), Merger Sub will merge with and into the Company, the separate corporate existence of Merger Sub will cease and the Company will be the surviving corporation and a wholly owned subsidiary of UERI (the “Merger”); and |
| (b) | as a result of the Merger, among other things, all outstanding shares of common stock of the Company immediately prior to Closing (except with respect to certain specified shares) will be converted into and shall for all purposes represent only the right to subscribe for and purchase, pursuant to the Subscription Agreement (as defined herein) and a letter of transmittal and subscription confirmation, one validly issued, fully paid and non-assessable common share of UERI upon the exercise of such subscription right. |
Prior to the Closing, TRA will effect a reorganization of parts of its business (the “Reorganization”) in accordance with the UEI Merger and Share Acquisition Agreement. Pursuant to the Reorganization, among other matters, UERI will become a direct subsidiary of TRA, TRLEI will become a wholly owned direct subsidiary of UERI, and intercompany receivables (other than ordinary course trade receivables) due from TRLEI to TRA and certain of its affiliates will be contributed to UERI. The parties currently anticipate that the transaction will close prior to the resolution of all tax issues related to the Reorganization, which may result in UERI possessing only contractual rights over the shares of TRLEI for a period of time.
Prior to Closing, but after the redemption of certain shares of the Company, the Company will, as agent acting on behalf of its stockholders, subscribe for UERI common shares of UERI, at a price equal to their par value of 0.05 Philippine pesos, with the cash payment for such American depositary shares being deemed made by and on behalf of the applicable stockholders of the Company (the “Subscription”). In order to fund the cash payment on behalf the applicable stockholders, the Company will, prior to Closing, declare and pay a cash dividend on the shares of common stock of the Company in the amount of 0.05 Philippine pesos per share of common stock of the Company, which amount will either be paid by the Company to UERI in accordance with the Subscription Agreement or paid to holders of the Company’s shares of common stock who elect not to participate in the Subscription (but have not elected to have their shares redeemed by the Company).
The Transactions are subject to the satisfaction or waiver of certain customary closing conditions, including, among others, (a) the absence of any order by a governmental authority of competent jurisdiction preventing the consummation of the Transactions, (b) the approval of the Merger, the Subscription and related matters by the stockholders of the Company, (c) the effectiveness of the registration statement filed by UERI with the SEC in connection with the Transactions, (d) the receipt of approval for listing of UERI’s common shares on NASDAQ, (e) the completion of the Reorganization, (f) the amendment of UERI’s organizational documents in accordance with the UEI Merger and Share Acquisition Agreement, and (g) the dividend to fund the Subscription shall have been declared, or alternative financing for the Subscription arranged.
The UEI Merger and Share Acquisition Agreement may be terminated at any time prior to the Closing (a) by mutual written consent of the parties, (b) by either the Company or the UEI Parties in certain other circumstances set forth in the UEI Merger and Share Acquisition Agreement, including, a breach by the other party or parties of their representations and warranties or covenants that would prevent the satisfaction of certain closing conditions, and (c) by either the Company or the UEI Parties (i) if any governmental authority shall have issued an order preventing consummation of the Transactions, (ii) in the event the Closing does not occur by July 1, 2022, and (iii) stockholders of the Company do not approve the Transactions as outlined in the UEI Merger and Share Acquisition Agreement. On June 28, 2022, the Company and TRA entered into a letter agreement that waived certain termination rights under the UEI Merger and Share Acquisition Agreement until October 1, 2022. On September 29, 2022, the Company and TRA entered into a letter agreement that waived certain termination rights under the UEI Merger and Share Acquisition Agreement until October 1, 2023.
On June 30, 2023, the Company received a notice of purported termination of the UEI Merger and Share Acquisition Agreement (the “Notice”) from the UEI Parties, which notice the Company maintains as baseless.
Refer to Form 8-K filings for more information on the proposed Business Combination.
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Legal Proceedings
On February 2, 2023, we commenced the Delaware Action by filing the Complaint in the Delaware Court. Specifically, the Complaint seeks a grant of specific performance ordering the UEI Parties to specifically perform their obligations under the UEI Merger and Share Acquisition Agreement, including using reasonable best efforts to consummate the UEI Business Combination in accordance with the terms of the UEI Merger and Share Acquisition Agreement.
On February 20, 2023, the UEI Parties filed the Answer with affirmative defenses to the Complaint in the Delaware Action. The UEI Parties also asserted several counterclaims against the Company seeking declaratory relief for alleged breaches of the UEI Merger and Share Acquisition Agreement by the Company and recessionary damages. On March 3, 2023, the UEI Parties filed the Amended Counterclaims which, among other things, amends the prayer for relief set forth in the Answer to clarify that the UEI Parties seek an order terminating the UEI Merger and Share Acquisition Agreement. On March 9, 2023, the Company filed a response to the Amended Counterclaims, in which it asserted various affirmative defenses to the Amended Counterclaims. On April 24, 2023, the UEI Parties filed a motion to make additional amendments to their Amended Counterclaims, which amendments were granted by the Delaware Court on May 10, 2023, to add allegations that the Company materially breached section 6.16 of the Merger Agreement through failing to make reasonable best efforts to pursue a PIPE investment and Section 5.5 of the Merger Agreement through material omissions and misstatements in recent public filings, and that Company and the Sponsor fraudulently induced the UEI Parties into the October 15, 2021 Merger Agreement. Also, the Company Amended its Complaint on April 24, 2023 to clarify that it has an alternative claim for damages, in addition to its primary claim for specific performance of the merger agreement. On June 30, 2023, the UEI Parties purported to terminate the merger agreement. A trial was held from July 10-14, 2023, which will resolve the specific performance issue. The parties have filed post-trial briefing and await a decision. If that trial does not fully resolve all of the Parties’ claims, a second 1-2 day trial shall occur in September 2023 to address the alternative damages remedy.
We believe that our causes of action are meritorious, that the UEI Parties are obligated to perform under the UEI Merger and Share Acquisition Agreement until a decision in the Delaware Action is rendered, and that the Delaware Court will ultimately issue an order affirming the same. Further, we believe that we have meritorious defenses to the Amended Counterclaims and we have and will continue to vigorously contest them. Litigation, however, can be uncertain and there can be no assurance that either a judgment for one or more of the UEI Parties or any other outcome in the Delaware Action would not have a material adverse effect on the Company.
Note 9 — Stockholders’ Deficit
Preferred Stock — The Company is authorized to issue a total of 1,000,000 preferred shares at par value of $0.0001 each. At June 30, 2023 and December 31, 2022, there were shares of preferred stock issued or outstanding.
Class A Common Stock — The Company is authorized to issue a total of 100,000,000 Class A common stock at par value of $0.0001 each. As of June 30, 2023 and December 31, 2022, there were shares of Class A common stock issued and outstanding, excluding 3,430,228 shares of Class A common stock subject to possible redemption, respectively. On December 20, 2022, the Extension was approved to extend the business combination period from January 20, 2023 to October 20, 2023. In connection with the Extension, 24,069,772 holders of Class A common stock elected to redeem their shares. After the redemption, the Company has 3,430,228 shares of Class A common stock subject to possible redemption.
Class B Common Stock — The Company is authorized to issue a total of 10,000,000 Class B common stock at par value of $0.0001 each. In August 2020, the Sponsor paid $25,000 to cover certain offering costs of the Company in consideration for 5,750,000 shares of Class B common stock. In January 2021, the Company effected a stock dividend of 0.2 shares for each founder share outstanding, resulting in an aggregate of 6,900,000 founder shares outstanding and held by the Sponsor (up to 900,000 of which were subject to forfeiture by the Sponsor if the underwriters’ over-allotment option is not exercised in full). On January 20, 2021, the Sponsor forfeited 25,000 founder shares to the extent that the over-allotment option was not exercised in full by the underwriters. As of June 30, 2023 and December 31, 2022, there were 6,875,000 Class B common stock issued and outstanding.
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The Company’s initial stockholders have agreed not to transfer, assign or sell their founder shares until the earlier to occur of (A) one year after the completion of the Company’s initial Business Combination or (B) subsequent to the Company’s initial Business Combination, (x) if the last reported sale price of the Company’s Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Company’s initial Business Combination, or (y) the date on which the Company completes a liquidation, merger, capital stock exchange, reorganization or other similar transaction that results in all of its stockholders having the right to exchange their shares of common stock for cash, securities or other property.
The shares of Class B common stock will automatically convert into shares of the Company’s Class A common stock at the time of its initial Business Combination on a one-for-one basis, subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and the like, and subject to further adjustment as provided herein. In the case that additional shares of Class A common stock, or equity-linked securities, are issued or deemed issued in excess of the amounts offered and related to the closing of the initial Business Combination, the ratio at which shares of Class B common stock shall convert into shares of Class A common stock will be adjusted (unless the holders of a majority of the outstanding shares of Class B common stock agree to waive such adjustment with respect to any such issuance or deemed issuance) so that the number of shares of Class A common stock issuable upon conversion of all shares of Class B common stock will equal, in the aggregate, on an as-converted basis, 20% of the sum of the total number of all shares of common stock outstanding upon the completion of the IPO plus all shares of Class A common stock and equity-linked securities issued or deemed issued in connection with the initial Business Combination (excluding any shares or equity-linked securities issued, or to be issued, to any seller in the initial Business Combination and any private placement-equivalent warrants issued to the Sponsor or its affiliates upon conversion of loans made to the Company).
Holders of the Class A common stock and holders of the Class B common stock will vote together as a single class on all matters submitted to a vote of the Company’s stockholders, with each share of common stock entitling the holder to one vote.
Note 10 — Subsequent Events
The Company evaluated subsequent events and transactions that occurred after the condensed balance sheet date up to the date that the condensed financial statements were issued. The Company, other than below, did not identify any subsequent events that would have required adjustment or disclosure in the condensed financial statements.
On July 20, 2023, in connection with the Extension, the Company deposited $275,000 into the Trust Account.
On August 2 2023, the Company issued a convertible promissory notes (the “Convertible Promissory Note 3 - Shares”) to Spring Owl Asset Management LLC, an affiliate of the Sponsor (“Spring Owl”), pursuant to which the Company may borrow up to an aggregate maximum amount of $1,000,000 on such convertible promissory notes from Spring Owl to pay fees and expenses and for other general corporate purposes. Any advances under the Convertible Promissory Note 3 – Shares shall be made at the sole discretion of Spring Owl. The Convertible Promissory Note 3 - Shares matures upon the earlier of (a) the Pre-Closing Satisfaction Date and (b) the date that the winding up of the Company is effective. The Convertible Promissory Note 3 - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Note 3 - Shares to an account designated for the benefit of Spring Owl, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Note 3 - Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to (i) portion of the principal amount of the Convertible Promissory Notes - Shares being converted divided by (ii) the average closing price of the Class A Common Stock for the 30 consecutive trading days immediately preceding the Pre-Closing Satisfaction Date. On July 19, 2023, July 25, 2023, August 3, 2023 and August 8, 2023, the Company borrowed $200,000, $150,000, $110,000 and $100,000, respectively, available to it under the Convertible Note.
On August 8, 2023, the Company entered into an amendment (the “Amendment”) of the existing Secured Convertible Promissory Note – Shares, pursuant to which, the parties agreed to amend the Secured Convertible Promissory Note – Shares by terminating the remaining $700,000 of undrawn amounts available to the Company to borrow under the Secured Convertible Promissory Note – Shares. Accordingly, pursuant to the Amendment, no additional amounts may be borrowed by the Company under the Secured Convertible Promissory Note – Shares beyond the $1,300,000 borrowed prior to date of the Amendment.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References to the “Company,” “26 Capital Acquisition Corp.,” “our,” “us” or “we” refer to 26 Capital Acquisition Corp. The following discussion and analysis of our 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 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
All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023 (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 unaudited condensed financial statements and the notes thereto included in this Report under “Item 1. Financial Statements”.
Overview
We are a blank check company formed under the laws of the State of Delaware on August 24, 2020 for the purpose of effecting a business combination.
Recent Developments
On April 28, 2023, the Company issued an unsecured convertible promissory note (the “Convertible Promissory Note 2 - Shares”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $4,000,000 from the Sponsor to pay fees and expenses and for other general corporate purposes. Any advances under the Convertible Promissory Note 2 – Shares shall be made at the sole discretion of the Sponsor. The Convertible Promissory Note 2 - Shares matures upon the earlier of (a) the Pre-Closing Satisfaction Date and (b) the date that the winding up of the Company is effective. The Convertible Promissory Note 2 - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Note 2 - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Note 2- Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to equal to (x) the portion of the principal amount of the promissory note being converted, divided by (y) the average closing price of the Class A Common Stock for the 30 consecutive Trading Days immediately preceding the Pre-Closing Satisfaction Date, rounded up to the nearest whole number. As of June 30, 2023, $4,000,000 is outstanding under the Convertible Promissory Note 2 – Shares, no further borrowings are available under the Convertible Promissory Note 2 – Shares.
On June 29, 2023, the Company issued a secured convertible promissory note (the “Secured Convertible Promissory Note - Shares”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $2,000,000 from the Sponsor to pay fees and expenses and for other general corporate purposes. Any advances under the Secured Convertible Promissory Note - Shares shall be made at the sole discretion of the Sponsor. The Secured Convertible Promissory Note - Shares matures upon the earlier of (a) the Pre-Closing Satisfaction Date, (b) the date that the winding up of the Company is effective and (c) the one year anniversary of the issuance of the Secured Convertible Promissory Note - Shares. The Secured Convertible Promissory Note - Shares is secured by all of the assets of the Company except for the Trust Account, any funds, monies, or other property on deposit in the Trust Account, or any right, title, interest, or claim in or to any distribution from the Trust Account. The Secured Convertible Promissory Note - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Note 2 - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Note 2- Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to equal to (x) the portion of the principal amount of the promissory note being converted, divided by (y) the average closing price of the Class A Common Stock for the 30 consecutive Trading Days immediately preceding the Pre-Closing Satisfaction Date, rounded up to the nearest whole number. As of June 30, 2023, $500,000 has been borrowed against Secured Convertible Promissory Note - Shares, with $1,500,000 remaining available for borrowings.
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UEI Business Combination
On October 15, 2021, we entered into the UEI Merger and Share Acquisition Agreement, which was amended on February 15, 2022 and March 30, 2022.
The UEI Merger and Share Acquisition Agreement provides that, among other things and upon the terms and subject to the conditions thereof, the following transactions will occur, following the Reorganization and the Subscription:
| (a) | at the UEI Closing, upon the terms and subject to the conditions of the UEI Merger and Share Acquisition Agreement and in accordance with the DGCL, Merger Sub will merge with and into the Company, the separate corporate existence of Merger Sub will cease and the Company will be the surviving corporation and a wholly owned subsidiary of UEI; and |
| (b) | as a result of the UEI Merger, among other things, all outstanding shares of common stock of the Company immediately prior to the UEI Closing (except with respect to certain specified shares) will be converted into and shall for all purposes represent only the right to subscribe for and purchase, pursuant to the Subscription Agreement and a letter of transmittal and subscription confirmation, one validly issued, fully paid and non-assessable common share of UEI upon the exercise of such subscription right. |
Our board of directors has unanimously (a) approved and declared advisable the UEI Merger and Share Acquisition Agreement and the UEI Business Combination and (b) resolved to recommend approval of the UEI Merger and Share Acquisition Agreement and related matters by the stockholders of the Company.
We have incurred and expect to continue to incur significant costs in the pursuit of the UEI Business Combination. We cannot assure you that our plans to raise capital or to complete the UEI Business Combination will be successful. For a full description of the UEI Merger and Share Acquisition Agreement and the proposed UEI Business Combination refer to Form 8-K filings on the proposed Business Combination.
Extension
We originally had up to 24 months from the closing of our initial public offering, or until January 20, 2023, to consummate an initial business combination. However, at the 2022 Special Meeting held on December 14, 2022, our stockholders approved an amendment to our amended and restated certificate of incorporation to extend the date by which we must consummate our initial business combination from January 20, 2023 to October 20, 2023 (or such earlier date as determined by our board of directors). In connection with the Extension, stockholders holding 24,069,772 public shares exercised their right to redeem such shares for a pro rata portion of the trust account. We paid cash in the aggregate amount of $242.8 million, or approximately $10.08 per share to such redeeming stockholders. After such redemptions, as of June 30, 2023 and December 31, 2022, we had 3,430,228 shares of Class A common stock subject to possible redemption.
In connection with the Extension, the Company has agreed to make monthly Extension payments into the Trust Account in the amount of $275,000. During the three and six months ended June 30, 2023, the Company deposited $825,000 and $1,650,000 into the Trust Account, respectively.
Results of Operations
Our entire activity since inception up to June 30, 2023 relates to our formation, the IPO and, since the closing of the IPO, a search for a Business Combination candidate. We will not be generating any operating revenues until the closing and completion of our initial Business Combination, at the earliest.
For the three months ended June 30, 2023, we had a net loss of $3,094,848 which was comprised of formation and operating costs of $2,536,499, unrealized loss on change in fair value of warrants of $815,963, and provision for income tax of $73,025, offset by interest income of $328,684 from cash and investments held in our Trust Account and unrealized gain on the change in fair value of the convertible working capital note of $1,955.
For the six months ended June 30, 2023, we had a net loss of $4,213,261 which was comprised of formation and operating costs of $9,908,884 and provision for income tax of $239,714, offset by unrealized gain on change in fair value of warrants of $4,638,051, interest income of $618,235 from cash and investments held in our Trust Account and unrealized gain on the change in fair value of the convertible working capital note of $679,051.
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For the three months ended June 30, 2022, we had a net income of $3,943,555 which was comprised of unrealized gain on change in fair value of warrants of $4,649,796, and interest income of $383,859 from investments held in our Trust Account, offset by formation and operating costs of $1,041,034 and provision for income tax of $49,066.
For the six months ended June 30, 2022, we had a net income of $6,112,524 which was comprised of unrealized gain on change in fair value of warrants of $7,719,927, and interest income of $405,297 from investments held in our Trust Account, offset by formation and operating costs of $1,963,634 and provision for income tax of $49,066.
Liquidity, Capital Resources and Going Concern
As of June 30, 2023, we had $201,539 in its operating bank account and working capital deficit of $15,812,741.
Prior to the completion of the IPO, our liquidity needs had been satisfied through a payment from the sponsor of $25,000 for the founder shares to cover certain offering costs and the loan under an unsecured promissory note from the sponsor of $275,000. The promissory note from the sponsor was paid in full as of January 20, 2021. Subsequent to the consummation of the IPO and private placement, our liquidity needs have been satisfied through the proceeds from the consummation of the private placement not held in the trust account.
In addition, in order to finance transaction costs in connection with a business combination, our sponsor or an affiliate of the sponsor or certain of our officers and directors may, but are not obligated to, provide us Working Capital Loans. On December 8, 2021, we received $1,500,000 from the sponsor under the Working Capital Loans.
On January 5, 2023 and March 30, 2023, the Company issued an unsecured convertible promissory notes (the “Convertible Promissory Notes - Shares”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $2,500,000 on each Convertible Promissory Notes - Shares from the Sponsor to pay fees and expenses and for other general corporate purposes, for a total available amount of $5,000,000. Any advances under the Convertible Note shall be made at the sole discretion of the Sponsor. The Convertible Promissory Notes - Shares mature upon the earlier of (a) the satisfaction of all conditions set forth in Article 7 of the UEI Merger and Share Acquisition Agreement other than those conditions set forth in Article 7 of the UEI Merger and Share Acquisition Agreement that by their nature cannot be satisfied other than at the Closing (as defined in the UEI Merger and Share Acquisition Agreement) and (b) the date that the winding up of the Company is effective. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Notes - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Notes - Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to (i) portion of the principal amount of the Convertible Promissory Notes - Shares being converted divided by (ii) $2.50, rounded up to the nearest whole number; provided that the holder of the Convertible Promissory Notes - Shares shall not be entitled to receive more than 2,000,000 shares of common stock in the aggregate on account of (1) both Convertible Promissory Notes – Shares (i.e., 2,000,000 shares issuable in the aggregate in connection with both Convertible Promissory Notes – Shares) and (2) the conversion of any other note or other equity issuance made after March 30, 2023 in connection with the ongoing funding of the Company. As of June 30, 2023, $5,000,000 is outstanding under the Convertible Promissory Notes – Shares, no further borrowings are available under the Convertible Promissory Notes – Shares.
On April 28, 2023, the Company issued an unsecured convertible promissory note (the “Convertible Promissory Note 2 - Shares”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $4,000,000 from the Sponsor to pay fees and expenses and for other general corporate purposes. Any advances under the Convertible Promissory Note 2 – Shares shall be made at the sole discretion of the Sponsor. The Convertible Promissory Note 2 - Shares matures upon the earlier of (a) the Pre-Closing Satisfaction Date and (b) the date that the winding up of the Company is effective. The Convertible Promissory Note 2 - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Note 2 - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Note 2- Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to equal to (x) the portion of the principal amount of the promissory note being converted, divided by (y) the average closing price of the Class A Common Stock for the 30 consecutive Trading Days immediately preceding the Pre-Closing Satisfaction Date, rounded up to the nearest whole number. As of June 30, 2023, $4,000,000 is outstanding under the Convertible Promissory Note 2 – Shares, no further borrowings are available under the Convertible Promissory Note 2 – Shares.
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On June 29, 2023, the Company issued a secured convertible promissory note (the “Secured Convertible Promissory Note - Shares”) to the Sponsor, pursuant to which the Company may borrow up to an aggregate maximum amount of $2,000,000 from the Sponsor to pay fees and expenses and for other general corporate purposes. Any advances under the Secured Convertible Promissory Note - Shares shall be made at the sole discretion of the Sponsor. The Secured Convertible Promissory Note - Shares matures upon the earlier of (a) the Pre-Closing Satisfaction Date, (b) the date that the winding up of the Company is effective and (c) the one year anniversary of the issuance of the Secured Convertible Promissory Note - Shares. The Secured Convertible Promissory Note - Shares is secured by all of the assets of the Company except for the Trust Account, any funds, monies, or other property on deposit in the Trust Account, or any right, title, interest, or claim in or to any distribution from the Trust Account. The Secured Convertible Promissory Note - Shares does not bear interest. Subject to the prior receipt of stockholder approval, and provided that the Company has not deposited an amount equal to the unpaid principal of the advances outstanding under the Convertible Promissory Note 2 - Shares to an account designated for the benefit of the Sponsor, then upon the occurrence of the Pre-Closing Satisfaction Date, the unpaid principal amount of advances under the Convertible Promissory Note 2- Shares will convert into a number of shares of Class A common stock at a conversion price per share equal to equal to (x) the portion of the principal amount of the promissory note being converted, divided by (y) the average closing price of the Class A Common Stock for the 30 consecutive Trading Days immediately preceding the Pre-Closing Satisfaction Date, rounded up to the nearest whole number. As of June 30, 2023, $500,000 has been borrowed against Secured Convertible Promissory Note 2 - Shares, with $1,500,000 remaining available for borrowings.
Prior to January 2023, the funds in the trust account had, since our initial public offering, been held only in U.S. government treasury obligations with a maturity of 185 days or less or in money market funds investing solely in U.S. government treasury obligations and meeting certain conditions under Rule 2a-7 under the Investment Company Act. However, to mitigate the risk of us being deemed to be an unregistered investment company (including under the subjective test of Section 3(a)(1)(A) of the Investment Company Act) and thus subject to regulation under the Investment Company Act, in January 2023, we instructed Continental Stock Transfer & Trust Company, the trustee with respect to the trust account (“Continental”), to liquidate the investments held in the trust account and instead to hold the funds in the trust account in an interest-bearing demand deposit account at Morgan Stanley, with Continental continuing to act as trustee, until the earlier of the consummation of our initial business combination or our liquidation. As a result, following the liquidation of investments in the trust account, the remaining proceeds from the initial public offering and private placement are no longer invested in U.S. government securities or money market funds.
In connection with our assessment of going concern considerations in accordance with ASU Topic 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that if we are unable to raise additional funds to alleviate liquidity needs as well as complete a business combination by October 20, 2023, then we will cease all operations except for the purpose of liquidating. If a business combination is not consummated by this date and an extension has not been requested by the sponsor and approved by our stockholders, there will be a mandatory liquidation and subsequent dissolution of the Company. Management has determined that the mandatory liquidation, should a business combination not occur and an extension not requested by the sponsor, and potential subsequent dissolution raise substantial doubt about our ability to continue as a going concern. No adjustments have been made to the carrying amounts of assets or liabilities should we be required to liquidate after October 20, 2023. We intend to continue to search for and seek to complete a business combination before the mandatory liquidation date.
Critical Accounting Estimates
The preparation of the unaudited condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed financial statements and expenses for the period.
Making estimates requires management to exercise significant judgement. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates. A few of the more significant accounting estimates included in these unaudited condensed financial statements is the determination of the fair value of warrant liabilities, fair value of Convertible Working Capital Loan and Convertible Promissory Note - Shares.
We have identified the following as our critical accounting estimates:
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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 480-10-S99, “Classification and Measurement of Redeemable Securities” (“ASC 480-10-S99”). Conditionally redeemable common stock (including common stock 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 our control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. Our Class A common stock features certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events. Accordingly, at June 30, 2023 and December 31, 2022, Class A common stock subject to possible redemption is presented at redemption value as temporary equity, outside of the stockholders’ deficit section of our unaudited condensed balance sheets.
Under ASC 480-10-S99, we have elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of each reporting period. This method would view the end of the reporting period as if it were also the redemption date for the security. Immediately upon the closing of the IPO, we recognized the accretion from initial book value to redemption amount value. The change in the carrying value of redeemable Class A common stock resulted in charges against additional paid-in capital and accumulated deficit.
Convertible Working Capital Loan
The Company has elected the fair value option to account for the Working Capital Loan with the Sponsor as defined and more fully described in Note 5. As a result of applying the fair value option, the Company records each draw at fair value with a gain recorded to the condensed statement of operations or loss recorded to additional paid-in capital which is recognized at issuance (see Note 6), and subsequent changes in fair value are recorded as change in the fair value of unrealized gain on change in fair value of convertible notes on the condensed statements of operations. The fair value option was evaluated and deemed appropriate based on the fair value of the initial borrowing not resulting in a substantial premium or an initial entry to equity, which precludes the use of the fair value option with a related party. The fair value is based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s and, if applicable, an independent third-party valuation firm’s own assumption about the assumptions a market participant would use in pricing the asset or liability.
Convertible Promissory Notes – Shares- Related Party
The Company analyzed the Convertible Promissory Notes – Shares - Related Party to assess if the fair value option was appropriate, due to fair value of the note being significantly below par value at initial borrowing, which results in an offsetting entry to additional paid in capital which precludes the fair value option it was determined the fair value option was not appropriate. As such, the Company analyzed the Convertible Promissory Notes – Shares – Related under ASC 815 and results in no bifurcation of a derivative due to the conversion feature impacting equity. Additionally, there is a contingent beneficial conversion feature that would be recognized once the contingency is resolved and does meet the scope exception under ASC 815, as such bifurcation is not required.
The Company reviews the terms of convertible debt issued to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value. The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to interest expense.
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Net (Loss) Income Per Share of Common Stock
We have two classes of stock, Class A common stock and Class B common stock. Earnings and losses are shared pro rata between the two classes of stock. The 21,250,000 shares of potential common stock for outstanding warrants to purchase our common stock were excluded from diluted earnings per share for the three and six months ended June 30, 2023 and 2022 because the warrants are contingently exercisable, and the contingencies have not yet been met. As a result, diluted net income (loss) per common stock is the same as basic net income (loss) per common stock for the periods presented.
JOBS Act
On April 5, 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” and under the JOBS Act are allowed to comply with new or revised accounting pronouncements based on the effective date for private (not publicly traded) companies.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and are not required to provide the information otherwise required under this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer (together, the “Certifying Officers”), or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Certifying Officers, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report, due to a material weakness in accounting for complex financial instruments as it related to the accounting for the Company’s warrants, temporary equity, and the convertible note that resulted in the restatement of the three months ended March 31, 2023 as restated in this filing.
In light of this material weakness, we have enhanced our processes to identify and appropriately apply applicable accounting requirements with respect to accounting for complex financial instruments to better evaluate and understand the nuances of the complex accounting standards that apply to our financial statements including making greater use of third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects. We believe our efforts will enhance our controls relating to accounting for complex financial transactions, but we can offer no assurance that our controls will not require additional review and modification in the future as industry accounting practice may evolve over time.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting during the quarterly period ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
On February 2, 2023, we commenced the Delaware Action by filing the Complaint in the Delaware Court. Specifically, the Complaint seeks a grant of specific performance ordering the UEI Parties to specifically perform their obligations under the UEI Merger and Share Acquisition Agreement, including using reasonable best efforts to consummate the UEI Business Combination in accordance with the terms of the UEI Merger and Share Acquisition Agreement.
On February 20, 2023, the UEI Parties filed the Answer with affirmative defenses to the Complaint in the Delaware Action. The UEI Parties also asserted several counterclaims against the Company seeking declaratory relief for alleged breaches of the UEI Merger and Share Acquisition Agreement by the Company and recessionary damages. On March 3, 2023, the UEI Parties filed the Amended Counterclaims which, among other things, amends the prayer for relief set forth in the Answer to clarify that the UEI Parties seek an order terminating the UEI Merger and Share Acquisition Agreement. On March 9, 2023, the Company filed a response to the Amended Counterclaims, in which it asserted various affirmative defenses to the Amended Counterclaims. On April 24, 2023, the UEI Parties filed a motion to make additional amendments to their Amended Counterclaims, which amendments were granted by the Delaware Court on May 10, 2023, to add allegations that the Company materially breached section 6.16 of the Merger Agreement through failing to make reasonable best efforts to pursue a PIPE investment and Section 5.5 of the Merger Agreement through material omissions and misstatements in recent public filings, and that Company and the Sponsor fraudulently induced the UEI Parties into the October 15, 2021 Merger Agreement. Also, the Company Amended its Complaint on April 24, 2023 to clarify that it has an alternative claim for damages, in addition to its primary claim for specific performance of the merger agreement. On June 30, 2023, the UEI Parties purported to terminate the merger agreement. A trial was held from July 10-14, 2023, which will resolve the specific performance issue. The parties have filed post-trial briefing and await a decision. If that trial does not fully resolve all of the Parties’ claims, a second 1-2 day trial shall occur in September 2023 to address the alternative damages remedy.
We believe that our causes of action are meritorious, that the UEI Parties are obligated to perform under the UEI Merger and Share Acquisition Agreement until a decision in the Delaware Action is rendered, and that the Delaware Court will ultimately issue an order affirming the same. Further, we believe that we have meritorious defenses to the Amended Counterclaims and we have and will continue to vigorously contest them. Litigation, however, can be uncertain and there can be no assurance that either a judgment for one or more of the UEI Parties or any other outcome in the Delaware Action would not have a material adverse effect on the Company.
Item 1A. Risk Factors.
As a smaller reporting company under Rule 12b-2 of the Exchange Act, we are not required to include risk factors in this Report. However, as of the date of this Report, other than as set forth below, there have been no material changes with respect to those risk factors previously disclosed in our (i) Registration Statement, (ii) Annual Reports on Form 10-K for the years ended December 31, 2021 and 2022, as filed with the SEC on March 30, 2021 and April 17, 2022, respectively, (iii) Quarterly Reports on Form 10-Q for the quarterly periods ended September 30, 2022 and March 31, 2023, as filed with the SEC on November 14, 2022 and May 15, 2023, respectively, and (iv) the Definitive Proxy Statement, as filed with the SEC on November 22, 2022. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risks could arise that may also affect our business or ability to consummate an initial business combination. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.
For risks related to UERI and the UEI Business Combination, please see the UERI Registration Statement once filed.
We have identified a material weakness in our internal control over financial reporting as of June 30, 2023. If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business and operating results.
We have identified a material weakness in our internal controls over financial reporting as of June 30, 2023 relating to our accounting for complex financial instruments. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected and corrected on a timely basis.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Measures to remediate material weaknesses may be time-consuming and costly and there is no assurance that such initiatives will ultimately have the intended effects. If we are unable to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and adversely affect our business and operating results. If we identify any new material weaknesses in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting and adversely affect our business and operating results. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report.
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| 26 CAPITAL ACQUISITION CORP. | ||
| Date: August 14, 2023 | By: | /s/ Jason Ader |
| Name: | Jason Ader | |
| Title: | Chief Executive Officer and Chairman | |
| (Principal Executive Officer) | ||
| Date: August 14, 2023 | By: | /s/ John K. Lewis |
| Name: | John K. Lewis | |
| Title: | Chief Financial Officer | |
| (Principal Accounting and Financial Officer) | ||
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