The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with our audited financial
statements and the notes related thereto which are included in "Item 8.
Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Certain information contained in the discussion and analysis set forth below
includes forward-looking statements. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of many
factors, including those set forth under "Special Note Regarding Forward-Looking
Statements," and elsewhere in this Annual Report on Form 10-K.
Overview
We are a blank check company recently incorporated as a Delaware corporation
whose business purpose is to effect a merger, capital stock exchange, asset
acquisition, stock purchase, reorganization or other similar business
combination with one or more businesses, which we refer to throughout this
Annual Report as our initial business combination. We have not selected any
specific business combination target and we have not, nor has anyone on our
behalf, initiated any substantive discussions, directly or indirectly, with any
business combination target with respect to an initial business combination with
us.
On February 15, 2022, we consummated our IPO of 10,000,000 units. Each unit
consists of one share of the Company's Class A common stock, par value $0.0001
per share, and one-half of one redeemable public warrant of the Company, with
each whole public warrant entitling the holder thereof to purchase one whole
share of Class A common stock at a price of $11.50 per share, subject to
adjustment as provided in our registration statement on Form S-1, initially
filed with the SEC on January 6, 2022, as later amended (File No. 333-262042).
The units were sold at a price of $10.00 per unit, generating gross proceeds to
the Company of $100,000,000.
Simultaneously with the closing of the IPO and in a second closing on
February 28, 2022, we completed the private sale of an aggregate of 6,000,000
private placement warrants to the sponsor and certain initial stockholders,
generating gross proceeds to the Company of $6,000,000.
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The net proceeds from the IPO, together with certain of the proceeds from the
private sale of the private placement warrants, $102,000,000 in the aggregate,
were placed in a U.S.-based trust account maintained by Continental Stock
Transfer & Trust Company, acting as trustee.
None of the funds held in trust will be released from the trust account, other
than interest income to pay any tax obligations until the earlier of (i) our
consummation of our initial business combination, and then only in connection
with those shares of common stock that such stockholder properly elected to
redeem, subject to the limitations described herein, (ii) the redemption of our
public shares if we are unable to consummate our initial business combination
within 15 months, or up to 21 months if an extension is properly effected, as
described below, after the closing of the IPO, or (iii) if we seek to amend our
certificate of incorporation to affect the substance or timing of our obligation
to redeem all public shares if we cannot complete an initial business
combination within 15 months, or up to 21 months if an extension is properly
effected, as described below, after the closing of the IPO, and such amendment
is duly approved.
If the Company is unable to complete a business combination within 15 months
from the closing of the IPO (ending on May 18, 2023), the Company may, by
resolution of its board of directors if requested by its sponsor, extend the
period of time to consummate an initial business combination up to two times,
each by an additional three months (for a total of up to 21 months from the
closing of the IPO through November 18, 2023), subject to the sponsor depositing
additional funds into the trust account as set out below. Public stockholders,
in this situation, will not be offered the opportunity to vote on or redeem
their shares in connection with such extensions. Pursuant to the terms of the
Company's amended and restated certificate of incorporation and the trust
agreement, in order for the time available for the Company to consummate the
initial business combination to be extended, the sponsor or its affiliates or
designees, upon five business days advance notice prior to the applicable
deadline, must deposit into the trust account $1,000,000 ($0.10 per public
share), on or prior to the date of the applicable deadline, for each of the
available three-month extensions, providing a total possible initial business
combination period of up to 21 months at a total payment value of $2,000,000
($0.20 per share). Any such payments would be made in the form of non-interest
bearing loans. If the Company completes an initial business combination, it
will, at the option of the sponsor, repay such loaned amounts out of the
proceeds of the trust account released to the Company or convert a portion or
all of the total loan amount into warrants at a price of $1.00 per warrant,
which warrants will be identical to the private placement warrants. If the
Company does not complete an initial business combination, it will repay such
loans only from funds held outside of the trust account. Furthermore, the letter
agreement with the Company's initial stockholders contains a provision pursuant
to which the sponsor has agreed to waive its right to be repaid for such loans
to the extent there is insufficient funds held outside of the trust account in
the event that the Company does not complete an initial business combination.
The sponsor and its affiliates or designees are not obligated to fund the trust
account to extend the time for the Company to complete an initial business
combination. In the event the Company receives notice from the sponsor five days
prior to the applicable deadline of their intent to effect an extension, the
Company intends to issue a press release announcing such intention at least
three days prior to the applicable deadline. In addition, the Company intends to
issue a press release the day after the applicable deadline announcing whether
or not the funds had been timely deposited.
While we may pursue an initial business combination target in any industry or
geographic region, we intend to focus on direct-to-consumer media, technology,
emerging digital enterprise sectors focused businesses that have an aggregate
enterprise value of approximately $550 million to $1.2 billion and would benefit
from access to public markets and the operational and strategic expertise of our
management team and board of directors. We will seek to capitalize on the
significant experience of our management team in consummating an initial
business combination with the ultimate goal of pursuing attractive returns for
our stockholders.
As indicated in the accompanying financial statements, at December 31, 2022, we
had $517,841 in cash and working capital of $615,465 (which includes a pending
reimbursement from the trust account for the Company's franchise taxes and
income taxes in the aggregate amount of $512,801). Further, we expect to
continue to incur significant costs in the pursuit of our initial business
combination plans. We cannot assure you that our plans to raise capital or to
complete our initial business combination will be successful.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date.
Our only activities since inception have been organizational activities and
those necessary to prepare for our IPO. We will not generate any operating
revenues until after completion of our initial business combination. Since the
IPO, we have generated, and will continue to generate, non-operating income in
the form of interest income on cash and cash equivalents. There has been no
significant change in our financial or trading position and no material adverse
change has occurred since the date of our financial statements. Since the IPO,
we have incurred, and expect to continue to incur, increased expenses as a
result of being a public company (for legal, financial reporting, accounting and
auditing compliance), as well as expenses as we conduct due diligence on
prospective initial business combination candidates.
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For the year ended December 31, 2022, we had net income of $863,201, which
consisted of other income of $2,022,080 which was primarily comprised of
$1,435,975 of interest income on investments held in the trust account and a
gain of $603,284 related to the change in fair value of the overallotment
liability, all offset by formation and operating costs of $646,509, a provision
for income taxes of $326,554, and franchise taxes of $185,816.
For the period from February 18, 2021 (inception) through December 31, 2021, we
had net loss of $1,202, which consisted of formation and operational costs of
$801 as well as other expenses of $401.
Liquidity and Capital Resources
As indicated in the accompanying financial statements, at December 31, 2022, the
Company had $517,841 of cash and working capital of $615,465 (which includes a
pending reimbursement from the trust account for the Company's franchise taxes
and income taxes in the aggregate amount of $512,801).
Management has determined that there is a possibility that the Company may be
unsuccessful in consummating an initial business combination within 15 months
from the closing of the IPO (ending on May 18, 2023), (or up to 21 months ending
on November 15, 2023, if the Company extends the period of time to consummate an
initial business combination for total payment value of $2,000,000), and thereby
be required to cease all operations, redeem the public shares and thereafter
liquidate and dissolve. This uncertainty raises substantial doubt about the
ability to continue as a going concern for at least one year from the date these
financial statements are issued. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Management
has determined that the Company has funds that are sufficient to fund the
working capital needs of the Company until the consummation of an initial
business combination or the winding up of the Company as stipulated in the
Company's amended and restated certificate of incorporation. The accompanying
financial statements have been prepared in conformity with generally accepted
accounting principles in the United States ("U.S. GAAP"), which contemplate
continuation of the Company as a going concern and the realization of assets and
satisfaction of liabilities in the normal course of business. The carrying
amounts of assets and liabilities presented in the financial statements do not
necessarily purport to represent realizable or settlement values. The financial
statements do not include any adjustment that might result from the outcome of
this uncertainty.
For the year ended December 31, 2022, cash used in operating activities was
$769,932, which was attributable to cash used to fund the net income of
$863,201, adjusted for net non-cash income of $2,022,748, which included an
adjustment of $1,435,975 related to interest earned on investments held in our
trust account, and $389,615 of cash provided by changes in the levels of
operating assets and liabilities. For the period from February 18, 2021
(inception) through December 31, 2021, cash used in operating activities was
$380, which was attributable to cash used to fund the net loss of $1,202,
partially offset by $822 of cash provided by changes in the levels of operating
assets and liabilities.
For the year ended December 31, 2022, cash used in investing activities was
$102,000,000, which was attributable to the investment of cash in the trust
account. For the period from February 18, 2021 (inception) through December 31,
2021, there was no net cash provided by investing activities.
For the year ended December 31, 2022, cash provided by financing activities was
$103,286,603, which was primarily attributable to proceeds of $106,000,000 from
the IPO and private placement, partially offset by the payment of offering costs
of $2,678,397 and the net repayment of a note payable to the Company's chief
financial officer in the amount of $35,000. For the period from February 18,
2021 (inception) through December 31, 2021, there was $1,550 of cash provided by
financing activities, which was attributable to $35,000 of proceeds from the
issuance of a note payable to a related party and $25,000 of proceeds from the
issuance of founder shares to the sponsor, all partially offset by the payment
of offering costs of $58,450.
On February 15, 2022, we consummated our initial public offering of 10,000,000
units. Each Unit consists of one share of the Company's Class A common stock,
par value $0.0001 per share, and one-half of one redeemable public warrant of
the Company, with each whole public warrant entitling the holder thereof to
purchase one whole share of Class A common stock at a price of $11.50 per share,
subject to adjustment as provided in our registration statement on Form S-1,
initially filed with the SEC on January 6, 2022, as later amended (File
No. 333-262042). The Units were sold at a price of $10.00 per unit, generating
gross proceeds to the Company of $100,000,000.
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Simultaneously with the closing of the IPO and in a second closing on
February 28, 2022, we completed the private sale of an aggregate of 6,000,000
private placement warrants to the sponsor and certain initial stockholders,
generating gross proceeds to the Company of $6,000,000.
The net proceeds from the IPO, together with certain of the proceeds from the
private sale of the private placement warrants, $102,000,000 in the aggregate,
were placed in a U.S.-based trust account maintained by Continental Stock
Transfer & Trust Company, acting as trustee. We intend to use substantially all
of the funds held in the trust account, including any amounts representing
interest earned on the trust account to complete our initial business
combination. We may withdraw interest to pay franchise and income taxes. We
estimate our annual franchise tax obligations, based on the number of shares of
our common stock authorized and outstanding after the completion of the
offering, to be $200,000, which is the maximum amount of annual franchise taxes
payable by us as a Delaware corporation per annum, which we may pay from funds
from the offering held outside of the trust account or from interest earned on
the funds held in our trust account and released to us for this purpose. Our
annual income tax obligations will depend on the amount of interest and other
income earned on the amounts held in the trust account. We expect the interest
earned on the amount in the trust account will be sufficient to pay our income
taxes. To the extent that our capital stock or debt is used, in whole or in
part, as consideration to complete our initial business combination, the
remaining proceeds held in the trust account will be used as working capital to
finance the operations of the target business or businesses, make other
acquisitions and pursue our growth strategies. Further, we have incurred and
expect to continue to incur significant costs in pursuit of our acquisition
plans. We cannot assure you that our plans to raise capital or to consummate an
initial business combination will be successful.
Our operating needs include funds to identify and evaluate target businesses,
perform business due diligence on prospective target businesses, travel to and
from the offices, plants or similar locations of prospective target businesses
or their representatives or owners, review corporate documents and material
agreements of prospective target businesses, and structure, negotiate and
complete an initial business combination.
In order to fund working capital deficiencies or finance transaction costs in
connection with an intended initial business combination, our sponsor or an
affiliate of our sponsor or certain of our officers and directors may, but are
not obligated to, loan us funds as may be required. If we complete our initial
business combination, we would repay such loaned amounts. In the event that our
initial business combination does not close, we may use a portion of the working
capital held outside the trust account to repay such loaned amounts but no
proceeds from our trust account would be used for such repayment. Up to
$1,500,000 of such working capital loans may be convertible into private
placement-equivalent warrants at a price of $1.00 per warrant, at the option of
the lender. Such warrants would be identical to the private placement warrants,
including as to exercise price, exercisability and exercise period. The terms of
such working capital loans by our sponsor or its affiliates, or our officers and
directors, if any, have not been determined and no written agreements exist with
respect to such loans. We do not expect to seek loans from parties other than
our sponsor or an affiliate of our sponsor as we do not believe third parties
will be willing to loan such funds and provide a waiver against any and all
rights to seek access to funds in our trust account.
We do not believe we will need to raise additional funds following this offering
in order to meet the expenditures required for operating our business. However,
if our estimates of the costs of identifying a target business, undertaking
in-depth due diligence and negotiating an initial business combination are less
than the actual amount necessary to do so, we may have insufficient funds
available to operate our business prior to our initial business combination.
Moreover, we may need to obtain additional financing either to complete our
initial business combination or because we become obligated to redeem a
significant number of our public shares upon completion of our initial business
combination, in which case we may issue additional securities or incur debt in
connection with such business combination. In addition, we intend to target
businesses larger than we could acquire with the net proceeds of this offering
and the sale of the private placement warrants, and may as a result be required
to seek additional financing to complete such proposed initial business
combination. Subject to compliance with applicable securities laws, we would
only complete such financing simultaneously with the completion of our initial
business combination. If we are unable to complete our initial business
combination because we do not have sufficient funds available to us, we will be
forced to cease operations and liquidate the trust account. In addition,
following our initial business combination, if cash on hand is insufficient, we
may need to obtain additional financing in order to meet our obligations.
Contractual Obligations
Other than the below, we do not have any long-term debt obligations, capital
lease obligations, operating lease obligations, purchase obligations or
long-term liabilities.
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Administrative Support Agreement
Commencing on February 10, 2022, we have agreed to pay an affiliate of our
sponsor a total of $10,000 per month for office space, utilities and secretarial
and administrative support. Upon completion of our initial business combination
or our liquidation, we will cease paying these monthly fees.
Registration Rights
The holders of our founder shares, private placement warrants and warrants that
may be issued upon conversion of working capital loans (and any shares of common
stock issuable upon the exercise of the private placement warrants or warrants
issued upon conversion of the working capital loans and upon conversion of the
founder shares) are entitled to registration rights pursuant to a registration
rights agreement signed on the effective date of the IPO requiring the Company
to register such securities for resale (in the case of the Founder Shares, only
after conversion to shares of Class A common stock). The holders of these
securities will be entitled to make up to three demands, excluding short form
registration demands, that the Company register such securities. In addition,
the holders have certain "piggy-back" registration rights with respect to
registration statements filed subsequent to completion of our initial business
combination and rights to require the Company to register for resale such
securities pursuant to Rule 415 under the Securities Act. However, the
registration rights agreement provides that the Company will not be required to
effect or permit any registration or cause any registration statement to become
effective until the securities covered thereby are released from their lock-up
restrictions. The Company will bear the expenses incurred in connection with the
filing of any such registration statements.
Underwriting Agreement
The Company granted B. Riley a 45-day option from the date of the IPO to
purchase up to 1,500,000 additional Units to cover over-allotments, if any, at
the IPO price less the underwriting discounts and commissions. On April 2, 2022,
the overallotment option expired unexercised.
Business Combination Marketing Agreement
On February 10, 2022, the Company and B. Riley entered into that certain
Business Combination Marketing Agreement, whereby the Company engaged B. Riley
as advisors in connection with its initial business combination to assist it in
arranging meetings with its stockholders to discuss a potential business
combination and the target business' attributes, introduce it to potential
investors that may be interested in purchasing its securities, assist it in
obtaining stockholder approval for its initial business combination and assist
it with the preparation of press releases and public filings in connection with
the initial business combination. The Company will pay B. Riley for such
services upon the consummation of the Company's initial business combination a
cash fee in an amount equal to 3.5% of the gross proceeds of the IPO (exclusive
of any applicable finders' fees which might become payable), or $3,500,000.
Pursuant to the terms of the business combination marketing agreement, no fee
will be due if the Company does not complete an initial business combination.
The Company determined in accordance with ASC 450-20 that the fee shall be
accrued in full at the time of the consummation of the initial business
combination as it determined that, at that point in time, the fee is probable
and estimable, there is no material future service requirement nor is there any
risk of forfeiture.
Critical Accounting Estimates
The preparation of financial statements and related disclosures must be in
conformity with U.S. GAAP. These accounting principles require us to make
estimates and judgments that can affect the reported amounts of assets and
liabilities as of the date of the financial statements as well as the reported
amounts of revenue and expense during the periods presented. We believe that the
estimates and judgments upon which it relies are reasonably based upon
information available to us at the time that it makes these estimates and
judgments. To the extent that there are material differences between these
estimates and actual results, our financial results will be affected. The
accounting policies that reflect our more significant estimates and judgments
and which we believe are the most critical to aid in fully understanding and
evaluating our reported financial results are described below.
The following is not intended to be a comprehensive list of all of our
accounting policies or estimates. Our accounting policies are more fully
described in "Note 2 - Summary of Significant Accounting Policies", in the notes
to our financial statements included at the end of this Annual Report on Form
10-K.
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Shares Subject to Possible Redemption
The Company accounts for shares subject to possible redemption in accordance
with the guidance in ASC 480, Distinguishing Liabilities from Equity. Shares
subject to mandatory redemption are classified as liability instruments and are
measured at fair value. Conditionally redeemable shares (including shares that
feature redemption rights that are either within the control of the holder or
subject to redemption upon the occurrence of uncertain events not solely within
the Company's control) are classified within temporary equity. Changes in
redemption value are reflected in additional paid in capital or, in the absence
of additional capital, in accumulated deficit. At all other times, shares are
classified within shareholders' equity. Accordingly, at December 31, 2022,
Class A Common Stock subject to possible redemption are presented at redemption
value as temporary equity, outside of stockholders' deficiency on the Company's
balance sheet.
Under ASC 480-10-S99, the Company recognizes changes in the redemption value
immediately as they occur and adjusts the carrying value of the security to
equal the redemption value at the end of each reporting period. This method
views the end of the reporting period as if it were also the redemption date for
the security.
Offering Costs
The Company's accounting for offering costs 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 of underwriting, legal,
accounting and other cash expenses incurred through the closing of the IPO that
are directly related to the IPO. In addition, the fair value of shares of
Class B common stock that were issued to investors in the private placement were
determined to be offering costs, which is described in "Note 4 - Private
Placement" in the notes to our audited consolidated financial statements.
Offering costs are allocated to the separable financial instruments on a
relative fair value basis compared to total proceeds received. Offering costs
related to the IPO amounted to $2,736,847 which were allocated to the Class A
Common Stock (temporary equity), overallotment liability (recognized as expense
immediately) and public warrants (stockholders' equity) and recognized upon the
completion of the IPO. Offering costs related to the private placement amounted
to $9,680,766 which represented the estimated fair value of Class B common stock
to be transferred to investors in the offering and, accordingly, the offering
costs were recognized by debiting and crediting additional paid-in capital upon
the completion of the offering.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes under ASC 740, "Income Taxes." Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statements carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that included the enactment date.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
ASC 740 prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions 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. 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 December 31,
2022 or 2021. 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 is subject to income tax examinations by major taxing
authorities since inception.
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Warrants and Overallotment Liability
The Company evaluates the public warrants, private placement warrants and
overallotment option as either equity-classified or liability-classified
instruments based on an assessment of the specific terms of the instrument and
applicable authoritative guidance in ASC 480, Distinguishing Liabilities from
Equity ("ASC 480") and ASC 815, Derivatives and Hedging ("ASC 815"). The
assessment considers whether the instrument is freestanding financial
instruments pursuant to ASC 480, meets the definition of a liability pursuant to
ASC 480, and whether the instrument meets all of the requirements for equity
classification under ASC 815, including whether the instrument is indexed to the
Company's own common stock, among other conditions for equity classification.
Pursuant to such evaluation, both public and private placement warrants are
classified in stockholders' equity and the overallotment option is classified as
a current liability and, accordingly, was measured at fair value upon issuance
and will be remeasured at each balance sheet date thereafter, with changes in
the estimated fair value recognized through earnings.
Recent Accounting Standards
In August 2020, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("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 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.
ASU 2020-06 is for fiscal years beginning after December 15, 2021 and should be
applied on a full or modified retrospective basis. Early adoption is permitted,
but no earlier than fiscal years beginning after December 15, 2020, including
interim periods within those fiscal years. The Company adopted
ASU 2020-06 effective January 1, 2022. The adoption of ASU 2020-06 did not have
a material impact on the Company's condensed financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU
2016-02"), as amended, with guidance regarding the accounting for and disclosure
of leases. The update requires that a lessee recognize the assets and
liabilities related to all leases, including operating leases, with a term
greater than 12 months on the balance sheet. This update also requires lessees
and lessors to disclose key information about their leasing transactions. In May
2020, the FASB issued ASU 2020-05 that deferred these dates one year for all
other entities, including emerging growth companies. This standard is effective
for annual reporting periods beginning after December 15, 2022, and interim
periods within annual periods beginning after December 15, 2023. Early adoption
is permitted. The Company expects to adopt ASU 2016-02 during the fiscal year
ending December 31, 2023 and is evaluating the impact on its statements of
operations and cash flows. Based upon the leases currently in place, management
believes there will be no material impact of adopting the new standard on the
Company's condensed financial statements.
Management does not believe that any recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material effect on the
Company's financial statements.
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SIGNAL HILL ACQUISITION CORP. 