HENNESSY CAPITAL INVESTMENT CORP. V MANAGEMENT REPORT ON FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the condensed financial statements and the notes thereto contained elsewhere in this report.
Special note regarding forward-looking statements
All statements other than statements of historical fact included in this section and elsewhere in this Form 10-Q regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to us or the Company's management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, the Company's 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. Overview We are a blank check company incorporated as a Delawarecorporation on October 6, 2020. We were 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 ("Initial Business Combination"). We intend to effectuate our Initial Business Combination using cash from the proceeds of our initial public offering that was completed in January 2021(the "Public Offering") and the sale of warrants in a private placement (the "Private Placement") that occurred simultaneously with the completion of the Public Offering (the "Private Placement Warrants"), our capital stock, debt or a combination of cash, stock and debt.
The issuance of additional shares of our shares in a first business combination:
? may significantly dilute the ownership of our shareholders;
? may subordinate the rights of holders of our common stock if preferred stock is
issued with rights greater than those granted to our ordinary shares;
? could result in a change of control if a substantial number of shares of our common stock
stock is issued, which may affect, among other things, our ability to use our
net operating losses carried forward, if any, and could lead to the resignation
or the removal of our current officers and directors;
? may have the effect of delaying or preventing a change of control of us by
dilute the shareholding or voting rights of a person seeking to obtain
control of us; and
? may adversely affect prevailing market prices for our Class A common stock
Similarly, if we issue debt securities or incur other indebtedness to fund our Initial Business Combination, it could result in:
? default and seizure of our assets if our operating income after a
The Initial Business Combination is insufficient to repay our debts;
? acceleration of our debt repayment obligations even if we do everything
principal and interest payments when due if we fail to comply with certain covenants
require the maintenance of certain financial ratios or reserves without
waiver or renegotiation of this commitment;
? our immediate payment of all principal and accrued interest, if any, if the
the debt obligation is payable on sight;
? our inability to obtain necessary additional financing if the debt obligation or
other debts contain covenants limiting our ability to obtain such
financing while the debt obligation or other indebtedness is outstanding;
? our inability to pay dividends on our common stock;
? use a significant portion of our cash flow to pay principal and interest on
our debt, which will reduce the funds available for dividends on our shares
inventory if declared, or limit our ability to pay expenses, make capital
expenses and acquisitions and fund other general corporate purposes;
? limits on our flexibility in planning and reacting to changes in our
business and in the industry in which we operate;
? increased vulnerability to adverse changes in the general economy, industry and
competitive conditions and adverse changes in government regulation;
? the limits on our ability to borrow additional money for expenses, capital
expenditures, acquisitions, debt service requirements, execution of our
strategy and for other purposes and
? other disadvantages compared to our less indebted competitors.
March 31, 2022, we had approximately $446,000in cash outside of the Trust Account, current liabilities of approximately $7,990,000and negative working capital of approximately $7,115,000. We are incurring and expect to incur significant costs in the pursuit of an Initial Business Combination and we cannot assure you that our plans to complete an Initial Business Combination will be successful.
Termination of merger agreement and plan of reorganization
May 7, 2021, the Company entered into a Merger Agreement and Plan of Reorganization (as amended and restated on June 19, 2021, the "Merger Agreement") with PlusAI Corp, an exempted company incorporated with limited liability in the Cayman Islands("Plus") and certain other partiesfor an initial business combination. Effective November 8, 2021the Company and Plus mutually terminated the Merger Agreement. Neither party was required to pay the other a termination fee as a result of the mutual decision to terminate the Merger
Agreement. Results of Operations
For the period from
October 6, 2020(date of inception) to March 31, 2022, our activities consisted of formation and preparation for the Public Offering and, subsequent to completion of the Public Offering on January 20, 2021, identifying and completing a suitable Initial Business Combination. As such, in 2021 we had no operations or significant operating expenses until after the completion of the Public Offering in January 2021. Our normal operating costs since January 20, 2021include costs associated with our search for an Initial Business Combination (see below), costs associated with our governance and public reporting (see below), state franchise taxes of approximately $17,000per month (see below), a charge of $15,000per month from our Sponsor for administrative services and $29,000per month ( $14,000of which is deferred as to payment until closing of our Initial Business Combination) for compensation to each of our Chief Operating Officer and Chief Financial Officer. Our costs in the three months ended March 31, 2022and 2021 also include professional and consulting fees and travel associated with evaluating various Initial Business Combination candidates, as well as the costs of our public reporting and other costs, subsequent to the Public Offering. Professional and consulting fees, regulatory and travel costs associated with investigating potential Initial Business Combination candidates were approximately $10,000and $1,263,000, respectively, for the three months ended March 31, 2022and 2021. As we identified an Initial Business Combination candidate, our costs increased significantly in the three months ended March 31, 2021in connection with negotiating and executing a definitive agreement and related agreements as well as additional professional, due diligence and consulting fees and travel costs required in connection with an Initial Business Combination. As that transaction was terminated in November 2021, transaction related costs have decreased in the three months ended March 31, 2022. Costs associated with our governance and public reporting have increased since the Public Offering and were approximately $219,000and $93,000for the three months ended March 31, 2022and 2021. In addition, since our operating costs are not expected to be deductible for federal income tax purposes, we are subject to federal income taxes on the interest income earned from the Trust Account less taxes. Such federal income taxes were $-0-, for both the three months ended March 31, 2022and 2021 because the cost of deductible franchise taxes exceeded the interest income earned on the Trust Account. We are permitted to withdraw interest earned from the Trust Account for the payment of taxes to the extent of interest income earned. We did not withdraw any interest from the Trust Account in the three months ended
March 31, 2022. 17
The Public Offering and the Private Placement closed on
January 20, 2021as more fully described in "Liquidity and Capital Resources" below. At that time, the proceeds in the Trust Account were initially invested in a money market fund that invested solely in direct U.S.government obligations meeting the applicable conditions of Rule 2a-7 of the Investment Company Act of 1940. At March 31, 2022, proceeds in the Trust Account are invested in cash as described in Note 5 to the condensed financial statements. As a result of market conditions occurring in connection with the Covid-19 pandemic, low interest rates on available investments have been insufficient to cover our franchise tax obligations although interest rates did start to rise during the three months ended March 31, 2022. As discussed further in Note 7 to the condensed financial statements, the Company accounts for its outstanding public and private warrants as components as derivative liabilities in the accompanying unaudited condensed financial statements. As a result, the Company is required to measure the fair value of the public and private warrants at the end of each reporting period and recognize changes in the fair value from the prior period in the Company's operating results for each current period. The condensed statement of operations for the three months ended March 31, 2022and 2021 reflects other income from change in fair value of the warrant liability of approximately $6,690,000and $623,000, respectively. Also reflected in other income (expense) for the three months ended March 31, 2021are charges to other expense aggregating approximately $-0- and $1,471,000, respectively, for warrant liability transaction costs (approximately $639,000) and transaction date expenses related to the issuance of the Private Placement Warrants (approximately $832,000). There were no such expense charges in the three months ended March 31, 2022.
Cash and capital resources
January 20, 2021, we consummated the Public Offering of an aggregate of 34,500,000 Units at a price of $10.00per unit generating gross proceeds of approximately $345,000,000before underwriting discounts and expenses. Simultaneously with the consummation of the Public Offering, we consummated the Private Placement of 6,933,333 Private Placement Warrants, each exercisable to purchase one share of our Class A common stock at $11.50per share, to the Sponsor and certain funds and accounts managed by subsidiaries of BlackRock, Inc. and D.E. Shaw Valance Portfolios,L.L.C. (collectively, the " Direct Anchor Investors"), at a price of $1.50per Private Placement Warrant, generating gross proceeds, before expenses, of approximately $10,400,000. The net proceeds from the Public Offering and Private Placement were approximately $347,776,000, net of the non-deferred portion of the underwriting commissions of $6,900,000and offering costs and other expenses of approximately $724,000. $345,000,000of the proceeds of the Public Offering and the Private Placement have been deposited in the Trust Account and are not available to us for operations (except amounts to pay taxes). At March 31, 2022, we had approximately $446,000of cash available outside of the Trust Account to fund our activities until we consummate an Initial Business Combination. Until the consummation of the Public Offering, the Company's only sources of liquidity were an initial purchase of shares of our Class B common stock for $25,000by the Sponsor, and a total of $150,000loaned by the Sponsor against the issuance of an unsecured promissory note (the "Note"). The Note was non-interest bearing and was paid in full on January 20, 2021in connection with the closing of the Public Offering. At March 31, 2022, the Company has approximately $446,000in cash, approximately $7,990,000of current liabilities and approximately $7,115,000in negative working capital. The Company has incurred and expects to continue to incur significant costs in pursuit of its Business Combination. Further, if the Company cannot complete a Business Combination prior to January 20, 2023, it could be forced to wind up its operations and liquidate unless it receives approval from its stockholders to extend such date. These conditions raise substantial doubt about the Company's ability to continue as a going concern for a period of time within one year after the date that the financial statements are issued. The Company's plan to deal with these uncertainties is to preserve cash by deferring payments with anticipated cooperation from its service providers and to complete a Business Combination prior to January 20, 2023. There is no assurance that the Company's plans to consummate a Business Combination will be successful or successful within the period permitted to complete the Business Combination. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. In an attempt to preserve cash, beginning in November 2021, the Company's Chief Operating Officer and Chief Financial Officer, as well as the Sponsor and certain service providers have agreed to defer cash payments for an indefinite period. Further, in January 2022, the Company elected to pay certain insurance payments over a time payment plan and such remaining liability, approximately $240,000at March 31, 2022is including in accrued and other liabilities in the accompanying unaudited condensed balance sheet. 18 The preponderance of the current liabilities (approximately $6,755,000) results from amounts accrued as payable to professional service firms who indicated their intention to accept deferred payment terms, or success fees, that are payable at the closing of the proposed Business Combination. As a result, the Company believes, but cannot assure, that it has the liquidity to complete
a Business Combination.
The Company has only until
January 20, 2023to complete an Initial Business Combination. If the Company does not complete an Initial Business Combination by January 20, 2023, the Company will (i) cease all operations except for the purposes of winding up; (ii) as promptly as reasonably possible, but not more than ten business days thereafter, redeem the public shares of Class A common stock for a pro rata portion of the Trust Account, including interest, but less taxes payable (and less up to $100,000of such net interest to pay dissolution expenses) and (iii) as promptly as reasonably possible following such redemption, dissolve and liquidate the balance of the Company's net assets to its creditors and remaining stockholders, as part of its plan of dissolution and liquidation. The initial stockholders have waived their redemption rights with respect to their founder shares; however, if the initial stockholders or any of the Company's officers, directors or their affiliates acquire shares of Class A common stock in or after the Public Offering, they will be entitled to a pro rata share of the Trust Account upon the Company's redemption or liquidation in the event the Company does not complete an Initial Business Combination within the required time period. In the event of such liquidation, it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the price per unit in the Public Offering.
Off-balance sheet financing
March 31, 2022, we have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
We have not entered into any off-balance sheet financing arrangements, established special purpose entities, guaranteed any debts or commitments of other entities, or entered into any arrangements for non-financial assets.
Contractual obligations At
March 31, 2022, we did not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities. In connection with the Public Offering, we entered into an Administrative Support Agreement with Hennessy Capital Group LLC, an affiliate of our Sponsor, pursuant to which the Company pays Hennessy Capital Group LLC $15,000per month for office space, utilities and secretarial and administrative support. Also, commencing on the date the securities are first listed on the Nasdaq Capital Market, the Company has agreed to compensate each of its President and Chief Operating Officer as well as its Chief Financial Officer $29,000per month prior to the consummation of the Company's initial Business Combination, of which $14,000per month is payable upon the completion of the Company's initial Business Combination and $15,000per month is payable currently for their services. Beginning in November 2021, these two officers agreed to defer collection of their compensation for an indefinite period. During the three months ended March 31, 2022and 2021, $174,000and $147,000, respectively, was charged to operations for these arrangements including approximately $174,000and 71,000, respectively, that was added to accrued deferred compensation at March 31, 2022and 2021. The amount of deferred compensation accrued as well as the cash portion of compensation that the two officers agreed to defer totals approximately $557,000at March 31, 2022.
Upon completion of the Initial Business Combination or liquidation of the Company, the Company will cease to pay or accrue such monthly fees.
19 In connection with identifying an Initial Business Combination candidate and negotiating an Initial Business Combination, the Company has and may enter into engagement letters or agreements with various consultants, advisors, professionals and others in connection with an Initial Business Combination. The services under these engagement letters and agreements can be material in amount and in some instances can include contingent or success fees. Contingent or success fees (but not deferred underwriting compensation) would be charged to operations in the quarter that an Initial Business Combination is consummated. In most instances (except with respect to our independent registered public accounting firm), these engagement letters and agreements are expected to specifically provide that such counterparties waive their rights to seek repayment from the funds in the Trust Account.
Critical accounting estimates and policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting estimates and policies: Accounting estimates:
A critical accounting estimate to our financial statements is the estimated fair value of our warrant liability. 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. 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
directly or indirectly observable, such as quoted prices for
instruments in active markets or at quoted prices for the same or similar prices
instruments in markets that are not active; and
? Level 3, defined as unobservable entries in which little or no market data
exists, which requires an entity to develop its own assumptions, such as
valuations derived from valuation techniques in which one or more
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. At inception on
January 20, 2021and for reporting periods ended on or before June 30, 2021, we utilized an independent valuation consultant that used a Monte Carlo simulation model with Geometric Brownian motion to value the warrants at each reporting period, with changes in fair value recognized in the statement of operations. The estimated fair value of the warrant liability was determined using Level 3 inputs. Inherent in a Monte Carlo simulation options pricing model are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield. We estimated the volatility of our shares based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate was based on the U.S. Treasuryzero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate was based on the historical rate, which we anticipated to remain at zero. Since the hierarchy gives the highest priority to unadjusted quoted prices in active markets, subsequent to June 30, 2021our public warrants were trading in an active market. As such, subsequent to June 30, 2021, we transferred the public warrants from Level 3 to Level 1 and the private placement warrants from Level 3 to Level 2 to reflect the fact that the warrants were trading in an active market. At March 31, 2022and December 31, 2021, we valued our public warrants based on publicly observable inputs (Level 1 inputs) from the trading in the public warrants in an active market ( $0.84per warrant on December 31, 2021). Since the private placement warrants are substantially similar to the public warrants but do not trade, we valued them based on the value of the public warrants (significant other observable inputs - Level 2).
For reference, each
Emerging Growth Company: 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 an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when an accounting 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.
Net earnings (loss) per common share:
Net income (loss) per common share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the period as calculated using the treasury stock method. The Company has not considered the effect of the warrants sold in the Public Offering and the Private Placement to purchase an aggregate of 15,558,333 shares of Class A common stock in the calculation of diluted income (loss) per share, since their inclusion would be anti-dilutive under the treasury stock method. As a result, diluted income (loss) per common share is the same as basic loss per common share for the period. The Company complies with the accounting and disclosure requirements of FASB ASC Topic 260, "Earnings Per Share." The Company has two classes of stock, which are referred to as Class A common stock and Class B common stock. Income and losses are shared pro rata between the two classes of stock. Net income (loss) per common share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the respective period.
The following table reflects earnings per share after allocating income between shares based on shares outstanding.
For the three months ended For the three months ended March 31, 2022 March 31, 2021 Class A Class B Class A Class B
Allocation of net income (loss) 4,978,000 1,244,000 (1,855,000 ) (580,000 ) Denominator: Weighted average shares outstanding 34,500,000
8,625,000 26,833,000 8,385,000 Basic and diluted net earnings (loss) per share $0.14
Concentration of credit risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution which, at times, may exceed the
Federal Deposit Insurance Corporationmaximum coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such
accounts. Financial Instruments: The fair value of the Company's assets and liabilities (excluding the warrant liability), which qualify as financial instruments under FASB Accounting Standards Codification ("ASC") 820, "Fair Value Measurements and Disclosures," approximates the carrying amounts represented in the condensed financial statements primarily due to their short-term nature. 21 Use of Estimates: The preparation of condensed financial statements in conformity with
U.S.GAAP requires the Company's 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 condensed financial statements and the reported amounts of expenses during the reporting 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. One of the more significant estimates included in these financial statements is the determination of the fair value of the warrant liability. Such estimates may be subject to change as more current information becomes available and accordingly the actual results could differ significantly from those estimates. Deferred Offering Costs:
The Company complies with the requirements of the FASB ASC 340-10-S99-1 and
SECStaff Accounting Bulletin (SAB) Topic 5A - "Expenses of Offering." Costs incurred in connection with preparation for the Public Offering were approximately $19,689,000, including the underwriting discount of $18,975,000. Such costs were allocated among the equity and warrant liability components based on their fair values and approximately $19,050,000of such costs have been charged to temporary equity and the remainder, approximately $639,000, have been charged to the condensed statement of operations upon completion of the Public Offering in January 2021. Income Taxes:
The Company follows the asset and liability method of accounting for income taxes under FASB 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. The Company's currently taxable income consists of interest income on the Trust Account net of taxes. The Company's general and administrative costs are generally considered start-up costs and are not currently deductible. During the three months ended
March 31, 2022, and 2021 the Company recorded income tax expense of approximately $-0- in both periods because the cost of deductible franchise taxes exceeded the interest income earned on the Trust Account so there was no income for tax purposes. The Company's effective tax rate for the three months ended March 31, 2022and 2021 was approximately -0-% in both periods which differs from the expected income tax rate due to the start-up costs (discussed above) which are not currently deductible and business combination and warrant costs which may not be deductible. At March 31, 2022and December 31, 2021, the Company has a deferred tax asset of approximately $400,000and $300,000, respectively, primarily related to start-up costs. Management has determined that a full valuation allowance of the deferred tax asset is appropriate at this time. FASB 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. There were no unrecognized tax benefits as of March 31, 2022or December 31, 2021. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at March 31, 2022and December 31, 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. 22 Redeemable Common Stock:
As discussed in Note 4, all of the 34,500,000 public shares sold as part of the Units in the Public Offering contain a redemption feature which allows for the redemption of public shares if the Company holds a stockholder vote or there is a tender offer for shares in connection with a Business Combination. In accordance with FASB ASC 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity's equity instruments, are excluded from the provisions of FASB ASC 480. Although the Company did not specify a maximum redemption threshold, its charter provides that in no event will it redeem its public shares in an amount that would cause its net tangible assets to be less than
$5,000,001upon the closing of a Business Combination. However, because all of the shares of Class A common stock are redeemable, all of the shares are recorded as Class A common stock subject to redemption on the enclosed unaudited condensed balance sheet. The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of the securities at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock are affected by adjustments to additional paid-in capital. Accordingly, at March 31, 2022and December 31, 2021, 34,500,000 of the 34,500,000 public shares were classified outside of permanent equity. Class A common stock subject to redemption consists of: Gross proceeds of Public Offering $ 345,000,000Less: Proceeds allocated to Public Warrants (13,973,000 ) Offering costs (19,050,000 )
Plus: Increase in book value to redemption value 33,023,000 Class A common shares subject to redemption
$ 345,000,000Warrant Liability The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant's specific terms and applicable authoritative guidance in FASB ASC 480, Distinguishing Liabilities from Equity ("ASC 480") and ASC 815, Derivatives and Hedging ("ASC 815"). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company's own shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded as a liability at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statements of operations. Costs associated with issuing the warrants accounted for as liabilities are charged to operations when the warrants are issued. The fair value of the warrants was estimated in the initial periods using a Monte Carlo simulation approach for the public and private warrants and in the current period based upon, or derived from, the public warrants in an active, open market.
Recent accounting statements:
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. ASU 2020-06 is effective in the fiscal year beginning after December 15, 2023, which in our case would be January 1, 2024and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is currently evaluating the impact that the pronouncement will have on the financial statements.
Management does not believe that any other recently issued but not yet effective accounting pronouncements, if currently adopted, would have a material impact on the Company’s financial statements.
Subsequent Events: Management has evaluated subsequent events and transactions that occurred after the balance sheet date and up to the date that the financial statements were issued and has concluded that all such events that would require adjustment or disclosure have been recognized or disclosed. 23
© Edgar Online, source