References in this report quarterly report on Form 10-Q (the "Quarterly Report")
to "we," "us" or the "Company" refer to Arrowroot Acquisition Corp. References
to our "management" or our "management team" refer to our officers and
directors, and references to the "Sponsor" refer to Arrowroot Acquisition LLC.
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 Quarterly Report.
Certain information contained in the discussion and analysis set forth below
includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act
that are not historical facts and involve risks and uncertainties that could
cause actual results to differ materially from those expected and projected. All
statements, other than statements of historical fact included in this Quarterly
Report including, without limitation, statements in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, business strategy and the plans and
objectives of management for future operations, are forward-looking statements.
Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek"
and variations and similar words and expressions are intended to identify such
forward-looking statements. Such forward-looking statements relate to future
events or future performance, but reflect management's current beliefs, based on
information currently available. A number of factors could cause actual events,
performance or results to differ materially from the events, performance and
results discussed in the forward-looking statements. For information identifying
important factors that could cause actual results to differ materially from
those anticipated in the forward-looking statements, please refer to the Risk
Factors section of the Company's Annual Report on Form 10-K filed with the SEC
on March 31, 2022 and Quarterly Report on Form 10-Q filed with the SEC on May
16, 2022. The Company's securities filings can be accessed on the EDGAR section
of the SEC's website at www.sec.gov. Except as expressly required by applicable
securities law, the Company disclaims any intention or obligation to update or
revise any forward-looking statements whether as a result of new information,
future events or otherwise.
Overview
We are a blank check company formed under the laws of the State of Delaware on
November 5, 2020 for the purpose of effecting a merger, capital stock exchange,
asset acquisition, stock purchase, reorganization or similar business
combination with one or more businesses. We intend to effectuate our Business
Combination using cash from the proceeds of the Initial Public Offering and the
sale of the Private Placement Warrants, our capital stock, debt or a combination
of cash, stock and debt.
We expect to continue to incur significant costs in the pursuit of our
acquisition plans. We cannot assure you that our plans to complete a Business
Combination will be successful.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date.
Our only activities through June 30, 2022 were organizational activities, those
necessary to prepare for the Initial Public Offering, described below, and
identifying a target company for a Business Combination. We do not expect to
generate any operating revenues until after the completion of our Business
Combination. We generate non-operating income in the form of interest income on
marketable securities held in the Trust Account. We incur expenses as a result
of being a public company (for legal, financial reporting, accounting and
auditing compliance), as well as for due diligence expenses.
For the three months ended June 30, 2022, we had net income of approximately
$4.5 million, which consists of income of approximately $4.5 million derived
from the changes in fair value of the warrant liabilities and interest income
earned on investments held in the Trust Account of approximately $0.3 million,
offset by general and administrative expenses of approximately $0.3 million and
provision for income tax of $21,720.
For the six months ended June 30, 2022, we had net income of approximately $10.4
million, which consists of income of approximately $10.8 million derived from
the changes in fair value of the warrant liabilities and interest income earned
on investments held in the Trust Account of approximately $0.4 million, offset
by general and administrative expenses of approximately $0.8 million and
provision for income tax of $21,720.
For the three months ended June 30, 2021, we had net loss of approximately $1.8
million, which consists of loss of approximately $1.4 million derived from the
changes in fair value of the warrant liabilities and general and administrative
expenses of approximately $0.5 million, and interest income earned on
investments held in the Trust Account of approximately $7,000.
For the six months ended June 30, 2021, we had net loss of approximately $0.17
million, which consists of general and administrative expenses of approximately
$1.4 million, offset by income of approximately $1.2 million derived from the
changes in fair value of the warrant liabilities and interest income earned on
investments held in the Trust Account of approximately $9,000.
Liquidity and Capital Resources
On March 4, 2021, we consummated the Initial Public Offering of 28,750,000 Units
which includes the full exercise by the underwriter of its over-allotment option
in the amount of 3,750,000 Units, at $10.00 per Unit, generating gross proceeds
of $287,500,000. Simultaneously with the closing of the Initial Public Offering,
we consummated the sale of 8,250,000 Private Placement Warrants at a price of
$1.00 per Private Placement Warrant in a private placement to Arrowroot
Acquisition LLC, generating gross proceeds of $8,250,000.
Following the Initial Public Offering, the full exercise of the over-allotment
option, and the sale of the Private Units, a total of $287,500,000 was placed in
the Trust Account. We incurred $16,392,714 in transaction costs related to the
Initial Public Offering, consisting of $5,750,000 in cash underwriting fees,
$10,062,500 of deferred underwriting fees and $580,214 of other offering costs.
For the six months ended June 30, 2022, cash used in operating activities was
$712,629. Net income of $10,410,456 was affected by income related to the change
in fair value of the warrant liabilities of $10,841,250 and interest earned on
marketable securities held in trust account of $362,360. Net changes in
operating assets and liabilities provided $80,525 of cash for operating
activities.
For the six months ended June 30, 2021, cash used in operating activities was
$1,375,364. Net loss of $174,393 was affected by income related to the change in
fair value of the warrant liabilities of $1,213,750, transaction costs allocable
to warrants of $760,022 and interest earned on marketable securities held in
trust account of $9,138. Net changes in operating assets and liabilities used
$738,105 of cash for operating activities.
As of June 30, 2022, we had cash and marketable securities held in the trust
account of $287,762,743 (including $262,743 of interest) consisting of money
market funds which invest primarily in U.S. Treasury Bills with a maturity of
185 days or less. Interest income on the balance in the trust account may be
used by us to pay taxes. Through June 30, 2022, we withdrew an amount of
$123,251 interest earned from the trust account to pay franchise and income
taxes.
We intend to use substantially all of the funds held in the trust account,
including any amounts representing interest earned on the trust account (less
income taxes payable), to complete our business combination. To the extent that
our capital stock or debt is used, in whole or in part, as consideration to
complete our 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.
As of June 30, 2022, we had cash of $423,293. We intend to use the funds held
outside the trust account primarily to identify and evaluate target businesses,
perform business due diligence on prospective target businesses, travel to and
from the offices, plants or similar locations of prospective target businesses
or their representatives or owners, review corporate documents and material
agreements of prospective target businesses, and structure, negotiate and
complete a business combination.
In order to fund working capital deficiencies or finance transaction costs in
connection with a business combination, the sponsor, or certain of our officers
and directors or their affiliates may, but are not obligated to, loan us funds
as may be required. If we complete a business combination, we would repay such
loaned amounts. In the event that a business combination does not close, we may
use a portion of the working capital held outside the trust account to repay
such loaned amounts but no proceeds from our trust account would be used for
such repayment. Up to $1,500,000 of such Working Capital Loans may be
convertible into warrants of the post-business combination entity at a price of
$1.00 per warrant. The warrants would be identical to the private placement
warrants.
On December 29, 2021, the Company issued an unsecured promissory note (the "
Convertible Promissory Note") in the principal amount of up to $1,500,000 to its
Sponsor, of which $750,000 was funded by the Sponsor upon execution of the
Convertible Promissory Note and an additional amount of $200,000 was drawn down
on March 17, 2022. On April 21, 2022, the Company drew down the remaining
$550,000 pursuant to the terms of the Convertible Promissory Note issued on
December 29, 2021. Following this draw down, the full $1,500,000 available under
the Convertible Promissory Note was outstanding. There are no remaining funds
available under the Convertible Promissory Note for future drawdowns. As of June
30, 2022 and December 31, 2021, $1,500,000 and $750,000 were drawn down on this
Convertible Promissory Note, respectively.
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The Convertible Promissory Note is subject to the Sponsor's approval and does
not bear interest. The principal balance of the note will be payable on the
earliest to occur of (i) the date on which the Company consummates its initial
business combination or (ii) the date that the winding up of the Company is
effective (such date, the "Maturity Date"). In the event the Company consummates
its initial business combination, the Sponsor has the option on the Maturity
Date to convert all or any portion of the principal outstanding under the
Convertible Promissory Note into that number of warrants ("Working Capital
Warrants") equal to the portion of the principal amount of the Convertible
Promissory Note being converted divided by $1.00, rounded up to the nearest
whole number. The terms of the Working Capital Warrants, if any, would be
identical to the terms of the private placement warrants issued by the Company
at the time of its initial public offering, as described in the prospectus for
the initial public offering dated March 1, 2021 and filed with the SEC,
including the transfer restrictions applicable thereto. The Convertible
Promissory Note is subject to customary events of default, the occurrence of
certain of which automatically triggers the unpaid principal balance of the
Convertible Promissory Note and all other sums payable with regard to the
Convertible Promissory Note becoming immediately due and payable.
If our estimate of the costs of identifying a target business, undertaking
in-depth due diligence and negotiating a business combination are less than the
actual amount necessary to do so, we may have insufficient funds available to
operate our business prior to our business combination. Moreover, we may need to
obtain additional financing either to complete our business combination or
because we become obligated to redeem a significant number of our public shares
upon consummation of our business combination, in which case we may issue
additional securities or incur debt in connection with such business
combination.
Based on the foregoing, management has determined that we do not have sufficient
liquidity to meet our anticipated obligations for at least twelve months after
the financial statements are available to be issued, as such, the events and
circumstances raise substantial doubt about our ability to continue as a going
concern, as discussed further below. The accompanying unaudited condensed
financial statements have been prepared on a going concern basis and do not
include any adjustments that might arise as a result of uncertainties about our
ability to continue as a going concern.
Going Concern
In connection with the Company's assessment of going concern considerations in
accordance with FASB's 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, obtain approval for an extension of the
deadline or complete a Business Combination by March 4, 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 March 4, 2023. The Company
intends to complete a Business Combination before the mandatory liquidation date
or obtain approval for an extension.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered
off-balance sheet arrangements as of June 30, 2022. We do not participate in
transactions that create relationships with unconsolidated entities or financial
partnerships, often referred to as variable interest entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements.
We have not entered into any off-balance sheet financing arrangements,
established any special purpose entities, guaranteed any debt or commitments of
other entities, or purchased any non-financial assets.
Contractual obligations
We do not have any long-term debt, capital lease obligations, operating lease
obligations or long-term liabilities, other than an agreement to pay the Sponsor
a monthly fee of $20,000 for office space, utilities and secretarial and
administrative support services. We began incurring these fees on March 4, 2021
and will continue to incur these fees monthly until the earlier of the
completion of the Business Combination and our liquidation.
The underwriters are entitled to a deferred fee of $0.35 per Unit, or
$10,062,500 in the aggregate. The deferred fee will become payable to the
underwriters from the amounts held in the Trust Account solely in the event that
the Company completes a Business Combination, subject to the terms of the
underwriting agreement.
Critical Accounting Policies
The preparation of condensed financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and income and expenses
during the periods reported. Actual results could materially differ from those
estimates. We have identified the following critical accounting policies:
Warrant Liabilities
We account for the Warrants in accordance with the guidance contained in ASC
815-40 under which the Warrants do not meet the criteria for equity treatment
and must be recorded as liabilities. Accordingly, we classify the Warrants as
liabilities at their fair value and adjust the Warrants to fair value at each
reporting period. This liability is subject to re-measurement at each balance
sheet date until exercised, and any change in fair value is recognized in our
condensed statement of operations. The Private Placement Warrants and the Public
Warrants for periods where no observable traded price was available are valued
using a Monte Carlo simulation. For periods subsequent to the detachment of the
Public Warrants from the Units, the Public Warrant quoted market price was used
as the fair value as of each relevant date.
Class A Common Stock Subject to Possible Redemption
We account for our Class A common stock subject to possible redemption in
accordance with the guidance in Accounting Standards Codification ("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 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 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,
shares of Class A common stock subject to possible redemption are presented as
temporary equity, outside of the stockholders' deficit section of our condensed
balance sheets.
Net Income (Loss) Per Common Share
The Company complies with accounting and disclosure requirements of FASB ASC
Topic 260, "Earnings Per Share". The company has two classes of common 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 common stock. Net
income (loss) per common stock is computed by dividing net income (loss) by the
weighted average number of common stock outstanding for the period. Accretion
associated with the redeemable shares of Class A common stock is excluded from
income (loss) per common share as the redemption value approximates fair value.
Recent Accounting Standards
In August 2020, the FASB issued ASU No. 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): Accounting for Convertible Instruments
and Contracts in an Entity's Own Equity" ("ASU 2020-06"), which simplifies
accounting for convertible instruments by removing major separation models
required under current GAAP. ASU 2020-06 removes certain settlement conditions
that are required for equity-linked contracts to qualify for the derivative
scope exception and it also simplifies the diluted earnings per share
calculation in certain areas. ASU 2020-06 is effective for fiscal years
beginning after December 15, 2023, including interim periods within those fiscal
years, with early adoption permitted. Management is currently evaluating the new
guidance but does not expect the adoption of this guidance to have a material
impact on our condensed financial statements.
Management does not believe that any other recently issued, but not yet
effective, accounting standards, if currently adopted, would have a material
effect on our condensed financial statements.
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