Management's Discussion and Analysis of Financial Condition and Results of
Operations References to the "Company," "DA32 Life Sciences Tech Acquisition
Corp.," "our," "us" or "we" refer to DA32 Life Sciences Tech Acquisition Corp.
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the 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
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act. We have based these forward-looking statements
on our current expectations and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions about us that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "should," "could," "would," "expect,"
"plan," "anticipate," "believe," "estimate," "continue," or the negative of such
terms or other similar expressions. Factors that might cause or contribute to
such a discrepancy include, but are not limited to, those described in our other
SEC filings.
Overview
We are a blank check company incorporated in Delaware on April 16, 2021. We were
formed for the purpose of effecting a merger, share exchange, asset acquisition,
share purchase, reorganization or similar business combination with one or more
businesses (the "Business Combination"). We are an emerging growth company and,
as such, we are subject to all of the risks associated with emerging growth
companies.
Our sponsor is DA32 Sponsor LLC, a Delaware limited liability company (the
"Sponsor"). The registration statement for the Company's initial public offering
(the "Initial Public Offering") was declared effective on July 27, 2021. On
July 30, 2021, the Company consummated its Initial Public Offering of 20,000,000
shares of Class A common stock (the "Public Shares"), at an offering price of
$10.00 per Public Share, generating gross proceeds of $200.0 million, and
incurring offering costs of approximately $9.3 million, inclusive of $5.6
million in deferred underwriting commissions.
Simultaneously with the closing of the Initial Public Offering, the Company
consummated the private placement ("Private Placement") of 650,000 shares of
Class A common stock (the "Private Placement Shares"), at a price of $10.00 per
Private Placement Share to the Sponsor, generating gross proceeds of $6.5
million paid on August 3, 2021.
Upon the closing of the Initial Public Offering and the Private Placement,
$200.0 million ($10.00 per Public Share) of the net proceeds of the Initial
Public Offering and certain of the proceeds of the Private Placement were placed
in a trust account ("Trust Account") located in the United States with
Continental Stock Transfer & Trust Company acting as trustee, and invested only
in U.S. "government securities" within the meaning of Section 2(a)(16)
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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 under Rule 2a-7 promulgated under the Investment Company Act
which invest only in direct U.S. government treasury obligations, as determined
by the Company, until the earlier of: (i) the completion of a Business
Combination and (ii) the distribution of the Trust Account as described below.
Our management has broad discretion with respect to the specific application of
the net proceeds of the Initial Public Offering and the sale of Private
Placement Shares, although substantially all of the net proceeds are intended to
be applied generally toward consummating a Business Combination. There is no
assurance that we will be able to complete a Business Combination successfully.
We must complete one or more initial Business Combinations having an aggregate
fair market value of at least 80% of the net assets held in the Trust Account
(net of amounts disbursed to management for working capital purposes, if
permitted, and excluding the amount of any deferred underwriting commissions) at
the time of the agreement to enter into the initial Business Combination.
However, we will only complete a Business Combination if the post-transaction
company owns or acquires 50% or more of the 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.
If we are unable to complete a Business Combination within 24 months from the
closing of the Initial Public Offering, or July 30, 2023, or during any extended
period of time that we may have to consummate a Business Combination as a result
of an amendment to the Certificate of Incorporation (the "Combination Period"),
we will (i) cease all operations except for the purpose of winding up, (ii) as
promptly as reasonably possible but not more than ten business days thereafter,
redeem 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, which
redemption will completely extinguish Public Stockholders' rights as
stockholders (including the right to receive further liquidating distributions,
if any), and (iii) as promptly as reasonably possible following such redemption,
subject to the approval of the remaining stockholders and the board of
directors, liquidate and dissolve, subject in each case to the Company's
obligations under Delaware law to provide for claims of creditors and the
requirements of other applicable law.
Liquidity and Capital Resources
As of December 31, 2022, we had approximately $0.7 million in our operating bank
account and working capital of approximately $0.5 million (not taking into
account approximately $629,000 in tax obligations that may be paid using
investment income earned in Trust Account).
Our liquidity needs to date have been satisfied through a cash payment of
$25,000 from our Sponsor to purchase the Founder Shares, the loan of
approximately $200,000 from the Sponsor pursuant to the Note, and the proceeds
from the consummation of the Private Placement not held in the Trust Account.
The Company fully repaid the Note upon closing of the Initial Public Offering.
In addition, 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, provide the
Company Working Capital Loans (the "Working Capital Loans"). As of December 31,
2022 and 2021, there was no outstanding Working Capital Loans.
Based on the foregoing, management believes that we will have sufficient working
capital and borrowing capacity from our Sponsor or an affiliate of our Sponsor,
or certain of our officers and directors to meet our needs through the earlier
of the consummation of a Business Combination or one year from this filing. Over
this time period, we will be using these funds for paying existing accounts
payable, identifying and evaluating prospective initial Business Combination
candidates, performing due diligence on prospective target businesses, paying
for travel expenditures, selecting the target business to merge with or acquire,
and structuring, negotiating and consummating the Business Combination.
However, in connection with our assessment of going concern considerations in
accordance with Financial Accounting Standards Board's ("FASB") Accounting
Standards Codification ("ASC") Topic 205-40, "Presentation of Financial
Statements-Going Concern," management has determined that mandatory liquidation
and subsequent dissolution raise substantial doubt about the Company's ability
to continue as a going concern. We intend to complete an initial business
combination before the mandatory liquidation date; however, there can be no
assurance that the Company will be able to consummate any business combination
by July 30, 2023. No adjustments have been made to the carrying amounts of
assets or liabilities should we be required to liquidate after July 30, 2023.
The financial statements do not include any adjustment that might be necessary
if we are unable to continue as a going concern.
Management continues to evaluate the impact of the COVID-19 pandemic on the
industry and has concluded that while it is reasonably possible that the virus
could have a negative effect on our financial position, results of our
operations and/or search for a target company, the specific impact is not
readily determinable as of the date of the financial statements. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
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In February 2022, the Russian Federation and Belarus commenced a military action
with the country of Ukraine. As a result of this action, various nations,
including the United States, have instituted economic sanctions against the
Russian Federation and Belarus. Further, the impact of this action and related
sanctions on the world economy are not determinable as of the date of these
financial statements and the specific impact on our Company's financial
condition, results of operations, and cash flows is also not determinable.
In addition, on August 16, 2022, President Biden signed into law the Inflation
Reduction Act of 2022 (the "IR Act"), which, among other things, imposes a 1%
excise tax on the fair market value of stock repurchased by "covered
corporations" beginning in 2023, with certain exceptions (the "Excise Tax"). 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. Any share redemption or other share 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 we would be subject to the excise tax in connection with a Business
Combination, extension vote or otherwise will 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 Private
Investment in Public Equity ("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 us 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 our ability to
complete a Business Combination. On December 27, 2022, the Treasury Department
and Internal Revenue Service ("IRS") issued a Notice 2023-2 ("Notice"), which
provided interim guidance regarding the application of the corporate stock
repurchase excise tax until the issuance of proposed regulations. The Notice
excluded the distributions complete liquidation of a corporation from the base
of the excise tax. The Notice also excludes from the scope of the excise tax any
distribution made during the taxable year in which a corporation fully
liquidates and dissolves, even if a distribution precedes the formal decision to
liquidate.
Results of Operations
Our entire activity from inception up to December 31, 2022, was for our
formation and the Initial Public Offering and, subsequent to the Initial Public
Offering, the search for a prospective target for an initial Business
Combination. We will not be generating any operating revenues until the closing
and completion of our initial Business Combination.
For the year ended December 31, 2022, we had a net income of approximately
$599,000, which consisted of approximately $1.4 million in general and
administrative expenses, $210,000 in general and administrative expenses-related
party, approximately $200,000 in franchise tax expenses and approximately
$543,000 in income tax expenses, partially offset by approximately $2.9 million
in income from investments held in Trust Account.
For the period from April 16, 2021 (inception) through December 31, 2021, we had
a net loss of approximately $571,000, which consisted of approximately $366,000
in general and administrative expenses, approximately $88,000 in administrative
expenses-related party and approximately $143,000 in franchise tax expenses,
partially offset by approximately $25,000 in income from investments held in
Trust Account.
Contractual Obligations
Administrative Services Agreement
Commencing on the date that our securities were first listed on NASDAQ and
continuing until the earlier of our consummation of a Business Combination or
our liquidation, we agreed to pay the Sponsor a total of $10,000 per month for
office space, secretarial and administrative services provided to members of our
management team. As of July 27, 2021, the original Administrative Services
Agreement was amended and restated in full to correct a clerical error in the
parties to the agreement. The Amended and Restated Administrative Services
Agreement (the "A&R Administrative Services Agreement"), by and between the
Company and Deerfield Partners, L.P. ("Deerfield Affiliate"), an affiliate of
the Sponsor, provides that the Company will pay Deerfield Affiliate a total of
$10,000 per month for office space, secretarial and administrative services
provided to members of the Company's management team. For the year ended
December 31, 2022 and for the period from April 16, 2021 (inception) through
December 31, 2021, the Company incurred expenses of $120,000 and $50,000,
respectively, under this agreement, included in administrative expenses-related
party on the accompanying statements of operations. As of December 31, 2022 and
2021, no amounts were outstanding for these services.
The Sponsor, officers and directors, or any of their respective affiliates will
be reimbursed for any out-of-pocket expenses incurred in connection with
activities on our behalf such as identifying potential target businesses and
performing due diligence on suitable Business Combinations. Our audit committee
will review on a quarterly basis all payments that were made to the Sponsor,
officers or directors, or their affiliates.
Wolfe Strategic Services Agreement
On July 27, 2021, we entered into an agreement that provides that, commencing on
the date that our securities were first listed on Nasdaq, we shall pay our Chief
Financial Officer, Christopher Wolfe, $7,500 per month for his services prior to
the initial Business Combination.
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During the year ended December 31, 2022 and during the period from April 16,
2021 (inception) through December 31, 2021, we incurred $90,000 and $37,500,
respectively, in expenses for these services which is included in administrative
expenses-related party on the accompanying statements of operations. As of
December 31, 2022 and 2021, $7,500 was prepaid for these services.
Registration Rights
The holders of Founder Shares, Private Placement Shares, and shares of Class A
common stock that may be issued upon conversion of Working Capital Loans, if
any, will be entitled to registration rights pursuant to a registration rights
agreement. The holders of these securities are entitled to make up to three
demands, excluding short form 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 the
completion of the initial Business Combination. The Company will bear the
expenses incurred in connection with the filing of any such registration
statements.
Underwriting Agreement
The underwriters did not earn any underwriting commissions on the 4,000,000
Affiliated Shares. Except for the Affiliated Shares, the underwriters were
entitled to an upfront underwriting discount of $0.20 per share, or $3.2 million
in the aggregate, paid upon the closing of the Initial Public Offering, and a
deferred underwriting commissions of $0.35 per share, or $5.6 million in the
aggregate will be payable to the underwriters from the amounts held in the Trust
Account solely in the event that we complete a Business Combination, subject to
the terms of the underwriting agreement.
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Critical Accounting Policies
This management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities in our financial statements. On an ongoing basis, we
evaluate our estimates and judgments, including those related to fair value of
financial instruments and accrued expenses. We base our estimates on historical
experience, known trends and events and various other factors that we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We have identified the
following as our critical accounting policies:
Investments held in the Trust Account
Our portfolio of investments is comprised of U.S. government securities, within
the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a
maturity of 185 days or less, or investments in money market funds that invest
in U.S. government securities and generally have a readily determinable fair
value, or a combination thereof. When our investments held in the Trust Account
are comprised of U.S. government securities, the investments are classified as
trading securities. When our investments held in the Trust Account are comprised
of money market funds, the investments are recognized at fair value. Trading
securities and investments in money market funds are presented on the balance
sheets at fair value at the end of each reporting period. Gains and losses
resulting from the change in fair value of these securities is included in
income from investments held in the Trust Account in the accompanying statements
of operations. The estimated fair values of investments held in the Trust
Account are determined using available market information.
Class A common stock subject to possible redemption
Class A common stock subject to mandatory redemption (if any) are classified as
liability instruments and are measured at fair value. Conditionally redeemable
Class A common stock (including shares of Class A 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) are classified as temporary equity. At all other times, Class A common
stock are 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, as of
December 31, 2022 and 2021, 20,000,000 shares of Class A common stock subject to
possible redemption at the redemption amount were presented at redemption value
as temporary equity, outside of the stockholders' deficit section of our balance
sheets.
We recognize changes in redemption value immediately as they occur and adjust
the carrying value of the Class A common stock subject to possible redemption 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. Effective with the closing of the Initial Public
Offering, we recognized the accretion from initial book value to redemption
amount, which resulted in charges against additional paid-in capital (to the
extent available) and accumulated deficit.
Net income (loss) per share of common stock
We comply with accounting and disclosure requirements of FASB ASC Topic 260,
"Earnings Per Share." We have two classes of shares, 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 shares, which assumes a Business Combination as
the most likely outcome. Net income (loss) per common share is calculated by
dividing the net income (loss) by the weighted average shares of common stock
outstanding for the respective period. Accretion associated with the redeemable
Class A common stock is excluded from earnings per share as the redemption value
approximates fair value.
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Recent Accounting Pronouncements
Management does not believe that any other recently issued, but not yet
effective, accounting standards if currently adopted would have a material
effect on the accompanying financial statements.
Off-Balance Sheet Arrangements
As of December 31, 2022, we did not have any off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of Regulation S-K.
JOBS Act
The Jumpstart Our Business Startups Act of 2012 (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. We are electing to delay the adoption of new or revised accounting
standards, and as a result, we may not comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required
for non-emerging growth companies. As a result, the financial statements may not
be comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.
Additionally, we are in the process of evaluating the benefits of relying on the
other reduced reporting requirements provided by the JOBS Act. Subject to
certain conditions set forth in the JOBS Act, if, as an "emerging growth
company," we choose to rely on such exemptions we may not be required to, among
other things, (i) provide an auditor's attestation report on our system of
internal controls over financial reporting pursuant to Section 404, (ii) provide
all of the compensation disclosure that may be required of non-emerging growth
public companies under the Dodd-Frank Wall Street Reform and Consumer Protection
Act, (iii) comply with any requirement that may be adopted by the PCAOB
regarding mandatory audit firm rotation or a supplement to the auditor's report
providing additional information about the audit and the financial statements
(auditor discussion and analysis) and (iv) disclose certain executive
compensation related items such as the correlation between executive
compensation and performance and comparisons of the CEO's compensation to median
employee compensation. These exemptions will apply for a period of five years
following the completion of our Initial Public Offering or until we are no
longer an "emerging growth company," whichever is earlier.
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