References to the "Company," "us," "our" or "we" refer to Hennessy Capital
Investment Corp. V. The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with our
audited financial statements and related notes included herein.
Cautionary Note Regarding Forward-Looking Statements
All statements other than statements of historical fact included in this Report
including, without limitation, statements under this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding our
financial position, business strategy and the plans and objectives of management
for future operations, are forward-looking statements. When used in this Report,
words such as "anticipate," "believe," "estimate," "expect," "intend" and
similar expressions, as they relate to us or our management, identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of management, as well as assumptions made by, and information currently
available to, our management. Actual results could differ materially from those
contemplated by the forward- looking statements as a result of certain factors
detailed in our filings with the SEC. All subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf
are qualified in their entirety by this paragraph.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the 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.
Overview
We are a blank check company incorporated as a Delaware corporation 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. We intend to effectuate our initial
business combination using cash from the proceeds of our initial public offering
that was completed in January 2021 and the sale of warrants in the Private
Placement that occurred simultaneously with the completion of our initial
public, our capital stock, debt or a combination of cash, stock and debt.
The issuance of additional shares of our stock in an initial business
combination:
? may significantly dilute the equity interest of our stockholders;
? may subordinate the rights of holders of our common stock if preferred stock
is issued with rights senior to those afforded our common stock;
? could cause a change in control if a substantial number of shares of our
common stock is issued, which may affect, among other things, our ability to
use our net operating loss carry forwards, if any, and could result in the
resignation or removal of our present officers and directors;
? may have the effect of delaying or preventing a change of control of us by
diluting the stock ownership 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
and/or warrants.
Similarly, if we issue debt securities or incur other indebtedness to finance
our initial business combination, it could result in:
? default and foreclosure on our assets if our operating revenues after an
initial business combination are insufficient to repay our debt obligations;
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? acceleration of our obligations to repay the indebtedness even if we make all
principal and interest payments when due if we breach certain covenants that
require the maintenance of certain financial ratios or reserves without a
waiver or renegotiation of that covenant;
? our immediate payment of all principal and accrued interest, if any, if the
debt security is payable on demand;
? our inability to obtain necessary additional financing if the debt security or
other indebtedness contains covenants restricting our ability to obtain such
financing while the debt security or other indebtedness is outstanding;
? our inability to pay dividends on our common stock;
? using a substantial portion of our cash flow to pay principal and interest on
our debt, which will reduce the funds available for dividends on our common
stock if declared, or limit our ability to pay expenses, make capital
expenditures and acquisitions and fund other general corporate purposes;
? limitations on our flexibility in planning for and reacting to changes in our
business and in the industry in which we operate;
? increased vulnerability to adverse changes in general economic, industry and
competitive conditions and adverse changes in government regulation; and
? limitations on our ability to borrow additional amounts for expenses, capital
expenditures, acquisitions, debt service requirements, execution of our
strategy and other purposes and other disadvantages compared to our
competitors who have less debt.
At December 31, 2021, we had approximately $913,000 in cash outside of the trust
account and approximately $6,619,000 of negative working capital. 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.
Recent Developments - Termination of Merger Agreement and Plan of Reorganization
As previously disclosed, on May 7, 2021, we entered into the Merger Agreement
with PlusAI Corp, for an initial business combination. In light of recent
developments in the regulatory environment outside of the United States, Plus is
pursuing a potential restructuring of certain aspects of its business. Given the
November 8, 2021 "outside date" set forth in the Merger Agreement, the parties
mutually agreed to terminate the Merger Agreement effective as of November 8,
2021. 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 December 31, 2021,
our activities consisted of formation and preparation for our initial public
offering and, subsequent to completion of our initial 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 our initial public offering in January 2021.
Our normal operating costs since January 20, 2021 included 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 $17,000 per month (see below), a charge of $15,000 per month from
our sponsor for administrative services and $29,000 per month ($14,000 of 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 year ended December 31, 2021 also included professional and
consulting fees and travel associated with evaluating various initial business
combination candidates, as well as costs in connection with negotiating and
executing a definitive agreement and related agreements and proxy materials in
addition to the costs of our public reporting and other costs, subsequent to our
initial public offering. Professional and consulting fees, regulatory and travel
costs associated with investigating potential initial business combination
candidates as well as costs in connection with negotiating and executing a
definitive agreement and related agreements and proxy materials were
approximately $7,437,000 for the year ended December 31, 2021. The majority of
such costs were legal and regulatory costs of approximately $5,080,000 and
consulting due diligence costs of approximately $2,190,000. Costs associated
with our governance and public reporting and administration have increased since
our initial public offering and were approximately $1,050,000 (including
approximately $173,000 for administrative services to our sponsor, $15,000 of
which is deferred as to payment at December 31, 2021) for the year ended
December 31, 2021. Further, compensation expense for our management including
our Chief Operating Officer and Chief Financial Officer, was approximately
$735,000 for the year ended December 31, 2021 including approximately $383,000
that is accrued at December 31, 2021 (including deferred compensation and
voluntary deferrals of cash compensation since November 2021). Operating costs
for the year ended December 31, 2021 aggregated approximately $9,424,000
including franchise taxes of approximately $200,000.
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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 the year ended December 31, 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 year ended December 31,
2021.
Our initial public offering and the Private Placement closed on January 20, 2021
as 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
December 31, 2021, proceeds in the trust account continue to be invested in such
money market fund. As a result of market conditions interest rates on available
investments are low (less than 0.1% per year) and at that level are insufficient
to cover our franchise tax obligations (approximately $200,000). It is unclear
how long this condition will persist, or whether it could worsen.
As discussed further in Notes 6 and 7 to the accompanying financial statements,
we account for our outstanding public and private warrants as components of
derivative liabilities in the accompanying financial statements. As a result,
we are 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 our operating results for each current period. The statement
of operations for the year ended December 31, 2021 reflects other income from
change in fair value of the warrant liability of approximately $12,292,000, and
charges to other expense aggregating approximately $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). In the aggregate, other income includes warrant costs
and income aggregating approximately $10,860,000 including approximately $39,000
of interest income.
Going Concern
On January 20, 2021, we consummated our initial public offering of an aggregate
of 34,500,000 units at a price of $10.00 per unit generating gross proceeds of
approximately $345,000,000 before underwriting discounts and expenses.
Simultaneously with the consummation of our initial 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 $11.50 per
share, to our sponsor and certain funds and accounts managed by the direct
anchor investors, at a price of $1.50 per private placement warrant, generating
gross proceeds, before expenses, of approximately $10,400,000.
The net proceeds from our initial public offering and Private Placement were
approximately $347,776,000, net of the non-deferred portion of the underwriting
commissions of $6,900,000 and offering costs and other expenses of approximately
$724,000. $345,000,000 of the proceeds of our initial public offering and the
Private Placement have been deposited in the trust account and are not available
to us for operations (except amounts of accrued interest in the trust account to
pay taxes). At December 31, 2021, we had approximately $913,000 of cash
available outside of the trust account to fund our activities until we
consummate an initial business combination.
Until the consummation of our initial public offering, our only sources of
liquidity were an initial purchase of shares of our Class B common stock for
$25,000 by our sponsor, and a total of $150,000 loaned by our sponsor against
the issuance of an unsecured promissory note. The note was non-interest bearing
and was paid in full on January 20, 2021 in connection with the closing of our
initial public offering.
At December 31, 2021, we had approximately $913,000 in cash, approximately
$7,528,000 of current liabilities and approximately $6,615,000 in negative
working capital. We have incurred and expect to continue to incur significant
costs in pursuit of our initial business combination. If we cannot complete an
initial business combination prior to January 20, 2023, we could be forced to
wind up our operations and liquidate unless we receive stockholder approval for
an extension. These conditions raise substantial doubt about our ability to
continue as a going concern for a period of time within one year after the date
that the financial statements are issued. Our plan to deal with these multiple
uncertainties is to preserve cash by deferring payments with anticipated
cooperation from our service providers as discussed below, and to complete an
initial business combination prior to January 20, 2023. There is no assurance
that our plans to consummate an initial business combination will be successful
or successful within the period allotted to complete an initial business
combination. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
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The preponderance of the current liabilities (approximately $6,770,000) resulted
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. In addition, in an
attempt to preserve cash, beginning in November 2021, our Chief Operating
Officer and Chief Financial Officer, as well as our sponsor and certain service
providers agreed to defer cash payments for an indefinite period. Further, in
January 2022, we elected to pay certain insurance payments over a time payment
plan. As a result, we believe, but cannot assure, that we have sufficient
liquidity to complete an initial business combination.
We only have until January 20, 2023 to complete an initial business combination.
If we do not complete an initial business combination by January 20, 2023, we
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
$100,000 of such net interest to pay dissolution expenses) and (iii) as promptly
as reasonably possible following such redemption, dissolve and liquidate the
balance of our net assets to our creditors and remaining stockholders, as part
of our 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 our officers, directors or their affiliates
acquire shares of Class A common stock in or after our initial public offering,
they will be entitled to a pro rata share of the trust account upon our
redemption or liquidation in the event we do 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 our initial public offering.
Off-balance sheet financing arrangements
As of December 31, 2021, we had no obligations, assets or liabilities which
would be considered off-balance sheet arrangements. We did 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 entered into any agreements for non-financial assets.
Contractual obligations
At December 31, 2021, we did not have any long-term debt, capital lease
obligations, operating lease obligations or long-term liabilities. In connection
with our initial public offering, we entered into an Administrative Support
Agreement with Hennessy Capital Group LLC, an affiliate of our sponsor, pursuant
to which we have agreed to pay Hennessy Capital Group LLC $15,000 per month for
office space, utilities and secretarial and administrative support. Beginning in
December 2021, our sponsor agreed to defer the fee under this agreement
indefinitely.
Also, commencing on the date the securities are first listed on the Nasdaq
Capital Market, we have agreed to compensate each of our President and Chief
Operating Officer as well as our Chief Financial Officer $29,000 per month prior
to the consummation of our initial business combination, of which $14,000 per
month is payable upon the completion of our initial business combination and
$15,000 per month is payable currently for their services. Beginning in November
2021, our Chief Operating Officer and Chief Financial Officer has agreed to
defer cash payments for an indefinite period. During the year ended December 31,
2021, approximately $90,000 and $286,000 was paid and approximately $383,000 was
included in current liabilities as deferred compensation at December 31, 2021
for these obligations.
Upon completion of the initial business combination or our liquidation, we will
cease paying or accruing these monthly fees.
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In connection with identifying an initial business combination candidate and
negotiating an initial business combination, we 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 either directly or indirectly observable such as quoted prices for
similar instruments in active markets or quoted prices for identical or
similar instruments in markets that are not active; and
? Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own assumptions, such
as valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable.
In some circumstances, the inputs used to measure fair value might be
categorized within different levels of the fair value hierarchy. In those
instances, the fair value measurement is categorized in its entirety in the fair
value hierarchy based on the lowest level input that is significant to the fair
value measurement.
At inception on January 20, 2021 and 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.
Treasury zero-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, 2021, our 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 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 ($0.84 per 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).
Derivative warrant liabilities
We account for warrants as either equity-classified or liability-classified
instruments based on an assessment of the warrant's specific terms and
applicable authoritative guidance FASB 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 our 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.
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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 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 using a binomial lattice simulation
approach.
The difference between the estimated fair value at inception on January 20, 2021
($1.62 per warrant or approximately $25,204,000) and the estimated fair value at
December 31, 2021 ($0.83 per warrant or approximately $12,913,000) was $0.79 or
approximately $12,292,000. For reference, each $0.10 change in fair value of our
warrants translated to approximately $1,556,000. We are required to record the
warrants at fair value at each reporting period, with changes in fair value
recognized in the statement of operations.
Redeemable Common Stock:
As discussed in Note 4, all of the 34,500,000 public shares sold as part of the
units in our initial public offering contain a redemption feature which allows
for the redemption of public shares if we hold a stockholder vote or there is a
tender offer for shares in connection with an initial business combination. In
accordance with FASB ASC 480, redemption provisions not solely within our
control 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 we did not specify a maximum redemption threshold, our charter
provide that in no event will we redeem our public shares in an amount that
would cause our net tangible assets to be less than $5,000,001 upon the closing
of an initial 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 accompanying balance sheet. See also, Note 7
to the accompanying financial statements, regarding a revision to the
presentation of redeemable shares in a previously reported balance sheet.
We recognize changes in redemption value immediately as they occur and adjust
the carrying value of the securities at the end of each reporting period. Under
this method, the end of the reporting period is treated as though it is also the
redemption date for the security. Increases or decreases in the carrying amount
of redeemable Class A common stock are affected by adjustments to additional
paid-in capital. Accordingly, at December 31, 2021, 34,500,000 of the 34,500,000
public shares were classified outside of permanent equity. At December 31, 2020,
there were no shares of Class A common stock outstanding or redeemable. Class A
common stock subject to redemption consists of:
Gross proceeds of public offering $ 345,000,000
Less: Proceeds allocated to public warrants (13,973,000 )
Offering costs (19,050,000 )
Plus: Accretion of carrying value to redemption value 33,023,000
Class A common shares subject to redemption
$ 345,000,000
Factors That May Adversely Affect Our Results of Operations
Our results of operations and our ability to complete an initial business
combination may be adversely affected by various factors that could cause
economic uncertainty and volatility in the financial markets, many of which are
beyond our control. Our business could be impacted by, among other things,
downturns in the financial markets or in economic conditions, increases in oil
prices, inflation, increases in interest rates, supply chain disruptions,
declines in consumer confidence and spending, the ongoing effects of the
COVID-19 pandemic, including resurgences and the emergence of new variants, and
geopolitical instability, such as the military conflict in the Ukraine. We
cannot at this time fully predict the likelihood of one or more of the above
events, their duration or magnitude or the extent to which they may negatively
impact our business and our ability to complete an initial business combination.
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