Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

References to "we," "us," "Company" or "our Company" refer to LF Capital Acquisition Corp. II. 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 Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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 other filings with the SEC. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Part II-Other Information. Item 1a. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.





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Overview

We are an early-stage blank check company incorporated in February 2021 as a Delaware corporation and 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 completed our IPO on November 19, 2021. We intend to effectuate our initial business combination using cash from the proceeds of the IPO and the sale of the private placement warrants, our capital stock, debt or a combination of cash, stock and debt.

Since completing our IPO, we have reviewed, and continue to review, a number of opportunities to enter into an initial business combination with an operating business, but we are not able to determine at this time whether we will complete an initial business combination with any of the target businesses that we have reviewed or with any other target business. We presently have no revenue, have had losses since inception from incurring formation costs and have had no operations other than the active solicitation of a target business with which to complete an initial business combination. We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to raise capital or to complete our initial business combination will be successful.





Results of Operations

We have neither engaged in any operations nor generated any revenues to date. Our only activities through September 30, 2022 were organizational activities, those necessary to prepare for the IPO, described below, and, after our IPO, identifying a target company for an initial business combination. We do not expect to generate any operating revenues until after the completion of our initial 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 September 30, 2022, we had a net income of $753,223, which consisted of operating costs of $428,869, and income tax expense of $273,632, offset by a change in fair value of Convertible Note of $201,585, an unrealized gain on marketable securities held in the trust account of $1,253,561 and dividend income of $578.

For the nine months ended September 30, 2022, we had a net income of $280,860, which consisted of operating costs of $1,236,541, and income tax expense of $295,164, offset by a change in fair value of Convertible Note of $202,129, an unrealized gain on marketable securities held in the trust account of $1,609,766 and dividend income of $670.

For the three months ended September 30, 2021, we had a net loss of $5,341, which consisted solely of operating costs.

For the nine months ended September 30, 2021, we had a net loss of $12,688, which consisted solely of operating costs.





Liquidity and Going Concern

As of September 30, 2022, the Company had $307,984 in its operating bank account, $265,218,910 in securities held in the Trust Account to be used for a Business Combination or to repurchase or redeem its common stock in connection therewith and working capital of $315,917.





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In connection with the Company's assessment of going concern considerations in accordance with the authoritative guidance in FASB Accounting Standards Update ("ASU") Subtopic 205-40, "Presentation of Financial Statements-Going Concern," management has determined that should the Company be unable to complete a Business Combination, the mandatory liquidation and subsequent dissolution described in Note 1 of the financial statements that would follow, raises substantial doubt about the Company's ability to continue as a going concern. The Company has 15 months from the closing of the IPO (i.e., February 19, 2023) to consummate a Business Combination. It is uncertain that the Company will be able to consummate a Business Combination by the specified period. If a Business Combination is not consummated by February 19, 2023, there will be a mandatory liquidation and subsequent dissolution. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

Also, in connection with the Company's assessment of going concern considerations in accordance with the ASU 2014-15 management has determined that if the Company is unable to raise additional funds to alleviate liquidity needs as well as complete a Business Combination by February 19, 2023 then the Company will cease all operations except for the purpose of liquidating. The liquidity condition as well as the date for mandatory liquidation and subsequent dissolution raise substantial doubt about the Company's ability to continue as a going concern.

These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company's liquidity needs prior to the consummation of the IPO were satisfied through the payment of $25,000 from the Sponsor to cover certain offering costs on the Company's behalf in exchange for issuance of Founder Shares (Note 4) and a promissory note, as amended, from the Sponsor (see Note 4). Subsequent to the IPO, the Company's liquidity needs have been satisfied through a portion of the net proceeds from the Private Placement. Until the consummation of a Business Combination, the Company will be using the funds not held in the Trust Account for identifying and evaluating prospective acquisition candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the target business to acquire, and structuring, negotiating and consummating the Business Combination. In order to finance transaction costs in connection with a Business Combination, the Company will need to raise additional capital through loans or additional investments from its Sponsor, shareholders, officers, directors, or third parties. The Company's officers, directors and Sponsor may, but are not obligated to, loan the Company funds, from time to time or at any time, in whatever amount they deem reasonable in their sole discretion, to meet the Company's working capital needs At September 30, 2022, there was $625,000 of cumulative cash advanced under the convertible promissory note. The convertible promissory note was valued using the fair value method. The advances of $625,000 for the nine months ended September 30, 2022 were initially valued at $501,147 whereas the difference of $123,853 was recorded as a credit to stockholders' deficit. The change in the fair value of the note recorded in the statements of operations for the three and nine months ended September 30, 2022 were $201,585 and $202,129, respectively, resulting in a fair value of the convertible note of $299,018.

Off-Balance Sheet Arrangements

As of September 30, 2022, we had no obligations, assets or liabilities, which would be considered off-balance sheet arrangements.





Contractual Obligations

As of September 30, 2022, we do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay affiliate of our Sponsor a monthly fee of $15,000 for office space, utilities and secretarial and administrative and support. We began incurring these fees on consummation of the IPO and will continue to incur these fees monthly until the earlier of the completion of our initial business combination and our liquidation.

The underwriter is entitled to a deferred fee of $0.35 per unit sold in the IPO, or $9,056,250 in the aggregate. This deferred fee will be waived by the underwriter in the event that the Company does not complete an initial business combination, subject to the terms of the underwriting agreement with respect to the Company's IPO.

Critical Accounting Policies and Estimates

The preparation of the unaudited condensed financial statements in conformity with US 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 unaudited condensed 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 policies:





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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 ASC 480. Common stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features 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, our Class A Common Stock subject to possible redemption is presented as temporary equity, outside of the stockholders' equity section of our balance sheets. The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable Class A Common Stock to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable Class A Common Stock are affected by charges against additional paid in capital and accumulated deficit.





Convertible Promissory Note

The Company accounts for its convertible promissory note under ASC 815, "Derivatives and Hedging" ("ASC 815"). Under 815-15-25, the election can be at the inception of a financial instrument to account for the instrument under the fair value option under ASC 825, "Financial Instruments" ("ASC 825"). The Company has made such election for its convertible promissory note. Using fair value option, the convertible promissory note is required to be recorded at its initial fair value on the date of issuance and each balance sheet date thereafter. Differences between the face value of the note and fair value at issuance are recognized as either an expense in the condensed statements of operations (if issued at a premium) or as a capital contribution (if issued at a discount). Changes in the estimated fair value of the notes are recognized as non-cash gains or losses in the condensed statements of operations.

Net Income (Loss) Per Ordinary Share

The Company follows the two-class method to calculate earnings per ordinary share. Net loss per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period, excluding shares of common stock subject to forfeiture by the Sponsor. The calculation of diluted income (loss) per share does not consider the effect of the warrants issued in connection with the IPO and warrants issued in the Private Placement since the exercise of these warrants are contingent upon the occurrence of future events. The calculation also does not include the warrants that could be issued as a result of the conversion option in the convertible promissory note. For the three and nine months ended September 30, 2022, the Company did not have any dilutive securities and/or other contracts that could, potentially, be exercised or converted into shares of common stock and then share in the earnings of the Company. As a result, diluted income (loss) per share is the same as basic income (loss) per share for the period presented.





Recent Accounting Standards

The Company has reviewed recent accounting pronouncements and concluded that they are either not applicable to the Company or no material effect is expected on the unaudited condensed financial statements as a result of future adoption.





Recent Developments

On April 13, 2022, the Sponsor issued a Convertible Note, pursuant to which the Company may borrow up to an aggregate principal amount of $1,500,000. The Convertible Note is non-interest bearing and payable on the Maturity Date.





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At the option of the Sponsor, at any time on or prior to the Maturity Date, any amounts outstanding under the Convertible Note (or any portion thereof) up to $1,500,000 in the aggregate, may be converted into warrants to purchase Class A Common Stock of the Company at the Conversion Price. As of September 30, 2022, there is an amount outstanding of $625,000 under the Convertible Note, fair valued at $299,018.

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