UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from to
Commission File Number:
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices, including zip code) |
| (Registrant’s telephone number, including area code) |
| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Units, each consisting of one share of Class A Common Stock and one-fifth of one Redeemable Warrant | FRXB.U | The New York Stock Exchange | ||
| Redeemable Warrants, each exercisable for one share of Class A Common Stock for $11.50 per share | FRXB WS | The New York Stock Exchange |
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☐ Large accelerated filer | ☐ Accelerated filer | |
| ☒ | ||
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes
As of August 15, 2022, there
were
FOREST ROAD ACQUISITION CORP. II
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2022
TABLE OF CONTENTS
i
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FOREST ROAD ACQUISITION CORP. II
CONDENSED BALANCE SHEETS
| June 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Prepaid expenses - non-current | ||||||||
| Investments held in trust account | ||||||||
| Total noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities, Common Stock Subject to Possible Redemption and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | (1) | |||||
| Taxes payable | ||||||||
| Total current liabilities | ||||||||
| Warrant liabilities | ||||||||
| Deferred liabilities | (1) | |||||||
| Deferred underwriters’ discount payable | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Class A common stock subject to possible redemption, $ | ||||||||
| Stockholders’ Deficit: | ||||||||
| Preferred stock, $ | ||||||||
| Class A common stock, $ | ||||||||
| Class B common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities, common stock subject to possible redemption and stockholders’ deficit | $ | $ | ||||||
| (1) | Deferred liabilities as of December 31, 2021 consist of deferred legal fees that were previously carried in accounts payable and accrued expenses. These were reclassified to conform to the current year’s presentation. See Note 2 (Reclassifications). |
The accompanying notes are an integral part of these unaudited condensed financial statements.
1
FOREST ROAD ACQUISITION CORP. II
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| General and administrative costs | $ | $ | $ | $ | ||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Change in fair value of warrant liabilities | ||||||||||||||||
| Loss on sale of private placement warrants | ( | ) | ||||||||||||||
| Offering costs allocated to warrants | ( | ) | ||||||||||||||
| Interest earned on trust account | ||||||||||||||||
| Total other income (expense), net | ||||||||||||||||
| Income before provision for income taxes | ||||||||||||||||
| Provision for income taxes | ( | ) | ( | ) | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| $ | $ | $ | $ | |||||||||||||
| $ | $ | $ | $ | |||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
2
FOREST ROAD ACQUISITION CORP. II
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022
| Common Stock | Additional | Total | ||||||||||||||||||
| Class B | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net income | — | |||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Accretion of Class A common stock subject to possible redemption | — | — | — | ( | ) | ( | ) | |||||||||||||
| Net income | — | |||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021
| Common Stock | Additional | Total | ||||||||||||||||||
| Class B | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Forfeiture of | ( | ) | ( | ) | ||||||||||||||||
| Accretion of Class A common stock subject to possible redemption | — | ( | ) | ( | ) | ( | ) | |||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net income | — | |||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
3
FOREST ROAD ACQUISITION CORP. II
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the six months ended June 30, 2022 | For the six months ended June 30, 2021 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income loss to net cash used in operating activities: | ||||||||
| Interest earned on trust account | ( | ) | ( | ) | ||||
| Change in fair value of warrant liabilities | ( | ) | ( | ) | ||||
| Change in deferred liabilities | ||||||||
| Loss on sale of private placement warrants | ||||||||
| Offering costs allocated to warrants | ||||||||
| Changes in current assets and current liabilities: | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Taxes payable | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Investment of cash into trust account | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from sale of common stock in initial public offering | ||||||||
| Proceeds from issuance of private placement warrants | ||||||||
| Proceeds from issuance of promissory note | ||||||||
| Repayment of promissory note to related party | ( | ) | ||||||
| Payments of offering costs | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net Change in Cash | ( | ) | ||||||
| Cash - Beginning of period | ||||||||
| Cash - End of period | $ | $ | ||||||
| Supplemental disclosure of noncash financing activities: | ||||||||
| Initial value of Class A common stock subject to possible redemption | $ | $ | ||||||
| Initial value of warrant liabilities | $ | $ | ||||||
| Deferred underwriters’ discount payable charged to additional paid-in capital | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
4
FOREST ROAD ACQUISITION CORP. II
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1 - Organization and Business Operations
Organization and General
Forest Road Acquisition Corp. II (the “Company”) was incorporated in Delaware on December 23, 2020. The Company was formed for the purpose of entering into a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “Business Combination”). The Company is not limited to a specific industry or sector for purposes of consummating a Business Combination; however, the Company intends to concentrate its efforts on identifying businesses in the technology, media and telecommunications industry. The Company is an early stage and emerging growth company and, as such, the Company is subject to all of the risks associated with early stage and emerging growth companies.
As of June 30, 2022, the Company had not yet commenced any operations. All activity through June 30, 2022, relates to the Company’s formation, the initial public offering (“IPO”) described below, and identifying a target company for a Business Combination. The Company will not generate any operating revenues until after the completion of its Business Combination, at the earliest. The Company generates non-operating income in the form of interest income on investments from the proceeds derived from the IPO.
The Company’s sponsor
is Forest Road Acquisition Sponsor II LLC, a Delaware limited liability company (the “Sponsor”). The registration statement
for the Company’s IPO was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on March 9,
2021 (the “Effective Date”). On March 12, 2021, the Company consummated the IPO of
Simultaneously with the closing
of the IPO, the Company consummated the private placement (“Private Placement”) with the Sponsor of an aggregate of
Transaction costs amounted
to $
Trust Account
Following the closing of
the IPO on March 12, 2021, an amount of $
Initial Business Combination
The Company’s management
has broad discretion with respect to the specific application of the net proceeds of the IPO and the sale of the Private Placement Warrants,
although substantially all of the net proceeds are intended to be applied generally toward consummating a Business Combination. There
is no assurance that the Company will be able to complete a Business Combination successfully. The Company must complete a Business Combination
with one or more operating businesses or assets that together have an aggregate fair market value equal to at least
5
The Company will provide
its holders of the outstanding Public Shares (the “public stockholders”) with the opportunity to redeem all or a portion of
their Public Shares upon the completion of a Business Combination either
The Company will only proceed
with a Business Combination if the Company has net tangible assets of at least $
If, however, stockholder approval of the transaction is required by applicable law or stock exchange rules, or the Company decides to obtain stockholder approval for business or other reasons, the Company will offer to redeem shares in conjunction with a proxy solicitation pursuant to the proxy rules and not pursuant to the tender offer rules. If the Company seeks stockholder approval in connection with a Business Combination, the Sponsor has agreed to vote its Founder Shares (as defined in Note 5), and any Public Shares purchased during or after the IPO in favor of approving a Business Combination. Additionally, each public stockholder may elect to redeem its Public Shares irrespective of whether they vote for or against the proposed transaction or do not vote at all.
Notwithstanding the above,
if the Company seeks stockholder approval of a Business Combination and it does not conduct redemptions pursuant to the tender offer rules,
the Amended and Restated Certificate of Incorporation provides that a public stockholder, together with any affiliate of such stockholder
or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted from redeeming its shares with respect to more
than an aggregate of
There will be no redemption rights or liquidating distributions with respect to the Private Placement Warrants, which will expire worthless if the Company fails to complete a Business Combination within the Combination Period. The Sponsor has agreed to waive its liquidation rights with respect to the Founder Shares if the Company fails to complete a Business Combination within the Combination Period. However, if the Sponsor acquires Public Shares in or after the IPO, such Public Shares will be entitled to liquidating distributions from the Trust Account if the Company fails to complete a Business Combination within the Combination Period.
Liquidity and Going Concern
As of June 30, 2022, the
Company had cash outside the Trust Account of $
6
The Company anticipates that
the $
The Company may need to raise additional funds in order to meet the expenditures required for operating its business. If the Company’s estimates of the costs of undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, the Company may have insufficient funds available to operate its business prior to the Business Combination. Moreover, the Company will need to raise additional capital through loans from its Sponsor, officers, directors, or third parties. None of the Sponsor, officers or directors is under any obligation to advance funds to, or to invest in, the Company. If the Company is unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of its business plan, and reducing overhead expenses. The Company cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all. The Sponsor has indicated that it will provide financial support to the Company to satisfy all working capital obligations as needed.
In connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, “Presentation of Financial Statements - Going Concern,” management has determined that the mandatory liquidation date, subsequent dissolution, and liquidity condition raise substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to complete a Business Combination by March 12, 2023, then the Company will cease all operations except for the purpose of liquidating. No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after March 12, 2023. The Company intends to complete a Business Combination before the mandatory liquidation date.
Risks and Uncertainties
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. As of the date of these unaudited condensed financial statements, the impact of this action and related sanctions on the world economy is not determinable. While it is reasonably possible that the action could have a negative effect on the Company’s financial condition, results of operations, and cash flows, the specific impact is not readily determinable as of the date of the unaudited condensed financial statements.
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 the Company’s financial position, results of its operations and/or search for a target company, the specific impact is not readily determinable as of the date of the unaudited condensed financial statements.
The unaudited condensed financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Note 2 - Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements of the Company are presented in U.S. dollars in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X of the SEC. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the period presented.
7
The accompanying unaudited condensed financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2021 and filed with the SEC on April 15, 2022. The interim results for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
Reclassifications
Certain reclassifications have been made to the historical financial statements to conform to the current year’s presentation. Such reclassifications have no effect on net income (loss) as previously reported.
Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, 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 election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a 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.
Use of Estimates
The preparation of the accompanying unaudited condensed financial statements in conformity with 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 financial statements and the reported amounts of revenues and expenses during the reporting periods.
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 accounting estimates included in these unaudited condensed financial statements is the determination of the fair value of the warrant liabilities. Such estimates may be subject to change as more current information becomes available and accordingly, the actual results could differ significantly from those estimates.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Company did not have any cash equivalents as of June 30, 2022 and December 31, 2021.
Investments Held in the Trust Account
At June 30, 2022 and December 31, 2021, the assets held in the Trust Account were money market funds. The money market funds are presented on the condensed balance sheets at fair value at the end of the reporting period. Gains and losses resulting from the change in fair value of the money market funds are included in interest income on marketable securities held in the Trust Account in the accompanying condensed statements of operations.
Concentration of Credit Risk
Financial instruments that
potentially subject the Company to concentrations of credit risk consist of a cash account in a financial institution, which, at times,
may exceed the Federal Deposit Insurance Corporation coverage limit of $
Class A Common Stock Subject to Possible Redemption
The Company accounts for
its Class A common stock subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities
from Equity” (“ASC 480”). Shares of Class A common stock subject to mandatory redemption (if any) 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
the Company’s control) are classified as temporary equity. At all other times, common stock is classified as stockholders’
equity. The Company’s Class A common stock features certain redemption rights that are considered to be outside of the Company’s
control and subject to the occurrence of uncertain future events. Accordingly, as of June 30, 2022 and December 31, 2021,
8
Under ASC 480-10-S99, the Company has elected to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of the reporting period. This method would view the end of the reporting period as if it were also the redemption date of the security. Effective with the closing of the IPO, the Company 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 per Share of Common Stock
The Company complies with
the 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. Earnings and losses are shared pro rata between the two
classes of stock. This presentation assumes a Business Combination as the most likely outcome. The
| For the three months ended June 30, 2022 | For the three months ended June 30, 2021 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| Basic and diluted net income per share: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net income | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| For the six months ended June 30, 2022 | For the six months ended June 30, 2021 | |||||||||||||||
| Class A | Class B | Class A | Class B | |||||||||||||
| Basic and diluted net income per share: | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net income | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Offering Costs
The Company complies
with the requirements of ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A- “Expense of Offering”.
Offering costs consist of legal, accounting, underwriting fees and other costs that are directly related to the IPO. Offering costs
are allocated to the separable financial instruments issued in the IPO based on a relative fair value basis, compared to total
proceeds received. Offering costs associated with warrant liabilities are expensed as incurred, presented as non-operating expenses
in the condensed statement of operations. Offering costs associated with the shares of Class A common stock were charged against the
carrying value of the shares of Class A common stock upon the completion of the IPO. The Company classifies deferred underwriting
commissions as noncurrent liabilities as their liquidation is not reasonably expected to require the use of current assets or
require the creation of current liabilities. Offering costs amounting to $
Warrant Liabilities
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815-15. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.
The Company
accounts for its
Fair Value of Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under the FASB ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the condensed balance sheets, except the warrant liabilities (see Note 9).
9
I
ASC 740-270-25-2 requires
that an annual effective tax rate be determined and such annual effective rate applied to year to date income in interim periods under
ASC 740-270-30-5. The Company accounts for income taxes under ASC 740, “Income Taxes.” ASC 740, Income Taxes, requires the
recognition of deferred tax assets and liabilities for both the expected impact of differences between the unaudited condensed financial
statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit
carry forwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion
of deferred tax assets will not be realized. As of June 30, 2022 and December 31, 2021, the Company’s deferred tax asset had a full
valuation allowance recorded against it. The Company’s effective tax rate was
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position 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. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of June 30, 2022 and 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 has identified the United States as its only “major” tax jurisdiction. The Company is subject to income taxation by major taxing authorities since inception. These examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Recent Accounting Standards
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 converted method for all convertible instruments. ASU 2020-06 is effective January 1, 2024 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company had not adopted ASU 2020-06 as of June 30, 2022. The Company is still evaluating the impact that ASU 2020-06 would have on its unaudited condensed financial statements.
The Company’s 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 Company’s unaudited condensed financial statements.
Note 3 - Initial Public Offering
On March 12, 2021, the Company
sold
All of the
10
If it is probable that the equity instrument will become redeemable, the Company has the option to either accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the instrument will become redeemable, if later) to the earliest redemption date of the instrument or to recognize changes in the redemption value immediately as they occur and adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. The Company recognizes changes in redemption value immediately as they occur. Immediately upon the closing of the IPO, the Company recognized the accretion from initial book value to redemption amount value. The change in the carrying value of redeemable common stock resulted in charges against additional paid-in capital and accumulated deficit.
As of June 30, 2022 and December 31, 2021, the common stock subject to possible redemption reflected on the condensed balance sheets was reconciled in the following table:
| Gross proceeds from IPO | $ | |||
| Less: | ||||
| Proceeds allocated to Public Warrants | ( | ) | ||
| Common stock issuance costs | ( | ) | ||
| Plus: | ||||
| Accretion of carrying value to redemption value | ||||
| Common stock subject to possible redemption as of December 31, 2021 | $ | |||
| Plus: | ||||
| Accretion of carrying value to redemption value | ||||
| Common stock subject to possible redemption as of June 30, 2022 | $ |
Note 4 - Private Placement
Simultaneously with the closing
of the IPO, the Sponsor purchased an aggregate of
Note 5 - Related Party Transactions
Founder Shares
On December 23, 2020, the
Sponsor paid $
Promissory Note – Related Party
The Sponsor agreed to loan
the Company an aggregate of up to $
Administrative Service Fee
The Company has agreed, commencing
on the effective date of the IPO through the earlier of the Company’s consummation of a Business Combination or its liquidation,
to pay an affiliate of the Sponsor a monthly fee of $
Related Party Loans
In addition, in order to
finance transaction costs in connection with a Business Combination, the Sponsor may, but is not obligated to, loan the Company funds
as may be required (“Working Capital Loans”). If the Company completes a Business Combination, the Company may repay the Working
Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans may be repaid only
out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of
proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to
repay the Working Capital Loans. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and
no written agreements exist with respect to such loans. The Working Capital Loans would either be repaid upon consummation of a Business
Combination, without interest, or, at the lender’s discretion, up to $
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Note 6 - Commitments & Contingencies
Registration Rights
The holders of the Founder
Shares, Private Placement Warrants, and warrants that may be issued upon conversion of Working Capital Loans (and any shares of Class
A common stock issuable upon the exercise of the Private Placement Warrants or warrants issued upon conversion of the Working Capital
Loans and upon conversion of the Founder Shares) are entitled to registration rights pursuant to a registration rights agreement signed
on the effective date of the IPO requiring the Company to register such securities for resale (in the case of the Founder Shares, only
after conversion to shares of Class A common stock). The holders of at least
Underwriting Agreement
On March 12, 2021, the underwriters
were paid a cash underwriting fee of
In addition, $0.35 per unit, or approximately $12,250,000 in the aggregate, will be payable to the underwriters for deferred underwriting commissions. 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.
Note 7 - Warrants
Public Warrants may only be exercised for a whole number of shares. No fractional warrants will be issued upon separation of the Units and only whole warrants will trade. The Public Warrants will become exercisable on the later of (a) 12 months from the closing of the IPO and (b) 30 days after the completion of a Business Combination. The Company will not be obligated to deliver any shares of Class A common stock pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act with respect to the Class A common stock underlying the warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration. No warrant will be exercisable and the Company will not be obligated to issue any shares of Class A common stock upon exercise of a warrant unless the share of Class A common stock issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants. The Company has agreed that as soon as practicable, but in no event later than 15 business days after the closing of a Business Combination, it will use its best efforts to file with the SEC a registration statement, under the Securities Act, registering the Class A common stock issuable upon exercise of the warrants. The Company will use its best efforts to cause the same to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration of the warrants in accordance with the provisions of the warrant agreement. If a registration statement covering the shares of Class A common stock issuable upon exercise of the warrants is not effective by the 60th business day after the closing of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption.
Notwithstanding the above, if the Class A common stock is at the time of any exercise of a warrant not listed on a national securities exchange such that it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of public warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, the Company will not be required to file or maintain in effect a registration statement, but will use its best efforts to qualify the shares under applicable blue sky laws to the extent an exemption is not available.
Redemption of warrants for cash. Once the warrants become exercisable, the Company may call the warrants for redemption:
| ● | in whole and not in part; | |
| ● | at a price of $ | |
| ● | upon not less than 30 days’ prior written notice of redemption to each warrant holder; and | |
| ● | if, and only if, the closing price of the common stock equals or exceeds $ |
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If and when the warrants become redeemable by the Company, it may exercise its redemption right even if the Company is unable to register or qualify the underlying securities for sale under all applicable state securities laws.
If the Company calls the Public Warrants for redemption for cash, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, except as described below, the warrants will not be adjusted for issuance of common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire worthless.
In addition, if (x) the
Company issues additional shares of Class A common stock or equity-linked securities for capital raising purposes in connection with
the closing of a Business Combination at an issue price or effective issue price of less than $
The Private Placement Warrants will be identical to the Public Warrants underlying the Units being sold in the IPO, except that the Private Placement Warrants and the shares of common stock issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or saleable until 30 days after the completion of a Business Combination, subject to certain limited exceptions, and will be entitled to certain registration rights (see Note 6). Additionally, the Private Placement Warrants will be exercisable for cash or on a cashless basis, at the holder’s option, and be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company in all redemption scenarios and exercisable by such holders on the same basis as the Public Warrants.
Note 8 - Stockholders’ Deficit
Preferred Stock
- The Company is authorized to issue a total of
Class A Common Stock
- The Company is authorized to issue a total of
Class B Common Stock
- The Company is authorized to issue a total of
Holders of Class A common
stock and Class B common stock will vote together as a single class on all matters submitted to a vote of stockholders except as
required by law. The shares of Class B common stock will automatically convert into shares of Class A common stock at the time
of a Business Combination on a one-for-one basis, subject to adjustment. In the case that additional shares of Class A common stock
or equity-linked securities are issued or deemed issued in connection with a Business Combination, the number of shares of Class A
common stock issuable upon conversion of all Founder Shares will equal, in the aggregate, on an as-converted basis,
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Note 9 - Fair Value Measurements
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. |
Investments Held in Trust Account
As of June 30, 2022 and December
31, 2021, the investments in the Trust Account consisted of approximately $
Fair Value Measurements
The Company’s permitted investments consist of U.S. money market funds. Fair values of these investments are determined by Level 1 inputs utilizing quoted prices (unadjusted) in active markets for identical assets. The Company’s initial value of the warrant liability was based on a valuation model utilizing management judgment and pricing inputs from observable and unobservable markets with less volume and transaction frequency than active markets and classified as level 3.
In April 2021, the Public Warrants began trading on the New York Stock Exchange and the Public Warrants were reclassified as Level 1 due to the use of an observable market price of these warrants. The Public Warrants were previously classified as Level 3 due to the lack of an observable market price for the warrants and initially valued using the Black-Scholes Option Pricing Model.
The Company utilizes the Black-Scholes Option Pricing Model to value the Private Placement Warrants at each reporting period, with changes in fair value recognized in the condensed statements of operations. The estimated fair value of the Private Placement Warrant liability is determined using Level 3 inputs.
The aforementioned warrant liabilities are not subject to qualified hedge accounting.
The following table presents fair value information as of June 30, 2022 of the Company’s financial assets and liabilities, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets | ||||||||||||||||
| Investments held in Trust Account - U.S. Money Market | $ | $ | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||||
| Public warrant liability | $ | $ | $ | $ | ||||||||||||
| Private placement warrant liability | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The following table presents fair value information as of December 31, 2021 of the Company’s financial assets and liabilities, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets | ||||||||||||||||
| Investments held in Trust Account - U.S. Money Market | $ | $ | $ | $ | ||||||||||||
| Liabilities | ||||||||||||||||
| Public warrant liability | $ | $ | $ | $ | ||||||||||||
| Private placement warrant liability | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
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The following tables presents the changes in the fair value of the Company’s Level 3 financial instruments that are measured at fair value for the three and six months ended June 30, 2022 and 2021:
| Fair value as of December 31, 2021 | $ | |||
| Change in fair value | ( | ) | ||
| Fair value as of March 31, 2022 | $ | |||
| Change in fair value | ( | ) | ||
| Fair value as of June 30, 2022 | $ |
| Fair value as of December 31, 2020 | $ | |||
| Initial measurement on March 12, 2021 | ||||
| Change in fair value | ( | ) | ||
| Fair value as of March 31, 2021 | $ | |||
| Transfer of Public Warrants to Level 1 | ( | ) | ||
| Change in fair value | ( | ) | ||
| Fair value as of June 30, 2021 | $ |
Transfers to/from Levels
1, 2 and 3 are recognized at the beginning of the reporting period in which a change in valuation technique or methodology occurs. The
estimated fair value of the Public Warrants transferred from a Level 3 measurement to a Level 1 fair value measurement during the three
and six months ended June 30, 2021 was $
Inherent in a binomial options pricing model are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its shares of common stock based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is 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 is based on the historical rate, which the Company anticipates to remain at zero.
The following table provides quantitative information regarding Level 3 fair value measurements:
| As of June 30, 2022 | As of December 31, 2021 | |||||||
| Stock price | $ | $ | ||||||
| Strike price | $ | $ | ||||||
| Term (in years) | ||||||||
| Volatility | % | % | ||||||
| Risk-free rate | % | % | ||||||
| Dividend yield | % | % | ||||||
The primary significant unobservable input used in the fair value measurement of the Company’s Private Placement Warrants is the expected volatility of the common stock. Significant increases (decreases) in the expected volatility in isolation would result in a significantly higher (lower) fair value measurement.
Note 10 - Subsequent Events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date up to the date that the unaudited condensed financial statements were issued. Based on the Company’s review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References to the “Company,” “us,” “our” or “we” refer Forest Road Acquisition Corp. II. 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 “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. When used in this report, 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. All subsequent written or oral forward-looking statements attributable to us or persons acting on the Company’s 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 unaudited condensed 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.
Results of Operations and Known Trends or Future Events
We have neither engaged in any operations nor generated any revenues to date. Our only activities since inception have been organizational activities, those necessary to prepare for our IPO and identifying a target company for our initial Business Combination. We do not expect to generate any operating revenues until after completion of our initial Business Combination. We generate non-operating income in the form of interest income on cash and cash equivalents 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 expenses as we conduct due diligence on prospective Business Combination candidates.
For the three months ended June 30, 2022, we had net income of $3,496,280. We incurred $254,163 of general and administrative costs and a provision for income tax of $15,783. We had investment income of $444,587 from investments held in the Trust Account and change in the fair value of our warrants that generated $3,321,639 in income.
For the six months ended June 30, 2022, we had net income of $5,801,130. We incurred $540,651 of general and administrative costs and a provision for income tax of $15,783. We had investment income of $ 475,790 from investments held in the Trust Account and change in the fair value of our warrants that generated $5,881,774 in income.
For the three months ended June 30, 2021, we had net income of $2,390,597. We incurred $203,732 of general and administrative costs. We had investment income of $8,727 from investments held in the Trust Account and change in the fair value of our warrants that generated $2,585,602 in income.
For the six months ended June 30, 2021, we had net income of $1,836,182. We incurred $253,974 of general and administrative costs. We had investment income of $10,357 from investments held in the Trust Account and change in the fair value of our warrants that generated $7,211,201 in income. We recognized a loss on the sale of Private Placement Warrants of $4,376,708, resulting from the initial fair value of the Private Placement Warrants exceeding the cash received during the private placement. We also recognized $754,694 of offering costs that were originally recorded against stockholders’ equity (deficit) to expenses that were related to the issuance of the warrants.
Liquidity and Capital Resources
As of June 30, 2022, we had approximately $0.1 million in our operating bank account, and working capital of approximately $0.2 million, excluding taxes. All remaining cash held in the Trust Account is generally unavailable for our use, prior to an initial Business Combination, and is restricted for use either in a Business Combination or to redeem common stock. As of June 30, 2022, $278,818 of the funds in the Trust Account were available to be withdrawn to pay taxes.
Through June 30, 2022, our liquidity needs were satisfied through receipt of $25,000 from the sale of the Founder Shares, advances from the Sponsor in an aggregate amount of $12,500 and the remaining net proceeds from the IPO and the sale of the Private Placement Warrants.
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The $130,340 outside of the Trust Account as of June 30, 2022 may not be sufficient to allow us to operate for at least the next 12 months from the issuance of the financial statements, assuming that a Business Combination is not consummated during that time. Until consummation of our Business Combination, we will be using the funds not held in the Trust Account, and any additional working capital loans from the Sponsor, our officers and directors, or their respective affiliates, for identifying and evaluating prospective acquisition candidates, performing business due diligence on prospective target businesses, traveling to and from the offices, plants or similar locations of prospective target businesses, reviewing corporate documents and material agreements of prospective target businesses, selecting the target business to acquire and structuring, negotiating and consummating the Business Combination.
We may need to raise additional funds in order to meet the expenditures required for operating our business. If our estimates of the costs of undertaking in-depth due diligence and negotiating an initial Business Combination is less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to the Business Combination. Moreover, we may need to raise additional capital through loans from our Sponsor, officers, directors, or third parties. None of the Sponsor, officers or directors is under any obligation to advance funds to, or to invest in, us. If we are unable to raise additional capital, we may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations, suspending the pursuit of our business plan, and reducing overhead expenses. We cannot provide any assurance that new financing will be available to us on commercially acceptable terms, if at all. The Sponsor has indicated that it will provide financial support to the Company to satisfy all working capital obligations as needed.
In connection with the Company’s assessment of going concern considerations in accordance with FASB ASC Topic 205-40, “Presentation of Financial Statements - Going Concern,” management has determined that the mandatory liquidation date and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern. If the Company is unable to complete a Business Combination by March 12, 2023, the Company will cease all operations except for the purpose of liquidating. No adjustments have been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after March 12, 2023. The Company intends to complete a Business Combination before the mandatory liquidation date.
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed financial statements in conformity with 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 financial statements and the reported amounts of revenues and 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 accounting estimates included in these unaudited condensed financial statements is the determination of the fair value of the warrant liabilities. Such estimates may be subject to change as more current information becomes available and accordingly, the actual results could differ significantly from those estimates.
Derivative Warrant Liabilities
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815-15. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.
We issued an aggregate of 13,000,000 warrants in connection with our IPO and private placement, which are recognized as derivative liabilities in accordance with ASC 815-40. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts the instruments to fair value at each reporting period. The liabilities are subject to remeasurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s unaudited condensed statements of operations. The fair value of warrants issued by the Company in connection with the private placement has been estimated using the Black-Scholes Option Pricing Method at each measurement date. The Company updated the measurement as of June 30, 2022.
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Class A Common Stock Subject to Possible Redemption
We account for our shares of Class A common stock subject to possible redemption in accordance with the guidance in ASC Topic 480 “Distinguishing Liabilities from Equity.” Class A common stock subject to mandatory redemption (if any) is classified as a liability instrument and is measured at fair value. Conditionally redeemable shares of common stock (including shares of 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, shares of common stock are classified as stockholders’ deficit. Our shares of common stock feature certain redemption rights that is considered to be outside of our control and subject to the occurrence of uncertain future events. Accordingly, Class A common stock subject to possible redemption is presented at redemption value as temporary equity, outside of the stockholders’ deficit section of our condensed balance sheets.
We recognize changes in redemption value immediately as they occur and adjusts the carrying value of redeemable shares of Class A common stock to equal the redemption value. Increases or decreases in the carrying amount of redeemable shares of Class A common stock are affected by charges against additional paid in capital and accumulated deficit.
Offering Costs
The Company complies with the requirements of ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A- “Expense of Offering”. Offering costs consist of legal, accounting, underwriting fees and other costs that are directly related to the IPO. Offering costs are allocated to the separable financial instruments issued in the IPO based on a relative fair value basis, compared to total proceeds received. Offering costs associated with warrant liabilities are expensed as incurred, presented as non-operating expenses in the condensed statement of operations. Offering costs associated with the shares of Class A common stock were charged against the carrying value of the shares of Class A common stock upon the completion of the IPO. The Company classifies deferred underwriting commissions as noncurrent liabilities as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities. Offering costs amounting to $19,691,331 (consisting of $7,000,000 in underwriting commissions, $12,250,000 of deferred underwriters’ fee and $441,331 of other offering costs) were incurred, of which $754,694 was allocated to warrants and expensed and $18,936,637 were charged to temporary equity.
Net Income Per Share of Common Stock
The Company complies with the accounting and disclosure requirements of 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. Earnings and losses are shared pro rata between the two classes of stock. Net income per share of common stock is computed by dividing net income by the weighted average number of common stock outstanding for the period. We have not considered the effect of the warrants sold in the IPO and private placement to purchase 13,000,000 shares of Class A common stock in the calculation of diluted income per share, since the exercise of the warrants are contingent upon the occurrence of future events and the inclusion of such warrants would be anti-dilutive.
Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 converted method for all convertible instruments. ASU 2020-06 is effective January 1, 2024 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company had not adopted ASU 2020-06 as of June 30, 2022. The Company is still evaluating the impact that ASU 2020-06 would have on its unaudited 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 unaudited condensed financial statements.
Off-Balance Sheet Arrangements
As of June 30, 2022 and December 31, 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
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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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officers and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended June 30, 2022, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officers and principal financial officer have concluded that as of June 30, 2022, our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective, solely due to the material weakness in our internal control over financial reporting related to the Company’s accounting for complex financial instruments. Our internal control over financial reporting did not result in the proper accounting of the Company’s accounting for complex financial instruments and, due to its impact on our financial statements, we determined it to be a material weakness.
Management has implemented remediation steps to improve our internal control over financial reporting. Specifically, we expanded and improved our review process for complex securities and related accounting standards. We plan to further improve this process by enhancing access to accounting literature, identification of third-party professionals with whom to consult regarding complex accounting applications and consideration of additional staff with the requisite experience and training to supplement existing accounting professionals.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management has identified a material weakness in internal controls related to the accounting for complex financial instruments. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to continue to enhance our system of evaluating and implementing the accounting standards that apply to our financial statements, including through enhanced analyses by our personnel and third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
As of the date of this report, except as set forth below, there have been no material changes from the risk factors previously disclosed in our final prospectus dated March 9, 2021 and filed with the SEC on March 11, 2021, our Annual Report on Form 10-K for the year ended December 31, 2021 and filed with the SEC on April 15, 2022, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 and filed with the SEC on May 16, 2022.
Recent increases in inflation and interest rates in the United States and elsewhere could make it more difficult for us to consummate an initial Business Combination.
Recent increases in inflation and interest rates in the United States and elsewhere may lead to increased price volatility for publicly traded securities, including ours, and may lead to other national, regional and international economic disruptions, any of which could make it more difficult for us to consummate an initial Business Combination.
Military conflict in Ukraine or elsewhere may lead to increased and price volatility for publicly traded securities, which could make it more difficult for us to consummate an initial Business Combination.
Military conflict in Ukraine or elsewhere may lead to increased and price volatility for publicly traded securities, including ours, and to other national, regional and international economic disruptions and economic uncertainty, any of which could make it more difficult for us to identify a Business Combination target and consummate an initial Business Combination on acceptable commercial terms or at all.
There may be significant competition for us to find an attractive target for an initial Business Combination. This could increase the costs associated with completing our initial Business Combination and may result in our inability to find a suitable target for our initial Business Combination.
In recent years, the number of special purpose acquisition companies (“SPACs”) that have been formed has increased substantially. Many companies have entered into business combinations with SPACs, and there are still many SPACs seeking targets for their initial business combination, as well as additional SPACs currently in registration. As a result, at times, fewer attractive targets may be available, and it may require more time, effort and resources to identify a suitable target for an initial business combination.
In addition, because there are a large number of SPACs seeking to enter into an initial business combination with available targets, the competition for available targets with attractive fundamentals or business models may increase, which could cause target companies to demand improved financial terms. Attractive deals could also become more scarce for other reasons, such as economic or industry sector downturns, geopolitical tensions or increases in the cost of additional capital needed to close business combinations or operate targets post-business combination. This could increase the cost of, delay or otherwise complicate or frustrate our ability to find a suitable target for and/or complete our initial Business Combination and may result in our inability to consummate an initial Business Combination on terms favorable to our investors altogether.
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The SEC has recently issued proposed rules relating to certain activities of SPACs. Certain of the procedures that we, a potential Business Combination target, or others may determine to undertake in connection with such proposals may increase our costs and the time needed to complete our initial Business Combination and may constrain the circumstances under which we could complete an initial Business Combination. The need for compliance with the SPAC Rule Proposals (as defined below) may cause us to liquidate the funds in the Trust Account or liquidate the Company at an earlier time than we might otherwise choose.
On March 30, 2022, the SEC issued proposed rules (the “SPAC Rule Proposals) relating, among other items, to disclosures in business combination transactions between SPACS such as us and private operating companies; the condensed financial statement requirements applicable to transactions involving shell companies; the use of projections by SPACs in SEC filings in connection with proposed business combination transactions; the potential liability of certain participants in proposed business combination transactions; and the extent to which SPACs could become subject to regulation under the Investment Company Act of 1940, as amended (the “Investment Company Act”), including a proposed rule that would provide SPACs a safe harbor from treatment as an investment company if they satisfy certain conditions that limit a SPAC’s duration, asset composition, business purpose and activities. The SPAC Rule Proposals have not yet been adopted, and may be adopted in the proposed form or in a different form that could impose additional regulatory requirements on SPACs. Certain of the procedures that we, a potential Business Combination target, or others may determine to undertake in connection with the SPAC Rule Proposals, or pursuant to the SEC’s views expressed in the SPAC Rule Proposals, may increase the costs and time of negotiating and completing an initial Business Combination, and may constrain the circumstances under which we could complete an initial Business Combination. The need for compliance with the SPAC Rule Proposals may cause us to liquidate the funds in the Trust Account or liquidate the Company at an earlier time than we might otherwise choose.
If we are deemed to be an investment company for purposes of the Investment Company Act, we would be required to institute burdensome compliance requirements and our activities would be severely restricted. As a result, in such circumstances, unless we are able to modify our activities so that we would not be deemed an investment company, we would expect to abandon our efforts to complete an initial Business Combination and instead to liquidate the Company.
As described further above, the SPAC Rule Proposals relate, among other matters, to the circumstances in which SPACs such as the Company could potentially be subject to the Investment Company Act and the regulations thereunder. The SPAC Rule Proposals would provide a safe harbor for such companies from the definition of “investment company” under Section 3(a)(1)(A) of the Investment Company Act, provided that a SPAC satisfies certain criteria, including a limited time period to announce and complete a de-SPAC transaction. Specifically, to comply with the safe harbor, the SPAC Rule Proposals would require a company to file a report on Form 8-K announcing that it has entered into an agreement with a target company for a business combination no later than 18 months after the effective date of its registration statement for its initial public offering. The company would then be required to complete its initial business combination no later than 24 months after the effective date of such registration statement.
Because the SPAC Rule Proposals have not yet been adopted, there is currently uncertainty concerning the applicability of the Investment Company Act to a SPAC, including a company like ours, that may not enter into a definitive agreement within 18 months after the effective date of its initial public offering registration statement or that may not complete its business combination within 24 months after such date. As a result, it is possible that a claim could be made that we have been operating as an unregistered investment company.
If we are deemed to be an investment company under the Investment Company Act, our activities would be severely restricted. In addition, we would be subject to burdensome compliance requirements. We do not believe that our principal activities will subject us to regulation as an investment company under the Investment Company Act. However, if we are deemed to be an investment company and subject to compliance with and regulation under the Investment Company Act, we would be subject to additional regulatory burdens and expenses for which we have not allotted funds. As a result, unless we are able to modify our activities so that we would not be deemed an investment company, we would expect to abandon our efforts to complete an initial Business Combination and instead to liquidate the Company.
To mitigate the risk that we might be deemed to be an investment company for purposes of the Investment Company Act, we may, at any time, instruct the trustee to liquidate the securities held in the Trust Account and instead to hold the funds in the Trust Account in cash until the earlier of the consummation of our initial Business Combination or our liquidation. As a result, following the liquidation of securities in the Trust Account, we would likely receive minimal interest, if any, on the funds held in the Trust Account, which would reduce the dollar amount our public stockholders would receive upon any redemption or liquidation of the Company.
The funds in the Trust Account have, since our IPO, been held only in U.S. government treasury obligations with a maturity of 185 days or less or in money market funds investing solely in U.S. government treasury obligations and meeting certain conditions under Rule 2a-7 under the Investment Company Act. However, to mitigate the risk of us being deemed to be an unregistered investment company (including under the subjective test of Section 3(a)(1)(A) of the Investment Company Act) and thus subject to regulation under the Investment Company Act, we may, at any time, and we expect that we will, on or prior to the 24-month anniversary of the effective date of the IPO registration statement, instruct Continental Stock Transfer & Trust Company, the trustee with respect to the Trust Account, to liquidate the U.S. government treasury obligations or money market funds held in the Trust Account and thereafter to hold all funds in the Trust Account in cash until the earlier of consummation of our initial Business Combination or liquidation of the Company. Following such liquidation, we would likely receive minimal interest, if any, on the funds held in the Trust Account. However, interest previously earned on the funds held in the Trust Account still may be released to us to pay our taxes, if any, and certain other expenses as permitted. As a result, any decision to liquidate the securities held in the Trust Account and thereafter to hold all funds in the Trust Account in cash would reduce the dollar amount our public stockholders would receive upon any redemption or liquidation of the Company.
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In addition, even prior to the 24-month anniversary of the effective date of the IPO registration statement, we may be deemed to be an investment company. The longer that the funds in the Trust Account are held in short-term U.S. government treasury obligations or in money market funds invested exclusively in such securities, even prior to the 24-month anniversary, the greater the risk that we may be considered an unregistered investment company, in which case we may be required to liquidate the Company. Accordingly, we may determine, in our discretion, to liquidate the securities held in the Trust Account at any time, even prior to the 24-month anniversary, and instead hold all funds in the Trust Account in cash, which would further reduce the dollar amount our public stockholders would receive upon any redemption or liquidation of the Company.
Were we considered to be a “foreign person,” we might not be able to complete an initial Business Combination with a U.S. target company if such initial Business Combination is subject to U.S. foreign investment regulations and review by a U.S. government entity such as the Committee on Foreign Investment in the United States (“CFIUS”), or ultimately prohibited.
Certain federally licensed businesses in the United States, such as broadcasters and airlines, may be subject to rules or regulations that limit foreign ownership. In addition, CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States by foreign persons in order to determine the effect of such transactions on the national security of the United States. Were we considered to be a “foreign person” under such rules and regulations, any proposed Business Combination between us and a U.S. business engaged in a regulated industry or which may affect national security could be subject to such foreign ownership restrictions and/or CFIUS review. The scope of CFIUS was expanded by the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) to include certain non-controlling investments in sensitive U.S. businesses and certain acquisitions of real estate even with no underlying U.S. business. FIRRMA, and subsequent implementing regulations that are now in force, also subject certain categories of investments to mandatory filings. If our potential initial Business Combination with a U.S. business falls within the scope of foreign ownership restrictions, we may be unable to consummate an initial Business Combination with such business. In addition, if our potential Business Combination falls within CFIUS’s jurisdiction, we may be required to make a mandatory filing or determine to submit a voluntary notice to CFIUS, or to proceed with the initial Business Combination without notifying CFIUS and risk CFIUS intervention, before or after closing the initial Business Combination. Our Sponsor is a U.S. entity, and the managing member of our Sponsor is a U.S. person. However, if CFIUS has jurisdiction over our initial Business Combination CFIUS may decide to block or delay our initial Business Combination, impose conditions to mitigate national security concerns with respect to such initial Business Combination or order us to divest all or a portion of a U.S. business of the combined company if we had proceeded without first obtaining CFIUS clearance. If we were considered to be a “foreign person,” foreign ownership limitations, and the potential impact of CFIUS, may limit the attractiveness of a transaction with us or prevent us from pursuing certain initial Business Combination opportunities that we believe would otherwise be beneficial to us and our shareholders. As a result, in such circumstances, the pool of potential targets with which we could complete an initial Business Combination could be limited and we may be adversely affected in terms of competing with other special purpose acquisition companies which do not have similar foreign ownership issues.
Moreover, the process of government review, whether by CFIUS or otherwise, could be lengthy. Because we have only a limited time to complete our initial Business Combination, our failure to obtain any required approvals within the requisite time period may require us to liquidate. If we liquidate, our public stockholders may only receive $10.00 per share, and our warrants will expire worthless. This will also cause you to lose any potential investment opportunity in a target company and the chance of realizing future gains on your investment through any price appreciation in the combined company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FOREST ROAD ACQUISITION CORP. II | ||
| Date: August 15, 2022 | By: | /s/ Thomas Staggs |
| Name: | Thomas Staggs | |
| Title: | Co-Chief Executive Officer | |
| (Co-Principal Executive Officer) | ||
| Date: August 15, 2022 | By: | /s/ Kevin Mayer |
| Name: | Kevin Mayer | |
| Title: | Co-Chief Executive Officer | |
| (Co-Principal Executive Officer) | ||
| Date: August 15, 2022 | By: | /s/ Idan Shani |
| Name: | Idan Shani | |
| Title: | Chief Financial Officer and Secretary | |
| (Principal Financial and Accounting Officer) | ||
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