HEALTHWELL ACQUISITION CORP. I MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
References in this report (the "Quarterly Report") to "we," "us" or the "Company" refer to
Healthwell Acquisition Corp.I References to our "management" or our "management team" refer to our officers and directors, and references to the "Sponsor" refer to Healthwell Acquisition Corp.I Sponsor LLC The following discussion and analysis of the Company's 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 Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Special Note Regarding Forward-Looking Statements This Quarterly Report includes "forward-looking statements" that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company's final prospectus for its Initial Public Offering (as defined below) filed with the U.S. Securities and Exchange Commission(the "SEC"). The Company's securities filings can be accessed on the EDGAR section of the SEC'swebsite at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Overview We are a blank check company incorporated on February 2, 2021as a Delawarecorporation and formed for the purpose of effectuating a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses, which we refer to throughout this Quarterly Report as our "initial business combination". We intend to effectuate our initial business combination using cash from the proceeds of our initial public offering (the "Initial Public Offering") and the private placement of the Private Placement Warrants (as defined below), the proceeds of the sale of our shares in connection with our initial business combination (pursuant to forward purchase agreements or backstop agreements we may enter into following the consummation of the Initial Public Offering or otherwise), shares issued to the owners of the target, debt issued to bank or other lenders or the owners of the target, or a combination of the foregoing. Results of Operations We have neither engaged in any operations nor generated any operating revenues to date. Our only activities for the period from February 2, 2021(inception) through September 30, 2021were organizational activities, those necessary to prepare for our initial public offering, described below, and, after our initial public offering, identifying a target company for a business combination. We do not expect to generate any operating revenues until after the completion of our initial business combination. We will generate non-operating income in the form of interest income on cash and cash equivalents held after our initial public offering. 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. 23 -------------------------------------------------------------------------------- Table of Contents For the three months ended September 30, 2021, we recorded net income of $5,977,714, which resulted from the change in fair value of warrant liabilities of $7,474,000and unrealized gain on investments held in trust account of $418, partially offset by expensed offering costs of $1,020,874, the change in fair value of derivative asset-forward purchase agreement of $188,000, operating costs of $156,682, and franchise tax expense of $131,148. For the period from February 2, 2021(inception) through September 30, 2021, we recorded net income of $5,968,248, which resulted from the change in fair value of warrant liabilities of $7,474,000and unrealized gain on investments held in trust account of $418, partially offset by expensed offering costs of $1,020,874, the change in fair value of derivative asset-forward purchase agreement of $188,000, formation and operating costs of $166,148, and franchise tax expense of $131,148. Liquidity and Capital Resources For the period from February 2, 2021(inception) through September 30, 2021, net cash used in operating activities was $978,515, which was due to the change in the fair value of warrant liabilities of $7,474,000, change in prepaid expenses of $848,870, and interest income on investments held in Trust Account of $418, partially offset by our net income of $5,968,248, expensed offering costs added back to net income of $1,020,874, change in fair value of derivative asset-forward purchase agreement of $188,000, change in accrued expenses of $36,503, and change in franchise tax payable of $131,148. For the period from February 2, 2021(inception) through September 30, 2021, net cash used in investing activities of $250,000,000was the result of the amount of net proceeds from the Initial Public Offering and the private placement sale of warrants being deposited to the trust account. For the period from February 2, 2021(inception) through September 30, 2021, net cash provided by financing activities was $251,962,174, which was due to proceeds from the initial public offering, net of underwriter's discount paid of $245,000,000, proceeds from the sale of private placement warrants of $7,700,000, proceeds from the promissory note-related party of $350,000and proceeds from the sale of Class B common stock to the Sponsor of $25,000, offset in part by the payment of offering costs of $762,826and the repayment of the promissory note-related party of $350,000. On August 5, 2021, we consummated the Initial Public Offering of 25,000,000 units, at $10.00per unit, generating gross proceeds of $250,000,000. Each unit consisted of one share of Class A common stock (the "Public Shares"), $0.0001par value, and one-half of one redeemable warrant ("Public Warrant"). Each Public Warrant entitles the holder to purchase one share of Class A common stock at an exercise price of $11.50per whole share Simultaneously with the closing of the Initial Public Offering, the Sponsor purchased an aggregate of 7,700,000 Private Placement Warrants at a price of $1.00per unit (the "Private Placement Warrants") ( $7,700,000in the aggregate). Each Private Placement Warrant is exercisable to purchase one share of Class A common stock at a price of $11.50per share. The proceeds from the sale of the Private Placement Units were added to the net proceeds from the Initial Public Offering held in the Trust Account. If we do not complete our initial business combination within 24 months from the closing of the Initial Public Offering, the proceeds held in the Trust Account will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law). There will be no redemption rights or liquidating distributions from the Trust Account with respect to the Private Placement Warrants. 24 -------------------------------------------------------------------------------- Table of Contents As of September 30, 2021, we had cash of $983,659held outside the trust account. We will use these funds to primarily identify and evaluate prospective partner businesses, perform business due diligence on prospective partner businesses, travel to and from the offices, plants or similar locations of prospective partner businesses or their representatives or owners, review corporate documents and material agreements of prospective partner businesses, and structure, negotiate and complete a business combination. We intend to use substantially all of the funds held in the trust account, including any amounts representing interest earned on the trust account (which interest shall be net of taxes payable and excluding deferred underwriting commissions) to complete our initial business combination. We may withdraw interest to pay taxes, if any. We estimate our annual franchise tax obligations, based on the number of shares of our common stock authorized and outstanding after the completion of the Initial Public Offering, to be $131,148to date, which we may pay from funds from this offering held outside of the trust account or from interest earned on the funds held in the trust account and released to us for this purpose. Our annual income tax obligations will depend on the amount of interest and other income earned on the amounts held in the trust account. To the extent that our common stock or debt is used, in whole or in part, as consideration to complete our initial business combination, the remaining proceeds held in the trust account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies. We do not believe we will need to raise additional funds following this offering in order to meet the expenditures required for operating our business prior to the completion of our initial business combination, other than funds available from loans from our sponsor, members of our management team or any of their affiliates. However, if our estimates of the costs of identifying a prospective partner business, undertaking in-depth due diligence and negotiating an initial business combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to the completion of our initial business combination. Moreover, we may need to obtain additional financing to complete our initial business combination, either because the transaction requires more cash than is available from the proceeds held in our trust account, or because we become obligated to redeem a significant number of our public shares upon completion of the business combination, in which case we may issue additional securities or incur debt in connection with such business combination. In order to fund working capital deficiencies or finance transaction costs in connection with an intended initial business combination, our sponsor or an affiliate of our sponsor or certain of our directors and officers may, but are not obligated to, loan us funds as may be required. If we complete our initial business combination, we may repay such loaned amounts out of the proceeds of the trust account released to us. Otherwise, such loans may be repaid only out of funds held outside the trust account. In the event that our initial business combination does not close, we may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds from our trust account would be used to repay such loaned amounts. Up to $1,500,000of such loans may be convertible into warrants at a price of $1.00per warrant at the option of the lender. The warrants would be identical to the private placement warrants issued to our sponsor. The terms of such loans, if any, have not been determined and no written agreements exist with respect to such loans. We do not expect to seek loans from parties other than our sponsor or an affiliate of our sponsor as we do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds in our trust account. These amounts are estimates and may differ materially from our actual expenses. In addition, we could use a portion of the funds not being placed in trust to pay commitment fees for financing, fees to consultants to assist us with our search for a target business or as a down payment or to fund a "no-shop" provision (a provision designed to keep target businesses from "shopping" around for transactions with other companies or investors on terms more favorable to such target businesses) with respect to a particular proposed business combination, although we do not have any current intention to do so. If we entered into an agreement where we paid for the right to receive exclusivity from a 25 -------------------------------------------------------------------------------- Table of Contents target business, the amount that would be used as a down payment or to fund a "no-shop" provision would be determined based on the terms of the specific business combination and the amount of our available funds at the time. Our forfeiture of such funds (whether as a result of our breach or otherwise) could result in our not having sufficient funds to continue searching for, or conducting due diligence with respect to, prospective target businesses. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of September 30, 2021. Contractual Obligations Promissory Note-Related PartyOn February 10, 2021, the Company issued an unsecured promissory note, as amended on July 6, 2021, to the Sponsor (the "Promissory Note"), pursuant to which the Company could borrow up to an aggregate of $350,000to cover expenses related to the Initial Public Offering. The Promissory Note was non-interest bearing and was payable on the earlier of (i) June 30, 2022or (ii) the consummation of the Initial Public Offering. As of September 30, 2021, there was no borrowings outstanding under the Promissory Note. On August 5, 2021, the Company repaid the outstanding balance under the Promissory Note. Underwriting Agreement The Company granted the underwriters a 45-day option to purchase up to 3,750,000 additional Units to cover over-allotments at the Initial Public Offering price, less the underwriting discounts and commissions. On September 11, 2021, the over-allotment option expired. The underwriters were paid a cash underwriting discount of $0.20per Unit, or $5,000,000in the aggregate, upon the closing of the Initial Public Offering. In addition, $0.35per unit, or $8,750,000in 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. Critical Accounting Policies The preparation of condensed financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following critical accounting policies. Net Income Per Common Share Net income per common share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. As the shares of Class A common stock are considered to be redeemable at fair value, and a redemption at fair value does not amount to a distribution different than other stockholders, Class A and Class B shares of common stock are presented as one class of stock in the calculation net income per share. As a result, the calculated net income per share is the same for Class A and Class B shares of common stock. At September 30, 2021, the Company did not have any dilutive securities and 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 per share is the same as basic income per share for the periods presented. Class A Common Stock Subject to Possible Redemption All of the 25,000,000 shares of Class A common stock sold as part of the Units in the Initial Public Offering contain a redemption feature which allows for the redemption of such Public Shares in connection with the Company's liquidation, if there is a stockholder vote or tender offer in connection with the Business Combination and in connection with certain amendments to the Company's second amended and restated certificate of incorporation. In 26 -------------------------------------------------------------------------------- Table of Contents accordance with SECand its staff's guidance on redeemable equity instruments, which has been codified in Accounting Standards Codification ("ASC") 480-10-S99, redemption provisions not solely within the control of the Company require common stock subject to redemption to be classified outside of permanent equity. Therefore, all Class A common stock has been classified outside of permanent equity. The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable common stock to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock are affected by charges against additional paid-in capital and accumulated deficit. Warrant Liabilities The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant's specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity ("ASC 480") and ASC 815, Derivatives and Hedging ("ASC 815"). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company's own common stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the statement of operations. The fair value of the Public Warrants, Private Placement Warrants was estimated using a Binomial lattice model. 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 if-converted method for all convertible instruments. ASU 2020-06 is effective January 1, 2022and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is currently assessing the impact, if any, that ASU 2020-06 would have on its financial position, results of operations or cash flows. 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 financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk As of September 30, 2021, we were not subject to any market or interest rate risk. Item 4. Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the SEC'srules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Evaluation of Disclosure Controls and Procedures As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2021. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective as of September 30, 2021, due to the restatement of our August 5, 2021balance sheet (the "restatement") related to the classification of redeemable Class A Shares and the accounting treatment of the purchase of Founder Share interests by Anchor Investors, which combined, constitutes a material weakness in our internal controls over financial reporting. Regarding the restatement of the Company's balance sheet included on the Company's Form 8-K, as filed with the SECon August 12, 2021, certain redemption provisions not solely within the control of the Company require common stock subject to redemption to be classified outside of permanent equity. The Company had previously classified a portion of the Class A common stock in permanent equity. The Company revised its financial statements to classify all Class A common stock as temporary equity and any related impact, as the threshold in its charter would not change the nature of the underlying shares as redeemable and thus would be required to be disclosed outside of permanent equity. Additionally, due to the requirement to record additional deferred offering costs for the excess fair value of the Founder Share interests sold over the purchase price, the Company has determined that the misstatement of the Balance Sheet as of August 5, 2021was material based on quantitative criteria. It is noted that the non-cash adjustments to the financial statements do not impact the amounts previously reported for our cash and cash equivalents, cash held in trust, or total assets. In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our unaudited interim financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the period presented. 27 -------------------------------------------------------------------------------- Table of Contents Changes in Internal Control Over Financial Reporting Other than the implementation of the remediation activities regarding the restatement of our August 5, 2021balance sheet, during the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In light of the restatement of our financial statement included in this Quarterly Report, we plan to enhance our processes to identify and appropriately apply applicable accounting requirements to better evaluate and understand the nuances of the complex accounting standards that apply to our financial statements. Our plans at this time include providing enhanced access to accounting literature, research materials and documents and increased communication among 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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