Waldencast Acquisition Corp. Form 10-Q Summary
Reporting period: Three months ended March 31, 2022; filed May 16, 2022. The registrant was a Cayman Islands special purpose acquisition company (SPAC), not yet an operating company, and reported as a shell company, smaller reporting company, and emerging growth company.
Business Context
The Company was formed to complete a business combination and had generated no operating revenue. Its activities consisted primarily of organizational expenses, identifying acquisition targets, and pursuing the proposed Obagi and Milk transactions. The proposed transactions were subject to shareholder and other closing conditions, and the filing did not give effect to them.
The Company had 34.5 million redeemable Class A ordinary shares and 8.625 million Class B founder shares outstanding as of March 31, 2022. It had 24 months from the March 18, 2021 IPO closing, subject to a possible shareholder-approved extension, to complete a business combination.
Key Financial Metrics
| Metric | March 31, 2022 / Q1 2022 | Comparable period or prior year-end |
|---|---|---|
| Operating revenue | $0 | $0 |
| Formation and operating costs | $4.0 million | $0.1 million in Q1 2021 |
| Net income (loss) | $3.0 million | $(1.2) million in Q1 2021 |
| Basic and diluted earnings per share | $0.07 per Class A and Class B share | $(0.10) in Q1 2021 |
| Net cash used in operating activities | $(0.4) million | $(0.1) million in Q1 2021 |
| Cash outside Trust Account | $1.1 million | $1.5 million at December 31, 2021 |
| Trust Account investments | $345.1 million | $345.1 million at December 31, 2021 |
| Working capital | $(0.5) million deficit | Not clearly provided for Q1 2021 |
| Total liabilities | $53.1 million | $56.6 million at December 31, 2021 |
| Shareholders’ deficit | $(51.8) million | $(54.8) million at December 31, 2021 |
The quarterly profit was substantially driven by non-cash fair-value gains of $4.4 million on warrant liabilities and $2.7 million on forward purchase agreement liabilities. Interest income was only $4,059 in total. Accordingly, the reported profit does not reflect operating performance or recurring revenue generation.
Debt consisted primarily of a $1.5 million non-interest-bearing Working Capital Promissory Note owed to the Sponsor. The Company also reported $12.1 million of deferred underwriting fees payable only if a business combination is completed, $10.3 million of deferred legal fees, $10.7 million of forward purchase agreement liabilities, and $16.8 million of warrant liabilities.
Material Changes Versus the Prior Comparable Period
- Net results improved from a $1.2 million loss in Q1 2021 to $3.0 million of income in Q1 2022, primarily because Q1 2022 included favorable non-cash fair-value changes, while Q1 2021 included warrant-related losses and offering expenses.
- Formation and operating costs increased to $4.0 million from $0.1 million, reflecting higher transaction, legal, and business-combination-related activity.
- Operating cash use increased to $0.4 million from $0.1 million.
- Cash outside the Trust Account declined by approximately $0.4 million from year-end 2021, while Trust Account investments increased slightly by approximately $4,000.
- Warrant liabilities declined from $21.2 million to $16.8 million and forward purchase agreement liabilities declined from $13.3 million to $10.7 million, generating the principal non-cash gains in the quarter.
- The Company continued to pursue the proposed acquisitions of Obagi and Milk and a domestication from the Cayman Islands to Jersey, with an intended Up-C structure.
Guidance, Outlook, Risks, and Unusual Items
- Management expected the $1.1 million of cash outside the Trust Account to fund operations for at least the next 12 months, assuming no business combination was completed during that period.
- Management stated that it might require additional loans or financing if diligence and transaction costs exceeded estimates. The Sponsor and other potential lenders were not obligated to provide additional funding.
- If a business combination was not completed within the permitted period, the Company expected to redeem 100% of its public shares using Trust Account funds and then liquidate.
- The filing stated that the completion deadline creates substantial doubt about the Company’s ability to continue as a going concern until a business combination or required liquidation. The financial statements contained no adjustments for a possible liquidation.
- COVID-19, the Russia-Ukraine war, sanctions, market volatility, supply-chain disruptions, inflation, interest rates, and regulatory changes could adversely affect the Company’s ability to complete a transaction. The specific effects were not determinable.
- Three putative shareholders sent letters alleging disclosure deficiencies in the Company’s Form F-4 registration statement and requesting additional disclosures.
- Disclosure controls were determined to be ineffective because of a material weakness involving accounting for complex financial instruments, including warrants and redeemable Class A shares. Management had begun remediation but could not assure that it would be successful.
- The filing included $12.1 million of deferred underwriting discounts payable only upon completion of a business combination and $1.5 million of related-party working capital borrowings that may be convertible into warrants.
Investor Verification Checklist
- Verify whether the Obagi and Milk business combinations were ultimately approved and completed, including transaction consideration, shareholder redemptions, financing, and the proposed Jersey domestication.
- Review the Company’s deadline, any shareholder-approved extension, and the consequences of failure to complete a business combination.
- Assess the likelihood that the Company’s limited unrestricted cash will cover transaction and operating costs, and whether additional Sponsor or third-party financing is available.
- Reconcile the non-cash fair-value gains on warrants and forward purchase agreements with the related valuation assumptions and subsequent fair-value changes.
- Evaluate the material weakness in internal controls and subsequent remediation disclosures.
- Review the shareholder disclosure allegations and any related amendments, litigation, or regulatory developments.
- Consider dilution from 34.5 million redeemable shares, 8.625 million founder shares, approximately 17.4 million IPO and private-placement warrants, and forward purchase commitments of up to $333 million.