Calidi Biotherapeutics(CLDI) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents unaudited condensed financial statements and detailed notes on organization, accounting policies, IPO, related party transactions, equity, warrants, commitments, fair value, income tax, and subsequent events Condensed Balance Sheets Presents the company's financial position as of June 30, 2023, and December 31, 2022, showing significant increases in cash, total assets, and total liabilities, particularly warrant and forward purchase unit liabilities Condensed Balance Sheet Highlights | Metric | June 30, 2023 (unaudited) | December 31, 2022 | | :-------------------------------------- | :------------------------ | :---------------- | | Cash | $669,867 | $93,892 | | Total Current Assets | $795,478 | $401,671 | | Marketable securities in trust account | $43,214,249 | $42,453,107 | | Total Assets | $44,009,727 | $42,854,778 | | Total Current Liabilities | $8,182,440 | $4,535,913 | | Warrant liability | $1,937,000 | $745,000 | | Forward purchase unit liability | $2,645,604 | $326,234 | | Total Liabilities | $12,765,044 | $5,607,147 | | Class A common stock subject to redemption | $43,214,249 | $42,453,107 | | Total Stockholders' Deficit | $(11,969,566) | $(5,205,476) | Condensed Statements of Operations Details financial performance for the three and six months ended June 30, 2023, and 2022, highlighting a shift from net income in 2022 to significant net losses in 2023, primarily due to changes in fair value of warrant and forward purchase unit liabilities Condensed Statements of Operations Highlights | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating costs | $1,495,739 | $361,622 | $3,524,950 | $890,480 | | Loss from operations | $(1,495,739) | $(361,622) | $(3,524,950) | $(890,480) | | Earnings on marketable securities | $493,561 | $159,999 | $919,410 | $176,504 | | Change in fair value of contingent interest liability | $(139,179) | — | $(240,583) | — | | Change in fair value of warrant liability | $(1,280,500) | $4,029,850 | $(1,192,000) | $6,124,150 | | Change in fair value of forward purchase unit liability | $(1,764,927) | $332,983 | $(2,319,370) | $210,963 | | Net (loss) income | $(4,268,408) | $4,161,210 | $(6,492,948) | $5,623,403 | - The company experienced a significant shift from net income in 2022 to net losses in 2023, primarily driven by negative changes in the fair value of warrant and forward purchase unit liabilities[13] Condensed Statements of Changes in Class A Common Stock Subject to Possible Redemption and Stockholders' Deficit Outlines changes in Class A common stock subject to possible redemption and stockholders' deficit for periods ended June 30, 2023, and 2022, showing the impact of remeasurements, net losses, and promissory note cancellations Changes in Stockholders' Deficit (Unaudited) | Item | December 31, 2022 | March 31, 2023 | June 30, 2023 | | :---------------------------------------- | :---------------- | :------------- | :------------ | | Balance – December 31, 2022 | $(5,205,476) | | | | Remeasurement of Class A common stock | $(453,836) | | | | Net loss | $(2,224,540) | | | | Balance – March 31, 2023 | | $(7,883,852) | | | Cancellation of promissory notes | | $490,000 | | | Remeasurement of Class A common stock | | $(307,306) | | | Net loss | | $(4,268,408) | | | Balance – June 30, 2023 | | | $(11,969,566) | - The cancellation of promissory notes from related parties resulted in a $490,000 increase in additional paid-in capital[215] Condensed Statements of Cash Flows Provides an overview of cash flows from operating, investing, and financing activities for the six months ended June 30, 2023, and 2022, indicating a shift from cash used in operations to cash provided by operations in 2023, alongside significant investing and financing activities Condensed Statements of Cash Flows Highlights | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | $(6,492,948) | $5,623,403 | | Net cash provided by (used in) operating activities | $573,783 | $(733,810) | | Net cash (used in) provided by investing activities | $(720,308) | — | | Net cash provided by (used in) financing activities | $722,500 | — | | Net Change in Cash | $575,975 | $(733,810) | | Cash – Ending | $669,867 | $328,843 | - Net cash provided by operating activities significantly improved from a deficit of $733,810 in H1 2022 to a positive $573,783 in H1 2023[35] - The company engaged in investing activities, including purchases and sales of marketable securities in the Trust Account, resulting in net cash used of $720,308 in H1 2023[35] Notes to the Condensed Financial Statements Provides detailed explanations and disclosures for the condensed financial statements, covering business operations, significant accounting policies, IPO, private placement, related party transactions, equity, warrants, commitments, fair value, income tax, and subsequent events NOTE 1. ORGANIZATION AND PLANS OF BUSINESS OPERATIONS Details the company's nature as a blank check company, its IPO, the establishment of a trust account, and ongoing efforts to complete a business combination, including extensions and the proposed merger with Calidi Biotherapeutics, Inc - The Company is a blank check company formed to effect a business combination, with no operating revenues until completion of its initial Business Combination[17][37][46] - The IPO closed on September 14, 2021, raising $230,000,000, which was placed in a trust account and invested in U.S. government securities[18][38][80] - A proposed merger with Calidi Biotherapeutics, Inc. was announced on January 9, 2023, with Calidi surviving as a wholly-owned subsidiary of the new public entity, 'New Calidi'[21][42][74] - The completion window for a business combination was extended multiple times, most recently to September 14, 2023, with the Sponsor funding the Trust Account for extensions[20][40][76] - Guggenheim Securities, the IPO Underwriter, waived its entitlement to $8,050,000 of deferred compensation[19][58][60] - The merger consideration for Calidi securityholders is based on an equity value of $250,000,000, subject to adjustments and potential escalation shares based on future stock price targets ($12.00, $14.00, $16.00, $18.00)[43][44][66] - Up to 2 million shares of New Calidi Common Stock will be made available to non-redeeming FLAG public stockholders on a pro rata basis at Closing as an incentive[23] NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines significant accounting policies, including basis of presentation, emerging growth company status, use of estimates, cash, common stock subject to redemption, income taxes, earnings per share, fair value, and derivative financial instruments - The Company is an 'emerging growth company' and has elected not to opt out of the extended transition period for complying with new or revised financial accounting standards[90][112] - Class A common stock subject to possible redemption is classified as temporary equity and its carrying value is adjusted to equal the redemption value at the end of each reporting period[95][116] - Warrants are classified as liability instruments and measured at fair value, with changes in fair value recorded in the statement of operations[101][152][170] - Contingent interest liability is treated as an embedded derivative, bifurcated, and accounted for at fair value with changes recognized in the statement of operations[153][189] - A full valuation allowance is recorded against net deferred tax assets due to the uncertainty of realizing a benefit from net operating losses[70][179] NOTE 3. INITIAL PUBLIC OFFERING Describes the IPO completed on September 14, 2021, where the company sold 23,000,000 units at $10.00 each, generating $230,000,000 in gross proceeds, with significant offering costs - The Company consummated its IPO on September 14, 2021, selling 23,000,000 Units at $10.00 per Unit, generating gross proceeds of $230,000,000[38][127][213] IPO Offering Costs | Item | Amount | | :---------------------------------- | :------------ | | Underwriting discount | $2,335,058 | | Deferred underwriting discount | $8,050,000 | | Actual offering costs | $640,129 | | Excess fair value of Founder Shares | $11,491,877 | | Total Offering Costs | $22,517,064 | - An aggregate of $10.00 per Unit sold in the IPO was held in the Trust Account[182] NOTE 4. PRIVATE PLACEMENT Details the private placement of 3,397,155 Private Placement Warrants to the Sponsor and Metric for $1.50 each, generating $5,095,733, with proceeds added to the Trust Account - The Company consummated the private placement of 3,397,155 Private Placement Warrants at $1.50 per warrant to the Sponsor and Metric, generating $5,095,733[38][81][129] - A portion of the proceeds from the Private Placement Warrants was added to the proceeds from the IPO held in the Trust Account[129] NOTE 5. RELATED PARTY TRANSACTIONS Covers transactions with related parties, including the initial purchase of Founder Shares, promissory notes, and an administrative support agreement, highlighting the cancellation of $490,000 in promissory notes from the Sponsor and Metric, treated as a capital contribution - The Sponsor and Metric purchased 5,750,000 Founder Shares for an aggregate purchase price of $25,000[210] - The Sponsor and Metric cancelled $490,000 in promissory notes on April 5, 2023, which was treated as a capital contribution and recorded to additional paid-in capital[56][132] - The Company entered into promissory note agreements with various parties for an aggregate borrowing capacity of $1,490,000, including zero-interest, 50% per annum, and 100% contingent interest notes[57][162] - The Company pays an affiliate of the Sponsor $10,000 per month for office space and administrative support[55][134] NOTE 6. STOCKHOLDERS' EQUITY Details authorized and outstanding shares of preferred stock, Class A common stock, and Class B common stock, including the redemption of 18,871,976 Class A shares and the conversion terms of Founder Shares - 18,871,976 shares of Class A common stock were redeemed on September 19, 2022, reducing outstanding redeemable Class A common stock to 4,128,024[39][116][135] - 5,750,000 shares of Class B common stock (Founder Shares) were issued and outstanding, which will automatically convert into Class A common stock on a one-for-one basis upon consummation of a Business Combination, subject to certain adjustments[130][136][165] - No preferred shares were issued or outstanding as of June 30, 2023, and December 31, 2022[164] NOTE 7. WARRANTS Describes terms and conditions of Public Warrants and Private Placement Warrants, including exercise prices, exercisability, redemption triggers, anti-dilution adjustments, and accounting treatment as liability instruments - Public Warrants become exercisable on the later of 12 months from the IPO closing or 30 days after the completion of a Business Combination, with an exercise price of $11.50 per share[137] - The Company may redeem Public Warrants at $0.01 per warrant if the Class A common stock price equals or exceeds $18.00 for 20 trading days within a 30-trading day period[168] - The Company may redeem Public Warrants at $0.10 per warrant if the Class A common stock price equals or exceeds $10.00, provided holders can exercise on a cashless basis prior to redemption[185] - Private Placement Warrants are non-transferable/non-assignable until 30 days after a Business Combination, exercisable for cash or cashless, and non-redeemable if held by initial purchasers or permitted transferees[198][223] - All warrants are classified as liability instruments and are subject to re-measurement at fair value at each balance sheet date, with changes recognized in the statement of operations[141][170] NOTE 8. COMMITMENTS AND CONTINGENCIES Outlines the company's commitments and contingencies, including registration and shareholder rights, underwriter agreements, and the forward purchase agreement, noting the underwriter waived its deferred fee and Franklin is not obligated to purchase forward purchase shares for the Calidi business combination - Holders of founder shares and Private Placement Warrants are entitled to registration rights[59][142] - The underwriter waived its right to the $8,050,000 deferred underwriting fee as of December 31, 2022[58][60][143] - The Company entered into a forward purchase agreement with Franklin Strategic Series for 5,000,000 shares of Class A common stock plus 2,500,000 forward purchase warrants for an aggregate purchase price of $50,000,000[62][173] - Franklin is not obligated under its forward purchase agreement to purchase the forward purchase shares in connection with the Business Combination with Calidi[99][202] NOTE 9. FAIR VALUE MEASUREMENTS Provides details on fair value measurements of financial instruments, categorizing them into Level 1, Level 2, and Level 3 based on observability of inputs, highlighting the valuation of warrant liability, forward purchase units, and contingent interest liability - The Company categorizes fair value measurements into a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[124] - Warrant liability, forward purchase units, and contingent interest liability are measured at fair value, with changes in fair value recognized in the statement of operations[145][186][189] Fair Value of Financial Instruments (June 30, 2023) | Item | Level 1 | Level 2 | Level 3 | | :------------------------------------ | :------------ | :--------- | :---------- | | Assets: | | | | | Marketable securities in trust account | $43,214,249 | — | — | | Liabilities: | | | | | Public Warrants | $1,495,000 | — | — | | Private Placement Warrants | — | $442,000 | — | | Forward Purchase Units | — | — | $2,645,604 | | Contingent Interest Liabilities | — | — | $273,448 | Changes in Fair Value of Level 3 Financial Instruments (Six Months Ended June 30, 2023) | Item | December 31, 2022 | Change in Fair Value | June 30, 2023 | | :------------------------------------ | :---------------- | :------------------- | :------------ | | Forward Purchase Units | $326,234 | $2,319,370 | $2,645,604 | | Contingent Interest Liability | $32,865 | $240,583 | $273,448 | NOTE 10. INCOME TAX Discusses the company's income tax provision and effective tax rate, noting a full valuation allowance against net deferred tax assets due to cumulative net losses and uncertainty of realizing benefits Income Tax Provision and Effective Tax Rate | Period | Tax Provision | Effective Tax Rate | | :------------------------------------ | :------------ | :----------------- | | Three months ended June 30, 2023 | $77,949 | 2.30% | | Six months ended June 30, 2023 | $143,424 | 1.91% | - The effective tax rates differ from the statutory rate of 21.0% due to the change in fair value of warrants and a full valuation allowance on deferred tax assets[70] - A full valuation allowance was recorded against net deferred tax assets as of June 30, 2023, and December 31, 2022, due to the uncertainty of realizing benefits from those items[70] NOTE 11. SUBSEQUENT EVENTS Notes the filing of a proxy statement/prospectus with the SEC on August 4, 2024, and the setting of the special stockholder meeting for August 22, 2023, to approve the Business Combination - On August 4, 2024, the Company filed a proxy statement/prospectus with the SEC[71] - The special stockholder meeting to approve the Business Combination has been set for August 22, 2023[71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including forward-looking statements, an overview of the proposed merger with Calidi, detailed analysis of financial performance, going concern considerations, contractual obligations, and critical accounting estimates Special Note Regarding Forward-Looking Statements Advises readers that the report contains forward-looking statements subject to risks and uncertainties, and actual results may differ materially from projections - 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[73] Overview Provides a general overview of the company's status as a blank check company, its proposed merger with Calidi Biotherapeutics, and the various extensions and promissory notes used to fund operations and extensions - The Company is a blank check company formed to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination[79] - On January 9, 2023, the Company entered into an Agreement and Plan of Merger with Calidi Biotherapeutics, Inc[74] - The Company's completion window for a business combination was extended multiple times, most recently to September 14, 2023, with the Trust Account funded by the Sponsor for extensions[76] - Promissory notes were issued to fund extension fees, some with interest rates ranging from 50% to 100% per annum, and $490,000 in related party promissory notes were cancelled[77][78] Results of Operations Compares financial results for the three and six months ended June 30, 2023, and 2022, showing a significant shift from net income in 2022 to net losses in 2023, primarily driven by changes in fair value of warrant and forward purchase unit liabilities - The Company has not generated any operating revenues from inception through June 30, 2023[46] Net (Loss) Income Comparison | Period | Net (Loss) Income | | :------------------------------------ | :---------------- | | Three months ended June 30, 2023 | $(4.3) million | | Three months ended June 30, 2022 | $4.2 million | | Six months ended June 30, 2023 | $(6.5) million | | Six months ended June 30, 2022 | $5.6 million | - The net losses in 2023 were primarily due to increased operating costs and significant losses on the change in fair value of forward purchase unit liability, contingent interest liability, and warrant liability[47][48] Going Concern Discusses the company's liquidity challenges, including a working capital deficit, and reliance on the Sponsor for working capital loans, raising substantial doubt about its ability to continue as a going concern Operating Cash and Working Capital Deficit | Metric | June 30, 2023 | December 31, 2022 | | :---------------------- | :------------ | :---------------- | | Operating cash | $669,867 | $93,892 | | Working capital deficit | $7,386,962 | $4,134,242 | - The Company's liquidity needs have been satisfied through payments from the Sponsor and Metric, the IPO, Private Placement Warrants, and unsecured promissory notes[52][110] - The Company lacks the financial resources to sustain operations for a reasonable period (one year), raising substantial doubt about its ability to continue as a going concern[53][54][87][88] - The Sponsor is committed to extend Working Capital Loans as needed, although no formal agreement exists[53][87] Contractual Obligations Details the company's contractual obligations, primarily an administrative support fee and various promissory notes, and notes the waiver of the deferred underwriting discount - As of June 30, 2023, the Company had no long-term debt, capital lease obligations, operating lease obligations, or long-term liabilities other than an administrative support agreement[55] - The Company has an agreement to pay an affiliate of its sponsor a monthly fee of $10,000 for office space and administrative support[55] - The Company had drawn down an aggregate of $1,490,000 on Promissory Notes as of June 30, 2023, with varying interest terms[57] - The underwriter of the IPO waived its right to the $8,050,000 deferred discount as of December 31, 2022[58] Critical Accounting Estimates Identifies critical accounting estimates related to warrant liability, forward purchase units, and contingent interest liability, emphasizing their measurement at fair value with changes recognized in the statement of operations - Warrant liability is measured at fair value with changes in fair value recorded to the statement of operations[101] - Forward purchase units are accounted for as a liability-classified instrument at fair value, with changes in fair value recorded to the statement of operations[102] - Contingent interest liability is treated as an embedded derivative, bifurcated, and accounted for as a liability-classified instrument at fair value, with changes recorded to the statement of operations[189] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not required for smaller reporting companies - Quantitative and Qualitative Disclosures About Market Risk are not required for smaller reporting companies[216] Item 4. Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and procedures and internal control over financial reporting, identifying material weaknesses and outlining remediation efforts Evaluation of Disclosure Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2023, due to material weaknesses in internal control over financial reporting, specifically related to accounting for derivatives, cash flow statement presentation, troubled debt restructuring, and accrued expenses - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2023[219] - Material weaknesses were identified in internal controls over financial reporting related to accounting for derivatives, presentation of the statement of cash flows, evaluation and recording of troubled debt restructuring, and recording of accrued expenses[219] Remediation Activities The company is undertaking remediation activities, including additional post-closing review procedures, consulting with subject matter experts, and retaining an additional consultant to improve internal control over financial reporting - The Chief Financial Officer performed additional post-closing review procedures, including consulting with subject matter experts related to accounting for derivatives, marketable securities, debt, and accrued expenses[226] - Management has retained an additional consultant to provide further review and subject matter expertise[226] - The Company plans to continue enhancing review procedures for evaluating and implementing accounting standards, including through additional analyses by personnel and third-party professionals[226] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2023, other than the previously discussed material weaknesses - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2023, other than the material weaknesses discussed[193] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section is not provided in the document, implying no material legal proceedings to report - No information regarding legal proceedings is provided in this section[217] Item 1A. Risk Factors Updates on risk factors, specifically highlighting the adverse impacts of developments in the financial services industry, such as bank failures, on the company's liquidity and ability to secure financing - There have been no material changes in risk factors from the Annual Report on Form 10-K, except for new risks related to adverse developments affecting the financial services industry[227] - Adverse developments in the financial services industry, including limited liquidity, defaults, or non-performance by financial institutions, could adversely affect the Company's liquidity and ability to acquire financing[194][221][228] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities Reports the private placement of 3,397,155 Private Placement Warrants to the Sponsor and Metric for $5,095,733, issued under Section 4(a)(2) of the Securities Act - On September 14, 2021, the Company consummated the private placement of 3,397,155 Private Placement Warrants to the Sponsor and Metric for total gross proceeds of $5,095,733[229] - The issuance of the Private Warrants was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended[229] Item 3. Defaults Upon Senior Securities States that there are no defaults upon senior securities - None[196] Item 4. Mine Safety Disclosures States that there are no mine safety disclosures - None[196] Item 5. Other Information States that there is no other information to disclose - None[196] Item 6. Exhibits Provides a list of exhibits filed as part of, or incorporated by reference into, the Quarterly Report on Form 10-Q, including amendments to the merger agreement, sponsor agreement, and certifications - The Exhibit Index includes the Amended and Restated Certificate of Incorporation, Bylaws, Amendment No. 2 to Agreement and Plan of Merger, Amendment No. 1 to Sponsor Agreement, Amendment No. 1 to Voting Agreement, and Certifications of the Chief Executive Officer and Chief Financial Officer[234] Signatures Signatures Official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report - The report was signed by Tom Vecchiolla, Chief Executive Officer, and Michael J. Alber, Chief Financial Officer, on August 21, 2023[240][241]