Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review.
On April 12, 2021, the Staff of the Securities and Exchange Commission (the “SEC”) issued a statement entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Statement”) informing market participants that certain warrants issued by special purpose acquisition companies may require classification as a liability of the entity measured at fair value, with changes in fair value each period reported in earnings. Specifically, the SEC Statement focused on certain settlement terms and provisions related to certain tender offers following a business combination. The terms described in the SEC Statement are common in SPACs and are similar to those contained in the warrant agreement (the “Warrant Agreement”), dated as of February 1, 2021, between the Company and Continental Stock Transfer & Trust Company, as warrant agent. The Company previously accounted for its outstanding public warrants and private placement warrants (collectively, the “Warrants”) issued in connection with its initial public offering as components of equity instead of as derivative liabilities. The warrant agreement governing the Warrants includes a provision that provides for potential changes to the settlement amounts dependent upon the characteristics of the holder of the warrant. In addition, the warrant agreement includes a provision that in the event of a tender offer or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of stock, all holders of the Warrants would be entitled to receive cash for their Warrants (the “tender offer provision”).
In further consideration of the SEC Statement, the Company’s management further evaluated the Warrants under Accounting Standards Codification (“ASC”) Subtopic 815-40, Contracts in Entity’s Own Equity. ASC Section 815-40-15 addresses equity versus liability treatment and classification of equity-linked financial instruments, including warrants, and states that a warrant may be classified as a component of equity only if, among other things, the warrant is indexed to the issuer’s common stock. Under ASC Section 815-40-15, a warrant is not indexed to the issuer’s common stock if the terms of the warrant require an adjustment to the exercise price upon a specified event and that event is not an input to the fair value of the warrant. Based on that evaluation management concluded that the Private Placement Warrants are not indexed to the Company’s common stock in the manner contemplated by ASC Section 815-40-15 because the holder of the instrument is not an input into the pricing of a fixed-for-fixed option on equity shares. In addition, management concluded that the tender offer provision fails the “classified in stockholders’ equity” criteria as contemplated by ASC Section 815-40-25.
On May 21, 2021, the audit committee of the Company’s board of directors (the “Audit Committee”), based on the recommendation of and after consultation with management, concluded that the Company’s previously issued audited balance sheet as of February 4, 2021, included in the Company’s Current Report on Form 8-K filed on February 10, 2021, should no longer be relied upon due to the reclassification of the Warrants described above. The previously issued audited balance sheet will be revised in the Company’s Form 10-Q for the quarterly period ended March 31, 2021. The Audit Committee has decided to review important and evolving accounting policies and practices, including future guidance from the SEC related to SPACs, periodically as may be appropriate to remedy any material weakness related to the reclassification of the Warrants in the Company’s internal controls.
The Audit Committee and management have discussed the matters disclosed in this Item 4.02(a) with Marcum LLP, the Company’s independent registered public accounting firm.
