References in this report (the "Quarterly Report") to "we," "us" or the
"Company" refer to Khosla Ventures Acquisition Co. III. References to our
"management" or our "management team" refer to our officers and directors,
references to the "Sponsor" refer to Khosla Ventures SPAC Sponsor III 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" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") 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 Form
10-Q
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 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's
website 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 formed under the laws of the State of Delaware on
January 29, 2021 for the purpose of effecting a merger capital stock exchange,
asset acquisition, stock purchase, reorganization or other similar Business
Combination with one or more businesses. We intend to effectuate our Business
Combination using cash from the proceeds of the Initial Public Offering and the
sale of the Private Placement Shares, and forward purchase shares, our capital
stock, debt or a combination of cash, stock and debt. We are an emerging growth
company and, as such, we are subject to all of the risks associated with
emerging growth companies.
Our Sponsor is Khosla Ventures SPAC Sponsor III LLC, a Delaware limited
liability company. The registration statement for our Initial Public Offering
was declared effective on March 23, 2021. On March 26, 2021, we consummated its
Initial Public Offering of 50,000,000 Public Shares, at $10.00 per share,
generating gross proceeds of $500,000,000. On March 30, 2021, the underwriters
partially exercised their over-allotment option, resulting in an additional
6,330,222 Public Shares issued for additional proceeds of $63,302,226. Total
shares sold in connection with the Initial Public Offering are 56,330,222 Public
Shares. We incurred offering costs of $31,705,310, inclusive of $19,715,578 in
deferred underwriting fees payable.
Simultaneously with the closing of the Initial Public Offering, we consummated
the Private Placement of 1,300,000 Private Placement Shares at a price of $10.00
per Private Placement Share to the Sponsor, generating proceeds of $13,000,000.
In connection with the underwriters' partial exercise of their over-allotment
option, we also consummated the sale of an additional 126,605 Private Placement
Shares at $10.00 per Private Placement Share, generating additional proceeds of
$1,266,050.
Following the closing of the Initial Public Offering, the partial exercise of
the over-allotment option and the Private Placement, $563,302,226 ($10.00 per
share) of the net proceeds of the Initial Public Offering and certain of the
proceeds of the Private Placement was held in a Trust Account located in the
United States with Continental Stock Transfer & Trust Company acting as trustee.
The Company's portfolio of investments held in the Trust Account are comprised
solely of U.S. government securities, within the meaning set forth in
Section 2(a)(16) of the Investment Company Act, with a maturity of 180 days or
less, classified as trading securities. Trading securities are presented on the
balance sheet at fair value at the end of each reporting period. Gains and
losses resulting from the change in fair value of these securities is included
in gain on marketable securities, dividends and interest held in the Trust
Account in the accompanying statements of operations. The fair value for trading
securities is determined using quoted market prices in active markets.

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If we are unable to complete a Business Combination within 24 months from the
closing of the Initial Public Offering (March 23, 2023) or 27 months (June 23,
2023), if we have executed a letter of intent, agreement in principle or
definitive agreement for an initial Business Combination by March 23, 2023 (the
"Combination Period"), and our stockholders have not amended the Certificate of
Incorporation to extend such Combination Period, we will (i) cease all
operations except for the purpose of winding up; (ii) as promptly as reasonably
possible but no more than ten business days thereafter subject to lawfully
available funds therefor, redeem the Public Shares, at a per-share price,
payable in cash, equal to the aggregate amount then on deposit in the Trust
Account, including interest earned on the funds held in the Trust Account and
not previously released to us to pay our taxes as well as expenses relating to
the administration of the Trust Account (less up to $100,000 of interest to pay
dissolution expenses) divided by the number of the then outstanding Public
Shares, which redemption will completely extinguish Public Stockholders' rights
as stockholders (including the right to receive further liquidation
distributions, if any), subject to applicable law; and (iii) as promptly as
reasonably possible following such redemption, subject to the approval of the
remaining stockholders and the board of directors, liquidate and dissolve,
subject in each case to our obligations under Delaware law to provide for claims
of creditors and the requirements of other applicable law.
Liquidity and Capital Resources
As of September 30, 2021, the Company had $486,094 in its operating bank
account, $563,319,440 in securities held in the Trust Account to be used for a
Business Combination or to repurchase or redeem its common stock in connection
therewith and working capital of $
1,056,038
.
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, suspending the pursuit of a Business Combination. The
Company cannot provide any assurance that new financing will be available to it
on commercially acceptable terms, if at all.
As a result of the above, in connection with the Company's assessment of going
concern considerations in accordance with Accounting Standards Update ("ASU")
2014-15,
"Disclosures of Uncertainties about an Entity's Ability to Continue as a Going
Concern," management has determined that the liquidity condition and date for
mandatory liquidation and dissolution raise substantial doubt about the
Company's ability to continue as a going concern through approximately one year
from the date these condensed financial statements were issued. These condensed
financial statements do not include any adjustments relating to the recovery of
the recorded assets or the classification of the liabilities that might be
necessary should the Company be unable to continue as a going concern.
Prior to the consummation of the IPO, the Company's liquidity needs have been
satisfied through receipt of a $25,000 capital contribution from the Sponsor in
exchange for the issuance of the Founder Shares to the Sponsor, and a $300,000
promissory note payable to the Sponsor. Subsequent to the consummation of the
Initial Public Offering, the Company received the net proceeds not held in the
Trust Account of $3,000,000.
In addition, in order to finance transaction costs in connection with a Business
Combination, the Sponsor or an affiliate of the Sponsor, or certain of the
Company's officers and directors may, but are not obligated to, loan the Company
Working Capital Loans. Except for the foregoing, the terms of such Working
Capital Loan, 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 $1,500,000 of such Working Capital Loans may be
convertible into shares of the post-transaction company at $10.00 per share at
the option of the lender. As of September 30, 2021, the Company has no
borrowings under the Working Capital Loans.

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Results of Operations
We have neither engaged in any operations (other than searching for a Business
Combination after our Initial Public Offering) nor generated any revenues to
date. Our only activities from January 29, 2021 (inception) through September
30, 2021 were organizational activities and those necessary to prepare for the
Initial Public Offering, described below. We do not expect to generate any
operating revenues until after the completion of our Business Combination. We
expect to generate
non-operating
income in the form of interest income on marketable securities held after the
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.
For the period from January 29, 2021 (inception) through September 30, 2021, we
had a loss from operations of $843,108, which consisted of $25,000 in formation
costs, $668,108 in general and administrative expenses, and $150,000 in
franchise tax expenses. We also incurred $47,887,500 in financing expenses on
derivative classified instruments, offset by $17,214 in interest income on funds
held in the Trust Account and a $36,600,000 in change in fair value of Class K
Founder Shares derivative liability, resulting in a net loss of $12,113,394 for
the period from January 29, 2021 (inception) through September 30, 2021.
For the three months ended September 30, 2021, we had a loss from operations of
$402,100, which consisted of $352,100 in general and administrative expenses,
and $50,000 in franchise tax expenses offset by $8,654 in interest income on
funds held in the Trust Account and a $9,900,000 in change in fair value of
Class K Founder Shares derivative liability, resulting in net income of
$9,506,554 for the three months ended September 30, 2021.
Off-Balance
Sheet Arrangements
We did not have any
off-balance
sheet arrangements as of September 30, 2021.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease
obligations or long-term liabilities.
The underwriters are entitled to a deferred underwriting fee of $0.35 per Public
Share, or $19,715,578 in the aggregate. The deferred underwriting fee will be
waived by the underwriters in the event that the Company does not complete a
Business Combination, subject to the terms of the underwriting agreement.
On March 23, 2021, we entered into a forward purchase agreement pursuant to
which the Sponsor (together with any permitted transferees under the forward
purchase agreement, the "Khosla Entities") have agreed to purchase an aggregate
of up to 1,000,000 forward purchase shares for $10.00 per share, or an aggregate
maximum amount of $10,000,000, in a private placement that will close
simultaneously with the closing of the initial Business Combination. The Khosla
Entities will purchase a number of forward-purchase shares that will result in
gross proceeds to us necessary to enable us to consummate our initial Business
Combination and pay related fees and expenses, after first applying amounts
available to us from the Trust Account (after paying the deferred underwriting
discount and giving effect to any redemptions of Public Shares) and any other
financing source obtained by us for such purpose at or prior to the consummation
of our initial Business Combination, plus any additional amounts mutually agreed
by us and the Khosla Entities to be retained by the post-Business Combination
company for working capital or other purposes. The Khosla Entities' obligation
to purchase forward-purchase shares will, among other things, be conditioned on
the Business Combination (including the target assets or business, and the terms
of the Business Combination) being reasonably acceptable to the Khosla Entities
and on a requirement that such initial Business Combination is approved by a
unanimous vote of our board of directors. In determining whether a target is
reasonably acceptable to the Khosla Entities, we expect that the Khosla Entities
would consider many of the same criteria as we will consider but will also
consider whether the investment is an appropriate investment for the Khosla
Entities.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires 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 not identified any critical accounting policies other than
the following.

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Class K Founder Shares Derivative Liabilities
Class K Founder Shares is accounted for as a derivative liability on the
accompanying September 30, 2021, balance sheet. The derivative liability was
measured at fair value at inception and on a recurring basis, which changes in
fair value presented within change in fair value of derivative liability in the
statements of operations. In order to capture the market conditions associated
with the Class K Founder Shares derivative liabilities, the Company applied an
approach that incorporated a Monte Carlo simulation, which involved random
iterations of future stock-price paths over the contractual life of the Class K
Founder Shares. Based on assumptions regarding potential changes in control of
the Company, and the probability distribution of outcomes, the payoff to the
holder was determined based on the achievement of the various market thresholds
within each simulated path. The present value of the payoff in each simulated
trial is calculated, and the fair value of the liability is determined by taking
the average of all present values.
The inputs used as of September 30, 2021 were as follow: risk free rate of
1.56%; term in years to business combination 0.8 years; expected volatility
12.5%; divided yield of 0.00% and the stock price was $9.80.
Recent accounting standards
Management does not believe that any recently issued, but not yet effective,
accounting standards, if currently adopted, would have a material effect on our
unaudited condensed financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 2021, other than our exposure to interest rate risk from the
investments in US Treasuries, we were not subject to any other market or
interest rate risk. Following the consummation of our Initial Public Offering,
the net proceeds of our Initial Public Offering, including amounts in the Trust
Account, have been invested in U.S. government treasury bills, notes or bonds
with a maturity of 180 days or less or in certain money market funds that invest
solely in U.S. Treasuries. Due to the short-term nature of these investments, we
believe there will be no associated material exposure to interest rate risk.
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 officer and principal financial and accounting officer,
we conducted an evaluation of the effectiveness of our disclosure controls and
procedures as of the end of the fiscal quarter ended September 30, 2021, 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 officer and principal
financial and accounting officer have concluded that during the period covered
by this report, our disclosure controls and procedures were not effective due to
material weaknesses in internal controls over financial reporting related to the
inaccurate accounting. Management identified errors in its historical financial
statements related to the accounting for the Class A common stock, deferred
underwriting fees payable, Class K Founder Shares, and other reclassification
adjustments on the balance sheet and statement of cash flows. Because the
Class A common stock issued in the Initial Public Offering can be redeemed or
become redeemable subject to the occurrence of future events considered outside
of the Company's control, the Company should have classified all of these
redeemable shares in temporary equity and remeasured these redeemable shares to
their redemption value (i.e., $10.00 per share) as of the end of the first
reporting period after the date of the Company's Initial Public Offering. The
Company also concluded that it incorrectly accounted for the Class K Founder
Shares as permanent equity versus a derivative liability. In addition, the
Company concluded that it incorrectly recorded the overallotment option that was
exercised by the underwriters and also incorrectly accounted for certain items
on the cash flow statement.

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To address these material weaknesses, management has devoted, and plans to
continue to devote, significant effort and resources to the remediation and
improvement of its internal control over financial reporting and to provide
processes and controls over the internal communications within the Company,
financial advisors and independent registered public accounting firm. While we
have processes to identify and appropriately apply applicable accounting
requirements, we plan to enhance these processes to better evaluate our research
and understanding of the nuances of the complex accounting standards that apply
to our financial statements. We plan to 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.
Other than this issue, our disclosure controls and procedures were effective at
a reasonable assurance level and, accordingly, provided reasonable assurance
that the information required to be disclosed by us in reports filed under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2021, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting, as the circumstances that led to the material weakness described
above had not yet been identified. We are in the process of implementing changes
to our internal control over financial reporting to remediate such material
weaknesses, as more fully described above. 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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