References in this report (the "Quarterly Report") to "we," "us" or the "Company" refer toKhosla Ventures Acquisition Co. III . References to our "management" or our "management team" refer to our officers and directors, references to the "Sponsor" refer toKhosla 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 theU.S. Securities and Exchange Commission (the "SEC"). The Company's securities filings can be accessed on the EDGAR section of theSEC'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 theState of Delaware onJanuary 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 isKhosla Ventures SPAC Sponsor III LLC , aDelaware limited liability company. The registration statement for our Initial Public Offering was declared effective onMarch 23, 2021 . OnMarch 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 . OnMarch 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 inthe United States withContinental Stock Transfer & Trust Company acting as trustee. The Company's portfolio of investments held in the Trust Account are comprised solely ofU.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. 16 -------------------------------------------------------------------------------- Table of Contents 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 byMarch 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 underDelaware law to provide for claims of creditors and the requirements of other applicable law. Liquidity and Capital Resources As ofSeptember 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 ofSeptember 30, 2021 , the Company has no borrowings under the Working Capital Loans. 17 -------------------------------------------------------------------------------- Table of Contents 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 fromJanuary 29, 2021 (inception) throughSeptember 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 fromJanuary 29, 2021 (inception) throughSeptember 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 fromJanuary 29, 2021 (inception) throughSeptember 30, 2021 . For the three months endedSeptember 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 endedSeptember 30, 2021 . Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as ofSeptember 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. OnMarch 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. TheKhosla 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 theKhosla Entities. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted inthe 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. 18 -------------------------------------------------------------------------------- Table of Contents Class K Founder Shares Derivative Liabilities Class K Founder Shares is accounted for as a derivative liability on the accompanyingSeptember 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 ofSeptember 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 ofSeptember 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 inU.S. government treasury bills, notes or bonds with a maturity of 180 days or less or in certain money market funds that invest solely inU.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 theSEC'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 endedSeptember 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 ClassK 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. 19 -------------------------------------------------------------------------------- Table of Contents 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 theSEC's rules and forms. Changes in Internal Control over Financial Reporting During the quarter endedSeptember 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.
© Edgar Online, source