References to the "Company," "DTOC," "our," "us" or "we" refer to Digital
Transformation Opportunities Corp. 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 report. Certain information contained in the
discussion and analysis set forth below includes forward-looking statements that
involve risks and uncertainties.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). We have based these forward-looking statements on our current
expectations and projections about future events. These forward-looking
statements are subject to known and unknown risks, uncertainties and assumptions
about us that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "should," "could," "would," "expect,"
"plan," "anticipate," "believe," "estimate," "continue," or the negative of such
terms or other similar expressions. Such statements include, but are not limited
to, possible business combinations and the financing thereof, and related
matters, as well as all other statements other than statements of historical
fact included in this Form 10-Q. Factors that might cause or contribute to such
a discrepancy include, but are not limited to, those described in our other
Securities and Exchange Commission ("SEC") filings.
Overview
We are a blank check company incorporated in Delaware on November 17, 2020 for
the purpose of effecting a merger, capital stock exchange, asset acquisition,
stock purchase, reorganization or similar business combination with one or more
businesses (a "business combination"). Our Sponsor is Digital Transformation
Sponsor LLC, a Delaware limited liability company.
The registration statement for our initial public offering (the "Initial Public
Offering") was declared effective on March 9, 2021. On March 12, 2021, we
consummated the Initial Public Offering of 33,350,000 units (including 3,350,000
units issued to the Underwriters pursuant to the partial exercise of the
over-allotment option granted to the Underwriters) ("Units" and, with respect to
the Class A common stock included in the Units being offered, the "Public
Shares"), at $10.00 per Unit, generating gross proceeds of $333.5 million, and
incurring offering costs of approximately $18.9 million, inclusive of
approximately $11.7 million in deferred underwriting commissions.
Simultaneously with the closing of the Initial Public Offering, we consummated
the private placement ("Private Placement") of 6,113,333 warrants at a price of
$1.50 per warrant ("Private Placement Warrants" and, together with the warrants
included in the Units, the "Warrants") to the Sponsor, generating gross proceeds
of approximately $9.2 million.
Upon the closing of the Initial Public Offering and the Private Placement on
March 12, 2021, $333.5 million ($10.00 per Unit) of the net proceeds of the sale
of the Units in the Initial Public Offering and the Private Placement were
placed in a trust account ("Trust Account") located in the United States with
Continental Stock Transfer & Trust Company acting as trustee, and invested only
in U.S. "government securities," within the meaning of Section 2(a)(16) of the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
having a maturity of 185 days or less or in money market funds meeting certain
conditions under Rule 2a-7 promulgated under the Investment Company Act, which
invest only in direct U.S. government treasury obligations, as determined by us
until the earlier of: (i) the completion of a business combination and (ii) the
distribution of the Trust Account as described below.
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If we have not completed a business combination within 24 months from the
closing of the Initial Public Offering, or March 12, 2021, we will (i) cease all
operations except for the purpose of winding up, (ii) as promptly as reasonably
possible but not more than ten business days thereafter, 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 franchise
and income taxes (less up to $100,000 of such net interest to pay dissolution
expenses), divided by the number of then outstanding Public Shares, which
redemption will completely extinguish Public Stockholders' rights as
stockholders (including the right to receive further liquidating 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 our 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.
Proposed Business Combination
On October 5, 2022, the Company entered into a Business Combination Agreement
with American Oncology Network, LLC ("AON"). As a result of the transactions
contemplated by the Business Combination Agreement (the "Business Combination"),
the combined company will be organized in an umbrella partnership C corporation
structure, in which substantially all of the assets and the business of the
combined company will be held by AON. In particular, the Business Combination
Agreement provides that, upon the terms and subject to the conditions thereof,
the Business Combination will be implemented as follows: (i) on the closing of
the Business Combination (the "Closing"), AON will amend and restate its
operating agreement (the "AON A&R LLC Agreement") to reclassify its existing
Class A units, Class A-1 units and Class B units into a single class of AON
common units that are later exchangeable on a one-to-one basis for shares of
DTOC Class A common stock; (ii) on the Closing and substantially concurrently
with the adoption of the AON A&R LLC Agreement, DTOC will amend and restate its
charter (the "DTOC A&R Charter") to provide for the (a) conversion of all shares
of DTOC Class B common stock into shares of DTOC Class A common stock on a
one-to-one basis, (b) amendment of the terms of DTOC Class B common stock to
provide holders voting rights but no economic rights and (c) authorization of
new shares of DTOC preferred stock in an amount sufficient to consummate a
private placement of up to $100,000,000 in preferred stock to be consummated
immediately prior to the consummation of the Business Combination (the "PIPE
Investment"); (iii) on the Closing, DTOC will consummate the PIPE Investment;
and (iv) on the Closing and following the adoption of the DTOC A&R Charter and
the consummation of the PIPE Investment, (a) AON will issue common units to DTOC
in exchange for a combination of cash and shares of DTOC Class B common stock,
(b) DTOC will be admitted as the sole managing member of AON, (c) AON will
distribute shares of DTOC Class B common stock to AON equity holders, (d) AON
will distribute cash equal to the preferred return set forth in the AON
operating agreement to holders of AON Class A units and AON Class A-1 units (or
only to holders of AON Class A units if the holder of AON Class A-1 units elects
to receive additional shares of AON common units in lieu of cash as provided in
the Business Combination Agreement), (e) DTOC will reserve a specified number of
additional shares of DTOC Class A common stock for issuance after the Closing to
eligible recipients, and (f) from and after the Closing (but subject to lock-up
restrictions), the AON equity holders will have the right (but not the
obligation) to exchange AON common units for shares of DTOC Class A common
stock.
Results of Operations
For the three and nine months ended September 30, 2022, we had a net income of
approximately $3.4 million and $8.8 million, respectively, which included a gain
from the change in fair value of warrant liabilities of approximately $3.0
million and $8.5 million, respectively, interest income of approximately $1.7
million and $2.1 million, respectively, offset by formation and operating costs
of approximately $0.97 million and $1.5 million, respectively, and provision for
income taxes of $0.36 million and $0.38 million, respectively. Our business
activities from inception to September 30, 2022, consisted primarily of our
formation and completing our Initial Public Offering, and since our Initial
Public Offering, our activity has been limited to identifying and evaluating
prospective acquisition targets for a business combination.
For the three and nine months ended September 30, 2021, we had a net income of
approximately $3.3 million and $9.0 million, respectively, which included a loss
from operations of approximately $0.40 million and $0.69 million, respectively,
offering cost expense allocated to warrants of $0 and approximately $0.66
million, respectively, and offset by a gain from the change in fair value of
warrant liabilities of approximately $3.6 million and $10.3 million,
respectively, and interest income of approximately $7,000 and $12,000,
respectively.
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Liquidity and Capital Resources
Our liquidity needs up to March 12, 2021 had been satisfied through a capital
contribution from the Sponsor of $25,000 for the Founder Shares (7,187,500
shares of Class B common stock) and the loan under an unsecured promissory note
from the Sponsor of up to $300,000 which was paid in full on March 12, 2021 from
the Initial Public Offering proceeds. Subsequent to the consummation of the
Initial Public Offering, our liquidity needs had been satisfied through the net
proceeds from the consummation of the Private Placement not held in the Trust
Account. In addition, in order to finance transaction costs in connection with a
business combination, our Sponsor or an affiliate of our Sponsor, or certain of
our officers and directors may, but are not obligated to, provide us working
capital loans. As of September 30, 2022, there were no amounts outstanding under
any working capital loan.
As of September 30, 2022 and December 31, 2021, we had cash of $ 231,211 and
$803,309, respectively, and working capital deficit and working capital, net of
taxes, of $(820,053) and $443,428, respectively. We have incurred and expect to
continue to incur significant costs in pursuit of its financing and acquisition
plans. We believe it will need to raise additional funds in order to meet the
expenditures required for operating its business and to consummate a business
combination. If we are unable to complete a business combination because we do
not have sufficient funds available, we will be forced to cease operations and
liquidate the Trust Account. Management has the option to address this
uncertainty through working capital loans from the Sponsor or an affiliate of
the Sponsor or certain of our officers and directors who may, but are not
obligated to, loan our funds as may be required. Up to $2,000,000 of such
Working Capital Loans may be convertible into warrants at a price of $1.50 per
warrant at the option of the lender. In addition, following the business
combination, if cash on hand is insufficient, we may need to obtain additional
financing in order to meet its obligations.
In addition, we have until March 12, 2023, to consummate an initial business
combination, unless such period is extended by our stockholders. It is uncertain
that we will be able to consummate an initial business combination by this time.
If an initial business combination is not consummated by this date, there will
be a mandatory liquidation and subsequent dissolution. The liquidity condition
and date for mandatory liquidation and subsequent dissolution raise substantial
doubt about our ability to continue as a going concern one year from the date
that these unaudited condensed financial statements are issued. The unaudited
condensed financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Contractual Obligations
We do not have any long-term debt obligations, capital lease obligations,
operating lease obligations, purchase obligations or long-term liabilities.
Critical Accounting Policies and Estimates
This management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these unaudited condensed
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities in our unaudited condensed
financial statements. On an ongoing basis, we evaluate our estimates and
judgments, including those related to fair value of financial instruments and
accrued expenses. We base our estimates on historical experience, known trends
and events and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Except as set forth below, there have been no
significant changes in our critical accounting policies as discussed in our Form
10-K filed by us with the SEC on April 13, 2022.
Critical accounting estimates made in our unaudited condensed financial
statements include the estimated fair values of our warrant liability and
investments in the trust which can impact the redemption value of our Class A
common stock subject to possible redemption. The fair value of our financial
assets and liabilities reflects management's estimate of amounts that we would
have received in connection with the sale of the assets or paid in connection
with the transfer of the liabilities in an orderly transaction between market
participants at the measurement date. In connection with measuring the fair
value of its assets and liabilities, we seek to maximize the use of observable
inputs (market data obtained from independent sources) and to minimize the use
of unobservable inputs (internal
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assumptions about how market participants would price assets and liabilities).
The following fair value hierarchy is used to classify assets and liabilities
based on the observable inputs and unobservable inputs used in order to value
the assets and liabilities:
Level 1, Valuations based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access.
? Valuation adjustments and block discounts are not being applied. Since
valuations are based on quoted prices that are readily and regularly available
in an active market, valuation of these securities does not entail a
significant degree of judgment.
Level 2, Valuations based on (i) quoted prices in active markets for similar
assets and liabilities, (ii) quoted prices in markets that are not active for
? identical or similar assets, (iii) inputs other than quoted prices for the
assets or liabilities, or (iv) inputs that are derived principally from or
corroborated by market through correlation or other means.
? Level 3, Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
Warrants Liability
We evaluated the Warrants in accordance with ASC 815-40, "Derivatives and
Hedging - Contracts in Entity's Own Equity" and concluded that a provision in
the Warrant Agreement related to certain tender or exchange offers as well as
provisions that provided for potential changes to the settlement amounts
dependent upon the characteristics of the holder of the warrant, precludes the
Warrants from being accounted for as components of equity. As the Warrants meet
the definition of a derivative as contemplated in ASC 815 and are not eligible
for an exception from derivative accounting, the Warrants are recorded as
derivative liabilities on the Balance Sheet and measured at fair value at
inception (on the date of the Initial Public Offering) and at each reporting
date in accordance with ASC 820, "Fair Value Measurement", with changes in fair
value recognized in the Statements of Operations in the period of change.
Common Stock Subject to Possible Redemption
All of the 33,350,000 Class A common stock sold as part of the Units in the
Public Offering contain a redemption feature which allows for the redemption of
such Public Shares in connection with our liquidation, if there is a stockholder
vote or tender offer in connection with the business combination and in
connection with certain amendments to our second amended and restated
certificate of incorporation. In accordance with SEC and its staff's guidance on
redeemable equity instruments, which has been codified in ASC 480-10-S99,
redemption provisions not solely within our control require common stock subject
to redemption to be classified outside of permanent equity. Ordinary liquidation
events, which involve the redemption and liquidation of all of the entity's
equity instruments, are excluded from the provisions of ASC 480. Accordingly, at
September 30, 2022 and December 31, 2021, all shares of Class A common stock
subject to possible redemption is presented as temporary equity, outside of the
stockholders' equity section of our balance sheets, respectively.
We recognize changes in redemption value immediately as they occur and adjust
the carrying value of redeemable common stock to equal the redemption value at
the end of each reporting period. Increases or decreases in the carrying amount
of redeemable common stock are affected by charges against additional paid in
capital and accumulated deficit.
Net Income Per Common Stock
We comply with accounting and disclosure requirements of FASB ASC Topic 260,
Earnings Per Share. Net income per share is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
period. We have two classes of shares, Class A common stock and Class B common
stock. Earnings and losses are shared pro rata between the two classes of
shares. We have not considered the effect of warrants sold in the Initial Public
Offering and the Private Placement to purchase 14,450,833 shares of common stock
in the calculation of diluted income per share, since the exercise of the
warrants are contingent upon the occurrence of future events. As a result,
diluted net income per common stock is the same as basic net income per common
stock for the period presented.
Our statements of operations apply the two-class method in calculating net
income per share. Basic and diluted net income per common stock for Class A
common stock and Class B common stock is calculated by dividing net income
attributable to us by the weighted average number of shares of Class A common
stock and Class B common stock outstanding, allocated proportionally to each
class of common stock.
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Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other
Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts
in an Entity's Own Equity ("ASU 2020-06"), which simplifies accounting for
convertible instruments by removing major separation models required under
current GAAP. The ASU also removes certain settlement conditions that are
required for equity-linked contracts to qualify for scope exception, and it
simplifies the diluted earnings per share calculation in certain areas. For
smaller reporting entities, ASU 2020-06 is effective for fiscal years beginning
after December 15, 2023 and should be applied on a full or modified
retrospective basis, with early adoption permitted beginning on January 1, 2021.
This standard is not expected to have a material impact on our balance sheet,
statement of operations or statement of cash flows.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820):
Fair Value Measurement of Equity Securities Subject to Contractual Sale
Restrictions ("ASU 2022-03"), which clarifies the principles of fair value
measurement when measuring the fair value of an equity security subject to
contractual sale restriction and improves current GAAP by reducing diversity in
practice, reducing the cost and complexity in measuring fair value, and
increasing comparability of financial information across reporting entities
holding those investments. The ASU also introduces new disclosure requirements
for equity securities subject to contractual sale restrictions that are measured
at fair value under current GAAP. ASU 2022-03 is effective for fiscal years
beginning after December 15, 2023 and should be applied prospectively with any
adjustments from adoption being recognized in earnings and disclosed on the date
of adoption. Early adoption is permitted. This standard is not expected to have
a material impact on our balance sheet, statement of operations or statement of
cash flows.
Our management does not believe that any other recently issued, but not
effective, accounting standards, if currently adopted, would have a material
effect on our unaudited condensed financial statements.
Off-Balance Sheet Arrangements
As of September 30, 2022 and December 31, 2021, we did not have any off-balance
sheet arrangements.
JOBS Act
The Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") contains
provisions that, among other things, relax certain reporting requirements for
qualifying public companies. We qualify as an "emerging growth company" and
under the JOBS Act are allowed to comply with new or revised accounting
pronouncements based on the effective date for private (not publicly traded)
companies. We are electing to delay the adoption of new or revised accounting
standards, and as a result, we may not comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required
for non-emerging growth companies. As a result, the unaudited condensed
financial statements may not be comparable to companies that comply with new or
revised accounting pronouncements as of public company effective dates.
Additionally, we are in the process of evaluating the benefits of relying on the
other reduced reporting requirements provided by the JOBS Act. Subject to
certain conditions set forth in the JOBS Act, if, as an "emerging growth
company," we choose to rely on such exemptions we may not be required to, among
other things, (i) provide an auditor's attestation report on our system of
internal controls over financial reporting pursuant to Section 404, (ii) provide
all of the compensation disclosure that may be required of non-emerging growth
public companies under the Dodd-Frank Wall Street Reform and Consumer Protection
Act, (iii) comply with any requirement that may be adopted by the PCAOB
regarding mandatory audit firm rotation or a supplement to the auditor's report
providing additional information about the audit and the financial statements
(auditor discussion and analysis) and (iv) disclose certain executive
compensation related items such as the correlation between executive
compensation and performance and comparisons of the CEO's compensation to median
employee compensation. These exemptions will apply for a period of five years
following the completion of our Initial Public Offering or until we are no
longer an "emerging growth company," whichever is earlier.
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