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OFFON

LEO HOLDINGS CORP. II

(LHC)
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LEO II : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/16/2021 | 04:51pm EDT
References to the "Company," "our," "us" or "we" refer to Leo Holdings Corp.
II. The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the unaudited
interim 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
(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"). 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. Factors that might cause or contribute to
such a discrepancy include, but are not limited to, those described in our other
SEC filings.
Overview
We are a blank check company incorporated as a Cayman Islands exempted company
on September 1, 2020. We were formed for the purpose entering into a merger,
share exchange, asset acquisition, share purchase, recapitalization,
reorganization or other similar business combination with one or more target
businesses (the "Business Combination"). 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 Leo Investors II Limited Partnership, a Cayman Islands exempted
limited partnership (the "Sponsor"). The registration statement for the
Company's Initial Public Offering was declared effective on January 7, 2021. On
January 12, 2021, the Company consummated its Initial Public Offering of
37,500,000 units (the "Units" and, with respect to the Class A ordinary shares
included in the Units being offered, the "Public Shares"), including
2,500,000 additional Units to partially cover over-allotments (the
"Over-Allotment Units"), at $10.00 per Unit, generating gross proceeds of
$375.0 million, and incurring offering costs of approximately $21.3 million, of
which approximately $13.1 million was for deferred underwriting commissions.
Simultaneously with the closing of the Initial Public Offering, we consummated
the private placement ("Private Placement") of 6,666,667 warrants (each, a
"Private Placement Warrant" and collectively, the "Private Placement Warrants"),
at a price of $1.50 per Private Placement Warrant with the Sponsor, generating
gross proceeds of $10.0 million, and incurring offering costs of approximately
$10,000.
Upon the closing of the Initial Public Offering and the Private Placement,
$375.0 million ($10.00 per Unit) of the net proceeds of the Initial Public
Offering and certain of the proceeds of the Private Placement were placed in a
trust account ("Trust Account"), located in the United States at J.P. Morgan
Chase Bank, N.A., with Continental Stock Transfer & Trust Company acting as
trustee, and invested only in U.S. government securities, within the meaning set
forth in Section 2(a)(16) of the Investment Company Act, with a maturity of
185 days or less or in any open-ended investment company that holds itself out
as a money market fund meeting the conditions of paragraphs (d)(2), (d)(3)
and (d)(4) of Rule 2a-7 of the Investment
Company Act, as determined by us, until the earlier of: (i) the completion of a
Business Combination and (ii) the distribution of the Trust Account.
Our management has broad discretion with respect to the specific application of
the net proceeds of the Initial Public Offering and the sale of Private
Placement Warrants, although substantially all of the net proceeds are intended
to be applied generally toward consummating a Business Combination.

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If we are unable to complete a Business Combination within 24 months from the
closing of the Initial Public Offering, or January 12, 2023 (the "Combination
Period"), 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 fund our regulatory compliance requirements, and
other costs related thereto and/or to pay our income taxes, if any, (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 Shareholders' rights as shareholders (including the right to receive
further liquidation distributions, if any); and (iii) as promptly as reasonably
possible following such redemption, subject to the approval of the remaining
shareholders and our board of directors, liquidate and dissolve, subject in the
case of clauses (ii) and (iii), to our obligations under Cayman Islands law to
provide for claims of creditors and the requirements of other applicable law.
Liquidity and Capital Resources
As of June 30, 2021, we had approximately $624,000 in our operating bank account
and working capital of approximately $1.1 million.
Our liquidity needs have been satisfied through a payment of $25,000 from our
Sponsor to cover certain of our expenses in exchange for the issuance of the
Founder Shares, a loan of approximately $169,000 from our Sponsor pursuant to a
promissory note. We repaid the promissory note in full on January 19, 2021.
Subsequent from the consummation of the Initial Public Offering, our liquidity
has been satisfied through the net proceeds from the consummation of the Initial
Public Offering and the Private Placement held outside of 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
Loan. To date, there were no amounts outstanding under any Working Capital Loan.
Based on the foregoing, management believes that we will have sufficient working
capital and borrowing capacity from our Sponsor or an affiliate of our Sponsor,
or certain of our officers and directors to meet our needs through the earlier
of the consummation of a Business Combination or one year from this filing. Over
this time period, we will be using these funds for paying existing accounts
payable, identifying and evaluating prospective initial Business Combination
candidates, performing due diligence on prospective target businesses, paying
for travel expenditures, selecting the target business to merge with or acquire,
and structuring, negotiating and consummating the Business Combination.
Management continues to evaluate the impact of the
COVID-19
pandemic on the industry and has concluded that while it is reasonably possible
that the virus could have a negative effect on our financial position, results
of our operations and/or search for a target company, the specific impact is not
readily determinable as of the date of the unaudited condensed financial
statements. The unaudited condensed financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Results of Operations
Our entire activity since inception up to June 30, 2021 was in preparation for
our formation and the Initial Public Offering, and since the closing of the
Initial Public Offering, the search for business combination candidates. We will
not be generating any operating revenues until the closing and completion of our
initial Business Combination.
For the three months ended June 30, 2021, we had net loss of approximately
$3.7 million, which consisted of approximately $199,000 general and
administrative expenses, approximately $30,000 in related party administrative
fee and a loss of approximately $3.5 million in change in the fair value of
warrant liabilities, partially offset by approximately $9,000 of net gain on the
investments held in the Trust Account.
For the six months ended June 30, 2021, we had net loss of approximately
$4.1 million, which consisted of approximately $629,000 general and
administrative expenses, approximately $56,000 in related party administrative
fee, a loss of approximately $3.0 million in change in the fair value of warrant
liabilities, and approximately $426,000 of offering costs associated with
issuance of warrants, partially offset by approximately $14,000 of net gain on
the investments held in the Trust Account.

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Contractual Obligations
Administrative Services Agreement
Commencing on the date that our securities were first listed on the New York
Stock Exchange, we agreed to pay the Sponsor a total of $10,000 per month for
office space, secretarial and administrative services provided to us commencing
with the closing of the Initial Public Offering. Upon completion of the initial
Business Combination or our liquidation, we will cease paying these monthly
fees. We incurred approximately $30,000 and $56,000 in expenses in connection
with such services during the three and six months ended June 30, 2021,
respectively, as reflected in the accompanying unaudited condensed statements of
operations.
Commitments and Contingencies
Registration Rights
The holders of Founder Shares, Private Placement Warrants and warrants that may
be issued upon conversion of Working Capital Loans (and any Class A ordinary
shares issuable upon the exercise of the Private Placement Warrants and warrants
that may be issued upon conversion of Working Capital Loans) were entitled to
registration rights pursuant to a registration and shareholder rights agreement
signed upon consummation of the Initial Public Offering. These holders were
entitled to certain demand and "piggyback" registration rights. However, the
registration and shareholder rights agreement provided that we would not permit
any registration statement filed under the Securities Act to become effective
until the termination of
the applicable lock-up period for
the securities to be registered. We will bear the expenses incurred in
connection with the filing of any such registration statements.
Underwriting Agreement
We granted
the underwriters a 45-day option from the
final prospectus relating to the Initial Public Offering to purchase up to
5,250,000 additional Units to cover over-allotments, if any, at the Initial
Public Offering price less the underwriting discounts and commissions. The
underwriters partially exercised their over-allotment option on January 12, 2021
to purchase an additional 2,500,000 Over-Allotment Units. The remaining
unexercised over-allotment option expired at the conclusion
of the 45-day option period.
The underwriters were entitled to an underwriting discount of $0.20 per unit, or
$7.5 million in the aggregate, paid upon the closing of the Initial Public
Offering. In addition, $0.35 per unit, or approximately $13.1 million in the
aggregate will be payable to the underwriters for deferred underwriting
commissions. The deferred fee will become payable to the underwriters from the
amounts held in the Trust Account solely in the event that we complete a
Business Combination, subject to the terms of the underwriting agreement.
Critical Accounting Policies
Class A Ordinary Shares Subject to Possible Redemption
We account for the Class A ordinary shares subject to possible redemption in
accordance with the guidance in FASB ASC Topic 480 "Distinguishing Liabilities
from Equity" ("ASC 480"), Class A ordinary shares subject to mandatory
redemption (if any) are classified as liability instruments and are measured at
fair value. Conditionally redeemable Class A ordinary shares (including Class A
ordinary shares that feature redemption rights that are either within the
control of the holder or subject to redemption upon the occurrence of uncertain
events not solely within the Company's control) are classified as temporary
equity. At all other times, Class A ordinary shares are classified as
shareholders' equity. Our Class A ordinary shares feature certain redemption
rights that are considered to be outside of our control and subject to the
occurrence of uncertain future events. Accordingly, at June 30, 2021, 34,243,640
Class A ordinary shares subject to possible redemption are presented as
temporary equity, outside of the shareholders' equity section of the balance
sheets.

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Net Income (Loss) per Ordinary Share
Our unaudited condensed statements of operations includes a presentation of
income (loss) per Class A ordinary share subject to redemption in a manner
similar to the
two-class
method of income (loss) per share. Net income per Class A ordinary share, basic
and diluted, is calculated by dividing the investment income earned on
investments held in Trust Account by the weighted average number of Class A
ordinary shares outstanding for the periods. Net loss per Class B ordinary
share, basic and diluted, is calculated by dividing the net loss, less income
attributable to Class A ordinary shares, by the weighted average number of
Class B ordinary shares outstanding for the periods.
The calculation of diluted net income (loss) per ordinary share does not
consider the effect of the warrants issued in connection with the (i) Initial
Public Offering, (ii) exercise of over-allotment and (iii) Private Placement
since the exercise price of the warrants is in excess of the average ordinary
shares price for the period and therefore the inclusion of such warrants would
be anti-dilutive.
Derivative Warrant Liabilities
We do not use derivative instruments to hedge exposures to cash flow, market, or
foreign currency risks. We evaluate all of our financial instruments, including
issued stock purchase warrants, to determine if such instruments are derivatives
or contain features that qualify as embedded derivatives, pursuant to ASC 480
and FASB ASC Topic
815-40,
Derivatives and Hedging, Contracts in Entity's Own Equity ("ASC
815-40").
The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is
re-assessed
at the end of each reporting period.
We account for warrants issued in connection with its Initial Public Offering
and Private Placement, as derivative warrant liabilities in accordance with ASC
815-40.
Accordingly, we recognize the warrant instruments as liabilities at fair value
and adjusts the instruments to fair value at each reporting period. The
liabilities are subject to
re-measurement
at each balance sheet date until exercised, and any change in fair value is
recognized in our statements of operations. The fair value of warrants issued in
connection with the Private Placement has been estimated using Monte-Carlo
simulations at each balance sheet date. The fair value of the warrants issued in
connection with the Initial Public Offering was initially measured using a
Monte-Carlo simulation model at each measurement date and subsequently been
measured based on the market price when separately listed and traded. The
determination of the fair value of the warrant liability may be subject to
change as more current information becomes available and accordingly the actual
results could differ significantly. Derivative warrant liabilities are
classified as
non-current
liabilities as their liquidation is not reasonably expected to require the use
of current assets or require the creation of current liabilities.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No.
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 the derivative scope exception, and it simplifies the diluted earnings per
share calculation in certain areas. We adopted ASU
2020-06
on January 1, 2021. Adoption of the ASU did not impact our financial position,
results of operations or cash flows.
Ma
nagement does not believe that any other recently issued, but not yet effective,
accounting standards updates, if currently adopted, would have a material effect
on the accompanying financial s
tatement.
Off-Balance
Sheet Arrangements
As of June 30, 2021, we did not have any
off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation
S-K.

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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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule
12b-2
of the Exchange Act and are not required to provide the information otherwise
required under this item. As of June 30, 2021, we were not subject to any market
or interest rate risk. The net proceeds of the Initial Public Offering,
including amounts in the Trust Account, will be invested in U.S. government
securities with a maturity of 185 days or less or in money market funds that
meet certain conditions under Rule
2a-7
under the Investment Company Act that invest only in direct U.S. government
treasury obligations. Due to the short-term nature of these investments, we
believe there will be no associated material exposure to interest rate risk.
We have not engaged in any hedging activities since our inception and we do not
expect to engage in any hedging activities with respect to the market risk to
which we are exposed.
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
(our "Certifying Officers"), we conducted an evaluation of the effectiveness of
our disclosure controls and procedures as of the end of the fiscal quarter ended
June 30, 2021, as such term is defined in Rules
13a-15(e)
and
15d-15(e)
under the Exchange Act. Based upon that evaluation due to the previously
reported material weakness in our internal control over financial reporting
related to our classification of the public, private warrants and units
associated with our Forward Purchase Agreement as components of equity instead
of derivative liabilities. The material weakness was identified and discussed in
Part I, Item 4 of our Form
10-Q
for the period ended March 31, 2021.

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Notwithstanding the identified material weakness as of June 30, 2021,
management, including the Certifying Officers, believe that the condensed
financial statements contained in this Form
10-Q
filing fairly present, in all material respects, our financial condition,
results of operations and cash flows for the fiscal period presented in
conformity with GAAP.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such
term is defined in Rules
13a-15(f)
and
15d-15(f)
under the Exchange Act) during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. In light of the restatement of the previously
filed financial statements, we enhanced our processes to identify and
appropriately apply applicable accounting requirements to better evaluate and
understand the nuances of the complex accounting standards that apply to our
financial statements. Our plan included 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. As of June 30, 2021, this has not
been fully remediated.

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