10-Q
Table of Contents
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number:
001-41218
 
 
Zapata Computing Holdings Inc.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Delaware
 
98-1578373
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
100 Federal Street, Floor 20
Boston,
MA
 
02110
(Address of principal executive offices)
 
(Zip Code)
(844)
492-7282
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange on which registered
Common Stock
 
ZPTA
 
The Nasdaq Stock Market LLC
Warrants, each whole warrant exercisable for one share of Common Stock, each at an exercise price of $11.50 per share
 
ZPTAW
 
The Nasdaq Stock Market LLC
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer      Accelerated filer  
Non-accelerated
filer
     Smaller reporting company  
     Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐ No 
As of May 10, 2024, the registrant had 31,982,816 shares of common stock, $0.0001 par value per share, outstanding.
 
 
 


Table of Contents

Table of Contents

 

          Page  
PART I.    FINANCIAL INFORMATION      F-1  
Item 1.    Financial Statements      F-1  
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      4  
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      19  
Item 4.    Controls and Procedures      19  
PART II.    OTHER INFORMATION      19  
Item 1.    Legal Proceedings      19  
Item 1A.    Risk Factors      20  
Item 2.    Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities      49  
Item 3.    Defaults Upon Senior Securities      49  
Item 4.    Mine Safety Disclosures      49  
Item 5.    Other Information      49  
Item 6.    Exhibits      50  
Signatures      51  

 

2


Table of Contents
P10D2024-11-302024-07-31
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
ZAPATA COMPUTING HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share and per share amounts)
 
    
March 31,
2024
   
December 31,
2023
 
Assets
    
Current assets:
    
Cash and cash equivalents
   $ 7,251     $ 3,332  
Accounts receivable ($700 and $829 from related parties, respectively)
     1,128       1,938  
Prepaid expenses and other current assets
     1,197       323  
  
 
 
   
 
 
 
Total current assets
     9,576       5,593  
Property and equipment, net
     129       156  
Operating lease
right-of-use
assets
     150       238  
Deferred offering costs
           1,943  
Other
non-current
assets
           137  
  
 
 
   
 
 
 
Total assets
   $ 9,855     $ 8,067  
  
 
 
   
 
 
 
Liabilities, Convertible Preferred Stock and Stockholders’ Deficit
    
Current liabilities:
    
Accounts payable ($3,000 and $1,500 
t
o related parties, respectively)
   $ 9,348     $ 6,452  
Accrued expenses and other current liabilities
     5,535       1,945  
Deferred revenue
     650       744  
Deferred legal fees
     3,330        
Operating lease liability, current
     161       252  
Note payable - related party, current
     2,428        
Equity line of credit commitment payable
     1,688        
  
 
 
   
 
 
 
Total current liabilities
     23,140       9,393  
Forward purchase agreement derivative liability
     4,935        
Senior secured notes
     2,000       8,900  
Note payable - related party,
non-current
     191        
Non-current
liabilities
     669        
  
 
 
   
 
 
 
Total liabilities
     30,935       18,293  
  
 
 
   
 
 
 
Commitments and contingencies (Note 16)
    
Convertible preferred stock (Series Seed, A,
B-1
and
B-2),
$0.0001 par value; 0 and 14,647,823 shares authorized at March 31, 2024 and December 31, 2023, respectively; 0 and 13,001,114 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively
           64,716  
Stockholders’ deficit:
    
Common stock, $0.0001 par value; 600,000,000 and 23,500,000 shares authorized at March 31, 2024 and December 31, 2023, respectively; 29,123,701 and 4,678,950 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively
     2        
Additional
paid-in
capital
     90,828       14,633  
Accumulated other comprehensive loss
     (64     (49
Accumulated deficit
     (111,846 )     (89,526
  
 
 
   
 
 
 
Total stockholders’ deficit
     (21,080 )     (74,942
  
 
 
   
 
 
 
Total liabilities, convertible preferred stock and stockholders’ deficit
   $ 9,855     $ 8,067  
  
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
F-1

ZAPATA COMPUTING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(In thousands, except share and per share amounts)
 
    
Three Months Ended March 31,
 
    
2024
   
2023
 
Revenue ($433 and $494 from related parties, respectively)
   $ 1,218     $ 1,512  
Cost of revenue
     1,052       1,306  
  
 
 
   
 
 
 
Gross profit
     166       206  
  
 
 
   
 
 
 
Operating expenses:
    
Sales and marketing ($696 and $696 from related parties, respectively)
     1,629       1,701  
Research and development
     1,407       2,129  
General and administrative
     2,206       1,469  
  
 
 
   
 
 
 
Total operating expenses
     5,242       5,299  
  
 
 
   
 
 
 
Loss from operations
     (5,076     (5,093
  
 
 
   
 
 
 
Other income (expense):
    
Interest expense
     (784 )      
Loss on issuance of forward purchase agreement derivative liability
     (4,935      
Loss on issuance of senior secured notes
     (9,776      
Other (expense) income, net
     (1,743 )     29  
  
 
 
   
 
 
 
Total other (expense) income, net
     (17,238 )     29  
  
 
 
   
 
 
 
Net loss before income taxes
     (22,314 )     (5,064
Provision for income taxes
     (6 )     (4
  
 
 
   
 
 
 
Net loss
   $ (22,320 )   $ (5,068
  
 
 
   
 
 
 
Net loss per share attributable to common stockholders, basic and diluted
   $ (4.09   $ (1.09
  
 
 
   
 
 
 
Weighted-average common shares outstanding, basic and diluted
     5,457,386       4,657,228  
  
 
 
   
 
 
 
Net loss
   $ (22,320 )   $ (5,068
Foreign currency translation adjustment
     (15     (1
  
 
 
   
 
 
 
Comprehensive loss
   $ (22,335 )   $ (5,069
  
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
F-2

ZAPATA COMPUTING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
(UNAUDITED)
For the Three Months Ended March 31, 2024 and 2023
(In thousands, except share amounts)
 
    
Convertible Preferred
Stock ($0.0001 par
value)
                
Common Stock
($0.0001 par value)
    
Additional
Paid-in

Capital
    
Accumulated Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Total
Stockholders’
Deficit
 
    
Shares
   
Amount
                
Shares
   
Amount
 
Balances at December 31, 2022
     14,222,580     $ 64,716    
 
       5,095,831     $      $ 2,734      $ (25   $ (59,792   $ (57,083
Retroactive application of reverse recapitalization
     (1,221,466     —     
 
       (439,603     —         —         —        —        —   
  
 
 
   
 
 
          
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Adjusted balance, beginning of period
     13,001,114       64,716              4,656,228              2,734        (25     (59,792     (57,083
Issuance of common stock resulting from exercise of stock options
     —        —               2,999       —         6        —        —        6  
Stock-based compensation expense
     —        —               —        —         45        —        —        45  
Net loss
     —        —               —        —         —         —        (5,068     (5,068
Cumulative translation adjustment
     —        —               —        —         —         (1     —        (1
  
 
 
   
 
 
          
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balances at March 31, 2023
     13,001,114     $ 64,716              4,659,227     $      $ 2,785      $ (26   $ (64,860   $ (62,101
  
 
 
   
 
 
          
 
 
   
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
    
Convertible Preferred
Stock ($0.0001 par
value)
                
Common Stock
($0.0001 par value)
    
Additional
Paid-in

Capital
   
Accumulated Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Total
Stockholders’
Deficit
 
    
Shares
   
Amount
                
Shares
   
Amount
 
Balances at December 31, 2023
     14,222,580     $ 64,716    
 
       5,118,553     $      $ 14,633     $ (49   $ (89,526   $ (74,942
Retroactive application of reverse recapitalization
     (1,221,466        
 
       (439,603     —         —        —        —        —   
  
 
 
   
 
 
          
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Adjusted balance, beginning of period
     13,001,114       64,716              4,678,950              14,633       (49     (89,526     (74,942
Issuance of common stock resulting from exercise of stock options
     —        —               47,183       —         68       —        —        68  
Stock-based compensation expense
     —        —               —        —         191       —        —        191  
Loss on issuance of senior secured notes
     —        —               —        —         9,776       —        —        9,776  
Issuance of common stock pursuant to the forward purchase agreement
     —        —               500,000       —         (10,986     —        —        (10,986
Issuance of common stock related to the conversion of Senior Secured Notes (
856,202
shares or $
3,853
to related parties)
     —        —               3,257,876       —         14,660       —        —        14,660  
Issuance of common stock in connection with debt issuance costs related to senior secured notes and capital markets advisory agreements
     —        —               42,372       —         352       —        —        352  
Conversion of redeemable convertible preferred stock into common stock in connection with the reverse recapitalization
     (13,001,114     (64,716            13,001,114       1        64,715       —        —        64,716  
Issuance of common stock upon the reverse recapitalization
     —        —               7,596,206       1        4,477       —        —        4,478  
Issuance costs in connection with the reverse recapitalization
     —        —               —        —         (7,058     —        —        (7,058
Net loss
     —        —               —        —         —        —        (22,320 )     (22,320 )
Cumulative translation adjustment
     —        —               —        —         —        (15     —        (15
  
 
 
   
 
 
          
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Balances at March 31, 2024
         $              29,123,701     $ 2      $ 90,828     $ (64 )   $ (111,846 )   $ (21,080 )
  
 
 
   
 
 
          
 
 
   
 
 
    
 
 
   
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
F-3
ZAPATA COMPUTING HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
    
For the Three Months Ended
March 31,
 
    
2024
    
2023
 
Cash flows from operating activities:
     
Net loss
   $ (22,320 )    $ (5,068
Adjustments to reconcile net loss to net cash used in operating activities:
     
Depreciation and amortization
     38        45  
Non-cash
interest expense
     761         
Non-cash vendor payments
     150         
Loss on issuance of senior secured notes
     9,776         
Stock-based compensation
     191        45  
Non-cash
lease expense
     87        87  
Equity line of credit commitment expense
     1,688         
Loss on issuance of forward purchase agreement derivative liability
     4,935         
Changes in operating assets and liabilities:
     
Accounts receivable ($129 and $46 from related parties, respectively)
     809        458  
Prepaid expenses and other current assets
     (736      (589
Accounts payable ($1,500 and $749
t
o related parties, respectively)
     2,109        635  
Accrued expenses and other current liabilities and other
non-current
liabilities
     550        (517
Deferred revenue
     (94      (330
Operating lease liabilities
     (91      (90
  
 
 
    
 
 
 
Net cash used in operating activities
     (2,147      (5,324
  
 
 
    
 
 
 
Cash flows from investing activities:
     
Purchases of property and equipment
     (11       
  
 
 
    
 
 
 
Net cash used in investing activities
     (11       
  
 
 
    
 
 
 
Cash flows from financing activities:
     
Payment of deferred offering costs
     (1,500       
Proceeds from the exercise of stock options
     68        6  
Proceeds from the reverse recapitalization
     12,636         
Prepayment for forward purchase agreement
     (10,986       
Proceeds from issuance of senior secured notes, net of debt issuance costs
     5,878         
  
 
 
    
 
 
 
Net cash provided by financing activities
     6,096        6  
  
 
 
    
 
 
 
Effect of exchange rate changes on cash and cash equivalents
     (19      5  
  
 
 
    
 
 
 
Net increase (decrease) in cash and cash equivalents
     3,919        (5,313
Cash and cash equivalents and restricted cash at beginning of period
     3,469        10,210  
  
 
 
    
 
 
 
Cash and cash equivalents and restricted cash at end of period
   $ 7,388      $ 4,897  
  
 
 
    
 
 
 
Supplemental disclosures
     
Issuance of common stock in connection with conversion of senior secured notes ($3,853 and
$0 from related parties, respectively)
   $ 14,660      $  
Issuance of common stock in connection with debt issuance costs related to senior secured notes and capital markets advisory agreements
   $ 352      $  
Issuance of senior secured notes in lieu of payments for offering costs and capital markets advisory agreements
   $ 1,150      $  
Deferred offering costs included in accounts payable and accrued expenses and
other current liabilities
   $ 4,222      $  
Debt issuance costs in included in accrued expenses and other current liabilities
   $ 35      $  
Conversion of convertible preferred stock upon the reverse recapitalization
   $ 64,716      $  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
F-4

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
1.
Nature of the Business and Basis of Presentation
Zapata Computing Holdings Inc., formerly known as Andretti Acquisition Corp. (“AAC”), was incorporated as a Cayman Islands exempted company on January 20, 2021. On March 28, 2024, AAC filed an application for deregistration with the Cayman Islands Registrar of Companies, together with the necessary accompanying documents, and filed a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, under which AAC was domesticated and continues as a Delaware corporation and changed its name to Zapata Computing Holdings Inc. AAC was formed for the purpose of effecting a merger, consolidation share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities. On March 28, 2024 (the “Closing Date” or “Closing”), AAC consummated a business combination with Zapata Computing, Inc. (“Legacy Zapata”) pursuant to the Business Combination Agreement by and among AAC, Tigre Merger Sub, Inc. and Legacy Zapata entered into on September 6, 2023 (the “Business Combination Agreement”).
Zapata Computing Holdings Inc. is a holding company whose principal asset is its ownership interest in Legacy Zapata, and operates and controls all of the businesses and operations of Legacy Zapata and its subsidiaries. Zapata Computing Holdings Inc. and its predecessor, AAC, are collectively referred to herein as “Zapata” or the “Company”. The Company offers customers Industrial Generative Artificial Intelligence (“AI”) Solutions designed to solve computationally complex problems. These are subscription-based solutions that combine software and services to develop custom industrial generative AI applications. Zapata’s software leverages a broad spectrum of computing resources, including classical, high performance, and quantum computing hardware and, in developing and applying its software tools to specific applications, Zapata uses techniques inspired by quantum physics that can then be applied to the appropriate hardware.
The Company is subject to risks and uncertainties similar to those of other companies of similar size in its industry, including, but not limited to, the need for successful development of products, competition from substitute products and services from larger companies, protection of proprietary technology, patent litigation, dependence on key individuals, risks associated with changes in information technology, and the ability to raise additional capital to fund operations. The Company’s long-term success is dependent upon its ability to successfully market, deliver, and scale its Industrial Generative AI Solutions, increase revenue, meet its obligations, obtain additional capital when needed and, ultimately, to achieve profitable operations.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Certain information or footnote disclosures normally included in unaudited condensed consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with Legacy Zapata’s consolidated financial statements and notes thereto included as Exhibit 99.1 to the Form
8-K
filed by Legacy Zapata on April 3, 2024. The interim results for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for any future periods.
On the Closing Date, AAC and Legacy Zapata, consummated a business combination (the “Merger”) (see Note 3) pursuant to the Business Combination Agreement. In connection with the Closing of the Merger, AAC changed its name to Zapata Computing Holdings Inc. The Company’s common stock commenced trading on the Nasdaq Global Market under the new trading symbols “ZPTA” and “ZPTAW”, respectively, on April 1, 2024. The Merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, AAC, which was the legal acquirer, was treated as the “acquired” company for financial reporting purposes and Legacy Zapata, a direct wholly owned subsidiary of AAC, was treated as the accounting acquirer.
As a result, the unaudited condensed consolidated financial statements included herein for the three months ended March 31, 2024 reflected (i) the historical operating results of Legacy Zapata prior to the Merger, (ii) the combined results of the Company, Legacy Zapata and AAC following the Closing of the Merger, (iii) the assets and liabilities of Legacy Zapata at their historical costs, (iv) the assets and liabilities of the Company and AAC at their historical costs, which approximated fair value, and (v) the Company’s equity structure for all periods presented.
 
F-5

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
The Company’s equity structure has been restated in all comparative periods up to the Closing Date, to reflect the number of shares of the Company’s common stock, par value $
0.0001
, issued to Legacy Zapata’s stockholders in connection with the recapitalization transaction. As such, the Company’s common stock and the corresponding capital amounts and earnings per share related to Legacy Zapata’s common stock prior to the Merger have been retrospectively restated as shares reflecting the conversion upon the closing of the Merger calculated in accordance with the Business Combination Agreement by multiplying each share of Convertible Preferred Stock (as defined below) by
0.9141
(the “Exchange Ratio”).
Going Concern
The
Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company has incurred significant losses and negative cash flows from operations since the inception of Legacy Zapata in November 2017 and expects to continue to incur losses and negative cash flows for the foreseeable future as the Company expands its penetration of the Industrial Generative AI Solutions in the industry.
Since inception through March 31, 2024, the Company has financed its operations primarily through sales of its Convertible Preferred Stock, as defined below, and common stock and with issuances of Senior Notes and Senior Secured Notes, as defined below. The Company has incurred net losses of $
22,320 and $5,068 for the three months ended March 31, 2024, and 2023, respectively. As of March 31, 2024 and December 31, 2023, the Company had an accumulated deficit of $111,846 and $89,526,
respectively. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to identify future equity or debt financing and generate profits from its operations. The Company is pursuing all available options for funding, which include seeking public or private investments and funding through its Purchase Agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”). In addition, the Company is party to a Forward Purchase Agreement, pursuant to which it may receive proceeds upon the exercise of the optional early termination by the seller of the Forward Purchase Agreement or at the settlement date (Note 7). There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to the Company. 
These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
2.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected within these condensed consolidated financial statements include, but are not limited to, revenue recognition, the Forward Purchase Agreement derivative liability, the valuation of the Company’s common stock, and stock-based awards. The Company’s estimates are based on historical information available as of the date of the unaudited condensed consolidated financial statements and various other assumptions that the Company believes are reasonable under the circumstances. Actual results may differ materially from those estimates 
or assumptions.
 
F-6

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
Foreign Currency and Currency Translation 
The functional currency for the Company’s wholly owned foreign subsidiaries in Canada, Japan, Spain and the United Kingdom is United States dollars (“USD”), Japanese Yen, Euro and British Pound, respectively. Assets and liabilities of these subsidiaries are translated into USD at the exchange rate in effect on the balance sheet date. Income and expenses are translated at the average exchange rate in effect during the period. Unrealized translation gains and losses are recorded as a translation adjustment, which is included in the condensed consolidated statements of stockholders’ deficit as a component of accumulated other comprehensive loss. Adjustments that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included in other
expense
, net in the condensed consolidated statements of operations and comprehensive loss.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents at high-quality and accredited financial institutions.

The Company
 
performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. Accounts receivable is presented after consideration of an allowance for credit losses, which is an estimate of amounts that may not be collectible. In determining the amount of the allowance at each reporting date, the Company makes judgments about general economic conditions, historical
write-off
experience and any specific risks identified in customer collection matters, including the aging of unpaid accounts receivable and changes in customer financial conditions. Account balances are written off after all means of collection are exhausted and the potential for recovery is determined to not be probable. As of March 31, 2024 and December 31, 2023, the Company recorded zero
allowance for credit losses.
As of March 31, 2024, the Company’s accounts receivable was from three main customers, representing approximately
62
%,
26
% and
12
% of the Company’s total accounts receivable, of which
62
% is from a related party. As of December 31, 2023, the Company’s accounts receivable was from three main customers, representing approximately
43
%,
31
% and
26
% of the Company’s total accounts receivable, of which 43% is from a related party.
For the three months ended March 31, 2024, the Company had four customers that represented greater than 10% of the Company’s total revenue and revenue recognized from these customers represented approximately
36
%,
22
%,
20
% and
14
% of total revenue, of which
36
% is from a related party. For the three months ended March 31, 2023, the Company had four customers that represented greater than 10% of the Company’s total revenue and revenue recognized from these customers represented approximately
33
%,
27
%,
21
% and
19
% of total revenue, of which 33% is from a related party.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less at the time of initial purchase to be cash equivalents. As of March 31, 2024 and December 31, 2023, the amount of cash equivalents included in cash and cash equivalents totaled $6,037 and $
2,693
, respectively.
Restricted Cash
Restricted
cash consists of cash on deposit to secure a letter of credit totaling $
137
as
of March 31, 2024 and December 31, 2023 that is required to be maintained in connection with the Company’s lease arrangements. The letter of credit is expected to be renewed until the lease expiration in 2024. As of March 31, 2024 and December 31, 2023, the Company classified its restricted cash as a current asset and included in prepaid expenses and other current assets on the condensed consolidated balance sheet based on the release date of the restrictions. 
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:
 
    
March 31,
2024
    
December 31,
2023
 
Cash and cash equivalents
  
$
7,251
 
  
$
3,332
 
Restricted cash
  
 
137
 
  
 
137
 
  
 
 
    
 
 
 
Total cash, cash equivalents and restricted cash
  
$
7,388
 
  
$
3,469
 
  
 
 
    
 
 
 
 
F-7

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
Deferred Offering Costs
The
Company capitalized deferred offering costs, consisting of direct legal, accounting, capital markets advisory and other fees and costs directly attributable to the Company’s Merger with Legacy Zapata (see Notes 3 and 16). Upon the Closing of the Merger on March 28, 2024, all deferred offering costs totaling $7,058 were reclassified and recorded against the additional
paid-in
capital in the condensed consolidated balance sheets. The deferred transaction costs were $
0
and $
1,943
as of March 31, 2024 and December 31, 2023, respectively.
Fair Value Measurements
Certain
assets and liabilities are carried at fair value under U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 
Level 1
 
 
Quoted prices in active markets for identical assets or liabilities.
Level 2
 
 
Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3
 
 
Unobservable inputs that are supported by little or no market activity that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful life of each asset as follows:
 
 
  
Estimated Useful Life
Computer equipment
   3 years
Furniture and fixtures
   5 years
Leasehold improvements
   Shorter of remaining lease term or useful life
Costs for capital assets not yet placed into service are capitalized and are depreciated once placed into service. Upon retirement or sale, the cost of assets disposed of, and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance that do not improve or extend the life of the respective assets are charged to expense as incurred.
Impairment of Long-Lived Assets
Long-lived assets consist primarily of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized in loss from operations when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. If such asset group is considered to be impaired, the impairment loss to be recognized is measured based on the excess of the carrying value of the impaired asset group over its fair value.
For the three months ended March 31, 2024, and 2023, the Company did not recognize any impairment losses on long-lived assets.
Leases
In accordance with ASC Topic 842, Leases (“ASC 842”), the Company determines whether an arrangement is or contains a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company classifies leases at the lease commencement date, when control of the underlying asset is transferred from the lessor to the lessee, as operating or finance leases and records a
right-of-use
(“ROU”) asset and a lease liability on the condensed consolidated balance sheets for all leases with a lease term of greater than twelve months. For all asset classes, the Company has elected to not recognize leases with a lease term of twelve months or less on the balance sheet and will recognize lease payments for such short-term leases as an expense on a straight-line basis.
 
F-8

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
The Company enters into contracts that contain both lease and
non-lease
components.
Non-lease
components are items or activities that transfer a good or service to the lessee, and may include items such as maintenance, utilities, or other operating costs. The Company elected to account for the lease and associated
non-lease
components as a single lease component for all existing classes of underlying assets. Variable costs associated with leases, such as utilities or maintenance costs, are not included in the measurement of ROU assets and lease liabilities, but rather are expensed when the event determining the amount of variable consideration to be paid occurs.
Finance and operating lease assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term and are measured using the discount rate implicit in the lease if readily determinable. If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate based upon the available information at the lease commencement date. The Company’s incremental borrowing rate reflects the fixed rate at which the Company could borrow the amount of lease payments in the same currency on a collateralized basis, for a similar term in a similar economic environment. ROU assets are further adjusted for items such as initial direct costs, prepaid rent, or lease incentives. Operating lease payments are expensed using the straight-line method as an operating expense over the lease term. The Company’s lease terms may include options to extend the lease when it is reasonably certain that the Company will exercise that option.
Deferred Legal Fees
Deferred legal fees consist of consideration to be paid to AAC’s legal advisors in connection with its initial public offering (“IPO”) and the consummation of the Merger. The deferred legal fees will be paid by the Company in equal monthly installments over the twelve-month period starting on April 18, 2024.
Forward Purchase Agreement Derivative Liability
On March 25, 2024, the Company entered into a forward purchase agreement with Sandia Investment Management LP, acting on behalf of certain funds (collectively, “Sandia” or the “Seller”). The Forward Purchase Agreement contains (i) an Optional Early Termination provision, which is considered an
in-substance
put option (the “Optional Early Termination”) and (ii) a Variable Maturity Consideration which is the amount of the Settlement Amount Adjustment in excess of the Settlement Amount as defined below in Note 7 (the “Variable Maturity Consideration”). The Optional Early Termination and the Variable Maturity Consideration, as combined, are considered a freestanding financial instrument as the Optional Early Termination and the Variable Maturity Consideration cannot be legally detachable and separately exercisable from each other and together, meet the definition of a derivative instrument. Pursuant to the Forward Purchase Agreement, the Seller has the option to early terminate the arrangement in whole or in part by providing written notice to the Company, and the Seller will pay the Company an amount equal to the product of the number of shares that are early terminated and the Reset Price (as defined in Note 7) then in effect. If the Seller exercises an Optional Early Termination, then the Settlement Amount and the Settlement Amount Adjustment to be paid at the Valuation Date, in each case as such term is defined in Note 7, will be reduced in proportion to the number of shares subject to the Optional Early Termination. Additionally, the Company may be obligated to pay consideration to the Seller in cash or, under certain circumstances, in shares of the Company’s common stock, if the Settlement Amount Adjustment exceeds the Settlement Amount. The Company recorded the derivative instrument as a liability on its condensed consolidated balance sheets and measured it at fair value with the initial value of the derivative instrument recorded as a loss on issuance of forward purchase agreement derivative liability in the condensed consolidated statements of operations and comprehensive loss. The forward purchase agreement derivative liability will be subsequently remeasured to fair value at each reporting period, with changes in fair value recognized in the condensed consolidated statements of operations and comprehensive loss.
Senior Notes and Senior Secured Notes
The Company performed an analysis of all of the terms and features of the Senior Notes and the Senior Secured Notes (as defined in Note 8). The Company elected the Fair Value Option to account for the Senior Notes. The Senior Notes were remeasured at fair value at each balance sheet date until they were extinguished and converted to Senior Secured Notes (see Note 8) in December 2023.
 
F-9

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
The Company accounts for the Senior Secured Notes at amortized cost, as they were issued at a substantial premium and do not qualify for the Fair Value Option. The Company concluded that the optional conversion features were not required to be bifurcated and separately accounted for as a derivative. The substantial premium related to the Senior Secured Notes issued is recorded as a loss at issuance within total other expense, net in the condensed consolidated statements of operations and comprehensive loss. Costs related to the issuance of the Senior Secured Notes are recorded as a debt discount as a reduction of the carrying value of the notes and amortized over the term of the Senior Secured Notes and are recorded in other expense, net within the condensed consolidated statements of operations and comprehensive loss using the effective interest method.
Segment Information
The Company manages its business as a single operating segment for the purposes of assessing performance and making operating decisions. The Company’s chief executive officer, who is the chief operating decision maker, reviews the Company’s financial information on a consolidated basis for purposes of evaluating financial performance and allocating resources. As of March 31, 2024 and December 31, 2023, the Company does not have material long-term assets outside the U.S.
Classification of Convertible Preferred Stock
Legacy Zapata has classified its Series Seed Preferred Stock (“Series Seed Preferred Stock”), Series A Preferred Stock (“Series A Preferred Stock”), Series
B-1
Preferred Stock and Series
B-2
Preferred Stock (the “Series B Preferred Stock” and, together with the Series Seed Preferred Stock and Series A Preferred Stock, the “Convertible Preferred Stock” outside of stockholders’ deficit on the Company’s condensed consolidated balance sheets because the holders of such stock had redemption features and certain liquidation rights in the event of a deemed liquidation that, in certain situations, were not solely within the control of Legacy Zapata and would require the redemption of the then-outstanding Convertible Preferred Stock. Upon the Closing of the Merger on March 28, 2024, 14,222,580 shares of Convertible Preferred Stock were converted into 13,001,114 shares of the Company’s common stock using the Exchange Ratio of 0.9141.
Capitalization of Software Development Costs
The Company incurred software development costs related to development of its quantum computing platform. Given that the Company may sell the platform both as a service as well as a license, the Company evaluates software development costs to determine the point where technological feasibility is established. The Company has determined that technological feasibility is typically concurrently with the release, and therefore there have not been costs capitalized through March 31, 2024. Costs incurred in connection with maintenance and customer support are also expensed as incurred.
Revenue Recognition
Revenue is recognized when the Company satisfies a performance obligation by transferring goods or services promised in a contract to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. Performance obligations in contracts represent distinct or separate goods or services that the Company provides to customers.
The Company recognizes revenue using the following steps: 1) identification of the contract, or contracts with a customer, 2) identification of performance obligations in the contract, 3) determination of the transaction price, 4) allocation of the transaction price to the performance obligations in the contract and 5) recognition of revenue when or as the Company satisfies the performance obligations.
At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good or service (or bundle of goods or services) that is distinct.
The Company currently earns revenue primarily from subscriptions to its software platform, referred to as the Orquestra Platform, and services.
 
F-10

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
The Company’s subscriptions to its Orquestra Platform are currently offered as stand-ready access to the Company’s cloud environment for access on an annual or multi-year basis. The Company’s consulting services may result in either single or multiple performance obligations based on the contractual terms. The Company may also offer services in the form of stand-ready scientific and software engineering services, which are typically only offered in conjunction with the Orquestra Platform. The Company evaluates its contracts at inception to determine if the promises represent a single, combined performance obligation or multiple performance obligations. The Company allocates the transaction price to the performance obligations identified.
Judgment is required to allocate the transaction price to each performance obligation. The Company utilizes a stand-alone selling price methodology based on observable or estimated prices for each performance obligation. The Company considers market conditions, entity-specific factors, and information about the customer that is reasonably available to the entity when estimating stand-alone selling price for those performance obligations without an observable selling price. The Company’s contracts do not contain rights of return, and any variable consideration as the result of service level agreements has been immaterial. The Company does not have other contractual terms that give rise to variable consideration.
Revenue from subscriptions to the Company’s Orquestra Platform to date have only been sold as access to the platform in its hosted environment and are therefore recognized over the contract term on a ratable basis, as the promise represents a stand-ready performance obligation.
Revenue from consulting services is generally recognized over time. The Company’s contracts typically contain
fixed-fee
transaction prices. The Company determines and records a provision for loss contracts at the contract level when the current estimate of total costs of the contract at completion exceeds the total consideration the Company expects to receive. The Company has not recorded any provision for loss contracts at March 31, 2024 or December 31, 2023.
For consulting services, the Company measures progress toward satisfaction of the performance obligation as the services are provided, and revenue is generally recognized based on the labor hours expended over time. Through this method, the Company recognizes revenue based on the actual labor hours incurred to date compared to the current estimate of total labors hours to satisfy the performance obligation. The Company believes this method best reflects the transfer of control to the customer. This method requires periodic updates to the total estimated hours to complete the contract, and these updates may include subjective assessments and judgments. The Company had limited contracts for which, based on the Company’s determination of the enforceability of payment terms, revenue was recognized at a point in time when payment became enforceable.
Revenue from
 services sold in the form of stand-ready scientific and software engineering services are recognized over the contract term on a ratable basis, as the obligation represents a stand-ready obligation.
The Company’s payment terms vary by contract and do not contain significant financing components. Amounts collected in advance of revenue recognized are recorded as deferred revenue in the condensed consolidated balance sheets.
The Company’s balances resulting from contracts with customers include the following:
Contract Acquisition Costs—
The Company incurs and pays commissions at the commencement of the contract. The period of the related revenue recognition for the Company’s contracts is typically less than one year in duration, and as such, the Company applies the practical expedient to expense the costs in the period in which they were incurred.
For contracts that have periods that exceed one year, the Company capitalizes contract acquisition costs. As of March 31, 2024
 
and
December 31, 2023, capitalized contract acquisition costs of $
29 and $38, respectively, were included in prepaid expenses and other current assets on the condensed consolidated balance sheets. There was $10 and $4 of amortization of contract acquisition costs recognized in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2024, and 2023, respectively.
Accounts Receivable—
Accounts receivable represents amounts billed or unbilled to customers that have yet to be collected and represents an unconditional right to receive this consideration from its customers. Account balances are written off against the allowance in the period in which the Company determines that is it probable that the receivable will not be recovered. As of March 31, 2024 and December 31, 2023, there were accounts receivable due from related parties amounting to $700 and $829, respectively. As of March 31, 2024 and December 31, 2023, the Company had zero allowance for
credit losses.

 
F-11

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
Deferred Revenue—
Deferred revenue represents payments received for which revenue has not yet been recognized.
All deferred revenue as of December 31, 2023 was recognized as revenue during the three months ended March 31, 2024. The decrease in deferred revenue is due to decreased customer billings for revenue not yet delivered for consulting services and subscriptions relating to timing of satisfaction of the Company’s performance obligations.
Balances from contracts with customers for the three months ended March 31, 2024, consist of the following: 
 
    
End of Period
    
Beginning of Period
 
Accounts receivable (including $500 and $562 from related parties at March 31, 2024 and December 31, 2023, respectively)
   $ 910      $ 1,341  
Unbilled accounts receivable (including $200 and $267 from related parties at March 31, 2024 and December 31, 2023, respectively)
     218        597  
Deferred revenue
     650        744  
Balances from contracts with customers for the year ended December 31, 2023, consist of the following:
 
    
End of Year
    
Beginning of Year
 
Accounts receivable (including $562 and $0 from related parties at December 31, 2023 and 2022, respectively)
   $ 1,341      $ 600  
Unbilled accounts receivable (including $267 and $534 from related parties at December 31, 2023 and 2022, respectively)
     597        827  
Deferred revenue
     744        500  
All revenue from contracts with customers was generated in the U.S. and was recognized over time during the three months ended March 31, 2024 and 2023.
Cost of Revenue
Cost of revenue includes expenses related to supporting product offerings. The Company’s primary cost of revenue is personnel costs, including salaries and other personnel-related expense. Cost of revenue also includes costs relating to the Company’s information technology and systems, including depreciation, network costs, data center maintenance, database management and data processing costs. The Company allocates these overhead expenses based on headcount, and thus these expenses are reflected in cost of revenue and each operating expense category.
Research and Development Expenses
Research and development expenses consist primarily of expenses and overhead costs incurred in developing new products. The Company expenses all research and development costs as incurred.
Sales and Marketing Expenses
Advertising expenses, which are included in sales and marketing expense in the condensed consolidated statements of operations and comprehensive loss, primarily include promotional expenditures, and are expensed as incurred. The amount incurred for advertising expenses for the three months ended March 31, 2024, and 2023 was immaterial.
In addition, sales and marketing expenses consist primarily of personnel-related costs, including salaries and wages, benefits, commissions, bonuses and stock-based compensation expense for the Company’s employees engaged in sales and sales support, business development, marketing, corporate partnerships, and customer service functions. Sales and marketing expenses also include costs incurred for market research, tradeshows, branding, marketing, promotional expense, and public relations, as well as facilities and other supporting overhead costs, including depreciation and amortization.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and other related costs, for personnel and consultants in the Company’s executive and finance functions. General and administrative expenses also include professional fees for legal, finance, accounting, intellectual property, auditing, tax and consulting services, travel expenses and facility-related expenses, which include allocated expenses for rent and maintenance of facilities and other operating costs not otherwise included in research and development expenses or sales and marketing expenses.
 
F-1
2

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
Warrant Instruments
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the instruments’ specific terms and applicable authoritative guidance in ASC 480 and ASC 815. The assessment considers whether the instruments are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the instruments meet all of the requirements for equity classification under ASC 815, including whether the instruments are indexed to the Company’s own common stock and whether the instrument holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and, for liability-classified warrants, at each reporting period end date while the warrants are outstanding.
The Company evaluated its outstanding warrants and concluded that the warrants to purchase common stock at an exercise price of $11.50 per share that are listed on the Nasdaq Capital Market under the ticker symbol “ZPTAW” (“Public Warrants”) and warrants to purchase common stock at an exercise price of $11.50 per share held by the Sponsor and the Sponsor
Co-Investor
(“Private Placement Warrants”) to be issued pursuant to the warrant agreements are indexed to its own common stock and therefore qualify for equity accounting treatment.
Stock-Based Compensation
The Company measures all stock-based awards granted to employees, directors and
non-employees
based on the fair value of the awards on the date of grant using the Black-Scholes option-pricing model. The Company measures restricted stock awards using the difference, if any, between the purchase price per share of the award and the fair value of the Company’s common stock at the date of grant.
The Company grants stock options and restricted stock awards that are subject to service-based vesting conditions. Compensation expense for awards to employees and directors with service-based vesting conditions is recognized using the straight-line method over the requisite service period, which is generally the vesting period of the respective award. Compensation expense for awards to
non-employees
with service-based vesting conditions is recognized in the same manner as if the Company had paid cash in exchange for the goods or services, which is generally over the vesting period of the award. The Company accounts for forfeitures as they occur.
The Company classifies stock-based compensation expense in its condensed consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified.
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ deficit that result from transactions and economic events other than those with stockholders. The comprehensive loss for the Company equals its net loss plus changes in foreign currency translation for all periods presented.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the condensed consolidated financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.
 
F-1
3

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
The Company
 accounts for uncertainty in income taxes recognized in the condensed consolidated financial statements by applying a
two-step
process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more likely than not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the condensed consolidated financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. The Company had accrued no amounts for interest or penalties related to uncertain tax positions as of March 31, 2024 and December 31, 2023.
Emerging Growth Company
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. The Company qualifies as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by FASB or the SEC either (i) within the same periods as those otherwise applicable to
non-emerging
growth companies or (ii) within the same time periods as private companies. The Company intends to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. As a result, the Company’s unaudited condensed consolidated financial statements may not be comparable to those public companies that comply with new or revised accounting pronouncements as of public company effective dates. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for nonpublic companies.
Recently Adopted 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) (“ASU
2020-06”).
ASU
2020-06
simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments became effective for the Company for annual and interim reporting periods beginning after December 15, 2023. The Company adopted ASU
2020-06
on January 1, 2024. The adoption of this guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU
2023-07,
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
, which requires all public entities, including public entities with a single reportable segment, to provide in interim and annual periods one or more measures of segment profit or loss used by the chief operating decision maker to allocate resources and assess performance. Additionally, the standard requires disclosures of significant segment expenses and other segment items as well as incremental qualitative disclosures. The guidance in this update is effective for fiscal years beginning after December 15, 2023, and interim periods after December 15, 2024. The Company is currently in the process of evaluating the effects of this pronouncement on its related disclosures.
In December 2023, the FASB issued ASU
2023-09,
Income Taxes (Topic 740): Improvements to Income Tax Disclosures
, which requires enhanced income tax disclosures, including specific categories and disaggregation of information in the effective tax rate reconciliation, disaggregated information related to income taxes paid, income or loss from continuing operations before income tax expense or benefit, and income tax expense or benefit from continuing operations. The requirements of the ASU are effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently in the process of evaluating the impact of this pronouncement on its related disclosures.
 
F-1
4

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
In March 2024, the FASB issued ASU
2024-02,
Codification Improvements—Amendments to Remove References to the Concepts Statements
, which amends the Codification to remove references to various concepts statements and impacts various topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU
2024-02
are not intended to result in significant accounting changes for most entities. The guidance in this update is effective for fiscal years beginning after December 15, 2024. The Company is currently in the process of evaluating the effects of this pronouncement on its related disclosures.
 
3.
Merger
On March 28, 2024, the Company completed its planned Merger with Legacy Zapata, pursuant to which Legacy Zapata became a wholly owned subsidiary of the Company.
In connection with the Merger, AAC filed an application for deregistration with the Cayman Islands Registrar of Companies and filed a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the state of Delaware, under which AAC was domesticated and continues as a Delaware corporation (the “Domestication”), changing its name to Zapata Computing Holdings Inc. At the effective time of the Domestication, existing holders of ordinary shares of AAC received 7,596,206 shares of the Company’s common stock in exchange for their Class A and Class B ordinary shares held immediately prior to the consummation of the Merger.
With the Closing of the Merger, holders of shares of Legacy Zapata common stock and Legacy Zapata Convertible Preferred Stock received an aggregate of 17,696,425 shares of the Company’s common stock, and holders of Legacy Zapata Options received options to purchase an aggregate of 3,016,409 shares of the Company’s common stock, determined by giving effect of the Exchange Ratio of 0.9141.
For accounting purposes, the Merger was accounted for as a reverse recapitalization whereby Legacy Zapata was treated as the accounting acquirer and AAC was treated as the acquired company. This determination was primarily based on the following factors: (i) Legacy Zapata’s existing stockholders had the majority of the voting interest in the combined entity with an approximate 63% voting interest; (ii) the combined company’s board of directors consisted of seven board members with one board member designated by AAC, and each of the remaining six board members were members of the board of directors of Legacy Zapata and one additional independent board member; (iii) Legacy Zapata’s senior management comprised all the senior management of the combined company; and (iv) Legacy Zapata’s existing operations comprised the ongoing operations of the combined company. In accordance with guidance applicable to these circumstances, the Merger was treated as the equivalent of Legacy Zapata issuing stock for the net assets of AAC, accompanied by a recapitalization. The net assets of AAC were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger were those of Legacy Zapata.
On April 1, 2024, in
 connection with the consummation of the Merger, the Company’s common stock was listed on the Nasdaq Global Market, and the Public Warrants and the Private Placement Warrants were listed on the Nasdaq Capital Market, under the new trading symbols “ZPTA” and “ZPTAW,” respectively. Costs paid by the Company directly attributable to the Merger were $7,058 and were treated as issuance costs and netted against additional
paid-in-capital
in the condensed consolidated balance sheet of the Company. Additionally, upon the consummation of the Merger, the holders of certain outstanding Senior Secured Notes elected to convert the principal of their notes and accrued interest thereon into 3,257,876 shares of the Company’s common stock (856,202 shares to related parties) in accordance with their terms, at a conversion price of $4.50 per share. Following the Closing, $2,000 in aggregate principal amount of Senior Secured Notes remain outstanding.
In connection with the Closing of the Merger, the following events occurred as discussed in more detail below:
Unvested Shares
In contemplation of the Merger, AAC, Legacy Zapata, the Sponsor, the Sponsor
Co-Investor
and certain directors entered into a sponsor support agreement. AAC’s Sponsor, the Sponsor
Co-Investor,
key stockholders of the Sponsors and directors owned an aggregate of 5,750,000 Class B ordinary shares of AAC (the “Sponsor Shares”), of which 1,423,500 shares of Class B ordinary shares were subject to certain vesting and forfeiture provisions as described in the sponsor support agreement. At the Closing of the Merger, 1,129,630 Sponsor Shares were determined to be unvested and are subject to forfeiture (the “Unvested Shares”) (see Note 12).
 
F-15

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
Purchase Agreement with Lincoln Park
On December 19, 2023, the Company entered into a purchase agreement (the “Purchase Agreement”) with Lincoln Park, pursuant to which Lincoln Park has agreed to purchase from the Company, at the option of the Company, an aggregate of up to $75,000 of the Company’s common stock from time to time over a
36-month
period following the Commencement Date, subject to certain limitations contained in the Purchase Agreement including, but not limited to, the filing and effectiveness of a registration statement (the “Lincoln Park Registration Statement”). In accordance with the Purchase Agreement, the Company
was required to
pay Lincoln Park a commitment fee of $1,688 (the “Commitment Fee”) as follows: (i) on the business day prior to the filing of the Lincoln Park Registration Statement, $563 in shares of common stock and (ii) the Company
could
elect to pay the remaining $1,125 amount of the Commitment Fee in either cash or shares of the Company’s common stock, with any shares issuable on the business day prior to the filing of the Lincoln Park Registration Statement and any cash due within 90 days of the Closing Date.
Shares issued as payment for the Commitment Fee are referred to herein as the “Commitment Shares”. As of March 31, 2024, the Company recognized an obligation related to the Commitment Fee of $
1,688 in its condensed consolidated balance sheet.
On April 11, 2024, the Company issued 712,025 shares of common stock to Lincoln Park as consideration for the Commitment Fee (see Note 19).
Forward Purchase Agreement
On March 25, 2024, the Company entered into the Forward Purchase Agreement with Sandia, pursuant to which Sandia purchased, prior to the Closing, 1,000,000 shares of AAC’s Class A Ordinary Shares from third parties through a broker in the open market (the “Recycled Shares”) and, concurrently with the Closing, 500,000 shares of the Company’s common stock at a purchase price of $10.99 per share (the “Additional Shares”). Pursuant to the Forward Purchase Agreement, at the Closing, the Company prepaid to Sandia (the “Prepayment”), (i) with respect to the Recycled Shares, with proceeds from the trust account, a cash amount equal to the (x) product of the number Recycled Shares and (y) $10.99 per share and, (ii) with respect to the Additional Shares, a per share amount equal to $10.99 per share netted against the proceeds from the Additional Shares received from Sandia. In the case of the Recycled Shares, the Prepayment was paid with proceeds from the trust account at the Closing of the Merger. The Prepayment for Additional Shares was netted against the proceeds that Sandia was to pay for the purchase of such Additional Shares, resulting in no cash received or paid for the share issuance (see Note 7).
Advisory Agreements
On July 4, 2023, AAC entered into an engagement letter with a third party, pursuant to which the third party acted as a capital markets advisor to AAC in connection with the Merger. AAC agreed to pay the third party a fee of (i) $500 in cash payable upon the Closing of the Merger, plus (ii) $1,000 in shares of the Company’s common stock, payable 180 days after the Closing of the Merger plus (iii) $1,000 payable in either cash or shares of the Company’s common stock, payable 270 calendar days following the completion of the Merger. On March 25, 2024, AAC and the third party entered into an amendment to the engagement letter to settle the fee arrangement, such that there is no remaining obligation following the Merger.
On September 13, 2023, the Company entered into an agreement with an additional third party for advisory services to be provided in connection with the Merger. In March 2024, the payment terms of the agreement were amended to provide for a fee of $
1,250, to be paid by the issuance of a Senior Secured Note with a principal amount of $1,000 and the remaining $250 in six monthly installments in cash of $42 per month commencing on May 15, 2024. The Senior Secured Note issued to the third party has the same terms as the Senior Secured Notes issued to other noteholders. The third party did not convert the Senior Secured Note into shares of the Company’s common stock upon the Closing of the Merger.
On February 
9
,
2024
, AAC and the Company entered into a capital markets advisory agreement with a third party pursuant to which the Company agreed to pay the third party i) $
300
for capital markets advisory services provided related to the Merger, and ii) $
150
for services provided related to the benefit of the holders of AAC and Zapata securities. On March 
27
,
2024
, AAC and the Company also agreed to issue to the third party a Senior Secured Note in the principal aggregate amount of $
150
immediately prior to the Closing of the Merger in exchange for additional capital markets advisory services provided in connection with the Merger. This Senior Secured Note was then converted into
33,333
shares of the Company’s common stock at the Closing of the Merger. The Company recorded a reduction of $
450
in additional
paid-in
capital on its condensed consolidated balance sheet as a transaction cost in connection with the capital markets advisory services provided. During the three months ended March 31, 2024, in connection with the
33,333
shares issued for the additional services, the Company recognized $
150
in general and administrative expense in the condensed consolidated statements of operations and comprehensive loss.
 
F-16

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
On February 9, 2024, the Company entered into an engagement letter with an additional third party, as amended on February 27, 2024, pursuant to which the third party acted as a capital markets advisor to the Company in connection with the Merger. The Company agreed to pay the third party a non-refundable cash fee of $
1,800, payable by the Company in monthly payments of $113 commencing on the earlier of May 31, 2024 or the effectiveness of the Lincoln Park Registration Statement 
until the full advisory fee of $1,800 has been paid (the “Term”), 
with $300 of such payment waivable if the Company voluntarily prepays $1,500 to the third party prior to December 31, 2024. The Lincoln Park Registration Statement was declared effective on April 18, 2024. Notwithstanding the foregoing, the Company will pay the full $1,800 upon consummation of a financing transaction with proceeds of $15,000 or more (not including sales under the Purchase Agreement or similar financing) during the Term. Upon the Closing of the Merger, the Company recognized $1,800
as transaction costs, which recorded as a reduction in additional paid-in capital. The Company also recorded an obligation of $1,350 to the third party in accrued expenses and other current liabilities and $450 in non-current liabilities within the condensed consolidated balance sheet as of March 31, 2024.

In March 2024, The Company entered into a placement agent agreement to retain an additional third party for the purpose of raising up to $
10,000
, for a term of
60
days from the execution of the placement agent agreement. The Company agreed to pay a cash fee equal to
7.0
% of the gross amount of cash proceeds received by the Company from investors introduced by the third party directly to the Company (the “Financing Proceeds”), payable within
7
business days following receipt of proceeds from any investors introduced by the third party. In addition, the Company agreed to issue a number of shares of common stock equal to
3.0
% of the Financing Proceeds divided by $
4.50
upon the closing of the Merger. The Company made cash payments in an aggregate amount equal to $
123
in connection with the receipt of the Financing Proceeds and issued
11,666
shares of common stock upon the closing of the Merger. The Company capitalized the cash fee and the fair value of the shares issued as a debt discount and amortized using the effective interest method over the term of the loans. (See Note 8).

Marketing Services Agreement

On February 
9
,
2024
, AAC entered into a marketing services agreement with a third party to promote investor engagement, pursuant to which AAC agreed to pay the third party in shares of the Company’s common stock with a value of $
300
upon the Closing of the Merger. In connection with the Closing of the Merger, the Company issued
30,706
shares of the Company’s common stock to the third party. As of March 31, 2024, the Company recorded the issuance of the Company’s common stock with a debit and an offsetting entry to additional
paid-in
capital in its condensed consolidated balance sheets.
The following
 table reconciles the elements of the Merger to the condensed consolidated statement of cash flows and the consolidated statement of changes in equity. Upon the Closing of the Merger, the Company obtained liabilities of $
8,159
from AAC, which comprised of $
223
of accounts payable, $
1,987
of accrued expenses and other current liabilities, $
2,619
of note payable – related party, and $
3,330
of deferred legal fees.
 
 
  
March 28, 2024
 
Cash - AAC Trust (net of redemptions)
   $ 20,283  
Less: AAC costs paid at Closing
     (7,317
Less: Notes payable - related party paid at Closing
     (330
  
 
 
 
Net proceeds from the Merger
     12,636  
Less: Liabilities obtained from AAC
     (8,159
  
 
 
 
Merger consideration
   $ 4,477  
  
 
 
 
The number of shares
of the Company’s common stock outstanding immediately following the consummation of the Merger was as follows:
 
 
  
Share Ownership
 
Legacy Zapata equityholders
     17,696,425  
AAC public shareholders
     1,846,206  
AAC Sponsor shares
     5,750,000  
Senior Secured Note holders
     3,257,876  
Additional Shares issued pursuant to the Forward Purchase Agreement
     500,000  
Capital markets advisors
     42,372  
  
 
 
 
Total shares of common stock immediately after the Merger
     29,092,879  
  
 
 
 
 
 
F-17

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
4.
Fair Value Measurements
The following tables present the Company’s fair value hierarchy for its assets and liabilities that are measured at fair value on a recurring basis and indicate the level within the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
 
 
  
Fair Value Measurements at
March 31, 2024
 
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
  
Total
 
Assets:
           
Cash equivalents:
           
Money market mutual funds
   $ 6,037      $      $      $ 6,037  
  
 
 
    
 
 
    
 
 
    
 
 
 
   $ 6,037      $      $      $ 6,037  
  
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities:
           
Forward purchase agreement derivative liability
   $      $      $ 4,935      $ 4,935  
  
 
 
    
 
 
    
 
 
    
 
 
 
   $      $      $ 4,935      $ 4,935  
  
 
 
    
 
 
    
 
 
    
 
 
 
    
Fair Value Measurements at
December 31, 2023
 
    
Level 1
    
Level 2
    
Level 3
    
Total
 
Assets:
           
Cash equivalents:
           
Money market mutual funds
   $ 2,693      $      $      $ 2,693  
  
 
 
    
 
 
    
 
 
    
 
 
 
     $2,693      $      $      $2,693  
  
 
 
    
 
 
    
 
 
    
 
 
 
The Company’s
 cash equivalents maintained in money market funds are based on quoted market prices in active markets, which represent a Level 1 measurement within the fair value hierarchy. The carrying values of the Company’s accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities, the note payable – related party, deferred revenue, deferred legal fees and the obligation to issue common stock approximate their fair values due to the short-term nature of these instruments. The Senior Secured Notes (as defined in Note 8) were issued at a substantial premium. Accordingly, the Company accounts for the Senior Secured Notes under the amortized cost model. The Forward Purchase Agreement derivative liability is carried at fair value, determined according to Level 3 inputs in the fair value hierarchy (see Note 7).
For the three months ended March 31, 2024 and 2023, there were no transfers between Level 1, Level 2 and Level 3.
Valuation of Forward Purchase Agreement Derivative Liability

As described in Note 3, the Company entered into the Forward Purchase Agreement in connection with the Merger on March 25, 2024. The Forward Purchase Agreement contains (i) an Optional Early Termination provision, and (ii) a Variable Maturity Consideration. The Optional Early Termination and the Variable Maturity Consideration, as combined, are considered as a freestanding financial instrument and meet the definition of a derivative instrument.
 
The fair value of the forward purchase agreement derivative liability, consisting of the Optional Early Termination and the Variable Maturity Consideration, was estimated using a Monte-Carlo Simulation in a risk-neutral framework. The fair value of the derivative liability was equal to the difference between the fair value of the Forward Purchase Agreement and the amount of cash receivable at the
two-year
settlement date, which was calculated as the present value of the initial reset price of $
10.00
per share (as defined in the Forward Purchase Agreement) discounted using the term-matched risk-free
rate.
The following table represents the significant inputs used in calculating the forward purchase agreement derivative liability on the issuance date and as of March 31, 2024:
 
Stock price
   $ 13.60  
Expected volatility
     50.00
Risk-free interest rate
     4.54
Expected life (in years)
     2  
Expected dividend yield
     0
 
F-18

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
The Company
 determined the initial value for the forward purchase agreement derivative liability of $4,935 using the Level 3 inputs as of the issuance date on March 28, 2024 and recorded the loss on issuance of $4,935 as a loss on issuance of forward purchase agreement derivative liability in the condensed consolidated statements of operations and comprehensive loss. No changes in fair value of forward purchase agreement derivative liability were recorded during the three months ended of March 31, 2024 in the condensed consolidated statements of operations and comprehensive loss as its initial fair value approximates the fair value as of March 31, 2024.
 
5.
Property and Equipment, Net
Property and equipment, net consisted of the following:
 
    
March 31,
2024
    
December 31,
2023
 
Computer equipment
   $ 640      $ 630  
Furniture and fixtures
     128        128  
Leasehold improvement
     26        26  
  
 
 
    
 
 
 
     794        784  
Less: Accumulated depreciation and amortization
     (665      (628
  
 
 
    
 
 
 
Property and equipment, net
   $ 129      $ 156  
  
 
 
    
 
 
 
Depreciation and amortization expense of property and equipment for the three months ended March 31, 2024, and 2023 was $38 and $45, respectively.
 
6.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
 
    
March 31,
2024
    
December 31,
2023
 
Accrued employee compensation and benefit
   $ 710      $ 263  
Accrued professional fees
     4,705        1,377  
Other
     120        305  
  
 
 
    
 
 
 
   $ 5,535      $ 1,945  
  
 
 
    
 
 
 
 
7.
Forward Purchase Agreement
On March 25, 2024, the Company entered into the Forward Purchase Agreement with Sandia, pursuant to which Sandia purchased, from the open market,
1,000,000
Recycled Shares and
500,000
Additional Shares, which represents the maximum number of shares subject to purchase under the Forward Purchase Agreement, subject to adjustment as described below (the “Maximum Number of Shares”). The number of shares subject to the Forward Purchase Agreement (the “Number of Shares”) is subject to reduction following a termination of the Forward Purchase Agreement with respect to such shares as described under “Optional Early Termination” in the Forward Purchase Agreement.
Pursuant to the Forward Purchase Agreement, at the Closing of the Merger, the Company prepaid to Sandia (the “Prepayment”), with respect to the Recycled Shares, with proceeds from the trust account, a cash amount equal to the (x) product of the number Recycled Shares and (y) $10.99 per share, totaling $
10,986
which was paid at the Closing of the Merger. With respect to the Additional Shares, a per share amount equal to $10.99 per share was netted against the proceeds from the Additional Shares received from Sandia, resulting in no cash received or paid for the share issuance.
 
F-19

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
As of March 31, 2024, the reset price (the “Reset Price”) was $
10.00
per share and will be subject to reset on a monthly basis (each a “Reset Date”), with the first such Reset Date occurring
180
days after the closing date of the Merger, to be greater of (a) $
4.50
and (b) the 30-day volume weighted
average price of shares of the Company’s common stock immediately preceding such Reset Date. Except as described below, the Reset Price will be reduced immediately to any lower price at which the Company closes any agreement to sell or grants any right to reprice, or otherwise disposes of or issues (or announces any offer, sale, grant or any option to purchase or other disposition of) any shares of the Company’s common stock or securities of the Company or any of its subsidiaries convertible, exercisable or exchangeable into, or otherwise entitles the holder thereof to receive, shares of the Company’s common stock or other securities (a “Dilutive Offering and, such reset, a Dilutive Offering Reset”).
In the event of a Dilutive Offering Reset, the Maximum Number of Shares will be increased to an amount equal to the quotient of (i) 1,500,000 divided by (ii) the quotient of (a) the price of such Dilutive Offering divided by (b) $10.00. In such event, Sandia has the right to purchase more Additional Shares, up to the Maximum Number of Shares, for which the Company will be required to provide a cash prepayment to Sandia netted against the purchase price for such shares, and such Additional Shares will be subject to the terms of the Forward Purchase Agreement.
To the extent Sandia does not early terminate shares purchased under the Forward Purchase Agreement, as described below, the parties will settle the then outstanding shares held by Sandia upon the Valuation Date, such date being
two years
from the Closing of the Merger, March 28, 2026, subject to acceleration under certain circumstances, as described in the Forward Purchase Agreement. On the Cash Settlement Payment Date, which is the
ten
th business day following the last day of the valuation period commencing on the Valuation Date, as described in the Forward Purchase Agreement (the “Valuation Period”), Sandia will pay the Company a cash amount equal to (A) the number of shares subject to the Forward Purchase Agreement as of the Valuation Date less the number of unregistered shares, multiplied by (B) the volume-weighted average price over the Valuation Period (the “Settlement Amount”); provided, that if the amount of the Settlement Amount Adjustment (as defined below) payable by the Company to Sandia is less than the Settlement Amount, then the Settlement Amount Adjustment will be automatically netted from the Settlement Amount and any remaining amount paid in cash. The Company will pay to Sandia on the Cash Settlement Payment Date an amount (the “Settlement Amount Adjustment”) equal to (1) the Number of Shares as of the Valuation Date multiplied by $2.00 per share if the amount is to be paid in cash, or (2) if the Settlement Amount Adjustment exceeds the Settlement Amount, the Company may at its election pay the Settlement Amount Adjustment to Sandia in shares of common stock of the Company, in an amount equal to the product of the number of shares, including the Recycled Shares and the Additional Shares as of the Valuation Date multiplied by $2.25; provided, that in certain circumstances as described in the Forward Purchase Agreement, including if a Delisting Event (as defined in the Forward Purchase Agreement) occurs during the Valuation Period, such amount must be paid in cash.
In addition, during the term of the Forward Purchase Agreement, Sandia may elect to terminate the transaction in whole or in part by providing a written notice to the Company, which will specify the quantity by which the number of shares will be reduced (the “Terminated Shares”). The Company shall be entitled to an amount from Sandia, equal to the product of (x) the number of Terminated Shares and (y) the Reset Price, as defined hereafter, on the date of notice.
The Company has determined that the Optional Early Termination provision and the Variable Maturity Consideration, within the Forward Purchase Agreement as combined are considered a freestanding financial instrument as the Optional Early Termination and the Variable Maturity Consideration cannot be legally detachable and separately exercisable from each other and meet the definition of a derivative.
The Company recorded the derivative instrument as a liability on its condensed consolidated balance sheets and measured it at fair value of $4,935 with the initial value of the instrument recorded as a loss on issuance of forward purchase agreement derivative liability in the condensed consolidated statements of operations and comprehensive loss. No changes in fair value of forward purchase agreement derivative liability were recorded during the three months ended March 31, 2024 in the condensed consolidated statements of operations and comprehensive loss as its initial fair value of $4,935 approximates the fair value as of March 31,
2024.

The Prepayment
 
is accounted for as a subscription receivable and recorded as a reduction to equity to reflect the substance of the overall arrangement as a net repurchase of the Recycled Shares and the Additional Shares. As of March 31, 2024, the Company recognized a subscription receivable of $
10,986
associated with the Recycled Shares as a reduction to additional
paid-in
capital in its condensed consolidated balance sheet and a subscription receivable associated with the Additional Shares was fully offset with the proceeds that Sandia paid for the purchase of these shares, resulting in no cash received or paid for such share issuance.

 
F-20

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
In addition, the Company reimbursed Sandia $
64
at the Closing for
reasonable
out-of-pocket
expenses for costs incurred in connection with the transaction, and (b) $
54
in expenses incurred in connection with the acquisition of the Recycled Shares. These expenses were recorded within other expense, net in the condensed consolidated statements of operations and comprehensive loss during the three months ended March 31, 2024. The Company will also pay to the third party a quarterly fee of $
5
in consideration of
certain
legal and administrative obligations in connection with this transaction.
 
8.
Debt
The aggregate principal amount of debt outstanding as of March 31, 2024 and December 31, 2023 consisted of the following:
 
    
March 31,
2024
    
December 31,
2023
 
Senior secured notes
   $ 2,000      $ 8,900  
Note payable - related parties
     2,619         
  
 
 
    
 
 
 
   $ 4,619      $ 8,900  
  
 
 
    
 
 
 
Current and
non-current
debt obligations reflected in the condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023 consisted of the following:
 
    
March 31,
2024
    
December 31,
2023
 
Current liabilities:
     
Note payable - related parties
   $ 2,428      $  
  
 
 
    
 
 
 
Debt, current portion
     2,428         
  
 
 
    
 
 
 
Non-current
liabilities:
     
Note payable - related parties
     191         
Senior secured notes
     2,000        8,900  
  
 
 
    
 
 
 
Debt, net of current portion
     2,191        8,900  
  
 
 
    
 
 
 
Total Debt
   $ 4,619      $ 8,900  
  
 
 
    
 
 
 
Senior Notes
On June 13, 2023, Legacy Zapata entered into a senior note purchase agreement with and issued senior promissory notes to certain lenders. Under the agreements, Legacy Zapata was permitted to issue convertible notes in an aggregate principal amount of up to $20,000 (the “Senior Notes”). The Senior Notes accrued interest at a rate of 20.0% per annum, had a maturity date of June 13, 2024, and could be extended one year from the maturity date at the option of Legacy Zapata. The Senior Notes were convertible in connection with a business combination between Legacy Zapata and a publicly traded special purpose acquisition company, including the Merger, or in connection with an IPO, in each on or prior to the maturity date, at a conversion price of $8.50 per share. On December 22, 2023, the aggregate principal amount of $5,625 plus accrued and unpaid interest of $557 of the Senior Notes were exchanged for $6,182 of the aggregate principal amount of the Senior Secured Notes (as defined below). Accrued and unpaid interest on the borrowings under the Senior Notes prior to the exchange was calculated at an interest rate of 20.0% based on the
365-day
period
from the issuance date to the amendment date. As of December 22, 2023, all Senior Notes were canceled in exchange for Senior Secured Notes with a principal amount equal to the principal amount of the Senior Notes plus accrued and unpaid interest through the date immediately prior to the exchange.
Senior Secured Notes
On December 22, 2023, Legacy Zapata entered into a Security Agreement and Senior Secured Note Purchase Agreement (collectively, the “Senior Secured Notes Agreements”) with new and existing noteholders. Under the Senior Secured Notes Agreements, Legacy Zapata was authorized to issue convertible notes (the “Senior Secured Notes”) in an aggregate principal amount of up to $14,375 and offered to exchange its outstanding Senior Notes for Senior Secured Notes. The Senior Secured Notes accrue interest at a compound rate of 15.0% per annum and mature on December 15, 2026. The Senior Secured Notes Agreements allowed existing noteholders the option to surrender their existing Senior Notes in exchange for Senior Secured Notes of an equal aggregate principal amount plus accrued and unpaid interest. All existing holders of Senior Notes exercised this option. The total principal and accrued interest of Senior Notes exchanged amounted to $5,625 and $557, respectively.
The Company determined that the exchange is a debt extinguishment. As of December 31, 2023, Legacy Zapata had an outstanding balance of Senior Secured Notes of $8,900, which was netted with $158 of unamortized debt issuance costs.

 
F-21

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
From January through March 2024, Legacy Zapata issued $
7,150
in additional aggregate principal amount of Senior Secured Notes, which includes
certain
Senior Secured Notes with an aggregate principal amount of $
1,150
that were issued to third party advisors in lieu of cash payment for services rendered to Legacy Zapata related to the
Merger (Note 3). The Senior Secured Notes
 were or
are
, as applicab
le
,
convertible at the option of the holder in connection with a business combination between Legacy Zapata and a publicly-traded special purpose acquisition company, including the Merger, or in connection with an initial public offering, in each case on or prior to the maturity date, at a conversion price (as may be adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) of (i) $4.50 per share at the closing of such business combination, including the Merger, or initial public offering, as applicable, or (ii) $8.50 per share at any time after the closing of such business combination, including the Merger, or initial public offering, as applicable.
The
Senior Secured Notes issued from January 2024 to March 2024 were issued at a substantial premium. Accordingly, the Company accounted for the issuance of these Senior Secured Notes under the amortized costs model. The premium associated with the Senior Secured Notes, which was recorded as a loss on the issuance date of $9,776 was recorded within other income (expense) and as additional
paid-in
capital. For the three months ended March 31, 202
4
 the Company recognized $416
in interest expense related to contractual interest on the Senior Secured Notes, which is recorded in interest expense within the condensed consolidated statement of operations and comprehensive loss. Legacy Zapata incurred an additional $
210
of debt issuance costs in connection with the Senior Secured Notes issued from January 2024 to March 2024 and were accounted as a debt discount, of which $53 was settled through the issuance of 11,666 shares of the Company’s common stock upon the Closing of the Merger
 (see Note 3).
For the three months ended March 31, 2024, the Company recognized $368 in interest expense associated with the accelerated amortization of debt issuance costs upon the conversion of the Senior Secured Notes, which is recorded in interest expense within the condensed consolidated statement of operations and comprehensive loss. 
The premium associated with the Senior Secured Notes issued during the three months ended March 31, 2024 was estimated utilizing a binomial lattice model which includes a combination of the discounted cash flow and optional conversion with
De-SPAC
features. The following table presents the significant unobservable inputs that were included in the discounted cash flow feature and the optional conversion with
De-SPAC
feature
for the period of January 1, 2024 to March 27, 2024 (the last issuance date):
 
    
March 31, 2024
Significant Unobservable Input
  
Input Range
Model
   Discounted cash flow
Discount rate
   29.7% to 31.4%
Model
  
Optional conversion with De-SPAC
Closing stock price
   $9.49 to $10.97
Expected annual volatility
   55.0%
Risk free rate
   4.2% to 4.4%
Dividend yield
   0.0%
Preferred yield
   29.7% to 31.4%
Upon the Closing of the Merger, a portion of the aggregate outstanding the Senior Secured Notes converted into 3,257,876 shares of the Company’s common stock (856,202 shares to related parties). Upon the conversion of the Senior Secured Notes, the
principal balance
 of the debt of $14,207 and associated accrued interest of $453 were converted, resulting in an increase in common stock
 
and additional
paid-in
capital of $14,660.
Certain holders of the Senior Secured Notes, holding $
2,000
in aggregate principal amount, did not convert their Senior Secured Notes into shares
 of the Company’s common stock and are recognized at amortized cost. As of March 31, 202
4
, the $2,000 of outstanding Senior Secured Notes did not have any associated costs that are being recorded as a debt discount and amortized over the remaining term of the outstanding Senior Secured Notes.
 
The $2,000 of outstanding Senior Secured Notes mature on December 15, 2026. 

 
F-22

ZAPATA COMPUTING HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, except per share and share amounts)
 
Notes Payable - Related Parties
To
finance transaction costs in connection with the Merger, the Sponsor and certain of AAC’s officers and directors made working capital loans (the “Notes Payable – Related Party”) to AAC prior to the Closing. The Notes Payable – Related Party would either be repaid upon the consummation of the Merger, without interest, or at AAC’s discretion, up to $1,500 of such Notes Payable – Related Party could be convertible into Private Placement Warrants of the Company at a price of $1.00 per warrant at the Closing
D
ate of the Merger (see Note 11).
On March 
28
, 2024, the terms of the Notes Payable – Related Party were amended, pursuant to which the outstanding principal balance plus the accrued interest of $2,619, which was also due per its terms at the Closing of the Merger was deferred and became due in monthly installments (including interest accruing from the Closing of the Merger through the payment date) for twelve months thereafter beginning thirty days following the effectiveness of the Lincoln Park Registration Statement (see Notes 3 and 10). The Lincoln Park Registration Statement was declared effective on April 18, 2024. Upon the closing of the Merger, none of the note holders elected to exercise their option of converting their respective loans into warrants. The Notes Payable – Related Party bear interest at a rate of 4.5% per annum. The Company accounted for the Notes Payable – Related Party under the amortized cost model. As of March 31, 2024, the outstanding balance of the Notes Payable – Related Party was $2,619 within the Company’s condensed consolidated balance sheet. There was no unamortized debt discount related to Notes Payable – Related Party as of March 31, 2024.
As of March 31, 2024, future minimum payments required on the Senior Secured Notes and the Notes Payable – Related Party are as follows:
 
Year Ending
  
Amount
 
2024 (remaining)
  
$
1,891
 
2025
  
 
796
 
2026
  
 
2,000
 
 
 
 
 
 
Total future minimum payments
  
 
4,687
 
Less: imputed interest
  
 
(68
  
 
 
 
Total Debt
  
$
4,619
 
  
 
 
 

9.
Convertible Preferred Stock
In
connection with the Merger on March 28, 2024, each holder of the Convertible Preferred Stock was converted into the
right
to
receive 0.9141 shares of the Company’s common stock. The Company determined that the Merger constituted a deemed liquidation under its charter and, as such, the holders of the Convertible Preferred Stock were entitled to receive an amount per share equal to the greater of i) the applicable original issue price of the applicable series of the Convertible Preferred Stock, plus any dividends declared but unpaid thereon (the “Preference”), or ii) such amount per share as would have been payable had all shares of the Convertible Preferred Stock been converted into common stock immediately prior to the Merger (the “As Converted Amount”). Upon the Closing of the Merger, the Company determined that the As Converted Amount was greater than the Preference, and converted 14,222,580 shares of Convertible Preferred Stock into 13,001,114 shares of the Company’s common stock. The Company’s capital amounts prior to the Merger have been retrospectively restated as shares reflecting the conversion ratio of 0.9141 established in the Merger. Following the Closing, the Company has no shares of Convertible Preferred Stock outstanding.
As of December 31, 2023, the authorized, issued, and outstanding Convertible Preferred Stock and their principal terms after retrospectively adjusting for the effect of the reverse recapitalization were as follows:
 
           
December 31, 2023
 
    
Par Value
    
Preferred
Stock
Authorized
    
Preferred
Stock Issued
and Outstanding
    
Carrying
Value
    
Liquidation
Preference
    
Common Stock
Issuable Upon
Conversion
 
Series Seed Preferred Stock
   $ 0.0001        2,163,527        1,977,705      $ 5,380      $ 5,443        1,977,705  
Series A Preferred Stock
     0.0001        4,785,883        4,374,866        21,417        21,626        4,374,866  
Series
B-1
Preferred Stock
     0.0001        6,264,714        5,337,972        30,587        30,760        5,337,972  
Series
B-2
Preferred Stock
     0.0001        1,433,699        1,310,571        7,332        7,175        1,310,571  
     
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
        14,647,823        13,001,114      $ 64,716      $