LeddarTech CORRESPCorrespondence with SEC

November 3, 2023
VIA EDGAR   United States Securities and Exchange Commission Division of Corporation Finance Office of Energy & Transportation 100 F Street NE Washington, D.C. 20549 Attn:  Shannon Buskirk and Joanna Lam		White & CaseLLC 1221 Avenue of the Americas New York, NY 10020-1095 T +1 212 819 8200   whitecase.com

Dear Ms. Buskirk and Ms. Lam:

On behalf of our client, Prospector Capital Corp., a Cayman Islands exempted company (the “Company”), we are writing to submit the Company’s supplemental response to the comment of the staff of the Division of Corporation Finance (the “Staff”) of the United States Securities and Exchange Commission with respect to the above-referenced Form 10-K for the fiscal year ended December 31, 2022, filed on March 31, 2023 (the “Form 10-K”), delivered telephonically on October 19, 2023.

Set forth below is the Company’s supplemental response to its response letter previously filed on November 3, 2023. The Company’s response below is preceded by the Staff’s comment for ease of reference. Capitalized terms used but not defined herein have the meanings given to them in the Form 10-K.

Form 10-K for the Fiscal Year Ended December 31, 2022

Financial Statements

Note 8, Warrants, page F-16

Response: The Company respectfully acknowledges receipt of the Staff’s comment and supplementally provides the SAB 99 memorandum as Exhibit A to this response letter.

* * *

United States Securities and Exchange Commission

November 3, 2023

Please do not hesitate to contact Joel Rubinstein at (212) 819-7642 of White & Case LLP with any questions or comments regarding this letter.

United States Securities and Exchange Commission

November 3, 2023

Exhibit A

Purpose

The purpose of this memorandum is to document management’s analysis and conclusion on the materiality of an error identified related to the classification of Private Placement Warrants post redemptions for Prospector Capital Corp (“the Company”).

Guidance Applied

The Company’s assessment is based on the following guidance resources:

Authoritative language in black italicized text.

Excerpts from the private placement warrant agreement in blue text.

Management’s analysis in red text.

Question #1: Does Section 4.4 result in liability classification of the Private Placement Warrants?

Section 4.4 If reorganization is a tender offer accepted by holders of ordinary shares in which the maker will own more than 65% of ordinary shares, the Private Placement Warrant holders would be entitled to receive the highest amount of settlement receivable as if they were a shareholder. That is the highest amount of cash, securities, or other property to which such holder would actually have been entitled as a shareholder if such Private Placement Warrant holder had exercised the Private Placement Warrant prior to the expiration of such tender or exchange offer, accepted such offer and all of the Ordinary Shares held by such holder had been purchased pursuant to such tender or exchange offer.

If less than 70% of consideration receivable by ordinary shareholders is payable in the form of listed shares/stock in the successor entity, and Private Placement Warrant holders want to exercise within 30 days of the reorganization, the Private Placement Warrant price will be reduced by an amount equal to the difference of (i) the Private Placement Warrant Price in effect prior to such reduction minus (ii) (A) the Per Share Consideration minus (B) the Black-Scholes Private Placement Warrant Value.

United States Securities and Exchange Commission

November 3, 2023

ASC 815-40-55-2 states that an event that causes a change in control of an entity is not within the entity’s control and, therefore, if a contract requires net cash settlement upon a change in control, the contract generally must be classified as an asset or a liability.

ASC 815-40-55-3 then states, however, if a change-in-control provision requires that the counterparty receive, or permits the counterparty to deliver upon settlement, the same form of consideration (for example, cash, debt, or other assets) as holders of the shares underlying the contract, permanent equity classification would not be precluded as a result of the change-in-control provision. In that circumstance, if the holders of the shares underlying the contract were to receive cash in the transaction causing the change in control, the counterparty to the contract could also receive cash based on the value of its position under the contract.

Further SEC Staff noted “We recently evaluated a fact pattern involving Private Placement Warrants issued by a SPAC. The terms of those Private Placement Warrants included a provision that in the event of a tender or exchange offer made to and accepted by holders of more than 50% of the outstanding shares of a single class of common stock, all holders of the Private Placement Warrants would be entitled to receive cash for their Private Placement Warrants. In other words, in the event of a qualifying cash tender offer (which could be outside the control of the entity), all Private Placement Warrant holders would be entitled to cash, while only certain of the holders of the underlying shares of common stock would be entitled to cash. OCA staff concluded that, in this fact pattern, the tender offer provision would require the Private Placement Warrants to be classified as a liability measured at fair value, with changes in fair value reported each period in earnings.”

Ordinary shares are defined in the Company’s Private Placement Warrant agreement as Class A shares. The Class A and Class B shares have rights that rank Pari-passu in all respects and vote together as same class on one-to-one basis. In tender offer transaction, if the maker obtains at least 65% of ordinary shares (65% of 32 million Class A Shares is 20.8 million which makes up more than 50% of the voting interest inclusive of Class A and Class B shares), the maker will effectively hold more than 50% of the Company’s voting interest resulting in a change in control. ASC 815-40 allows for cash settlement of a Private Placement Warrant in circumstances in which holders of the underlying shares also would receive cash. Specifically, ASC 815-40-55-3 stated that “if a change-in-control provision requires that the counterparty receive, or permits the counterparty to deliver upon settlement, the same form of consideration (for example, cash, debt, or other assets) as holders of the shares underlying the contract, permanent equity classification would not be precluded as a result of the change-in-control provision.” As the tender offer provision in Section 4.4 of the Private Placement Warrant Agreement requires a change of more than 65% of ordinary shares (effectively more than 50% of the voting control) of the Company, it would be considered a change of control and therefore compliant with the SEC Staff Statement. Therefore, equity classification for the Public Warrants and Private Placement Warrants would not be prohibited.

In the event of a Private Placement Warrant price reduction by means of a mathematical formula because less than 70% of consideration receivable by ordinary shareholders is payable in the form of listed shares/stock in the successor entity, the guidance under ASC 815-40-55-42 states that for these types of events, if the adjustment to the strike price is based on a mathematical formula that determines the direct effect that the occurrence of such dilutive events should have on price of the underlying shares, this does not preclude an instrument from being considered indexed to the Company’s own stock, as the only variables that could affect the settlement amount would be inputs to the fair value of a fixed-for-fixed option on equity shares. Therefore, this provision does not preclude the Private Placement Warrants from being considered indexed to the Company’s own stock.

United States Securities and Exchange Commission

November 3, 2023

Subsequent to year end, the redemptions effectively flipped the percentages such that 65% of the Class A shares no longer make up more than 50% of the voting interest. None of the Private Placement Warrants would be exercisable in advance of a de-spac transaction, thus at the time the Public Warrants could be tendered for cash consideration, all of the Class B shares would have been converted into Class A shares. The warrant agreement reads,” if a tender, exchange or redemption offer shall have been made to and accepted by the holders of the Ordinary Shares … under circumstances in which, upon completion of such tender or exchange offer, the maker thereof … own[s] beneficially … more than 65% of the outstanding Ordinary Shares, the holder of a Warrant shall be entitled to receive as the Alternative Issuance, the highest amount of cash, securities or other property to which such holder would actually have been entitled as a shareholder if such Warrant holder had exercised the Warrant prior to the expiration of such tender or exchange offer”. The 65% test, should it be satisfied at the time of warrant exercisability, would mean that sufficient shares would have been tendered that a change of control would have occurred and therefore would be compliant with the SEC Staff Statement. However, on advice of counsel, it is not possible to rule out the possibility that a Private Placement Warrant holder could assert that, even in the face of a failed 65% test at the time of warrant presentation for cash consideration, such Private Placement Warrant must be deemed to be exercisable because the 65% might at one point in the past have been met and therefore demand cash compensation. Without taking a view as to the probability of prevailing on such a claim, it is clearly more conservative to assume that such a claim could succeed. As such this conservative interpretation of the 65% test would preclude the Private Placement Warrants from receiving equity treatment and under such conservative interpretation should have been reclassified to liability based on the fair value of the Private Placement Warrants on January 24, 2023, the date the redemptions occurred and subsequently carried at fair value with changes in fair value reflected in the statement of operations. See SAB 99 workbook for impact on materiality on a quantitative basis.

Question #1 Conclusion

As a result of further evaluation surrounding the Company’s accounting treatment for Private Placement Warrants under ASC 815, it was identified that as a result of the redemptions that occurred on January 24, 2023, the Private Placement Warrants will be conservatively assumed to no longer qualify for equity classification. The redemptions resulted in the possibility for the tender offer provision listed within the Private Placement Warrant agreement referenced above to be triggered without a change in control also being triggered.

Question #2: Does the change in classification of the Private Placement Warrants result in a material modification to the Company’s financial statements?

In accordance with SEC Staff Accounting Bulletin No. 99, Materiality:

1. Assessing Materiality

Facts: During the course of preparing or auditing year-end financial statements, financial management or the registrant’s independent auditor becomes aware of misstatements in a registrant’s financial statements. When combined, the misstatements result in a 4% overstatement of net income and a $.02 (4%) overstatement of earnings per share. Because no item in the registrant’s consolidated financial statements is misstated by more than 5%, management and the independent auditor conclude that the deviation from generally accepted accounting principles (“GAAP”) is immaterial and that the accounting is permissible.

United States Securities and Exchange Commission

November 3, 2023

Question: Each Statement of Financial Accounting Standards adopted by the Financial Accounting Standards Board (“FASB”) states, “The provisions of this Statement need not be applied to immaterial items.” In the staff’s view, may a registrant or the auditor of its financial statements assume the immateriality of items that fall below a percentage threshold set by management or the auditor to determine whether amounts and items are material to the financial statements?

Interpretive Response: No. The staff is aware that certain registrants, over time, have developed quantitative thresholds as “rules of thumb” to assist in the preparation of their financial statements, and that auditors also have used these thresholds in their evaluation of whether items might be considered material to users of a registrant’s financial statements. One rule of thumb in particular suggests that the misstatement or omission of an item that falls under a 5% threshold is not material in the absence of particularly egregious circumstances, such as self-dealing or misappropriation by senior management. The staff reminds registrants and the auditors of their financial statements that exclusive reliance on this or any percentage or numerical threshold has no basis in the accounting literature or the law.

The use of a percentage as a numerical threshold, such as 5%, may provide the basis for a preliminary assumption that – without considering all relevant circumstances – a deviation of less than the specified percentage with respect to a particular item on the registrant’s financial statements is unlikely to be material. The staff has no objection to such a “rule of thumb” as an initial step in assessing materiality. But quantifying, in percentage terms, the magnitude of a misstatement is only the beginning of an analysis of materiality; it cannot appropriately be used as a substitute for a full analysis of all relevant considerations. Materiality concerns the significance of an item to users of a registrant’s financial statements. A matter is “material” if there is a substantial likelihood that a reasonable person would consider it important. In its Statement of Financial Accounting Concepts No. 2, the FASB stated the essence of the concept of materiality as follows:

The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.

This formulation in the accounting literature is in substance identical to the formulation used by the courts in interpreting the federal securities laws. The Supreme Court has held that a fact is material if there is –

a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available. 

Under the governing principles, an assessment of materiality requires that one views the facts in the context of the “surrounding circumstances,” as the accounting literature puts it, or the “total mix” of information, in the words of the Supreme Court. In the context of a misstatement of a financial statement item, while the “total mix” includes the size in numerical or percentage terms of the misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. The shorthand in the accounting and auditing literature for this analysis is that financial management and the auditor must consider both “quantitative” and “qualitative” factors in assessing an item’s materiality.⁵ Court decisions, Commission rules and enforcement actions, and accounting and auditing literature⁶ have all considered “qualitative” factors in various contexts.

United States Securities and Exchange Commission

November 3, 2023

The FASB has long emphasized that materiality cannot be reduced to a numerical formula. In its Concepts Statement No. 2, the FASB noted that some had urged it to promulgate quantitative materiality guides for use in a variety of situations. The FASB rejected such an approach as representing only a “minority view,” stating –

The predominant view is that materiality judgments can properly be made only by those who have all the facts. The Board’s present position is that no general standards of materiality could be formulated to take into account all the considerations that enter into an experienced human judgment. 

The FASB noted that, in certain limited circumstances, the Commission and other authoritative bodies had issued quantitative materiality guidance, citing as examples guidelines ranging from one to ten percent with respect to a variety of disclosures. And it took account of contradictory studies, one showing a lack of uniformity among auditors on materiality judgments, and another suggesting widespread use of a “rule of thumb” of five to ten percent of net income. The FASB also considered whether an evaluation of materiality could be based solely on anticipating the market’s reaction to accounting information.

The FASB rejected a formulaic approach to discharging “the onerous duty of making materiality decisions” in favor of an approach that takes into account all the relevant considerations. In so doing, it made clear that –

[M]agnitude by itself, without regard to the nature of the item and the circumstances in which the judgment has to be made, will not generally be a sufficient basis for a materiality judgment.

Evaluation of materiality requires a registrant and its auditor to consider all the relevant circumstances, and the staff believes that there are numerous circumstances in which misstatements below 5% could well be material. Qualitative factors may cause misstatements of quantitatively small amounts to be material; as stated in the auditing literature:

As a result of the interaction of quantitative and qualitative considerations in materiality judgments, misstatements of relatively small amounts that come to the auditor’s attention could have a material effect on the financial statements.

Among the considerations that may well render material a quantitatively small misstatement of a financial statement item are –

United States Securities and Exchange Commission

November 3, 2023

This is not an exhaustive list of the circumstances that may affect the materiality of a quantitatively small misstatement. Among other factors, the demonstrated volatility of the price of a registrant’s securities in response to certain types of disclosures may provide guidance as to whether investors regard quantitatively small misstatements as material. Consideration of potential market reaction to disclosure of a misstatement is by itself “too blunt an instrument to be depended on” in considering whether a fact is material. When, however, management or the independent auditor expects (based, for example, on a pattern of market performance) that a known misstatement may result in a significant positive or negative market reaction, that expected reaction should be taken into account when considering whether a misstatement is material. The SPAC industry has shown, and management agrees, based on experience in the industry and knowledge of its investors, that the investors of the Company are interested in the current progression of management identifying a target Company and obtaining the approval of shareholders to complete a Business Combination, as well as preserving the balance of funds available within the trust account as such funds are invested and used to consummate a Business Combination. Management believes it is NOT probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item. Management does not believe a reasonable investor would conclude it is likely that they might receive an offer for the Class A shares only valuing that Class A share at a level in excess of the trust cash per share when they are a substantial minority of the decision making authority of the SPAC.

United States Securities and Exchange Commission

November 3, 2023

For the reasons noted above, the staff believes that a registrant and the auditors of its financial statements should not assume that even small intentional misstatements in financial statements, for example those pursuant to actions to “manage” earnings, are immaterial. While the intent of management does not render a misstatement material, it may provide significant evidence of materiality. The evidence may be particularly compelling where management has intentionally misstated items in the financial statements to “manage” reported earnings. In that instance, it presumably has done so believing that the resulting amounts and trends would be significant to users of the registrant’s financial statements. The staff believes that investors generally would regard as significant a management practice to over- or under-state earnings up to an amount just short of a percentage threshold in order to “manage” earnings. Investors presumably also would regard as significant an accounting practice that, in essence, rendered all earnings figures subject to a management-directed margin of misstatement.

The materiality of a misstatement may turn on where it appears in the financial statements. For example, a misstatement may involve a segment of the registrant’s operations. In that instance, in assessing materiality of a misstatement to the financial statements taken as a whole, registrants and their auditors should consider not only the size of the misstatement but also the significance of the segment information to the financial statements taken as a whole. A misstatement of the revenue and operating profit of a relatively small segment that is represented by management to be important to the future profitability of the entity” is more likely to be material to investors than a misstatement in a segment that management has not identified as especially important. In assessing the materiality of misstatements in segment information - as with materiality generally -situations may arise in practice where the auditor will conclude that a matter relating to segment information is qualitatively material even though, in his or her judgment, it is quantitatively immaterial to the financial statements taken as a whole.

No evidence exists that suggests the change in the accounting treatment of the Private Placement Warrants was a result of management intentionally misstating items in the financial statements to “manage” reported earnings nor was the non-correction a result of management believing that the resulting amounts and trends would be significant to users of the registrant’s financial statements and/or was probable that such resulting amounts and trends would have influenced the judgment of a reasonable person relying upon the report (i.e., reasonable person would have been changed their decision or been influenced by the inclusion or correction of the item). Moreover, management does not believe a reasonable SPAC investor would evaluate a cash tender offer for Class A shares at a price in excess of the redemption value for said shares (which would be required for the Private Placement Warrants to have any value upon exercise) as a likely outcome for their investment, particularly in a case where ownership of even all of the Class A shares does not convey voting control of the SPAC. In this case, the change results in an increase to net loss and net loss per share; therefore, it did mask a negative change in earning or other negative trends for the three months ended March 31, 2023, and for the three and six months ended June 30, 2023. However, SPAC investors are not primarily interested in the earning pers share or operations as such management believes there are no items that would have caused the judgment of a reasonable person relying upon the report to change their decision as a result of the inclusion or correction of the item.

United States Securities and Exchange Commission

November 3, 2023

Internal Controls Over Financial Reporting 

Once the entity has identified an error, whether material or immaterial, the entity should consider whether and how the identified error affects the design and effectiveness of the entity’s related internal controls. An evaluation of internal controls would be considered necessary even if the error does not result in a restatement or adjustment to prior period financial statements, as an error indicates that some aspect of the internal control design or execution was not properly functioning (i.e., a control deficiency). If it is determined that a control deficiency exists, management should evaluate whether it represents a deficiency, significant deficiency, or material weakness. In doing so, management should consider the existence of mitigating controls to determine whether those controls operate at a level of precision that would prevent or detect a misstatement that could be material.

As discussed in AS 2201 – Evaluating deficiencies, significant deficiencies, and material weaknesses

.69        Indicators of material weaknesses in internal control over financial reporting include -

United States Securities and Exchange Commission

November 3, 2023

.70        When evaluating the severity of a deficiency, or combination of deficiencies, the auditor also should determine the level of detail and degree of assurance that would satisfy prudent officials in the conduct of their own affairs that they have reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles. If the auditor determines that a deficiency, or combination of deficiencies, might prevent prudent officials in the conduct of their own affairs from concluding that they have reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles, then the auditor should treat the deficiency, or combination of deficiencies, as an indicator of a material weakness. Management believes the error did preclude prudent officials in conducting their own review to determine they have reasonable assurance that transactions are recorded in conformity with generally accepted accounting principles. Based upon the review of the defined terms for a material weakness, management does believe this is met and as such a material weakness exists.

Not applicable given the material weakness conclusion above.

Not applicable given the material weakness conclusion above.

Management will communicate to the audit committee the finding and adjustment to the prior period financial statements to reflect the changes in classification of the Private Placement Warrants and the corresponding change in the fair value for both March 31, 2023, and June 30, 2023.

Question #2 Conclusion

As a result of the evaluation described above with regard to the change in classification of the Warrants from Equity to Liability, management believes the overall financial statements, based on a quantitative basis, is material and will require adjustment through a restatement to the prior period financial statements to reflect the changes in classification of the Private Placement Warrants and the corresponding change in the fair value for both March 31, 2023, and June 30, 2023.

11