10-Q/A: DMY Squared Restates Q1, Cites Excise Tax Error & Control Weakness

dMY Squared Technology Group, Inc. filed an amended quarterly report, restating its Q1 2025 financials due to an under-accrual of excise tax and disclosing a new material weakness in internal controls.

Summary

• Restated Q1 2025 financial statements to correct an under-accrual of approximately $421,924 in excise tax payable under the Inflation Reduction Act of 2022, related to Class A common stock redemptions in January 2024.
• Identified a new material weakness in internal control over financial reporting concerning the evaluation and recognition of excise tax, in addition to a previously disclosed material weakness.
• Reported a net loss of approximately $4.6 million for the three months ended March 31, 2025, a significant increase from the $168,454 net loss for the same period in 2024.
• The company had a working capital deficit of approximately $3.7 million and minimal cash of $528 as of March 31, 2025, raising substantial doubt about its ability to continue as a going concern.
• Entered into a non-binding Letter of Intent (LOI) for a business combination with Horizon Quantum Computing Pte. Ltd., valuing Horizon at a pre-money equity value of approximately $500 million.
• The company's liquidation date has been extended multiple times, currently to May 29, 2025, with further extensions possible until December 29, 2025, contingent on Sponsor contributions.
• Derivative warrant liabilities increased substantially from $1,450,600 at December 31, 2024, to $5,741,960 at March 31, 2025, contributing significantly to the net loss.

Sentiment

Score: 3

Explanation: The restatement, material weaknesses, significant net loss, and going concern doubt are highly negative. While a non-binding LOI exists, the overall financial health and control environment are concerning, indicating high risk and operational challenges.

Positives

• Entered into a non-binding Letter of Intent (LOI) for a business combination with Horizon Quantum Computing Pte. Ltd., a developer of advanced software development tools for quantum computers.
• The proposed Horizon Business Combination values Horizon at a pre-money equity value of approximately $500 million, indicating a potential significant transaction.
• Sponsor and related parties continue to provide funding through advances and convertible notes to extend the business combination period and cover expenses.

Negatives

• Restatement of Q1 2025 financial statements due to an under-accrual of approximately $421,924 in excise tax.
• Identification of a new material weakness in internal control over financial reporting related to excise tax recognition, in addition to a previously disclosed material weakness.
• Significant increase in net loss to approximately $4.6 million for Q1 2025, compared to $168,454 in Q1 2024, primarily driven by a $4.3 million loss from the change in fair value of derivative warrant liabilities.
• Working capital deficit of approximately $3.7 million and minimal cash balance of $528 as of March 31, 2025, raising substantial doubt about the company's ability to continue as a going concern.
• Management determined that approximately $0.69 million of funds withdrawn from the Trust Account for taxes were improperly used for general operating expenses, requiring the Sponsor to re-contribute funds.

Risks

• Substantial doubt about the ability to continue as a going concern due to liquidity conditions and mandatory liquidation if a business combination is not completed within the Combination Period.
• Uncertainty regarding the successful negotiation and consummation of a definitive agreement for the proposed business combination with Horizon Quantum Computing Pte. Ltd. on contemplated terms or timeframe, or at all.
• Material weaknesses in internal control over financial reporting could continue to adversely affect the ability to report financial results accurately and timely, potentially leading to loss of investor confidence and stock price decline.
• Potential for litigation or other disputes arising from the identified material weaknesses and financial statement restatements.
• Exposure to macroeconomic, geopolitical, and regulatory uncertainties, including inflation, changes in trade policies, interest rate policies, and international conflicts, which could negatively impact the search for a business combination.
• The company will cease operations and liquidate if a business combination is not completed by the extended liquidation date of May 29, 2025.
• The fair value of derivative warrant liabilities is subject to significant change, impacting financial results.

Future Outlook

The company is actively searching for a business combination and has entered into a non-binding Letter of Intent with Horizon Quantum Computing Pte. Ltd., with an expected pre-money equity valuation of approximately $500 million. However, there is no assurance that a definitive agreement will be reached or that the transaction will be consummated. The company's liquidation date has been extended to May 29, 2025, and further extensions are possible until December 29, 2025, contingent on Sponsor contributions. Management intends to remediate identified material weaknesses in internal controls over financial reporting.

Management Comments

• Management has concluded that a material weakness exists in the Company's internal control over financial reporting related to the evaluation and recognition of excise tax and that the Company's disclosure controls and procedures were not effective.
• Management intends to take steps to remediate both material weaknesses identified, including enhancing documentation, expanding internal review procedures for non-routine and tax-sensitive transactions, and reinforcing communication protocols.
• We are committed to the continuous improvement of our internal control over financial reporting and will continue to diligently review our internal control over financial reporting.

Industry Context

The filing highlights common challenges faced by Special Purpose Acquisition Companies (SPACs) in the current market, including the pressure to complete a business combination within a defined timeframe, the complexities of financial reporting for derivative instruments (warrants), and the impact of new tax regulations like the IRA excise tax. The pursuit of a business combination with Horizon Quantum Computing places the company in the emerging and high-growth quantum computing sector, which carries both significant potential and inherent risks associated with early-stage technology development and market adoption.

Comparison to Industry Standards

• The restatement due to excise tax under-accrual and the identified material weaknesses in internal controls are below industry best practices for financial reporting and corporate governance, indicating a need for significant improvement in financial control environments.
• The substantial increase in derivative warrant liabilities and the resulting net loss are typical for SPACs nearing their liquidation deadline without a completed business combination, as warrant valuations become more volatile.
• The repeated extensions of the business combination period and reliance on sponsor funding (convertible notes, advances) are common for SPACs struggling to find or close a suitable target, contrasting with more efficient SPACs that complete deals within initial timelines.
• The non-binding LOI with Horizon Quantum Computing, a quantum software developer, positions the company in a highly specialized and nascent technology sector, which differs from SPACs targeting more mature or traditional industries.

Corporate Governance

Related Party Transactions

• Sponsor purchased Founder Shares for $25,000.
• Sponsor purchased Private Placement Warrants for approximately $2.8 million initially, and an additional $45,000.
• Sponsor extended Overfunding Loans totaling $947,850 to be deposited in the Trust Account.
• Company pays Sponsor $10,000 per month for office space, administrative and support services.
• Harry L. You (Chairman, CFO, and Sponsor affiliate) provided a convertible promissory note up to $1.75 million, with $791,667 outstanding as of March 31, 2025 (increased to $841,667 post-period).
• Sponsor and affiliates provided advances totaling approximately $1.1 million as of March 31, 2025 (increased to approximately $1.2 million post-period).
• Sponsor re-contributed approximately $0.73 million to the Company in March 2025, representing funds improperly used from Trust Account withdrawals for operating expenses plus interest.

Stakeholder Impact

• Shareholders face increased uncertainty due to financial restatement, material weaknesses, and going concern doubt. Potential for dilution if convertible notes convert to warrants. Redemption value of Class A shares is a key factor.
• Potential investors face high risk due to the company's financial condition, control deficiencies, and the speculative nature of a SPAC nearing its liquidation deadline.
• Management and the Board face increased scrutiny and workload due to remediation efforts for internal control weaknesses and the ongoing search for a business combination.
• Creditors face potential risk if the company liquidates without sufficient funds outside the Trust Account to repay related party loans.

Next Steps

• Negotiate and execute a definitive merger agreement for the proposed business combination with Horizon Quantum Computing Pte. Ltd.
• Complete the business combination with Horizon Quantum Computing Pte. Ltd. or another target by May 29, 2025, or a further extended date.
• Implement remediation plans to address the identified material weaknesses in internal control over financial reporting, including enhanced documentation, expanded review procedures, and improved communication.
• File the 2024 excise tax return and ensure timely payment of the obligation.

Key Dates

Recommendation

The company faces significant headwinds, including a financial restatement, identified material weaknesses in internal controls, a substantial net loss, and a going concern warning. While a non-binding LOI for a business combination exists, the company's precarious financial position, reliance on related-party funding, and past improper use of Trust Account funds indicate high operational and financial risk. The increased derivative warrant liabilities further complicate the financial picture. These factors collectively suggest a high probability of further value erosion or liquidation if a business combination is not successfully and promptly executed, making it a high-risk investment.

Keywords

SPAC, 10-Q/A, Restatement, Excise Tax, Internal Controls, Material Weakness, Business Combination, Quantum Computing, Horizon Quantum Computing, Going Concern, Warrants, SEC Filing, Financial Reporting, Corporate Governance, Liquidation