10-Q: ShoulderUp Technology Acquisition Corp. Faces Going Concern Doubt Amidst Deepening Losses and Business Combination Hurdles

ShoulderUp Technology Acquisition Corp. (SUAC) reported a significant net loss of $4.49 million for Q1 2025, a substantial increase from the prior year, and disclosed substantial doubt about its ability to continue as a going concern due to a working capital deficit and a passed mandatory liquidation date.

Summary

• ShoulderUp Technology Acquisition Corp. (SUAC), a blank check company, reported a net loss of $4,491,196 for the three months ended March 31, 2025, a significant increase from a net loss of $439,985 for the same period in 2024.
• The company's total liabilities surged to $19,364,002 as of March 31, 2025, up from $14,816,337 at December 31, 2024, primarily driven by a substantial increase in non-redemption agreements derivative liability and excise tax payable.
• A working capital deficit of approximately $6.3 million was reported as of March 31, 2025, with management expressing substantial doubt about the company's ability to continue as a going concern due to this liquidity condition and the fact that its mandatory liquidation date has passed.
• The company's cash balance in its operating bank account decreased to $400,093 as of March 31, 2025, from $432,533 at December 31, 2024, with $365,175 of this cash restricted for tax payments.
• Shareholders approved a Business Combination Agreement with SEE ID, Inc. on February 6, 2025, with the combined entity expected to be listed on the Nasdaq Stock Market, LLC, though the closing remains subject to customary conditions.
• The company has faced multiple extensions for its business combination deadline, with the latest extension for the Non-Redemption Agreement termination date agreed to be June 15, 2025.
• A significant excise tax liability of $3,905,240 (including penalties and interest) was recorded as of March 31, 2025, related to stock redemptions under the Inflation Reduction Act of 2022.
• The company's securities were delisted from the NYSE and are now traded on the over-the-counter (OTC) market, which could limit investor trading ability and make the company less attractive to potential business combination targets.
• The Sponsor and its affiliates have provided $900,000 in promissory notes for working capital needs, which are fully drawn and convertible into common stock upon business combination.

Sentiment

Score: 2

Explanation: The sentiment is overwhelmingly negative due to the company's severe financial distress, including a substantial net loss, significant working capital deficit, and explicit disclosure of substantial doubt about its ability to continue as a going concern. The delisting from NYSE to OTC further compounds the negative outlook, despite the approval of a business combination agreement.

Positives

• Stockholders approved the Business Combination Agreement with SEE ID, Inc. on February 6, 2025, moving closer to a potential merger.
• An underwriter, Citigroup, waived $11,200,000 in deferred underwriting fees on September 19, 2024, reducing a significant contingent liability.
• A non-redemption agreement was secured on April 17, 2025, with an investor agreeing to rescind redemptions of 500,000 shares, subject to certain conditions, which could help maintain capital for the business combination.

Negatives

• The company reported a significantly increased net loss of $4,491,196 for the three months ended March 31, 2025, compared to $439,985 in the prior year period.
• Total liabilities increased substantially to $19,364,002 as of March 31, 2025, from $14,816,337 at December 31, 2024.
• A working capital deficit of approximately $6.3 million as of March 31, 2025, raises substantial doubt about the company's ability to continue as a going concern.
• The mandatory liquidation date has passed, further exacerbating going concern issues.
• The non-redemption agreements derivative liability increased significantly to $12,599,255 as of March 31, 2025, from $8,886,828 at December 31, 2024.
• A large excise tax liability of $3,905,240 was recorded as of March 31, 2025, due to the Inflation Reduction Act on share redemptions.
• The company's securities were delisted from the NYSE and now trade on the less liquid over-the-counter (OTC) market.
• Income from cash and investments held in the Trust Account decreased significantly to $28,349 for Q1 2025 from $257,512 for Q1 2024.
• The company has repeatedly extended its business combination deadline, indicating difficulties in closing a deal.

Risks

• The company's ability to continue as a going concern is in substantial doubt due to its liquidity condition and the fact that the mandatory liquidation date has passed.
• The Inflation Reduction Act of 2022 imposes a 1% excise tax on stock repurchases, which could reduce cash available for a business combination and the company's ability to complete one.
• Delisting from the NYSE to the OTC market could lead to limited market quotations, reduced liquidity, potential 'penny stock' classification, limited news/analyst coverage, and decreased ability to issue additional securities or obtain financing.
• Securities trading on the OTC are not 'covered securities' under the National Securities Markets Improvement Act of 1996, subjecting the company to state-level regulation, which may make completing a business combination more difficult and costly.
• Securityholders may face difficulty trading their shares due to the lack of state registration of the company's securities.
• The OTC listing may make the company less attractive to potential business combination targets.
• A material weakness in internal controls related to failures in reporting period closing could lead to understatement of the company's liabilities arising from complex financial instruments.

Future Outlook

The company's primary future outlook is the consummation of its Business Combination with SEE ID, Inc., which, if successful, is expected to result in Holdings (a subsidiary) being listed on the Nasdaq Stock Market, LLC. However, there are no assurances that the Business Combination will close, as it remains subject to the satisfaction or waiver of certain customary closing conditions, including the effectiveness of a registration statement and stockholder approvals.

Management Comments

• Management has determined that the liquidity condition and the fact that the mandatory liquidation date has passed, raises substantial doubt about the Company's ability to continue as a going concern.
• The Principal Executive Officer and Principal Financial Officer certified that the financial statements fairly present, in all material respects, the financial condition, results of operations, and cash flows of the company.

Industry Context

As a Special Purpose Acquisition Company (SPAC), ShoulderUp Technology Acquisition Corp.'s operations are entirely focused on identifying and completing a business combination. The broader industry context for SPACs has seen increased regulatory scrutiny and investor redemptions, making it more challenging to complete de-SPAC transactions. The company's delisting from NYSE to OTC reflects a common challenge for SPACs that fail to complete a timely business combination or meet listing requirements, impacting their attractiveness and liquidity compared to peers listed on major exchanges.

Corporate Governance

Related Party Transactions

• The Sponsor (ShoulderUp Technology Sponsor LLC) provided initial capital of $25,000 for Founder Shares and an advance of approximately $29,000.
• The Sponsor and its affiliates have advanced $900,000 under promissory notes for working capital needs as of March 31, 2025. These notes are convertible into common stock at $10.00 per share upon business combination.
• The company pays the Sponsor $10,000 per month for office space, secretarial, and administrative services.
• Non-Redemption Agreements involved the Sponsor agreeing to transfer Founder Shares (e.g., 413,333 founder shares as of April 17, 2025) to investors who agreed not to redeem their public shares.

Stakeholder Impact

• Shareholders: Face significant uncertainty due to the company's going concern issues, substantial net losses, and the delisting of securities to the OTC market, which may reduce liquidity and trading activity. Potential for dilution from convertible notes and warrants exists. However, the approved business combination with SEE ID offers a path forward.
• Sponsor: Has provided significant financial support through promissory notes and administrative services, indicating continued commitment, but also bears the risk of the company's financial distress and the success of the business combination.
• Creditors: The going concern warning raises concerns for creditors, although funds in the Trust Account are generally protected for public shareholders' redemptions.

Next Steps

• Consummation of the Business Combination with SEE ID, Inc., subject to satisfaction or waiver of customary closing conditions.
• Holdings (a subsidiary) is expected to be listed on the Nasdaq Stock Market, LLC upon closing of the Business Combination.
• The Non-Redemption Agreement termination date is extended to June 15, 2025, indicating ongoing efforts to finalize terms with the investor.

Key Dates

Recommendation

Keywords

SPAC, ShoulderUp Technology Acquisition Corp., SEE ID Inc., Business Combination, Going Concern, SEC Filing, 10-Q, Financial Results, Redemptions, OTC Market, Excise Tax, Derivative Liability, Liquidity, Corporate Governance