Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise stated or the context otherwise requires, references in this quarterly report to (i) the “Company,” “us” or “we” are to Southport Acquisition Corporation, a Delaware corporation; (ii) “founder shares” are to shares of our Class B common stock initially purchased by our Sponsor in a Private Placement (as defined herein) prior to our IPO (as defined herein), and the shares of our Class A common stock issued upon the conversion thereof; and (iii) “Sponsor” are to Southport Acquisition Sponsor LLC, a Delaware limited liability company. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Special Note Regarding Forward-Looking Statements
This quarterly report, including statements under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our or our management team’s expectations, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not a forward-looking statement. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying some of the important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the discussion under the headings “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2022 and our quarterly reports on Form 10-Q filed with the U.S. Securities and Exchange Commission (the “SEC”). The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Overview
We are a blank check company incorporated as a Delaware corporation on April 13, 2021 and formed for the purpose of effectuating a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “Business Combination”). We have not identified any Business Combination target. We intend to effectuate our initial Business Combination using cash from the proceeds from our IPO and the Private Placement, our capital stock, debt or a combination of cash, capital stock and debt.
On December 14, 2021, we consummated our initial public offering (our “IPO”) of 23,000,000 units (the “Units”), each unit consisting of one share of Class A common stock of the Company, par value $0.0001 per share and one-half of one warrant of the Company, each whole warrant entitling the holder thereof to purchase one share of Class A Common Stock for $11.50 per share (subject to adjustment). The 23,000,000 Units sold in our IPO include 3,000,000 Units sold to BofA Securities, Inc., the underwriter for our IPO (the “underwriter”), pursuant to the underwriter’s full exercise of its option under the underwriting agreement for our IPO to purchase up to 3,000,000 additional Units solely to cover over-allotments. The Units were sold at a price of $10.00 per Unit, and our IPO generated gross proceeds of $230,000,000. Simultaneously with the closing of our IPO, we consummated a private placement (the “Private Placement”) with our sponsor of an aggregate of 11,700,000 warrants (the “private placement warrants”) at a price of $1.00 per private placement warrant, generating gross proceeds to the Company of $11,700,000.
On December 14, 2021, a total of $234,600,000 of the net proceeds from our IPO and the Private Placement were deposited in a trust account (the “Trust Account”) established for the benefit of the Company’s public stockholders at JPMorgan Chase Bank, N.A., with Continental Stock Transfer & Trust Company, acting as trustee. The net proceeds deposited into the Trust Account remain on deposit in the Trust Account earning interest and are available for a Business Combination, assuming no redemptions, before fees and expenses associated with our initial Business Combination.
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Except with respect to interest earned on the funds held in the Trust Account that may be released to us to pay our tax obligations (less up to $100,000 of interest to pay dissolution expenses), the proceeds deposited in the Trust Account will not be released from the Trust Account until the earliest of (a) the completion of our initial Business Combination, (b) the redemption of any public shares properly submitted in connection with a stockholder vote to amend our amended and restated certificate of incorporation (i) to modify the substance or timing of our obligation to provide our public stockholders the right to have their public shares redeemed in connection with our initial Business Combination or to redeem 100% of our public shares if we do not complete our initial Business Combination by June 14, 2023 or during any extended time we have to consummate our initial Business Combination beyond June 14, 2023 as a result of a stockholder vote to amend our amended and restated certificate of incorporation (an “Extension Period”) or (ii) with respect to any other provision relating to stockholders’ rights or pre-initial Business Combination activity, and (c) the redemption of all of our public shares if we are unable to complete our initial Business Combination by June 14, 2023 or during any Extension Period, subject to applicable law. The proceeds held in the Trust Account may only be invested in U.S. government securities with a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940, as amended (the “Investment Company Act”), which invest only in direct U.S. government treasury obligations.
On June 9, 2023, the Company’s stockholders approved a proposal to amend the Company’s amended and restated certificate of incorporation (the “Extension Amendment Proposal”) to extend the time that the Company has to consummate its initial Business Combination (the “Extension”) from June 14, 2023 to September 14, 2023 (the “Extended Date”) and to allow the board of directors of the Company, without another stockholder vote, to elect to further extend the date to consummate an initial Business Combination after the Extended Date up to six times, by an additional month each time, up to March 14, 2024, providing the Company a 21-month period (or up to 27-month period) from the closing of the IPO to consummate its initial Business Combination.
On September 11, 2023, the board of directors of the Company approved the extension of the date by which the Company must consummate an initial Business Combination from September 14, 2023 to October 14, 2023 (the “First Extension”). The First Extension is the first of six one-month extensions permitted under the Company’s Amended and Restated Certificate of Incorporation. On October 11, 2023, the board of directors of the Company approved the further extension of the date by which the Company must consummate an initial Business Combination from October 14, 2023 to November 14, 2023 (the “Second Extension”). The Second Extension is the second of six one-month extension permitted under the Company’s Amended and Restated Certificate of Incorporation.
As of September 30, 2023, we had not yet commenced any operations. All activity from inception through September 30, 2023 relates to our formation, our IPO and our pursuit of a target company with which to effect our initial Business Combination. The Company has selected December 31 as its fiscal year end.
Results of Operations and Known Trends or Future Events
Our entire activity from inception through September 30, 2023 relates solely to our formation, our IPO and, since the closing of our IPO, a search for a Business Combination candidate. We have not generated any operating revenues to date, and we will not generate any operating revenues until after completion of our initial Business Combination. We will generate non-operating income in the form of interest income on cash and cash equivalents. There has been no significant change in our financial or trading position and no material adverse change has occurred since the date of our audited financial statements. We have incurred and expect to continue to incur increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses.
For the three months ended September 30, 2023, we had net loss of $10,518, which consisted of $731,196 dividend income on marketable securities held in the Trust Account, offset by a loss of $325,000 on the change in fair value of the warrant liability, a $135,986 financing expense related to the excess fair value of Class B common stock transferred by the Sponsor, provision for income tax of $142,965, $56,330 in legal and accounting expenses, $50,411 of franchise tax expense, $7,845 of administrative expenses, $21,250 of listing fees, and $1,927 of bank fees.
For nine months ended September 30, 2023, we had net income of $2,831,194, which consisted of $6,120,704 dividend income on marketable securities held in the Trust Account, offset by a loss of $725,950 on the change in fair value of the warrant liability, $522,948 of financing expenses related to the excess fair value of Class B common stock transferred by the Sponsor, provision for income tax of $1,253,934, $211,771 in legal and accounting expenses, $149,589 of franchise tax expense, $227,594 of insurance expense, $128,248 of administrative expenses, $63,750 of listing fees, and $5,726 of bank fees.
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For the three months ended September 30, 2022, we had net income of $1,306,458, which consisted of a $593,000 gain on the change in fair value of warrant liabilities and $1,065,967 of dividend income on marketable securities held in the Trust Account, offset by $82,705 in legal and accounting expenses, $50,411 of franchise tax expense, $129,063 of insurance expense, $63,750 of listing fees, $25,895 of administrative expenses, and $685 bank fees.
For the nine months ended September 30, 2022, we had net income of $15,047,487, which consisted of a $14,872,000 gain on the change in fair value of warrant liabilities and $1,399,231 of dividend income on marketable securities held in the Trust Account, offset by $429,833 in legal and accounting expenses, $153,874 of franchise tax expense, $387,189 of insurance expense, $153,874 of listing fees, $101,395 of administrative expenses, and $1,864 bank fees expenses.
Liquidity and Capital Resources
As of September 30, 2023 and December 31, 2022, we had cash of $2,351,814 and $50,858, respectively, and working capital deficit of $2,459,358 and $929,527, respectively.
As of September 30, 2023, net cash provided by operating activities was $5,745,670. Net income of $2,831,194 was increased by a $725,950 loss on the fair value of the warrant liability, $522,948 of non-cash financing expense related to the transfer of Class B shares by the Sponsor, and a $1,853,840 increase in changes in operating assets and liabilities, offset by a decrease for $188,262 of accrued dividends on marketable securities held in the Trust Account.
As of September 30, 2022, net cash used in operating activities was $1,053,342. Net income of $15,047,487 was decreased by a $14,872,000 gain on the fair value of the warrant liability, $435,286 of accrued dividends on marketable securities held in the Trust Account, and a $793,543 decrease in changes in operating assets and liabilities.
As of September 30, 2023, net cash provided by investing activities was $194,049,943, comprised of purchases of marketable securities held in the Trust Account of $5,932,443, offset by proceeds from marketable securities held in the Trust Account of $199,982,386. As of September 30, 2022, net cash used in investing activities was $963,945 comprised of purchases of marketable securities held in the Trust Account.
As of September 30, 2023, net cash used in financing activities was $197,494,657, comprised of payments for stockholder redemptions of $197,694,657 and offset by a $200,000 cash capital contribution from the Sponsor. As of September 30, 2022, net cash provided by financing activities was $240,131, comprised of $156,550 of payments made by the Sponsor on behalf of the Company and receipt of $83,581 repayment for due from related party balance.
We expect to use our working capital primarily for legal and accounting fees related to our regulatory reporting requirements, fees for office space, utilities, and secretarial and administrative services, continued listing fees on the New York Stock Exchange (“NYSE”), and for expenses in connection with identifying and evaluating target businesses, performing business due diligence on prospective target businesses, travelling to and from the offices or similar locations of prospective target businesses or their representatives or owners, reviewing corporate documents and material agreements of prospective target businesses and structuring, negotiating and completing a Business Combination.
Our management does not expect that we will be able to fund our liquidity requirements in the next 12 months from our current working capital. In order to fund the expected working capital deficiency or to finance transaction costs in connection with an intended initial Business Combination, our management plans to seek capital contributions or loans from our management team or our Sponsor or any of their respective affiliates. However, neither our management team nor our Sponsor or their respective affiliates are obligated to provide capital contributions or loan us these funds, and, as such, there is no assurance that we will be able to obtain sufficient loans to fund any working capital deficiency. For the three and nine months ended September 30, 2023, the Sponsor has provided $200,000 in cash through a capital contribution. If we receive such loans, up to $1,500,000 of such loans may be convertible into warrants at a price of $1.00 per warrant at the option of the lender. These warrants would be identical to the Private Placement Warrants.
These conditions raise substantial doubt about our ability to continue as a going concern for a period of time within 12 months from September 30, 2023.
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Moreover, we may need to obtain additional financing either to complete our initial Business Combination or because we become obligated to redeem a significant number of our public shares upon completion of our initial Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination. In addition, we may target businesses with enterprise values that are greater than we could acquire with the net proceeds from our IPO and the Private Placement, and, as a result, if the cash portion of the purchase price exceeds the amount available from the Trust Account, net of amounts needed to satisfy redemptions by public stockholders, we may be required to seek additional financing to complete such proposed initial Business Combination.
If we are unable to complete our initial Business Combination because we do not have sufficient funds available to us, we will be forced to cease operations and liquidate the Trust Account.
On May 25, 2023, pursuant to the terms of the amended and restated certificate of incorporation of the Company, the Sponsor converted 4,200,000 shares of the Company’s Class B common stock held by it on a one-for-one basis into shares of the Company’s Class A common stock, resulting in an aggregate of 27,200,000 shares of Class A common stock issued and outstanding, comprised of 4,200,000 shares of Class A common stock held by the Sponsor and not subject to possible redemption and 23,000,000 shares of Class A common stock subject to possible redemption. On June 9, 2023, the holders of 18,849,935 shares of Class A common stock properly exercised their right to redeem their shares in connection with the vote on the Extension Amendment Proposal for $197,694,657 in cash, resulting in 4,150,065 shares of Class A common stock issued and outstanding that are subject to possible redemption.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of September 30, 2023 or December 31, 2022. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities as of September 30, 2023 or December 31, 2022.
Pursuant to the underwriting agreement for our IPO, the underwriter of our IPO was entitled to a deferred fee of $0.35 per unit, or $8,050,000 in the aggregate, payable to the underwriter from the amounts held in the Trust Account solely in the event that we complete a Business Combination, subject to the terms of the underwriting agreement. However, on August 22, 2022, the underwriter delivered a letter to the Company pursuant to which the underwriter waived its entitlement to the payment of the deferred underwriting fee.
We have entered into a letter agreement with our Sponsor pursuant to which we are required to pay our Sponsor a total of $15,000 per month for office space, utilities, and secretarial and administrative services, commencing on December 10, 2021, the date that our securities were first listed on the NYSE, through the earlier of our initial Business Combination and our liquidation.
Commitments and Contingencies
Registration rights
The holders of the Founder Shares, Private Placement Warrants and any warrants that may be issued upon conversion of working capital loans (and in each case holders of the underlying securities thereof, as applicable) are entitled to registration rights pursuant to a registration rights agreement signed on December 9, 2021, requiring the Company to register such securities for resale (in the case of the Founder Shares, only after conversion to our Class A common stock). The holders of these securities are entitled to make up to three demands, excluding short form registration demands, that the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the Company’s consummation of a Business Combination and rights to require the Company to register for resale such securities pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”). However, the registration rights agreement provides that the Company is not required
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to effect or permit any registration or cause any registration statement to become effective until termination of the applicable lock-up period with respect to such securities. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Underwriting Agreement
We granted the underwriter a 45-day option from the date of our IPO to purchase up to 3,000,000 additional Units to cover over-allotments, if any, at the IPO price less the underwriting discount. On December 13, 2021, the underwriter exercised the option in full, closing the sale of the 3,000,000 additional Units on December 14, 2021. The underwriter was paid an underwriting commission of $4,600,000 upon the closing of our IPO. In addition, the underwriter was entitled to a deferred fee of $0.35 per unit, or $8,050,000 in the aggregate, payable to the underwriter from the amounts held in the Trust Account solely in the event that we complete a Business Combination, subject to the terms of the underwriting agreement.
On August 22, 2022, the underwriter delivered a letter to the Company pursuant to which the underwriter waived its entitlement to the payment of the deferred underwriting fee. The $8,050,000 waived fee was recorded to accumulated deficit.
Non-redemption Agreements
On May 25, 2023, the Company and the Sponsor entered into Non-Redemption Agreements with unaffiliated third parties in exchange for such third parties agreeing (i) not to redeem an aggregate of 4,000,000 shares of Class A common stock sold in its initial public offering (the “Non-Redeemed Shares”) in connection with the Special Meeting and (ii) to vote in favor of the Extension Amendment Proposal and the Extension at the Special Meeting (other than with respect to certain shares acquired or to be acquired pursuant to the Non-Redemption Agreements). In exchange for the foregoing commitments, the Sponsor has agreed to transfer to such third parties an aggregate of up to 1,499,996 shares of Class B common stock held by the Sponsor, with 500,000 of such shares to be transferred to such third parties promptly upon consummation of the Extension, and an additional 166,666 shares to be transferred to such third parties monthly beginning on September 14, 2023 and up to, and including, February 14, 2024, if the board of directors of the Company elects to further extend the deadline to consummate an initial Business Combination at or prior to such date, in each case, if such third parties continue to hold such Non-Redeemed Shares through the Special Meeting.
The Company accounted for the Non-Redemption Agreements in accordance with Staff Accounting Bulletin Topic 5T (“SAB Topic 5T”). The Company considered the Sponsor’s transfer of Class B common stock to the unaffiliated third parties in exchange for the Non-Redemption Agreements as a capital contribution by the Sponsor, and recognized the excess fair value of the transferred Class B common stock as a financing expense on the condensed statements of operations for the three and nine months ended September 30, 2023. The Company determined the excess fair value of the 500,000 Class B shares transferred to such third parties upon the consummation of the Extension to be $386,961 and the 166,666 Class B shares transferred in connection with the First Extension to be $135,986.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have not identified any critical accounting estimates as of September 30, 2023.
Recent Accounting Pronouncements
Refer to Note 2. Summary of Significant Accounting Policies of the Notes to the Financial Statements.
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