Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Forward-Looking Statements
References to the “Company”,
“us”, “our”, or “we” refer to ChampionsGate Acquisition Corporation. The following discussion and
analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and
related notes herein.
The following discussion
and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited financial
statements and the notes related thereto which are included in “Item 8. Financial Statements and Supplementary Data”
of this Annual Report on Form 10-K. Certain information contained in the discussion and analysis set forth below includes forward-looking
statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors,
including those set forth under “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Annual Report
on Form 10-K.
Overview
ChampionsGate Acquisition
Corporation (the “Company”) is a blank check company incorporated in the Cayman Islands on March 27, 2024 as an exempted company
with limited liability. The Company was formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase,
recapitalization, reorganization or similar business combination involving the Company, with one or more businesses or entities (the “initial
business combination”). We intend to effectuate our initial business combination using cash from the proceeds of our IPO (as defined
below), Private Placement (as defined below), and the sale of our shares, debt or a combination of cash, equity and debt. We expect to
continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete an initial
business combination will be successful.
Our Initial Public Offering
On May 29, 2025, the Company
consummated its initial public offering (the “IPO”) of 7,475,000 units (“Units”), including 975,000 additional
Units granted to the underwriters to cover over-allotments, if any (the “Over-Allotment Option”). Each Unit consists of one
Class A ordinary share, $0.0001 par value per share (“Class A ordinary shares”), and one right (“rights”) to receive
of one-fifth of one Class A ordinary share upon the completion of the initial business combination. The Units were sold at an offering
price of $10.00 per Unit, generating total gross proceeds of $74,750,000.
Simultaneously with the consummation
of the IPO and the sale of the Units, the Company consummated the private placement (“Private Placement”) of 230,000 units
(the “Private Placement Units”) to the Sponsor HoldCo, at a price of $10.00 per Private Placement Unit, generating total proceeds
of $2,300,000.
The sales of the Private
Placement Units issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act. No commissions
were paid in connection with such sales.
Upon the closing of the
IPO, management has agreed that $74,750,000, or $10.00 per Unit sold in the IPO, would be held into a U.S.-based trust account
(“trust account”), with Continental Stock Transfer & Trust Company acting as trustee. The funds held in the trust
account are invested only in U.S. government treasury bills with a maturity of 185 days or less, or in money market funds
meeting the applicable conditions of Rule 2a-7 promulgated under the Investment Company Act which invest solely in direct
U.S. government treasury. Except with respect to divided and/or interest earned on the funds held in the trust account that may
be released to the Company to pay the Company’s tax obligation, if any, the proceeds from the IPO and the sale of the Private
Placement Units that are deposited and held in the trust account will not be released from the trust account until the earliest
to occur of (i) the completion of the Company’s initial business combination, (ii) the redemption of any public
shares properly tendered in connection with a shareholder vote to amend the company’s memorandum and articles of association
effective at the time to (A) modify the substance or timing of obligation to redeem 100% of the Company’s public shares
if the Company does not complete the Company’s initial business combination by the Combination Deadline (as defined below), or
(B) with respect to any other provision relating to shareholders’ rights or pre-business combination activity and
(iii) the redemption of all of public shares if the Company is unable to complete their initial business combination by the
Combination Deadline, subject to applicable law. In no other circumstances will a public shareholder have any right or interest of
any kind to or in the trust account. The proceeds deposited in the trust account could become subject to the claims of the
Company’s creditors, if any, which could have priority over the claims of the public shareholders.
Our efforts to identify a
prospective target business will not be limited to a particular industry or geographic location. Since our IPO, our sole business activity
has been identifying and evaluating suitable target businesses. We presently have no revenue and have had losses since inception from
incurring formation and operating costs. We have relied upon the sale of our securities and loans from the Sponsor HoldCo, sponsor and
other parties to fund our operations.
10
Separation of Units
On June 16, 2025, the Company
announced that holders of the Company’s Public Units may elect to separately trade the Public Shares and Public Rights from the
Public Units, commencing on or about June 20, 2025.
The Class A ordinary shares
and rights are traded on the Nasdaq Global Market (“Nasdaq”) under the symbols “CHPG” and “CHPGR”,
respectively. Units not separated continue to trade on Nasdaq under the symbol “CHPGU.”
Results of Operations
We have neither engaged in
any operations nor generated any revenues to date. Our only activities from March 27, 2024 (inception) to December 31, 2025 were organizational
activities, those necessary to prepare for the IPO, described below, and, after the IPO, identifying a target company for an initial business
combination. We do not expect to generate any operating revenues until after the completion of our initial business combination. We may
generate non-operating income in the form of interest income on marketable securities held in the trust account. We incur expenses as
a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence
expenses in connection with completing an initial business combination.
For the year ended
December 31, 2025, we had a net income of $1,175,395, which consisted of the interest and dividend earned on investments held in trust
account of $1,778,580. This was partially offset by formation and operating costs of $447,281 and stock-based compensation expense of
$155,904.
For the period from March
27, 2024 (inception) through December 31, 2024, we had a net loss of $250,846, which consisted of formation and operating costs of $218,941
and stock-based compensation expense of $31,905.
Liquidity and Capital Resources
The Company’s liquidity
needs up to December 31, 2025 had been satisfied through a payment from the Sponsor HoldCo of $25,000 for the founder shares to cover
certain offering costs and the proceeds from the public offering and private placements.
Following the closing
of the IPO and sale of the Private Placement Units on May 29, 2025, a total of $75,123,750 was placed in the trust account, and we
had $464,339 of cash held outside of the trust account, after payment of costs related to the IPO, and available for working capital
purposes. In connection with the IPO, we incurred $ 3,259,220
in transaction costs, consisting of $747,500 of underwriting commissions which was paid in cash at the closing date of the IPO,
$1,495,000 of deferred underwriting commissions, $293,020 of the Representative Shares (discussed below), and $723,700 of other
offering costs.
In conjunction with the IPO,
the Company issued to the underwriter 112,125 Class A ordinary shares for no consideration (the “Representative Shares”).
The fair value of the Representative Shares accounted for as compensation under the Financial Accounting Standards Board’s Accounting
Standards Codification (“ASC”) 718, “Compensation – Stock Compensation” (“ASC 718”) is included
in the offering costs. The estimated fair value of the Representative Shares as of the IPO date totaled $293,020.
As of December 31, 2025,
the Company had cash of $17,251 and a working capital deficit of $77,569.
For the year ended
December 31, 2025, there was $491,328 of cash used in operating activities resulting from interest and dividend earned on investments
held in trust account of $1,778,580, the increase in prepaid expenses of $47,418, and the decrease in accounts payable and accrued expenses
of $50,830. The changes were partially offset by net income of $1,175,395, stock compensation expense of 155,904 and the increase in due
to related parties of $54,201.
For the period from March
27, 2024 (inception) through December 31, 2024, there was $123,142 of cash used in operating activities resulting from net loss of $250,846
and the increase in prepaid expenses of $26,000. The changes were partially offset by stock compensation expense of $31,905, the increase
in due to related parties of $54,401, and the increase in accounts payable and accrued expenses of $67,398.
For the year ended December
31, 2025, there was $75,123,750 of cash used in investing activities resulting from the purchase of investments held in trust account.
11
For the period from March
27, 2024 (inception) through December 31, 2024, there were no investing activities.
For the year ended December
31, 2025, there was $75,632,326 of cash provided by financing activities resulting from the proceeds from the IPO of $74,750,000, the
proceeds of the private placement consummated simultaneously with the IPO of $2,300,000, proceeds from working capital loans provided
by a related party of $74,696, and proceeds from promissory note provided by a related party of $95,048. The changes were partially offset
by the payment of the underwriter discount of $747,500, the payment of promissory note–related party of $350,000, and the payment
of deferred offering costs of $489,918.
For the period from March
27, 2024 (inception) through December 31, 2024, there was $123,145 of cash provided by financing activities resulting from the proceeds
from promissory note-related party of $331,927 and the proceeds from issuance of Class B ordinary shares of $25,000. The changes were
partially offset by the payment of deferred offering costs of $233,782.
We intend to use the funds
held in the trust account, including any amounts representing interest earned on the trust account (which interest shall be net of taxes
payable and up to $100,000 of interest released to the Company to pay dissolution expenses) to complete our initial business combination.
We may withdraw interest to pay taxes, if any. Our annual income tax obligations will depend on the amount of interest and other income
earned on the amounts held in the trust account. To the extent that our ordinary shares or debt is used, in whole or in part, as consideration
to complete our initial business combination, the remaining proceeds held in the trust account will be used as working capital to finance
the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.
Prior to the completion of
our initial business combination, we will have available to the Company $1,500,000 of proceeds held outside the trust account. We will
use these funds primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses,
travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review
corporate documents and material agreements of prospective target businesses, structure, negotiate and complete a business combination,
and to pay taxes to the extent the interest earned on the trust account is not sufficient to pay our taxes.
In order to fund working
capital deficiencies or finance transaction costs in connection with an intended initial business combination, the Sponsor HoldCo, the
Sponsor or their affiliates or certain of our officers and directors may, but are not obligated to, loan us funds as may be required.
If we complete our initial business combination, we would repay such loaned amounts. In the event that our initial business combination
does not close, we may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds
from our trust account would be used for such repayment.
On June 26, 2025, the Company
issued a promissory note to the Sponsor HoldCo, under which the Sponsor HoldCo may loan the Company up to $500,000 to be used for a portion
of the working capital. The promissory note is non-interest bearing, unsecured and is due at the earlier of (1) the date on which the
Company consummates its initial business combination or (2) the date on which the Company liquidates and dissolves. The Sponsor HoldCo,
as the payee, has the right, but not the obligation, to convert the promissory note, in whole or in part, into Private Placement Units
of the Company, that are identical to the Private Placement Units issued by the Company in the Private Placement consummated simultaneously
with the Company’s IPO, subject to the Cap described below, by providing the Company with written notice of the intention to convert
at least two business days prior to the closing of the Initial Business Combination. The number of Private Placement Units to be received
by the Sponsor HoldCo in connection with such conversion shall be an amount determined by dividing (x) the sum of the outstanding principal
amount payable to the Sponsor HoldCo by (y) $10.00.
Up to $1,500,000 of the loans
(the “Cap”) made by our Sponsor HoldCo, sponsor, our officers and directors, or our or their affiliates to the Company prior
to or in connection with our initial business combination may be convertible into units, at a price of $10.00 per unit at the option of
the lender, upon consummation of our initial business combination. The units would be identical to the placement units. The terms of such
loans by our officers and directors, if any, have not been determined and no written agreements exist with respect to such loans. We do
not expect to seek loans from parties other than the Sponsor HoldCo, the sponsor, the officers and directors or their affiliates as we
do not believe third parties will be willing to loan such funds and provide a waiver against any and all rights to seek access to funds
in our trust account.
As of December 31, 2025,
the Company had $151,671 of borrowings under the working capital loans.
On July 7, 2025, the Company
repaid $350,000 of the promissory note, dated April 18, 2024, to Sponsor and transferred the remaining balance of $76,975 to the working
capital loans.
We believe we will need to raise additional funds in order to meet the expenditures required for operating our business. However,
if our estimates of the costs of identifying a target business, undertaking in-depth due diligence and negotiating an initial business
combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior
to our initial business combination. 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, if the we are
unable to complete a Business Combination within the Combination Period by November 29, 2026, or up to August 29, 2027 if extended, our
board of directors would proceed to commence a voluntary liquidation and thereby a formal dissolution. There is no assurance that our
plans to raise capital or to consummate a Business Combination will be successful or successful within the required period. As a result,
management has determined that such additional condition also raise substantial doubt about our ability to continue as a going concern.
12
Off-Balance
Sheet Financing Arrangements
We
have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2025. 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
Registration
Rights
The
holders of the founder shares and Private Placement Units, including any Working Capital Units of those issued upon conversion of Working
Capital Loans will be entitled to registration rights pursuant to a registration rights agreement signed on May 27, 2025 by and among
the Company and the insiders. The holders of these securities are entitled to make up to three demands, excluding short form demands,
that the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect
to registration statements filed after the completion of our initial business combination and rights to require the Company to register
for resale such securities pursuant to Rule 415 under the Securities Act. The Company will bear the costs and expenses of filing any
such registration statements.
Underwriting
Agreement
The
underwriters received a cash underwriting discount of $0.10 per Public Unit, or $747,500 in the aggregate and paid at the closing of
the IPO and the exercising of over-allotment option in part. In addition, the underwriters will be entitled to a deferred fee of $0.20
per Public Unit, or approximately $1,495,000 in the aggregate upon the consummation of an initial business combination. The deferred
fee will become payable to the underwriters from the amounts held in the trust account solely in the event that the Company completes
its initial business combination, subject to the terms of the underwriting agreement dated May 27, 2025 by and among the Company, and
Clear Street LLC.
Critical
Accounting Estimates
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during
the reporting period. Actual results could differ from those estimates. Making estimates requires management to exercise significant
judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed
at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to
one or more future confirming events. Accordingly, actual results may differ from these estimates. We have identified the following critical
accounting policies and estimates:
Fair
Value of Financial Instruments
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC 820, “Fair Value
Measurements and Disclosures” (“ASC 820”), approximates the carrying amounts represented in the accompanying balance
sheet, primarily due to their short-term nature.
13
The
Company applies ASC 820, which establishes a framework for measuring fair value and clarifies the definition of fair value within that
framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a
liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement
date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use
in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity.
Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions
that market participants would use in pricing the asset or liability and are to be developed based on the best information available
in the circumstances.
●
Level
1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement
are observable inputs, such as quoted prices in active markets for identical assets or liabilities.
●
Level
2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar
underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at
commonly quoted intervals.
●
Level
3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques
when little or no market data exists for the assets or liabilities.
The
public Rights have been classified within shareholders’ deficit and will not require remeasurement after issuance. The public Rights
were classified within Level 3 of the fair value hierarchy at the measurement dates due to the use of unobservable inputs inherent in
assumptions related to the market adjustments as noted below. The following table presents the quantitative information regarding market
assumptions used in the valuation of the public Rights:
May 29,
2025
Unit value
$ 10.00
Share price
$ 9.67
Conversion ratio
12.5 %
Probability of Business Combination
30.0 %
Discount of lack of marketability (DLOM)
2.0 %
Fair value of each right
$ 0.33
Stock
Compensation
The
Company accounts for stock-based compensation expense in accordance with ASC 718, “Compensation — Stock Compensation”
(“ASC 718”). Under ASC 718, stock-based compensation associated with equity-classified awards is measured at fair
value upon the grant date and recognized over the requisite service period. To the extent a stock-based award is subject to a performance
condition, the amount of expense recorded in a given period, if any, reflects an assessment of the probability of achieving such performance
condition, with compensation recognized once the event is deemed probable to occur. Forfeitures are recognized as incurred. The Company
has recognized stock-based compensation expense in the amount of $155,904 for the year ended December 31, 2025, and $31,905 for the period
from March 27, 2024 (inception) through December 31, 2024.
14
On May 15, 2024, the Sponsor entered into a securities
transfer agreement, pursuant to which the Sponsor transferred 100,000 Class B insider shares, for a total purchase price of $1,159 to
Bala Padmakumar, the former CEO, Chairman and Director of the Company, and 60,000 Class B insider shares for a total purchase price of
$695 to Evan M. Graj, the CFO and director of the Company, respectively. The fair value of these 160,000 shares transferred on the
grant date was $33,760 or $0.211 per share, based on valuation performed by a third-party specialist. The Company accounted for the transfer
under ASC 718 stock compensation (See Note 2 for details).
The share price was calculated using a scenario-based
method, incorporating probabilities of both a business combination and an IPO, with the total Unit value reaching $10 and the Right valued
at one-eighth of the share price. Based on these probabilities, an indicated per share marketable value for the Founders Shares was determined,
and a discount for lack of marketability, derived from the Finnerty model, a valuation methodology, was applied to yield a minority non-marketable
fair value. The following criteria presents the quantitative information regarding market assumptions used in the founder share valuation
performed by a third-party specialist:
May 15,
2024
Estimated Volatility
102.5 %
Risk-free rate
4.67 %
Spot price
$ 9.639
Discount of lack of marketability (DLOM)
27.02 %
Concurrent with the IPO, the Sponsor transferred an
aggregate of 60,000 of its Class B insider shares, or 20,000 each to its three independent directors for their board service, for nominal
cash consideration, of $696. The fair value of these 60,000 shares transferred on the grant date was $156,600 or $2.61 per share per valuation
performed by a third-party specialist. The Company accounted for the transfer under ASC 718 stock compensation (See Note 2 for
details).
The share price was calculated using a scenario-based
method, incorporating probabilities of both a business combination and an IPO, with the total Unit value reaching $10 and the Right valued
at one-eighth of the share price. Based on these probabilities, an indicated per share marketable value for the Founders Shares was determined,
and a discount for lack of marketability, derived from the Finnerty model, was applied to yield a minority non-marketable fair value.
The following criteria presents the quantitative information regarding market assumptions used in the founder share valuation performed
by a third-party specialist:
May 29,
2025
Per Share Value of Class A Ordinary Shares
$ 8.89
Probability of Business Combination
30.0 %
Per Share Value of Class B Ordinary Shares (Marketable Basis)
$ 2.67
Discount of lack of marketability (DLOM)
2.0 %
Recent Accounting Pronouncements
Management does not believe
that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on our financial
statements.
15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.