Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
References to the “Company,”
“our,” “us” or “we” refer to Power & Digital Infrastructure Acquisition II Corp. The following
discussion and analysis of our financial condition and results of operations should be read in conjunction with the 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,” “Item 1.A. Risk Factors” and elsewhere
in this Annual Report on Form 10-K.
Cautionary Note Regarding Forward-Looking
Statements
This Annual Report on
Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking
statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such
as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,”
“believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors
that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other SEC filings.
Overview
We are a blank check company
incorporated in Delaware on March 23, 2021, formed for the purpose of effecting a merger, capital stock exchange, asset acquisition,
stock purchase, reorganization or other similar business combination with one or more businesses or entities (a “Business Combination”).
We are an emerging growth company and, as such, we are subject to all of the risks associated with emerging growth companies.
Our sponsor is XPDI Sponsor
II LLC, a Delaware limited liability company (the “Sponsor”). The registration statement for our initial public offering
(the “IPO”) was declared effective on December 9, 2021. On December 14, 2021, we consummated our IPO of 28,750,000 units,
which included the exercise of the underwriters’ option to purchase an additional 3,750,000 units at the IPO price to cover over-allotments
(the “Over-Allotment Units”), at $10.00 per unit, generating gross proceeds of $287.5 million, and incurring offering costs
of approximately $20.7 million, of which approximately $10.1 million was a deferred discount, which was subsequently reduced to approximately
$6 million following the resignation of BofA Securities, Inc. (“BofA”) as an underwriter as described below.
Simultaneously with the
closing of our IPO, we completed the private placement (the “Private Placement”) of 11,125,000 private placement warrants
(the “Private Placement Warrants”), at a price of $1.00 per Private Placement Warrant to our Sponsor and certain funds and
accounts managed by subsidiaries of BlackRock, Inc., an unrelated party (the “Anchor Investors”), generating proceeds of
approximately $11.1 million.
Upon the closing of the
IPO and the Private Placement on December 14, 2021, approximately $290.4 million ($10.10 per unit) of the net proceeds of the sale of
the units in the IPO, including proceeds from the sale of the Over-Allotment Units and certain of the proceeds from the sale of the Private
Placement Warrants, were deposited into a segregated Trust Account (the “Trust Account”) located in the United States with
Continental Stock Transfer & Trust Company acting as trustee and approximately $1.7 million of such net proceeds were deposited in
our operating account to pay expenses in connection with the closing of the IPO and for working capital following the IPO. The proceeds
held in the Trust Account have been (i) held in an interest-bearing bank demand deposit account or (ii) invested in U.S. “government
securities,” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company
Act”), having a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under
the Investment Company Act, which invest only in direct U.S. government treasury obligations, as determined by the Company, until the
earlier of: (i) the completion of an initial Business Combination and (ii) the distribution of the Trust Account as described below.
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Our management has broad
discretion with respect to the specific application of the net proceeds of the IPO and the sale of Private Placement Warrants, although
substantially all of the net proceeds are intended to be applied generally toward consummating an initial Business Combination. There
is no assurance that we will be able to complete an initial Business Combination successfully. We must complete one or more initial Business
Combinations having an aggregate fair market value of at least 80% of the net assets held in the Trust Account (net of amounts disbursed
to management for working capital purposes and excluding the deferred underwriting commissions and taxes payable on the interest earned
on the Trust Account) at the time of the agreement to enter into the initial Business Combination. However, we will only complete an
initial Business Combination if the post-transaction company owns or acquires 50% or more of the voting securities of the target or otherwise
acquires a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment
Company Act.
On May 15, 2023, we filed
a definitive proxy statement for the solicitation of proxies in connection with the special meeting in lieu of annual meeting of the
Company’s stockholders (the “Extension Special Meeting”) to consider and vote on, among other proposals, the extension
of the date by which the Company must consummate an initial business combination from June 14, 2023 (the “Initial Outside Date”)
to December 14, 2023 (such date, the “Extended Date”), and to allow the Company, without another stockholder vote, by resolution
of the Company’s Board to elect to further extend the Extended Date in one-month increments up to three additional times, or a
total of up to nine months after the Initial Outside Date, until March 14, 2024, unless the closing of a Business Combination shall have
occurred prior thereto or such earlier date as determined by our Board to be in the best interests of the Company (such proposal, the
“Extension Amendment Proposal”), and the amendment of the Company’s amended and restated certificate of incorporation
to remove the limitation that the Company may not redeem public shares to the extent that such redemption would result in the Company
having net tangible assets (as determined in accordance with Rule 3a51-1(g)(1) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) (or any successor rule)) of less than $5,000,001 (such proposal, the “Redemption Limitation Amendment
Proposal”).
On June 5, 2023, the Company
entered into the Merger Agreement, and on February 5, 2024, the Company entered into that certain First Amendment to the Merger Agreement
(the “Amendment”), see “Contractual Obligations—Merger Agreement” below.
At the Extension Special
Meeting on June 9, 2023, the Company’s stockholders approved the Extension Amendment Proposal and the Redemption Limitation Amendment
Proposal. In connection with the stockholders’ vote at the Extension Special Meeting, the stockholders elected to redeem 18,141,822
shares of Class A common stock at a redemption price of approximately $10.37 per share, for an aggregate redemption amount of approximately
$188,132,132 (the “June Redemptions”). After the satisfaction of the June Redemptions, the balance in the Trust Account as
of December 31, 2023 was approximately $114,641,527. Upon completion of the June Redemptions, 10,608,178 shares of Class A common stock
and 7,187,500 shares of Class B common stock remain issued and outstanding.
In connection with the approval
of the Extension Amendment Proposal, the company deposited $300,000 in the Trust Account on June 15, 2023, July 10, 2023 and August 10,
2023 and the sponsor deposited $300,000 in the Trust Account on September 8, 2023, October 10, 2023, and November 9, 2023.
On December 12, 2023, the
Board approved an extension of the date by which the Company must consummate an initial business combination from December 14, 2023 to
January 14, 2024.
On January 10, 2024, the
Board approved an extension of the date by which the Company must consummate an initial business combination from January 14, 2024 to
February 14, 2024.
On February 8, 2024, the
Board approved an extension of the date by which the Company must consummate an initial business combination from February 14, 2024 to
March 14, 2024.
On February 20, 2024, we
filed a definitive proxy statement for the solicitation of proxies in connection with a special meeting of stockholders of the Company
to consider and vote on, among other proposals, the extension of the date by which the Company must consummate an initial business combination
from March 14, 2024 to April 14, 2024, and to allow the Company, without another stockholder vote, by resolution of the Board, to elect
to further extend such date in one-month increments up to three additional times until July 14, 2024 (the “2024 Extension”),
unless the closing of a an initial business combination shall have occurred prior thereto, or such earlier date as determined by the
Board to be in the best interests of the Company.
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Liquidity, Capital Resources and Going Concern
Our liquidity needs to date
have been satisfied through a capital contribution of $25,000 from our Sponsor to purchase our Class B common stock (the “Founder
Shares”), the related party loan under a promissory note of approximately $115,000 from, our Sponsor, which was repaid in full
on December 17, 2021, and the net proceeds from the consummation of the Private Placement not held in the Trust Account. In addition,
in order to finance transaction costs in connection with an initial Business Combination, our officers, directors and initial stockholders
may, but are not obligated to, provide working capital loans. As of December 31, 2023, there were no amounts outstanding under any working
capital loans.
In connection with the Company’s assessment of going concern
considerations in accordance with the Financial Accounting Standards Board’s (“FASB’s”) Accounting Standards Codification
(“ASC”) Topic 205-40, “Presentation of Financial Statements – Going Concern,” management has determined
that the liquidity needs, mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability
to continue as a going concern, which is considered to be one year from the issuance of these financial statements. No adjustments have
been made to the carrying amounts of assets or liabilities should the Company be required to liquidate after March 14, 2024. The financial
statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern. The Company
intends to complete a Business Combination before the mandatory liquidation date, as it may be extended. Over this time period, the Company
will be using the funds outside of the Trust Account for paying existing accounts payable and meeting conditions to closing the Business
Combination. See Note 10 – Subsequent Events, of the Notes to Consolidated Financial Statements included in “Item 8. Financial
Statements and Supplementary Data” of this report.
The Company cannot provide
any assurance that new financing will be available to it on commercially acceptable terms, if at all. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern through one year from the issuance date of these financial statements.
These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the
liabilities that might be necessary should the Company be unable to continue as a going concern.
In February 2022, the Russian
Federation and Belarus commenced a military action with the country of Ukraine. As a result of this action, various nations, including
the United States, have instituted economic sanctions against the Russian Federation and Belarus. The recent military conflict between
Israel and militant groups led by Hamas has also caused uncertainty in the global markets. Further, the impact of these actions and related
sanctions on the world economy are not determinable as of the date of these financial statements.
On August 16, 2022, the
Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things,
a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic
subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing
corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair
market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing
corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases
during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the Treasury (the “Treasury”)
has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.
Any share redemption or other share repurchase that occurs after December 31, 2022, in connection with a Business Combination, extension
vote or otherwise, may be subject to the excise tax. Whether and to what extent we would be subject to the excise tax in connection with
a Business Combination, extension vote or otherwise will depend on a number of factors, including (i) the fair market value of the redemptions
and repurchases in connection with the Business Combination, extension or otherwise, (ii) the structure of a Business Combination, (iii)
the nature and amount of any “PIPE” or other equity issuances in connection with a Business Combination (or otherwise issued
not in connection with a Business Combination but issued within the same taxable year of a Business Combination) and (iv) the content
of regulations and other guidance from the Treasury. In addition, because the excise tax would be payable by us and not by the redeeming
holder, the mechanics of any required payment of the excise tax have not been determined. The foregoing could cause a reduction in the
cash available on hand to complete a Business Combination and in our ability to complete a Business Combination. Further, the application
of the excise tax in the event of a liquidation is uncertain.
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Results of Operations
Our entire activity since
inception up to December 31, 2023 has been related to our formation, the preparation for the IPO, and since the closing of the IPO, the
search for a prospective initial Business Combination. We will not generate any operating revenues until after the completion of our
initial Business Combination. We generate non-operating income in the form of investment income from the Trust Account. We will 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 year ended December 31, 2023, we had a
net income of approximately $1.2 million, which consisted of approximately $9.1 million of income from investments held in the Trust Account,
and reversal of transaction costs incurred in connection with IPO of approximately $0.2 million, offset by approximately $6.3 million
in operating expenses and approximately $1.8 million in income tax expenses. Operating expenses were comprised of approximately $5.9 million
of general and administrative expenses, $240,000 of general and administrative expenses - related party, and $200,000 of franchise tax
expenses.
For the year ended December
31, 2022, we had a net income of approximately $2.0 million, which consisted of approximately $4.2 million of income from investments
held in the Trust Account, partially offset by approximately $1.3 million in operating expenses and approximately $802,000 in income
tax expenses. Operating expenses were comprised of approximately $888,000 of general and administrative expenses, $240,000 of general
and administrative expenses - related party, and $215,000 of franchise tax expense.
Contractual Obligations
Registration Rights
The holders of Founder Shares,
Private Placement Warrants and warrants that may be issued upon conversion of working capital loans, if any (and any shares of common
stock issuable upon the exercise of the Private Placement Warrants or warrants issued upon conversion of the working capital loans and
upon conversion of the Founder Shares), were entitled to registration rights pursuant to a registration rights agreement to be signed
prior to the consummation of the IPO (the “Registration Rights Agreement”). These holders are entitled to certain demand
and “piggyback” registration rights. However, the Registration Rights Agreement provides that we will not be required to
effect or permit any registration or cause any registration statement to become effective until termination of the applicable lock-up
period. We will bear the expenses incurred in connection with the filing of any such registration statements.
Underwriting Agreement
BofA and Barclays Capital
Inc. (“Barclays”), the underwriters in our IPO, were entitled to an underwriting discount of $0.20 per unit on all units
sold in the IPO, except for the units purchased by the Anchor Investors, or approximately $5.3 million in the aggregate, paid upon the
closing of the IPO.
BofA and Barclays were also
entitled to an additional fee of $0.35 per unit, or $10,062,500 in the aggregate. The deferred fee will become payable to the underwriters
from the amounts held in the Trust Account solely in the event that we complete an initial Business Combination, subject to the terms
of the underwriting agreement.
On June 20, 2023, BofA formally notified the Company in writing that
it had resigned and withdrew from its role in the Business Combination and thereby, for no additional consideration, waived its entitlement
to its portion of the Deferred Discount despite having already completed the services and obligations that would entitle BofA to payment
under the terms of the underwriting agreement. As a result, the reduction in deferred fees was allocated on a pro rata basis between additional
paid-in capital and other income based upon the original amount of the deferred underwriting fees allocation to the liability-classified
instruments in the IPO. Therefore, the deferred underwriting fee was reduced by $4,025,000, of which $205,275 is reflected in the consolidated
statement of operations as other income and $3,819,725 is charged to additional paid-in capital in the statement of stockholders’
deficit. As a result of the waiver, and pursuant to that agreement dated June 4, 2023 among Barclays Capital Inc., the Company and XPDI
Sponsor II LLC, the outstanding deferred underwriting fee payable upon closing of the Business Combination was reduced to approximately
$6.0 million.
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Administrative Support Services
Commencing on December 9,
2021, we have agreed to pay affiliates of our Sponsor a total of $20,000 per month for office space and administrative support services.
Upon completion of our initial Business Combination or our liquidation, we will cease paying these monthly fees. In connection with our
initial Business Combination, we will make a cash payment in an aggregate amount of up to $3,000,000 to affiliates of our Sponsor or Anchor
Investors for any financial advisory, placement agency or other similar investment banking or consulting services that affiliates of our
Sponsor or Anchor Investors have provided and may continue to provide to us in connection with our initial Business Combination, and may
reimburse to affiliates of our Sponsor or Anchor Investors for any out-of-pocket expenses incurred by it in connection with the performance
of such services.
Merger Agreement
On June 5, 2023, the Company
and XPDB Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub”),
entered into an Agreement and Plan of Merger (as it may be amended, supplemented or otherwise modified from time to time in accordance
with its terms, the “Merger Agreement”) with Montana Technologies LLC, a Delaware limited liability company (“Montana”),
pursuant to which Merger Sub will merge with and into Montana, with Montana surviving the Merger as a wholly owned subsidiary of the Company
(the “Merger” and, along with the transactions contemplated in the Merger Agreement, the “Proposed Transactions”).
Following the closing of the Proposed Transactions (the “Closing”), the Company will be renamed “Montana Technologies
Corporation” (the “Combined Company”).
As part of the Business Combination,
equity holders of Montana will receive aggregate consideration of approximately $421.9 million (subject to adjustment as described in
the Merger Agreement), payable (i) in the case of Class B and holders of Class C common units of Montana, in the form of newly issued
shares of Class A common stock, par value $0.0001 per share, of the Combined Company (“Combined Company Class A common stock”),
with a $10.00 value ascribed to each such share and which will entitle the holder thereof to one vote per share on all matters submitted
to a vote of the holders of common stock, whether voting separately as a class or otherwise, (ii) in the case of holders of Class A common
units of Montana, in the form of newly issued shares of Class B common stock, par value $0.0001 per share, of the Combined Company (“Combined
Company Class B common stock”) with a $10.00 value ascribed to each such share and which will entitle the holder thereof to a number
of votes per share such that the equity holders of Montana as of immediately prior to the Closing will, immediately following the Closing,
collectively own shares representing at least 80% of the voting power of all classes of capital stock of the Combined Company entitled
to vote on matters submitted to a vote of the stockholders of the Combined Company and (iii) in the case of Montana’s option holders
and warrant holders, in the form of options and warrants of the Combined Company, respectively, having substantially similar terms to
the applicable options and warrants of Montana.
Montana’s equity holders
(other than warrant holders) will also have the opportunity to receive additional equity consideration (in each case, in accordance with
their respective pro rata share) in the form of shares of Combined Company Class A common stock with a $10.00 value ascribed to each share
(the “Earnout Shares”), only upon full completion of construction and operational viability (including all permitting, regulatory
approvals and necessary or useful inspections) of new production capacity of Montana’s key components or assemblies based solely
on demand from bona fide customer commitments evidenced by binding contracts (or in the discretion of a majority of the independent members
of the board of directors of the Combined Company, a non-binding letter of intent or indication of interest or similar writing that is
substantially likely to become a binding contract) with a known price or pricing formula that exceeds a level of production capacity that
is expected to generate Annualized EBITDA of more than $150,000,000 (the “Threshold Annualized EBITDA”), which shall be determined
by a majority of the independent members of the board of directors of the Combined Company in its sole discretion, equal to (i) the ratio
of (x) (1) the Annualized EBITDA that is expected from such new production capacity (the “Expected Annualized EBITDA”) less
(2) (A) the Threshold Annualized EBITDA plus (B) all previously Expected Annualized EBITDA amounts associated with previous new production
capacities for which previous earnouts were achieved, divided by (y) $150,000,000 multiplied by (ii) $200,000,000, provided that
the aggregate Expected Annualized EBITDA may not exceed $300,000,000.
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The maximum value of the
Earnout Shares will be capped at $200 million and the ability to receive Earnout Shares will expire on the fifth anniversary of the Closing.
A majority of the independent members of the board of directors of the Combined Company then serving will have sole discretion in determining,
among other things, the achievement of the applicable milestones, the calculations of payments of Earnout Shares to the applicable Montana
equity holders, the dates on which construction and operational viability of new production capacity is deemed completed and whether to
consent to a transfer of the applicable Montana equity holder’s right to receive Earnout Shares. Earnout Shares issuable in respect
of Montana options outstanding as of immediately prior to the effective time of the Merger may be issued to the holder of such Montana
option only if such holder continues to provide services (whether as an employee, director or individual independent contractor) to the
Combined Company or one of its subsidiaries through the date on which such Earnout Shares are issued, as determined by a majority of the
independent members of the Combined Company Board.
As of the date of the Merger
Agreement, 100.0% of the total outstanding Class A common units of Montana and 72.7% of the total outstanding Class B common units of
Montana (or an aggregate of approximately 76.6% of the total outstanding Class A common units and Class B common units of Montana in the
aggregate) were held by unitholders that are expected to continue as directors, officers or employees of the Combined Company. The retention
of certain holders of options of Montana who will continue as directors, officers or employees of the Combined Company (whose responsibilities
are expected to include continued technology development and commercial execution) is integral to the achievement of the milestones that
will determine whether Earnout Shares are payable. Montana does not believe that such targets are achievable absent the continued involvement
of such persons. The Combined Company is expected to provide competitive compensation, benefits and equity awards (pursuant to the terms
of the Montana Technologies Corporation 2023 Incentive Award Plan) to these individuals following the Merger in order to incentivize these
individuals to continue to provide services to the Combined Company.
On February 5, 2024, the
Company, Merger Sub, and Montana entered into the Amendment to the Merger Agreement, amending the Merger Agreement to, among other things,
(i) amend the definition of Aggregate Transaction Proceeds and (ii) reduce the Aggregate Transaction Proceeds condition from $85 million
to $50 million.
Sponsor Support Agreement
In connection with the execution
of the Merger Agreement and pursuant to the terms of the Sponsor Support Agreement (the “Sponsor Support Agreement”) entered
into among the Sponsor, the Company, Montana and other holders of the Company’s Class B common stock, $0.0001 par value per share
(the “Class B common stock”), the Sponsor and the other holders of Class B common stock agreed to, among other things, (i)
vote any Class A common stock, $0.0001 par value per share (the “Class A common stock”), of the Company or Class B common
stock (collectively, the “Sponsor Securities”), held of record or thereafter acquired in favor of the proposals presented
by the Company at a special meeting to approve the Proposed Transactions, (ii) be bound by certain other covenants and agreements related
to the Proposed Transactions, (iii) be bound by certain transfer restrictions with respect to the Sponsor Securities and (iv) waive certain
antidilution protections with respect to the Sponsor Securities, in each case, on the terms and subject to the conditions set forth in
the Sponsor Support Agreement. In addition, pursuant to the terms of the Sponsor Support Agreement, the Sponsor has agreed to waive its
redemption rights with respect to any Sponsor Securities in connection with the completion of a Business Combination (which waiver was
provided in connection with the IPO and without any separate consideration paid in connection with providing such waiver), has agreed
not to transfer any Public Shares and Founder Shares held by it during the time prior to (i) Closing or (ii) the termination of the Merger
Agreement, has agreed to waive anti-dilution protections and has agreed to subject certain of the shares of Combined Company Class A common
stock held by Sponsor following the conversion of the Founder Shares as of the Closing to certain vesting provisions. Specifically, the
Sponsor Support Agreement provides that as of immediately prior to (but subject to) the Closing, 1,380,736 shares of Combined Company
Class A common stock held by the Sponsor following the conversion of the Founder Shares as of the Closing (the “Subject Vesting
Shares”) will be subject to an earnout, with the Subject Vesting Shares vesting during the period beginning on the date of Closing
and ending five (5) years following the date of Closing (i) simultaneously with the Earnout Payments made to the Montana equity holders
in a proportionate amount to the payment achieved in relation to the maximum issuance of Earnout Shares of equity interests of $200 million
(the “Performance Vesting Trigger”) and (ii) up to 50% of the Subject Vesting Shares (including any vested Subject Vesting
Shares from the Performance Vesting Trigger) vesting on any day following the Closing when the closing price of a share of Combined Company
Class A common stock on the Nasdaq (the “Closing Share Price”) equals or exceeds $12.00 (as adjusted for stock splits, stock
dividends, reorganizations, recapitalizations and the like) and all remaining Subject Vesting Shares vesting when the Closing Share Price
equals or exceeds $14.00 (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like).
The Sponsor Support Agreement
will terminate on the earlier of (i) the date the Business Combination becomes effective and (ii) the termination of the Merger Agreement
in accordance with its terms.
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Investment Agreement
On September 29, 2023, we
entered into an Investment Agreement (the “Investment Agreement”) with Montana, Contemporary Amperex Technology Co., Limited
(“CATL”), CATL US Inc., an affiliate of CATL (“CATL US”) and Contemporary Amperex Technology USA Inc. an affiliate
of CATL (“CATL USA,” and, together with CATL US and CATL, the “CATL Parties”), pursuant to which the CATL Parties
agreed, among other things, that they will not, directly or indirectly, (i) acquire any additional units of the Combined Company, (ii)
seek election to, or to place a representative on, Montana’s board of managers or the board of directors of the Combined Company,
or (iii) acquire any securities of the Combined Company if, following such acquisition, the CATL Parties and their affiliates would hold,
in the aggregate, an interest in the Combined Company of greater than 9.8% on either an economic or voting basis (the “CATL Ownership
Limit”). In the event the CATL Parties and their affiliates exceed the CATL Ownership Limit, the CATL Parties have agreed, following
written notice from the Combined Company, to divest within five business days such number of Combined Company securities as shall be necessary
to cause the CATL Ownership Limit not to be exceeded. In addition, at any time the CATL Ownership Limit is exceeded, the CATL Parties
have agreed to vote any voting power they hold in excess of 9.8% in accordance with the recommendation of the board of directors of the
Combined Company.
The CATL Parties agreed that
they will not, and will cause their affiliates not to, access, obtain, or seek to access or obtain Montana or the Combined Company’s
trade secrets, know-how, or other confidential, proprietary, or competitively sensitive information (excluding any such information that
Montana is obligated to provide to CATL US, CAMT, or CAMT’s subsidiaries pursuant to that certain Amended and Restated Joint Venture
Agreement for CAMT, dated as of September 29, 2023, by and among Montana, CAMT Climate Solutions, Ltd. (“CAMT”) and CATL US),
including by reverse engineering, or seeking to reverse engineer, any of Montana’s products.
Montana has agreed to use
its reasonable best efforts to assist CATL USA in selling, prior to the consummation of the Business Combination, units of Montana representing
at least 2% of Montana’s issued and outstanding units at a price per unit that is not materially lower than the price per unit implied
by the valuation of Montana in connection with the Business Combination. In so assisting CATL USA, Montana is not obligated to incur any
expenses or grant any concessions, nor is it obligated to prioritize any sale by CATL USA over its own capital raising or financing activities.
The Investment Agreement
contains customary representations and warranties and may be terminated only with the written consent of the parties thereto.
Carrier Letter Agreement
On January 7, 2024, we entered
into a letter agreement with Montana and Carrier Corporation, an affiliate of Carrier Global Corporation (NYSE: CARR), a global leader
in intelligent climate and energy solutions (collectively with its affiliates, “Carrier”), pursuant to which Carrier, Montana
and the Company agreed, among other things, to provide Carrier the right to nominate one (1) designee, subject to the approval of the
Company, for election to the board of directors of the Combined Company for so long as Carrier satisfies certain investment conditions,
following the business combination between the Company and Montana.
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Other Agreements
On November 12, 2023, we entered
into an arrangement pursuant to which, under certain circumstances, up to 2% of the proceeds of the capital raised in transactions arranged
by certain third parties from investors located in certain limited jurisdictions may be paid to such third parties. On December 14, 2023,
Montana agreed to reimburse, and did reimburse, the Company 50% of certain expenses incurred by third parties and paid by the Company
in connection with this arrangement.
Critical Accounting Estimates
We prepare our consolidated financial
statements in accordance with U.S. generally accepted accounting principles, which require our management to make estimates that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet
dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material
differences between these estimates and actual results, our financial condition or results of operations would be affected. We base
our estimates on our own historical experience and other assumptions that we believe are reasonable after taking into account our
circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.
We consider an accounting estimate to be critical
if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate
was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that
we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
There are items within our financial statements that require estimation but are not deemed critical, as defined above.
For a detailed discussion of our significant accounting
policies and related judgements, see Note 2 – Summary of Significant Accounting Policies, of the Notes to Consolidated Financial
Statements included in “Item 8. Financial Statements and Supplementary Data” of this report.
Derivative Warrant Liabilities
We do not use derivative
instruments to hedge exposures to cash flow, market, or foreign currency risks. Management evaluates all of our financial instruments,
including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded
derivatives, pursuant to Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”)
Topic 480 “Distinguishing Liabilities from Equity” (“ASC 480”) and FASB ASC Topic 815-40, “Derivatives and
Hedging - Contracts in Entity’s Own Stock” (“ASC 815”). The classification of derivative instruments, including
whether such instruments should be classified as liabilities or as equity, is re-assessed at the end of each reporting period.
The Public Warrants and the
Private Placement Warrants are not precluded from equity classification, based on the guidance in ASC 480 and ASC 815. Equity-classified
contracts are initially measured at fair value (or allocated value). Subsequent changes in fair value are not recognized as long as the
contracts continue to be classified in equity.
Class A Common Shares Subject to Possible Redemption
We account for our Class
A common stock subject to possible redemption in accordance with the guidance in ASC 480. Class A common stock subject to mandatory redemption
(if any) is classified as liability instruments and are measured at fair value. Conditionally redeemable Class A common stock (including
Class A common stock that features redemption rights that are either within the control of the holder or subject to redemption upon the
occurrence of uncertain events not solely within our control) are classified as temporary equity. At all other times, Class A common stock
is classified as stockholders’ equity. Our Class A common stock feature certain redemption rights that are considered to be outside
of our control and subject to the occurrence of uncertain future events. Accordingly, all of our outstanding shares of Class A common
stock is presented at redemption value as temporary equity, outside of the stockholders’ equity section of our balance sheets.
Under ASC 480, we have elected
to recognize changes in the redemption value immediately as they occur and adjust the carrying value of the security to equal the redemption
value at the end of the reporting period. This method would view the end of the reporting period as if it were also the redemption date
of the security. Effective with the closing of the IPO, we recognized the accretion from initial book value to redemption amount, which
resulted in charges against additional paid-in capital (to the extent available) and accumulated deficit.
Net Income per Common Share
We comply with accounting
and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share.” We have two classes of shares, which are referred
to as Class A common stock and Class B common stock. Income and losses are shared pro rata between the two classes of shares. Net income
per common share is calculated by dividing the net income by the weighted average shares of common stock outstanding for the respective
period.
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The calculation of diluted
net income does not consider the effect of the Public Warrants and the Private Placement Warrants to purchase an aggregate of 25,500,000
shares of Class A common stock in the calculation of diluted income per share, because their exercise is contingent upon future events
and their inclusion would be anti-dilutive under the treasury stock method. As a result, diluted net income per share is the same as basic
net income per share for the year ended December 31, 2023 and 2022. Accretion associated with the redeemable Class A common stock is excluded
from earnings per share as the redemption value approximates fair value.
Recent Accounting Pronouncements
In December 2023, the FASB
issued Accounting Standards Updated (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU
2023-09), which requires disclosure of incremental income tax information within the rate reconciliation and expanded disclosures of income
taxes paid, among other disclosure requirements. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. Early adoption
is permitted. The Company’s management does not believe the adoption of ASU 2023-09 will have a material impact on its financial
statements and disclosures.
Our management does not believe
that there are any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect
on our consolidated balance sheets.
Off-Balance Sheet Arrangements and Contractual
Obligations
As of December 31, 2023,
we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments
or contractual obligations.
JOBS Act
The Jumpstart Our Business
Startups Act of 2012, or the JOBS Act, contains provisions that, among other things, relax certain reporting requirements for qualifying
public companies. We qualify as an “emerging growth company” and under the JOBS Act are allowed to comply with new or revised
accounting pronouncements based on the effective date for private (not publicly traded) companies. We are electing to delay the adoption
of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates
on which adoption of such standards is required for non- emerging growth companies. As a result, the financial statements may not be comparable
to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Additionally, we are in the
process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act. Subject to certain
conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not
be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial
reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public
companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by
the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about
the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation related items
such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee
compensation. These exemptions will apply for a period of five years following the completion of our IPO or until we are no longer an
“emerging growth company,” whichever is earlier.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.
We are a smaller reporting
company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are not required
to provide the information otherwise required under this item.
Item 8. Financial Statements and Supplementary Data.
This information appears following
Item 15 of this Annual Report and is included herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
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Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures
are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required
to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including
our principal executive officer and principal financial and accounting officer, to allow timely decisions regarding required disclosure.
As of December 31, 2023, as
required by Rules 13a-15 and 15d-15 under the Exchange Act, our principal executive officer and principal financial and accounting
officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based
upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective due to a material weakness in internal
control over financial reporting relating to accounting issues for accrued general and administrative expenses as well as
the preparation of the Company’s tax provision. Additionally, this material weakness could result in a misstatement of the
carrying value of accounts payable or accrued expenses and the reported amount of general and administrative expenses and income tax
expense in the financial statements that would not be prevented or detected on a timely basis. As a result, our management performed
additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with generally accepted
principles in the United States of America. Accordingly, management believes that the financial statements included in this Annual
Report present fairly, in all material respects, the Company’s financial position, result of operations and cash flows of the
periods presented.
Management’s Report on Internal Controls Over Financial Reporting
As required by SEC rules
and regulations implementing Section 404 of the Sarbanes-Oxley Act, our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with
GAAP. Our internal control over financial reporting includes those policies and procedures that:
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect errors or misstatements in our financial statements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of
our internal control over financial reporting at December 31, 2023. In making these assessments, management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013).
Based on our assessments and those criteria, management determined that our internal controls over financial reporting were not effective
as of December 31, 2023, for the reasons described above.
This Report does not include
an attestation report of internal controls from our independent registered public accounting firm due to our status as an emerging growth
company under the JOBS Act.
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Changes in Internal Control over Financial Reporting
There were no changes in our
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B. Other Information.
During the three months ended December 31, 2023, none of our directors
or “officers” (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement”
or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K).
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent
Inspections.
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance.
Our officers and directors are as follows:
Name Age Position
Theodore J. Brombach 61 Chairman of the Board
Patrick C. Eilers 57 Chief Executive Officer and Director
James P. Nygaard, Jr. 49 Chief Financial Officer
Paul Dabbar 56 Director
Paul Gaynor 58 Director
Scott Widham 66 Director
John B. Sexton 28 Vice President
John P. McGarrity 62 General Counsel and Secretary
Theodore J. Brombach serves as Chairman
of the Board. Mr. Brombach is a founding partner of XMS Capital and serves as the firm’s Co-Managing Partner and has served in such
role since 2006. He is also the Chief Executive Officer of XA Investments LLC, an alternative asset management firm he co-founded in 2016.
Mr. Brombach is the President and Chief Executive Officer and a Trustee of XAI Octagon Floating Rate & Alternative Income Term Trust
(NYSE: XFLT), a closed end fund investing in alternative credit investments, and has served in such role since 2017. He has over 30 years
of investment banking experience in Chicago, New York and London. Mr. Brombach served as the Chairman of XPDI I from December 2020 until
the completion of its merger with Core Scientific in January 2022. Prior to founding XMS Capital, Mr. Brombach was a Managing Director
and co-head of Midwest Investment Banking at Morgan Stanley, which he joined in 1990. At XMS Capital, he has led numerous mergers and
acquisitions and capital raising transactions across a number of industry sectors. Mr. Brombach is a director of RiverWood Bank. Mr. Brombach
earned a Bachelor of Arts from the University of Notre Dame and a Master of Business Administration from the Kellogg Graduate School of
Management at Northwestern University.
Mr. Brombach’s qualifications to serve on
our Board include his extensive executive, director and leadership experience, including over 30 years in investment banking experience.
Patrick C. Eilers serves as our Chief
Executive Officer and is a member of the Board. Mr. Eilers is the founder and has served since 2019 as the Managing Partner of TEP, a
private equity firm focused on the energy & power transition, in particular its impact on the electrical grid, with an expertise in
(i) renewable energy, (ii) energy storage, technology, equipment & services, and (iii) transitional energy infrastructure. Mr. Eilers
has over 20 years of investment experience focused on the energy & power transition. Mr. Eilers served as Chief Executive Officer
and Director of XPDI I from December 2020 until the completion of its merger with Core Scientific in January 2022. Prior to founding TEP,
Mr. Eilers was a Managing Director on the BlackRock Infrastructure Platform, where he also served as an Investment Committee member for
BlackRock’s Global Renewable Power Fund, Global Energy & Power Infrastructure Fund, and chaired the Energy & Power Private
Equity Fund. Prior to joining BlackRock in 2016, he also worked at Madison Dearborn Partners overseeing the firm’s energy, power,
and chemicals practices for 10 years. Mr. Eilers earned a Bachelor of Science in Biology and Mechanical Engineering from the University
of Notre Dame and a Master of Business Administration from the Kellogg School of Management at Northwestern University.
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Mr. Eilers’ qualifications to serve on our
Board include his extensive executive, director and leadership experience in private equity and investment banking, including extensive
knowledge relating to the power generation, power infrastructure, transmission, and battery storage industries.
James P. Nygaard, Jr. serves as our
Chief Financial Officer. Mr. Nygaard is a Managing Director of XMS Capital and is responsible for leading mergers and acquisitions execution
activities at the firm. With 27 years of investment banking experience, he has completed several strategic transactions, financings, and
corporate finance advisory assignments for a diverse range of clients across a variety of industry sectors. Mr. Nygaard served as Chief
Financial Officer of XPDI I from December 2020 until the completion of its merger with Core Scientific in January 2022. Prior to joining
XMS Capital at the end of 2007, Mr. Nygaard spent 12 years in the Investment Banking Division of Morgan Stanley where he assumed various
roles within the corporate finance, mergers and acquisitions and administrative practices of the firm. While at Morgan Stanley, Mr. Nygaard
led coverage and strategic execution efforts for a number of Midwest-based companies, including 3M, Anheuser-Busch, ConAgra Brands, Ford
Motor Company, and General Mills.
Mr. Nygaard graduated summa cum laude from the
University of Illinois at Urbana-Champaign with a Bachelor of Arts in Economics, where he was valedictorian of his department and received
Bronze Tablet Honors, the university’s highest academic distinction.
Paul Dabbar serves on the Board.
Mr. Dabbar is currently the President and Chief Executive Officer of Bohr Quantum Technology Corp, a quantum communications company, and
has served as Chief Executive Officer since 2021. Mr. Dabbar has served on the board of directors of Dominion Energy, Inc. (NYSE: D) since
November 2023 and served on the board of directors of XPDI I from February 2021 until the completion of its merger with Core Scientific
in January 2022. Prior to Bohr Quantum, Mr. Dabbar served as Under Secretary for Science at the U.S. Department of Energy from 2017 to
2021, managing the operations of, and investing capital at the seventeen U.S. National Laboratories, conducting research and development
in energy, technology and the sciences. Mr. Dabbar was previously a Managing Director in investment banking at J.P. Morgan Chase &
Co., in energy and mergers & acquisitions from 1996 to 2017. Mr. Dabbar was also previously a nuclear submarine officer in the U.S.
Navy. Mr. Dabbar earned a Bachelor of Science from the U.S. Naval Academy and an MBA from Columbia University.
Mr. Dabbar’s qualifications to serve on our
Board include his extensive leadership experience in the communications and energy industry.
Paul Gaynor serves on the Board.
Mr. Gaynor is currently the Chief Executive Officer of Longroad Energy, a renewable energy company. Mr. Gaynor served on the board of
directors of XPDI I from February 2021 until the completion of its merger with Core Scientific in January 2022. Prior to co-founding Longroad
Energy, Mr. Gaynor served as CEO of First Wind, which he founded in 2004. Mr. Gaynor has also held various roles within Singapore Power,
PSG International, GE Capital, and GE Power Systems. Mr. Gaynor earned a Bachelor of Science in Mechanical Engineering from Worcester
Polytechnic Institute and an MBA from University of Chicago.
Mr. Gaynor’s qualifications to serve on our
Board include his extensive executive and leadership experience in the power generation and power infrastructure industries.
Scott Widham serves on the Board.
Mr. Widham brings over 30 years of broad-based management and operations experience in the digital transformation and telecommunications
industry. Mr. Widham is currently Chairman of Ezee Fiber, providing telecom services to government, enterprise, carrier and residences
in Texas. Mr. Widham served on the board of directors of XPDI I from February 2021 until the completion of its merger with Core Scientific
in January 2022. Previously, he served as President of Never fail from 2018 to 2019, CEO of Alpheus Communications from 2011 to 2017 and,
prior to Alpheus, as CEO of Cobridge Communications, Broadwing Communications, and Capital Cable. Mr. Widham also served as EVP of Corecomm
and was a Director at MTV Networks. Mr. Widham earned a B.B.A. from the University of Texas at Austin.
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Mr. Widham’s qualifications to serve on our
Board include his over 30 years of executive, financial and leadership experience in the telecommunications industry.
John B. Sexton serves on our management
team as a Vice President. Mr. Sexton is a Vice President for TEP where he focuses on control, and growth equity investments in companies
making North America’s power and energy systems increasingly sustainable and smart. Prior to joining TEP in 2021, Mr. Sexton served
as an Associate with Marathon Capital’s investment banking division where he served since 2018, working across mergers and acquisitions
transactions and tax equity financings in the renewables, carbon capture and energy services sectors. Mr. Sexton earned his Bachelor of
Business Administration in Finance in 2018, while minoring in Sustainability at the University of Notre Dame.
John P. McGarrity serves on our management
team as General Counsel and Secretary. Mr. McGarrity is managing director and chief administrative officer for XMS Capital and general
counsel of XMS Holdings LLC. Mr. McGarrity has over 30 years of experience in legal and product development positions, primarily in the
financial services industry. Prior to joining XMS, and its asset management affiliate XA Investments LLC, in 2016, Mr. McGarrity was managing
director and general counsel of River Branch Holdings, a boutique international merchant bank that was acquired by Piper Jaffray. Mr.
McGarrity is the former executive vice president and head of product development for Man Investments, Inc., the North American subsidiary
of Man Group PLC. Previously, Mr. McGarrity served as a director on the capital markets desk at Bank One, N.A. Prior to that, he was the
Associate General Counsel and Secretary of Unicom Corporation, which merged with PECO Energy Company to become Exelon Corporation. Mr.
McGarrity began his career at Sidley Austin LLP, where he was a partner in its corporate and securities group. Mr. McGarrity earned his
B.B.A., cum laude, in finance and philosophy at the University of Notre Dame. He earned his J.D., magna cum laude, at the University of
Illinois College of Law, where he was an editor of the University of Illinois Law Review.
Number and Terms of Office of Officers and Directors
Our Board is divided into three classes, with only
one class of directors being elected in each year, and with each class (except for those directors appointed prior to our first annual
meeting of stockholders) serving a three-year term. In accordance with the Nasdaq corporate governance requirements, we are not required
to hold an annual meeting until one year after our first fiscal year end following our listing on the Nasdaq. The term of office of the
first class of directors, consisting of Mr. Gaynor, will expire at our first annual meeting of stockholders. The term of office of the
second class of directors, consisting of Mr. Dabbar and Mr. Widham, will expire at our second annual meeting of the stockholders. The
term of office of the third class of directors, consisting of Mr. Brombach and Mr. Eilers, will expire at our third annual meeting of
stockholders. We may not hold an annual meeting of stockholders until after we complete our initial business combination.
Prior to the completion of an initial business