UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
(Mark One)
For
the quarterly period ended
For the transition period from ______________ to ______________
Commission
File Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| The |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As
of August 22, 2024, there were
EXPLANATORY NOTE
Background of Restatement
This Amendment No. 1 to the Quarterly Report on Form 10-Q/A for the three-month period ended March 31, 2024 (the “Amended Report”) filed by Montana Technologies Corporation (“we”, “us”, “our”, “Montana” or the “Company”) amends and restates certain information in the Company’s Quarterly Report on Form 10-Q for the three month period ended March 31, 2024, filed with the Securities and Exchange Commission (the “SEC”) on May 20, 2024 (the “Original Report”).
As described in the Company’s Current Report on Form 8-K filed with the SEC on August 13, 2024, on August 12, 2024, the Board of Directors of the Company (the “Board”), in consultation with management and upon the recommendation of the audit committee of the Board determined that the previously filed unaudited condensed consolidated financial statements of the Company as of and for the three month period ended March 31, 2024, can no longer be relied upon as the result of accounting errors identified by management in the course of a consultation process with the U.S. Securities and Exchange Commission (the “SEC”) relating to the erroneous consolidation as a variable interest entity, or “VIE”, of the Company’s interest in the AirJoule, LLC (the “AirJoule JV”) which should have been accounted for based upon the equity method.
In the Original Report, the Company concluded that it was the primary beneficiary because a de facto agency relationship existed with GE Vernova, and the Company was the most closely associated. Accordingly, the Company consolidated the AirJoule JV in the condensed consolidated financial statements. Through consultation with the SEC, it was determined that the de facto agency guidance was misapplied and could not be used to conclude that the Company is the primary beneficiary.
Additionally, during the preparation of the Amended Report, management identified a misstatement and adjustment needed to the transaction costs incurred in connection with the Business Combination. Originally the Company had recorded certain transaction costs, including the recognition of the Earnout Shares liability, as a reduction in equity. Upon further consideration of the nature of the transaction as a reverse recapitalization and the amount of proceeds resulting from the Business Combination, it was determined that these costs should have been expensed as part of the transaction.
Therefore, the Company is restating its unaudited condensed consolidated financial statements to account for its investment in the AirJoule JV based upon the equity method and to expense certain transactions costs relating to the Business Combination within the statement of operations.
Items Amended in this Amended Report
For the convenience of the reader, this Amended Report sets forth the information in the Original Report in its entirety. However, only the following items of the Original Report are revised in this Amended Report, solely as a result of and to reflect the restatement and conditions related to the restatement described above.
Part I, Item 1: Condensed Consolidated Financial Statements (Unaudited)
Part I, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Part I, Item 4: Controls and Procedures
Part II, Item 6: Exhibits
As required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, our principal executive officer and principal financial officer have provided new certifications, which are included in this Amended Report as Exhibits 31.1, 31.2, 32.1 and 32.2.
Except as it relates to the restatements described above with related disclosures, this Amended Report does not reflect events occurring after the date of the Original Report. Among other things, forward looking statements made in the Original Report have not been revised to reflect events that occurred or facts that became known to the Company after the filing of the Original Report, and such forward looking statements should be read in their historical context. As such, this Amended Report speaks only as of the date the Original Report was filed, and the Company has not undertaken herein to amend, supplement or update any information contained in the Original Report to give effect to any subsequent events. Accordingly, this Amended Report should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing of the Original Report, including any amendment to those filings.
MONTANA TECHNOLOGIES CORPORATION
TABLE OF CONTENTS
i
Part 1 - Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
MONTANA
TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Assets | (As Restated) | |||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses and other assets | ||||||||
| Total current assets | ||||||||
| Operating lease right-of-use asset | ||||||||
| Property and equipment, net | ||||||||
| Investment in AirJoule, LLC | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ equity (deficit) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued transaction fees | ||||||||
| Other accrued expenses | ||||||||
| Due to related parties | ||||||||
| Operating lease liability, current | ||||||||
| Total current liabilities | ||||||||
| Earnout Shares liability | ||||||||
| True Up Shares liability | ||||||||
| Subject Vesting Shares liability | ||||||||
| Operating lease liability, non-current | ||||||||
| Deferred tax liability | ||||||||
| Total liabilities | $ | $ | ||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock, $ |
$ | $ | ||||||
| Class A Common stock, $ |
||||||||
| Class B Common stock, $ |
||||||||
| Subscription receivable | ( |
) | ||||||
| Additional paid-in capital | ||||||||
| Retained earnings (Accumulated deficit) | ( |
) | ||||||
| Total stockholders’ equity (deficit) | ( |
) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
MONTANA
TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three
Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| (As Restated) | ||||||||
| Costs and expenses: | ||||||||
| General and administrative | $ | $ | ||||||
| Research and development | ||||||||
| Sales and marketing | ||||||||
| Transaction costs incurred in connection with business combination | ||||||||
| Depreciation and amortization | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income, net: | ||||||||
| Interest income | ||||||||
| Gain on contribution to AirJoule, LLC | ||||||||
| Equity loss from investment in AirJoule, LLC | ( | ) | ||||||
| Change in fair value of Earnout Shares liability | ( | ) | ||||||
| Change in fair value of True Up Shares liability | ||||||||
| Change in fair value of Subject Vesting Shares | ( | ) | ||||||
| Total other income, net | ||||||||
| Income (Loss) before income taxes | ( | ) | ||||||
| Income tax expense | ( | ) | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Weighted average Class A common stock outstanding, basic | ||||||||
| Basic net income (loss) per share, Class A common stock | $ | $ | ( | ) | ||||
| Weighted average Class A common stock outstanding, diluted | ||||||||
| Diluted net income (loss) per share, Class A common stock | $ | $ | ( | ) | ||||
| Weighted average Class B common stock outstanding, basic | ||||||||
| Basic net income (loss) per share, Class B common stock | $ | $ | ( | ) | ||||
| Weighted average Class B common stock outstanding, diluted | ||||||||
| Diluted net income (loss) per share, Class B common stock | $ | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
MONTANA
TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ AND STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
For the Three Months Ended March 31, 2024
(As Restated)
| Members’ | Preferred | Class
A Common Stock | Class
B Common Stock | Subscription | Additional Paid-In | Retained Earnings (Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||
| Contribution | Units | Shares | Amount | Shares | Amount | Receivable | Capital | Deficit) | (Deficit) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
| Retroactive application of recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
| Issuance of common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||||||
| Exercise of options | ||||||||||||||||||||||||||||||||||||||||
| Reverse capitalization, net of transaction costs | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||
| Net income, as restated | - | - | ||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2024, as restated | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||||
For the Three Months Ended March 31, 2023
| Members’ | Preferred | Class
A common stock | Class B Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Contribution | Units | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | - | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Retroactive application of recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
| Issuance of class A common stock | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MONTANA
TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For
the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| (As Restated) | ||||||||
| Cash Flows from Operating Activities | ||||||||
| Net income/(loss) | $ | $ | ( | ) | ||||
| Adjustment to reconcile net income (loss) to cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Deferred tax expense | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Change in fair value of Earnout Shares liability | ||||||||
| Change in fair value of True Up Shares liability | ( | ) | ||||||
| Change in fair value of Subject Vesting Shares liability | ||||||||
| Gain on contribution to AirJoule, LLC | ( | ) | ||||||
| Equity loss from investment in AirJoule, LLC | ||||||||
| Non-cash transaction costs in connection with business combination | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other assets | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses, accrued transaction costs and other liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Investment in AirJoule, LLC | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from the exercise of warrants | ||||||||
| Proceeds from the exercise of options | ||||||||
| Proceeds from the issuance of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of the period | $ | $ | ||||||
| Supplemental Non-Cash investing and financing activities: | ||||||||
| Initial recognition of True Up Shares liability | $ | $ | ||||||
| Initial recognition of Subject Vesting Shares liability | $ | $ | ||||||
| Initial recognition of ROU asset and operating lease liability | $ | $ | ||||||
| Liabilities combined in recapitalization, net | $ | $ | ||||||
| Contribution to AirJoule, LLC of license to technology | $ | $ | ||||||
| Supplemental Cash flow information: | ||||||||
| Taxes paid | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MONTANA
TECHNOLOGIES CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(As Restated)
Note 1 — ORGANIZATION AND BUSINESS OPERATIONS
Montana Technologies Corporation (the “Company”) was established to pursue the development and expected commercialization of various technological innovations and may engage in any activity or purpose permitted for a corporation organized in Delaware. The Company has created a transformational technology that provides significant energy efficiency gains in air conditioning and comfort cooling applications, as well as a potential source of potable water, all through its proprietary “AirJoule®” units.
Power & Digital Infrastructure Acquisition II Corp (“XPDB”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated June 5, 2023, as amended on February 5, 2024, with XPDB Merger Sub, LLC, a direct wholly-owned subsidiary of XPDB (“Merger Sub”), and Montana Technologies LLC (“Legacy Montana”). On March 14, 2024, pursuant to the Merger Agreement, Merger Sub was merged with and into Legacy Montana, with the Legacy Montana surviving the merger as a wholly-owned subsidiary of XPDB (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). In connection with closing the Business Combination (the “Closing”), XPDB changed its name from “Power & Digital Infrastructure Acquisition II Corp.” to “Montana Technologies Corporation.”
Prior
to the Business Combination, all of the outstanding preferred units of Legacy Montana were converted into Class B common units. As a
result of the Business Combination, (i) each issued and outstanding Class B common unit and Class C common unit of Legacy Montana was
converted into the right to receive approximately
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, although XPDB acquired the outstanding equity interest in Legacy Montana in the Business Combination, XPDB is treated as the “acquired company” and Legacy Montana was treated as the accounting acquirer for financial statement purposes. Accordingly, the Business Combination was treated as the equivalent of Legacy Montana issuing stock for the net assets of XPDB, accompanied by a recapitalization.
Furthermore, the historical financial statements of Legacy Montana became the historical financial statements of the Company upon the consummation of the merger. As a result, the condensed consolidated financial statements reflect (i) the historical operating results of Legacy Montana prior to the Business Combination; (ii) the combined results of XPDB and Legacy Montana following the Closing; (iii) the assets and liabilities of Legacy Montana at their historical cost and (iv) Legacy Montana’s equity structure for all periods presented, as affected by the recapitalization presentation after completion of the Business Combination. See Note 5 – Recapitalization (As Restated) for further details of the Business Combination.
In
connection with the Business Combination, XPDB entered into a subscription agreement (the “Subscription Agreement”) with
Rice Investment Group (the “PIPE Investor”), pursuant to which, among other things, the PIPE Investor agreed to
subscribe for and purchase from XPDB, and XPDB agreed to issue and sell to the PIPE Investor, an aggregate of
After
giving effect to the Business Combination, the redemption of Class A common stock in connection with the Special Meeting held on March
8, 2024 by XPDB ( the “Special Meeting”) and the consummation of the issuance and sale of the Committed Shares, there were
On January 25, 2024, the Company entered into a joint venture formation framework agreement with GE Ventures LLC, a Delaware limited liability company and, solely for the purposes specified therein, GE Vernova LLC, a Delaware limited liability company, pursuant to which the Company and GE Vernova agreed, subject to the terms and conditions of the framework agreement, including certain closing conditions specified therein, to form a joint venture (the “AirJoule JV”) in which each of the Company and GE Vernova will each hold a
Note 2 — RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the issuance of the condensed consolidated financial statements of the Company as of and for the three months ended March 31, 2024, the Company identified errors related to: 1) the accounting for the AirJoule JV, which was incorrectly consolidated as a VIE instead of being accounted for using the equity method: and 2) the treatment of certain transaction costs incurred in connection with the Company’s Business Combination which should have been charged to expense instead of equity.
In previously issued financial statements, the Company concluded that it was the primary beneficiary because a de facto agency relationship existed with GE Vernova, and the Company was the most closely associated. Accordingly, the Company consolidated the AirJoule JV in the condensed consolidated financial statements. It was subsequently determined that the de facto agency guidance was misapplied and could not be used to conclude that the Company is the primary beneficiary.
Additionally, management identified a misstatement related to the transaction costs incurred in connection with the Business Combination. Originally the Company had recorded certain transaction costs, including the recognition of the Earnout Shares liability, as a reduction in equity. Upon further consideration of the nature of the transaction as a reverse recapitalization and the amount of proceeds resulting from the Business Combination, it was determined that these costs should have been expensed as part of the transaction.
Therefore, the Company is restating its unaudited condensed consolidated financial statements to account for its investment in the AirJoule JV based upon the equity method and to expense certain transactions costs relating to the Business Combination within the statement of operations.
5
| As Previously Reported | Adjustment to convert AirJoule JV from consolidation to equity method | Adjustment for expensing of transaction costs | As Restated | |||||||||||||
| Condensed Consolidated Balance Sheet as of March 31, 2024 (unaudited) | ||||||||||||||||
| Cash | $ | $ | ( | ) | $ | $ | ||||||||||
| Total current assets | ( | ) | ||||||||||||||
| Property and equipment, net | ( | ) | ||||||||||||||
| In process research and development | ( | ) | ||||||||||||||
| Goodwill | ( | ) | ||||||||||||||
| Investment in AirJoule, LLC | ||||||||||||||||
| Total assets | ( | ) | ||||||||||||||
| Accounts Payable | ( | ) | ||||||||||||||
| Other accrued expenses | ( | ) | ||||||||||||||
| Total current liabilities | ( | ) | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||||
| Total liabilities | ||||||||||||||||
| Additional paid-in capital | - | |||||||||||||||
| Retained earnings (Accumulated deficit) | ( | ) | ( | ) | ||||||||||||
| Total Montana Technologies Corporation stockholders’ equity (deficit) | ( | ) | ||||||||||||||
| Non-controlling interest | ( | ) | ||||||||||||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||||||||||
| Total liabilities and stockholders’ equity (deficit) | ( | ) | ||||||||||||||
| Condensed consolidated statement of changes in stockholders’ equity (deficit) for the three months ended March 31, 2024 (unaudited) | ||||||||||||||||
| Formation of AirJoule, LLC | $ | $ | ( | ) | $ | |||||||||||
| Reverse capitalization, net of transaction costs – | ||||||||||||||||
| Additional paid-in capital | ( | ) | - | ( | ) | |||||||||||
| Retained earnings (accumulated deficit) | ( | ) | - | |||||||||||||
| Total stockholders’ equity (deficit) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Condensed Consolidated Statement of Operations for the three months ended March 31, 2024 (unaudited) | ||||||||||||||||
| General and administrative | $ | $ | ( | ) | $ | $ | ||||||||||
| Research and development | ( | ) | ||||||||||||||
| Transaction costs incurred in connection from business combination | - | |||||||||||||||
| Depreciation and amortization | ( | ) | ||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest income | ( | ) | ||||||||||||||
| Gain on contribution to AirJoule, LLC | ||||||||||||||||
| Equity loss from investment in AirJoule, LLC | ( | ) | ( | ) | ||||||||||||
| Total other income (expense), net | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax expense | - | ( | ) | ( | ) | |||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Net loss attributable to non-controlling interest | ( | ) | ||||||||||||||
| Net loss attributable to common stockholders of the Company | ( | ) | - | |||||||||||||
| Basic net income (loss) per share, Class A | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Basic Weighted average Class A common stock outstanding, Class A | ||||||||||||||||
| Diluted weighted average shares outstanding, Class A | ||||||||||||||||
| Diluted net income per share, Class A | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Basic net income (loss) per share, Class B | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted net income (loss) per share, Class B | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2024 (unaudited) | ||||||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | $ | |||||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||||||
| Depreciation and amortization | ( | ) | ||||||||||||||
| Deferred tax expense | ||||||||||||||||
| Gain on contribution to AirJoule, LLC | ( | ) | ( | ) | ||||||||||||
| Equity loss from investment in AirJoule, LLC | ||||||||||||||||
| Non-cash transaction costs in connection with business combination | - | |||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts payable | ( | ) | ( | ) | ( | ) | ||||||||||
| Accrued expenses, accrued transaction costs and other liabilities | ( | ) | ( | ) | ( | ) | ||||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Cash Flows from Investing Activities: | ||||||||||||||||
| Purchases of fixed assets | ( | ) | ||||||||||||||
| Investment in AirJoule, LLC | ( | ) | ( | ) | ||||||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||||||
| Cash Flow from Financing Activities: | ||||||||||||||||
| Transaction costs - recapitalization | ( | ) | - | |||||||||||||
| Net cash provided by financing activities | - | |||||||||||||||
| Net increase (decrease) in cash | ( | ) | ||||||||||||||
| Cash, end of the period | ( | ) | ||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||||
| Initial recognition of earnout shares liability | - | ( | ) | |||||||||||||
| Acquisition of business from GE Vernova in exchange for issuing non-controlling interest | ( | ) | ||||||||||||||
| Contribution to AirJoule, LLC of license to technology | ||||||||||||||||
6
In addition, all disclosures and amounts in the footnotes impacted by the restatement have also been corrected.
Note 3 — LIQUIDITY AND CAPITAL RESOURCES (AS RESTATED)
The
Company’s primary sources of liquidity have been cash from contributions from founders or other investors. The Company had retained
earnings of $
The Company assesses its liquidity in terms of its ability to generate adequate amounts of cash to meet current and future needs. Its expected primary uses of cash on a short and long-term basis are for working capital requirements, capital expenditures, capital contributions to its joint ventures and other general corporate services. The Company’s primary working capital requirements are for project execution activities including purchases of materials, services and payroll which fluctuate during the year, driven primarily by the timing and extent of activities required on new and existing projects. The Company’s management expects that future operating losses and negative operating cash flows may increase from historical levels because of additional costs and expenses related to the development of its technology and the development of market and strategic relationships with other businesses and customers.
With the consummation of the Business Combination and Subscription Agreements (as described above and in Note 5 – Recapitalization (As Restated)), the Company received proceeds of approximately $
Our future capital requirements will depend on many factors, including, the timing and extent of spending by the Company and its joint ventures to support the launch of its product and research and development efforts, the degree to which it is successful in launching new business initiatives and the cost associated with these initiatives, the timing and extent of contributions made to its joint ventures by the other partners and the growth of our business generally. Pursuant to the A&R Joint Venture Agreement, the Company contributed $
Note 4 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (AS RESTATED)
Basis of Presentation and principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP, expressed in U.S. dollars. The accompanying condensed consolidated financial statements reflect all adjustments including normal recurring adjustments, which, in the opinion of the Company’s management, are necessary to present fairly the financial position, results of operations and cash flows for the periods presented in accordance with GAAP. References to GAAP issued by the Financial Accounting Standards Board (“FASB”) in these accompanying notes to the financial statements are to the FASB Accounting Standards Codification (“ASC”). The condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern.
The
Company owns a noncontrolling interest (
7
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period.
Some of the more significant estimates include estimates of amortization and depreciation, fair values of Subject Vesting Shares and Earnout Shares liability (as such terms are defined in Note 5 — Recapitalization (As Restated)), consolidation analysis of JVs and other entities (including determination of primary beneficiary, VIE and consolidation), fair value of the initial investment in AirJoule, LLC, income taxes and estimates relating to leases. Due to the uncertainty involved in making estimates, actual results could differ from those estimates which could have a material effect on the financial condition and results of operations in future periods.
Cash and Concentration of Credit Risk
The
Company considers all highly liquid investments with a maturity of 90 days or less at the time of purchase to be cash equivalents.
The carrying values of cash and cash equivalents approximate their fair values due to the short-term nature of these instruments. As
of March 31, 2024 and December 31, 2023, there were cash equivalents on the Company’s condensed consolidated balance sheets.
The Company maintains cash balances at financial institutions that may exceed the Federal Deposit Insurance Corporation’s insurance
limits. The amounts over these insured limits as of March 31, 2024 and December 31, 2023 were $
Business Combinations
The Company evaluates whether acquired net assets should be accounted for as a business combination or an asset acquisition by first applying a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the transaction is accounted for as an asset acquisition. If not, the Company applies its judgement to determine whether the acquired net assets meet the definition of a business by considering if the set includes an acquired input, process, and the ability to create outputs.
The Company accounts for business combinations using the acquisition method when it has obtained control. The Company measures goodwill as the fair value of the consideration transferred, including the fair value of any non-controlling interest recognized, less the net recognized amount of the identifiable assets acquired and liabilities combined, all measured at their fair value as of the acquisition date. Transaction costs, other than those associated with the issuance of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.
Any contingent consideration is measured at fair value at the acquisition date. For contingent consideration that does not meet all the criteria for equity classification, such contingent consideration is required to be recorded at its initial fair value at the acquisition date, and on each balance sheet date thereafter. Changes in the estimated fair value of liability-classified contingent consideration are recognized on the consolidated statements of operations in the period of change.
Equity Method Investment
In accordance with ASC 323, Investments - Equity Method and Joint Ventures, investments in entities over which the Company does not have a controlling financial interest but has significant influence are accounted for using the equity method, with the Company’s share of earnings or losses reported in earnings or losses from equity method investments on the statements of operations. Under the equity method, the Company’s investments are initially measured and recognized using the cost accumulation model following the guidance in ASC 805-50-30. After initial recognition, the consolidated financial statements include the Company’s share of undistributed earnings or losses, and impairment, if any, until the date on which significant influence ceases.
The Company’s equity method investments are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value may have occurred. When a loss is deemed to have occurred and is other than temporary, the carrying value of the equity method investment is written down to fair value. In evaluating whether a loss is other than temporary, the Company considers the length of time for which the conditions have existed and its intent and ability to hold the investment.
8
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and includes expenditures that substantially increase the useful lives of existing property and equipment. Maintenance, repairs and minor renovations are charged to expense as incurred. When property and equipment is retired or otherwise disposed of, the related costs and accumulated depreciation are removed from their respective accounts, and any difference between the sale proceeds and the carrying amount of the asset is recognized as a gain or loss on disposal in the statements of income.
Depreciation
is computed using the straight-line method over the estimated useful lives of the various classes of depreciable assets.
| Estimated useful lives | ||
| Machinery and Equipment | ||
| Vehicles |
The estimated useful lives and depreciation methods are reviewed at each year-end, with the effect of any changes in estimates accounted for prospectively. All depreciation expenses are included with depreciation and amortization in the condensed consolidated statements of operations.
Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use asset (“ROU asset”) and short-term and long-term lease liability are included on the face of the condensed consolidated balance sheets.
ROU asset represents the right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments arising from the lease. An operating lease ROU asset and liability are recognized at the commencement date based on the present value of lease payments over the lease term. As typically the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date over the respective lease term in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and it recognizes such lease payments on a straight-line basis over the lease term.
Warrants
The Company determines the accounting classification of warrants it issues as either liability or equity classified by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480”), then in accordance with ASC 815-40 (“ASC 815”), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. In order for a warrant to be classified in stockholders’ deficit, the warrant must be (i) indexed to the Company’s equity and (ii) meet the conditions for equity classification.
If a warrant does not meet the conditions for stockholders’ deficit classification, it is carried on the condensed consolidated balance sheets as a warrant liability measured at fair value, with subsequent changes in the fair value of the warrant recorded in other non-operating losses (gains) in the consolidated statements of operations. If a warrant meets both conditions for equity classification, the warrant is initially recorded, at its relative fair value on the date of issuance, in stockholders’ deficit in the condensed consolidated balance sheets, and the amount initially recorded is not subsequently remeasured at fair value.
9
Income Taxes
Prior to the Business Combination on March 14, 2024, the Company was a limited liability company (“LLC”) and treated as a partnership for income tax purpose. As a Partnership, the Company was not directly liable for federal income taxes. As of the date of the Business Combination, the operations of the Company ceased to be taxed as a partnership resulting in a change in tax status for federal and state income tax purposes.
The
Company follows the asset and liability method of accounting for income taxes under ASC Topic 740, Income Taxes (“ASC 740”).
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that is included in the enactment date. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized. During the three months ended March 31, 2024, as a result of our contribution
to AirJoule, LLC of a perpetual license to our intellectual property, measured at fair value resulting in a book gain, a temporary difference
between book and tax arose. The temporary difference resulted in the recognition of a deferred tax expenses and deferred tax liabilities
of approximately $
ASC
740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions
taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be
sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits
as income tax expense. Management has evaluated the Company’s tax positions, including its previous status as a pass-through entity
for federal and state tax purposes, and has determined that the Company has taken no uncertain tax positions that require adjustment
to the condensed consolidated financial statements. The Company’s reserve related to uncertain tax positions was
Research and Development Cost
The Company accounts for research and development cost (“R&D”) in accordance with FASB ASC Topic 730, “Research and Development.” R&D represents costs incurred in performing research aimed at the discovery of new knowledge and the advancement of techniques to bring significant improvements to products and processes. Costs incurred in developing a product include consulting, engineering, construction and costs incurred to build prototypes.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset, or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Company classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
| Level 1 — | Inputs based on unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. | ||
| Level 2 — | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active or for which all significant inputs are observable or can be corroborated by observable market data. | ||
| Level 3 — | Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are both unobservable for the asset and liability in the market and significant to the overall fair value measurement. |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. The Company establishes the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a fair value hierarchy based on the inputs used to measure fair value. The recorded amounts of certain financial instruments, including accounts payable, accrued expenses, and other current liabilities approximate fair value due to their relatively short maturities. See Note 6 – Equity Method Investment (As Restated) for measurements of the Investment in AirJoule, LLC measured utilizing level 3 inputs as of March 4, 2024. See Note 11 – Fair Value Measurements for measurements of the Earnout Shares, True Up Shares and Subject Vesting Shares, measured utilizing level 3 inputs as of March 31, 2024 and March 14, 2024.
10
Earnout Shares Liability
In connection with the reverse recapitalization and pursuant to the Business Combination Agreement, eligible former Legacy Montana Equityholders are entitled to receive additional shares of Common Stock upon the Company achieving certain Earnout Milestones (as described in the Merger Agreement) (the “Earnout Shares”). The settlement of the Earnout Shares to the holders of Legacy Montana common units contains variations in something other than the fair value of the issuer’s equity shares. As such, management determined that they should be classified as a liability and recognized at fair value at each reporting period with changes in fair value included in earnings.
We
estimated fair value of the Earnout Shares with a Monte Carlo simulation using a distribution of potential outcomes for expected earnings
before interest, taxes, depreciation and amortization (“EBITDA”) and stock price at expected commission dates, utilizing
a correlation coefficient for EBITDA and stock price, and assuming $
The Company determined the Earnout Shares associated with employees are accounted for as compensation expense under FASB ASC Topic 718, Share-based Compensation (“ASC 718”). See “Share-Based Compensation” below.
Derivative Financial Instruments and Other Financial Instruments Carried at Fair Value
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including the True Up Shares issued in connection with the Subscription Agreement and the Subject Vesting Shares issued in connection with the Business Combination, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.
The True Up Shares issued under the Subscription Agreement do not qualify as equity under ASC 815-40; therefore, the Class A common stock (the “True Up Shares”) is required to be classified as a liability and measured at fair value with subsequent changes in fair value recorded in earnings. Changes in the estimated fair value of the derivative liability are recognized as a non-cash gain or loss on the condensed consolidated statements of operations. The fair value of the derivative liability is discussed in Note 11 Fair Value Measurements.
The
Subject Vesting Shares liability was an assumed liability of XPDB in the Merger as described in Note 5 – Recapitalization (As
Restated). The Subject Vesting Shares vested and are no longer subject to forfeiture as described in Note 5. They do not meet the
“fixed-for-fixed” criterion and thus are not considered indexed to the issuer’s stock. As such, management determined
that the Subject Vesting Shares should be classified as a liability and recognized at fair value at each reporting period with changes
in fair value included in earnings. The estimated fair value of the Subject Vesting Share liability was determined utilizing a Monte
Carlo simulation, with underlying forecast mathematics based on geometric Brownian motion in a risk-neutral framework. The Calculation
of the value of the Subject Vesting Shares considered the $
Share-Based Compensation
The Company accounts for share-based compensation arrangements granted to employees in accordance with ASC 718 by measuring the grant date fair value of the award and recognizing the resulting expense over the period during which the employee is required to perform service in exchange for the award. Equity-based compensation expense is only recognized for awards subject to performance conditions if it is probable that the performance condition will be achieved. The Company accounts for forfeitures when they occur.
The Company estimates the fair value of stock option awards subject to only a service condition on the date of grant using the Black-Scholes valuation model. The Black-Scholes model requires the use of highly subjective and complex assumptions, including the option’s expected term, price volatility of the underlying stock, risk-free interest rate and the expected dividend yield of the underlying common stock, as well as an estimate of the fair value of the common stock underlying the award.
11
The
Company estimates the fair value of Earnout Shares awards to employees, which is considered a compensatory award and accounted for under
ASC 718, using the Monte-Carlo simulation model. The Monte-Carlo simulation model was selected as the valuation methodology for
the Earnout Shares due to the path-dependent nature of triggering events. Under ASC 718, the award is measured at fair value at the grant
date and expense is recognized over the time-based vesting period (the triggering event is a market condition and does not impact expense
recognition). The Monte-Carlo model requires the use of highly subjective and complex assumptions, estimates and judgements, including
the current stock price, volatility of the underlying stock, expected term the risk-free interest rate, the selection of comparable companies,
and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between
those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of Common Stock. An
increase of 100-basis points in interest rates would not have a material impact on the Company’s stock-based compensation. During
the period from the date of the Business Combination through March 31, 2024 the Company did not record stock-based compensation expense
associated with these Earnout Shares as the performance conditions associated with these Earnout Shares were not deemed probable of achievement.
Unrecognized stock-based compensation expense for these Earnout Shares with a performance-based vesting condition that was not deemed
probable of occurring as of March 31, 2024 was $
Net Income (Loss) Per Share
Basic
net income (loss) per share is computed by dividing the net income (loss), which is allocated based upon the proportionate amount of
weighted average shares outstanding, by each class of stockholder’s stock outstanding during the period. Diluted income (loss)
per share is computed by giving effect to all potential shares of common stock, including warrants, stock options, and Earnout Shares,
to the extent dilutive. For the three months ended March 31, 2024, dilutive shares included in the calculation or net income per share
of common stock, utilizing the treasury stock method, were:
| For the three months ended March 31, | ||||||||||||||||
| 2024 | 2023 | |||||||||||||||
| Class
A Common Stock |
Class
B Common Stock |
Class
A Common Stock |
Class
B Common Stock |
|||||||||||||
| Basic and diluted net loss per common share | ||||||||||||||||
| Numerator: | ||||||||||||||||
| Allocation of net income (loss) - basic | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||
| Allocation of net income (loss) - diluted | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||
| Denominator: | ||||||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
| Basic net income (loss) per ordinary share | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||
| Diluted net income (loss) per ordinary share | $ | $ | $ | ( |
) | $ | ( |
) | ||||||||
New Accounting Pronouncements
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses” (Topic 326), which requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in current GAAP with a methodology that requires consideration of a broader range of information to estimate credit losses. The guidance also modifies the impairment model for available-for-sale debt securities. ASU 2016-13 is effective for the Company’s fiscal year beginning January 1, 2023. The Company has adopted ASU 2016-13 as of January 2023 with no material impacts on the financial statements as a result.
Recently Issued Accounting Standards
The Company is an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act, until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
12
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions,” which clarifies that contractual sale restrictions are not considered in measuring fair value of equity securities and requires additional disclosures for equity securities subject to contractual sale restrictions. The standard is effective for the Company for fiscal years beginning after December 15, 2024. The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. The standard will be effective for the Company for fiscal years beginning after December 15, 2025. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its condensed consolidated financial statements and disclosures.
Note 5 — RECAPITALIZATION (AS RESTATED)
On June 5, 2023, XPDB and Merger Sub entered into the Merger Agreement with Legacy Montana. On March 14, 2024, pursuant to the Merger Agreement, Merger Sub merged with and into Legacy Montana, with Legacy Montana surviving the Merger as a wholly owned subsidiary of XPDB.
As
part of the Business Combination, Legacy Montana Equityholders received consideration (“Merger Consideration”). After giving
effect to the conversion of all outstanding Legacy Montana preferred units into Legacy Montana Class B common units, which
occurred prior to the effective time of the Merger, the Merger Consideration was paid (i) in the case of holders of Legacy Montana
Class B common units and Legacy Montana Class C common units, in the form of newly issued shares of Class A common
stock, with a $
Immediately
prior to the Closing,
The holders of Legacy Montana equity securities (“Eligible Equityholders”) have the opportunity to receive additional equity consideration (in each case, in accordance with their respective pro rata share) (“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 Legacy Montana’s key components or assemblies based on the terms of the agreement (See Note 11 – Fair Value Measurements).
13
Upon
the Closing of the Business Combination, and following the conversion of the XPDB Class B common stock to Class A common stock,
the sponsor of XPDB beneficially owns
| 1. | During the Vesting Period, a portion of the Subject Vesting Shares shall vest, from time to time, simultaneously with any Earnout Stock Payment, with the number of vesting shares calculated as (A) the aggregate number of Subject Vesting Shares outstanding immediately after the Closing multiplied by (B) the fraction of (x) the applicable Earnout Milestone Amount divided by (y) the Maximum Earnout Milestone Amount; and |
| 2. | (A) |
| 3. | Any remaining Subject Vesting Shares shall vest in full at the same time that the volume weighted average price of Class A common stock on the Nasdaq as reported by Bloomberg L.P. equals or exceeds $ |
On
March 8, 2024, XPDB and the PIPE investor entered into the Subscription Agreement pursuant to which XPDB agreed to sell
As discussed in Note 1 - Organization and Business Operations, the Business Combination was consummated on March 14, 2024, which, for accounting purposes, was treated as the equivalent of Montana Technologies LLC issuing stock for the net assets of XPDB, accompanied by a recapitalization. Under this method of accounting, XPDB was treated as the acquired company for financial accounting and reporting purposes under US GAAP.
Legacy Montana was determined to be the accounting acquirer based on evaluation of the following facts and circumstances:
| ● | Following Closing, the Legacy Montana Equityholders had the greatest voting interest in the Post-Combination Company; |
| ● | The Post-Combination Company Board immediately after Closing had six members, and Legacy Montana nominated the majority of the members of the Post-Combination Company Board at Closing; |
| ● | The ongoing operations of the Post-Combination Company was comprised of Legacy Montana operations; |
| ● | Legacy Montana’s existing senior management became the senior management of the Post-Combination Company; and |
| ● | The intended strategy and operations of the Post-Combination Company continued Legacy Montana’s prior strategy and operations. |
14
Transaction Proceeds
Upon
closing of the Business Combination, the Company received gross proceeds of $
| Cash-trust and cash, net of redemptions | $ | |||
| Add: Proceeds from PIPE investment | ||||
| Less: transaction costs and advisory fees, paid | ( | ) | ||
| Net proceeds from the Business Combination | ||||
| Less: Subject Vesting Shares liability | ( | ) | ||
| Less: True Up Shares liability | ( | ) | ||
| Less: accounts payable and accrued liabilities combined | ( | ) | ||
| Add: other, net | ||||
| Reverse recapitalization, net | $ | ( | ) |
| XPDB Class A common stock, outstanding prior to the Business Combination | ||||
| Less: Redemption of XPDB Class A common stock | ( | ) | ||
| Class A common stock of XPDB | ||||
| XPDB Class B common stock, outstanding prior to the Business Combination | ||||
| PIPE subscription | ||||
| Business Combination Class A common stock | ||||
| Legacy Montana Shares | ||||
| Class A and B Common Stock immediately after the Business Combination |
| Legacy Montana Units | Montana’s Shares after conversion ratio | |||||||
| Class A Common Stock | ||||||||
| Class A Common Stock | ||||||||
Transaction Costs
During the three months ended March 31, 2024,
based on the net proceeds received, the Company expensed $
Public and private placement warrants
The
Redemption
Prior
to the closing of the Business Combination, certain XPDB public shareholders exercised their right to redeem certain of their outstanding
shares for cash, resulting in the redemption of
15
Note 6 — EQUITY METHOD INVESTMENT (AS RESTATED)
AirJoule, LLC
On
January 25, 2024, the Company entered into a joint venture formation framework agreement (the “Framework Agreement”) with
GE Ventures LLC, a Delaware limited liability company (“GE Vernova”), and, solely for the purposes specified therein, GE
Vernova LLC, a Delaware limited liability company (“GE Vernova Parent”), pursuant to which the Company and GE Vernova agreed,
subject to the terms and conditions of the Framework Agreement, including certain closing conditions specified therein, to form a joint
venture (the “AirJoule JV”) in which each of the Company and GE Vernova will hold a
Upon
the closing of the transaction on March 4, 2024, (the “JV Closing”), each party to the agreement entered into (i) an amended
and restated limited liability company agreement of the AirJoule JV (the “A&R Joint Venture Agreement”), pursuant to
which, among other things, the AirJoule JV has the exclusive right to manufacture and supply products incorporating the combined technologies
to leading original equipment manufacturers and customers in the Americas, Africa and Australia, (ii) master services agreements, pursuant
to which, among other things, each party to the agreement agree to provide certain agreed services to the AirJoule JV for a period of
at least
Pursuant
to the A&R Joint Venture Agreement, the Company contributed $
The
business and affairs of the A&R Joint Venture Agreement shall be managed by a Board of Managers, consisting of two managers (including
the chairman) appointed by the Company and two managers appointed by GE Vernova. Following the second anniversary of the JV Closing,
if the Board of Managers reach an impasse that cannot be resolved through the process set forth in the A&R Joint Venture Agreement,
the A&R Joint Venture Agreement generally provides that the Company may require GE Vernova to sell GE Vernova’s
In
the event that a change in applicable laws or regulations has a material adverse effect on GE Vernova’s interest in the AirJoule
JV, or GE Vernova determines that the Company fails to meet certain financial performance benchmarks, GE Vernova may require the Company
to purchase GE Vernova’s interest for a total purchase price of $
AirJoule, LLC is a variable interest entity for which the Company has determined there is shared power with GE Vernova and therefore accounts for the VIE under the equity method of accounting.
The
Company applies the equity method to an investment in common stock of a nonconsolidated entity. In addition to $
The Company evaluated whether there was a basis difference between the carrying value and fair value of the Company’s proportionate share of the investee’s underlying net assets. AirJoule, LLC has elected to early adopt ASU 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60), and, as a result measured the contributed assets at fair value. AirJoule, LLC was deemed a business as defined in ASC 805 - Business Combinations, and, as such there is a basis difference between the Company’s investment and the amount recorded in member’s capital by the investee, AirJoule, LLC, related to in-process R&D and goodwill which as of March 31, 2024 have indefinite lives.
The
Company determined the fair value of the IP license by applying the multi-period excess earnings method. The excess earnings valuation
method estimates the value of the IP license equal to the present value of the incremental after-tax cash flows attributable to that
IP license over its remaining economic life. Some of the more significant assumptions utilized in our asset valuations included projected
revenues, probability of commercial success, and the discount rate. The fair value using the excess earnings valuation method
was determined using an estimated weighted average cost of capital of
The Company’s share of the losses reported by AirJoule, LLC are classified as equity loss from investment in AirJoule, LLC. The investment is evaluated for impairment annually and if facts and circumstances indicate that the carrying value may not be recoverable, an impairment charge would be recorded.
16
| As
of March 31, 2024 | ||||
| Total current assets | ||||
| Total non-current assets | ||||
| Total assets | $ | |||
| Total liabilities | $ | |||
| Equity | ||||
| Total liabilities and equity | $ | |||
| For
the period from March 4, 2024 to March 31, 2024 | ||||
| Revenue | $ | |||
| Net loss | $ | ( | ) | |
Note 7 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| March
31, 2024 | December
31, 2023 | |||||||
| Accrued royalty (see Note 12) | $ | $ | ||||||
| Accrued payroll | ||||||||
| Professional services | ||||||||
| Engineering consulting | ||||||||
| Business development | ||||||||
| Accrued other | ||||||||
| $ | $ | |||||||
Note 8 — LEASES
As
discussed in Note 9 – Related Party Transactions, the Company had a property lease with a related party which terminated on March
14, 2024. Lease expenses under this lease were $
On
March 1, 2024, the Company’s entered into an operating property lease with an initial term of
17
| Operating Lease | ||||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total undiscounted lease payments | ||||
| Less: effects of discounting | ( | ) | ||
| Operating Lease Liability | $ | |||
| Classified as: | ||||
| Current lease liabilities | $ | |||
| Non-current lease liabilities | $ | |||
Note 9 — RELATED PARTY TRANSACTIONS
Lease Agreement
The Company had a property lease agreement with its Chief Executive Officer as discussed in Note 8 - Leases. The lease agreement was terminated upon close of the Business Combination on March 14, 2024. As of March 31, 2024 and December 31, 2023, $
Consultancy Agreement
On
January 1, 2019, the Company entered into a consultancy agreement with a company affiliated with the Chief Executive Officer for a monthly
payment of $
Office Services Agreement
On
October 31, 2020, the Company entered into a consultancy agreement with an affiliate for a monthly payment of $
Due to related party
Commencing
on December 9, 2021 through the consummation of the initial Business Combination, XPDB agreed to pay affiliates of the sponsor a total
of $
In
2023, the sponsor contributed $
Related Party Equity transactions
As described in Note 10 – Stockholders’ Equity (Deficit), Montana Technologies LLC completed a private placement subscription agreement and a preferred equity financing of which TEP Montana, LLC (“TEP Montana”) was a participant. The Executive Chairman of the Company is the managing partner of the managing member of TEP Montana.
18
Note 10 — STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred
Stock — The Company is authorized to issue
Class
A Common stock — The Company is authorized to issue
Class
B Common stock — The Company is authorized to issue
Shares
of Class B common stock shall be convertible into shares of Class A common stock on a one-for-one basis (i) at any time and from time
to time at the option of the holder thereof or (ii) automatically upon on the earliest to occur of (a) the date that is seven (7) years
from the date of the Second Amended and Restated Certificate of Incorporation and (b) the first date on which the permitted Class B owners
cease to own, in the aggregate, at least
Warrants
As
part of XPDB’s initial public offering (“IPO”), XPDB issued warrants to third-party investors where each whole warrant
entitles the holder to purchase
The Private Placement Warrants (including the common stock issuable upon exercise of the Private Placement Warrants) was not transferable, assignable or saleable until 30 days after the consummation of the Business Combination (except, among other limited exceptions, to the Company’s officers and directors and other persons or entities affiliated with the XPDB’s sponsor and anchor investors) and they will not be redeemable by the Company. Except as described below, the Private Placement Warrants have terms and provisions that are identical to those of the Public Warrants, including as to exercise price, exercisability and exercise period.
If holders of the Private Placement Warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering their warrants for that number of shares of the Company’s common stock equal to the quotient obtained by dividing (x) the product of the number of shares of the Company’s common stock underlying the warrants multiplied by the excess of the “10 day average closing price” (defined below) as of the date prior to the date on which notice of exercise is sent or given to the warrant agent, less the warrant exercise price by (y) the 10 day average closing price. The “10 day average closing price” means, as of any date, the average last reported sale price (defined below) of the shares of the Company’s common stock as reported during the 10 trading day period ending on the trading day prior to such date. “Last reported sale price” means the last reported sale price of the Company’s common stock on the date on which the notice of exercise of the warrant is sent to the warrant agent.
These warrants expire on the fifth anniversary of the Business Combination or earlier upon redemption or liquidation and are exercisable commencing 30 days after the Business Combination, provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available (or the Company permits holders to exercise their warrants on a cashless basis under the circumstances specified in the warrant agreement) and registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder.
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Once the Public Warrants become exercisable, the Company may redeem the outstanding Public Warrants:
| ● | in whole and not in part; | |
| ● | at a price of $ | |
| ● | upon a minimum 30 days’ prior written notice of redemption to each warrant holder; and | |
| ● | if, and only if, the reported last reported sale price of the Class A ordinary shares for any 20 trading days within a 30-trading day prior to the date on which the Company sends the notice of redemption to the warrant holders equals or exceeds $ |
The Company accounts for the warrants issued in connection with the IPO in accordance with the guidance contained in ASC 815. Such guidance provides that the warrants described above are not precluded from equity classification. 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.
Subscription Agreements
During
the first quarter of 2024, Legacy Montana entered into common unit subscription agreements (the “Subscription Agreements”),
with certain investors (the “Investors”), bringing aggregate transaction proceeds expected at closing to over $
Equity financing
Montana
Technologies LLC completed a preferred equity financing during February 2023 with TEP Montana, and issued
Exercise of warrants
In
January, February and March 2024, 14 warrant holders of Legacy Montana exercised their warrants to purchase a total of
Options
On
April 5, 2023, Legacy Montana granted
The Company used the Black-Scholes option pricing model to estimate the fair value of stock options. Fair value is estimated at the date of grant.
In
January, February and March 2024, 13 option holders exercised their options to purchase a total of
As
of March 31, 2024, of the
Note 11 — FAIR VALUE MEASUREMENTS
Items Measured at Fair Value on a Recurring Basis:
The Company accounts for certain liabilities at fair value on a recurring basis and classifies these liabilities within the fair value hierarchy (Level 1, Level 2, or Level 3).
| As of March 31, 2024 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Earnout Shares liability | $ | $ | $ | $ | ||||||||||||
| True Up Shares liability | ||||||||||||||||
| Subject Vesting Shares liability | ||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
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Earnout Shares
The
holders of Legacy Montana equity securities (“Eligible Equityholders”) have the opportunity to receive additional equity
consideration (in each case, in accordance with their respective pro rata share) (“Earnout Shares”). The maximum value of
the Earnout Shares is capped at $
If
the conditions for payment of the Earnout Shares are satisfied and assuming all originally designated employees are then still providing
services to the Post-Combination Company on the date such condition is met, approximately
The settlement of the Earnout Shares to the holders of Legacy Montana common units contains variations in something other than the fair value of the issuer’s equity shares. As such, management determined that they should be classified as a liability and recognized at fair value at each reporting period with changes in fair value included in earnings. The Earnout Shares to employees are subject to ASC 718 and are accounted for as post-combination compensation cost.
The
estimated fair value of the Earnout Shares was determined with a Monte Carlo simulation using a distribution of potential outcomes for
expected earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and stock price at expected commission
dates, utilizing a correlation coefficient for EBITDA and stock price, and assuming $
| As of March 31, 2024 | As of 2024 | |||||||
| Stock Price (1) | $ | $ | ||||||
| Volatility | % | % | ||||||
| Risk free rate of return | % | % | ||||||
| Expected term (in years) | ||||||||
| (1) |
| For the three months ended March 31, 2024 | ||||
| Earnout Shares Liability as of December 31, 2023 | $ | |||
| Expensed as transaction costs of business combination | ||||
| Change in fair value | ||||
| Balance as of March 31, 2024 | $ | |||
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As
of March 31, 2024 and March 14, 2024, the estimated fair value of all the Earnout Shares ($
True Up Shares liability
As
discussed in Note 5 – Recapitalization (As Restated), on March 8, 2024, XPDB and the PIPE investor entered into the Subscription
Agreement pursuant to which XPDB agreed to sell
For the 2024 | ||||
| Balance as of December 31, 2023 | $ | |||
| Assumed in the Business Combination | ||||
| Change in fair value | ( | ) | ||
| Balance as of March 31, 2024 | $ | |||
The estimated fair value of the true up share liability was determined utilizing a Monte Carlo simulation, with underlying forecast mathematics based on geometric Brownian motion in a risk-neutral framework. The Calculation of the value of the True Up Shares considered the 15-day average price over the one-year period following the Closing Date.
Subject Vesting Shares liability
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 XPDB sponsor, XPDB, Montana Technologies LLC and other holders of the Company’s
Class B common stock, $
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For the three
months | ||||
| Balance as of December 31, 2023 | $ | |||
| Assumed in the Business Combination | ||||
| Change in fair value | ||||
| Balance as of March 31, 2024 | $ | |||
The
estimated fair value of the Subject Vesting Share liability was determined utilizing a Monte Carlo simulation, with underlying forecast
mathematics based on geometric Brownian motion in a risk-neutral framework. The Calculation of the value of the Subject Vesting Shares
considered the $
Items Measured at Fair Value on a Nonrecurring Basis:
In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a nonrecurring basis, which are not included in the table above. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. For further information see Note 6 – Equity Method Investment (As Restated).
Note 12 — COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal matters arising in the normal course of business. In the opinion of the Company’s management and legal counsel, the amount of losses that may be sustained, if any, would not have a material effect on the financial position and results of operations of the Company.
Risks and Uncertainties
The Company, as an early-stage business without any current operations, product sales or revenue, has historically been dependent upon the sourcing of external capital to fund its overhead and product development costs. This is a typical situation for any early-stage company without product sales to be in.
License Agreement
In
October 2021, the Company entered into a patent license agreement with a third party whereby the third party granted the Company
rights to use certain of their patents in exchange for an upfront payment and royalties based on a percentage of net sales until such
patents expire. In connection with this, the Company agreed to a minimum royalty amount of which $
| Remainder of 2024 | $ | |||
| 2025 and each year through the date the patents expire |
Joint Venture Agreement
On
October 27, 2021, the Company entered into a joint venture with CATL US Inc. (“CATL US”), an affiliate of CATL, pursuant
to which we and CATL US formed CAMT Climate Solutions Ltd., a limited liability company organized under the laws of Hong Kong (“CAMT”).
The Company and CATL US both own
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Pursuant
to the Amended and Restated Joint Venture Agreement for CAMT, entered into on September 29, 2023 (the “A&R Joint Venture Agreement”),
the Company and CATL US have each agreed to contribute $
The purpose of the Company’s joint venture with CATL US is to commercialize our AirJoule® technology in Asia and Europe and, pursuant to the A&R Joint Venture Agreement, CAMT has the exclusive right to commercialize our AirJoule® technology in those territories. Subject to the oversight of CAMT’s board, CATL US is responsible for managing the day-to-day operations of CAMT (including the nomination and replacement of the Chief Executive Officer of CAMT), and is responsible for providing CAMT and any subsidiaries formed by CAMT with, among other things, administrative services, supply chain support, assistance in obtaining required permits and approvals, and assistance in purchasing or leasing land and equipment. The Company’s financial statements do not reflect any accounting for CAMT as no assets (including IP) or cash have been contributed to CAMT as of March 31, 2024.
Letter Agreement
On January 7, 2024, the Legacy Montana entered into a letter agreement (the “Letter Agreement”) with XPDB 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, XPDB 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 for so long as Carrier satisfies certain investment conditions, following the Business Combination. Pursuant to the terms of the agreement, Carrier has nominated its director.
Note 13 — SUBSEQUENT EVENTS
The Company’s management has identified the following subsequent events:
Subscription Receivable
On
May 9, 2024 and May 10, 2024, the Company received $
Termination of consultancy agreement
On May 1, 2024, the Company terminated the consultancy agreements with the affiliate companies of the CEO and CAO and entered into employment agreements with the CEO and CAO.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In this Form 10-Q/A, we have restated our unaudited condensed consolidated financial statements for the three-month period ended March 31, 2024. Like the other updated sections of this Form 10-Q/A, where specifically stated, the information in this section is reflective of the restatement, but no attempt has been made to modify this Item 2 of the Form 10-Q/A, except as required to reflect the effects of the restatement. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the Original Quarterly Report.
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)” should be read in conjunction with our unaudited condensed consolidated financial statements for the three months ended March 31, 2024, as restated and 2023, and our audited financial statements as of the year ended December 31, 2023, included in Form 8-K filed with the SEC on March 20, 2024
This discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “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. Such statements include, but are not limited to, possible business combinations and the financing thereof, and related matters, as well as all other statements other than statements of historical fact included herein. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other Securities and Exchange Commission (“SEC”) filings.
Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “Montana,” “we”, “us”, “our”, and the “Company” are intended to refer to (i) following the Business Combination (as defined below), the business and operations of Montana Technologies Corporation (formerly Montana Technologies LLC.) and its consolidated subsidiaries, and (ii) prior to the Business Combination, Montana (the predecessor entity in existence prior to the consummation of the Business Combination) and its consolidated subsidiaries.
Company Overview
We are an atmospheric renewable energy and water harvesting technology company that aims to provide energy and cost-efficient, sustainable dehumidification, evaporative cooling and atmospheric water generation. As compared to currently existing HVAC systems, our AirJoule technology is designed to reduce energy consumption, minimize/eliminate harmful refrigerants, and generate material cost efficiencies. AirJoule® is a climate solution technology that harvests the untapped supply of renewable thermal energy in water vapor in the atmosphere in an effort to provide significant energy efficiency gains in HVAC and a potential source of potable water. We are focused on scaling manufacturing through global joint ventures and deploying AirJoule® units worldwide as a key part of the solution to address global warming and water scarcity.
Growth Strategy and Outlook
The AirJoule® system seeks to address two of the world’s most problematic issues: increasing demand for comfort cooling and rising water stress. We estimate that our Total Addressable Market (“TAM”) globally is approximately $455 billion, comprised of a TAM in the HVAC sector of approximately $355 billion and a TAM in the atmospheric water harvesting sector of approximately $100 billion. We obtained the HVAC estimate from an independent report prepared by thebrainyinsights.com and the atmospheric harvesting estimate from conversations with water.org.
We aim to offer our products and services in global markets where demand for comfort cooling and water stress are highest. In light of our proprietary technology, we believe that we are uniquely positioned to provide curated solutions that satisfy our customers’ needs and expectations within the HVAC and atmospheric water harvesting sectors. Additionally, with several partnerships in place and a rapidly growing pipeline of new opportunities, we believe that we possess the potential for global scalability at attractive margins. We anticipate that our existing partnerships with Pacific Northwest National Laboratory, BASF (an international chemical company), and CATL (an international lithium-ion electric vehicle battery manufacturer) will help accelerate manufacturing of materials and components as well as provide product validation and commercialization.
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We believe that we have a capital efficient and highly scalable business model. We estimate that a capital expenditure investment of less than $25 million per production line to coat aluminum contactors has the potential to generate approximately $50 million in Annualized EBITDA per line for the Company.
Recent Developments
Recapitalization
Power & Digital Infrastructure Acquisition II Corp. (“XPDB”) previously entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated June 5, 2023, as amended on February 5, 2024, with XPDB Merger Sub, LLC, a direct wholly-owned subsidiary of XPDB (“Merger Sub”), and pursuant to which, on March 14, 2024, Merger Sub was merged with and into Legacy Montana, with Legacy Montana surviving the merger as a wholly-owned subsidiary of XPDB (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Business Combination”). In connection with the closing of the Business Combination (the “Closing”), the Company changed its name from “Power & Digital Infrastructure Acquisition II Corp.” to “Montana Technologies Corporation.”
Prior to the Recapitalization, all of the outstanding preferred units of Legacy Montana were converted to Class B common units. As a result of the Business Combination, (i) each issued and outstanding Class B common unit and Class C common unit of Legacy Montana was converted into the right to receive approximately 23.8 shares of newly issued shares of Class A common stock of Montana Technologies Corporation, (ii) each issued and outstanding Class A common unit of Legacy Montana converted into the right to receive approximately 23.8 shares of newly issued shares of Class B common stock, par value $0.0001 per share, of Montana Technologies Corporation and (iii) each option to purchase common units of Legacy Montana converted into the right to receive an option to purchase Class A common stock of Montana Technologies Corporation having substantially similar terms to the corresponding option, including with respect to vesting and termination-related provisions, except that such options represented the right to receive a number of shares of Class A common stock equal to the number of common units subject to the corresponding option immediately prior to the effective time of the merger multiplied by approximately 23.8.
The recapitalization was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, although XPDB acquired the outstanding equity interests in Legacy Montana at the Closing, XPDB is treated as the “acquired company” and Legacy Montana was treated as the accounting acquirer for financial statement purposes. Accordingly, the Business Combination was treated as the equivalent of Legacy Montana issuing stock for the net assets of XPDB, accompanied by a recapitalization.
Furthermore, the historical financial statements of Legacy Montana became the historical financial statements of the Company upon the consummation of the merger. As a result, the condensed consolidated financial statements reflect (i) the historical operating results of Legacy Montana prior to the merger; (ii) the combined results of XPDB and Legacy Montana following the close of the merger; (iii) the assets and liabilities of Legacy Montana at their historical cost and (iv) Legacy Montana’s equity structure for all periods presented, as affected by the recapitalization presentation after completion of the merger.
In connection with the Recapitalization, XPDB entered into a subscription agreement (the “Subscription Agreement”) with a certain investor (the “PIPE Investor”), pursuant to which, among other things, the PIPE Investor agreed to subscribe for and purchase from XPDB, and XPDB agreed to issue and sell to the PIPE Investor, an aggregate of 588,235 newly issued shares of Class A common stock (the “Committed Shares”) on the terms and subject to the conditions set forth therein. On March 14, 2024, in connection with the Business Combination, the Company consummated the issuance and sale of the Committed Shares to the PIPE Investor.
After giving effect to the Recapitalization, the redemption of Class A common stock in connection with the Special Meeting and the consummation of the issuance and sale of the Committed Shares, there were 53,823,412 shares of Company Common Stock issued and outstanding, consisting of 49,063,770 shares of Class A common stock and 4,759,642 shares of Class B common stock issued and outstanding. Of those shares, 45,821,456 were issued to holders of Legacy Montana equity securities in respect of such Legacy Montana equity securities, representing approximately 85.5% of the Company’s voting power at the Closing.
The Company’s Class A common stock and public warrants to purchase Class A common stock commenced trading on the Nasdaq Capital Market (“Nasdaq”) under the symbols “AIRJ” and “AIRJW,” respectively, on March 15, 2024.
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Subscription agreements
Prior to the Closing, Montana entered into common unit subscription agreements (the “Subscription Agreements”) with certain investors party thereto (the “Investors”), resulting in Aggregate Transaction Proceeds in the Business Combination of approximately $43,365,000 million. Pursuant to the Subscription Agreements, and subject to the conditions set forth therein, the Investors agreed to purchase from Montana and Legacy Montana agreed to issue and sell to the Investors, an aggregate number of Legacy Montana Class B Common Units as converted into an aggregate of 5,807,647 shares of Class A common stock (such shares, the “Conversion Shares”) upon the Closing as part of the consideration relating thereto. As of March 31, 2024, there was a $6,000,000 receivable under this agreement and is reported as subscription receivable on the condensed consolidated statement of equity.
Investment in AirJoule, LLC
On January 25, 2024, Montana entered into a joint venture formation framework agreement (the “Framework Agreement”) with GE Ventures LLC, a Delaware limited liability company (“GE Vernova”), and, solely for the purposes specified therein, GE Vernova LLC, a Delaware limited liability company (“GE Vernova Parent”), pursuant to which Legacy Montana and GE Vernova agreed, subject to the terms and conditions of the Framework Agreement, including certain closing conditions specified therein, to form a joint venture (the “AirJoule JV”) in which each of Montana and GE Vernova will hold a 50% interest. The purpose of the AirJoule JV is to incorporate GE Vernova’s proprietary sorbent materials into systems that utilize Legacy Montana’s AirJoule® water capture technology and to manufacture and bring products incorporating the combined technologies to market in the Americas, Africa, and Australia.
Upon the closing of the transaction on March 4, 2024, (the “JV Closing”), each party to the agreement entered into (i) an amended and restated limited liability company agreement of the AirJoule JV (the “A&R Joint Venture Agreement”), pursuant to which, among other things, the AirJoule JV has the exclusive right to manufacture and supply products incorporating the combined technologies to leading original equipment manufacturers and customers in the Americas, Africa and Australia, (ii) master services agreements, pursuant to which, among other things, each party to the agreement agree to provide certain agreed services to the AirJoule JV for a period of at least two years following the JV Closing (unless earlier terminated by the parties thereto) and (iii) an intellectual property agreement, pursuant to which, among other things, each of the Company and GE Vernova Parent license certain intellectual property to the AirJoule JV.
Pursuant to the A&R Joint Venture Agreement, the Company contributed $10 million in cash to the AirJoule JV at the JV Closing (the “Closing Contribution”). The Company has also agreed to contribute up to an additional $90 million in capital contributions to the AirJoule JV following the JV Closing based on a business plan and annual operating budgets to be agreed between the Company and GE Vernova. In general, for the first six years, GE Vernova has the right, but not the obligation, to make capital contributions to the AirJoule JV. Until GE Vernova elects to participate and contributes its pro-rata share of all past capital contributions and commits to contribute its pro-rata share for all future capital contributions (the “GE Match Date”), the Company shall be solely responsible for funding the AirJoule JV, and the Company shall have a distribution preference under the A&R Joint Venture Agreement for the amount of its post-closing capital contributions plus a 9.50% preferred return on such amounts.
The business and affairs of the A&R Joint Venture Agreement shall be managed by a Board of Managers, consisting of two managers (including the chairman) appointed by the Company and two managers appointed by GE Vernova. Following the second anniversary of the JV Closing, if the Board of Managers reach an impasse that cannot be resolved through the process set forth in the A&R Joint Venture Agreement, the A&R Joint Venture Agreement generally provides that the Company may require GE Vernova to sell GE Vernova’s 50% interest to the Company or GE Vernova may require the Company to purchase GE Vernova’s 50% interest, but only, in each case, if the GE Match Date has not yet occurred. The price for GE Vernova’s interest will depend on the fair market value of the interest, as set forth in the A&R Joint Venture Agreement, with a minimum value of approximately $5 million. The A&R Joint Venture Agreement also provides similar call and put rights with respect to GE Vernova’s interest if the GE Match Date does not occur by the sixth anniversary of the JV Closing or if the Company is acquired by a competitor of GE Vernova.
In the event that a change in applicable laws or regulations has a material adverse effect on GE Vernova’s interest in the AirJoule JV, or GE Vernova determines that the Company fails to meet certain financial performance benchmarks, GE Vernova may require the Company to purchase GE Vernova’s interest for a total purchase price of $1.00.
We own 50% interest in AirJoule, LLC. A variable interest entity (“VIE”), AirJoule, LLC is to be consolidated by its primary beneficiary if the Company has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. The Company determined that it does not meet the control criterion for consolidating AirJoule, LLC and, accordingly, accounts for its variable interest in AirJoule, LLC under the equity method.
In addition to $10.0 million in cash, we contributed a perpetual license in our intellectual property with a carrying value of zero in exchange for the investment in AirJoule. In applying the equity method, our investment was initially recorded at fair value on the consolidated balance sheet. As such the Company recognized a gain of $333.5 million (and treated as a temporary item for tax purposes resulting in a deferred tax liability of approximately $87.8 million) as presented on the accompanying condensed consolidated statements of operations.
Our share of the losses reported by AirJoule, LLC are classified as equity loss from investment in AirJoule, LLC. The investment is evaluated for impairment annually and if facts and circumstances indicate that the carrying value may not be recoverable, an impairment charge would be recorded.
Appointment of additional executive officers
On May 7, 2024, the Company announced the expansion of its management team, including the appointment of a new Chief Financial Officer (“CFO”) and the transition of the previous CFO to the role of Chief Administrative Officer (“CAO”).
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Key Financial Definitions/Components of Results
Revenue
The Company anticipates that it will earn revenue from the sale of various key components that will be used in the assembly of AirJoule® systems. As of March 31, 2024 no revenue has been earned.
Operating Expenses
We classify our operating expenses into the following categories:
| ● | General and administrative expenses. General and administrative expenses consist primarily of personnel-related expenses for our executives, consultants and advisors. These expenses also include non-personnel costs, such as rent, office supplies, legal, audit and accounting services and other professional fees. |
| ● | Research and development expenses. Research and development expenses include internal personnel, parts, prototypes and third-party consulting costs related to preliminary research and development of the Company’s products. |
| ● | Sales and marketing expenses. Sales and marketing expenses consist primarily of business development professional fees, advertising and marketing costs. |
| ● | Transaction costs incurred in connection with business combination. Transaction costs represent the initial recognition of the earnout shares liability and fees incurred for financial advisory, legal and other professional services that were directly related to the Business Combination. |
| ● | Depreciation expense: Depreciation expense consists of depreciation of Montana’s property and equipment. |
Critical Accounting Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions can be subjective and complex and may affect the reported amounts of assets and liabilities, revenues, and expenses reported in those financial statements. As a result, actual results could differ from such estimates and assumptions. Such changes to estimates could potentially result in impacts that would be material to the consolidated financial statements.
While our significant accounting policies are described in more detail in Note 4 to our condensed consolidated financial statements appearing in Item 1 to this Quarterly Report on Form 10-Q, we believe that the following accounting policies were most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Share-Based Compensation
We account for share-based compensation arrangements granted to employees in accordance with ASC Topic 718, “Compensation: Stock Compensation,” by measuring the grant date fair value of the award and recognizing the resulting expense over the period during which the employee is required to perform service in exchange for the award. Equity-based compensation expense is only recognized for awards subject to performance conditions if it is probable that the performance condition will be achieved. The Company accounts for forfeitures when they occur.
We estimate the fair value of stock option awards subject to only a service condition on the date of grant using the Black-Scholes valuation model. The Black-Scholes model requires the use of highly subjective and complex assumptions, including the option’s expected term, price volatility of the underlying stock, risk-free interest rate, and the expected dividend yield of the underlying common stock, as well as an estimate of the fair value of the common stock underlying the award.
The Company estimates the fair value of Earnout Shares awards to employees, which is considered a compensatory award and accounted for under ASC 718, using the Monte-Carlo simulation model. The Monte-Carlo simulation model was selected as the valuation methodology for the Earnout Shares due to the path-dependent nature of triggering events. Under ASC 718, the award is measured at fair value at the grant date and expense is recognized over the time-based vesting period (the triggering event is a market condition and does not impact expense recognition). The Monte-Carlo model requires the use of highly subjective and complex assumptions, estimates and judgements, including the current stock price, volatility of the underlying stock, expected term the risk-free interest rate, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of Common Stock. An increase of 100-basis points in interest rates would not have a material impact on the Company’s stock-based compensation. During the period from the date of the Business Combination through March 31, 2024 the Company did not record stock-based compensation expense associated with these Earnout Shares as the performance conditions associated with these Earnout Shares were not deemed probable of achievement. Unrecognized stock-based compensation expense for these Earnout Shares with a performance-based vesting condition that was not deemed probable of occurring as of March 31, 2024 was $16.6 million which is expected to vest subject to the performance-based vesting condition being satisfied or deemed probable.
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Earnout Shares Liability
In connection with the Reverse Recapitalization and pursuant to the Business Combination Agreement, eligible former Legacy Montana Equityholders are entitled to receive the Earnout Shares upon the Company achieving certain Earnout Milestones (as described in the Merger Agreement). The settlement of the Earnout Shares to the holders of Legacy Montana common units contain variations in something other than the fair value of the issuer’s equity shares. As such, management determined that they should be classified as a liability and recognized at fair value at each reporting period with changes in fair value included in earnings.
We estimated fair value of the Earnout Shares with a Monte Carlo simulation using a distribution of potential outcomes for expected earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and stock price at expected commission dates, utilizing a correlation coefficient for EBITDA and stock price, and assuming $50 million of Annualized EBITDA per production line, with six production lines commissioned over a five-year period. EBITDA was discounted to the valuation date with a weighted average cost of capital estimate and forecasted to each estimated commission date. Earnout mechanics at each estimated commission date were assessed, and if the Earnout Thresholds were achieved, the future value of the Earnout Shares was discounted to the valuation date utilizing a risk-free rate commensurate with the overall term. Expected EBITDA assumes that each production line will achieve equivalent production generating $50 million of Annualized EBITDA. The commission dates used reflected management’s best estimates regarding the time to complete full construction and operational viability of a production line, including all permitting, regulatory approvals and necessary or useful inspections. The Earnout term of 5 years and the Earnout mechanics represent contractual inputs. The contingent Earnout Shares liability involves certain assumptions requiring significant judgment and actual results may differ from assumed and estimated amounts.
Derivative Financial Instruments and Other Financial Instruments Carried at Fair Value
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of its financial instruments, including the True Up Shares issued in connection with the Subscription Agreement and the Subject Vesting Shares issued in connection with the Business Combination, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
The True Up Shares issued under the Subscription Agreement do not qualify as equity under ASC 815-40; therefore, the Class A common stock (the “True Up Shares”) is required to be classified as a liability and measured at fair value with subsequent changes in fair value recorded in earnings. Changes in the estimated fair value of the derivative liability are recognized as a non-cash gain or loss on the condensed consolidated statements of operations. The fair value of the derivative liability is discussed in Note 11 – Fair Value Measurements.
The Subject Vesting Shares liability was an assumed liability of XPDB in the Merger as described in Note 5 – Recapitalization (As Restated). The Subject Vesting Shares vest and are no longer subject to forfeiture as described in Note 5. They do not meet the “fixed-for-fixed” criterion and thus are not considered indexed to the issuer’s stock. As such, management determined that the Subject Vesting Shares should be classified as a liability and recognized at fair value at each reporting period with changes in fair value included in earnings. The estimated fair value of the Subject Vesting Share liability was determined utilizing a Monte Carlo simulation, with underlying forecast mathematics based on geometric Brownian motion in a risk-neutral framework. The Calculation of the value of the Subject Vesting Shares considered the $12.00 and $14.00 vesting conditions in addition to the vesting related to the Earnout Milestone Amount. The Subject Vesting Shares liability involves certain assumptions requiring significant judgment and actual results may differ from assumed and estimated amounts. See Note 11 – Fair Value Measurements.
Business Combinations
We evaluate whether acquired net assets should be accounted for as a business combination or an asset acquisition by first applying a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the transaction is accounted for as an asset acquisition. If not, we apply judgement to determine whether the acquired net assets meet the definition of a business by considering if the set includes an acquired input, process, and the ability to create outputs.
We account for business combinations using the acquisition method of accounting whereby the identifiable assets and liabilities of the acquired business, including contingent consideration, as well as any non-controlling interest in the acquired business, are recorded at their estimated fair values as of the date that we obtain control of the acquired business. We measure goodwill as the fair value of the consideration transferred including the fair value of any non-controlling interest recognized, less the net recognized amount of the identifiable assets and liabilities combined, all measured at their fair value as of the acquisition date. Transaction costs, other than those associated with the issuance of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.
Any contingent consideration is measured at fair value at the acquisition date. For contingent consideration that does not meet all the criteria for equity classification, such contingent consideration is required to be recorded at its initial fair value at the acquisition date, and on each balance sheet date thereafter. Changes in the estimated fair value of liability-classified contingent consideration are recognized on the consolidated statements of operations in the period of change.
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Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use a variation of the income approach, whereby a forecast of future cash flows attributable to the asset is discounted to present value using a risk-adjusted discount rate. Some of the more significant estimates and assumptions inherent in the income approach include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, and the assessment of the asset’s expected useful life. When the initial accounting for a business combination has not been finalized by the end of the reporting period in which the transaction occurs, we report provisional amounts. Provisional amounts are adjusted during the measurement period, which does not exceed one year from the acquisition date. These adjustments, or recognition of additional assets or liabilities, reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date.
Equity Method Investment
In accordance with ASC 323, Investments - Equity Method and Joint Ventures, investments in entities over which the Company does not have a controlling financial interest but has significant influence are accounted for using the equity method, with the Company’s share of earnings or losses reported in earnings or losses from equity method investments on the statements of operations. Under the equity method, the Company’s investments are initially measured and recognized using the cost accumulation model following the guidance in ASC 805-50-30. After initial recognition, the consolidated financial statements include the Company’s share of undistributed earnings or losses, and impairment, if any, until the date on which significant influence ceases.
The Company’s equity method investments are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value may have occurred. When a loss is deemed to have occurred and is other than temporary, the carrying value of the equity method investment is written down to fair value. In evaluating whether a loss is other than temporary, the Company considers the length of time for which the conditions have existed and its intent and ability to hold the investment.
Warrants
We determine the accounting classification of warrants it issues as either liability or equity classified by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480”), then in accordance with ASC 815-40 (“ASC 815”), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.. In order for a warrant to be classified in stockholders’ deficit, the warrant must be (i) indexed to the Company’s equity and (ii) meet the conditions for equity classification.
If a warrant does not meet the conditions for stockholders’ deficit classification, it is carried on the condensed consolidated balance sheets as a warrant liability measured at fair value, with subsequent changes in the fair value of the warrant recorded in other non-operating losses (gains) in the consolidated statements of operations. If a warrant meets both conditions for equity classification, the warrant is initially recorded, at its relative fair value on the date of issuance, in stockholders’ deficit in the condensed consolidated balance sheets, and the amount initially recorded is not subsequently remeasured at fair value.
Income taxes
Prior to the Business Combination on March 14, 2024, the Company was a limited liability company (“LLC”) and treated as a partnership for income tax purpose. As a Partnership, the Company was not directly liable for federal income taxes. As of the date of the Business Combination, the operations of the Company ceased to be taxed as a partnership resulting in a change in tax status for federal and state income tax purposes.
The Company follows the asset and liability method of accounting for income taxes under ASC Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that is included in the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. Management has evaluated the Company’s tax positions, including its previous status as a pass-through entity for federal and state tax purposes, and has determined that the Company has taken no uncertain tax positions that require adjustment to the condensed consolidated financial statements. The Company’s reserve related to uncertain tax positions was zero as of March 31, 2024 and December 31, 2023. There were no unrecognized tax benefits, and no amounts accrued for interest and penalties as of March 31, 2024 and December 31, 2023. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.
Recent Accounting Pronouncements
A discussion of recently issued accounting standards applicable to Montana is described in Note 4, Significant Accounting Policies, in the Notes to Financial Statements contained elsewhere in this Current Report on Form 10-Q.
Results of Operations
The following tables set forth the results of our operations for the periods presented, as well as the changes between periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
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The three months ended March 31, 2024 compared to the three months ended March 31, 2023
The following table sets forth the Company’s condensed consolidated statements of operations data for the three months ended March 31, 2024 and 2023:
| For the Three Months ended | ||||||||||||
| March 31, | Dollar | |||||||||||
| 2024 | 2023 | Change | ||||||||||
| Expenses | (as restated) | |||||||||||
| General and administrative | $ | 813,239 | $ | 218,175 | $ | 595,064 | ||||||
| Research and development | 846,157 | 604,944 | 241,213 | |||||||||
| Sales and marketing | 37,725 | 10,423 | 27,303 | |||||||||
| Transaction costs incurred in connection with business combination | 54,693,103 | - | 54,693,103 | |||||||||
| Depreciation expense | 1,085 | 1,085 | - | |||||||||
| Loss from operations | (56,391,309 | ) | (834,627 | ) | 55,556,682 | |||||||
| Other income (expenses): | ||||||||||||
| Interest Income | 26,146 | - | 26,146 | |||||||||
| Gain on contribution to AirJoule, LLC | 333,500,000 | - | 333,500,000 | |||||||||
| Equity loss from investment in AirJoule, LLC | (26,382 | ) | - | (26,382 | ) | |||||||
| Change in fair value of Earnout Shares liability | (7,672,000 | ) | - | (7,672,000 | ) | |||||||
| Change in fair value of True Up Shares liability | 269,000 | - | 269,000 | |||||||||
| Change in fair value of Subject Vesting Shares | (2,425,000 | ) | - | (2,425,000 | ) | |||||||
| Other income (loss), net | 323,671,764 | - | 323,671,764 | |||||||||
| Income (loss) before income taxes | 267,280,455 | (834,627 | ) | 268,115,082 | ||||||||
| Income tax expense | 85,723,163 | - | 85,723,163 | |||||||||
| Net income (loss) | $ | 181,555,292 | $ | (834,627 | ) | $ | 182,389,919 | |||||
General and Administrative
General and administrative expenses for the three months ended March 31, 2024 was $813,239 as compared to $218,175 for the three months ended March 31, 2023. The $595,064 increase in general and administrative reflects increases in professional services such as legal and audit and accounting. Montana expects that its general and administrative expenses will increase in future periods commensurate with the expected growth of its business and increased expenditures associated with its status as an exchange listed public company.
Research and Development
Research and Development expenses for the three months ended March 31, 2024 was $846,157 as compared to $604,944 for the three months ended March 31 2023. The $241,213 increase in research and development reflects increases in personnel and prototype related costs as the Company continues to develop its products and technology. The Company expects that its research and development expense will increase in future periods commensurate with the expected growth of its business.
Sales and Marketing
Sales and marketing for the three months ended March 31, 2024 was $37,725 as compared to $10,423 for the three months ended March 31, 2023. Montana expects that its sales and marketing expense will increase in future periods commensurate with the expected growth of its business.
Transaction Cost Incurred in Connection with Business Combination
Transaction costs incurred in connection with the business combination include the non-cash recognition of earnout liabilities of approximately $53.7 million and transaction costs incurred by Legacy Montana of approximately $1.0 million, which were paid in 2024.
Depreciation Expense
Depreciation expense for the three months ended March 31, 2024 and 2023 was $1,085.
Interest Income
Interest income of $26,146 for the three months ended March 31, 2024 is a result of an increase in cash balance after the close of the Business Combination.
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Fair value of Earnout Shares liability
Upon consummation of the Business Combination, the Company expensed approximately $53.7 million in earnout shares liability. The change in fair value of $7.7 million during the three months ended March 31, 2024 is recognized as other expenses for the period.
Fair value of Subject Vesting Shares liability
Upon consummation of the Business Combination, the Company assumed approximately $11.8 million in earnout shares liability. The change in fair value of $2.4 million during the three months ended March 31, 2024 is recognized as other expenses for the period.
Fair value of True Up Shares liability
Upon consummation of the Business Combination, the Company assumed approximately $555,000 in earnout shares liability. The change in fair value of $269,000 during the three months ended March 31, 2024 is recognized as other income for the period.
Gain on contribution to AirJoule, LLC
An equity method investment received in exchange for noncash consideration is measured at fair value. As a result, we recognized a gain of $333,500,000 on the contribution to AirJoule, LLC for the difference between our zero carrying value and the fair value of the perpetual license to intellectual property that we transferred to AirJoule, LLC.
The Company determined the fair value of the intellectual property by applying the multi-period excess earnings method, which involved the use of significant estimates and assumptions related to forecasted revenue growth rate and customer attrition rate, Level 3 measurements. Valuation specialists were used to develop and evaluate the appropriateness of the multi-period excess earnings method, the Company’s discount rates, attrition rate and fair value estimates using its cash flow projections.
Equity loss on earnings from investment AirJoule, LLC
As previously noted, on January 25, 2024, we entered into a joint venture with GE Ventures LLC, the AirJoule JV which closed on March 4, 2024. For the period from March 4, 2024 to March 31, 2024, we recognized a loss of $26,382 from our 50% equity investment in the AirJoule JV.
Income Taxes
During the three months ended March 31, 2024, as a result of our contribution to AirJoule, LLC of a perpetual license to our intellectual property, measured at fair value resulting in a book gain, a temporary difference between book and tax arose. The temporary difference resulted in the recognition of a deferred tax expenses and deferred tax liabilities of approximately $87.8 million. This expense was partially offset by the recognition of deferred tax assets in connection with the Company now being a corporation through the Business Combination.
Liquidity and Capital Resources
The Company’s primary sources of liquidity have been cash from contributions from founders or other investors. The Company had retained earnings of $164.4 million as of March 31, 2024. As of March 31, 2024, the Company had $16.2 million of working capital including $27.4 million in cash.
The Company assesses its liquidity in terms of its ability to generate adequate amounts of cash to meet current and future needs. Its expected primary uses of cash on a short and long-term basis are for working capital requirements, capital expenditures and other general corporate services. The Company’s primary working capital requirements are for project execution activities including purchases of materials, services and payroll which fluctuate during the year, driven primarily by the timing and extent of activities required on new and existing projects. The Company’s management expects that future operating losses and negative operating cash flows may increase from historical levels because of additional costs and expenses related to the development of its technology and the development of market and strategic relationships with other businesses and customers.
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With the consummation of the Business Combination and Subscription Agreements (as described above), the Company received proceeds of approximately $40 million in March 2024, after giving effect to XPDB’s stockholder redemptions and payment of transaction expenses, which will be utilized to fund our product development, operations and growth plans. We believe that as a result of the Business Combination our existing cash and cash equivalents, as well as proceeds received from the Business Combination and cash received from Subscription Agreements, will be sufficient to fund operations for the next year from the date the financial statements were issued.
Our future capital requirements will depend on many factors, including, the timing and extent of spending by the Company to support the launch of its product and research and development efforts, the degree to which it is successful in launching new business initiatives and the cost associated with these initiatives, and the growth of our business generally. Pursuant to the A&R Joint Venture Agreement, the Company contributed $10 million in cash to the AirJoule JV at the JV Closing (the “Closing Contribution”). The Company has also agreed to contribute up to an additional $90 million in capital contributions to the AirJoule JV following the JV Closing based on a business plan and annual operating budgets to be agreed between the Company and GE Vernova. In general, for the first six years, GE Vernova has the right, but not the obligation, to make capital contributions to the AirJoule JV. In order to finance these opportunities and associated costs, it is possible that the Company would need to raise additional financing if the proceeds realized from the Business Combination and cash received from Subscription Agreements are insufficient to support its business needs. While management believes that the proceeds realized through the Business Combination and cash received from Subscription Agreements will be sufficient to meet its currently contemplated business needs, management cannot assure that this will be the case. If additional financing is required by us from outside sources, the Company may not be able to raise it on terms acceptable to it or at all. If the Company is unable to raise additional capital on acceptable terms when needed, its product development business, results of operations and financial condition would be materially and adversely affected.
Contractual Obligations and Commitments
In October 2021, the Company entered into a patent license agreement with a third party whereby the third party granted the Company rights to use certain of their patents in exchange for an upfront payment and royalties based on a percentage of net sales until such patents expire. In connection with this, the Company agreed to a minimum royalty amount of which $62,500 and $37,500 was expensed for the three months ended March 31, 2024 and 2023, respectively. At March 31, 2024 and December 31, 2023, $62,500 and $150,000, respectively, was accrued by the Company in the accompanying condensed consolidated balance sheet.
Future minimum royalties are as follows as of March 31,2024:
| Remainder of 2024 | $ | 187,500 | ||
| 2025 and each year through the date the patents expire | 300,000 |
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Joint Venture Agreement
On October 27, 2021, we entered into a joint venture agreement with CATL US, an affiliate of CATL, pursuant to which we and CATL US formed CAMT, a limited liability company organized under the laws of Hong Kong. Legacy Montana and CATL US each own 50% of CAMT’s issued and outstanding shares.
Pursuant to the Amended and Restated Joint Venture Agreement for CAMT, entered into on September 29, 2023 (the “A&R Joint Venture Agreement”), Legacy Montana and CATL US have each agreed to contribute $6 million to CAMT. Of this $6 million, we expect to make an initial contribution of $2 million prior to December 31, 2024, with the remaining $4 million contributed when requested by CAMT based on a business plan and operating budgets to be agreed between us and CATL US. Any additional financing beyond the initial $12 million (i.e., $6 million from each of Legacy Montana and CATL US) will be subject to the prior mutual agreement of Legacy Montana and CATL US. CAMT is managed by a four-member board of directors, with two directors (including the chairman) designated by CATL US and two directors (including the vice chairman) designated by Legacy Montana. In the event of an equal vote, the chairman may cast the deciding vote. Certain reserved matters, including debt issuances exceeding $5 million in a single transaction or in aggregate within a fiscal year, amendments to CAMT’s constitutional documents the annual financial budget of CAMT, and any transaction between CAMT and CATL US or Legacy Montana in an amount exceeding $10 million in a single transaction or in aggregate within a fiscal year, require the unanimous vote of both CATL US and Legacy Montana or all directors. As of March 31, 2024, the Company has not funded this joint venture or contributed any assets to the joint venture.
The purpose of Legacy Montana’s joint venture with CATL US is to commercialize our AirJoule® technology in Asia and Europe and, pursuant to the A&R Joint Venture Agreement, CAMT has the exclusive right to commercialize AirJoule® technology in those territories. Subject to the oversight of CAMT’s board, CATL US is responsible for managing the day-to-day operations of CAMT (including the nomination and replacement of the Chief Executive Officer of CAMT), and is responsible for providing CAMT and any subsidiaries formed by CAMT with, among other things, administrative services, supply chain support, assistance in obtaining required permits and approvals and assistance in purchasing or leasing land and equipment.
Cash flows for the three months ended March 31, 2024 and 2023
The following table summarizes the Company’s cash flows from operating, investing and financing activities for the three months ended March 31, 2024 and 2023:
| For
the three months ended March 31, | ||||||||
| (in thousands) | 2024 | 2023 | ||||||
| (as restated) | ||||||||
| Net cash used in operating activities | $ | (6,425,437 | ) | $ | (803,635 | ) | ||
| Net cash used in investing activities | (10,000,000 | ) | - | |||||
| Net cash provided by financing activities | $ | 43,467,010 | $ | 255,861 | ||||
Net Cash Used in Operating Activities
Net cash used in operating activities was $6,425,437 during the three months ended March 31, 2024 compared to net cash used in operating activities of $803,635 during the three months ended March 31, 2023. The period-to-period change was a result of Montana’s net loss for the period, including transactions costs of the business combination, a decrease in accounts payable and accrued expenses and other liabilities due to payments made partially offset by the change in fair value of earnout shares liability, change in fair value of True Up Shares and the change in fair value of Subject Vesting Shares.
Net Cash Used in Investing Activities
Net cash used in investing activities was $10,000,000 during the three months ended March 31, 2024 as a result of the contribution made to AirJoule, LLC.
Net Cash provided byFinancing Activities
For the three months ended March 31, 2024, net cash provided by financing activities was $43,467,010 compared to net cash flow from financing activities of $255,861 during the three months ended March 31, 2023. The period-to-period change was primarily due to higher proceeds from the issuance of Legacy Montana common stock related to private placements prior to the Merger, and the exercise of stock options and warrants.
Off balance sheet arrangements
The Company did not have any off-balance sheet arrangements as of March 31, 2024.
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Emerging Growth Company Status
We are an emerging growth company as defined in the JOBS Act. The JOBS Act permits companies with emerging growth company status to take advantage of an extended transition period to comply with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to use this extended transition period to enable it to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting standards as of public company effective dates.
In addition, we intend to rely on the other exemptions and 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 intend to rely on such exemptions, we are not 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(b) of the Sarbanes-Oxley Act; (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 Public Company Accounting Oversight Board 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 Chief Executive Officer’s compensation to median employee compensation.
We will remain an emerging growth company under the JOBS Act until the earliest of (i) the last day of our first fiscal year following the fifth anniversary of the closing of XPDB’s initial public offering, (ii) the last date of our fiscal year in which we have total annual gross revenue of at least $1.235 billion, (iii) the date on which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding securities held by non-affiliates or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the previous three years.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective, due to the material weakness in our internal control over financial reporting, which pertains to internal controls over complex accounting issues, including the application of the reverse recapitalization accounting for the Business Combination and the VIE accounting for the AirJoule JV. As a result, we performed additional analysis as deemed necessary to ensure that our consolidated financial statements were prepared in accordance with US GAAP which resulted in a restatement of the previously issued financial statements. Accordingly, management believes that the condensed consolidated financial statements included in this Form 10-Q/A present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
Management intends to implement remediation steps to improve our disclosure controls and procedures and our internal control over financial reporting. Specifically, we intend to expand and improve our review process for complex transactions. We are currently considering remedial procedures, including enhancing access to accounting literature, identifying third-party professionals with whom to consult regarding complex accounting applications, and considering the addition of staff with the requisite experience and training to supplement existing accounting professionals.
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter ended March 31, 2024, other than noted above, there were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are and, from time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any other legal proceedings that, in the opinion of our management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.
ITEM 1A. RISK FACTORS
We are subject to various risks and uncertainties in the course of our business. As a result of the closing of the Business Combination, the risk factors previously disclosed in part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 no longer apply. For a discussion of risks and uncertainties relating to our business following the Business Combination, please see below as well as the section in our Registration Statement on Form S-1 filed with the SEC on April 12, 2024 (as amended) (the “Form S-1”) titled “Risk Factors.” As of the date hereof, other than as disclosed below, there have been no material changes to the risk factors disclosed in the Form S-1.. Any of the factors referenced below or the factors disclosed in the Form S-1 in the section titled “Risk Factors” could result in a significant or material adverse effect on our results of operations or financial condition, and additional risks could arise that may also affect our business. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.
We have identified a material weakness in our internal controls over financial reporting. Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act in the future could have a material adverse effect on our business and stock price.
As a public company, we are required to comply with the rules of the Securities and Exchange Commission (“SEC”) implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. We are required to disclose changes made in our internal controls and procedures on a quarterly basis and to make annual assessments of our internal control over financial reporting pursuant to Section 404.
When evaluating our internal control over financial reporting, we may identify material weaknesses and significant deficiencies and, as of March 31, 2024, our management concluded that our disclosure controls and procedures were not effective, due solely to the material weakness in our internal control over financial reporting, which pertains to internal controls over complex accounting issues, including the application of the reverse recapitalization accounting for the Business Combination and the VIE accounting for the AirJoule JV. Management has developed and is implementing a remediation plan to address the material weakness. However, we cannot assure you that the testing of the operational effectiveness of the new control will be complete within a specific timeframe.
There is no assurance that another material weaknesses or significant deficiencies will not occur or that we will be able to remediate such material weaknesses or significant deficiencies in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be materially adversely affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Set forth below is information regarding shares of capital stock issued by us within the quarterly period ended in March 31, 2024. Also included is the consideration received by us for such shares and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.
PIPE Investment
In connection with the Closing, on March 14, 2024, the Company consummated that certain subscription agreement the (the “PIPE Subscription Agreement”) entered into by XPDB and a certain investor (the “PIPE Investor”), pursuant to which the Company issued and sold to the PIPE Investor an aggregate of 588,235 newly issued shares of Class A common stock on the terms and subject to the conditions set forth in the PIPE Subscription Agreement at a purchase price of $8.50 per share for aggregate gross proceeds to the Company of $5,000,000. These securities were issued and sold in reliance on Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed as part of, or incorporated by reference into, this Report.
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| * | Filed or furnished herewith. |
| + | Indicates management contract or compensatory plan |
| # | Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC. |
| † | The information in Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act (including this Annual Report), unless the Registrant specifically incorporates the foregoing information into those documents by reference. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MONTANA TECHNOLOGIES CORPORATION | ||
| August 22, 2024 | By: | /s/ Stephen S. Pang |
| Name: | Stephen S. Pang | |
| Title: | Chief Financial Officer | |
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