References to the "Company," "our," "us" or "we" refer to Power & Digital
Infrastructure Acquisition II Corp. You should read the following discussion and
analysis of our financial condition and results of operations in conjunction
with our condensed financial statements and related notes included in Part I,
Item 1 of this Quarterly Report. This discussion and other parts of this report
contain forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. Our actual
results could differ materially from those discussed in these forward-looking
statements. See "Cautionary Note Regarding Forward-Looking Statements." Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in Part I, Item 1A "Risk Factors" of our Annual Report on
Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act. We have based these forward-looking statements on our
current expectations and projections about future events. These forward-looking
statements are subject to known and unknown risks, uncertainties and assumptions
about us that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "should," "could," "would," "expect,"
"plan," "anticipate," "believe," "estimate," "continue," or the negative of such
terms or other similar expressions. Factors that might cause or contribute to
such a discrepancy include, but are not limited to, those described in our other
SEC filings.
We are a blank check company incorporated in Delaware on March 23, 2021. We were
formed for the purpose of effecting a merger, capital stock exchange, asset
acquisition, stock purchase, reorganization or similar business combination with
one or more businesses or entities. We are an emerging growth company and, as
such, we are subject to all of the risks associated with emerging growth
companies.
Our sponsor is XPDI Sponsor II LLC, a Delaware limited liability company. The
registration statement for our IPO was declared effective on December 9, 2021.
On December 14, 2021, we consummated our IPO of 28,750,000 units, which included
the exercise of the underwriters' option to purchase an additional 3,750,000
units at the initial public offering price to cover over-allotments (the
"over-allotment units"), at $10.00 per unit, generating gross proceeds of $287.5
million, and incurring offering costs of approximately $20.7 million, of which
approximately $10.1 million was for deferred underwriting fees.
Simultaneously with the closing of our IPO, we completed the private placement
(the "private placement") of 11,125,000 private placement warrants, at a price
of $1.00 per private placement warrant to our sponsor and Anchor Investors,
generating proceeds of approximately $11.1 million.
Upon the closing of the IPO and the private placement, approximately $290.4
million ($10.10 per unit) of the net proceeds of the sale of the units in the
IPO and of the private placement warrants in the private placement were placed
in a trust account (the "trust account") located in the United States with
Continental Stock Transfer & Trust Company acting as trustee, and invested only
in U.S. "government securities," within the meaning of Section 2(a)(16) of the
Investment Company Act 1940, as amended (the "Investment Company Act"), having a
maturity of 185 days or less or in money market funds meeting certain conditions
under Rule 2a-7 promulgated under the Investment Company Act, which invest only
in direct U.S. government treasury obligations, as determined by the company,
until the earlier of: (i) the completion of an initial Business Combination and
(ii) the distribution of the trust account as described below.
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Our management has broad discretion with respect to the specific application of
the net proceeds of the IPO and the sale of private placement warrants, although
substantially all of the net proceeds are intended to be applied generally
toward consummating an initial Business Combination. There is no assurance that
we will be able to complete an initial Business Combination successfully. We
must complete one or more initial Business Combinations having an aggregate fair
market value of at least 80% of the net assets held in the trust account (net of
amounts disbursed to management for working capital purposes and excluding the
deferred underwriting commissions and taxes payable on the interest earned on
the trust account) at the time of the agreement to enter into the initial
Business Combination. However, we will only complete an initial Business
Combination if the post-transaction company owns or acquires 50% or more of the
voting securities of the target or otherwise acquires a controlling interest in
the target sufficient for it not to be required to register as an investment
company under the Investment Company Act.
We will have until 18 months from the closing of the IPO, or June 14, 2023 (the
"Combination Period"), to complete the initial Business Combination. However, if
we anticipate that it may not be able to complete the initial Business
Combination within 18 months, we may, but are not obligated to, extend the
period of time we will have to complete an initial Business Combination by up to
two additional three-month periods (for a total of up to 24 months from the
closing of the IPO to complete an initial Business Combination), subject to the
sponsor or its affiliates or designees contributing, for each such three-month
extension, $0.10 per share of Class A common stock to the trust account (or
approximately $2.9 million in the aggregate). In connection with each such
additional deposit, the sponsor or its affiliates or designees will receive an
additional 2,875,000 private placement warrants, with the same terms as the
original private placement warrants. The Public Stockholders will not be
entitled to vote on, or redeem their shares in connection with, any such
extension.
Liquidity and Going Concern
Our liquidity needs to date have been satisfied through a capital contribution
of $25,000 from our sponsor to purchase our Class B common stock (the "founder
shares"), the related party loan under a promissory note of approximately
$115,000 from, our sponsor, which was repaid in full on December 17, 2021, and
the net proceeds from the consummation of the private placement not held in the
trust account. In addition, in order to finance transaction costs in connection
with an initial Business Combination, our officers, directors and initial
stockholders may, but are not obligated to, provide working capital loans. As of
September 30, 2022, there were no amounts outstanding under any working capital
loans.
In connection with the Company's assessment of going concern considerations in
accordance with the Financial Accounting Standards Board's ("FASB's") Accounting
Standards Codification Topic 205-40, "Presentation of Financial Statements -
Going Concern," management has determined that the liquidity needs, mandatory
liquidation and subsequent dissolution raises substantial doubt about the
Company's ability to continue as a going concern, which is considered to be one
year from the issuance of these financial statements. No adjustments have been
made to the carrying amounts of assets or liabilities should the Company be
required to liquidate after June 14, 2023. The financial statements do not
include any adjustment that might be necessary if the Company is unable to
continue as a going concern. The Company intends to complete a Business
Combination before the mandatory liquidation date. Over this time period, the
Company will be using the funds outside of the Trust Account for paying existing
accounts payable, identifying and evaluating prospective initial Business
Combination candidates, performing due diligence on prospective target
businesses, paying for travel expenditures, selecting the target business to
merge with or acquire, and structuring, negotiating and consummating the
Business Combination.
The Company cannot provide any assurance that new financing will be available to
it on commercially acceptable terms, if at all. These conditions raise
substantial doubt about the Company's ability to continue as a going concern
through one year from the issuance date of these condensed consolidated
financial statements. These financial statements do not include any adjustments
relating to the recovery of the recorded assets or the classification of the
liabilities that might be necessary should the Company be unable to continue as
a going concern.
We continue to evaluate the impact of the COVID-19 pandemic on the industry and
have concluded that while it is reasonably possible that the virus could have a
negative effect on our financial position, results of its operations and/or
search for a target company, the specific impact is not readily determinable as
of the date of these condensed financial statements. The condensed financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
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In February 2022, the Russian Federation and Belarus commenced a military action
with the country of Ukraine. As a result of this action, various nations,
including the United States, have instituted economic sanctions against the
Russian Federation and Belarus. Further, the impact of this action and related
sanctions on the world economy are not determinable as of the date of these
financial statements.
On August 16, 2022, the Inflation Reduction Act of 2022 (the "IR Act") was
signed into federal law. The IR Act provides for, among other things, a new U.S.
federal 1% excise tax on certain repurchases of stock by publicly traded U.S.
domestic corporations and certain U.S. domestic subsidiaries of publicly traded
foreign corporations occurring on or after January 1, 2023. The excise tax is
imposed on the repurchasing corporation itself, not its shareholders from which
shares are repurchased. The amount of the excise tax is generally 1% of the fair
market value of the shares repurchased at the time of the repurchase. However,
for purposes of calculating the excise tax, repurchasing corporations are
permitted to net the fair market value of certain new stock issuances against
the fair market value of stock repurchases during the same taxable year. In
addition, certain exceptions apply to the excise tax. The U.S. Department of the
Treasury (the "Treasury") has been given authority to provide regulations and
other guidance to carry out and prevent the abuse or avoidance of the excise
tax. Any share redemption or other share repurchase that occurs after December
31, 2022, in connection with a Business Combination, extension vote or
otherwise, may be subject to the excise tax. Whether and to what extent we would
be subject to the excise tax in connection with a Business Combination,
extension vote or otherwise will depend on a number of factors, including (i)
the fair market value of the redemptions and repurchases in connection with the
Business Combination, extension or otherwise, (ii) the structure of a Business
Combination, (iii) the nature and amount of any "PIPE" or other equity issuances
in connection with a Business Combination (or otherwise issued not in connection
with a Business Combination but issued within the same taxable year of a
Business Combination) and (iv) the content of regulations and other guidance
from the Treasury. In addition, because the excise tax would be payable by us
and not by the redeeming holder, the mechanics of any required payment of the
excise tax have not been determined. The foregoing could cause a reduction in
the cash available on hand to complete a Business Combination and in our ability
to complete a Business Combination.
Results of Operations
Our entire activity since inception up to September 30, 2022 related to our
formation, the preparation for the Initial Public Offering, and since the
closing of the Initial Public Offering, the search for a prospective initial
Business Combination. We will not be generating any operating revenues until the
closing and completion of our initial Business Combination, at the earliest.
For the three months ended September 30, 2022, we had a net income of
approximately $781,000, which consisted of approximately $1.3 million of income
from investments held in the trust account, partially offset by approximately
$271,000 in operating expenses and approximately $267,000 in income tax
expenses. Operating expenses were comprised of approximately $161,000 of general
and administrative expenses, $60,000 of general and administrative expenses -
related party, and $50,000 of franchise tax expense.
For the three months ended September 30, 2021, we had net loss of $2,143 which
consisted entirely of state franchise tax expense 2021.
For the nine months ended September 30, 2022, we had a net income of
approximately $309,000, which consisted of approximately $1.7 million of income
from investments held in the trust account, partially offset by approximately
$1.1 million in operating expenses and approximately $297,000 in income tax
expenses. Operating expenses were comprised of approximately $781,000 of general
and administrative expenses, $180,000 of general and administrative expenses -
related party, and $165,000 of franchise tax expense.
For the period from March 23, 2021 (inception) through September 30, 2021, we
had net loss of $3,116 which consisted of $973 in formation costs and general
and administrative expenses and $2,143 in state franchise tax expense.
Commitments and Contingencies
Registration Rights
The holders of founder shares, private placement warrants and warrants that may
be issued upon conversion of working capital loans, if any (and any shares of
common stock issuable upon the exercise of the private placement warrants or
warrants issued upon conversion of the working capital loans and upon conversion
of the founder shares), were entitled to registration rights pursuant to a
registration rights agreement to be signed prior to the consummation of the IPO.
These holders are entitled to certain demand and "piggyback" registration
rights. However, the registration rights agreement provides that we will not be
required to effect or permit any registration or cause any registration
statement to become effective until termination of the applicable lock-up
period. We will bear the expenses incurred in connection with the filing of any
such registration statements.
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Underwriting Agreement
The underwriter was entitled to an underwriting discount of $0.20 per unit on
all units sold in the IPO, except for the units purchased by the Anchor
Investors, or approximately $5.3 million in the aggregate, paid upon the closing
of the IPO.
The underwriter received an additional fee of $0.35 per unit, or approximately
$10.1 million in the aggregate will be payable to the underwriters for deferred
underwriting commissions. The deferred fee will become payable to the
underwriters from the amounts held in the trust account solely in the event that
we complete an initial Business Combination, subject to the terms of the
underwriting agreement.
Administrative Support Services
Commencing on December 9, 2021, we have agreed to pay affiliates of our sponsor
a total of $20,000 per month for office space and administrative support
services. Upon completion of our initial Business Combination or our
liquidation, we will cease paying these monthly fees. In connection with our
initial Business Combination, we may potentially make a cash payment to
affiliates of our sponsor or anchor investor for any financial advisory,
placement agency or other similar investment banking or consulting services that
affiliates of our sponsor or anchor investor may provide to us in connection
with our initial Business Combination, and may reimburse to affiliates of our
sponsor or anchor investor for any out-of-pocket expenses incurred by it in
connection with the performance of such services
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. A summary of our significant accounting
policies is included in Note 2 to our condensed financial statements in Part I,
Item 1 of this Quarterly Report. Certain of our accounting policies are
considered critical, as these policies are the most important to the depiction
of our financial statements and require significant, difficult or complex
judgments, often employing the use of estimates about the effects of matters
that are inherently uncertain. Such policies are summarized in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
in our 2021 Annual Report on Form 10-K filed with the SEC on April 13, 2022.
There have been no significant changes in the application of our critical
accounting policies during the nine months ended September 30, 2022. We have
identified the following as our critical accounting policies:
Derivative Warrant Liabilities
We do not use derivative instruments to hedge exposures to cash flow, market, or
foreign currency risks. Management evaluates all of our financial instruments,
including issued stock purchase warrants, to determine if such instruments are
derivatives or contain features that qualify as embedded derivatives, pursuant
to Financial Accounting Standards Board's ("FASB") Accounting Standards
Codification ("ASC") Topic 480 "Distinguishing Liabilities from Equity" ("ASC
480") and FASB ASC Topic 815-40, "Derivatives and Hedging - Contracts in
Entity's Own Stock" ("ASC 815"). The classification of derivative instruments,
including whether such instruments should be classified as liabilities or as
equity, is re-assessed at the end of each reporting period.
The warrants issued in the IPO ("public warrants") and the private placement
warrants are not precluded from equity classification, based on the guidance in
ASC 480 and ASC 815. Equity-classified contracts are initially measured at fair
value (or allocated value). Subsequent changes in fair value are not recognized
as long as the contracts continue to be classified in equity.
Class A Common Shares Subject to Possible Redemption
We account for our Class A common stock subject to possible redemption in
accordance with the guidance in ASC 480. Class A common stock subject to
mandatory redemption (if any) is classified as liability instruments and are
measured at fair value. Conditionally redeemable Class A common stock (including
Class A common stock that features redemption rights that are either within the
control of the holder or subject to redemption upon the occurrence of uncertain
events not solely within our control) are classified as temporary equity. At all
other times, Class A common stock is classified as stockholders' equity. Our
Class A common stock feature certain redemption rights that are considered to be
outside of our control and subject to the occurrence of uncertain future events.
Accordingly, all of our outstanding shares of Class A common stock is presented
at redemption value as temporary equity, outside of the stockholders' equity
section of our balance sheet.
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Under ASC 480, we have elected to recognize changes in the redemption value
immediately as they occur and adjust the carrying value of the security to equal
the redemption value at the end of the reporting period. This method would view
the end of the reporting period as if it were also the redemption date of the
security. Effective with the closing of the IPO, we recognized the accretion
from initial book value to redemption amount, which resulted in charges against
additional paid-in capital (to the extent available) and accumulated deficit.
Net Loss per Common Share
We comply with accounting and disclosure requirements of FASB ASC Topic 260,
"Earnings Per Share." We have two classes of shares, which are referred to as
Class A common stock and Class B common stock. Income and losses are shared pro
rata between the two classes of shares. Net loss per common share is calculated
by dividing the net loss by the weighted average shares of common stock
outstanding for the respective period.
The calculation of diluted net loss does not consider the effect of the public
warrants and the private placement warrants to purchase an aggregate of
25,500,000 shares of Class A common stock in the calculation of diluted income
(loss) per share, because their exercise is contingent upon future events and
their inclusion would be anti-dilutive under the treasury stock method. As a
result, diluted net loss per share is the same as basic net loss per share for
the three and nine months ended September 30, 2022, the three months ended
September 30, 2021 and for period from March 23, 2021 (inception) through
September 30, 2021. Accretion associated with the redeemable Class A common
stock is excluded from earnings per share as the redemption value approximates
fair value.
Recent Accounting Pronouncements
The Company's management does not believe that any recently issued, but not yet
effective, accounting standards updates, if currently adopted, would have a
material effect on the Company's unaudited condensed financial statements.
Off-Balance Sheet Arrangements
As of September 30, 2022, we did not have any off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of Regulation S-K.
JOBS Act
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, contains
provisions that, among other things, relax certain reporting requirements for
qualifying public companies. We qualify as an "emerging growth company" and
under the JOBS Act are allowed to comply with new or revised accounting
pronouncements based on the effective date for private (not publicly traded)
companies. We are electing to delay the adoption of new or revised accounting
standards, and as a result, we may not comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required
for non- emerging growth companies. As a result, the financial statements may
not be comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.
Additionally, we are in the process of evaluating the benefits of relying on the
other reduced reporting requirements provided by the JOBS Act. Subject to
certain conditions set forth in the JOBS Act, if, as an "emerging growth
company," we choose to rely on such exemptions we may not be required to, among
other things, (i) provide an auditor's attestation report on our system of
internal controls over financial reporting pursuant to Section 404, (ii) provide
all of the compensation disclosure that may be required of non-emerging growth
public companies under the Dodd-Frank Wall Street Reform and Consumer Protection
Act, (iii) comply with any requirement that may be adopted by the PCAOB
regarding mandatory audit firm rotation or a supplement to the auditor's report
providing additional information about the audit and the financial statements
(auditor discussion and analysis) and (iv) disclose certain executive
compensation related items such as the correlation between executive
compensation and performance and comparisons of the CEO's compensation to median
employee compensation. These exemptions will apply for a period of five years
following the completion of our IPO or until we are no longer an "emerging
growth company," whichever is earlier.
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