Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Overview
We are a blank check company
incorporated in the Cayman Islands on April 4, 2024 formed for the purpose of effecting a merger, amalgamation, share exchange, asset
acquisition, share purchase, reorganization or other similar business combination with one or more businesses. We intend to effectuate
our business combination using cash derived from the proceeds of the Initial Public Offering and the sale of the Private Placement Warrants,
our shares, debt or a combination of cash, shares and debt.
We expect to continue to incur
significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete a business combination will
be successful.
Recent Developments
On March 26, 2025, the Company entered into a Business Combination Agreement (as it may be amended, supplemented or otherwise modified
from time to time in accordance with its terms, the “Business Combination Agreement”) by and among the Company, Terrestrial
Energy Inc., a Delaware corporation (“Terrestrial Energy”), and HCM II Merger Sub Inc., a Delaware corporation and a direct
wholly owned subsidiary of Company (“Merger Sub”), pursuant to which, among other things and subject to the terms and conditions
contained therein, Merger Sub will merge with and into Terrestrial Energy (the “Merger”), with Terrestrial Energy continuing
as the surviving entity (the “Surviving Company”). The transactions contemplated by the Business Combination Agreement are
referred to herein as the “Business Combination.” The combined company’s business will continue to operate through Terrestrial
Energy and its subsidiaries.
The Business Combination Agreement and the Business Combination were unanimously approved by the board of
directors of the Company and the board of directors of Terrestrial Energy.
The Business Combination is expected to close in the fourth
quarter of 2025, subject to the receipt of the required approvals by Company’s shareholders and the fulfilment of other customary
closing conditions.
In addition to the Merger, the Company will, subject to obtaining the required shareholder approvals and at least one
(1) day prior to the date of the closing of the Business Combination (the “Closing”), change its jurisdiction of incorporation
by deregistering as a Cayman Islands exempted company and continuing and domesticating as a corporation incorporated under the laws of
the State of Delaware (the “Domestication”). The Company will provide its public shareholders the opportunity to elect, at
least two (2) business days prior to the Company shareholder’s meeting, to redeem their shares on the terms and conditions set forth
in the Business Combination Agreement and the Company’s governing documents (the “Redemption”). Subject to the receipt
of approval from shareholders of the Company, and at least one (1) day prior to the Domestication, the Company will carry out the Redemption.
By
virtue of the Domestication and subject to the satisfaction or waiver of the conditions of the Business Combination Agreement, including
approval of the Company’s shareholders: (i) immediately prior to the Domestication, each of the then issued and outstanding Class
B Ordinary Shares of the Company will convert automatically, on a one-for-one basis, into one (1) Class A Ordinary Share, par value of
$0.0001 per share, of the Company (the “Sponsor Share Conversion”); and (ii) immediately following the Sponsor Share Conversion,
in connection with the Domestication, (x) each then issued and outstanding Class A Ordinary Share (other than any Class A Ordinary Share
included in the Cayman Purchaser Units (as defined in the Business Combination Agreement)) will convert automatically, on a one-for-one
basis, into one (1) share of common stock, par value $0.0001 per share, of the Company (after the Domestication) (the “Domesticated
Common Stock”); (y) each of the then issued and outstanding warrants (other than any Cayman Purchaser Public Warrants (as defined
in the Business Combination Agreement) included in the Cayman Purchaser Units) representing the right to purchase one (1) Class A Ordinary
Share will convert automatically into a warrant to acquire one (1) share of Domesticated Common Stock (each a “Domesticated Warrant”);
and (z) each of the then issued and outstanding Cayman Purchaser Units will be cancelled and each holder thereof will be entitled to one
(1) share of Domesticated Common Stock and one-half (1/2) of one (1) Domesticated Warrant.
The Company has also entered into subscription
agreements (collectively, the “PIPE Subscription Agreements”), each dated as of March 26, 2025, with certain investors (collectively,
the “PIPE Investors”), pursuant to which, among other things, the Company has agreed to issue and sell, in private placements
to close immediately prior to or substantially concurrently with the Closing, an aggregate of 5,000,000 shares of Domesticated Common
Stock for a purchase price of $10.00 per share (the “PIPE Financing”). The PIPE Investors are permitted, under the PIPE Subscription
Agreements, to satisfy their commitments thereunder if they hold shares of Domesticated Common Stock that qualify as Non-Redeemed Shares
(as defined in the PIPE Subscription Agreements), subject to certain conditions and restrictions set forth in the PIPE Subscription Agreements.
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Results of Operations
We have neither engaged in
any operations nor generated any revenues to date. Our only activities from April 4, 2024 (inception) through December 31, 2024 were organizational
activities, those necessary to prepare for the Initial Public Offering, described below, and, after our Initial Public Offering, identifying
a target company for a business combination. We do not expect to generate any operating revenues until after the completion of our business
combination. We generate non-operating income in the form of interest income on marketable securities held in the trust account. We incur
expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due
diligence expenses.
For the period from April
4, 2024 (inception) through December 31, 2024, cash used in operating activities was $318,768. Net income of $3,408,788 was affected by
operating costs paid by Sponsor in exchange for issuance of Class B founder shares of $12,463, payment of operation costs through promissory
note of $45,200 and interest earned on marketable securities held in the trust account of $4,043,585. Changes in operating assets and
liabilities was affected by $258,366 of cash provided for operating activities.
Factors That May Adversely Affect our Results
of Operations
Our results of operations
and our ability to complete an initial business combination may be adversely affected by various factors that could cause economic uncertainty
and volatility in the financial markets, many of which are beyond our control. Our business could be impacted by, among other things,
downturns in the financial markets or in economic conditions, increases in oil prices, inflation, increases in interest rates, supply
chain disruptions, declines in consumer confidence and spending, public health considerations, and geopolitical instability, such as the
military conflicts in Ukraine and the Middle East. We cannot at this time predict the likelihood of one or more of the above events, their
duration or magnitude or the extent to which they may negatively impact our business and our ability to complete an initial business combination.
Liquidity and Capital Resources
Until the consummation of
the Initial Public Offering, our only source of liquidity was an initial purchase of shares of Class B Ordinary Shares, par value $0.0001
per share, by the Sponsor and loans from the Sponsor.
On August 19, 2024, we consummated
the Initial Public Offering of 23,000,000 Units, which includes the full exercise by the underwriters of their over-allotment option in
the amount of 3,000,000 Units generating gross proceeds of $230,000,000. Simultaneously with the closing of the Initial Public Offering,
we consummated the sale of an aggregate of 6,850,000 Private Placement Warrants at a price of $1.00 per Private Placement Warrant, in
a private placement to the Sponsor and Cantor Fitzgerald & Co., generating gross proceeds of $6,850,000.
We intend to use substantially
all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account (less income taxes
payable), to complete our Business Combination. To the extent that our share capital or debt is used, in whole or in part, as consideration
to complete our Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the
operations of the target business or businesses, make other acquisitions and pursue our growth strategies.
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We intend to use the funds
held outside the Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target
businesses, travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners,
review corporate documents and material agreements of prospective target businesses, and structure, negotiate and complete a Business
Combination.
For the period from April
4, 2024 (inception) through December 31, 2024, cash used in operating activities was $323,234. Net income of $3,408,788 was affected by
operating costs paid by Sponsor in exchange for issuance of Class B founder shares of $12,463, payment of operation costs through promissory
note of $45,200 and interest earned on marketable securities held in the trust account of $4,043,585. Changes in operating assets and
liabilities was affected by $253,900 of cash provided for operating activities.
As of December 31,2024, we
had marketable securities held in the trust account of $235,193,585. We intend to use substantially all of the funds held in the Trust
Account, including any amounts representing interest earned on the Trust Account (less income taxes payable), to complete our Business
Combination. To the extent that our share capital or debt is used, in whole or in part, as consideration to complete our Business Combination,
the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses,
make other acquisitions and pursue our growth strategies.
As of December 31,2024, we
had cash held outside of the trust account of $672,555 available for working capital needs. We intend to use the funds held outside the
Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel
to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review corporate
documents and material agreements of prospective target businesses, and structure, negotiate and complete a Business Combination.
We have until August 19, 2026
to consummate the initial Business Combination (assume no extensions). If we do not complete a Business Combination, we will trigger an
automatic winding up, dissolution and liquidation pursuant to the terms of the Amended and Restated Memorandum and Articles of Association.
Notwithstanding management’s belief that we would have sufficient funds to execute its business strategy, there is a possibility
that business combination might not happen within the 24-month period from the date of the auditors’ report.
In connection with our assessment of going concern considerations in accordance with ASC 205-40, Going Concern, as of December 31, 2024,
we may need to raise additional capital through loans or additional investments from Sponsor, stockholders, officers, directors, or third
parties. Our officers, directors and Sponsor may, but are not obligated to, loan us funds, from time to time or at any time, in whatever
amount they deem reasonable in their sole discretion, to meet our working capital needs. Accordingly, we may not be able to obtain additional
financing. If we are unable to raise additional capital, it may be required to take additional measures to conserve liquidity, which could
include, but not necessarily be limited to, curtailing operations, suspending the pursuit of a potential transaction, and reducing overhead
expenses. We cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all.
Management plans to
address this uncertainty through a Business Combination. If a Business Combination is not consummated by the end of the Combination
Period, currently August 19, 2026, there will be mandatory liquidation and subsequent dissolution of the Company. Management has
determined that the liquidity condition raises substantial doubt about our ability to continue as a going concern. No adjustments
have been made to the carrying amounts of assets or liabilities should be required to liquidate after the Combination Period. We
intend to complete the initial Business Combination before the end of the Combination Period. However, there can be no assurance
that we will be able to consummate any Business Combination by the end of the Combination Period.
Off-Balance Sheet Financing Arrangements
We have no obligations, assets
or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2024. We do not participate in transactions
that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which
would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance
sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased
any non-financial assets.
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Contractual Obligations
We do not have any long-term
debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay the Sponsor a total
of $15,000 per month for office space, utilities and secretarial and administrative support services.
The underwriter will be entitled
to a deferred underwriting discount of 4.40% of the gross proceeds of the Initial Public Offering held in the Trust Account other than
those sold pursuant to the underwriters’ over-allotment option and 6.40% of the gross proceeds sold pursuant to the underwriter’s
over-allotment option, $10,720,000 in the aggregate, payable upon the completion of the Company’s initial Business Combination subject
to the terms of the underwriting agreement
Critical Accounting Estimates
The preparation of financial
statement and related disclosures in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statement, and income and expenses during the periods reported. Making estimates requires
management to exercise significant judgement. It is at least reasonably possible that the estimate of the effect of a condition, situation
or set of circumstances that existed at the date of the financial statement, which management considered in formulating its estimate,
could change in the near term due to one or more future confirming events. Accordingly, the actual results could materially differ from
those estimates. As of December 31, 2024, we did not have any critical accounting estimates to be disclosed.
Recent Accounting Pronouncements
In November 2023, the FASB
issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments
in this ASU require disclosures, on an annual and interim basis, of significant segment expenses that are regularly provided
to the chief operating officer decision maker (“CODM”), as well as the aggregate amount of other segment items included in
the reported measure of segment profit or loss. The ASU requires that a public entity disclose the title and position of the
CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding
how to allocate resources. Public entities will be required to provide all annual disclosures currently required by Topic 280 in
interim periods, and entities with a single reportable segment are required to provide all the disclosures required by the amendments
in this ASU and existing segment disclosures in Topic 280. This ASU is effective for fiscal years beginning after
December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.
Management does not believe
that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s
financial statement.