TMC the metal company (TMC) - 2022 Q4 - Annual Report

PART I Business TMC is a deep-sea mineral exploration company focused on collecting polymetallic nodules containing critical metals from the CCZ - The company is focused on exploring and collecting polymetallic nodules from the Clarion Clipperton Zone (CCZ), which contain high concentrations of nickel, manganese, cobalt, and copper[18] - TMC holds exclusive exploration and commercial rights to three of the 17 polymetallic nodule contract areas in the CCZ through its subsidiaries NORI (sponsored by Nauru), TOML (sponsored by Tonga), and an arrangement with Marawa (sponsored by Kiribati)[20] - The company is in the exploration phase and has not yet obtained an exploitation contract from the ISA, which is required for commercial-scale collection[21] - In November 2022, a pilot test with partner Allseas successfully collected approximately 4,500 tonnes of wet nodules and lifted over 3,000 tonnes 4.3km to the surface, demonstrating the core collection technology[53][70] - TMC has a non-binding MoU with PAMCO of Japan to evaluate toll treatment of 1.3 million tonnes of wet nodules per year starting in 2025, aiming to produce a nickel-copper-cobalt alloy and a manganese silicate product[61][103] Risk Factors The company faces significant risks from regulatory uncertainty, unproven technologies, partner dependence, commodity price volatility, limited operating history, and financial control weaknesses - The business is subject to significant regulatory uncertainty, as the ISA has not yet finalized exploitation regulations for commercial collection. A notice submitted by Nauru obliges the ISA to complete these regulations by July 9, 2023, but delays are possible[171][173] - No seafloor polymetallic nodule deposit has ever been commercially collected, and the company's offshore collection technology and development plans may not be sufficient for commercial-scale operations[199] - The business is substantially dependent on its strategic relationship with Allseas for the development of offshore collection systems. Failure to maintain this relationship or enter into definitive commercial agreements would materially harm the business[233] - Material weaknesses in internal control over financial reporting have been identified. While remediation is underway, these weaknesses could result in misstatements in financial reports and have not been fully remediated as of year-end[168][271][273] - The company is involved in several legal proceedings, including a shareholder class-action lawsuit and litigation against PIPE investors who failed to fund their commitments, which could result in substantial costs[279][280] - The company has a limited operating history, has not generated revenue, and will require significant additional capital to fund its operations and achieve commercialization. There is no assurance that this financing will be available[244][263] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[311] Properties This section details the company's exploration-stage mineral properties in the CCZ, including NORI and TOML contract areas with estimated polymetallic nodule resources NORI Area | NORI Area | Category | Tonnes (Mt wet) | Abundance (wet kg/m²) | Nickel (%) | Copper (%) | Cobalt (%) | Manganese (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | D | Measured | 4 | 18.6 | 1.42 | 1.16 | 0.13 | 32.2 | | D | Indicated | 341 | 17.1 | 1.40 | 1.14 | 0.14 | 31.2 | | D | Measured + Indicated | 345 | 17.1 | 1.40 | 1.14 | 0.14 | 31.2 | | D | Inferred | 11 | 15.6 | 1.38 | 1.14 | 0.12 | 31.0 | | A, B, C | Inferred | 510 | 11.0 | 1.28 | 1.04 | 0.21 | 28.3 | TOML Area | TOML Area | Category | Tonnes (Mt wet) | Abundance (wet kg/m²) | Nickel (%) | Copper (%) | Cobalt (%) | Manganese (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total | Measured | 2.6 | 11.8 | 1.33 | 1.05 | 0.23 | 27.6 | | Total | Indicated | 69.6 | 11.8 | 1.35 | 1.18 | 0.21 | 30.3 | | Total | Measured + Indicated | 72.2 | 11.8 | 1.35 | 1.18 | 0.21 | 30.2 | | Total | Inferred | 696 | 11.3 | 1.29 | 1.14 | 0.20 | 29.0 | - The NORI Area D project has a post-tax Net Present Value (NPV) of $6.8 billion, based on a preliminary economic assessment with a 9% discount rate. This assessment is conceptual and does not demonstrate economic viability[77][410] - The company cautions that mineral resources do not have demonstrated economic value and cannot be assumed to be convertible into mineral reserves until further studies are completed[79][352][463] Legal Proceedings The company is involved in multiple material legal proceedings, including a shareholder class-action lawsuit, litigation against PIPE investors, and an SEC investigation - A putative class action lawsuit was filed against the company and certain executives in October 2021, alleging violations of the Exchange Act by making false or misleading statements. The company denies wrongdoing and has filed a motion to dismiss[497][765] - The company is suing two investors who failed to fund their PIPE commitments from the September 2021 Business Combination[496] - In February 2022, the company received notice of an SEC investigation regarding the 2020 acquisition of Tonga Offshore Mining Limited (TOML) and the Business Combination with SOAC. The company is cooperating with the investigation[498] - In January 2023, another investor from the 2021 PIPE filed a lawsuit alleging breach of the subscription agreement. The company denies the allegations and is preparing a motion to dismiss[499][766] Mine Safety Disclosures This item is not applicable to the company - Not applicable[500] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common shares and public warrants trade on Nasdaq, with 277.9 million shares outstanding as of March 2023, and no equity repurchases in 2022 - Common shares and Public Warrants trade on Nasdaq under symbols "TMC" and "TMCWW"[503] - As of March 24, 2023, there were 277,878,995 common shares outstanding[504] - The company did not repurchase any of its equity securities in 2022[506] Management's Discussion and Analysis of Financial Condition and Results of Operations TMC reported a net loss of $171.0 million in 2022, driven by increased exploration expenses, and relies on financing for liquidity, ending 2022 with $46.8 million cash Comparison of Financial Results (Years Ended Dec 31) | (In thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Exploration and evaluation expenses | $144,599 | $93,006 | 55% | | General and administrative expenses | $29,518 | $56,583 | (48)% | | Loss for the year, after tax | $170,964 | $141,299 | 21% | - Exploration expenses increased by $51.6 million in 2022, primarily due to the recognition of a $69.9 million non-cash expense for the Allseas Warrant vesting upon successful completion of the Pilot Mining Test System (PMTS)[558] - General & Administrative expenses decreased by $27.1 million in 2022, mainly due to lower share-based compensation of $24.8 million compared to 2021, which included significant option awards related to the Business Combination[559] - The company ended 2022 with $46.8 million in cash. It raised $30.4 million in a private placement in August 2022 and secured a new $25 million credit facility with an Allseas affiliate in March 2023[563][571] - Management believes current cash and available credit are sufficient for the next twelve months, but additional financing will be needed to fund continued operations and potential commercialization[567][568] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks including commodity price volatility for key metals, foreign currency exposure, and interest rate fluctuations, with mitigation strategies in place - The company's primary future market risk is commodity price volatility for nickel, copper, manganese, and cobalt, which will be the principal source of future revenue[610] - Foreign currency risk exists due to transactions in CAD, AUD, and GBP, but is mitigated by holding most cash in USD[608] - Interest rate and credit risks are considered low, as cash is held in high-grade short-term deposits and receivables are primarily from the Canadian government[606][607] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2022 and 2021, reflecting its exploration-stage status, significant expenses, and reliance on financing Consolidated Balance Sheet (in thousands) | | As at Dec 31, 2022 | As at Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $94,777 | $133,125 | | Cash | $46,842 | $84,873 | | Exploration contracts | $43,150 | $43,150 | | Total Liabilities | $53,272 | $40,374 | | Accounts payable and accrued liabilities | $41,614 | $26,573 | | Warrants liability | $983 | $3,126 | | Total Equity | $41,505 | $92,751 | Consolidated Statement of Loss (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Exploration and evaluation expenses | $144,599 | $93,006 | | General and administrative expenses | $29,518 | $56,583 | | Operating loss | $174,117 | $149,589 | | Loss for the year, after tax | $170,964 | $141,299 | | Loss per share - Basic and diluted | $0.71 | $0.69 | Consolidated Statement of Cash Flows (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(66,637) | $(56,092) | | Net cash used in investing activities | $(1,169) | $(3,842) | | Net cash provided by financing activities | $29,722 | $134,701 | | Decrease (increase) in cash | $(38,084) | $74,767 | Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2022, due to an un-remediated material weakness in financial reporting controls, despite ongoing remediation efforts - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022, due to an ongoing material weakness in internal control over financial reporting[779] - The material weakness relates to deficiencies in the financial statement close and reporting controls, stemming from the company's prior status as a private entity with limited resources[781] - Remediation efforts in 2022 included appointing a CFO, hiring qualified accounting staff, and engaging external experts. However, management concluded these new controls have not been in operation long enough to be deemed effective[784][785][787] Other Information On March 22, 2023, the company secured a $25 million unsecured credit facility with an Allseas affiliate, enhancing its liquidity - On March 22, 2023, the company secured a credit facility with an affiliate of Allseas, allowing it to borrow up to $25 million[792] PART III Directors, Executive Officers and Corporate Governance The company's board comprises eight directors, mostly independent, with Gerard Barron as Chairman & CEO, supported by four standing committees and robust governance policies - The board is composed of eight directors, with Gerard Barron as Chairman & CEO. Seven of the eight directors are determined to be independent[796][815] - The board has four standing committees: Audit, Compensation, Nominating and Corporate Governance, and Sustainability and Innovation, each with a written charter[816] - The Audit Committee is chaired by Kathleen McAllister, who, along with Andrew Hall, qualifies as an "audit committee financial expert"[818][820] Executive Compensation Executive compensation for NEOs includes base salary, STIP (paid in RSUs for 2022), and LTIP equity awards, detailed in the Summary Compensation Table Summary Compensation Table (2022) | Name and Principal Position | Year | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Gerard Barron, CEO | 2022 | 565,000 | 317,813 | — | 882,813 | | Anthony O'Sullivan, CDO | 2022 | 475,000 | 178,125 | 8,251 | 661,376 | | Craig Shesky, CFO | 2022 | 350,000 | 186,250 | 32,339 | 605,256 | - The 2022 Short-Term Incentive Plan (STIP) bonus was awarded at 75% of target and paid entirely in immediately vested Restricted Share Units (RSUs) to conserve cash[851] - No new stock option or stock awards were granted to NEOs in 2022. The compensation table for 2021 reflects significant stock and option awards granted in connection with the Business Combination[849][851] - Non-employee directors receive an annual cash retainer of $90,000, plus committee fees, and an annual equity grant of RSUs valued at $100,000[896][898] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details beneficial ownership of common shares as of January 2023, highlighting major holders and management's collective ownership, alongside equity compensation plan information Security Ownership of Major Holders and Management (as of Jan 31, 2023) | Name of Beneficial Owner | Percentage of Shares Beneficially Owned (%) | | :--- | :--- | | ERAS Capital | 19.9% | | Allseas Group S.A. | 12.3% | | Maersk Supply Service A/S | 6.4% | | Gerard Barron (CEO) | 7.1% | | Andrei Karkar (Director) | 20.2% | | All Directors and Executive Officers as a Group (12 individuals) | 31.3% | Equity Compensation Plan Information (as of Dec 31, 2022) | Plan category | Securities to be issued upon exercise () | Weighted-average exercise price ($) | Securities remaining available for future issuance () | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 29,955,405 | 1.11 | 35,719,259 | Certain Relationships and Related Transactions, and Director Independence The company discloses related party transactions with Allseas Group S.A., ERAS Capital LLC, and CEO Gerard Barron, with a formal policy for audit committee review and approval - Allseas Group S.A., a major shareholder, participated in both the 2021 and 2022 PIPE financings and is the company's key strategic partner for developing the offshore collection system[915][916][918] - In March 2023, the company entered into a $25 million credit facility with an affiliate of Allseas[921] - CEO Gerard Barron and ERAS Capital LLC (affiliated with director Andrei Karkar) purchased shares in the August 2022 private placement[916] - The company has an adopted policy requiring the audit committee to review and approve or ratify related person transactions exceeding $120,000[929][930][933] Principal Accounting Fees and Services This section details fees paid to Ernst & Young LLP for 2021 and 2022, with all audit and non-audit services pre-approved by the audit committee Accountant Fees (in USD) | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit fees | $555,560 | $705,795 | | Audit-related fees | $17,576 | — | | Tax fees | — | — | | All other fees | — | — | - The audit committee has a pre-approval policy for all audit and non-audit services provided by the independent auditor and has delegated authority to the committee chairperson for interim approvals[943][945] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including key agreements, governance documents, and certifications from the CEO and CFO Form 10-K Summary This item is not applicable - Not applicable[954]