ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion, which has been prepared based on information available to us as of March 31, 2022, provides information that we believe is relevant to an assessment and understanding of our consolidated operating results and financial condition. As a result of the completion of the Recapitalization Transaction, the financial statements of Seller are now the financial statements of the Company. Prior to the Recapitalization Transaction, the Company had no operating assets but, upon consummation of the Recapitalization Transaction, the business and operating assets of Seller sold to the Company became the sole business and operating assets of the Company. Accordingly, the financial statements of Seller and its subsidiaries as they existed prior to the Recapitalization Transaction and reflecting the sole business and operating assets of the Company going forward, are now the financial statements of the Company. The following discussion should be read in conjunction with our other reports filed with the SEC as well as our consolidated financial statements (the "Consolidated Financial Statements") and the notes thereto (the "Notes") included in this Annual Report on Form 10-K for the year ended December 31, 2021 ("2021 Form 10-K"). Terms not defined herein have the same meaning defined elsewhere in this 2021 Form 10-K.
The following MD&A generally discusses our consolidated financial condition and results of operations for 2021 and 2020 and year-to-year comparisons between 2021 and 2020.
Introduction to the Company
We are a U.S.-based gold and silver company that is focused on developing our wholly owned Hycroft Mine in a safe, environmentally responsible, and cost-effective manner. Gold and silver sales represent 100% of our operating revenues and the market prices of gold and silver significantly impact our financial position, operating results, and cash flows. The Hycroft Mine is located in the State of Nevada and the corporate office is located in Winnemucca, Nevada. We recently filed the 2022 Hycroft TRS which contemplates processing gold and silver ore using milling and pressure oxidation to process sulfide ore along with heap leaching to process oxide and transition ore.
As discussed throughout this MD&A, including within the Hycroft Mine section, during the year ended December 31, 2021, while we have been able to achieve or improve on certain of our internal operating, processing, sales and production cost targets, because the Company was operating at a pre-commercial scale until it ceased mining operations in November 2021, it has incurred a net operating loss with negative cash flows before financing activities. Refer to the Liquidity and Capital Resources section of this MD&A for additional details.
Health and Safety
We believe that safety is a core value and we support that belief through our philosophy of safe work performance. Our mandatory mine safety and health programs include employee engagement and ownership of safety performance, accountability, employee and contractor training, risk management, workplace inspection, emergency response, accident investigation, and program auditing. This integrated approach is essential to ensure that our employees, contractors, and visitors operate safely.
During the year ended December 31, 2021, we reported no lost time accidents. The Hycroft Mine’s Total Reportable Injury Frequency Rate ("TRIFR") for the trailing twelve months, is one of the metrics we use to assess safety performance, and it is well below industry averages and significantly below historical levels experienced at the Hycroft Mine. During the year ended December 31, 2021, we continued our critical focus on safety, including allocating additional personnel, resources, workforce time, and communications to mine safety. These actions contributed to a reduction in our TRIFR to approximately 0.64 at December 31, 2021, compared with approximately 2.30 at December 31, 2020, an approximate 80% reduction. We will continue our safety efforts to reach the level of safety we expect and need to keep our workforce, contractors, and visitors safe.
For health and safety actions specific to COVID-19, refer to the Recent Developments section of this MD&A.
Executive Summary
During the year ended December 31, 2021, we operated a conventional ROM heap leach operation at pre-commercial scale using a mix of the Hycroft-owned mining fleet and a rental mining fleet until ceasing mining operations in November 2021 due to cost pressures for many of the reagents and consumables used at the Hycroft Mine, and the timeline for completing our updated technical studies in early 2022. We will continue to produce gold and silver from ore on the leach pads as long as it is economic. When the operation was re-started in 2019, mining oxide and transition ore allowed the Company to pre-strip overburden with some revenue offset to gain access to commercial scale sulfide mineralization. With the change in focus from the two-stage heap oxidation and leach to a milling operation, there is ample time to align the remaining pre-stripping with the start-up of commercial scale sulfide operations. We believe that this action will conserve cash and focus the Company's time and resources on its technical studies for sulfide ore. The metallurgical and variability drill program concluded in Q1 2022 and metallurgical analysis and test work is expected to continue through Q3 2022.
The Company has previously discussed its strategy for developing an economic sulfide process for Hycroft. Based on the Company's findings to-date, including the analysis completed by an independent third-party research laboratory and the independent reviews by two metallurgical consultants, the Company does not believe the novel two-stage sulfide heap oxidation and leach process ("Novel Process"), as currently designed in the 2019 Hycroft TRS, is economic at current metal prices or those metal prices used in the 2019 Hycroft TRS. Subject to the challenges discussed below, we will complete test work that is currently underway and may advance our understanding of the Novel Process in the future.
Following a review of past and recent test work and based on the currently contemplated designs and operating parameters of the alternative sulfide processing methods being studied including the Novel Process, and milling with atmospheric alkaline oxidation or alkaline pressure oxidation ("POX"), the Company, working closely with its industry leading technical consultants, completed pit optimization runs and trade-off analyses comparing the alternative processes which reflected that an Acid POX process has significantly better economics than other processes studied. Therefore, the Company focused its study efforts and resources solely on the Acid POX Initial Assessment which was prepared by Ausenco, with an effective date of February 18, 2022. The Acid POX process included in the 2022 Hycroft TRS is a conventional crushing, grinding, and flotation circuit that generates a concentrate to be fed to an autoclave facility commonly used for refractory gold ores in this region.
2021 Highlights
•Safety - Hycroft’s safety performance was significantly improved with a 0.64 Total Recordable Injury Frequency Rate (TRIFR) at the end of 2021, which was an 80% reduction from 2.30 at the end of 2020. At month end January 2022, the TRIFR improved to a new low of 0.31.
•Production - Gold production for the year ended December 31, 2021, of 57,668 ounces exceeded the high end of the guidance range as the process team continued to improve equipment, process control and costs. Silver production of 355,967 ounces was approximately 20% below guidance due to slower than planned leach kinetics. Processing of ore on leach pads is currently planned to proceed through the second quarter of 2022.
•Cash Position - The Company ended 2021 with $12.3 million of cash on hand and was in compliance with debt covenants.
2021 Development Highlights
•Drill Results - During the 2021 drill program Hycroft encountered positive assay results further supporting the strategy to enhance the deposit through exploration drilling:
◦Higher-grade intercepts from the 2021 drill program returned approximately 102 intercepts (1.5-meter intervals) averaging 4.1 grams per metric ton (“g/t”) or 0.13 ounces per ton (“opt”) gold and 85.3 g/t (2.73 opt) silver.
◦Recent near-surface, higher-grade material was encountered in the Porter area of the deposit with intervals including 3 meters grading 9.13 g/t (0.29 opt) gold and 32.55 g/t (1.04 opt) silver within a larger interval of 19.8 meters grading 1.78 g/t (0.06 opt) gold and 12.85 g/t (0.41 opt) silver (H21C-5568) and 12.2 meters grading 0.68 g/t (0.02 opt) gold and 12.78 g/t (0.41 opt) silver (H21C-5552).
◦Exploration drilling in the Vortex Zone identified gold grades that are up to five times higher than the average Mineral Resource grades at Hycroft of 0.34 g/t (0.011 opt). Significant intercepts previously reported from that drilling included 51.8 meters (170 feet) grading 2.47 g/t (0.08 opt) gold and 25.5 g/t (0.82 opt) silver (H21R-5592) and an additional intercept of 30.5 meters (100 feet) grading 0.71 g/t (0.02 opt) gold and 17.5 g/t (0.56 opt) silver in drill hole H21R-5591.
•Variability Program - The drilling portion of the program concluded in January 2022. The Company completed 12,985 meters of drilling in 62 holes. This generated 92 samples and two bulk samples for variability testing and enhancing information in the metallurgical database. Backlogs in the independent labs due reduced staffing levels associated with the COVID-19 pandemic combined with delayed drilling have adversely impacted the assays and variability work schedule. To date, the Company has received test results for approximately 20% of the samples. Additional test results on the remaining samples are anticipated to be received over the course of the next two quarters, assuming no further delays.
Recent Developments
COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic, which continues to spread throughout the United States with new variants of the virus. Efforts implemented by local and national governments, as well as businesses, including temporary closures, have had adverse impacts on local, national and global economies. We have implemented health and safety policies and protocols for employees, contractors, and visitors that follow guidelines published by the Center for Disease Control (CDC) and the Mine Safety and Health Administration ("MSHA"). During 2021, and the fourth quarter of 2020, our operations were limited by COVID-19 related absences, however the impact while negative, did not materially and adversely affect our operations. The extent of the impact of COVID-19 on our operational and financial performance going forward will depend on certain developments, including but not limited to the duration and continued spread of the outbreak and strand mutations, the availability and use of vaccines, the development of therapeutic drugs and treatments, and the direct and indirect impacts on our employees, vendors, and customers, all of which are uncertain and cannot be fully anticipated or predicted. Since the Hycroft Mine represents the entirety of our operations, any further COVID-19 outbreaks at the mine site or any governmental restrictions implemented to combat the pandemic could result in a partial or an entire shutdown of the Hycroft Mine itself, which would adversely impact our financial position, operating results, and cash flows.
During the year ended December 31, 2021, the site continued to manage COVID-19 control restrictions in accordance with state, national, and CDC guidelines and will continue to monitor and follow those guidelines going forward.
To date, COVID-19 related absences have limited our operations from time-to-time but did not materially disrupt our operations. Additionally, we have not experienced any material disruptions to our supply chain because of COVID-19. However, we can provide no assurance that our operations will not be materially adversely affected by the COVID-19 pandemic in the future that could result from any worsening of the pandemic, the effect of mutating strains, additional outbreaks of the pandemic, actions taken to contain the pandemic’s spread or treat its impact, continued availability of vaccines, and their distribution, acceptance and efficacy, and governmental, business and individual actions taken in response to the pandemic including government-imposed regulations regarding, among other things, COVID-19 testing, vaccine mandates and related workplace restrictions.
Mineral Resource Update
Gold equivalent mineral resources totaled 15.5 million ounces of measured and indicated and 6.9 million ounces of inferred. For this study, IMC developed the Hycroft Mine resource block model which includes data from 1981 to 2018 and includes 5,501 holes, representing 2,482,722 ft of drilling. The current inflationary environment and change in processing technique has resulted in increased cost assumptions and an associated higher cut-off grade partially mitigated by higher recoveries leading to a change in the mineral resource estimate, when compared with the prior model.
The mineral resources were estimated based upon results of the 2022 Hycroft TRS, as conducted in accordance with the Modernization Rules. With the issuance of the 2022 Hycroft TRS reflecting a different mining process, the 2019 Hycroft TRS is superseded and the 2019 Hycroft TRS and information from such 2019 Hycroft TRS should no longer be relied upon.
Private Placement
On March 14, 2022, the Company entered into subscription agreements (the “Subscription Agreements” and each a “Subscription Agreement”) with each of American Multi-Cinema, Inc. (“AMC”) and 2176423 Ontario Limited, an entity affiliated with Eric Sprott (“Sprott” and together with AMC, the “Purchasers”), pursuant to which the Company agreed to sell to the Purchasers, in a private placement, an aggregate of 46,816,480 units (“Units”) at a purchase price per Unit of $1.193, with each Unit consisting of one share of the Company’s Class A common stock, par value $0.0001 per share (“Common Stock”) and one warrant to purchase a share of Common Stock and the shares issuable upon exercise of the Warrants (the
“Warrant Shares”), providing for a total purchase price of approximately $55.9 million (the “Private Placement”). The Warrants issued in the Private Placement have an exercise price of $1.068 per Warrant Share, and will expire five years after issuance.
The closing of the sales of securities pursuant to the Subscription Agreements occurred on March 15, 2022 for gross proceeds to the Company of approximately $55.9 million before deducting expenses incurred in connection with the Private Placement. The Company intends to use the proceeds for general corporate purposes, which may include the repayment, refinancing, redemption or repurchase of existing indebtedness, working capital or capital expenditures and other investments, which may include additional technical evaluations and studies, advancement of the Initial Assessment in the 2022 Hycroft TRS to a pre-feasibility and/or feasibility study and additional exploration at the Hycroft Mine.
The Subscription Agreement with AMC also provided AMC with the right to appoint a director to the Company’s board of directors (the “Board”) and the Company agreed to support such director’s nomination so long as AMC retains at least 50% of the common stock purchased under the Subscription Agreement with AMC.
As part of the Subscription Agreements, the Company is required to prepare and file a resale registration statement with the SEC as soon as practicable, but in no event later than ten (10) business days after the filing of this 2021 Form 10-K to register the Common Stock, Warrants and Warrant Shares for sale under the Securities Act.
Agreement with Sprott Private Resource Lending II (Collector), LP
On November 10, 2021, the Company entered into a waiver with Sprott Private Resource Lending II (Collector) (the "Lender") of certain provisions of the Amended and Restated Credit Agreement effective November 10, 2021 (the "November 2021 Waiver"). Pursuant to the November 2021 Waiver, the Lender has permitted the Company to cease active mining operations and to reduce the amount of Unrestricted Cash required to be maintained by the Company from not less than $10.0 million to not less than $9.0 million for the period ending May 10, 2022
On February 28, 2022 the Company entered into a waiver and amendment agreement with the Lender and Sprott Private Resource Lending II (Co) Inc. (the "February 2022 Waiver and Amendment") amending the previous waiver and require that the Company maintain at least $7.5 million of Unrestricted Cash on the last day of February 2022 and at least $9.0 million on the last day of each month thereafter during the waiver period, waived all obligations of the Company to prepay the facility with the net cash proceeds of any mill asset sales until the earlier of the date on which the Company completes a private placement or other offering or issuance of its equity securities and March 31, 2022, and extended the payment due date for the February additional interest payment and the February principal payment until the earlier of any such offering date and March 31, 2022.
On March 11, 2022, the Company entered into an agreement (the “March 2022 Sprott Agreement”) with the Lender with respect to the Amended and Restated Credit Agreement, dated as of May 29, 2020 (as amended, restated, supplemented or otherwise modified from time to time, the “Sprott Credit Agreement”) among the Company, the Lender, the Guarantors (as defined in the Sprott Credit Agreement) and the other parties thereto. As described in the March 2022 Sprott Agreement, the Company was contemplating the sale or issuance of its equity securities pursuant to one or more transactions to be completed on or before March 31, 2022 (the “Equity Financing Transactions”). Pursuant to the March 2022 Sprott Agreement, if the Equity Financing Transactions result (or are likely to result pursuant to definitive subscription underwriting and/or similar legally binding agreements) in the Company’s receipt of total gross cash proceeds (before deduction of fees and expenses) of at least $50 million on or before March 31, 2022 (the “Required Equity Amount”), the Lender and the Company will amend the principal repayment terms under the Sprott Credit Agreement such that no further scheduled payments of principal shall be required prior to May 31, 2025 (the “Maturity Date”) (i.e., there will be no required regular amortization payments of the Facility (as defined in the Sprott Credit Agreement) and the full principal balance of the Facility shall be due and payable in a single “bullet” payment on the Maturity Date). The consummation of the Private Placement as described under “Private Placement” above satisfied the Required Equity Amount condition in the March 2022 Sprott Agreement.
The March 2022 Sprott Agreement also provides that, in connection with the modification of the required facility amortization payments, the Company shall pay in-kind to the Lender an amount equal to $3.3 million, with such amount to be capitalized and added to the principal amount owing under the Sprott Credit Agreement and accrue interest at the same rate and upon the same terms as the existing loans under the Sprott Credit Agreement; provided, the payment or prepayment of such capitalized principal amount shall not be subject to the Prepayment Premium (as defined in the Sprott Credit Agreement) or any other penalty or premium.
Second Amendment to Sprott Credit Agreement
On March 30, 2022, the Company and Lender under the Sprott Credit Agreement entered into the Second Amended and Restated Credit Agreement dated March 30, 2022 (“Second A&R Agreement”), which (a) extends the maturity date for all of
the loans and other principal obligations under the Sprott Credit Facility by two years, to May 31, 2027; (b) provides for the Company to prepay principal under the facility in the amount of $10.0 million promptly upon the Company’s receipt of cash proceeds from the Private Placement offering with American Multi-Cinema, Inc. and 2176423 Ontario Limited (the “Initial Equity Proceeds Prepayment”); (c) provides for the Company to prepay principal under the Sprott Credit Agreement in the amount of $13.9 million (representing 10% of the subsequent issuance of its equity interests consummated on or prior to March 31, 2022) (the “Subsequent Equity Proceeds Prepayments”); and (d) eliminates the prepayment premiums otherwise payable with respect to the Initial Equity Proceeds Prepayment, the Subsequent Equity Proceeds Prepayments and all future prepayments of principal under the Sprott Credit Facility. In addition, the Company’s obligations to prepay principal with proceeds of asset sales will be credited/offset by the aggregate amount of Initial Equity Proceeds Prepayment and the Subsequent Equity Proceeds Prepayments ($23.9 million), and to maintain a minimum amount of Unrestricted Cash (as defined in the Second A&R Agreement) is increased to $15.0 million. The Company (i) paid the previously deferred additional interest payment of $0.5 million, (ii) made the Initial Equity Proceeds Prepayment of $10.0 million and paid in kind a $3.3 million fee in connection with the modification and capitalized it to principal on March 16, 2022 and (iii) made the Subsequent Equity Proceeds Prepayment of $13.9 million on March 30, 2022; and after giving effect to such prepayments the outstanding principal balance under the Second A&R Agreement is estimated to be $57.9 million (before issuance discounts) including unpaid additional interest of approximately $7.1 million.
At-the-market Offering of Common Shares
On March 15, 2022, the Company implemented an “at-the-market offering” program (“ATM Program”) by entering into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”). Under the terms of the Sales Agreement, the Company may from time to time to or through the Agent, acting as sales agent or principal, offer and sell shares of the Company’s common stock having a gross sales price of up to $500,000,000. The compensation payable to the Agent for sales of shares pursuant to the Sales Agreement was equal to 3.0% of the gross sales price for any shares of common stock sold through the ATM Program by Agent as sales agent under the Sales Agreement. Shares sold under the Sales Agreement, were issued pursuant to the Company’s shelf registration statement on Form S-3 (No. 333-257567) (the “Registration Statement”) that the SEC declared effective on July 13, 2021, including the prospectus, dated July 13, 2021, and the prospectus supplement, dated March 15, 2022.
On March 25, 2022, the Company announced that it had terminated the ATM Program having sold 89,553,602 shares of common stock and generated aggregate gross proceeds before commissions and offering expenses of approximately $138.6 million. Following consummation of all sales under the ATM Program, the Company will have 196,803,459 Shares issued and outstanding.
Amendment to the 10% Senior Secured Notes and Note Exchange Agreement
On March 14, 2022, the Company entered into an amendment to the 10% Senior Secured Notes and Note Exchange Agreement (the “Note Amendment”), with (i) certain direct and indirect subsidiaries of the Company as Guarantors; (ii) holders of the 10% Senior Secured Notes (the "Notes"), including certain funds affiliated with, or managed by, Mudrick Capital Management, L.P, Whitebox Advisors, LLC, Highbridge Capital Management, LLC, Aristeia Highbridge Capital Management, LLC and Wolverine Asset Management, LLC (collectively, the “Amending Holders”), and (iii) Wilmington Trust, National Association, in its capacity as collateral agent. The Note Amendment amends the Note Exchange Agreement dated as of January 13, 2020 (the “Note Exchange Agreement”) and the Notes (as defined in the Note Exchange Agreement) issued thereunder in order to extend the maturity date of the Notes from December 1, 2025 to December 1, 2027. The Note Amendment also removes the requirements that a holder receive the consent of the Company and the other holders in order to transfer any Note. The Amending Holders constitute all of the holders of the Notes. The Note Amendment became effective upon the closing of the Private Placement Offering upon receipt of $55.9 million gross cash proceeds (before deduction of fees and expenses).
Amendment to the Company’s Second Amended and Restated Certificate of Incorporation
On March 11, 2022, the Board approved an amendment to the Company’s Second Amended and Restated Certificate of Incorporation increasing the number of authorized shares of the Company’s Class A common stock by 1,000,000,000 to a total of 1,400,000,000 (the “Certificate of Incorporation Amendment”) and directed that the Certificate of Incorporation Amendment be submitted for consideration by the stockholders of the Corporation. On March 15, 2022, AMC, Sprott, and entities affiliated with Mudrick Capital Management LP, who together constituted the holders of a majority of the Common Stock, approved the Certificate of Incorporation Amendment by written consent. The Certificate of Incorporation Amendment will not become effective until 20 days after the Company distributes an Information Statement on Schedule 14C to the stockholders of the
Company. The Company expects to commence mailing of the Information Statement on Schedule 14C to the stockholders of the Company on or about April 1, 2022.
2022 Outlook
Our current operating plan is to: (i) operate safely as we continue to process heap leach inventory until it is no longer economic; (ii) complete the metallurgical test work associated with the variability drilling program; (iii) conduct exploration activities and targeted exploration drilling; and (iv) continue to advance the Acid POX technical study to a pre-feasibility or feasibility level.
Technical Activities
During 2021, we continued to work alongside our industry leading consultants to provide additional and expanded information on the ore body and investigate opportunities for improvements in operating parameters for commercial scale operations at the Hycroft Mine. This information is critical in understanding the mineralogical properties of the deposit and ultimately the most economic processing technology for the various ore domains. Accordingly, we developed an approximate $10 million program for drilling and additional metallurgical and mineralogical studies in 2021 and early 2022. The drilling program was completed in January 2022, and the metallurgical test work portion of the program is expected to be completed in the early third quarter of 2022. Lab testing continues to be challenged by labor shortages and equipment availability. As of December 31, 2021, we have spent $7.3 million under the program.
Ongoing and future technical work for the Hycroft Mine will be primarily focused on the Acid POX milling for processing sulfide ore and completing the variability and metallurgical test work. We also plan to evaluate exploration opportunities targeting higher ore grades and expect to continue to advance the Novel Process as time and resources permit.
•Exploration – We have identified exploration drilling opportunities to follow up on higher grade areas that would benefit from expanded drilling in order to convert inferred blocks to measured or indicated blocks, and areas that are prospective for higher grade material. We currently have plans to opportunistically and cost effectively drill these areas as we have drilling capacity with the drill rigs that were contracted to complete the variability drilling program.
•Mill sulfide processing options – While our technical team continued to progress and develop an understanding of the requirements for implementing the Novel Process on a commercial scale, we received a completed peer reviewed report in the fourth quarter 2021 from one of our independent technical consultants stating that, for reasons outlined below as well as increased commodity costs, it did not appear that the proprietary two-stage oxidation and leaching process as detailed in the 2019 Hycroft TRS, will be economic as designed at current metal prices or those metal prices used in the 2019 Hycroft TRS. Based on scoping level economic analyses on multiple processing options completed by our technical team, together with independent engineering firms and consultants and on the currently contemplated designs and operating parameters of the alternative sulfide milling processes being studied, we completed pit optimization runs comparing the alternative processes. The comparative analysis indicated that using an Acid POX process should be significantly more economic than the alternatives. Therefore, we used the test results and documented recoveries from the Acid POX process in the financial determination of the mineral resource. These are documented in the 2022 Hycroft TRS.
•Two-stage sulfide heap oxidation and leach process – As a result of challenges to consistently achieve targeted oxidation and recoveries from the Novel Process, our new technical and operating team, together with our industry leading metallurgical consultants, initiated detailed reviews of the technical information and prior work. We also had fresh samples of material from our Brimstone deposit metallurgically tested and launched a $10.0 million expanded variability drilling and metallurgical test program in late Q1 2021. While the variability metallurgical test work is ongoing, the information to date supports our view that milling is likely the preferred method of processing sulfide ores at the Hycroft Mine. Additionally, while the chemistry of the two-stage sulfide oxidation and leach process has been confirmed, the commercial scale application of the process as currently understood will be economically challenged due to:
◦Higher operating costs - In the field work on the pre-commercial test pads, higher levels of soda ash were being applied to oxidize the transitional ore, and inconsistencies in achieving the targeted oxidation levels across the ore body. The test work has confirmed soda ash consumption is significantly higher than what was estimated in the 2019 Hycroft TRS. Moreover, the cost of soda ash and other reagents has increased substantially since 2019, which will negatively impact operating costs;
◦Higher capital costs - We identified a number of critical areas that had not been previously addressed in the 2019 Hycroft TRS. These included 1) the logistical placement of large volumes of new ROM material at the same time there is removal of material for preparation of the second stage, 2) the implementation of on/off pads to avoid comingling solutions on the leach pads, 3) addition of a material handling system, 4) an additional amalgamation circuit, and 5) an additional forced air injection pumping system. As a result, the necessary capital costs were expected to be materially higher than previously reported. Additionally, working capital was projected to be higher due to slower oxidation rates for some ores;
◦Lower recoveries on some ores - After reviewing all the column tests and considering additional factors in measuring oxidation and recovery rates, we were not able to consistently replicate a strong correlation between oxidation rates and gold recoveries. We believe that more test work is required before implementing this process in a commercial setting; and
◦Finer crush size will be required - After reviewing all the column tests and considering additional factors in measuring oxidation and recovery rates, we were not able to consistently replicate a strong correlation between oxidation rates and gold recoveries. We believe that more test work is required before implementing this process in a commercial setting.
We currently believe that more test and development work is required to demonstrate that the Novel Process can be applied successfully on a commercial scale and the analysis to date indicates the process may not be amenable to all ore domains at the Hycroft Mine. For the near term, we currently plan to complete the following test work which is important and will benefit all processing methods for the Hycroft Mine:
•Column test work - Column tests are being performed on sulfide ores mined during the year ended December 31, 2021. These column tests will provide additional information for the Novel Process.
•Variability test work - The variability test work that is underway is necessary for all commercial scale sulfide processing options. The test work includes a suite of laboratory tests designed to:
◦understand the metallurgical characteristics of each geologic domain and their amenability to various processing technologies;
◦understand the metallurgical characteristics of sulfide material below the water table;
◦understand the role other minerals may play in the overall oxidation process;
◦determine amenability to oxidation in each geologic domain; and
◦establish a relationship between oxidation levels and gold recoveries across each geologic domain.
Hycroft Mine
Operations
The following table provides a summary of operating results for the Hycroft Mine:
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 |
| Ore mined - sulfide stockpile | (ktons) | | 1,505 | | — |
| Ore mined - crusher feed | (ktons) | | — | | 4,941 |
| Ore mined - ROM | (ktons) | | 6,853 | | 1,873 |
| Total ore mined | (ktons) | | 8,358 | | 6,814 |
| Waste mined | (ktons) | | 4,934 | | 4,815 |
| Total mined | (ktons) | | 13,292 | | 11,629 |
| | | | | |
| Waste tons to ore tons strip ratio | (#) | | 0.59 | | 0.71 |
| | | | | |
| Ore grade mined - gold | (oz/ton) | | 0.014 | | 0.014 |
| Ore grade mined - silver | (oz/ton) | | 0.425 | | 0.261 |
| | | | | |
| Production - gold | (oz) | | 57,668 | | 27,392 |
| Production - silver | (oz) | | 355,967 | | 178,836 |
| | | | | |
| Ounces sold - gold | (oz) | | 56,045 | | 24,892 |
| Ounces sold - silver | (oz) | | 397,546 | | 136,238 |
| | | | | |
| Average realized sales price - gold | ($/oz) | | $ | 1,794 | | | $ | 1,779 | |
| Average realized sales price - silver | ($/oz) | | $ | 25.66 | | | $ | 20.30 | |
As reflected above, tons mined, ounces produced, ounces sold and average realized prices increased during the year ended December 31, 2021, compared with the same period of the prior year due to higher tons mined in 2021. The average price increased during the year ended December 31, 2021 consistent with the increase in the spot price of gold compared with the same period of the prior year. As planned for 2021, all mined ore was routed to the leach pad as ROM and sulfide ore encountered was stockpiled. Due to the ROM plan for 2021, the crusher did not operate during the year.
Production and sales for the year ended 2021 increased over the comparable 2020 period due to increased quantities of ROM ounces placed during 2021. The gold and silver ounces produced in the year ended December 31, 2021 resulted from continued leach production of inventory ounces added to the leach pad in 2020, additional ounces placed under leach from mining in 2021, higher leach solution flows to the pad, and improved flows and recovery performance from the Brimstone plant.
Results of Operations
Revenues
Gold revenue
The table below summarizes gold sales, ounces sold and average realized prices for the following periods (dollars in thousands, except per ounce amounts):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Gold revenue | $ | 100,532 | | | $ | 44,279 | |
| Gold ounces sold | 56,045 | | | 24,892 | |
| Average realized price (per ounce) | $ | 1,794 | | | $ | 1,779 | |
During the year ended December 31, 2021, gold revenue was $100.5 million compared to $44.3 million for the comparable period of 2020. The significant increase in revenue during 2021 was attributable to the mine having more ore under leach as mining and processing operations increased beginning in the second quarter of 2020, resulting in higher production-related inventory balances and gold revenue during the year ended December 31, 2021. Gold revenue was also adversely affected during the year ended December 31, 2020 due to lower gold ounces available for sale as a result of write-downs of recoverable gold ounces on the leach pads (see Note 4 - Inventories and Ore on Leach Pads to the Notes to the Consolidated Financial Statements).
Silver revenue
The table below summarizes silver sales, ounces sold and average realized prices for the following periods (dollars in thousands, except per ounce amounts):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Silver revenue | $ | 10,202 | | | $ | 2,765 | |
| Silver ounces sold | 397,546 | | | 136,238 | |
| Average realized price (per ounce) | $ | 25.66 | | | $ | 20.30 | |
During the year ended December 31, 2021, silver revenue was $10.2 million compared to $2.8 million for the comparable period of 2020. Similar to gold revenue, the increase in silver revenue during 2021 was attributable to the mine having more ore under leach as compared to the same 2020 period. During the year ended December 31, 2021, we also benefited from favorable silver prices, which were more than $5 per ounce higher compared to the same period of 2020. Silver revenue was also adversely affected during the year ended December 31, 2020 due to lower silver ounces available for sale as a result of write-downs of recoverable ounces on the leach pads.
Total cost of sales
Total cost of sales consists of Production costs, Depreciation and amortization, Mine site period costs, and Write-down of inventories. The table below summarizes total cost of sales for the following periods (dollars in thousands):
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| Production costs | | $ | 102,750 | | | $ | 41,688 | |
| Depreciation and amortization | | 8,544 | | | 2,894 | |
| Mine site period costs | | 38,166 | | | 47,115 | |
| Write-down of inventories | | 13,878 | | | 17,924 | |
| Total cost of sales | | $ | 163,338 | | | $ | 109,621 | |
Production costs
For the year ended December 31, 2021, we recognized $102.8 million in Production costs, or $1,833 per ounce of gold sold, compared to $41.7 million or $1,675 per ounce of gold sold during the same period of 2020. The increase in Production costs was primarily due to a respective increase in the sales volumes of gold and silver of 31,153 and 261,308 ounces sold, respectively, at a higher average inventory cost per ounce during the year ended December 31, 2021 compared to the same period of 2020. As discussed in the below Mine site period costs section, throughout 2021 and 2020, a high operating cost structure at current levels of production has resulted in Mine site period costs to adjust ending inventory values of gold that approximate the net realizable value per ounce of gold (after considering future costs to complete and sell) as determined in accordance with our accounting policies. Accordingly, production costs per ounce of gold sold has been partially limited by the impact of recognizing Mine site period costs, which lowers the carrying value of production-related inventories. Reductions in the spot price of gold at the reporting periods as compared to prior reporting periods can result in additional Mine site period costs.
Depreciation and amortization
Depreciation and amortization was $8.5 million, or $152 per ounce of gold sold, for the year ended December 31, 2021 compared to $2.9 million, or $116 per ounce of gold sold, during the same periods of 2020. The increase in total depreciation and amortization costs per ounce of gold sold was largely due to an increase of 31,153 gold ounces sold during the year ended December 31, 2021 compared to the same period of 2020.
Mine site period costs
During the year ended December 31, 2021, inclusive of depreciation and amortization, we recorded $38.2 million of Mine site period costs for costs that were in excess of the net realizable value per ounce of gold inventories, compared to $47.1 million during the same period of 2020. Such period costs are generally the result of costs related to activities at the Hycroft Mine that do not qualify for capitalization to production-related inventories or adjustments to production inventories that are the result of recurring or significant downtime or delays, unusually high levels of repairs, inefficient operations, overuse of processing reagents, inefficient cost-volume structures, or other unusual costs and activities, and cannot be recorded to production-related inventories based on the threshold established by the calculation of the estimated net realizable value per ounce of gold.
Write-down of inventories
We recorded a Write-down of inventories of $13.9 million for the year ended December 31, 2021 related to the following:
•A write-down of the non-current portion of Ore on leach pads of $5.5 million for Production costs and $0.4 million of capitalized depreciation and amortization costs related to 3,612 ounces of gold contained in the over liner material on the new larger leach pad which the Company began constructing in 2020. As the 2022 Hycroft TRS does not include proven and probable reserves, it was determined that the recoverability of these ounces is dependent upon additional work and technical studies and, as a result, it was determined that the ounces and related capitalized amounts should be written-off.
•A write-down of Inventories of $5.9 million for obsolete and slow moving materials and supplies inventories. As a result of ceasing mining operations, it was determined that certain materials and supplies were not expected to be used in the next 12 months and, accordingly, a reserve was placed against these items.
•A loss of $2.1 million related to a firm purchase commitment for crusher liners that the Company agreed to purchase under consignment over a period of three years beginning in August 2020. This loss relates to the unfulfilled commitment obligation and has been reduced to reflect the Company's negotiated settlement with the supplier.
As discussed in Note 4 - Inventories and Ore on Leach Pads to the Notes to the Consolidated Financial Statements, based on metallurgical balancing results, during the year ended December 31, 2020, we determined that 10,492 ounces of gold that had been placed on the leach pads were no longer recoverable and recognized $17.9 million of Write-down of inventories on the Consolidated Statements of Operations, which included production costs of $16.7 million, and capitalized depreciation and amortization costs of $1.2 million, respectively.
General and administrative
General and administrative totaled $14.6 million during the year ended December 31, 2021 compared to $21.1 million during the year ended December 31, 2020. The decrease of $6.4 million during the year ended December 31, 2021 was primarily due to decreases in: (i) salary and compensation costs of $6.2 million; (ii) insurance costs of $1.2 million; partially offset by increases in: (i) legal, professional, and consulting fees associated with general corporate matters and obligations as a public company of $0.4 million; and (ii) director compensation for the members of our committees created upon becoming a public company of $0.5 million.
Projects, exploration and development
During the year ended December 31, 2021, Projects, exploration and development costs totaled $13.6 million and were related to the following activities: (i) analyzing established feasibility studies; (ii) conducting geological studies; (iii) oversight and project management; and (iv) exploration drilling, engineering, and metallurgical activities. Upon determining that the 2019 Hycroft TRS was not likely to be economic, we determined that previously capitalized mine development costs related to the 2019 Hycroft TRS no longer qualified for capitalization. As a result we recorded an impairment charge of $6.7 million for the previously capitalized amounts that was included in Projects, exploration and development during the year ended December 31, 2021. We did not incur any such costs during the year ended December 31, 2020.
Write-off of deposit
During the year ended December 31, 2021, the Company determined that additional equipment was no longer expected to be purchased under the current mine plan. Accordingly, a full reserve was applied against the $0.9 million deposit previously paid by the Company to an equipment supplier. Refer to Note 5 - Prepaids and Other, Net to the Notes to the Consolidated Financial Statements for further detail.
Accretion
We recorded $0.4 million of Accretion during both of the years ended December 31, 2021 and 2020, which related to our Asset retirement obligation and future reclamation costs. Refer to Note 13 - Asset Retirement Obligation to the Notes to the Consolidated Financial Statements for further detail.
Interest expense, net of capitalized interest
As discussed and detailed in Note 10 - Debt, Net to the Notes to the Consolidated Financial Statements, Interest expense, net of capitalized interest totaled $20.6 million during the year ended December 31, 2021 compared to $43.5 million during the same period in 2020. The decrease of $23.0 million during the year ended December 31, 2021 was a result of completing the Recapitalization Transaction on May 29, 2020, which caused the exchange or conversion of the majority of Seller's $627.8 million outstanding indebtedness to equity, thus resulting in post-Recapitalization Transaction indebtedness totaling $159.8 million for the Sprott Credit Agreement and Subordinated Notes.
Fair value adjustments to warrants
During the year ended December 31, 2021, the Fair value adjustments to warrants resulted in a non-cash gain $14.4 million as the market trading values of our publicly listed warrants decreased, which was primarily due to a decrease in the underlying trading price of our common shares. We did not incur any such warrant adjustment during the year ended December 31, 2020. Refer to Note 12 - Warrant Liabilities to the Notes to the Consolidated Financial Statements for further detail.
Interest income
Interest income totaled approximately $Nil during the year ended December 31, 2021 compared with $0.2 million during the year ended December 31, 2020. During the second quarter of 2021, the Company replaced certain surety bonds with new surety bonds with lower cash collateral requirements, in which none of the accounts holding the cash collateral earns interest income, resulting in no Interest income for the year ended December 31, 2021.
Income taxes
During the year ended December 31, 2021, we recognized an income tax benefit of $1.5 million which was the result of the Company carrying back its net operating losses to periods that the Company paid income tax prior to the Recapitalization Transaction. There was no income tax benefit or expense, net, recognized during the year ended December 31, 2020. We have not recorded any future income tax benefits for net losses generated after the completion of the Recapitalization Transaction, due to a full valuation allowance recorded against our net operating loss carryforward earned after the Recapitalization Transaction. For additional details, refer to Note 17 - Income Taxes to the Notes to the Consolidated Financial Statements.
Net loss
For the reasons discussed above, we recorded a net loss of $88.6 million for the year ended December 31, 2021, respectively, which included a gain from Fair value adjustments to warrants of $14.4 million, compared to a net loss of $136.4 million for the year ended December 31, 2020.
Liquidity and Capital Resources
General
The Company's unrestricted cash position at December 31, 2021 was $12.3 million as compared with $56.4 million at December 31, 2020. While the Company plans to continue processing gold and silver ore on the leach pads after ceasing mining operations for the pre-commercial scale ROM operation and partially offset the cash that is projected to be used in operations and investing activities, we do not expect to generate net positive cash for the foreseeable future. Accordingly, we will be dependent on our unrestricted cash and other sources of cash to fund our business. As discussed in Note 25 - Subsequent Events in the Notes to the Consolidated Financial Statements, the Company raised gross proceeds of approximately $194.4 million in March 2022, before deduction of commissions and expenses, through the following equity financings:
•On March 14, 2022, the Company entered into the Subscription Agreements with two private investors pursuant to which the Company sold on March 15, 2022 an aggregate of 46,816,480 units, each unit consisting of one share of common stock and one warrant to purchase one share of common stock, at a purchase price of $1.193 per unit for total gross proceeds of $55.9 million.
•On March 15, 2022, the Company implemented an at-the-market offering program pursuant to which the Company has registered the offer and sale from time to time of its common stock have an aggregate offering price of up to $500.0 million of gross proceeds. The Company terminated the ATM Program on March 25, 2022 and announced that it had
sold 89,553,602 shares of common stock under the ATM Program and generated aggregate gross proceeds before commissions and offering expenses of approximately $138.6 million.
In addition, the Company will continue to evaluate alternatives to raise additional capital necessary to fund the future development of the Hycroft Mine and will continue to explore other strategic initiatives to enhance stockholder value.
Historically, the Company has been dependent on various forms of debt and equity financing to fund its business. While the Company has been successful in the past raising funds through equity and debt financings, no assurance can be given that additional financing will be available to it in amounts sufficient to meet the Company’s needs or on terms acceptable to the Company. In the event that funds are not available, the Company may be required to materially change its business plans.
To avoid potential non-compliance with the Sprott Credit Agreement, the Company obtained a series of waivers and entered into amendments to the Sprott Credit Agreement. Please see Debt Covenants below and Note 25 - Subsequent Events in the Notes to the Consolidated Financial Statements for information regarding additional waivers received and modifications to the Sprott Credit Agreement.
Our future liquidity and capital resources management strategy entails a disciplined approach to monitor the timing and depth of any drilling, metallurgical and mineralogical studies and the continuation of processing the remaining leach pad inventory while attempting to remain in a position that allows us to respond to changes in our business environment, such as a decrease in metal prices or lower than forecasted future cash flows, and changes in other factors beyond our control. We have undertaken efforts aimed at managing our liquidity and preserving our capital resources by, among other things: (i) monitoring metal prices and the impacts (near-term and future) they have on our business and cash flows; (ii) ceasing open pit mining operations to reduce net cash outflows while continuing to process leach pad inventory until such time as it is no longer economic; (iii) reducing the size of our workforce to reflect the cessation of mining operations; (iv) controlling our working capital and managing discretionary spending; (v) reviewing contractor usage and rental agreements for more economic options, including termination of certain agreements in accordance with their terms; (vi) decreasing restricted cash balances that collateralize bonds, as available; and (vii) planning the timing and amounts of capital expenditures and drilling, metallurgical and mineralogical study costs at the Hycroft Mine and deferring such items that are not expected to benefit our near term operating plans. We have undertaken and continue to undertake additional efforts to: (i) monetize non-core assets and excess materials and supplies inventories; (ii) return excess rental and leased equipment; (iii) sell certain uninstalled grinding mills that are not expected to be needed for a future milling operation; (iv) selling other uninstalled grinding mills if the proceeds contribute to enhancing a future milling operation; and (v) work with existing debt holders to adjust debt service requirements. In addition, as of October 6, 2021, we entered into an agreement with Randy Buffington, our former Chairman, President and Chief Executive Officer to terminate $0.7 million in aggregate future cash payments in exchange for the termination of the remainder of his restrictive covenant of non-competition and issuance of up to 275,000 shares of our common stock.
Cash and liquidity
We have placed substantially all of our cash in operating accounts with a well-capitalized financial institution, thereby ensuring balances remain readily available. Due to the nature of our operations and the composition of our current assets, our Cash, Accounts receivable, and metal in Inventories represent substantially all of our liquid assets on hand. Additionally, we are provided with additional liquidity as ounces are recovered from the Ore on leach pads, processed into finished goods, and sold at prevailing spot prices to our customers.
The following table summarizes our projected sources of future liquidity, as recorded within the Consolidated Financial Statements (dollars in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Cash | $ | 12,342 | | | $ | 56,363 | |
| Accounts receivable | — | | | 426 | |
Metal in Inventories(1) | 6,693 | | | 6,418 | |
Ore on leach pads(2) | 10,106 | | | 38,041 | |
| Total projected sources of future liquidity | $ | 29,141 | | | $ | 101,248 | |
(1)Metal in Inventories,contained approximately 3,849 recoverable ounces of gold that are expected to be sold within the next nine months. Assuming a gold selling price of $1,806 per ounce (the December 31, 2021 P.M. fix) and excluding any proceeds from silver sales, the sale of all gold ounces estimated to be recovered from our metal inventories would provide us with $7.0 million of revenue. See Note 4 - Inventories and Ore on Leach Pads to the Notes to the Consolidated Financial Statements for additional information.
(2)The current portion of Ore on leach pads contained approximately 7,130 ounces of gold that are expected to be processed into finished goods and then sold within the next 12 months. Assuming a gold selling price of $1,806 per ounce (the December 31, 2021 P.M. fix) and excluding any proceeds from silver sales, the sale of all gold ounces estimated to be recovered from our ore on leach pads would provide us with $12.9 million of revenue. See Note 4 - Inventories and Ore on Leach Pads to the Notes to the Consolidated Financial Statements for additional information.
The year ended December 31, 2021 compared to the year ended December 31, 2020
The following table summarizes our sources and uses of cash for the following periods (dollars in thousands):
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| | |
| Net loss | | $ | (88,564) | | | $ | (136,392) | |
| Net non-cash adjustments | | 30,829 | | | 76,809 | |
| Net change in operating assets and liabilities | | 20,697 | | | (50,925) | |
| Net cash used in operating activities | | (37,038) | | | (110,508) | |
| Net cash used in investing activities | | (6,873) | | | (31,124) | |
| Net cash (used in) provided by financing activities | | (5,494) | | | 188,705 | |
| Net (decrease) increase in cash | | (49,405) | | | 47,073 | |
| Cash and restricted cash, beginning of period | | 96,040 | | | 48,967 | |
| Cash and restricted cash, end of period | | $ | 46,635 | | | $ | 96,040 | |
Cash used in operating activities
During the year ended December 31, 2021, we used $37.0 million of cash in operating activities primarily attributable to a net loss of $88.6 million, the cash impact of net loss was equal to $57.7 million, and $20.7 million provided by working capital, which included $29.0 million used to increase production-related inventories. The largest non-cash items included in net income during the year ended December 31, 2021 included Impairment charges of $17.3 million related to the Write-down of inventories and Impairment on equipment not in use, a $14.4 million gain from Fair value adjustments to warrants and Non-cash portion of interest expense of $16.8 million.
For the year ended December 31, 2020, we used $110.5 million of cash for operating activities primarily attributable to a net loss of $136.4 million, the cash impact of net loss was equal to $59.6 million, and $50.9 million used for working capital, including the operational ramp up following the 2019 restart of the Hycroft Mine using a net $43.8 million to increase production-related inventory balances. Cash outflows during the year ended December 31, 2020 were partially offset by certain non-cash expenses included in Net loss, including $38.8 million of non-cash interest expense and a $17.9 million Write-down of inventories
Cash used in investing activities
For the year ended December 31, 2021 and 2020, we used $6.9 million and $31.1 million, respectively, in investing activities. For the year ended December 31, 2021, expenditures included (i) $2.7 million for purchased equipment and refurbishments; (ii) $2.5 million spent for the leach pad expansion project (which excludes $0.7 million of capitalized interest) to complete construction to the appropriate point in which we believe there would be minimal risk of adverse impacts to the leach pad. For the year ended December 31, 2020, the majority of the capital expenditures related to construction of new leach pad space.
Cash (used in) provided by financing activities
During the year ended December 31, 2021 we repaid $5.4 million of the Additional Interest and principal which is classified as debt under the terms of our Sprott Credit Agreement. Cash provided by financing activities was $188.7 million for the year ended December 31, 2020, which included proceeds from financing instruments consummated in connection with the Recapitalization Transaction of $254.8 million, offset by principal payments on debt of $132.4 million and payments for legal and consulting fees related to the Recapitalization Transaction of $16.1 million.
Future capital and cash requirements
The following table provides our gross contractual cash obligations as of December 31, 2021, which are grouped in the same manner as they were classified in the cash flows in order to provide a better understanding of the nature of the obligations and to provide a basis for comparison to historical information. We believe the following provides the most meaningful presentation of near-term obligations expected to be satisfied using current and available sources of liquidity (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total | | Less than
1 Year | | 1 - 3
Years | | 3 - 5
Years | | More than
5 Years |
| |
| Operating activities: | | | | | | | | | |
Net smelter royalty(1) | $ | 241,229 | | | $ | 229 | | | $ | — | | | $ | — | | | $ | 241,000 | |
Remediation and reclamation expenditures(2) | 70,100 | | | — | | | — | | | — | | | 70,100 | |
Interest payments(3) | 10,115 | | | 5,730 | | | 4,383 | | | 2 | | | — | |
Crofoot royalty(4) | 4,630 | | | — | | | — | | | — | | | 4,630 | |
| Financing activities: | | | | | | | | | |
Repayments of debt principal(5) | 209,676 | | | 15,157 | | | 56,594 | | | 137,925 | | | — | |
Additional interest payments(6) | 7,699 | | | 2,200 | | | 5,499 | | | — | | | — | |
| Total | $ | 543,449 | | | $ | 23,316 | | | $ | 66,476 | | | $ | 137,927 | | | $ | 315,730 | |
(1)Under the Sprott Royalty Agreement, we are required to pay a perpetual royalty equal to 1.5% of the Net Smelter Returns from our Hycroft Mine, payable monthly that also includes an additional amount for withholding taxes payable by Sprott. Amounts presented above incorporate estimates of our current life-of-mine plan, and are based on consensus pricing for gold and silver. See Note 11 - Deferred Gain on Sale of Royalty to the Notes to the Consolidated Financial Statements for additional information.
(2)Mining operations are subject to extensive environmental regulations in the jurisdictions in which they are conducted and we are required, upon cessation of operations, to reclaim and remediate the lands that our operations have disturbed. The estimated undiscounted cash outflows of these remediation and reclamation obligations are reflected here. In the above presentation, no offset has been applied for the $59.3 million of our reclamation bonds or for the $34.3 million of cash collateral for those bonds included in Restricted Cash. See Note 7 - Restricted Cash to the Notes to the Consolidated Financial Statements for additional information.
(3)Under the Sprott Credit Agreement, we were required to pay interest beginning in the 13th month after the initial advance on May 29, 2020 to Sprott Private Resource Lending II (Collector), LP.
(4)We are required to pay a 4% net profits royalty, including advance minimum royalty payments of $120,000 in any year where mining occurs on the Crofoot claims and an additional minimum royalty of $120,000 if tons mined from the Crofoot claim blocks exceed 5.0 million tons. See Note 23 - Commitments and Contingencies to the Notes to the Consolidated Financial Statements. Amounts shown represent our current estimates of cash payment timing using consensus pricing for gold and silver.
(5)Repayments of principal on debt consists of amounts due under the Sprott Credit Agreement, the Subordinated Notes and notes payable for equipment purchases. Included in the repayment of the Subordinated Notes principal is interest that has been capitalized as payable in-kind on a quarterly basis, and on a monthly basis for the Sprott Credit Agreement for the first 12 months after the initial advance.
(6)Additional interest payments consist of repayments of additional interest under the Sprott Credit Agreement, commencing February 28, 2021 (with the first cash payment due three months after such date) and ending on the maturity date.
Debt covenants
Our debt agreements contain representations and warranties, events of default, restrictions and limitations, reporting requirements, and covenants that are customary for agreements of these types.
The Sprott Credit Agreement contains covenants that, among other things, restrict or limit the ability of the Company to enter into encumbrances (other than Permitted Encumbrances), incur indebtedness (other than Permitted Indebtedness), dispose of its assets (other than Permitted Disposals), pay dividends, and purchase or redeem shares, as such terms are defined in the Sprott Credit Agreement. The Sprott Credit Agreement requires the Company to ensure that, at all times, both its Working Capital and Unrestricted Cash are at least $10.0 million (subsequently reduced by the Waiver and Waiver Amendment discussed below), as such terms are defined in the Sprott Credit Agreement, and that at least every six months we demonstrate our ability to repay and meet all present and future obligations as they become due with a financial Model that uses consensus gold prices discounted by 5.0%, as such terms are defined in the Sprott Credit Agreement. The Subordinated Notes (as defined herein) include customary events of default, including those relating to a failure to pay principal or interest, a breach of a covenant, representation or warranty, a cross-default to other indebtedness, and non-compliance with security documents. As of December 31, 2021, the Company was in compliance with all covenants under its debt agreements.
On November 9, 2021, we entered into the November 2021 Waiver with Sprott Private Resource Lending II (Collector), LP (the “Lender”) of certain provisions of the Sprott Credit Agreement. Pursuant to the Waiver, the Lender has: (i) permitted the Company to cease active mining operations; and (ii) to reduce the amount of Unrestricted Cash required to be maintained by the Company from not less than $10.0 million to not less than $9.0 million for the period ending May 10, 2022.
Additionally, on February 28, 2022, we entered into the February 2022 Waiver and Amendment with the Lender of certain provisions of the Sprott Credit Agreement and the November 2021 Waiver. Pursuant to the February 2022 Waiver and Amendment, the Lender has (i) waived the Company’s obligation under the Sprott Credit Agreement to maintain at least $9.0 million of Unrestricted Cash on the last day of each calendar month during the period ending May 10, 2022 (the “Waiver Period”), provided that, the Company maintains at least $7.5 million of Unrestricted Cash on the last day of February 2022 and at least $9.0 million on the last day of each month thereafter during the Waiver Period; (ii) waived all obligations of the Company to prepay the facility with the net cash proceeds of any Mill Asset Sales (as defined in the Waiver and Amendment) until the earlier of (A) the date on which the Company completes a private placement or other offering or issuance of its equity securities (the “Offering Date”) and (B) March 31, 2022; and (iii) extended the payment due date for the additional February interest payment and the February principal payment pursuant to the Credit Agreement until the earlier of (A) the Offering Date and (B) March 31, 2022. Further, pursuant to the February 2022 Waiver and Amendment, any failure by the Company to comply with the terms of the preceding sentence shall constitute an immediate Event of Default under the Credit Agreement.
On March 11, 2022, the Company entered into the March 2022 Sprott Agreement with the Lender with respect to the Sprott Credit Agreement. As described in the March 2022 Sprott Agreement, the Company was contemplating the sale or issuance of its equity securities pursuant to one or more transactions to be completed on or before March 31, 2022 (the “Equity Financing Transactions”). Pursuant to the March 2022 Sprott Agreement, if the Equity Financing Transactions result (or are likely to result pursuant to definitive subscription underwriting and/or similar legally binding agreements) in the Company’s receipt of total gross cash proceeds (before deduction of fees and expenses) of at least $50 million on or before March 31, 2022 (the “Required Equity Amount”), the Lender and the Company will amend the principal repayment terms under the Credit Agreement such that no further scheduled payments of principal shall be required prior to May 31, 2025 (the “Maturity Date”) (i.e., there will be no required regular amortization payments of the Facility (as defined in the Credit Agreement) and the full principal balance of the Facility shall be due and payable in a single “bullet” payment on the Maturity Date). The consummation of the Private Placement Offering of Company securities as described under “Private Placement” above satisfied the condition in the March 2022 Sprott Agreement.
The March 2022 Sprott Agreement also provides that, in connection with the modification of the required facility amortization payments, the Company shall pay to the Lender an amount equal to $3.3 million, with such payment to be capitalized and added to the principal amount owing under the Sprott Credit Agreement and accrue interest at the same rate and upon the same terms as the existing loans under the Sprott Credit Agreement; provided, the payment or prepayment of such capitalized principal amount shall not be subject to the Prepayment Premium (as defined in the Sprott Credit Agreement) or any other penalty or premium.
On March 14, 2022, the Company reached an agreement in principle with the Lender with respect to the Sprott Credit Agreement to modify the terms of the Sprott Credit Agreement and other applicable loan documents. On March 30, 2022, the Company and Lender under the Sprott Credit Agreement entered into the Second A&R Agreement, which (a) extends the maturity date for all of the loans and other principal obligations under the Sprott Credit Facility by two years, to May 31, 2027; (b) provides for the Company to prepay principal under the facility in the amount of $10.0 million promptly upon the
Company’s receipt of cash proceeds from the Private Placement offering with American Multi-Cinema, Inc. and 2176423 Ontario Limited (the “Initial Equity Proceeds Prepayment”); (c) provides for the Company to prepay principal under the Sprott Credit Agreement in the amount of $13.9 million (representing 10% of the subsequent issuance of its equity interests consummated on or prior to March 31, 2022) (the “Subsequent Equity Proceeds Prepayments”); and (d) eliminates the prepayment premiums otherwise payable with respect to the Initial Equity Proceeds Prepayment, the Subsequent Equity Proceeds Prepayments and all future prepayments of principal under the Sprott Credit Facility. In addition, the Company’s obligations to prepay principal with proceeds of asset sales will be credited/offset by the aggregate amount of Initial Equity Proceeds Prepayment and the Subsequent Equity Proceeds Prepayments ($23.9 million), and to maintain a minimum amount of Unrestricted Cash (as defined in the Second A&R Agreement) is increased to $15.0 million. The Company (i) paid the previously deferred additional interest payment of $0.5 million, (ii) made the Initial Equity Proceeds Prepayment of $10.0 million and paid in kind a $3.3 million fee in connection with the modification and capitalized it to principal on March 16, 2022 and (iii) made the Subsequent Equity Proceeds Prepayment of $13.9 million on March 30, 2022; and after giving effect to such prepayments the outstanding principal balance under the Sprott Credit Agreement is estimated to be $57.9 million (before issuance discounts) including unpaid additional interest of approximately $7.1 million.
Off-balance sheet arrangements
As of December 31, 2021, our off-balance sheet arrangements consisted of a net profit royalty arrangement and a net smelter royalty arrangement (see Note 23 - Commitments and Contingencies to the Notes to the Consolidated Financial Statements).
Accounting Developments
For a discussion of any recently issued and/or recently adopted accounting pronouncements, see Note 2 - Summary of Significant Accounting Policies to the Notes to the Consolidated Financial Statements.
Critical Accounting Estimates
MD&A is based on our Consolidated Financial Statements, that have been prepared in accordance with GAAP. The preparation of these statements requires us to make assumptions and estimates that affect the reported amounts. We base our assumptions and estimates on historical experience and various other sources that we believe to be reasonable at the time our estimates are made. Actual results may differ from amounts estimated in these statements, and such difference could be material. As such, future events and their effects cannot be determined with certainty.
Although other estimates are used in preparing our financial statements, we believe that the following accounting estimates are the most critical to understanding and evaluating our reported financial results. For information on all of our significant accounting policies, see Note 2 - Summary of Significant Accounting Policies to the Notes to the Consolidated Financial Statements.
Ore on leach pads
Estimate Required:
The recovery of gold and silver at the Hycroft Mine is currently accomplished through a heap leach process, the nature of which limits our ability to precisely determine the recoverable gold ounces in Ore on leach pads. We estimate the quantity of recoverable gold ounces in ore on leach pads using surveyed volumes of material, ore grades determined through sampling and assaying of blastholes, and estimated recovery rates based on ore type and domain and level of oxidation actually achieved or expected to be achieved prior to leaching. The quantity of recoverable gold ounces and recovery rates varies based on ore mineralogy, steps in the leach process, ore grade, ore particle sizes and the percentage of cyanide soluble gold. The estimated recoverable gold ounces placed on the leach pads are periodically reconciled by comparing the related ore to the actual gold ounces recovered (metallurgical balancing). The ultimate recoverable gold ounces or life-of-mine recovery rate is unknown until mining operations cease. A change in the recovery rate or the quantity of recoverable gold ounces in our stockpiles or ore on leach pads could materially impact our financial statements.
Impact of Change in Estimate:
Changes in recovery rate estimates or estimated recoverable gold ounces that do not result in write-downs are accounted for on a prospective basis. If a write-down is required, ore on leach pads would be adjusted to market values before prospectively accounting for the remaining costs and revised estimated recoverable gold ounces. During the year ended December 31, 2021, we did not recognize any write-downs related to estimated ounces on our in-service leach pads.
At December 31, 2021, if our estimate of recoverable gold ounces on the leach pad decreased by 2.5% or 5.0%, recoverable gold ounces in Ore on leach pads would decrease by approximately 178 ounces or 357 ounces, respectively, which would require a write-down of $0.3 million or $0.5 million, respectively, of our Ore on leach pads costs before prospectively accounting for the remaining costs. A 2.5% or 5.0% increase to our estimate of recoverable gold ounces in Ore on leach pads would increase the estimated recoverable ounces by the aforementioned amounts and would not result in a change to our weighted average cost per ounce.
Impairment of long-lived assets
Estimate Required:
Our long-lived assets consist of Plant, equipment, and mine development, net. We review and evaluate our long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Events that may trigger a test for recoverability include, but are not limited to, significant adverse changes to projected revenues, costs, or future expansion plans or changes to federal and state regulations (with which we must comply) that may adversely impact our current or future operations. An impairment is determined to exist if the total projected future cash flows on an undiscounted basis are less than the carrying amount of a long-lived asset group. An impairment loss is measured and recorded based on the excess carrying value of the impaired long-lived asset group over fair value.
To determine fair value, we used a market-based approach for determining fair value based on sales transactions of comparable assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. Our estimates of future cash flows from the potential sale of our assets are based on numerous assumptions that are consistent or reasonable in relation to transactions occurring in the market and actual future cash flows may be significantly different than the estimates as each are each subject to significant risks and uncertainties.
Impact of Change in Estimate:
The estimates and assumptions used to determine the fair value of our long-lived assets as of December 31, 2021 were based sales transactions of comparable assets. We compared the estimated $162.0 million estimated fair value, after allocating the fair value to other assets and liabilities, to the carrying value of our Plant, equipment, and mine development, net of $58.5 million, and given the large surplus between the estimated fair value of the Company and the carrying value of our Plant, equipment, and mine development, net a change in the estimates used in the mark-based approach would be unlikely to result in an impairment as of December 31, 2021.
Asset retirement obligation ("ARO")
Estimate Required:
We will be required to perform reclamation activity at the Hycroft Mine in the future. As a result of this requirement, an ARO has been recorded on our consolidated balance sheets that is based on our expectation of the costs that will be incurred years in the future. Any underestimate or unanticipated reclamation costs or any changes in governmental reclamation requirements could require us to record or incur additional reclamation costs. ARO liabilities are accrued when they become known, are probable and can be reasonably estimated. Whenever a previously unrecognized ARO liability becomes known, or a previously estimated reclamation cost is increased, the amount of that liability and additional cost will be recorded at that time and could materially reduce our consolidated net income attributable to stockholders.
Impact of Change in Estimate:
Based on our current proposed 34-year mine plan set forth in the 2019 Hycroft TRS, which we believe remains the best estimate for the life of mine, no significant reclamation activity will be made until 2047. However, if the significant reclamation activity were to begin in 2042 or 2045 our reclamation liability would increase by approximately $1.9 million and approximately $0.7 million, respectively.
Warrant liability
Estimate Required:
We account for the 5-Year Private Warrants to purchase shares of our common stock that are not indexed to our own stock as liabilities at fair value on the balance sheet. The warrants are subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of Other income (expense), net on the statement of operations. We will continue to adjust the liability for changes in fair value of the 5-Year Private Warrants until the earlier of the (i) exercise or expiration of the 5-Year Private Warrants or (ii) the transfer of any 5-Year Private Warrants to any person who is not a permitted transferee, at which time the applicable warrant liability will be extinguished. The terms of the 5-Year Private Warrants are substantially identical to the 5-Year Public Warrants except the 5-Year Private Warrants, while held by the SPAC sponsor and/or SPAC underwriter and their permitted transferees, are precluded from mandatory redemption and are entitled to exercise on a cashless bases at the holder’s election. Accordingly, we use a Black-Scholes model with an appropriate estimate of volatility considering volatility of the 5-Year Public Warrants and using a Monte Carlo simulation model to incorporate the redemption and cashless exercise features in the 5-Year Private Warrants. Increases (decreases) in the assumptions result in a directionally similar impact to the fair value of the warrant liability.
Impact of Change in Estimate:
A $0.01 increase or decrease in the fair value estimate of 5-Year Private Warrants would increase or decrease the warrant liability, by $0.1 million with the offset in Other income (expense).
ITEM I. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
| | | | | |
| Page |
| Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm, PCAOB ID 166 | |
Consolidated Balance Sheets | |
| Consolidated Statements of Operations | |
| Consolidated Statements of Cash Flows | |
| Consolidated Statements of Stockholders’ Equity (Deficit) | |
| Notes to the Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Hycroft Mining Holding Corporation
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Hycroft Mining Holding Corporation (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2021; and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Notes 2 and 25 to the consolidated financial statements, the Company entered into significant financing transactions subsequent to December 31, 2021. Our opinion is not modified with respect to this matter.
Basis for Opinion
The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (the “PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Plante & Moran, PLLC
We have served as the Company’s auditor since 2015.
Southfield, Michigan
March 30, 2022
HYCROFT MINING HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| | | |
| Assets: | | | |
| Cash | $ | 12,342 | | | $ | 56,363 | |
| Accounts receivable | — | | | 426 | |
| Income tax receivable - Note 17 | 1,530 | | | — | |
| Inventories - Note 4 | 11,069 | | | 12,867 | |
| Ore on leach pads - Note 4 | 10,106 | | | 38,041 | |
| Prepaids and other, net - Note 5 | 2,342 | | | 4,303 | |
| Current assets | 37,389 | | | 112,000 | |
| Ore on leach pads - Note 4 | — | | | 7,243 | |
| Plant, equipment, and mine development, net - Note 6 | 58,484 | | | 60,223 | |
| Restricted cash - Note 7 | 34,293 | | | 39,677 | |
| Other assets - Note 5 | 600 | | | 13,483 | |
| Assets held for sale - Note 8 | 11,558 | | — |
| Total assets | $ | 142,324 | | | $ | 232,626 | |
| Liabilities: | | | |
| Accounts payable and accrued expenses | $ | 9,430 | | | $ | 12,280 | |
| Debt, net - Notes 10, 20 and 25 | 16,666 | | | 5,120 | |
| Deferred gain on sale of royalty - Note 11 | 125 | | | 124 | |
| Other liabilities - Note 9 | 5,044 | | | 4,157 | |
| Current liabilities | 31,265 | | | 21,681 | |
| Warrant liabilities - Notes 12 and 20 | 669 | | | 15,389 | |
| Debt, net - Notes 10, 20 and 25 | 143,638 | | | 142,665 | |
| Deferred gain on sale of royalty - Note 11 | 29,714 | | | 29,839 | |
| Asset retirement obligation - Note 13 | 5,193 | | | 4,785 | |
| Other liabilities - Note 9 | 339 | | | 1,650 | |
| Total liabilities | $ | 210,818 | | | $ | 216,009 | |
| Commitments and contingencies - Note 23 | | | |
Stockholders' (deficit) equity - Note 14: | | | |
Common stock, $0.0001 par value; 400,000,000 shares authorized; 60,433,395 issued and outstanding at December 31, 2021; and 59,901,306 issued and outstanding at December 31, 2020 | $ | 6 | | | $ | 6 | |
| Additional paid-in capital | 540,823 | | | 537,370 | |
| Accumulated deficit | (609,323) | | | (520,759) | |
| Total stockholders' (deficit) equity | (68,494) | | | 16,617 | |
| Total liabilities and stockholders' (deficit) equity | $ | 142,324 | | | $ | 232,626 | |
The accompanying notes are an integral part of these consolidated financial statements.
HYCROFT MINING HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 |
| Revenues - Note 15 | | $ | 110,734 | | | $ | 47,044 | |
| Cost of sales: | | | | |
| Production costs | | 102,750 | | | 41,688 | |
| Depreciation and amortization | | 8,544 | | | 2,894 | |
| Mine site period costs - Note 2 | | 38,166 | | | 47,115 | |
| Write-down of inventories - Note 4 | | 13,878 | | | 17,924 | |
| Total cost of sales | | 163,338 | | | 109,621 | |
| Operating expenses: | | | | |
| General and administrative | | 14,619 | | | 21,084 | |
| Projects, exploration and development | | 13,587 | | | — | |
| Write-off of deposit - Note 5 | | 916 | | | — | |
| Accretion - Note 13 | | 408 | | | 374 | |
| Impairment on equipment not in use - Notes 5 and 8 | | 1,777 | | | 5,331 | |
| Loss from operations | | (83,911) | | | (89,366) | |
| Other expenses: | | | | |
| Interest expense, net of capitalized interest - Note 10 | | (20,593) | | | (43,458) | |
| Fair value adjustment to warrants - Notes 12 and 20 | | 14,426 | | | (3,767) | |
| Loss on sale of equipment | | (16) | | | — | |
| Interest income | | — | | | 199 | |
| Loss before income taxes | | $ | (90,094) | | | $ | (136,392) | |
| Income tax benefit - Note 17 | | 1,530 | | | — | |
| Net loss | | $ | (88,564) | | | $ | (136,392) | |
| | | | |
| Loss per share: | | | | |
| Basic - Note 18 | | $ | (1.47) | | | $ | (3.92) | |
| Diluted - Note 18 | | $ | (1.47) | | | $ | (3.92) | |
| Weighted average shares outstanding: | | | | |
| Basic - Note 18 | | 60,101,499 | | | 34,833,211 | |
| Diluted - Note 18 | | 60,101,499 | | | 34,833,211 | |
The accompanying notes are an integral part of these consolidated financial statements.
HYCROFT MINING HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Cash flows used in operating activities: | | | |
| Net loss | $ | (88,564) | | | $ | (136,392) | |
| Adjustments to reconcile net loss for the period to net cash used in operating activities: | | | |
| Non-cash portion of interest expense | 16,812 | | | 38,843 | |
| Non-cash (gain) loss on fair value adjustment for warrant liabilities - Note 12 | (14,426) | | | 3,767 | |
| Depreciation and amortization | 8,429 | | | 5,849 | |
| Stock-based compensation - Note 16 | 2,264 | | | 2,380 | |
| Accretion - Note 13 | 408 | | | 374 | |
| Salary continuation and compensation costs - Note 9 | — | | | 2,116 | |
| Impairment charges and write-downs | 17,326 | | | 23,255 | |
| Loss on sale of equipment | 16 | | | — | |
| Phantom share compensation | — | | | 225 | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | 426 | | | (329) | |
| Income tax receivable | (1,530) | | | — | |
| Production-related inventories | 29,015 | | | (43,756) | |
| Materials and supplies inventories | (6,186) | | | (3,891) | |
| Prepaids and other assets, net | 1,690 | | | (2,946) | |
| Accounts payable and accrued expenses | (2,851) | | | 372 | |
| Other liabilities | 133 | | | 443 | |
| Interest payable | — | | | (818) | |
| Net cash used in operating activities | (37,038) | | | (110,508) | |
| Cash flows used in investing activities: | | | |
| Additions to plant, equipment, and mine development | (6,990) | | | (33,439) | |
| Proceeds from sales of equipment | 117 | | | 2,315 | |
| Net cash used in investing activities | (6,873) | | | (31,124) | |
| Cash flows (used in) provided by financing activities: | | | |
| Principal payments on Sprott Credit Agreement | (5,405) | | | (1,158) | |
| Principal payments on finance leases | (89) | | | — | |
| Proceeds from Public Offering | — | | | 83,515 | |
| Proceeds from private placement - Note 3 | — | | | 75,963 | |
| Proceeds from Sprott Credit Agreement - Notes 3 and 10 | — | | | 68,600 | |
| Proceeds from Sprott Royalty Agreement - Notes 3 and 11 | — | | | 30,000 | |
| Proceeds from forward purchase contract - Note 3 | — | | | 25,000 | |
| Proceeds from Recapitalization Transaction - Note 3 | — | | | 10,419 | |
| Proceeds from 1.25 Lien Note Issuances - Note 3 | — | | | 44,841 | |
| Proceeds from warrant exercise - Note 12 | — | | | 1 | |
| Repayment of First Lien Agreement - Note 3 | — | | | (125,468) | |
| Transaction and issuance costs - Note 3 | — | | | (16,094) | |
| Repayment of Promissory Note - Note 3 | — | | | (6,914) | |
| Net cash (used in) provided by financing activities | (5,494) | | | 188,705 | |
| Net (decrease) increase in cash and restricted cash | (49,405) | | | 47,073 | |
| Cash and restricted cash, beginning of period | 96,040 | | | 48,967 | |
| Cash and restricted cash, end of period | $ | 46,635 | | | $ | 96,040 | |
| Reconciliation of cash and restricted cash: | | | |
| Cash | $ | 12,342 | | | $ | 56,363 | |
| Restricted cash | 34,293 | | | 39,677 | |
| Total cash and restricted cash | $ | 46,635 | | | $ | 96,040 | |
See Note 21 - Supplemental Cash Flow Information for additional details.
The accompanying notes are an integral part of these consolidated financial statements.
HYCROFT MINING HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock(1) | | Treasury Stock(1) | | Additional Paid-in Capital(1) | | Accumulated
Deficit | | Total
Stockholders'
(Deficit)
Equity |
| Shares | | Amount | | Shares | | Amount | | | |
| January 1, 2020 | 345,431 | | | — | | | 22,103 | | | — | | | 5,187 | | | (444,438) | | | (439,251) | |
| Conversion of Seller's 2.0 Lien Notes to common shares of Seller and distribution of HYMC common stock(2) | 14,795,153 | | | 2 | | | (22,103) | | | — | | | 146,217 | | | 74,640 | | | 220,859 | |
| Exchange of Seller's 1.5 Lien Notes for HYMC common stock | 16,025,316 | | | 2 | | | — | | | — | | | 160,252 | | | (14,569) | | | 145,685 | |
| Common shares issued in private placement | 7,596,309 | | | 1 | | | — | | | — | | | 75,962 | | | — | | | 75,963 | |
| Exchange of Seller's 1.25 Lien Notes for HYMC common stock | 4,845,920 | | | — | | | — | | | — | | | 48,459 | | | — | | | 48,459 | |
| Shares issued pursuant to forward purchase agreement with SPAC sponsor, including conversion of Class B shares, less fair value of 5-year Private Warrants | 4,813,180 | | | — | | | — | | | — | | | 12,814 | | | — | | | 12,814 | |
| Unredeemed SPAC shares of MUDS public stockholders | 1,197,704 | | | — | | | — | | | — | | | 3,723 | | | — | | | 3,723 | |
| Common shares issued pursuant to Sprott Credit Agreement | 496,634 | | | — | | | — | | | — | | | 6,282 | | | — | | | 6,282 | |
| Common shares issued to underwriter | 44,395 | | | — | | | — | | | — | | | 444 | | | — | | | 444 | |
| Vesting of restricted stock(3) | — | | | — | | | — | | | — | | | 1,802 | | | — | | | 1,802 | |
| Equity issuance costs | — | | | — | | | — | | | — | | | (8,255) | | | — | | | (8,255) | |
| Shares issued | 101 | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Stock-based compensation costs | — | | | — | | | — | | | — | | | 388 | | | — | | | 388 | |
Private Warrants transferred to Public Warrants(4) | — | | | — | | | — | | | — | | | 581 | | | — | | | 581 | |
| Shares issued pursuant to Public Offering | 9,583,334 | | | 1 | | | — | | | — | | | 83,513 | | | — | | | 83,514 | |
| Shares issued under stock-based compensation program | 157,829 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (136,392) | | | (136,392) | |
| Balance at December 31, 2020 | 59,901,306 | | | 6 | | | — | | | — | | | 537,370 | | | (520,759) | | | 16,617 | |
(1)Retroactively restated January 1, 2020 and March 31, 2020 for the reverse recapitalization as described in Note 2 - Summary of Significant Accounting Policies, and the restated reclassification of the Company's 5-Year Private Warrants as described in Note 12 - Warrant Liabilities.
(2)Includes 3,511,820 shares of HYMC common stock received by Seller that were surrendered by the Company.
(3)As of December 31, 2021 there were 21,256 unissued shares underlying restricted stock units that had vested but have not been converted into issued and outstanding shares of common stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock(1) | | Treasury Stock(1) | | Additional Paid-in Capital(1) | | Accumulated
Deficit | | Total
Stockholders'
(Deficit)
Equity |
| Shares | | Amount | | Shares | | Amount | | | |
| January 1, 2021 | 59,901,306 | | | $ | 6 | | | — | | | $ | — | | | $ | 537,370 | | | $ | (520,759) | | | 16,617 | |
| Stock-based compensation costs | — | | | — | | | — | | | — | | | 2,185 | | | — | | | 2,185 | |
| Vesting of restricted stock units | 394,589 | | | — | | | — | | | — | | | 765 | | | — | | | 765 | |
| Stock issuance - other - Note 9 | 137,500 | | | — | | | — | | | — | | | 209 | | | — | | | 209 | |
| 5-Year Private Warrants transferred to 5-Year Public Warrants | — | | | — | | | — | | | — | | | 294 | | | — | | | 294 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (88,564) | | | (88,564) | |
| Balance at December 31, 2021 | 60,433,395 | | $ | 6 | | | — | | $ | — | | | $ | 540,823 | | | $ | (609,323) | | | $ | (68,494) | |
The accompanying notes are an integral part of these consolidated financial statements.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
1. Company Overview
Hycroft Mining Holding Corporation (formerly known as Mudrick Capital Acquisition Corporation ("MUDS")) and its subsidiaries (collectively, “Hycroft”, the “Company”, “we”, “us”, “our”, "it", "HYMC") is a U.S.-based gold and silver company that is focused on operating and developing its wholly owned Hycroft Mine in a safe, environmentally responsible, and cost-effective manner. The Hycroft Mine is located in the State of Nevada and the corporate office is located in Denver, Colorado.
The Company restarted pre-commercial scale open pit mining operations at the Hycroft Mine during the second quarter of 2019 and began producing and selling gold and silver during the third quarter of 2019. The Company's operating plan until November 2021 was primarily focused on developing the novel two-stage heap oxidation and leach process ("Novel Process") detailed in the Hycroft Technical Report Summary, Heap Leaching Feasibility Study, prepared in accordance with the requirements of the Modernization Rules, with an effective date of July 31, 2019 ("2019 Hycroft TRS"). Subsequent to November 2021, the Company's operating plan has been focused on advancing evaluations and developing technical studies for milling sulfide ore so that the Company can evaluate alternative processing technologies. Based upon the Company's findings in 2021, including an analysis completed by an independent third-party research laboratory and independent reviews by two metallurgical consultants, the Company does not believe the Novel Process, as currently designed in the 2019 Hycroft TRS, is economic at current metal prices or those metal prices used in the 2019 Hycroft TRS. Additionally, as announced on November 10, 2021, as a result of current and expected ongoing cost pressures for many of the reagents and consumables used at the Hycroft Mine, and the timeline for completing the updated technical studies in early 2022, the Company discontinued pre-commercial scale mining at its ROM operation. The Company will continue producing gold and silver from ore on the leach pads as long as it is economic and will right-size the workforce to meet ongoing operational requirements. In February 2022, Hycroft, along with its third-party consultants, completed and filed the Initial Assessment Technical Report Summary for the Hycroft Mine ("2022 Hycroft TRS") which included a mineral resource estimate utilizing a milling and acid pressure oxidation ("Acid POX") process for sulfide mineralization and heap leaching process for oxide and transition mineralization. The Company will continue to build on the work to date and investigate opportunities identified through progressing the technical and data analyses leading up to the 2022 Hycroft TRS and will provide an updated technical report at an appropriate time.
On May 29, 2020, the Company consummated the Recapitalization Transaction (as defined below) as contemplated by a purchase agreement dated January 13, 2020, as amended on February 26, 2020 (the “Purchase Agreement”), by and among the Company, MUDS Acquisition Sub, Inc. (“Acquisition Sub”) and Hycroft Mining Corporation ("Seller"). Pursuant to the Purchase Agreement, Acquisition Sub acquired all of the issued and outstanding equity interests of the direct subsidiaries of Seller and substantially all of the other assets of Seller and assumed substantially all of the liabilities of Seller in a business combination and reverse recapitalization transaction (the "Recapitalization Transaction"). See Note 3 - Recapitalization Transaction for further details.
2. Summary of Significant Accounting Policies
Basis of presentation
These consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
Recapitalization Transaction
The Recapitalization Transaction (see Note 3 - Recapitalization Transaction) was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, for financial reporting purposes, MUDS has been treated as the “acquired” company and Hycroft Mining Corporation (“Seller”) has been treated as the “acquirer”. This determination was primarily based on (1) stockholders of Seller immediately prior to the Recapitalization Transaction having a relative majority of the voting power of the combined entity; (2) the operations of Seller prior to the Recapitalization Transaction comprising the only ongoing operations of the combined entity; (3) four of the seven members of the Board of Directors immediately following the Recapitalization Transaction were directors of Seller immediately prior to the Recapitalization Transaction; and (4) executive and senior management of Seller comprises the same for the Company.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Based on Seller being the accounting acquirer, the financial statements of the combined entity represent a continuation of the financial statements of Seller, with the acquisition treated as the equivalent of Seller issuing stock for the net assets of MUDS, accompanied by a recapitalization. The net assets of MUDS were recognized at historical cost as of the date of the Recapitalization Transaction, with no goodwill or other intangible assets recorded. Comparative information prior to the Recapitalization Transaction in these financial statements are those of Seller and the accumulated deficit of Seller has been carried forward after the Recapitalization Transaction. The shares and net loss per common share prior to the Recapitalization Transaction have been retroactively restated as shares reflecting the exchange ratio established in the Recapitalization Transaction to effect the reverse recapitalization (1 Seller share for 0.112 HYMC share). See Note 3 - Recapitalization Transaction for additional information.
Liquidity
As of December 31, 2021, the Company had available cash on hand of $12.3 million and working capital of $6.1 million which, along with additional funds received subsequent to year-end, is expected to provide it with the necessary liquidity to fund its operating and investing requirements and future obligations as they become due within the next twelve months from the date of this filing.
While the Company expects to continue processing gold and silver ore on the leach pads after ceasing mining operations for the pre-commercial scale ROM operation and partially offset the cash that is projected to be used in its operations and investing activities, the Company does not expect to generate net positive cash from operations for the foreseeable future. Accordingly, the Company will be dependent on its unrestricted cash and other sources of cash to fund its business. As discussed in Note 25 - Subsequent Events, the Company raised gross proceeds of $194.4 million in March 2022 through the following equity financings:
•On March 14, 2022, the Company entered into subscription agreements with two private investors pursuant to which the Company agreed to sell an aggregate of 46,816,480 units at a purchase price of $1.193 per unit for total net proceeds of $55.9 million.
•On March 15, 2022, the Company implemented an at-the-market offering program pursuant to which the Company has registered the offer and sale from time to time of its common stock having an aggregate offering price of up to $500.0 million of gross proceeds. Under the at-the-market offering, the Company sold 89,553,602 shares of common stock for net proceeds of $138.6 million.
Also, as discussed in Note 25 - Subsequent Events, as a result of the equity financings above, the Company reached an agreement with the Lender (as hereinafter defined) with respect to the Sprott Credit Agreement which required the Company to prepay principal under the facility in the amount of $10.0 million following the Company’s receipt of the $55.9 million cash proceeds discussed above. In addition, the Company made the additional prepayment of $13.9 million on March 30, 2022.
In addition to the above equity financings, the Company will continue to evaluate alternatives to raise additional capital necessary to fund the future development of the Hycroft Mine and will continue to explore other strategic initiatives to enhance stockholder value.
Historically, the Company has been dependent on various forms of debt and equity financing to fund its business. While the Company has been successful in the past raising funds through equity and debt financings, no assurance can be given that additional financing will be available to it in amounts sufficient to meet the Company’s needs or on terms acceptable to the Company. In the event that funds are not available, the Company may be required to materially change its business plans.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Use of estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management estimates and assumptions relate to: recoverable gold and silver ounces on stockpiles, leach pads and in-process inventories; timing of near-term ounce production and related sales; the useful lives of long-lived assets; probabilities of future expansion projects; estimates of mineral resources; estimates of life-of-mine production timing, volumes, costs and prices; current and future mining and processing plans; environmental reclamation and closure costs and timing; deferred taxes and related valuation allowances; estimates of the fair value of liability classified warrants, and estimates of fair value for asset impairments and financial instruments. The Company bases its estimates on technical analyses and measurements, historical experience and various other assumptions that are believed to be reasonable at the time the estimate is made. Actual results may differ from amounts estimated in these financial statements, and such differences could be material. Accordingly, amounts presented in these financial statements are not indicative of results that may be expected for future periods.
Cash
Cash consisted of cash balances as of December 31, 2021. The Company has not experienced any losses on cash balances and believes that no significant risk of loss exists with respect to its cash. As of December 31, 2021, and December 31, 2020, the Company held no cash equivalents.
Restricted cash
Restricted cash is held as collateral for surety bonds that the Company uses to fulfill financial assurance obligations related to reclamation activity (see Note 13 - Asset Retirement Obligation for further detail.) Restricted cash is excluded from cash and is listed separately on the Consolidated Balance Sheets. As of December 31, 2021, and December 31, 2020, the Company held $34.3 million and $39.7 million in restricted cash, respectively. See Note 7 - Restricted Cash for additional information.
Accounts receivable
Accounts receivable consists of amounts due from customers for gold and silver sales. The Company evaluates the customers’ credit risk, payment history and financial condition to determine whether an allowance for doubtful accounts is necessary. The Company did not have accounts receivable amounts outstanding as of December 31, 2021 and the Company did not have a recorded allowance for doubtful accounts as of December 31, 2020.
Inventories and Ore on Leach Pads
The Company’s production-related inventories include: (i) stockpiles; (ii) ore on leach pads; (iii) in-process inventories; and (iv) doré, off-site carbon and slag finished goods. Production-related inventories are carried at the lower of average cost or net realizable value per estimated recoverable gold ounce, which is computed for each category of production-related inventories at each reporting period.
Net realizable value represents the estimated future gold revenue of production-related inventories after adjusting for silver by-product revenue and deductions for further processing, refining, and selling costs. The estimated future revenue is calculated using sales prices based on the London Bullion Market Association’s (“LBMA”) quoted period-end gold prices. Estimates for silver revenue by-products credits is based on LBMA quoted period-end silver prices and deductions for estimated costs to complete reflect the Company’s historical experience and expected processing, refining and selling plans. Actual net realizable values for gold sales may be different from such estimates. Changes to inputs and estimates resulting from changes in facts and circumstances are recognized as a change in management estimate on a prospective basis.
Stockpiles
Stockpiles represent ore that has been extracted from the mine and is available for further processing. Stockpiles are subject to oxidation over time which can impact expected future recoveries depending on the process recovery method. The value of the stockpiles is measured by estimating the number of tons added and removed from the stockpiles, the number of contained ounces based on assay data, and the estimated metallurgical recovery rates based on the expected processing method. Costs are added to the value of the stockpiles based on current mining costs, including applicable overhead and depreciation and amortization relating to the Company's mining operations.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Ore on leach pads
Ore on leach pads represents ore that has been mined and placed on leach pads where a solution is applied to dissolve the contained gold and silver. Costs are added to ore on leach pads based on current mining costs, including reagents, leaching supplies, and applicable depreciation and amortization relating to mining operations. As gold-bearing materials are further processed, costs are transferred from ore on leach pads to in-process inventories at an average cost per estimated recoverable ounce of gold.
Although the quantities of recoverable metal placed on the leach pads are reconciled by comparing the grades of ore placed on pads to the quantities of metal actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored, and estimates are refined based on actual results over time and changes in future estimates.
In-process inventories
In-process inventories represent gold-bearing concentrated materials that are in the process of being converted to a saleable product using a Merrill-Crowe plant or carbon-in-column processing method. As gold ounces are recovered from in-process inventories, costs, including conversion costs are transferred to precious metals inventory at an average cost per ounce of gold.
Precious metals inventory
Precious metals inventory consists of doré and loaded carbon containing both gold and silver, which is ready for offsite shipment or at a third-party refiner before being sold to a third party. As gold ounces are sold, costs are recognized in Production costs and Depreciation and amortization in the consolidated statements of operations at an average cost per gold ounce sold.
Materials and supplies
Materials and supplies are valued at the lower of average cost or net realizable value. Cost includes applicable taxes and freight. The Company monitors its materials and supplies for turnover and obsolescence and records losses for excess and obsolete inventory, as appropriate.
Plant, equipment, and mine development, net
Expenditures for new facilities and equipment, and expenditures that extend the useful lives or increase the capacity of existing facilities or equipment are capitalized and recorded at cost. Such costs are depreciated using either the straight-line method over the estimated productive lives of such assets or the units-of-production method (when actively operating). For equipment and facilities that are constructed by the Company, interest is capitalized to the cost of the underlying asset while being constructed until such asset is ready for its intended use. See Note 6 - Plant, Equipment, and Mine Development, Net for additional information.
Mine development
Mine development costs include the cost of engineering and metallurgical studies, drilling and assaying costs to delineate an ore body, environmental permitting costs, and the building of infrastructure. Any of the above costs incurred before mineralization is classified as proven and probable mineral reserves are expensed.
Drilling, engineering, metallurgical, and other related costs are capitalized for an ore body where proven and probable reserves exist and the activities are directed at obtaining additional information on the ore body, converting non-reserve mineralization to proven and probable mineral reserves, infrastructure planning, or supporting the environmental impact statement and permitting activities. All other exploration drilling costs are expensed as incurred. Drilling costs incurred during the production phase for operational ore control are allocated to production-related inventories and upon the sale of gold ounces are included in Cost of sales on the Consolidated Statements of Operations.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Mine development costs are amortized using the units-of-production method based upon estimated recoverable ounces in proven and probable mineral reserves. To the extent such capitalized costs benefit an entire ore body, they are amortized over the estimated life of that ore body. Capitalized costs that benefit specific ore blocks or areas are amortized over the estimated life of that specific ore block or area. Recoverable ounces are determined by the Company based upon its proven and probable mineral reserves and estimated metal recoveries associated with those mineral reserves.
Impairment of long-lived assets
The Company’s long-lived assets consist of Plant, equipment, and mine development, net. The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Events that may trigger a test for recoverability include, but are not limited to, significant adverse changes to projected revenues, costs, or future expansion plans or changes to federal and state regulations (with which the Company must comply) that may adversely impact the Company’s current or future operations. An impairment is determined to exist if the total projected future cash flows on an undiscounted basis are less than the carrying amount of a long-lived asset group. An impairment loss is measured and recorded based on the excess carrying value of the impaired long-lived asset group over fair value.
In estimating future cash flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future cash flows from other asset groups. The Company’s estimates of future cash flows and estimates of fair value are based on numerous assumptions and are subject to significant risks and uncertainties. See Note 6 - Plant, Equipment, and Mine Development, Net for additional information.
During the year ended December 31, 2021, the Company determined a triggering event had occurred, as a result of the Company ceasing mining operations and determining the Novel Process used in the 2019 Hycroft TRS was no longer expected to be economic. In addition, the 2022 Hycroft TRS did not include estimates of proven and probable reserves. As a result, the Company did not have a basis for projecting future cash flows on an undiscounted basis. The Company used a market-based approach for determining fair value based on sales transactions of comparable assets. Because the Company's estimated fair value of long-lived assets held and used exceeded their carrying value, the Company determined that, except for an impairment charge of $6.7 million recognized for capitalized Mine development, no additional impairments of long-lived assets were necessary at December 31, 2021. See Note 6 - Plant, Equipment, and Mine Development, Net for discussion of impairment of capitalized Mine development
Assets held for sale
The Company classifies long-lived assets or disposal groups to be sold as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the asset or disposal group; (2) the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets or disposal groups; (3) an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated; (4) the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year; (5) the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. The Company assesses the fair value of a long-lived asset or disposal group less any costs to sell each reporting period it remains classified as held for sale and report any subsequent changes as an adjustment to the carrying value of the asset or disposal group, as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale.
Upon determining that a long-lived asset or disposal group meets the criteria to be classified as held for sale, the Company ceases depreciation and reports long-lived assets and/or the assets and liabilities of the disposal group as Assets held for sale, in our Consolidated Balance Sheets.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Deferred gain on sale of royalty
The Company's Deferred gain on sale of royalty is carried at amortized cost with reductions calculated by dividing actual gold and silver production by the estimated total life-of-mine production from proven and probable mineral reserves. Any updates to proven and probable mineral reserves or the estimated life-of-mine production profile would result in prospective adjustments to the amortization calculation used to reduce the carrying value of the royalty obligation. Amortization reductions to the Deferred gain on sale of royalty are recorded to Production costs which is included in Cost of sales. A portion of the Company’s Deferred gain on sale of royalty is classified as current based upon the estimated gold and silver expected to be produced over the next 12 months. The Deferred gain on sale of royalty and its embedded features do not meet the requirements for derivative accounting.
Asset retirement obligation
The Company’s mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment. The Company’s asset retirement obligation (“ARO”), associated with long-lived assets are those for which there is a legal obligation to settle under existing law, statute, written or oral contract or by legal construction. The Company’s ARO relates to its operating property, the Hycroft Mine, and was recognized as a liability at fair value in the period incurred. An ARO, which is initially estimated based on discounted cash flow estimates, is accreted to full value over time using the expected timing of future payments through charges to Accretion in the Consolidated Statements of Operations. In addition, asset retirement costs (“ARC”) are capitalized as part of the related asset’s carrying value and are depreciated on a straight-line method or units of production basis over the related long-lived asset’s useful life. The Company’s ARO is adjusted annually, or more frequently if necessary, to reflect changes in the estimated present value resulting from revisions to the timing or amount of reclamation and closure costs. Estimated mine reclamation and closure costs, may increase or decrease significantly in the future as a result of changes in regulations, mine plans, cost estimates, or other factors.
Revenue recognition
The Company recognizes revenue for gold and silver sales when it satisfies the performance obligation of transferring finished inventory to the customer, which generally occurs when the refiner notifies the customer that gold has been credited or irrevocably pledged to their account, at which point the customer obtains the ability to direct the use and obtain substantially all of the remaining benefits of ownership of the asset. The transaction amount is determined based on the agreed upon sales prices and the number of ounces delivered. Concurrently, the payment date is agreed upon, which is usually within one week of the sale date. The majority of sales are in the form of doré bars, but the Company also sells gold and silver laden carbon and slag, a by-product. All sales are final.
Mine site period costs
Mine site period costs are generally the result of costs related to activities at the Hycroft Mine that do not qualify for capitalization to production-related inventories or adjustments to production inventories that are the result of recurring or significant downtime or delays, unusually high levels of repairs, inefficient operations, overuse of processing reagents, inefficient cost-volume structures, or other costs and activities, and cannot be recorded to production-related inventories based on the threshold established by the calculation of the estimated net realizable value per ounce of gold, which incorporates estimated future processing, refining, and selling costs, as well as the value for silver by-product.
The following table summarize the components of Mine site period costs (dollars in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Production related costs | $ | 36,512 | | | $ | 44,127 | |
| Capitalized depreciation and amortization | 1,654 | | | 2,988 | |
| Total | $ | 38,166 | | | $ | 47,115 | |
Stock-based compensation
Stock-based compensation costs for non-employee Directors and eligible employees are measured at fair value on the date of grant. Stock-based compensation costs are charged to General and administrative on the Consolidated Statements of
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Operations over the requisite service period. The fair value of awards is determined using the stock price on either the date of grant (if subject only to service conditions) or the date that the Compensation Committee of the Board of Directors establishes applicable performance targets (if subject to performance conditions). The Company records forfeitures as they occur. See Note 16 - Stock-Based Compensation for additional information.
Income taxes
The Company accounts for income taxes using the liability method, recognizing certain temporary differences between the financial reporting basis of the Company’s liabilities and assets and the related income tax basis for such liabilities and assets. This method generates either a net deferred income tax liability or asset for the Company, as measured by the statutory tax rates in effect at the anticipated time of reversal. The Company derives its deferred income tax provision or benefit by recording the change in either the net deferred income tax liability or asset balance for the year. See Note 17 - Income Taxes for additional information.
The Company’s deferred income tax assets include certain future tax benefits. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized. Evidence evaluated includes past operating results, forecasted earnings, estimated future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates used to manage the underlying business.
As necessary, the Company also provides reserves against the benefits of uncertain tax positions taken on its tax filings. The necessity for and amount of a reserve is established by determining, based on the weight of available evidence, the amount of benefit that is more likely than not to be sustained upon audit for each uncertain tax position. The difference, if any, between the full benefit recorded on the tax return and the amount more likely than not to be sustained is recorded as a liability on the Company’s Consolidated Balance Sheets unless the additional tax expense that would result from the disallowance of the tax position can be offset by a net operating loss, a similar tax loss, or a tax credit carryforward. In that case, the reserve is recorded as a reduction to the deferred tax asset associated with the applicable net operating loss, similar tax loss, or tax credit carryforward.
Fair value measurements
Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements, defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis;
Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Certain financial instruments, including Cash, Restricted cash, Accounts receivable, Prepaids and other, net, and Accounts payable and accrued expenses, are carried at cost, which approximates their fair value due to the short-term nature of these instruments. See Note 20 - Fair Value Measurements for additional information.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Warrants
Warrant liabilities
The Company accounts for certain warrants to purchase shares of the Company’s common stock that were issued to the SPAC sponsor and/or underwriter in a private placement and/or pursuant to a forward purchase contract (the “5-Year Private Warrants”) that are not indexed to the Company’s own stock as Warrant liabilities at fair value on the Consolidated Balance Sheets. These warrants are subject to remeasurement at each balance sheet date and any change in fair value is recognized as a component of Other expenses on the Consolidated Statements of Operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the (i) exercise or expiration of the 5-Year Private Warrants or (ii) the transfer of any 5-Year Private Warrants to any person who is not a permitted transferee, at which time the warrant liability will be reclassified to Additional paid-in capital on the Consolidated Balance Sheets.
Equity classified warrants
Warrants that are considered indexed to the Company's own stock, which are not required to be recorded as a liability are measured at fair value at the date of issuance and included in Additional paid-in capital on the Consolidated Balance Sheets and do not require subsequent remeasurement of the fair value.
Projects, exploration and development
Costs incurred for exploration, development and other project related expenses that do not qualify for capitalization are expensed within Projects, exploration and development, which is included in Operating expenses on the Consolidated Statements of Operations. Projects, exploration and development costs include expenditures for: (i) publishing technical studies; (ii) conducting geological studies; (iii) oversight and project management; and (iv) drilling, engineering, and metallurgical activities related to exploration and development.
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases ("ASU 2016-02"). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations and classification within the consolidated statement of cash flows. In October 2019, the FASB issued ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) ("ASU 2019-10") that amends the effective date of ASU 2016-02 for emerging growth companies, such that the new standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
The Company early adopted this standard as of January 1, 2021 using the modified retrospective approach. The comparative information has not been adjusted and continues to be reported under the accounting standard in effect for those periods.
The new standard offers a number of optional practical expedients of which the Company elected the following:
Transition elections: The Company elected the land easements practical expedient whereby existing land easements were not reassessed under the new standard.
Ongoing accounting policy elections: The Company elected the short-term lease recognition exemption whereby right-of-use assets and lease liabilities will not be recognized for leasing arrangements with terms less than one year. The Company elected the practical expedient to not separate lease and non-lease components for the majority of its underlying asset classes.
Based on contracts outstanding at January 1, 2021, the adoption of the new standard resulted in the recognition of additional operating lease ROU assets and lease liabilities of $0.1 million, and finance lease ROU assets and lease liabilities of $0.3 million. ROU assets are included in Plant, equipment, and mine development, net on the Consolidated Balance Sheets, and lease liabilities are included in the non-current portion of Other liabilities on the Consolidated Balance Sheets. Adoption of this standard did not have a material impact to the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Accounting pronouncements not yet adopted
In December of 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), as part as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Amendments include removal of certain exceptions to the general principles of ASC 740, Income Taxes and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. For emerging growth companies, the new guidance is effective for annual periods beginning after December 15, 2021. As the Company qualifies as an emerging growth company, the Company plans to take advantage of the deferred effective date afforded to emerging growth companies. The Company is currently evaluating the impact that adopting this update will have on its consolidated financial statements and related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies guidance on accounting for convertible instruments and contracts in an entity’s own equity including calculating diluted earnings per share. For emerging growth companies, the new guidance is effective for annual periods beginning after December 15, 2022. As the Company qualifies as an emerging growth company, the Company plans to take advantage of the deferred effective date afforded to emerging growth companies. The Company is currently evaluating the impact that adopting this update will have on its consolidated financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). ASU 2021-04 clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (e.g,, warrants) that remain equity classified after modification or exchange. ASU 2021-04 provides guidance that will clarify whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (i) an adjustment to equity and, if so, the related earnings per share effects, if any, or (ii) an expense and, if so, the manner and pattern of recognition. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that adopting this update will have on its consolidated financial statements and related disclosures.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
3. Recapitalization Transaction
Recapitalization Transaction with MUDS
On May 29, 2020, the Company, formerly known as Mudrick Capital Acquisition Corporation, consummated a business combination transaction (the “Recapitalization Transaction”) as contemplated by a purchase agreement dated January 13, 2020, as amended on February 26, 2020 (the “Purchase Agreement”), by and among the Company, MUDS Acquisition Sub, Inc. (“Acquisition Sub”) and Hycroft Mining Corporation (“Seller”). Pursuant to the Purchase Agreement, Acquisition Sub acquired all of the issued and outstanding equity interests of the direct subsidiaries of Seller and substantially all of the other assets of Seller and assumed substantially all of the liabilities of Seller. In conjunction with the Recapitalization Transaction, Seller’s indebtedness existing prior to the Recapitalization Transaction was either repaid, exchanged for indebtedness of the Company, exchanged for shares of common stock or converted into shares of Seller common stock, and the Company’s post-Recapitalization Transaction indebtedness included amounts drawn under the Sprott Credit Agreement and the assumption of the newly issued Subordinated Notes (as such are defined herein). Upon closing of the Recapitalization Transaction, the Company’s unrestricted cash available for use totaled $68.9 million, and the number of shares of common stock issued and outstanding totaled 50,160,042. In addition, upon closing, the Company had 34,289,999 outstanding warrants to purchase an equal number of shares of common stock at $11.50 per share and 12,721,623 warrants to purchase 3,210,213 shares of common stock at a price of $44.82 per share.
Prior to the Recapitalization Transaction, the Company was a blank check special purpose acquisition corporation (“SPAC”) with no business operations and on May 29, 2020 had assets and liabilities consisting primarily of $10.4 million of cash and $6.9 million of liabilities for accounts payable, accrued expenses, and deferred underwriting fees. As described in Note 2 - Summary of Significant Accounting Policies, the Company accounted for the Recapitalization Transaction as a reverse recapitalization in which the Company’s financial statements reflect a continuation of Seller.
The material financial effects and actions arising from the Recapitalization Transaction, which are described in detail elsewhere in these financial statements, were as follows (the defined terms that follow are included elsewhere in these financial statements):
Common stock and warrant transactions
a.The Company issued, in a private placement transaction, an aggregate of 7.6 million shares of common stock and 3.25 million warrants to purchase shares of common stock at a price of $10.00 per share for aggregate gross cash proceeds of $76.0 million. The warrants were exercisable into 3.25 million shares for $11.50 per warrant. These warrants are included with the 5-Year Public Warrants because they may be mandatorily redeemed under the terms in the warrant agreement. Refer to Note 13 - Stockholders' Equity for further detail.
b.Pursuant to a forward purchase contract, the Company issued 3.125 million shares of common stock and 2.5 million warrants to purchase shares of common stock having substantially the same terms as the private placement warrants for gross cash proceeds of $25.0 million. The Company also converted 5.2 million shares of MUDS Class B common stock into the same number of shares of common stock, of which 3.5 million shares were surrendered to Seller as transaction consideration. The 2.5 million warrants were exercisable into 2.5 million shares at an exercise price of $11.50 per warrant. These warrants are included with the 5-Year Private Warrants because they cannot be mandatorily redeemed under the terms of the warrant agreement. Refer to Note 12 - Warrant Liabilities for further detail.
c.The Company received $10.4 million of cash proceeds from the SPAC trust associated with the 1.2 million shares of common stock that were not redeemed by the Company's public stockholders. Additionally, the Company has outstanding 27.9 million warrants to purchase shares of common stock at a price of $11.50 per share that were issued in a unit offering to the Company's public stockholders at the time of the SPAC’s initial public offering and the Company has outstanding 7.74 million warrants to purchase shares of common stock at a price of $11.50 per share that were sold to the Sponsor and underwriter, Cantor Fitzgerald & Co. These warrants are included with the 5-Year Private Warrants because they cannot be mandatorily redeemed under the terms of the warrant agreement. Refer to Note 12 - Warrant Liabilities for further detail.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
d.The Company assumed the obligations with respect to 12.7 million Seller Warrants (as defined herein), which Seller Warrants became exercisable to purchase shares of common stock at an exercise price as of July 1, 2020 and December 31, 2020, of $44.82 per share (see Note 12 - Warrant Liabilities). Since July 1, 2020, each Seller Warrant was exercisable into approximately 0.2523 shares of common stock for a total of 3,210,213 shares of common stock. The exercise price and the conversion factor were further adjusted during the year ended December 31, 2020 to an exercise price of $41.26 per share and each Seller Warrant was exercisable for 0.27411 shares of common stock for a total of 3,487,168 shares of common stock. Subsequently, as of January 19, 2021, the Seller Warrants were subject to a further adjustment to an exercise price of $40.31 per share and each Seller Warrant was exercisable for 0.28055 shares of common stock for a total of 3,569,051 shares of common stock. Refer to Note 12 - Warrant Liabilities for further detail.
Seller’s pre-Recapitalization Transaction indebtedness
a.Seller’s $125.5 million First Lien Agreement with the Bank of Nova Scotia, as agent, and $6.9 million promissory note plus accrued and unpaid interest were repaid with cash (see Note 10 - Debt, Net).
b.$48.5 million of Seller’s 1.25 Lien Notes were exchanged, and subsequently cancelled, for 4.85 million shares of common stock and the remaining $80.0 million of Seller’s 1.25 Lien Notes were exchanged for $80.0 million in aggregate principal of new Subordinated Notes of the Company (see Note 10 - Debt, Net).
c.After giving effect to the 1.5 Lien Notes’ 110% repurchase feature, $145.7 million of Seller’s 1.5 Lien Notes plus accrued and unpaid interest were exchanged, and subsequently cancelled, for 16.0 million shares of common stock (see Note 10 - Debt, Net).
d.Prior to close, a total of $221.3 million of Seller’s 2.0 Lien Notes were converted into 132.8 million shares of Seller common stock and, together with the existing 2.9 million shares of Seller’s common stock issued and outstanding, received transaction consideration of 15.1 million shares of common stock distributed by Seller, including 3.5 million surrendered shares received by Seller from the Company (see Note 10 - Debt, Net). The consideration initially received by Seller was promptly distributed to the its stockholders on a pro rata basis pursuant to Seller’s plan of dissolution.
Sprott entity transactions
a.The Company assumed the amended Sprott Credit Agreement and was advanced $70.0 million of cash, subject to an original issue discount of 2.0% (see Note 10 - Debt, Net). Pursuant to the Sprott Credit Agreement, the Company issued approximately 0.5 million shares of common stock to the Lender, which was equal to 1.0% of the Company’s post-closing shares of common stock issued and outstanding.
b.The Company entered into the Royalty Agreement among Hycroft Mining Holding Corporation, its wholly subsidiary Hycroft Resources and Development, LLC and Sprott Private Resource Lending II (CO) Inc. ("Sprott Royalty Agreement"), pursuant to which the Company received $30.0 million of cash proceeds and incurred a 1.5% net smelter royalty payment obligation, payable monthly, relating to the Hycroft Mine’s monthly production (see Note 11 - Deferred Gain on Sale of Royalty).
Other items
a.Seller retained a reserve of $2.3 million in cash for use in the dissolution of Seller.
b.A $2.5 million cash payment was made and approximately 0.04 million shares of common stock were issued to the Company’s underwriter, Cantor Fitzgerald & Co. (“Cantor”), pursuant to an underwriting agreement. Additionally, a $2.0 million payment was made to Cantor at closing in connection with shares of common stock held by Cantor, which were not redeemed from the SPAC trust balance prior to closing.
c.The Company remitted $1.8 million of cash to holders of Seller’s deferred phantom units (see Note 20 - Fair Value Measurements) and paid $7.4 million of cash for additional transaction costs.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Upon closing of the Recapitalization Transaction and after giving effect to the terms of the business combination, the former holders of Seller’s indebtedness and common stock, including affiliated entities of such former holders, owned approximately 96.5% of the issued and outstanding common stock. The following table summarizes the ownership of the Company’s common stock issued and outstanding upon closing of the Recapitalization Transaction:
| | | | | | | | | | | |
| Shares | | Ownership % |
| Former Seller stockholders and affiliated entities | 48,421,309 | | | 96.5 | % |
Former MUDS public stockholders(1) | 1,197,704 | | | 2.4 | % |
| Lender to Sprott Credit Agreement | 496,634 | | | 1.0 | % |
| Cantor Fitzgerald & Co. | 44,395 | | | 0.1 | % |
| Total shares issued and outstanding | 50,160,042 | | | 100.0 | % |
(1)Includes 200,000 shares held by Cantor.
4. Inventories and Ore on Leach Pads
The following table provides the components of Inventories and the estimated recoverable gold ounces therein (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 30, 2020 |
| Amount | | Gold Ounces | | Amount | | Gold Ounces |
| Inventories, current: | | | | | | | |
| Materials and supplies | $ | 4,376 | | | — | | | $ | 6,449 | | | — | |
| Merrill-Crowe process plant | 11 | | | 6 | | | 4,810 | | | 2,587 | |
| Carbon-in-column | 3,493 | | | 2,044 | | | 299 | | | 166 | |
| Finished goods (doré and off-site carbon) | 3,189 | | | 1,799 | | | 1,309 | | | 710 | |
| Inventories, non-current: | | | | | | | |
Stockpiles(1) | — | | | — | | | — | | | — | |
| Total | $ | 11,069 | | | 3,849 | | | $ | 12,867 | | | 3,463 | |
(1)During 2021, the Company began stockpiling sulfide ore. The Company intends to use the stockpiles for testing or for future processing through a mill and subsequent oxidation process. As of December 31, 2021, stockpiles had a value of $Nil as the Company did not have established proven and probable mineral reserves.
As of December 31, 2021 and December 31, 2020, Merrill-Crowe process plant, carbon-in-column and finished goods inventories included $0.4 million and $0.3 million, respectively of capitalized depreciation and amortization costs.
The following table summarizes Ore on leach pads and the estimated recoverable gold ounces therein (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Amount | | Gold Ounces | | Amount | | Gold Ounces |
| Ore on leach pads, current | $ | 10,106 | | | 7,130 | | | $ | 38,041 | | | 21,869 | |
| Ore on leach pads, non-current | — | | | — | | | 7,243 | | | 4,164 | |
| Total | $ | 10,106 | | | 7,130 | | | $ | 45,284 | | | 26,033 | |
As of December 31, 2021 and December 31, 2020, the current portion of Ore on leach pads included $0.6 million and $1.8 million, respectively of capitalized depreciation and amortization costs. Additionally, as of December 31, 2020 the non-current portion of Ore on leach pads included $0.4 million of capitalized depreciation and amortization costs.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Write-down of inventories
The Company recognized a Write-down of inventories on the Consolidated Statements of Operations of $13.9 million for the year ended December 31, 2021 related to the following:
•A write-down of the non-current portion of Ore on leach pads of $5.5 million for Production costs and $0.4 million of capitalized depreciation and amortization costs related to 3,612 ounces of gold contained in the over liner material on the new larger leach pad which the Company began constructing in 2020. As the 2022 Hycroft TRS does not include proven and probable mineral reserves, it was determined that the recoverability of these ounces is dependent upon additional work and technical studies and, as a result, it was determined that the ounces and related capitalized amounts should be written-off.
•A write-down of Inventories of $5.9 million for obsolete and slow moving materials and supplies inventories. As a result of ceasing mining operations, it was determined that certain materials and supplies were not expected to be used in the next 12 months and, accordingly, a reserve was placed against these items.
•A loss of $2.1 million related to a firm purchase commitment for crusher liners that the Company agreed to purchase under consignment over a period of three years beginning in August 2020. This loss relates to the unfulfilled commitment obligation and has been reduced to reflect the Company's negotiated settlement with the supplier and the Company has reflected the $2.1 million obligation in Accounts payable and accrued expenses on the Consolidated Balance Sheets.
In addition, the estimated recoverable gold ounces placed on the in-service leach pads are periodically reconciled by comparing the related ore contents to the actual gold ounces recovered (metallurgical balancing). As the Company did not experience a reduction in ounces expected to be recovered from its in-service leach pads during 2021, the Company did not record a Write-down of inventories related to our current Ore on leach pads inventories during the year ended December 31, 2021.
During the year ended December 31, 2020, the Company recognized a Write-down of inventories on the Consolidated Statements of Operations of $17.9 million based on metallurgical balancing results, the Company determined that 6,512 ounces of gold that had been placed on the in-service leach pads were no longer recoverable and recognized a Write-down of inventories on the Consolidated Statements of Operations, which included Production costs of $16.7 million and capitalized depreciation and amortization costs of $1.2 million. The write-off of ounces during the year ended December 31, 2020 was primarily due to mismanagement of the oxidation process, improper adjustments to variables in the oxidation process for changes in the ore type based on domain, and improper solution management. As a result, the Company determined it would recover less gold ounces than planned for those sections of the in-service leach pads.
HYCROFT MINING HOLDING CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
5. Prepaids and Other, Net
The following table provides the components of Prepaids and other, net and Other assets (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Prepaids and other, net | | | |
| Prepaids | | | |
| Insurance | $ | 1,014 | | | $ | 1,847 | |
| Mining claims and permitting fees | 891 | | | 417 | |
| License fees | 186 | | | 259 | |
| Equipment mobilization | — | | | 423 | |
| Other | 56 | | | 252 | |
| Deposits | 195 | | | 1,105 | |
| Total | $ | 2,342 | | | $ | 4,303 | |
| | | |
| Other assets | | | |
| Equipment not in use | $ | — | | | $ | 12,238 | |
| Royalty - advance payment | 600 | | | 360 | |
| Prepaid supplies inventory | — | | | 885 | |
| Total | $ | 600 | | | $ | 13,483 | |
DepositsDuring the year ended December 31, 2021, the Company determined that additional equipment was no longer expected to be purchased under the current mine plan. Accordingly, a full reserve was applied against a $0.9 million deposit previously paid by the Company to an equipment supplier.
Equipment not in use
As of December 31, 2021, the Company has reclassified the equipment not in use to Assets held for sale on the Consolidated Balance Sheets. See Note 8 - Assets Held for Sale.
As of December 31, 2020, equipment not in use was classified as Other assets and included three ball mills, one SAG mill, one regrind mill, and related motors and components that were previously purchased by a predecessor of the Company. During the second quarter of 2020, the Company engaged an international equipment broker to advertise equipment not in use for potential sale. As a result of the sale of a SAG mill along with updated estimates of fair value less selling costs, the Company recorded an adjustment of $5.3 million to the carrying value during the third quarter of 2020 to reflect the fair market value of the equipment not in use.
Prepaid supplies inventory
The Company has multiple inventory consignment agreements with certain of its suppliers of parts used in the crushing, drilling, and blasting processes that require the supplier to maintain a specified inventory of replacement parts and components that are exclusively for purchase and use at the Hycroft Mine. As part of the agreements, the Company is required to make certain payments in advance of receiving such consignment inventory at the mine site. The Company records advance payments as prepaid supplies inventory within Other assets until such inventory is received, at which point, the amounts are reclassified to Inventories. As of December 31, 2021 the Company had reclassified its prepaid supplies inventory to Inventories.
Royalty - advance payment
As of December 31, 2021, royalty-advance payments included annual advance payments for a portion of the Hycroft Mine that is subject to a mining lease requiring a 4% net profit royalty be paid to the owner of certain patented and unpatented mining claims. Refer to Note 23 - Commitments and Contingencies for further detail.
HYCROFT MINING HOLDING CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
6. Plant, Equipment, and Mine Development, Net
The following table provides the components of Plant, equipment, and mine development, net (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Depreciation Life
or Method | | December 31,
2021 | | December 31,
2020 |
| Leach pads | Units-of-production | | $ | 17,431 | | | $ | 17,432 | |
| Process equipment | 5 - 15 years | | 17,735 | | | 16,065 | |
| Buildings and leasehold improvements | 10 years | | 9,280 | | | 10,507 | |
| Mine equipment | 5 - 7 years | | 6,224 | | | 5,961 | |
| Vehicles | 3 - 5 years | | 1,454 | | | 991 | |
| Furniture and office equipment | 7 years | | 330 | | | 322 | |
| Mine development | Units-of-production | | — | | | 756 | |
| Construction in progress and other | | | 35,794 | | | 33,222 | |
| | | $ | 88,248 | | | $ | 85,256 | |
| Less, accumulated depreciation and amortization | | | (29,764) | | | (25,033) | |
| Total | | | $ | 58,484 | | | $ | 60,223 | |
Leach pads
The Company has historically recorded depreciation on its production leach pads by dividing the monthly ounce production by the estimated proven and probable mineral reserves included in its technical reports. As the Company ceased mining activities in November 2021 and no longer reports proven and probable mineral reserves for the Hycroft Mine, the Company estimated the remaining leach pad life based on available capacity in tons. As a result of this change in estimate, the Company recorded additional depreciation expense of $1.7 million for the year ended December 31, 2021.
Mine development
During the year ended December 31, 2021, the Company determined the previously capitalized mine development costs for drilling and additional studies related to it proven and probable mineral reserves reported under the 2019 Hycroft TRS no longer qualified for capitalization. As a result, the Company recorded an impairment charge of $6.7 million related to metallurgical testing and drill work previously capitalized that is included in Projects and development on the Consolidated Statements of Operations.
Construction in progress and other
The primary project included in construction in progress at December 31, 2021 was construction of a new larger leach pad, which continued through February 2021 at which time construction was suspended ($3.2 million, including $0.7 million of capitalized interest), resulting in construction costs for the new larger leach pad of $34.1 million since commencing construction in 2020.
7. Restricted Cash
The following table provides the components of Restricted cash (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Reclamation and other surety bond cash collateral | $ | 34,293 | | | $ | 39,677 | |
As of December 31, 2021, our surface management surety bonds totaled $59.3 million, of which $58.3 million secures the financial assurance requirements for the Hycroft Mine, and $1.0 million secures the financial assurance requirements for the adjacent water supply well field and exploration project, which were partially collateralized by the Restricted cash shown above. During the year ended December 31, 2021 the Company replaced certain surety bonds with new surety bonds with lower cash collateral requirements, resulting in an approximate $5.4 million reduction in restricted cash.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
8. Assets Held For Sale
The following table summarizes the Company's Assets held for sale by asset class as of December 31, 2021 and 2020 (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Equipment not in use | $ | 11,163 | | | $ | — | |
| Mine equipment | 125 | | | — | |
| Materials and supplies | 270 | | | — | |
| Total | $ | 11,558 | | | $ | — | |
The Assets held for sale are being marketed for sale and the Company has received interest from potential purchasers. It is the Company's intention to complete the sales of these assets within the upcoming year. During the year ended December 31, 2021, the Company determined that the carrying value of its Assets held for sale was higher than the estimated fair value and, as a result, the Company recorded an impairment charge of $1.8 million related to the difference between the carrying value of its Assets held for sale and the estimated fair value .
9. Other Liabilities
The following table summarizes the components of current and non-current portions of Other liabilities (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Other liabilities, current | | | |
| Accrued compensation | $ | 2,641 | | | $ | 1,560 | |
| Salary continuation payments | 935 | | | 1,215 | |
| Restricted stock units | 714 | | | 913 | |
| Deferred payroll tax liability | 471 | | | 436 | |
| Excise tax liability | 268 | | | — | |
| Accrued directors' fees | 15 | | | 33 | |
| Total | $ | 5,044 | | | $ | 4,157 | |
| | | |
| Other liabilities, non-current | | | |
| Lease liability | | | |
| Finance lease liability | $ | 286 | | | — | |
| Operating lease liability | 53 | | | $ | — | |
| Salary continuation payments | — | | | 1,145 | |
| Deferred payroll tax liability | — | | | 505 | |
| Total | $ | 339 | | | $ | 1,650 | |
Accrued compensation
Accrued compensation reflects amounts for pay earned by not yet due, amounts for accrued and unused vacation pay, and accrued incentive compensation.
Salary continuation payments
The Company has entered into separation agreements with former executives that provide for, among other things, continuation of such former executives' salaries and certain benefits for periods of 12-24 months from the date of separation.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
On October 6, 2021, the Company entered in a Waiver and Amendment to the Transition and Succession Agreement and Consulting Agreement with Randy Buffington, the former Chairman of the Board, President and Chief Executive Officer of the Company. The Waiver and Amendment amends the Transition and Succession Agreement and the Consulting Agreement between the Company and Mr. Buffington, dated July 1, 2020. The Waiver and Amendment terminated the remaining unpaid cash payments to Mr. Buffington pursuant to the Transition and Succession Agreement and Consulting Agreement in the aggregate amount of $0.7 million, in exchange for the issuance of an aggregate of up to 275,000 shares of the Company's common stock, of which 137,500 was issued on October 8, 2021, and the remaining shares to be issued on June 30, 2022.
Deferred payroll tax liability
Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company has deferred payment of certain employer payroll taxes, with 50% due December 31, 2022.
Excise tax liability
A new mining excise tax applied to gross proceeds became effective on July 1, 2021 following the passing of Assembly Bill 495 at the Nevada Legislative Session ended on May 31, 2021. The new excise tax is a tiered tax, with a highest rate of 1.1% and the first payment expected in April 2022.
The bill does not take into consideration expenses or costs incurred to generate gross proceeds. Therefore, this tax will be treated as a gross receipts tax and not as a tax based on income. As a result, this new tax will be reported as a component of Cost of sales and not as income tax expense. As of December 31, 2021, the Company has accrued $0.3 million related to the annual excise tax.
10. Debt, Net
Debt covenants
The Company’s debt agreements contain representations and warranties, events of default, restrictions and limitations, reporting requirements, and covenants that are customary for agreements of these types.
On November 9, 2021, we entered into a waiver (the “Waiver”) with Sprott Private Resource Lending II (Collector), LP (the “Lender”) of certain provisions of the Sprott Credit Agreement. Pursuant to the Waiver, the Lender has: (i) permitted the Company to cease active mining operations; and (ii) to reduce the amount of Unrestricted Cash required to be maintained by the Company from not less than $10.0 million to not less than $9.0 million for the period ending May 10, 2022.
As a result of the receipt of the Waiver, as of December 31, 2021, the Company was in compliance with all covenants under its debt agreements. Refer to Note 25 - Subsequent Events for further details on the Company's debt covenants and changes to the Company's debt agreements.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Debt balances
The following table summarizes the components of Debt, net (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Debt, net, current: | | | |
| Sprott Credit Agreement | $ | 17,223 | | | $ | 5,274 | |
| Note payable | 115 | | | — | |
| Less, debt issuance costs | (672) | | | (154) | |
| Total | $ | 16,666 | | | $ | 5,120 | |
| | | |
| Debt, net, non-current: | | | |
| Subordinated Notes | $ | 93,599 | | | $ | 84,797 | |
Sprott Credit Agreement (1) | 51,809 | | | 61,894 | |
| Note payable | 345 | | | — | |
| Less, debt issuance costs | (2,115) | | | (4,026) | |
| Total | $ | 143,638 | | | $ | 142,665 | |
(1) Non-current portion of the Sprott Credit Agreement as of the years ended December 31, 2021 and 2020 is presented net of original issue discount of 10.0 million and $14.7 million, respectively.
The following table summarizes the Company's contractual payments of Debt, net, including current maturities, for the four years subsequent to December 31, 2021 (dollars in thousands):
| | | | | |
| 2022 | 17,338 | |
| 2023 | 24,879 | |
| 2024 | 24,864 | |
| 2025 | 106,034 | |
| Total | 173,115 | |
Less, original issue discount, net of amortization ($7.0 million) | (10,024) | |
Less, debt issuance costs, net of amortization ($2.1 million) | (2,787) | |
| Total debt, net | $ | 160,304 | |
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Sprott Credit Agreement
On October 4, 2019, the Company, as borrower, certain subsidiaries of the Company, as guarantors, and Sprott Private Resource Lending II (Collector), LP. (“Lender”), as arranger, executed a secured multi-advance term credit facility pursuant to which Lender committed to make, subject to certain conditions set forth therein, term loans in an aggregate principal amount up to $110.0 million. On May 29, 2020, the Company entered into the Sprott Credit Agreement to update the conditions precedent and effect certain other changes to conform to the details of the business combination. On May 29, 2020, at the consummation of the Recapitalization Transaction, the Company borrowed $70.0 million under the Sprott Credit Agreement, which was equal to the amount available under the first and second tranches, and issued to Lender 496,634 shares of common stock, which was equal to 1.0% of the Company’s post-closing shares of common stock outstanding. The Company paid an original issuance discount equal to 2.0% ($1.4 million) of the amount borrowed. The Company does not believe it is currently able to borrow under the third and final $40.0 million tranche of the Sprott Credit Agreement due to its inability to satisfy applicable conditions and production milestones required by certain conditions precedent to borrowing.
As it relates to the $62.3 million initially recorded for the Sprott Credit Agreement on the May 29, 2020 closing of the Recapitalization Transaction, the Company recorded $70.0 million for the stated amount of the borrowing itself, $9.3 million for the additional interest payment obligation, and a $17.0 million discount (inclusive of the $1.4 million original issuance discount), which will be amortized to Interest expense, net of capitalized interest using the effective interest method over the term of the Sprott Credit Agreement. As of December 31, 2021, the interest rate charged on the outstanding principal balance of the Sprott Credit Agreement was 8.5%. Using the closing price of $12.65 per share of common stock on the Recapitalization Transaction date, the Company also recorded $6.3 million to Additional paid-in capital for the 496,634 shares of common stock issued to the Lender.
Advances under the Sprott Credit Agreement bear interest monthly at a floating rate equal to 7.0% plus the greater of (i) U.S. Dollar three-month LIBOR and (ii) 1.5%, per annum, accruing daily and compounded monthly. For a period of twelve months following the May 29, 2020 initial advance date, no cash payments of interest or principal will be due, with 100% of interest accruing and being capitalized on a monthly basis to the outstanding principal balance of the Sprott Credit Agreement. Additionally, for each three-month period commencing on February 28, 2021 and ending on the maturity date, the Company shall pay Lender additional interest on the last business day of such three-month period, calculated according to a formula set forth in the Sprott Credit Agreement and currently equal to $0.5 million per quarter ($9.3 million in total over the life of the Sprott Credit Agreement). Upon a prepayment of the entire Sprott Credit Agreement, all remaining additional interest payments and all remaining and yet unpaid additional interest must be prepaid as well.
The Company was required to make principal repayments beginning on August 31, 2021 and on the last business day every three months thereafter. The first four principal repayments are equal to two and one-half percent (2.5%) of the outstanding principal amount of the Sprott Credit Agreement on May 31, 2021 (including all capitalized interest thereon, if any, but excluding the principal repayment then due). All subsequent principal repayments are equal to seven and one-half (7.5%) of the outstanding principal amount of the Sprott Credit Agreement on May 31, 2021 (including all capitalized interest thereon, if any, but excluding the principal repayment then due). The entire outstanding balance of the Sprott Credit Agreement, together with all unpaid interest and fees (including all capitalized interest, if any), is due on the day that is five years from the last day of the month of the initial closing date, which shall be no later than May 31, 2025, the maturity date. The Company reviewed the features of the Sprott Credit Agreement for embedded derivatives, and determined no such instruments exist.
The Sprott Credit Agreement may be repaid in whole or in part, at any time prior to the maturity date. Each prepayment or cancellation of the Sprott Credit Agreement (including capitalized interest, if any), whether in whole or in part, voluntarily or mandatory, subject to certain exceptions, that occurs on or prior to the fourth anniversary of the date of the initial advance is subject to a prepayment premium between 3.0% and 5.0%. The obligations of the Company under the Sprott Credit Agreement are guaranteed by Credit Parties and secured by a lien on all properties and assets now owned, leased or hereafter acquired or leased by any Credit Party, as such terms are defined and further detailed in the Sprott Credit Agreement.
The Company is required to make prepayments of its outstanding principal balance equal to 50% or 100% of the proceeds received as outlined in the Sprott Credit Agreement. On October 31, 2020, the Company completed the sale of a SAG mill that was not in use for net proceeds of $2.3 million, of which $1.2 million was repaid in accordance with the Sprott Credit Agreement. See Note 25 - Subsequent Events for additional information related to repayment terms for the Sprott Credit Agreement.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Subordinated Notes
In connection with the business combination and pursuant to a 1.25 Lien Exchange Agreement, on May 29, 2020, the Company assumed $80.0 million in aggregate principal amount of Seller’s 1.25 Lien Notes that were exchanged as part of the Recapitalization Transaction (the "Subordinated Notes”). The Subordinated Notes are secured and subordinate in priority to the obligations under the Sprott Credit Agreement. The Subordinated Notes bear interest at a rate of 10.0% per annum, payable in-kind on a quarterly basis. The principal on the new Subordinated Notes is due December 1, 2025. See Note 25 - Subsequent Events for additional information related to repayment terms for the Subordinated Notes.
2.0 Lien Notes
As discussed in Note 3 - Recapitalization Transaction, on May 29, 2020, $221.3 million of Seller's 2.0 Lien Notes were converted into shares of Seller common stock which, along with all of Seller's other stockholders, as part of Sellers's plan of dissolution, received a pro rata distribution of common stock from Seller that was received by Seller as consideration from the Company. The Company recorded $74.6 million directly to retained earnings upon Seller's distribution of 14,795,153 shares of common stock to Seller's former 2.0 Lien Note holders, which represented the difference between the carrying value of the 2.0 Lien Notes and the value of the common stock received as consideration by Seller's former 2.0 Lien Note holders. The 2.0 Lien Notes bore interest at a rate of 15.0% per annum, payable in-kind on a quarterly basis, through the issuance of additional 2.0 Lien Notes. The 2.0 Lien Notes were converted into Seller common stock at a conversion price of $1.67 per share in accordance with the 2.0 Lien Agreement. While outstanding, the obligations under the 2.0 Lien Notes and the guarantees by the guarantors in respect thereof were secured by liens on substantially all assets of the Company and the guarantors, subject to the priority of the liens that secured the obligations under the First Lien Agreement, the 1.25 Lien Notes and the 1.5 Lien Notes.
1.5 Lien Notes
As discussed in Note 3 - Recapitalization Transaction, on May 29, 2020, after giving effect to the 1.5 Lien Notes’ 110.0% repurchase feature, $145.7 million of Seller’s 1.5 Lien Notes plus accrued and unpaid interest were exchanged, and subsequently cancelled, for 16,025,316 shares of common stock. The Company recorded a $14.6 million loss directly to retained earnings upon such exchange, which represented 10.0% of the $145.7 million aggregate principal amount of 1.5 Lien Notes balance at the time of exchange. While outstanding, the 1.5 Lien Notes bore interest at a rate of 15.0% per annum, which was payable in-kind on a quarterly basis, through the issuance of additional 1.5 Lien Notes. While outstanding, the obligations under the 1.5 Lien Notes and the guarantees by the guarantors in respect thereof were secured by liens on substantially all assets of Seller and the guarantors, subject to the priority of the liens that secured the obligations of the First Lien Agreement and the 1.25 Lien Notes, but superior in priority to the liens that secured the obligations of the 2.0 Lien Notes and the unsecured obligations of Seller.
1.25 Lien Notes
As discussed in Note 3 - Recapitalization Transaction, on May 29, 2020, $48.5 million in aggregate principal amount of Seller’s 1.25 Lien Notes, which bore interest at 15.0% per annum, payable in-kind, were exchanged, and subsequently cancelled, for 4,845,920 shares of common stock and the remaining $80.0 million aggregate principal amount of Seller’s 1.25 Lien Notes were exchanged for $80.0 million in aggregate principal amount of new Subordinated Notes that were assumed in the Recapitalization Transaction by the Company, bearing interest at a rate of 10.0% per annum, payable-in-kind. The 1.25 Lien Notes bore interest at a rate of 15.0% per annum, which was payable in-kind on a quarterly basis, through the issuance of additional 1.25 Lien Notes. While outstanding, the obligations under the 1.25 Lien Notes and the guarantees by the guarantors in respect thereof were secured by liens on substantially all assets of Seller and the guarantors, subject to the priority of the liens that secured the obligations of the First Lien Agreement, but superior in priority to the liens that secured the obligations of the 1.5 Lien Notes, the 2.0 Lien Notes and the unsecured obligations of Seller.
First Lien Agreement
As discussed in Note 3 - Recapitalization Transaction, on May 29, 2020, $125.5 million of outstanding principal under the First Lien Agreement with the Bank of Nova Scotia as agent, plus accrued interest, was repaid. Most recently, from January 31, 2020 through the repayment date, the First Lien Agreement bore interest at either LIBOR plus 7.5% or an Alternate Base Rate Canada plus 7.5%, as such terms were defined in the First Lien Agreement. The repayment of the First Lien Agreement and other obligations under the First Lien Agreement were guaranteed by all of the direct and indirect domestic subsidiaries of Seller. While outstanding, the obligations under the First Lien Agreement, the guarantees by the guarantors in respect thereof
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
were secured by liens on substantially all of the assets of the Company and its subsidiaries. Upon repayment of the First Lien Agreement, $3.3 million of restricted cash was released to the Company (see Note 6 - Restricted Cash).
Promissory Note
As discussed in Note 3 - Recapitalization Transaction, on May 29, 2020, a $6.9 million promissory note was repaid, the obligation of which related to a 2014 settlement with a vendor of a predecessor of Seller.
Interest expense, net of capitalized interest
The following table summarizes the components of recorded Interest expense, net of capitalized interest (dollars in thousands):
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
| Sprott Credit Agreement | | $ | 10,997 | | | $ | 6,009 | |
| Subordinated Notes | | 8,803 | | | 4,797 | |
| Amortization of debt issuance costs | | 1,394 | | | 1,972 | |
| Other interest expense | | 53 | | | 40 | |
| 2.0 Lien Notes | | — | | | 12,902 | |
| 1.5 Lien Notes | | — | | | 8,635 | |
| 1.25 Lien Notes | | — | | | 6,218 | |
| First Lien Agreement | | — | | | 4,575 | |
| Promissory Note | | — | | | 141 | |
| Capitalized interest | | (654) | | | (1,831) | |
| Total | | $ | 20,593 | | | $ | 43,458 | |
The Company capitalizes interest to Plant, equipment, and mine development, net for construction projects in accordance with ASC Topic 835, Interest. Interest expense incurred under the Subordinated Notes is payable-in-kind. In May 2021, the Company began paying cash for interest expense incurred under the Sprott Credit Agreement. Prior to May 2021, interest expense incurred under the Sprott Credit Agreement was payable-in-kind.
11. Deferred Gain on Sale of Royalty
On May 29, 2020, the closing date of the Recapitalization Transaction, the Company and Sprott Private Resource Lending II (Co) Inc. (the “Payee”) entered into a royalty agreement with respect to the Hycroft Mine (the “Sprott Royalty Agreement”) in which Payee paid to the Company cash consideration in the amount of $30.0 million, for which the Company granted to Payee a perpetual royalty equal to 1.5% of the Net Smelter Returns from its Hycroft Mine, payable monthly. Net Smelter Returns for any given month are calculated as Monthly Production multiplied by the Monthly Average Gold Price and the Monthly Average Silver Price, minus Allowable Deductions, as such terms are defined in the Sprott Royalty Agreement. The Company is required to remit royalty payments to the Payee free and clear and without any present or future deduction, withholding, charge or levy on account of taxes, except Excluded Taxes as such term is defined in the Sprott Royalty Agreement.
The Company had the right to repurchase up to 33.3% (0.5% of the 1.5% royalty) of the royalty on each of the first and second anniversaries from May 29, 2020. The Company did not exercise its right to repurchase 0.5% on the first anniversary and waived its right to the repurchase on the second anniversary (see Note 25 - Subsequent Events below). The Sprott Royalty Agreement is secured by a first priority lien on certain property of the Hycroft Mine, including: (1) all land and mineral claims, leases, interests, and rights; (2) water rights, wells, and related infrastructure; and (3) stockpiles, buildings, structures, and facilities affixed to, or situated on, the Hycroft Mine, which ranks senior to security interests and liens granted pursuant to the Sprott Credit Agreement. In addition to the terms generally described above, the Sprott Royalty Agreement contains other terms and conditions commonly contained in royalty agreements of this nature.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
During the year ended December 31, 2021, the Company recorded amortization of its Deferred gain on sale of royalty of approximately $0.1 million, and made payments under the Sprott Royalty Agreement of $2.3 million, which are included in Cost of sales on the Consolidated Statements of Operations. As of December 31, 2021, the Company included $0.1 million of the Deferred gain on sale of royalty in Current liabilities on its Consolidated Balance Sheets based upon the estimated gold and silver expected to be produced over the next 12 months, using the forecasted ounces expected to be produced during 2022.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
12. Warrant Liabilities
The following table summarizes the Company's outstanding warrants included in Warrant liabilities on the Consolidated Balance Sheets (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at January 1, 2021 | | Fair Value Adjustments(1) | | Transfers to an Unrelated Third Party | | Balance at
December 31, 2021 |
| | Warrants | | Amount | | Warrants | | Amount | | Warrants | | Amount | | Warrants | | Amount |
| Warrant liabilities | | | | | | | | | | | | | | | | |
| 5-Year Private Warrants | | 9,888,415 | | | $ | 15,326 | | | — | | | $ | (14,368) | | | (409,585) | | | $ | (294) | | | 9,478,830 | | | $ | 664 | |
| Seller Warrants | | 12,721,901 | | | 63 | | | — | | | (58) | | | — | | | — | | | 12,721,901 | | | 5 | |
| Total | | 22,610,316 | | | $ | 15,389 | | | — | | | $ | (14,426) | | | (409,585) | | | $ | (294) | | | 22,200,731 | | | $ | 669 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2020 | Warrant Issuances | Fair value adjustments(1) | Transfers to an Unrelated Third Party | Balance at
December 31, 2020 |
| Warrants | Amount | Warrants | | Amount | Warrants | Amount | Warrants | Amount | Warrants | Amount |
| Warrant liabilities | | | | | | | | | | | |
| 5-Year Private Warrants | — | | $ | — | | 10,240,000 | | | $ | 12,185 | | — | | $ | 3,722 | | (351,585) | | $ | (581) | | 9,888,415 | | $ | 15,326 | |
| Seller Warrants | 12,721,901 | | 18 | | — | | | — | | — | | 45 | | — | | — | | 12,721,901 | | 63 | |
| Total | 12,721,901 | $ | 18 | | 10,240,000 | | $ | 12,185 | | — | | $ | 3,767 | | $ | (351,585) | | $ | (581) | | 22,610,316 | | $ | 15,389 | |
(1)Liability classified warrants are subject to fair value remeasurement at each balance sheet date in accordance with ASC 814-40, Contracts on Entity's Own Equity. As a result, fair value adjustments related exclusively to the Company's liability classified warrants. Refer to Note 20 - Fair Value Measurements for further detail on the fair value of the Company's liability classified warrants.
The following table summarizes additional information on the Company's outstanding warrants:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Exercise Price | | Exercise Period | | Expiration Date | | Warrants Outstanding |
| Warrant liabilities | | | | | | | | |
| 5-Year Private Warrants | | $ | 11.50 | | | 5 years | | May 29, 2025 | | 9,478,830 | |
| Seller Warrants | | 40.31 | | | 7 years | | October 22, 2022 | | 12,721,901 | |
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Warrant liabilities
5-Year Private Warrants
Prior to the Recapitalization Transaction, MUDS issued 7,740,000 warrants to purchase 7,740,000 shares of common stock, and concurrently with the Recapitalization Transaction, the Company issued 2,500,000 private placement warrants as part of a forward purchase unit offering (collectively, the "5-Year Private Warrants"). Refer to Note 3 - Recapitalization Transaction for further detail on the Recapitalization Transaction. The 5-Year Private Warrants cannot be redeemed and can be exercised on a cashless basis if the 5-Year Private Warrants are held by the initial purchasers or their permitted transferees. If the 5-Year Private Warrants are transferred to someone other than the initial purchasers or their permitted transferees (i.e. transferred to an "Unrelated Third Party"), such warrants become redeemable by the Company under substantially the same terms as the 5-Year Public Warrants. Since the original issue of private warrants, transfers to an Unrelated Third Party totaled 761,170, including 351,585 and 409,585 in the year ended December 31, 2020 and 2021, respectively, and therefore became classified as 5-Year Public Warrants.
Seller Warrants
In connection with the Recapitalization Transaction, the Company assumed the obligations and liabilities under that certain warrant agreement, dated as of October 22, 2015, by and between Seller and Computershare Inc., a Delaware corporation, and its wholly owned subsidiary Computershare Trust Company, N.A., a federally chartered trust company, collectively as initial warrant agent; and Continental Stock Transfer & Trust Company, LLC was named as the successor warrant agent (the “Seller Warrant Agreement”). Pursuant to the assumption of the Seller Warrant Agreement, the warrants issued thereunder (the “Seller Warrants”) became exercisable into shares of common stock.
Under the Seller Warrant Agreement, certain adjustments are required to be made to: (i) the exercise price of each Seller Warrant; and (ii) the number of shares of common stock issuable upon exercise of each Seller Warrant upon issuing shares of common stock to “Restricted Persons” as defined in the Seller Warrant Agreement. As of December 31, 2021, the exercise price of each Seller Warrant was $40.31 per share of common stock and the number of shares of common stock issuable upon exercise of each Seller Warrant was 0.28055. As a result, an aggregate of 3,569,129 shares of common stock are issuable upon exercise of the 12,721,901 outstanding Seller Warrants. The Seller Warrants are listed on the Nasdaq Capital Market under the symbol "HYMCZ".
13. Asset Retirement Obligation ("ARO")
The following table summarizes changes in the Company’s ARO (dollars in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Balance, beginning of period | $ | 4,785 | | | $ | 4,374 | |
| Accretion expense | 408 | | | 374 | |
| Changes in estimates | — | | | 37 | |
| Balance, end of period | $ | 5,193 | | | $ | 4,785 | |
During the year ended December 31, 2021, the Company did not incur any additional reclamation obligations associated with additional disturbances, or other regulatory requirements. The Company estimates that no significant reclamation expenditures associated with the ARO will be made until 2047 and that reclamation work will be completed by the end of 2065. During the year ended December 31, 2021, there were no events or changes to the Company's regulatory environment or new or additional disturbances that would require a change to the Company's ARO due to changes in estimates. As a result, the Company did not record any adjustments to the ARO.
14. Stockholders' Equity
Following the May 29, 2020 Recapitalization Transaction, the total number of shares of all classes of capital stock that the Company has authority to issue is 410,000,000, of which 400,000,000 are common stock, par value $0.0001 per share, and 10,000,000 are preferred stock par value $0.0001 per share. The designations, powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect to each of our class of capital stock are discussed below.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Common stock
As of December 31, 2021, there were 60,433,395 shares of common stock issued and outstanding. Each holder of common stock is entitled to one vote for each share of common stock held by such holder. The holders of common stock are entitled to the payment of dividends and other distributions as may be declared from time to time by the Board of Directors in accordance with applicable law and to receive other distributions from the Company. See Note 25 - Subsequent Events for details related to issuances of shares of common stock that occurred in March 2022.
Preferred stock
As of December 31, 2021, there were no shares of preferred stock issued and outstanding.
Dividend policy
The Company’s credit facility under the Sprott Credit Agreement contains provisions that restrict its ability to pay dividends. For additional information see Note 10 - Debt, Net.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Warrants
The following table summarizes the Company's outstanding warrants included in Additional paid-in capital on the Consolidated Balance Sheets (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2021 | Warrant Issuances | Exercises of warrants | Transfers from an Unrelated Third Party | Balance at
December 31, 2021 |
| Warrants | Amount | Warrants | | Amount | Warrants | Amount | Warrants | Amount | Warrants | Amount |
| Equity classified warrants | | | | | | | | | | | |
| 5-Year Public Warrants | 24,401,483 | | $ | 28,618 | | — | | | $ | — | | — | | $ | — | | 409,585 | | $ | 294 | | 24,811,068 | | $ | 28,912 | |
| Public Offering Warrants | 9,583,334 | | 12,938 | | — | | | — | | — | | — | | — | | — | | 9,583,334 | | 12,938 | |
| Total | 33,984,817 | | $ | 41,556 | | — | | | $ | — | | — | | $ | — | | $ | 409,585 | | $ | 294 | | 33,984,918 | | $ | 41,850 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at January 1, 2020 | Warrant Issuances | Exercises of warrants | Transfers from an Unrelated Third Party | Balance at
December 31, 2020 |
| Warrants | Amount | Warrants | | Amount | Warrants | Amount | Warrants | Amount | Warrants | Amount |
| Equity classified warrants | | | | | | | | | | | |
| 5-Year Public Warrants | 20,800,000 | | $ | 25,100 | | 3,249,999 | | | $ | 2,938 | | (101) | | $ | (1) | | 351,585 | | $ | 581 | | 24,401,483 | | $ | 28,618 | |
| Public Offering Warrants | — | | — | | 9,583,334 | | | 12,938 | | — | | — | | — | | $ | — | | 9,583,334 | | $ | 12,938 | |
| Total | 20,800,000 | | $ | 25,100 | | 12,833,333 | | $ | 15,876 | | (101) | | $ | (1) | | $ | 351,585 | | $ | 581 | | 33,984,817 | | $ | 41,556 | |
The following table summarizes additional information on the Company's outstanding warrants:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Exercise Price | | Exercise Period | | Expiration Date | | Warrants Outstanding |
| Equity classified warrants | | | | | | | | |
| 5-Year Public Warrants | | $ | 11.50 | | | 5 years | | May 29, 2025 | | 24,811,068 | |
| Public Offering Warrants | | 10.50 | | | 5 years | | October 6, 2025 | | 9,583,334 | |
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
5-Year Public Warrants
Prior to the Recapitalization Transaction, MUDS issued 20,800,000 units, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $11.50 per share for a period of five years from the May 29, 2020 Recapitalization Transaction (the "IPO Warrants"), and concurrently with the Recapitalization Transaction, the Company issued 3,249,999 warrants upon substantially the same terms as part of a backstop unit offering at an exercise price of $11.50 per share for a period of five years from the issuance date (the "Backstop Warrants" and collectively with the IPO Warrants, the "5-Year Public Warrants"). During the years ended December 31, 2021 and 2020, 409,585 and 351,585, respectively, 5-Year Private Warrants were transferred from a 5-Year Private Warrant holder to an Unrelated Third Party and, accordingly those warrants are now included with the 5-Year Public Warrants. The Company has certain abilities to call the 5-Year Public Warrants if the last reported sale price of common stock equals or exceeds $18.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period. As of December 31, 2021, the Company had 24,811,068 5-Year Public Warrants outstanding. The 5-Year Public Warrants (other than the Backstop Warrants) are listed for trading on the Nasdaq Capital Market under the symbol "HYMCW". See Note 3 - Recapitalization Transaction for additional details on transactions to which the 5-Year Public Warrants were issued.
Public Offering Warrants
On October 6, 2020, the Company issued 9,583,334 units in an underwritten public offering at an offering price to of $9.00 per unit (the "Public Offering"), with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $10.50 per share (“Public Offering Warrants”). Of the 9.6 million units issued, 5.0 million units were issued to Restricted Persons, as defined under the Seller Warrant Agreement. After deducting underwriting discounts and commission and offering expenses, the proceeds net of discount and equity issuance costs to the Company were $83.1 million. The Public Offering Warrants are immediately exercisable and entitle the holder thereof to purchase one share of common stock at an exercise price of $10.50 for a period of five years from the closing date of the Public Offering. The shares of common stock and the Public Offering Warrants were separated upon issuance in the Public Offering. The Public Offering Warrants are listed for trading on the Nasdaq Capital Market under the symbol "HYCML".
15. Revenues
The table below is a summary of the Company’s gold and silver sales (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
| | Amount | | Ounces Sold | | Amount | | Ounces Sold |
| Gold sales | | $ | 100,532 | | | 56,045 | | | $ | 44,279 | | | 24,892 | |
| Silver sales | | 10,202 | | | 397,546 | | | 2,765 | | | 136,238 | |
| Total | | $ | 110,734 | | | | | $ | 47,044 | | | |
While the Company is not obligated to sell any of its gold and silver to one customer, the majority of gold and silver sales during both of the years ended December 31, 2021 and 2020 were to two customers, Customer A and Customer B. For the year ended December 31, 2021, approximately 90.4% of revenue was attributable to sales to Customer A and approximately 9.6% of revenue was attributable to Customer B. For the year ended December 31, 2020, approximately 88.6% of revenue was attributable to sales to Customer A and approximately 11.4% of revenue was attributable to sales to Customer B.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
16. Stock-Based Compensation
Performance and Incentive Pay Plan ("PIPP")
The Company's PIPP, which was approved on February 20, 2019 and amended on May 29, 2020 in connection with the Recapitalization Transaction, is a stock-based compensation plan to attract, retain and motivate employees and directors while directly linking incentives to increases in stockholder value. Terms and conditions (including performance-based vesting criteria) of awards granted under the PIPP are established by the Board of Directors or the Compensation Committee of the Board of Directors, who administer the PIPP. Awards made be granted in a variety of forms, including restricted stock, restricted stock units, stock options, stock appreciation rights, performance awards, and other stock-based awards. The number of shares of common stock made available for award under the PIPP is equal to 5% of the issued and outstanding shares of the Company's common stock immediately after the close of the Recapitalization Transaction, or 2,508,002 shares. As of December 31, 2021 there were no shares available for issuance under the PIPP.
As of December 31, 2021, all awards granted under the PIPP were in the form of restricted stock units to employees or consultants of the Company. Restricted stock units granted under the PIPP without performance-based vesting criteria typically vest in either equal annual installments over two to three years, or in entirety on the fourth anniversary after the grant date. Awards granted with performance-based vesting criteria typically vest in annual installments over three years subject to the achievement of certain financial and operating results of the Company. Certain restricted stock units granted to non-employee directors vested immediately while others vest in substantially equal installments over a two to three year period.
For certain restricted stock units granted during 2019 a price per share was not determined as of the grant date. The number of shares of common stock of the Company to be issued upon vesting is to be calculated on the vesting date, which is either the later of the second or third anniversary of the date of the grant, or the annual date the compensation committee determines the achievement of the corporate performance targets. Such unvested restricted stock unit awards are included in the current portion of Other liabilities. Refer to Note 9 - Other Liabilities for further detail. The Company estimates the number of shares of common stock to be issued upon vesting using the closing share price of its common stock on the last day of the period as quoted on the NASDAQ. For purposes of the outstanding unvested calculations below and the calculation of the shares available for issuance under the PIPP above, the Company used the closing share price on December 31, 2021 of $0.61 to estimate the number of shares of common stock to be issued upon vesting of these awards. As a result, actual shares of common stock issued upon vesting may be significantly different than these estimates.
The following table summarizes the Company’s unvested share awards granted under the PIPP:
| | | | | | | | | | | | | | |
| | Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value |
| Unvested awards at December 31, 2019 | | 339,271 | | | $ | 10.96 | |
| Granted | | 517,234 | | | 8.11 |
Canceled/forfeited(1) | | (131,724) | | | 11.32 |
| Vested | | (179,085) | | | 11.05 |
| Unvested awards at December 31, 2020(1) | | 545,696 | | | $ | 8.12 | |
| | | | |
| Unvested awards at December 31, 2020 | | 545,696 | | | $ | 8.12 | |
| Granted | | 1,171,869 | | | 5.08 | |
| Impact of fluctuations in price of common stock | | 1,632,136 | | | 0.61 | |
Canceled/forfeited(1) | | (762,822) | | | 3.42 | |
| Vested | | (375,968) | | | 4.06 | |
Unvested awards at December 31, 2021(1) | | 2,210,911 | | | $ | 2.82 | |
(1)Amounts include liability-based awards for which the number of units awarded is not determined until the vesting date. The number of liability-based award units included in this amount are estimated using the market value of the Company's common shares as of the end of each year.
During the year ended December 31, 2021 and the year ended December 31, 2020, the Company reclassified $0.8 million and $1.8 million from the current portion of Other liabilities to Additional paid-in capital for restricted stock units that vested.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
The total intrinsic value of restricted stock units (calculated as the product of price per share on the vesting date times the number of restricted stock units vested) vested during the years ended December 31, 2021 and 2020 was $1.3 million and $2.0 million, respectively.
Total compensation expense relating to restricted stock awards was $2.3 million and $2.4 million for the years ended December 31, 2021 and 2020, respectively.
As of December 31, 2021, $3.8 million of total unrecognized compensation cost related to restricted stock units was expected to be recognized as an expense by the Company in the future over a weighted-average period of approximately 2.27 years.
17. Income Taxes
For the year ended December 31, 2021 the Company recorded a current income tax benefit of $1.5 million primarily related to a carry back of the 2020 net operating loss to 2018 and 2019 under provisions of the CARES Act. For the year ended December 31, 2020, the Company recorded no income tax benefit or expense. During the year ended December 31, 2020, the Company reversed a portion of the valuation allowance based on the net operating loss expected to be used, in order to offset Seller's taxable gain related to the Recapitalization Transaction.
The Company is subject to state income tax in Colorado, which was the location of its corporate office during 2021, but did not incur any income tax expense related to Colorado due to continued net operating losses. The Company is subject to mining taxes in Nevada, which are classified as income taxes as such taxes are based on a percentage of mining profits, but did not incur any mining tax expense due to continued mining losses. The Company is not subject to foreign income taxes as all of the Company’s operations and properties are located within the United States.
The Company’s loss before income taxes was attributable solely to domestic operations in the United States. The components of the Company’s income tax expense (benefit) were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
| Current | | | | |
| Federal | | $ | (1,530) | | | $ | — | |
| Deferred | | | | |
| Federal | | (14,495) | | | 146,794 | |
| Change in Valuation Allowance | | 14,495 | | | (146,794) | |
| Income Tax Benefit | | $ | (1,530) | | | $ | — | |
The following table provides a reconciliation of income taxes computed at the United States federal statutory tax rate of 21% in 2021 and 2020 to the income tax provision (in thousands):
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
| Loss before income taxes | | $ | (90,094) | | | $ | (136,392) |
| United States statutory income tax rate | | 21 | % | | 21% |
| Income tax (benefit) at United States statutory income tax rate | | $ | (18,920) | | | $ | (28,642) |
| Change in valuation allowance | | 14,495 | | | (146,794) |
| Recapitalization transaction | | — | | | 157,855 |
| Cancellation of debt income | | — | | | 15,360 |
| State tax provision, net of federal benefit | | — | | | 1,263 |
| Warrant liability fair value adjustment | | 3,030 | | | 790 |
| Other | | (135) | | | 168 |
| Income Tax Benefit | | $ | (1,530) | | | $ | — | |
For the year ended December 31, 2021, the effective tax rate was a result of an increase in the valuation allowance of $14.5 million and warrant liability fair value adjustment.
For the year ended December 31, 2020, the effective tax rate was a result of an increase in the valuation allowance of $146.8 million which offset a $157.9 million net write-off and usage of certain deferred tax assets as a result of the Recapitalization Transaction and $15.4 million of cancellation of debt income related to the Recapitalization Transaction.
The components of the Company’s deferred tax assets are as follows (in thousands):
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
| Net operating loss | | $ | 30,355 | | | $ | 7,675 | |
| Mineral properties | | 39,371 | | | 39,555 | |
| Plant, equipment, and mine development | | 25,506 | | | 30,767 | |
| Intangible assets | | 20,204 | | | 21,710 | |
| Royalty | | 6,266 | | | 6,292 | |
| Interest expense carryforward | | — | | | 1,935 | |
| Asset retirement obligation | | 1,083 | | | 997 | |
| Stock-based compensation | | 856 | | | 405 | |
| Accrued compensation | | 502 | | | 197 | |
| Inventories | | 76 | | | 191 | |
| Reorganization costs | | — | | | — | |
| Other liabilities | | — | | | — | |
| Credits and other | | — | | | — | |
| Valuation allowance | | (124,219) | | | (109,724) | |
| Total net deferred tax assets | | $ | — | | | $ | — | |
Based on the weight of evidence available as of both December 31, 2021, and 2020, which included recent operating results, future projections, and historical inability to generate operating cash flow, the Company concluded that it was more likely than not that the benefit of its net deferred tax assets would not be realized and, as such, recorded full valuation allowances of $124.2 million and $109.7 million, respectively, against its net deferred tax assets.
The Company had net operating loss carryovers as of December 31, 2021 and 2020 of $144.5 million and $36.6 million, respectively, for federal income tax purposes. The carryforward amount as of December 31, 2021 can be carried forward
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
indefinitely and can be used to offset taxable income and reduce income taxes payable in future periods, pending any potential limitation pursuant to Internal Revenue Code (“IRC”) section 382. Additional analysis of the IRC section 382 limitations will be performed in the future and could result in an annual limitation applied to the $144.5 million of net operating losses.
As necessary, the Company provides a reserve against the benefits of uncertain tax positions taken in its tax filings that are more likely than not to not be sustained upon examination. Based on the weight of available evidence, the Company does not believe it has taken any uncertain tax positions that require the establishment of a reserve. The Company has not recorded any income tax reserves or related interest or penalties related to income tax liabilities as of December 31, 2021. The Company's policy, if it were to have uncertain tax positions, is to recognize interest and/or penalties related to unrecognized tax benefits as part of its income tax expense. With limited exception, the Company is no longer subject to U.S. federal income tax audits by taxing authorities for tax years 2017 and prior; however, net operating loss and credit carryforwards from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.
18. Loss Per Share
The table below summarizes the Company's basic and diluted loss per share calculations (in thousands, except share and per share amounts):
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 |
| Net loss | | $ | (88,564) | | | $ | (136,392) | |
| | | | |
| Weighted average shares outstanding | | | | |
| Basic | | 60,101,499 | | | 34,833,211 | |
| Diluted | | 60,101,499 | | | 34,833,211 | |
| | | | |
| Basic loss per common share | | $ | (1.47) | | | $ | (3.92) | |
| Diluted loss per common share | | $ | (1.47) | | | $ | (3.92) | |
Basic and diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Loss per share amounts in the 2020 period exclude the common share effects from certain of Seller's debt instruments, which are reflected in the 2021 period.
Due to the Company's net loss during the years ended December 31, 2021 and 2020, there was no dilutive effect of common stock equivalents because the effects of such would have been anti-dilutive. The following table summarizes the shares excluded from the weighted average number of common shares outstanding, as the impact would be anti-dilutive (in thousands): | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Warrants | 47,442 | | | 37,500 | |
| Restricted stock units | 2,211 | | 149 | |
| Total | 49,653 | | | 37,649 | |
Refer to Note 25 - Subsequent Events for information regarding equity financings that occurred subsequent to December 31, 2021 that would have had a material impact on the number of potential common shares outstanding at the end of the year if the transactions had occurred as of or prior to December 31, 2021.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
19. Segment Information
The Company's reportable segments are comprised of operating units that have revenues, earnings or losses, or assets exceeding 10% of the respective consolidated totals, and are consistent with the Company’s management reporting structure. Each segment is reviewed by the executive decision-making group to make decisions about allocating the Company's resources and to assess their performance. The tables below summarize the Company's segment information (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | Hycroft Mine | | Corporate and Other | | Total |
| 2021 | | | | | | |
| Revenue - Note 15 | | $ | 110,734 | | | $ | — | | | $ | 110,734 | |
| Cost of sales | | 163,338 | | | — | | | 163,338 | |
| Other operating costs | | 16,688 | | | 14,619 | | | 31,307 | |
| Loss from operations | | (69,292) | | | (14,619) | | | (83,911) | |
| Interest expense, net of capitalized interest - Note 10 | | — | | | (20,593) | | | (20,593) | |
| Fair value adjustment to warrants - Notes 12 and 20 | | — | | | 14,426 | | | 14,426 | |
| Gain on sale of equipment | | $ | (16) | | | $ | — | | | $ | (16) | |
| Loss before income taxes | | $ | (69,308) | | | $ | (20,786) | | | $ | (90,094) | |
| Income tax benefit - Note 17 | | — | | | 1,530 | | | 1,530 | |
| Net loss | | $ | (69,308) | | | $ | (19,256) | | | $ | (88,564) | |
| | | | | | |
| Total Assets | | $ | 138,971 | | | $ | 3,353 | | | $ | 142,324 | |
| | | | | | |
| 2020 | | | | | | |
| Revenue - Note 15 | | $ | 47,044 | | | $ | — | | | $ | 47,044 | |
| Cost of sales | | 109,621 | | | — | | | 109,621 | |
| Other operating costs | | 5,705 | | | 21,084 | | | 26,789 | |
| Loss from operations | | (68,282) | | | (21,084) | | | (89,366) | |
| Interest expense, net of capitalized interest - Note 10 | | (141) | | | (43,317) | | | (43,458) | |
| Fair value adjustment to warrants - Notes 12 and 20 | | — | | | (3,767) | | | (3,767) | |
| Interest income | | 199 | | | — | | | 199 | |
| Net loss | | $ | (68,224) | | | $ | (68,168) | | | $ | (136,392) | |
| | | | | | |
| Total Assets | | $ | 177,298 | | | $ | 55,328 | | | $ | 232,626 | |
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
20. Fair Value Measurements
Recurring fair value measurements
The following table sets forth by level within the fair value hierarchy, the Company’s liabilities that are measured at fair value on a recurring basis (dollars in thousands).
| | | | | | | | | | | | | | | | | |
| Hierarchy
Level | | December 31,
2021 | | December 31,
2020 |
| Warrant liabilities | | | | | |
| 5-Year Private Warrants | 2 | | 664 | | | 15,327 | |
| Seller Warrants | 2 | | 5 | | | 62 | |
| Total | | | $ | 669 | | | $ | 15,389 | |
5-Year Private Warrants
The 5-Year Private Warrants are valued using a Black-Scholes model that requires a variety of inputs including the Company's stock price, the strike price of the 5-Year Private Warrants, the risk-free rate, and the implied volatility. As the terms of the 5-Year Private Warrants are identical to the terms of the 5-Year Public Warrants except that the 5-Year Private Warrants, while held by the SPAC sponsor and/or SPAC underwriter and their permitted transferees, are precluded from mandatory redemption and are entitled to be exercise on a "cashless basis" at the holder’s election, the implied volatility used in the Black-Scholes model is calculated using a Monte-Carlo model of the 5-Year Public Warrants that factors in the restrictive redemption and cashless exercise features of the 5-Year Private Warrants. The Company updates the fair value calculation on at least a quarterly basis, or more frequently if changes in circumstances and assumptions indicate a change from the existing carrying value.
Seller Warrants
As part of the Recapitalization Transaction, the Company assumed Seller's obligations under the Seller Warrant Agreement and the 12.7 million Seller Warrants outstanding became exercisable into shares of the Company's common stock. The Seller Warrant Agreement also contains certain terms and features to reduce the exercise price and increase the number of shares of common stock each warrant is exercisable into. As a result, Seller Warrants are considered derivative financial instruments and carried at fair value. The fair value of Seller Warrants was computed by an independent third-party consultant (and validated by the Company) using a Monte Carlo simulation-based model that requires a variety of inputs, including contractual terms, market prices, exercise prices, equity volatility and discount rates. The Company updates the fair value calculation on at least an annual basis, or more frequently if changes in circumstances and assumptions indicate a change from the existing carrying value. See Note 12 - Warrant Liabilities for additional information on the Seller Warrants.
Items disclosed at fair value
Debt, net
The Sprott Credit Agreement and the Subordinated Notes are privately held and, as such, there is no public market or trading information available for such debt instruments. As of December 31, 2021 and December 31, 2020, the fair value of the Company’s debt instruments was $162.8 million and $154.9 million, compared to the carrying value of $160.3 million and $147.8 million as of December 31, 2021 and December 31, 2020, respectively. The fair value of the principal of the Company’s debt instruments, including capitalized interest, was estimated using a market approach in which pricing information for publicly traded, non-convertible debt instruments with speculative ratings were analyzed to derive a mean trading multiple to apply to the December 31, 2021 and 2020 balances.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
21. Supplemental Cash Flow Information
The following table provides supplemental cash flow information (dollars in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Cash interest paid | $ | 3,732 | | | $ | 5,366 | |
| | | |
| Significant non-cash financing and investing activities: | | | |
| Exchange of Seller's 1.5 Lien Notes for HYMC common stock | — | | | 160,254 | |
| Exchange of Seller's 1.25 Lien Notes for Subordinated Notes | — | | | 80,000 | |
| Exchange of Seller's 1.25 Lien Notes for HYMC common stock | — | | | 48,459 | |
| Write-off of Seller's debt issuance costs | — | | | 8,202 | |
| Increase in debt from in-kind interest | 11,425 | | | — | |
| Plant, equipment, and mine development additions included in Accounts payable and accrued liabilities | 538 | | | 1,229 | |
| Accrual of deferred financing and equity issuance costs | — | | | 94 | |
| Liability based restricted stock units transferred to equity | 765 | | — | |
22. Employee Benefit Plans
401(k) Plan
The Hycroft Mining Corporation 401(k) Plan (the “401(k) Plan”) is a defined contribution plan that is available to all employees of the Company upon their date of hire. The 401(k) Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and Section 401(k) of the Internal Revenue Code. Administrative fees of the 401(k) Plan are paid by the Company. The assets of the 401(k) Plan are held and the related investments are executed by the 401(k) Plan’s trustee.
Participants in the 401(k) Plan exercise control and direct the investment of their contributions and account balances among various investment alternatives. The Company matches a percentage of employee deferrals to the 401(k) Plan up to certain limits. For the years ended December 31, 2021 and 2020, the Company’s matching contributions totaled $1.1 million, and $0.9 million, respectively.
23. Commitments and Contingencies
From time to time, the Company is involved in various legal actions related to its business, some of which are class action lawsuits. Management does not believe, based on currently available information, that contingencies related to any pending or threatened legal matter will have a material adverse effect on the Company’s financial statements, although a contingency could be material to the Company’s results of operations or cash flows for a particular period depending on the results of operations and cash flows for such period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.
The Company has deductible-based insurance policies for certain losses related to general liability, workers’ compensation and automobile coverage. The Company records accruals for contingencies related to its insurance policies when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. Insurance losses for claims filed and claims incurred but not reported are accrued based upon estimates of the aggregate liability for uninsured claims using historical loss development factors and actuarial assumptions followed in the insurance industry.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
Financial commitments not recorded in the financial statements
As of December 31, 2021, the Company's off-balance sheet arrangements consisted of a net profit royalty arrangement, a net smelter royalty arrangement and routine consignment agreements for materials and supplies used in its operations.
Net profit royalty
A portion of the Hycroft Mine is subject to a mining lease that requires a 4% net profit royalty be paid to the owner of certain patented and unpatented mining claims. The mining lease also requires an annual advance payment of $120,000 every year mining occurs on the leased claims. All advance annual payments are credited against the future payments due under the 4% net profit royalty. An additional payment of $120,000 is required for each year total tons mined on the leased claims exceeds 5.0 million tons. As of December 31, 2021 total tons mined from the leased claims exceeded 5.0 million tons, for which the Company remitted the required additional payment of $120,000 during the fourth quarter of 2021. The total payments due under the mining lease are capped at $7.6 million, of which the Company has paid or accrued $3.0 million and included $0.6 million in Other assets in the Consolidated Balance Sheets as of December 31, 2021.
Net smelter royalty
Pursuant to the Sprott Royalty agreement in which the Company received cash consideration in the amount of $30.0 million, the Company granted a perpetual royalty equal to 1.5% of the Net Smelter Returns from its Hycroft Mine, payable monthly. Net Smelter Returns for any given month are calculated as Monthly Production multiplied by the Monthly Average Gold Price and the Monthly Average Silver Price, minus Allowable Deductions, as such terms are defined in the Sprott Royalty Agreement. The Company is required to remit royalty payments to the payee free and clear and without any present or future deduction, withholding, charge or levy on account of taxes, except Excluded Taxes as such term is defined in the Sprott Royalty Agreement.
As of December 31, 2021 and December 31, 2020, the estimated net present value of the Company’s net smelter royalty was $154.0 million and $148.4 million, respectively. The net present value of the Company's net smelter royalty was modeled using the following level 3 inputs: (i) market consensus inputs for future gold and silver prices; (ii) a precious metals industry consensus discount rate of 5.0%; and (iii) estimates of the Hycroft Mine’s life-of-mine gold and silver production volumes and timing based on an internal mine plan using measured and indicated mineral resources.
24. Related Party Transactions
During the year ended December 31, 2021, the Company incurred costs of $1.2 million, of which $0.3 million was included in Accounts payable and accrued expenses on the Consolidated Balance Sheets, to Ausenco Engineering USA South ("Ausenco") for work performed on preparing an Acid POX milling technical study. Diane Garrett is currently a non-executive director on Ausenco's Board of Directors.
Certain amounts of the Company's indebtedness have historically, and with regard to the $80.0 million aggregate principal of Subordinated Notes, are currently, held by five financial institutions. As of December 31, 2021, two of the financial institutions, Mudrick Capital Management, L.P (“Mudrick”) and, Whitebox Advisors, LLC (“Whitebox”), held more than 10% of the common stock of the Company and were considered affiliates and, as a result, each are considered a related party (the "2021 Related Parties") in accordance with ASC 850, Related Party Disclosures. For the year ended December 31, 2021, Interest expense, net of capitalized interest included $6.0 million for the debt held by the 2021 Related Parties. In addition, December 31, 2021, the 2021 Related Parties held a total $63.8 million of the Subordinated Notes.
As of December 31, 2020, three of the financial institutions, Highbridge Capital Management, LLC (“Highbridge”), Mudrick and Whitebox, held more than 10% of the common stock of the Company and were considered affiliates and, as a result, each are considered a related party (the "2020 Related Parties"). For the year ended December 31, 2020, Interest expense, net of capitalized interest included $31.3 million for the debt held by the 2020 Related Parties. As of December 31, 2020, the 2020 Related Parties held a total of $71.2 million, of the Subordinated Notes.
In connection with the closing of the Public Offering on October 6, 2020, Highbridge and Mudrick acquired 833,333, and 3,222,222 of the units, consisting of shares of common stock and Public Offering Warrants, issued in the Public Offering, respectively. Refer to Note 12 - Warrant Liabilities for further information.
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
25. Subsequent Events
Sprott Credit Agreement Waiver and Amendment
On February 28, 2022, the Company entered into the Waiver and Amendment among Hycroft Mining Holding Corporation, Sprott Private Resource Lending (Collector), L.P. and Sprott Private Resource Lending II (Co) Inc. amending the previous waiver obtained. Pursuant to the Waiver and Amendment, the lender has (i) waived the Company’s obligation under the Sprott Credit Agreement to maintain at least $9.0 million of Unrestricted Cash on the last day of each calendar month during the period ending May 10, 2022 (the “Waiver Period”), provided that, the Company maintains at least $7.5 million of Unrestricted Cash on the last day of February 2022 and at least $9.0 million on the last day of each month thereafter during the Waiver Period; (ii) waived all obligations of the Company to prepay the facility with the net cash proceeds of any Mill Asset Sales (as defined in the Waiver and Amendment) until the earlier of (A) the date on which the Company completes a private placement or other offering or issuance of its equity securities (the “Offering Date”) and (B) March 31, 2022; and (iii) extended the payment due date for the additional February interest payment and the February principal payment pursuant to the Sprott Credit Agreement until the earlier of (A) the Offering Date and (B) March 31, 2022. Further, pursuant to the Waiver and Amendment, any failure by the Company to comply with the terms of the preceding sentence shall constitute an immediate Event of Default under the Sprott Credit Agreement.
Pursuant to the Waiver and Amendment, the Company waived its Reduction Right under and as defined in the Sprott Royalty Agreement.
On March 11, 2022, the Company entered into an agreement (the “2022 March Sprott Agreement”) with the Lender under the Sprott Credit Agreement. Pursuant to the 2022 March Sprott Agreement, the Company was contemplating the sale or issuance of its equity securities pursuant to one or more transactions to be completed on or before March 31, 2022 (the “Equity Financing Transactions”). Subsequent to the 2022 March Sprott Agreement and prior to March 31, 2022, the Company entered into Equity Financing Transactions resulting in the Company’s receipt of total gross cash proceeds (before deduction of fees and expenses) of at least $50 million obligating the Lender and the Company to amend the principal repayment terms under the Sprott Credit Agreement such that no further scheduled payments of principal shall be required prior to May 31, 2025 (the “Maturity Date”) (i.e., there will be no required regular amortization payments of the Facility (as defined in the Sprott Credit Agreement) and the full principal balance of the Facility shall be due and payable in a single “bullet” payment on the Maturity Date).
The March 2022 Sprott Agreement also provided that, in connection with the modification of the required Facility amortization payments, the Company shall pay to the Lender an amount equal to $3.3 million, with such payment to be capitalized and added to the principal amount owing under the Sprott Credit Agreement and accrue interest at the same rate and upon the same terms as the existing loans under the Sprott Credit Agreement; provided, the payment or prepayment of such capitalized principal amount shall not be subject to the Prepayment Premium (as defined in the Sprott Credit Agreement) or any other penalty or premium.
Second Amendment to Sprott Credit Agreement
On March 30, 2022, the Company and Lender under the Sprott Credit Agreement entered into the Second Amended and Restated Credit Agreement (“Second A&R Agreement”), which (a) extends the maturity date for all of the loans and other principal obligations under the Sprott Credit Facility by two years, to May 31, 2027; (b) provides for the Company to prepay principal under the facility in the amount of $10.0 million promptly upon the Company’s receipt of cash proceeds from the Private Placement offering with American Multi-Cinema, Inc. and 2176423 Ontario Limited (the “Initial Equity Proceeds Prepayment”); (c) provides for the Company to prepay principal under the Sprott Credit Agreement in the amount of $13.9 million (representing 10% of the subsequent issuance of its equity interests consummated on or prior to March 31, 2022) (the “Subsequent Equity Proceeds Prepayments”); and (d) eliminates the prepayment premiums otherwise payable with respect to the Initial Equity Proceeds Prepayment, the Subsequent Equity Proceeds Prepayments and all future prepayments of principal under the Sprott Credit Facility. In addition, the Company’s obligations to prepay principal with proceeds of asset sales will be credited/offset by the aggregate amount of Initial Equity Proceeds Prepayment and the Subsequent Equity Proceeds Prepayments ($23.9 million), and to maintain a minimum amount of Unrestricted Cash (as defined in the Second A&R Agreement) is increased to $15.0 million. The Company (i) paid the previously deferred additional interest payment of $0.5 million, (ii) made the Initial Equity Proceeds Prepayment of $10.0 million and paid in kind a $3.3 million fee in connection with the modification and capitalized it to principal on March 16, 2022 and (iii) made the Subsequent Equity Proceeds Prepayment of $13.9 million on March 30, 2022; and after giving effect to such prepayments the outstanding principal
HYCROFT MINING HOLDING CORPORATION
Notes to Consolidated Financial Statements
balance under the Sprott Credit Agreement is estimated to be $57.9 million (before issuance discounts) including unpaid additional interest of approximately $7.1 million.
Amendment to the 10% Senior Secured Notes and Note Exchange Agreement
On March 14, 2022, the Company entered into an amendment to the 10% Senior Secured Notes and Note Exchange Agreement (the “Note Amendment”), with (i) certain direct and indirect subsidiaries of the Company as Guarantors; (ii) holders of the 10% Senior Secured Notes (the "Notes"), including certain funds affiliated with, or managed by, Mudrick Capital Management, L.P, Whitebox Advisors, LLC, Highbridge Capital Management, LLC, Aristeia Highbridge Capital Management, LLC and Wolverine Asset Management, LLC (collectively, the “Amending Holders”), and (iii) Wilmington Trust, National Association, in its capacity as collateral agent. The Note Amendment amends the Note Exchange Agreement dated as of January 13, 2020 (the “Note Exchange Agreement”) and the Notes (as defined in the Note Exchange Agreement) issued thereunder in order to extend the maturity date of the Notes from December 1, 2025 to December 1, 2027. The Note Amendment also removes the requirements that a holder receive the consent of the Company and the other holders in order to transfer any Note. The Amending Holders constitute all of the holders of the Notes. The Note Amendment became effective upon the closing of a private placement upon receipt of $55.9 million gross cash proceeds (before deduction of fees and expenses).
Private placement offering
On March 14, 2022, the Company entered into subscription agreements with two private investors pursuant to which the Company agreed to sell the entities an aggregate of 46,816,480 units at a purchase price per unit of $1.193 with each unit consisting of one share of the Company’s common stock and one warrant to purchase a share of Common Stock and the shares issuable upon exercise of the Warrants (the “Warrant Shares”), providing for a total purchase price of approximately $55.9 million. The Warrants have an exercise price of $1.068 per Warrant Share, and will expire five years after issuance. On March 15, 2022, the private placement offering closed and the Company received gross proceeds of $55.9 million before deducting expenses incurred in connection with therewith.
At-the-market offering
On March 15, 2022, the Company implemented an “at-the-market" offering ("ATM Program") by entering into an At Market Issuance Sales Agreement with B. Riley Securities, Inc. ("Sales Agreement"). Under the terms of the Sales Agreement, the Company may from time to time to or through the Agent, acting as sales agent or principal, offer and sell shares of its Class A common stock, par value $0.0001 per share, having a gross sales price of up to $500.0 million. Shares of common stock sold under the Sales Agreement,were issued pursuant to the Company’s shelf registration statement on Form S-3 (No. 333-257567) that the Securities and Exchange Commission declared effective on July 13, 2021, including the prospectus, dated July 13, 2021, and the prospectus settlement, dated March 15, 2022, as the same may be amended or supplemented. The Company completed the ATM Program on March 25, 2022 and received total gross proceeds, before deducting fees and expenses of the ATM Program, of $138.6 million for the sale of 89,553,602 shares of the Company’s common stock.