| Item 4.02 |
Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review. |
Non-Reliance on Previously Issued Financial Statements
The audit committee and the board of directors of the Company, in consultation with the Company’s management, concluded on February 20, 2024, that the Company should restate certain of its consolidated financial statements, which should no longer be relied upon. The affected financial statements are those included in the Company’s Forms 10-Q for each of the interim periods ended June 30, 2019, through June 30, 2023, and Forms 10-K for each of the years ended December 31, 2019, through December 31, 2022. The restatement relates primarily to the accounting and classification of the Company’s litigation financing as a derivative liability instead of as a loan payable.
During the preparation of its consolidated financial statements for the three- and nine-month periods ended September 30, 2023, a question arose regarding the historical accounting treatment of the Litigation Financing (as defined below), as a result of which the Company reevaluated its accounting treatment of the Litigation Financing and determined that it should be accounted for and classified as a derivative liability on the balance sheet, measured at fair value at each reporting date, with the corresponding change in market value being accounted for in the statement of operations. At the inception of the Litigation Financing in 2019, the Company, with the assistance of external accounting advisors, concluded that it should account for the Litigation Financing as a loan payable, and the related accrued interest as a short-term liability, in its consolidated financial statements beginning in the second quarter of 2019.
The Litigation Financing was provided to the Company and its subsidiary, Exploraciones Oceánicas S. de R.L. de C.V. (together, the “Claimholder”) pursuant to an International Claims Enforcement Agreement dated as of June 14, 2019 (as thereafter amended and restated, the “ICEA”), with Poplar Falls LLC (the “Funder”), pursuant to which the Funder has provided an aggregate of approximately $24.9 million (the “Litigation Financing”) to fund certain expenses relating to the Claimholder’s pending arbitration against the United States of Mexico under Chapter Eleven of the North American Free Trade Agreement (the “Arbitration”). The ICEA was originally filed as an exhibit to the Company’s Current Report on Form 8-K filed on June 20, 2019; the most recent version, the Third Amended and Restated International Claims Enforcement Agreement dated as of June 14, 2021, was filed as an exhibit to the Company’s Current Report on Form 8-K filed on June 17, 2021; and full descriptions of the ICEA, the Litigation Financing, and the Arbitration are disclosed in the Company’s Form 10-K for the year ended December 31, 2022, filed on March 31, 2023, as well as in several of the Company’s earlier Forms 10-Q and Forms 10-K.
The change in accounting treatment does not reflect any change in the Company’s expectations regarding the outcome of the Arbitration or any amendment or modification of the ICEA, or of the Company’s anticipated cash flows. It is a change in the accounting treatment of the Litigation Financing resulting in certain reclassifications in the financial statements.