What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-09 · 152 added, 112 removed, 201 unchanged (57% of the section changed)

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The discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto for the year ended December 31, 2021 contained in our 2021 Annual Report on Form 10-K.

This discussion contains forward looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in “Risk Factors” in Item 1A of Part I of the 2021 Annual Report on Form 10-K, as updated and supplemented under the caption “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q, as further updated and/or supplemented in subsequent filings with the SEC.

Actual results may differ materially from those contained in any forward-looking statements.

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and its consolidated subsidiaries.

The unaudited condensed consolidated interim financial statements for the three months ended March 31, 2022 and 2021, respectively, present the financial position and results of operations of TMC the metals company Inc.

The unaudited condensed consolidated interim financial statements for the three and six months ended June 30, 2022 and 2021, respectively, present the financial position and results of operations of TMC the metals company Inc.

and its consolidated subsidiaries.

We are a deep-sea minerals exploration company focused on the collection and processing of polymetallic nodules found on the seafloor in international waters of the Clarion Clipperton Zone ("CCZ"), about 1,300 nautical miles south-west of San Diego, California.

We are a deep-sea minerals exploration company focused on the collection and processing of polymetallic nodules found on the seafloor in international waters of the Clarion Clipperton Zone (“CCZ”), about 1,300 nautical miles south-west of San Diego, California.

The CCZ is a geological submarine fracture zone of abyssal plains and other formations in the Eastern Pacific Ocean, with a length of around 7,240 km (4,500 miles) that spans approximately 4,500,000 square kilometers (1,700,000 sq mi).

Polymetallic nodules are discrete rocks that sit unattached to the seafloor, occur in significant quantities in the CCZ and have high concentrations of nickel, cobalt and copper in a single rock.

Polymetallic nodules are discrete rocks that sit unattached to the seafloor, occur in significant quantities in the CCZ and have high concentrations of nickel, manganese, cobalt and copper in a single rock.

These four metals contained in the polymetallic nodules are critical for the transition to clean energy.

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If we are able to collect polymetallic nodules from the seafloor on a commercial scale, we plan to use such nodules to produce three types of metal products:

(i) feedstock for battery cathode precursors (nickel-copper-cobalt matte and/or nickel and cobalt sulfates) for electric vehicles (“EV”) and renewable energy storage markets, (ii) nickel-copper-cobalt matte and/or copper cathode for EV wiring, clean energy transmission and other applications and (iii) manganese silicate for manganese alloy production required for steel production.

(i) feedstock for battery cathode precursors (nickel and cobalt sulfates) for electric vehicles (“EV”) and renewable energy storage markets, (ii) nickel-copper-cobalt matte and/or copper cathode for EV wiring, clean energy transmission and other applications and (iii) manganese silicate for manganese alloy production required for steel production.

Our mission is to build a carefully managed shared stock of metal (a “metals common”) that can be used, recovered and reused for generations to come.

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to develop a near-zero solid waste flowsheet.

The pyromet stages of the flowsheet were tested as part of our pilot plant program at FLSmidth & Co.

A/S’s and XPS Solutions’ (Glencore subsidiary) facilities and hydrometallurgical refining stages are being carried out at SGS SA.

The near-zero solid waste flowsheet is in the process design that is expected to serve as the basis for our onshore processing facilities.

The pyrometallurgical stages of the flowsheet were tested as part of our pilot plant program at FLSmidth & Co.

A/S’s and XPS Solutions’ (Glencore subsidiary) facilities and bench-scale hydrometallurgical refining work is being carried out with SGS SA.

The near-zero solid waste flowsheet provides a design that is expected to serve as the basis for our onshore processing facilities.

In March 2022, we entered into a non-binding memorandum of understanding with Epsilon Carbon Pvt, LTD.

(“Epsilon Carbon”) in which Epsilon Carbon expressed its intent to conduct pre-feasibility work to potentially finance, engineer, permit, construct and operate a commercial polymetallic nodule processing plant in India.

We are currently focused on applying for our first exploitation contract from the ISA on the NORI Area D contract area with the goal of potentially starting commercial production in 2024.

To reach our objective and initiate commercial production in 2024, we are:

Together with Epsilon Carbon, we have recently selected a suitable plant site in India and developed and issued a Request for Proposal for Project Zero Pre-feasibility and Feasibility Study.

We are currently focused on applying for our first exploitation contract from the ISA on the NORI Area D contract area and, subject to regulatory review by the ISA, intend to start commercial production in 2024.

To reach our objective, we are:

(i) defining our resource and project economics, (ii) developing an offshore nodule collection system, (iii) assessing the ESG impacts of offshore nodule collection, and (iv) developing onshore technology to process collected polymetallic nodules into a manganese silicate product, and an intermediate nickel-copper-cobalt matte product and/or end-products like nickel and cobalt sulfates, and copper cathode.

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We have yet to obtain exploitation contracts from the ISA to commence commercial scale polymetallic nodule collection in the CCZ and have yet to obtain the applicable environmental permits and other permits required to build and operate commercial scale polymetallic nodule processing and refining plants on land.

Developments in the First Quarter 2022

Building on the significant achievements in 2021, below are some of the major developments that occurred in the first quarter 2022.

● Project Zero Plant:

In March 2022, we announced that we entered into a non-binding memorandum of understanding for a business collaboration with Epsilon Carbon to complete a pre-feasibility study for a commercial plant in India, powered by renewables and targeting capacity to process approximately 1.3 million tonnes per annum (“Mtpa”) of wet nodules into more than 30,000 tonnes per annum (“TPA”) of an intermediate nickel-copper-cobalt matte product used in active cathode material for nickel-rich cathode chemistries for lithium-ion batteries and more than 750,000 TPA of manganese silicate by-product expected to be used in manganese alloy production for the steel industry.

● Project Zero System:

In March 2022, our subsidiary, NORI, and Allseas entered into a non-binding term sheet for the potential development and operation of a commercial nodule collection system.

The pilot nodule collection system developed and currently being tested by Allseas is expected to be upgraded to a commercial system with a targeted production capacity of approximately 1.3 Mtpa of wet nodules, with expected production readiness by the fourth quarter of 2024.

● Environmental Filings:

In March 2022, a revised Environmental Impact Study for the collector test was filed with the ISA (original filed July 29, 2021), incorporating stakeholder feedback and baseline results collected in 2021.

Subsequently, a detailed Environmental Management and Monitoring Plan for the collector test was filed with the ISA on May 2, 2022.

This documentation is required for the collector test to proceed, which is currently planned for the third quarter of 2022 in the NORI Area D.

Developments in the Second Quarter 2022

Below are some of the major developments that occurred in the second quarter 2022:

Pilot Collection System Trials:

● Harbor Trials:

In March 2022, the pilot collector vehicle underwent extensive equipment testing in the Port of Rotterdam and all systems were shown to be fully functional.

● North Sea Drive Trials:

In March 2022, the pilot collector vehicle and the Hidden Gem vessel underwent extensive testing of critical deployment and mobility functions in the Dutch Sector of the North Sea, covering a total of 4,533 meters.

All systems were shown to be functional.

Engineers successfully completed a variety of tests of the dynamic positioning system aboard Hidden Gem in advance of pilot trials in the NORI Area D in the CCZ expected in the second half of 2022.

Developments Subsequent to March 31, 2022

● Pilot Collection System Trials - Atlantic Deep-Water Trials:

In April 2022, segments of the pilot nodule riser system were mobilized onboard the Hidden Gem for planned deep-sea testing with the collector vehicle in the Eastern Atlantic Basin.

Vehicle drive testing down to 2,470-meter depths has now occurred, which we expect will be followed by tests in 1,500-meter depths deploying the riser and the collector, connecting them, then bringing them back onboard.

● Atlantic Deepwater Trials:

In May 2022, the pilot collector vehicle underwent extensive testing of its various pumps and critical mobility functions in ultra-deep water in the Atlantic Ocean.

Engineers successfully lowered the collector vehicle to depths of 2,470 meters and drove 1,018 meters across the seafloor, in advance of pilot trials in the NORI Area D in the CCZ expected in the second half of 2022.

● Riser & Jumper Trials:

In May 2022, the pilot riser system and jumper hose was successfully deployed in the Atlantic Ocean.

Engineers aboard the Hidden Gem deployed the flexible jumper hose, connected it to the base of the riser and then launched the pilot riser, lowering the assembly to a depth of around 650 meters before making a sub-sea connection between the jumper hose and collector vehicle in 745 meters water depth.

Onshore Processing:

● SINTEF Manganese Study:

In May 2022, we announced that we had retained SINTEF, one of Europe’s leading independent research institutions, to analyze our manganese silicate product that can be used to produce silicomanganese alloy for steelmaking.

SINTEF found that our high-grade nodule-derived manganese silicate, which we estimate could account for approximately one third of potential future revenues, behaves similarly to traditional land-based manganese sources and appears to have significant advantages on cost and carbon dioxide footprint, with the potential for 7 to 17% higher value-in-use, depending on carbon tax regimes.

Environmental, Social and Governance (ESG):

● Impact Report 2021:

In May 2022, we published our inaugural Impact Report setting out our motivations for collecting nodules and providing a forward-looking view of the potential environmental impacts of our expected operations and the efforts underway to potentially eliminate or reduce them.

● Independent Lifecycle Impact Assessment of NORI Area D Project:

In April 2022, we announced that we chose the leading lithium-ion battery supply chain research firm, Benchmark Mineral Intelligence (“Benchmark”), to conduct an independent lifecycle assessment of the environmental impacts of our planned NORI Area D polymetallic nodule project and

compare these impacts to producing the same metals from commonly used production pathways using conventional land ores.

Benchmark anticipates completing its comprehensive Lifecycle Impact Assessment for us in mid-Summer 2022.

Benchmark anticipates completing its comprehensive Lifecycle Impact Assessment for us by the end of the third quarter of 2022.

Developments Subsequent to June 30, 2022

● Project Zero Research :

In July, our Australian subsidiary entered into a research funding agreement with a consortium of institutions led by Australia’s Commonwealth Scientific Industrial Research Organization (CSIRO) to create a framework for the development of an ecosystem-based Environmental Management and Monitoring Plan (EMMP) for our proposed deep-sea polymetallic nodule collection operations in the CCZ.

● NORI Collector Test Environmental Impact Statement (EIS):

The Legal and Technical Commission (the “LTC”) reviewed the EIS submitted to the ISA as part of NORI’s program to undertake a test of the collector system during their July 2022 meeting and provided their comments to NORI on July 15, 2022.

The LTC noted that while the generic framework and spatial components of the monitoring program described in the EMMP were good, the monitoring program lacked sufficient detail on the overall sampling design and integrated environmental monitoring specifications that the LTC needs to adequately evaluate the accuracy and statistical reliability of the EIS and the Monitoring Plan.

As such, the LTC decided that it was unable to recommend to the Secretary-General of the Authority that the EIS be included in the program of activities of NORI until NORI provided more detail on its proposed survey design, the level of benthic sediment plume monitoring, pelagic sampling of biological impacts of the plume discharge, temporal issues of survey timing and duration, and the extent of noise monitoring.

NORI submitted its responses to the LTC on July 29, 2022 and it is under review by the LTC.

We continue to expect that the planned collector test in the CCZ will commence in the third quarter of 2022, as initially planned.

● PIPE Financing:

On August 15, 2022, we announced a private placement financing with 25 accredited investors, pursuant to three securities purchase agreements the Company entered into with the investors on August 12, 2022.

We will issue an aggregate of 37,978,680 common shares to the investors at a price per share of $0.80 ($0.9645 with respect to approximately $100,000 of common shares purchased by our Chief Executive Officer and Chairman in the private placement financing).

The Company expects to receive aggregate gross cash proceeds of approximately $30.4 million this quarter from the private placement and net proceeds of approximately $30 million, after deducting placement agent fees and offering expenses.

The Company agreed to file a resale registration statement for the common shares issued to the investors in the financing with the SEC on or before September 16, 2022.

The Business Combination

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The transaction resulted in the combined company being renamed “TMC the metals company Inc.” and the combined company’s common shares and warrants to purchase common shares commenced trading on the Nasdaq Global Select Market (“Nasdaq”) on September 10, 2021 under the symbols “TMC” and “TMCWW,” respectively.

As a result of the Business Combination, we received gross proceeds of $137.6 million ($104.5 million net of transactions fees).

As a result of the Business Combination, we received gross proceeds of $137.6 million ($104.5 million net of transaction fees).

The Business Combination was accounted for as a reverse recapitalization and DeepGreen was deemed the accounting acquirer.

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NORI Exploration Contract

NORI, our wholly-owned subsidiary, was granted the NORI Exploration Contract on July 22, 2011 under the sponsorship of Nauru.

NORI, our wholly-owned subsidiary, was granted a polymetallic nodule exploration contract in the CCZ by the ISA on July 22, 2011 under the sponsorship of Nauru.

This Exploration Contract provides NORI with exclusive rights to explore for polymetallic nodules in an area covering 74,830 km 2 in the CCZ (“NORI Area”) for an initial term of 15 years (renewable for successive five-year periods) subject to complying with the exploration contract terms and provides NORI with the priority right to apply for an exploitation contract to collect polymetallic nodules in the same area.

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TOML Exploration Contract

TOML, our wholly-owned subsidiary, was granted the TOML Exploration Contract on January 11, 2012 under the sponsorship of Tonga.

TOML, our wholly-owned subsidiary, was granted an exploration contract on January 11, 2012 by the ISA and sponsored by the Kingdom of Tonga pursuant to the TOML Exploration Contract .

TOML was acquired by us on March 31, 2020 for $32 million from Deep Sea Mining Finance Ltd.

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finalization of ISA regulations to allow for commercial exploitation, approval of an application for the ISA exploitation contract, developing environmental regulations associated with our business and successful development of our technologies to collect and process polymetallic nodules.

These risks, as well as other risks, are discussed in the section entitled “ Risk Factors ” in Item 1A of Part II of the 2021 Annual Report on Form 10-K as updated and/or supplemented in subsequent filings with the SEC.

These risks, as well as other risks, are discussed in the section entitled “ Risk Factors ” in Item 1A of Part I of the 2021 Annual Report on Form 10-K, as updated and supplemented under the caption “ Risk Factors ” in Item 1A of Part II of this Quarterly Report on Form 10-Q, as further updated and/or supplemented in subsequent filings with the SEC.

Impact of Global Inflation

As a pre-revenue company, persistent inflation may affect our ultimate cash requirements prior to our ability to begin commercial production.

In 2022, the global inflation rate has risen sharply.

Marine fuel prices and vessel day rates are higher year-over-year and have increased our exploration expenses beyond what we had originally expected.

Additionally, we are experiencing higher offshore labor costs through our contractors due to an upturn in the offshore oil and gas market.

Impact of Climate Change

We are committed to adopting the Task Force on Climate-Related Financial Disclosures recommendations.

In our upcoming inaugural impact report, we will be providing the same type of climate-related disclosure to the one in the 2021 Annual Report on Form 10-K.

We recognize that climate change may have a meaningful impact on our financial performance over time, and we have begun the process of consolidating key risks and corresponding action plans to mitigate their negative impact of climate change and create value.

In our first inaugural impact report published in May 2022, we provided climate-related disclosures and shared how we believe our mission is aligned with supporting a clean energy transition and contributing to a circular metals economy.

Our climate related transition risks and opportunities are likely to be driven by changes in regulation, public policy, and technology, as disclosed in our 2021 Annual Report on Form 10-K.

During the first quarter of 2022, active work comprised of the integration of the collector and riser to the Hidden Gem and completion of harbor testing, offshore dynamic positioning trials and the North Sea drive test.

There were some sporadic outbreaks of COVID on the Hidden Gem while the vessel was docked in Rotterdam requiring isolation of some of the members of the work crews.

The project plan was adjusted to minimize the impact on the project’s schedule resulting in little impact to the overall project schedule.

Allseas implemented pre-departure COVID protocols and there were no reported COVID incidents during the offshore dynamic positioning trials and the North Sea drive test.

During the second quarter of 2022, active work comprised the deep-water test of the collector system as well test deployment of the riser system and test connection of the jumper hose to the collector test all deployed by the Hidden Gem .

These tests were all completed successfully without any COVID outbreaks given the pre-departure COVID protocols that Allseas implemented.

At the end of the second quarter, the Hidden Gem was steaming from the Atlantic to the west coast of North America to commence mobilization for the collector test which is planned to commence in the third quarter 2022.

We continue to closely monitor the recent developments surrounding the continued spread and potential resurgence of COVID-19 from variants.

The COVID-19 pandemic may have an adverse impact on our operations, particularly because of preventive and precautionary measures that our company, other businesses, and governments are taking.

Refer to the section entitled “Risk Factors” in Item 1A of Part II of the 2021 Annual Report on Form 10-K as updated and/or supplemented in subsequent filings with the SEC for more information.

Refer to the section entitled “Risk Factors” in Item 1A of Part I of the 2021 Annual Report on Form 10-K, as updated and supplemented under the caption “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q, as further updated and/or supplemented in subsequent filings with the SEC for more information.

We are unable to predict the full impact that the COVID-19 pandemic will have on our future results of operations, liquidity and financial condition due to numerous uncertainties, including the duration of the pandemic and the actions that may be taken by government authorities.

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Restatement of Previously Issued Quarterly Financial Statements

As disclosed in our 2021 Annual Report on Form 10-K filed March 25, 2022, we have restated our financial statements as of and for the three-month period ended March 31, 2021 in the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

The restatement resulted from our expensing of options granted in the first quarter of 2021 under the Company’s Short-Term Incentive Plan based on the grantee’s historical start date with us rather than the grant date of the options on March 4, 2021, as required by U.S.

Generally Accepted Accounting Principles (“U.S.

This resulted in a $1.8 million overstatement of stock-based compensation expenses as of and for the three-month period ended March 31, 2021.

As disclosed in our 2021 Annual Report on Form 10-K, we have restated our financial statements as of and for the three and six-months period ended June 30, 2021 in the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

The restatement resulted from the following items:

certain invoices for exploration expenses were not appropriately accrued as of June 30, 2021, resulting in a $2.7 million understatement of each of exploration expenses and accounts payable and accrued liabilities as of and for the six-month period ended June 30, 2021;

our expensing of options granted in the first quarter of 2021 under the Company’s Short-Term Incentive Plan (“STIP”) based on the grantee’s historical start date with us rather than the grant date of the options on March 4, 2021, as required by US Generally Accepted Accounting Principles (“US GAAP”), resulting in a $1.8 million overstatement of stock-based compensation expenses as of and for the three-month period ended March 31, 2021, and $0.3 million understatement and $1.5 million overstatement of stock-based compensation expenses as of and for the six month period ended June 30, 2021, respectively.

Basis of Presentation

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Components of Results of Operations

We are an exploration-stage company with no revenue to date and a net loss of $21.1 million for the three months ended March 31, 2022, compared to a net loss of $55.7 million in the same quarter of 2021.

We have an accumulated deficit of approximately $325.3 million from inception through March 31, 2022.

We are an exploration-stage company with no revenue to date and a net loss of $12.4 million and $33.5 million for the three and six months ended June 30, 2022, respectively, compared to a net loss of $29.1 million and $84.9 million in the same periods of 2021, respectively.

We have an accumulated deficit of approximately $337.7 million from inception through June 30, 2022.

Our historical results may not be indicative of our future results for reasons that may be difficult to anticipate.

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Interest Income/Expense

Interest expense in the first quarter of 2021 resulted from our financing transactions, specifically the convertible debentures issued in February 2021, which accrued interest at 7% per annum.

Interest expense in the first half of 2021 resulted from our financing transactions, specifically the convertible debentures issued in February 2021, which accrued interest at 7% per annum.

The convertible debentures were fully converted into DeepGreen common shares on September 9, 2021.

Interest income recorded in the first half of 2022 resulted from the interest earned on the funds we received from the Business Combination which closed in September 2021.

Foreign Exchange Loss

The foreign exchange income or loss for the periods primarily relates to our cash held in Canadian dollars and to the settlement of costs incurred in foreign currencies, depending on either the strengthening or weakening of the U.S.

The foreign exchange income or loss for the periods reported primarily relates to our cash held in Canadian dollars and to the settlement of costs incurred in foreign currencies, depending on either the strengthening or weakening of the U.S.

Change in Fa ir V alue of W arrants L iability

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DeepGreen was determined to be the accounting acquirer and therefore, all information prior to the Business Combination, including the prior period financial information, represent the financial condition and operating results of DeepGreen.

The following is a discussion of our results of operations for the three months ended March 31, 2022 and 2021.

The following is a discussion of our results of operations for the three and six months ended June 30, 2022 and 2021.

Our accounting policies are described in Note 3 “Summary of Significant Accounting Policies” in our financial statements filed as part of the 2021 Annual Report on Form 10-K.

Comparison of the Three Months Ended March 31, 2022 and 2021

Three Months Ended March 31,

(dollar amounts in thousands)

Comparison of the Three and Six Months Ended June 30, 2022 and 2021

For the Three Months Ended

For the Six Months Ended

(Dollar amounts in thousands, except as noted)

Exploration and evaluation expenses

Interest expense

General and administrative expenses

Change in fair value of warrants liability

Foreign exchange loss

Foreign exchange loss (gain)

Interest expense (income)

Loss for the period

Three Months ended June 30, 2022 compared to Three Months ended June 30, 2021

We reported a net loss of $12.4 million in the second quarter of 2022, compared to $29.1 million in the same period of 2021.

The following explains the major reasons for the reduction in the net loss in the second quarter 2022.

Exploration and Evaluation Expenses

Exploration and evaluation expenses for the three months ended March 31, 2022 were $7.3 million, compared to $38.1 million for the same period in 2021.

The decrease of $30.8 million was primarily due a decrease in offshore campaign costs of $16.4 million, due to the completion of the NORI Area D baseline campaigns in the fourth quarter of 2021.

The first quarter of 2021 offshore campaign costs included a fair value increase of $12.2 million that was recognized on the issuance of DeepGreen common shares to Maersk.

The decrease in the first quarter year over year also reflects a reduction in share-based compensation of $15.2 million in the 2022 period, as a significant number of stock options were awarded in March 2021, in recognition of past services and in anticipation of the Business Combination, while no stock options were awarded in the first quarter of 2022.

Work on the PMTS progressed in the first quarter of 2022 resulting in increased PMTS expenses of $1.3 million, which partially offset the above expense reductions.

Exploration and evaluation expenses for the three months ended June 30, 2022 were $10.0 million, compared to $18.2 million for the same period in 2021.

The decrease of $8.2 million was primarily due a decrease in offshore campaign costs of $4.5 million, due to the completion of the NORI Area D baseline campaigns in the fourth quarter of 2021 and a reduction in share-based compensation of $6.5 million in the 2022 period, as the cost of the LTIP options with vesting condition of $3 billion market capitalization was completely amortized in 2021 in addition to the decrease in the amortization cost of STIP sign-up options granted in 2021 offset by the increase amortization cost of the RSUs issued to employees and contractors in 2022.

Work on the PMTS progressed in the second quarter of 2022 resulting in increased PMTS expenses of $1.3 million, which partially offset the above expense reductions.

General and Administrative Expenses

G&A expenses for the three months ended March 31, 2022 were $8.6 million compared to $17.4 million for the same period in 2021.

The decrease of $8.8 million in G&A expenses in the first quarter of 2022 was mainly the result of lower share-based compensation in the 2022 period as the first quarter of 2021 included the award of a significant number of stock options in recognition of past services and in anticipation of the Business Combination.

This decrease was partially offset by higher G&A expenses in the first quarter of 2022, reflecting an increase in personnel, legal and other expenses associated with being a public company.

G&A expenses for the three months ended June 30, 2022 were $8.3 million compared to $10.4 million for the same period in 2021.

The decrease of $2.1 million in G&A expenses was mainly the result of lower share-based compensation in the 2022 period as the cost of the LTIP options with vesting condition of $3 billion market capitalization was completely amortized in 2021 in addition to the decrease in the amortization cost of STIP sign-up options granted in 2021 offset by the increase amortization cost of the RSUs issued to employees and contractors in 2022.

This decrease was partially offset by higher G&A expenses in the second quarter of 2022, reflecting an increase in personnel, legal and other expenses associated with being a public company.

Change in Fair Value of Warrants Liability

The change in fair value of warrants liability during the second quarter of 2022 resulted in a credit of $5.7 million.

The credit was primarily due to a 67% decrease in the price of our warrants in the second quarter of 2022.

The warrants liability was initially recorded as part of the Business Combination and therefore did not exist in the prior year.

Six Months ended June 30, 2022 compared to Six Months ended June 30, 2021

We reported a net loss of $33.5 million in the first half of 2022, compared to $84.9 million in the same period of 2021.

The following explains the major reasons for the reduction in the net loss in the first half of 2022.

Exploration and Evaluation Expenses

Exploration and evaluation expenses for the six months ended June 30, 2022 were $17.3 million, compared to $56.3 million for the same period in 2021.

The decrease of $39 million was primarily due to a decrease in offshore campaign costs of $20.9 million, due to the completion of the NORI Area D baseline campaigns in the fourth quarter of 2021.

The first half of 2021 offshore campaign costs included a fair value increase of $12.2 million that was recognized on the issuance of DeepGreen common shares to Maersk Supply Service A/S (“Maersk”).

The decrease in the first half of 2022 also reflects a reduction in share-based compensation of $21.7 million, as a significant number of stock options were awarded in March 2021, in recognition of past services and in anticipation of the Business Combination, while no stock options were awarded in the first half of 2022.

Work on the PMTS progressed in the first half of 2022 resulting in increased PMTS expenses of $2.6 million, which partially offset the above expense reductions.

General and Administrative Expenses

G&A expenses for the six months ended June 30, 2022 were $16.9 million compared to $27.8 million for the same period in 2021.

The decrease of $10.9 million in G&A expenses in the first half of 2022 was mainly the result of lower share-based compensation in the 2022 period as the first half of 2021 included the award of a significant number of stock options in recognition of past services and in anticipation of the Business Combination.

This decrease was partially offset by higher G&A expenses in the first half of 2022, reflecting an increase in personnel, legal and other expenses associated with being a public company.

Change in F air V alue of W arrants Liability

The change in fair value of warrants liability during the first quarter of 2022 resulted in a charge of $5.2 million.

The charge was primarily due to a 25% increase in our share price in the first three months of 2022.

The change in fair value of warrants liability during the first half of 2022 resulted in a credit of $0.5 million.

The credit was primarily due to a 28% decrease in the price of our warrants in the first half of 2022.

The warrants liability was initially recorded as part of the Business Combination and therefore did not exist in the prior year.

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In addition, on September 9, 2021, we completed the Business Combination with SOAC, and as a result we received gross proceeds of $137.6 million ($104.5 million net of transaction fees).

As of March 31, 2022, we had cash on hand of $69.0 million.

As of June 30, 2022, we had cash on hand of $46.3 million.

We received lower than expected cash proceeds upon closing of the Business Combination resulting from higher-than-expected redemptions of SOAC’s Class A ordinary shares and the default by certain PIPE investors in their funding obligations in connection with the closing of the Business Combination.

As a result, we revised our work plan to focus on activities necessary to have an application ready for submission to the ISA in the second half of 2023 for an exploitation contract for the NORI Area D and stopped and/or deferred work and expenses associated with other activities.

In light of the significant deficit in expected funding following the closing of the Business Combination in September 2021, we adopted what we call a “capital-light” strategy whereby we removed any allocation of funds to capital expenditures that were not deemed necessary to support the submission of an application for an exploitation contract for the NORI Area D, and by negotiating the settlement of program expenditures with our equity whenever possible.

We have yet to generate any revenue from our business operations.

We are an exploration-stage company and the recovery of our investment in mineral exploration contracts and attainment of profitable operations is dependent upon many factors including, among other things, the development of production system for collecting polymetallic nodules from the seafloor as well as the development of our processing technology for the metallurgical treatment of such nodules, the establishment of mineable reserves, the demonstration of commercial and technical feasibility of seafloor polymetallic nodule collection and processing systems, metal prices, and securing ISA exploitation contracts.

We are an exploration-stage company and the recovery of our investment in mineral exploration contracts and attainment of profitable operations is dependent upon many factors including, among other things, the development of a production system for collecting polymetallic nodules from the seafloor as well as the development of our processing technology for the metallurgical treatment of such nodules, the establishment of mineable reserves, the demonstration of commercial and technical feasibility of seafloor polymetallic nodule collection and processing systems, metal prices, and securing ISA exploitation contracts.

While we have obtained financing in the past, there is no assurance that such financing will continue to be available on favorable terms, if at all.

We believe that our cash on hand will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months, however, additional cash resources may be required due to changes in business conditions or other developments, including, but not limited to, deferral of approvals, capital and operating cost escalation, currently unrecognized technical and development challenges or changes in external business environment.

We may need to seek additional equity or debt financing.

If the financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to delay our exploration and/or exploitation activities or scale back our operations, which could have a material adverse impact on our business and financial prospects.

We expect to incur significant expenses and operating losses for the foreseeable future, particularly as we advance towards our application to the ISA for an exploitation contract and preparation for potential commercialization.

Based on our cash balance, including the expected proceeds from the financing we announced in August 2022, we believe we will have sufficient funds to meet our obligations that become due within the next twelve months.

Our estimates used in reaching this conclusion are based on information available as at the date of filing this Quarterly Report on Form 10-Q.

Accordingly, actual results could differ from these estimates and resulting variances may result and we may need cash resources in this period in addition to the recently announced financing due to changes in business conditions or other developments, including, but not limited to, deferral of approvals, capital and operating cost escalation, currently unrecognized technical and development challenges, our ability to pay certain vendors or suppliers in our common shares or changes in external business environment.

In addition, we will need and expect to seek additional financing to fund our operations beyond the next twelve months and to reach potential commercial production through additional public or private equity, debt financings, equity-linked financings or other sources, including through non-dilutive asset- or project-based financings.

If these financing or other financing sources are not available, or if the terms of financing are less desirable than we expect, we may be forced to delay our exploration and/or exploitation activities or scale back our operations, which could have a material adverse impact on our business and financial prospects.

We may receive up to approximately $281.8 million in aggregate gross proceeds from cash exercises of the Public Warrants and the Private Warrants, based on the per share exercise price of such warrants.

However, the exercise price for the outstanding Public Warrants and Private Warrants is $11.50 per common share and there can be no assurance that such warrants will be in the money prior to their expiration, and as such, such warrants may expire worthless.

Based on the current trading price of our common shares we do not expect to receive any proceeds from exercise of the Public Warrants and Private Warrants unless there is a significant increase in the price of our common shares.

In certain circumstances, the Public Warrants and Private Warrants may be exercised on a cashless basis and the proceeds from the exercise of such warrants will decrease.

Furthermore, even if the warrants will be in the money, the holders of the warrants are not obligated to exercise their warrants, and we cannot predict whether holders of the warrants will choose to exercise all or any of their warrants.

Cash Flows Summary

Comparison of the Three Months Ended March 31, 2022 and March 31, 2021

Comparison of the Three and Six Months Ended June 30, 2022 and June 30, 2021

Presented below is a summary of our operating, investing and financing cash flows:

Three Months Ended March 31,

For the Three Months Ended

For the Six Months Ended

2021 Restated

(in thousands)

2021 Restated

Net cash (used in) operating activities

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(Decrease) increase in cash

Six Months ended June 30, 2022 compared to Six Months ended June 30, 2021

Cash flows used in Operating Activities

Net cash used in operating activities for the three months ended March 31, 2022 was $15.5 million, attributable to a net loss of $21.1 million and an increase in net operating assets and liabilities of $5.3 million, partially offset by non-cash adjustments of $12.2 million.

Non-cash adjustments primarily consisted of $6.9 million of expenses settled with share-based payments and $5.2 million related to the increase in the fair value of the Private Warrants, mainly as a result of the increase in our share price during the first three months of 2022.

Net cash used in operating activities for the six months ended June 30, 2022 was $38.1 million, attributable to a net loss of $33.5 million and an increase in net operating assets and liabilities of $17.0 million, partially offset by non-cash adjustments of $12.4 million.

Non-cash adjustments primarily consisted of $12.7 million of expenses settled with share-based payments, partially offset by $0.5 million related to the decrease in the fair value of the Private Warrants, mainly as a result of the decrease in our share price during the first half of 2022.

The increase in our net operating assets and liabilities was primarily due to a $15.9 million decrease in accounts payable and accrued liabilities in the 2022 period due to the timing of supplier payments.

Cash flows used in Investing Activities

Net cash used in investing activities for the three months ended March 31, 2022 was $0.2 million for the purchase of equipment, as compared to $2.2 million in the first three months of 2021, which related to the initial payments made to DSMF in connection with our acquisition of TOML in 2020.

Cash flows provided by Financing Activities

Net cash used in financing activities for the three months ended March 31, 2022 was $0.1 million, compared to $27.4 million provided by financing activities in the first three months of 2021, which consisted of $26.0 million from the issuance of convertible debentures in February 2021 and $1.4 million from the exercise of incentive stock options.

Net cash used in investing activities for the six months ended June 30, 2022 was $0.3 million for the purchase of equipment, as compared to $3.8 million in the first half of 2021, which related to the initial payments made to DSMF in connection with our acquisition of TOML in 2020.

Cash flows (used in) provided by Financing Activities

Net cash used in financing activities for the six months ended June 30, 2022 was nil, compared to $28.6 million provided by financing activities in the first half of 2021, which consisted of $26.0 million from the issuance of convertible debentures in February 2021 and $2.6 million from the exercise of incentive stock options.

PIPE Financing

On August 15, 2022, we announced a private placement financing with 25 accredited investors, including our Chief Executive Officer and Chairman Gerard Barron and ERAS Capital LLC, which is the investment fund of our director Andrei Karkar.

Pursuant to three securities purchase agreements we entered into on August 12, 2022, we will issue an aggregate of 37,978,680 common shares to the investors at a price per share of $0.80 ($0.9645 with respect to approximately $100,000 of common shares purchased by our Chief Executive Officer and Chairman in the private placement financing, which was the consolidated closing bid price of the common shares on August 11, 2022).

The Company expects to receive aggregate gross cash proceeds of approximately $30.4 million from the private placement this quarter and net cash proceeds of approximately $30 million, after deducting placement agent fees and offering expenses.

The Company agreed to file a resale registration statement for the common shares issued to the investors in the financing with the SEC on or before September 16, 2022.

Contractual Obligations and Commitments

NORI Exploration Contract

As part of the NORI Exploration Contract with the ISA, NORI submitted a periodic review report to the ISA in 2021, covering its intended work plan the 2017-2021 period.

As part of the NORI Exploration Contract with the ISA, NORI submitted a periodic review report to the ISA in 2021, covering the 2017-2021 period.

The periodic review report included a summary of work completed over the previous 5-year period (2017 to 2021) and a work plan and estimated budget for the next five-year period (2022 to 2026).

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The periodic review report, which included a proposed work plan and estimated budget for 2022 to 2026, has been reviewed by and agreed with the ISA, and we are implementing the next five-year plan.

NORI has estimated its work plan for 2022 and 2023 to be approximately $40 million and $25 million, respectively, which may be settled in cash or equity.

NORI has estimated its work plan for 2022 and 2023 to be approximately $40 million and $25 million, respectively, which may be settled in cash or through the issuance of the Company’s shares.

The cost of the estimated work plan for 2024 onwards is contingent on the ISA’s approval of the NORI Area D exploitation application.

Should the approval of NORI’s exploitation application for NORI Area D be delayed or rejected, NORI intends to revise its estimated future work plan in respect of its NORI Area.

Work plans are reviewed annually by the Company, agreed with the ISA and may be subject to change depending on the Company’s progress to date.

Work plans are reviewed annually by the Company, agreed with the ISA and may be subject to change depending on our progress to date.

Marawa Option Agreement and Services Agreement

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The commitment for fiscal 2022, 2023 and 2024 is AUD $1 million, AUD $3 million and AUD $2 million, respectively.

Such commitment is negotiated with the ISA as part of a five-year plan submissions and is subject to regular periodic reviews.

Such commitment is negotiated between Marawa and the ISA as part of a five-year plan submission and is subject to regular periodic reviews.

To date, very limited offshore marine resource definition activities in the Marawa Contract Area have occurred and DGE expects to commit future resources as contractually agreed with Marawa to evaluate the future commercial viability of any project in such area.

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Each company has been registered and incorporated within the applicable host nation’s jurisdiction.

The ISA requires that a contractor must obtain and maintain sponsorship by a host nation that is a member of the ISA and such nation must maintain effective supervision and regulation over such sponsored contractor.

Each of TOML and NORI is subject to the registration and incorporation requirements of these nations.

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Upon reaching the minimum recovery level within the exploitation contract area, TOML has agreed to pay Tonga a seabed mineral recovery payment based on the polymetallic nodules recovered from the exploitation contract area.

In addition, TOML has agreed to pay the reasonable direct costs incurred by Tonga to administer the obligations of Tonga to the ISA.

In addition, TOML will pay an administration fee each year to Tonga for such administration and sponsorship, which is subject to review and increase in the event TOML is granted an ISA exploitation contract.

On September 23, 2021, Tonga updated the TOML Sponsorship Agreement harmonizing the terms of its engagement with TOML with those held by NORI with Nauru.

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Under the PMTA, Allseas agreed to cover the development cost of the project in exchange for a payment from us upon successful completion of the pilot trial of the PMTS in NORI Area D.

On March 16, 2022, NORI and Allseas entered into a non-binding term sheet for the development and operation of commercial nodule collection system The pilot nodule collection system developed and currently being tested by Allseas and is expected to be upgraded to a commercial system with a targeted production capacity of 1.3 million tonnes of wet nodules per year with expected production readiness by the fourth quarter of 2024.

On March 16, 2022, NORI and Allseas entered into a non-binding term sheet for the development and operation of a commercial nodule collection system.

The pilot nodule collection system developed and currently being tested by Allseas is expected to be upgraded to a commercial system with a targeted production capacity of 1.3 million tonnes of wet nodules per year with expected production readiness by the fourth quarter of 2024.

NORI and Allseas intend to equally finance all costs related to developing and getting the first commercial system.

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Through December 31, 2021, we have made the following payments to Allseas under the PMTA:

(a) $10 million in cash in February 2020, (b) $10 million through the issuance of 3.2 million common shares valued at $3.11 per share in February 2020, (c) issued Allseas

warrants to purchase 11.6 million common shares at a nominal exercise price per share in March 2021 and (d) $10 million in cash in October 2021, following the closing of the Business Combination and meeting certain progress targets on the PMTS.

(a) $10 million in cash in February 2020, (b) $10 million through the issuance of 3.2 million common shares valued at $3.11 per share in February 2020, (c) issued Allseas warrants to purchase 11.6 million common shares at a nominal exercise price per share in March 2021 and (d) $10 million in cash in October 2021, following the closing of the Business Combination and meeting certain progress targets on the PMTS.

We made the second $10 million payment to Allseas under the PMTA on April 25, 2022, following the successful completion of the North Sea drive test.

The third and final $10 million payment to Allseas will be due upon successful completion of the pilot trial of the PMTS in NORI Area D.

Maersk Agreements

Effective March 15, 2017, we entered into a strategic partnership with Maersk to undertake the exploration, environmental baseline and offshore testing required to support development of feasibility studies for economic production of polymetallic nodules from the CCZ.

Under the agreement, Maersk provided vessel services and project management services, which enabled us to undertake the various offshore campaigns to support required pre-feasibility studies.

During these offshore campaigns, we undertook baseline studies required to complete an ESIA, collected nodules for metallurgical test work and collected samples and survey data for resource evaluation.

The invoiced cost related to the vessel was settled through issuance of common shares at an agreed upon price of $1.08 per common share.

Project management services provided by Maersk for managing these offshore campaigns are paid in cash.

On March 3, 2021, the agreement with Maersk was amended whereby all costs incurred on or after February 5, 2021, pertaining to the use of the marine vessel, would be paid in cash rather than through issuance of common shares.

Under this amendment, Maersk also agreed that amounts owed to Maersk for services rendered through February 5, 2021 in the aggregate amount of $4.6 million had been satisfied by the issuance of 4.2 million common shares at a contractual price per share of $1.08.

Our agreement with Maersk ended pursuant to its terms in January 2022.

We are currently in discussion with a third party to provide a survey vessel and specialized remotely operated vehicles, and autonomous underwater vehicles services required to support the implementation of the collector test monitoring survey planned for 2022 in the NORI Area D.

The third and final $10 million payment to Allseas will be due upon successful completion of the pilot trial of the PMTS in NORI Area D which is expected in the fourth quarter of 2022.

Offtake Agreement

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Actual results may differ from these estimates under different assumptions or conditions.

Except as described in Note 3 to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our 2021 Annual Report on Form 10-K filed with the SEC on March 25, 2022.

Recent Accounting Pronouncements

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We are an “emerging growth company” as defined in Section 2(a) of the Securities Act and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.

Following the closing of the Business Combination, we remained an emerging growth company through the end of the 2021 fiscal year and we expect to continue to take advantage of the benefits of the extended transition period at least to the end of the fiscal year, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards.

Following the closing of the Business Combination, we expect to remain an emerging growth company through at least the end of the 2022 fiscal year and we expect to continue to take advantage of the benefits of the extended transition period at least to the end of the 2022 fiscal year, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards.

This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.

Cautionary Statements Regarding the NORI Initial Assessment and TOML Mineral Resource Statement

We have defined the size and quality of our resource in the NORI and TOML Areas, as described below, in our SEC Regulation S-K (subpart 1300) compliant Technical Report Summary - Initial Assessment, of the NORI Property, Clarion-Clipperton Zone, Pacific Ocean dated March 17, 2021 ( “ NORI Initial Assessment ” ) and Technical Report Summary - TOML Mineral Resource, Clarion-Clipperton Zone, Pacific Ocean dated March 26, 2021 ( “ TOML Mineral Resource Statement ” ), respectively, prepared by AMC Consultants Ltd.

We plan to continue to define our resource in the NORI and TOML Areas and develop the project economics.

The initial assessment included in the NORI Initial Assessment is a conceptual study of the potential viability of mineral resources in the NORI Area D.

This initial assessment indicates that development of the mineral resource in the NORI Area D is potentially technically and economically viable;

We have estimated the size and quality of our resource in the NORI and TOML Areas, as described below, in our SEC Regulation S-K (subpart 1300) compliant Technical Report Summary - Initial Assessment, of the NORI Property, Clarion-Clipperton Zone, Pacific Ocean dated March 17, 2021 ( “ NORI Initial Assessment ” ) and Technical Report Summary - TOML Mineral Resource, Clarion-Clipperton Zone, Pacific Ocean dated March 26, 2021 ( “ TOML Mineral Resource Statement ” ), respectively, prepared by AMC Consultants Ltd.

We plan to continue to estimate our resource in the NORI and TOML Areas and develop the project economics.

The initial assessment included in the NORI Initial Assessment Report is a conceptual study of the potential viability of mineral resources in NORI Area D.

This initial assessment indicates that development of the mineral resource in NORI Area D is potentially technically and economically viable;

however, due to the preliminary nature of project planning and design, and the untested nature of the specific seafloor production systems at a commercial scale, economic viability has not yet been demonstrated.

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Information concerning our mineral properties in the NORI and TOML Technical Report Summaries and in this Quarterly Report on Form 10-Q includes information that has been prepared in accordance with the requirements of the SEC Mining Rules forth in subpart 1300 of Regulation S-K.

Under SEC standards, mineralization, such as mineral resources, may not be classified as a “ reserve ” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time of the reserve determination.

Under SEC standards, mineralization, such as mineral resources, may not be classified as a “ reserve ” unless the determination has been made that the mineralization would be economically and legally produced or extracted at the time of the reserve determination.

Inferred mineral resources have a high degree of uncertainty as to their existence and to whether they can be economically or legally commercialized.

Under the SEC Mining Rules, estimates of inferred mineral resources may not form the basis

of an economic analysis.

Under the SEC Mining Rules, estimates of inferred mineral resources may not form the basis of an economic analysis.

It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis