HYCROFT MINING HOLDING CORP quarterly report, Q1 FY2020

Business Context and Reporting Period

Mudrick Capital Acquisition Corporation, a blank-check company and emerging growth company, filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The company had not commenced operating activities or generated operating revenue and was pursuing a business combination focused on Hycroft Mining Corporation.

On February 10, 2020, stockholders extended the business-combination deadline from February 12, 2020 to August 12, 2020. The company entered into a Hycroft purchase agreement on January 13, 2020, as amended February 26, 2020.

Financial Metrics

MetricQ1 2020Q1 2019 / Prior Period
Operating revenue$0$0
General and administrative expenses$3.12 million$0.16 million
Interest income from Trust Account$0.66 million$1.15 million
Net income (loss)$(2.59) million$0.74 million income
Cash used in operating activities$(0.84) million$(0.32) million
Cash outside Trust Account at period end$12,639$0.42 million at March 31, 2019
Trust Account investments$71.79 million$215.39 million at December 31, 2019
Total liabilities$10.58 million$7.61 million at December 31, 2019

Margins are not meaningful because the company had no operating revenue. The quarter-end balance sheet included $2.67 million of accounts payable and accrued expenses, $0.60 million outstanding under a non-interest-bearing related-party convertible promissory note, and $7.28 million of deferred underwriting fees contingent on completion of a business combination.

Material Changes Versus the Prior Comparable Period

  • The company shifted from $0.74 million of net income in Q1 2019 to a $2.59 million net loss in Q1 2020, primarily because general and administrative expenses increased to $3.12 million from $0.16 million.
  • Trust Account investments declined by approximately $143.60 million from December 31, 2019, principally because 13,890,713 shares were redeemed for approximately $144.22 million following the extension vote.
  • Interest income declined to $0.66 million from $1.15 million, reflecting the substantially smaller Trust Account balance.
  • Cash outside the Trust Account decreased to $12,639, while accounts payable and accrued expenses increased materially to $2.67 million.
  • The company issued a $1.50 million Sponsor promissory note on January 2, 2020; $0.60 million was outstanding at March 31, 2020. An additional $0.10 million was drawn in April 2020.

Outlook, Risks, Contingencies, and Unusual Items

  • Management intends to use substantially all Trust Account funds, net of applicable taxes and deferred underwriting fees, to complete the Hycroft Business Combination. The Sponsor also committed to a $25 million forward purchase transaction upon closing.
  • The filing states that liquidity, the August 12, 2020 mandatory liquidation date, and the uncertainty of completing a business combination raise substantial doubt about the company’s ability to continue as a going concern.
  • If no business combination is completed by August 12, 2020, the company expects to redeem public shares and liquidate, subject to applicable law. Public warrants may expire worthless in that event.
  • The deferred underwriting arrangement was amended so that the $7.28 million fee would be paid upon completion of the Hycroft transaction through a combination of cash and Class A common stock. Based on the March 31, 2020 Trust Account value, the filing estimated approximately $2.67 million of one component would be payable in stock.
  • A purported Hycroft warrant holder filed a Delaware class action seeking, among other remedies, treatment of the transaction as a fundamental change and an injunction against closing. The company and Hycroft moved to dismiss on March 27, 2020. Although Part II, Item 1 states “None” for legal proceedings, Note 5 discloses this action.
  • Management stated that COVID-19 could negatively affect the company’s financial position, results, or target-company search, but that the specific impact was not determinable as of the filing date.
  • The company reported effective disclosure controls and no material changes to internal control over financial reporting.

Investor Verification Points

  • Verify whether the Hycroft Business Combination closed by the August 12, 2020 deadline and review its final consideration, assumed liabilities, financing, and dilution.
  • Reconcile the substantial reduction in the Trust Account with redemptions, taxes, deferred underwriting fees, and any subsequent withdrawals.
  • Assess the going-concern disclosure in light of the very limited cash outside the Trust Account and the company’s accrued liabilities.
  • Review the status and resolution of the Hycroft warrant-holder litigation and its potential effect on transaction completion and assumed liabilities.
  • Evaluate dilution from Class B founder-share conversion, warrants, the Sponsor’s forward purchase commitment, potential stock-paid underwriting fees, and other transaction securities.