NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Description of the Business
FREYR Battery (“FREYR,” the “Company”, “we”, or “us”) is a developer of clean, next-generation battery cell production capacity. Our mission and vision are to accelerate the decarbonization of global energy and transportation systems by producing clean, cost-competitive batteries. We are in the design and testing phase related to our battery production process and we are in the final stages of the construction of our Customer Qualification Plant (“CQP”) and groundworks and foundation structures for our inaugural gigafactory (“Giga Arctic”), both located in Mo i Rana, Norway. As of September 30, 2022, we have not yet initiated manufacturing or derived revenue from our principal business activities.
Business Combination
On January 29, 2021, FREYR AS, a private limited liability company organized under the laws of Norway (“FREYR Legacy”) and Alussa Energy Acquisition Corp., a Cayman Islands exempted company (“Alussa”), among others, entered into the Business Combination Agreement (the “BCA”) to effect a merger between the companies (the “Business Combination”). FREYR, a Luxembourg public limited liability company was formed to complete the Business Combination and related transactions and carry on the business of FREYR Legacy. FREYR serves as the successor entity to FREYR Legacy, the predecessor entity.
The merger was completed in multiple stages, pursuant to the terms of the BCA, which included among other things, the transfer of FREYR Legacy’s wind farm business to Sjonfjellet Vindpark Holding AS (“SVPH”), resulting in SVPH shares being held by FREYR Legacy’s shareholders. On July 8, 2021, FREYR’s ordinary shares and warrants began trading on the New York Stock Exchange. On July 9, 2021, FREYR completed the Business Combination with FREYR Legacy and Alussa. In connection with the consummation of the transactions contemplated by the BCA, FREYR Legacy and Alussa became wholly owned subsidiaries of FREYR.
The Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, Alussa was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on the following factors: (i) FREYR Legacy’s existing operations comprised the ongoing operations of the combined company, (ii) FREYR Legacy’s senior management comprised the senior management of the combined company and (iii) no shareholder had control of the board of directors or a majority voting interest in the combined company. In accordance with guidance applicable to these circumstances, the Business Combination was treated as the equivalent of FREYR issuing shares for the net assets of Alussa, accompanied by a recapitalization. The net assets of Alussa were stated at historical cost, with no goodwill or other intangible assets recorded.
As a result, the condensed consolidated financial statements included herein reflect (i) the historical operating results of FREYR Legacy prior to the Business Combination, (ii) the combined results of FREYR, FREYR Legacy and Alussa following the closing of the Business Combination, (iii) the assets and liabilities of FREYR Legacy at their historical cost, (iv) the assets and liabilities of FREYR and Alussa at their historical cost, which approximates fair value, and (v) FREYR’s equity structure for all periods presented.
In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, guidance applicable to these circumstances, the equity structure has been restated in all comparative periods up to the closing date, to reflect the number of shares of FREYR’s ordinary shares issued to FREYR Legacy’s shareholders in connection with the recapitalization transaction. As such, the shares and corresponding capital amounts and earnings per share related to FREYR Legacy’s ordinary shares prior to the Business Combination have been retroactively restated as shares reflecting the exchange ratio established in the Business Combination.
Basis of Presentation
The unaudited condensed consolidated interim financial statements have been prepared in conformity with the accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of United States Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, these financial statements do not include all of the information required by GAAP for complete consolidated financial statements.
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements for the year ended December 31, 2021 and, in management’s opinion, include all adjustments, consisting of only normal recurring adjustments necessary for the fair presentation of the Company’s condensed consolidated financial statements for the periods presented. The results of operations for the nine months ended September 30, 2022, are not necessarily indicative of the results to be expected for the full year ending December 31, 2022. The condensed consolidated balance sheet as of December 31, 2021, was derived from the audited consolidated financial statements as of December 31, 2021. However, these interim condensed consolidated financial statements do not contain all of the footnote disclosures from the annual consolidated financial statements. These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 9, 2022.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The condensed consolidated financial statements include the accounts of FREYR and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. Certain prior period balances and amounts have been reclassified to conform with the current year presentation.
Use of Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Estimates and assumptions include, but are not limited to, estimates related to the valuation of share-based compensation, warrant liability, and convertible note. We base these estimates on historical experiences and on various other assumptions that we believe are reasonable under the circumstances, however, actual results may differ materially from these estimates.
Risks and Uncertainties
We are subject to those risks common to our business and industry and also those risks common to early stage development companies. These risks include those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 9, 2022 and Part II, Item 1A, of our Quarterly Report on Form 10-Q for the period ended March 31, 2022. As of the date of this report, our existing cash resources, which were primarily provided as a result of the business combination, are sufficient to support our planned operations for at least the next 12 months. Therefore, our financial statements have been prepared on the basis that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Supplemental accounting policy disclosures are included below.
Restricted Cash
Restricted cash consists of funds held in a restricted account for payment of upfront rental lease deposits and income tax withholdings to the Norwegian government, payable every other month.
Leases
A lease is a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Lease classification as short-term lease, operating lease or finance lease is made at the lease inception. The Company considers all relevant contractual provisions, including renewal and termination options, to determine the term of the lease. Renewal or termination options that are reasonably certain of exercise by the lessee and those controlled by the lessor are included in determining the lease term. The Company has made an accounting policy election to present the lease and associated non-lease operations as a single component based upon the predominant component.
The Company made an accounting policy election not to recognize a right-of-use asset and lease liability for short-term leases with an initial term of 12 months or less, therefore these leases are not recorded on the condensed consolidated balance sheets. Expenses for short-term leases are recognized on a straight-line basis over the lease term in the consolidated statements of operations and comprehensive loss.
The Company recognizes lease liabilities and right-of-use assets for all operating and finance leases for which it is a lessee at the lease commencement date. Lease liabilities are initially recognized at the present value of the future lease payments during the expected lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, based on the information available at the lease commencement date, in determining the present value of lease payments. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The right-of-use asset is initially recognized at the amount of the initial measurement of the lease liability, plus any lease payments made at or before the commencement date, less any lease incentives received, and any initial direct costs incurred by the Company. Right-of-use assets are recorded as other long-term assets in the consolidated balance sheets. Subsequent to initial recognition, the right-of-use asset is reflected net of amortization. Costs to get a leased asset to the condition and location necessary for its intended use are capitalized as leasehold improvements.
The Company remeasures its lease liabilities with a corresponding adjustment to the right-of-use asset due to an applicable change in lease payments such as those due to a lease modification not accounted for as a separate contract, certain changes in the expected term of the lease, and certain changes in assessments and contingencies. Subsequent to initial recognition, the operating lease liability is increased for the interest component of the lease liability and reduced by the lease payments made. Operating lease expenses are recognized as a single lease cost in the consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term, which includes the interest component of the measurement of the lease liability and amortization of the right-of-use asset.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Adoption of Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve the consistent application. We adopted this guidance as of January 1, 2022. Adoption of the standard did not have a material impact on the condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted this guidance as of January 1, 2022, on a modified retrospective basis and thus did not restate comparative periods. As a result, the comparative financial information and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. We elected the package of practical expedients permitted under the transition guidance, which allows us to carry forward our historical lease classification, our assessment of whether a contract is or contains a lease, and our initial direct costs for any leases that existed before the adoption of the new standard. A description of our accounting policy and accounting methods elected, is included under “Leases” above. Our right-of-use assets and corresponding lease liabilities for operating lease liabilities at adoption were $9.9 million. There was no change to accumulated deficit as a result of adoption, and the implementation of this standard did not cause a material change in the Company’s operating expenses.
3. BUSINESS COMBINATION
As discussed in Note 1 - Business and Basis of Presentation, we completed the Business Combination on July 9, 2021. Immediately before the closing of the Business Combination, all outstanding redeemable preferred shares of FREYR Legacy were converted into ordinary shares of FREYR. Upon the consummation of the Business Combination, each share of FREYR Legacy issued and outstanding was canceled and converted into the right to receive 0.179038 ordinary shares in FREYR (the “Exchange Ratio”).
Upon the closing of the Business Combination, our articles of association were amended and restated to, among other things, increase the total number of authorized shares to 245,000,000 shares without par value.
In connection with the Business Combination, on January 29, 2021, Alussa and FREYR entered into separate subscription agreements with a number of investors (each a “Subscriber”), pursuant to which the Subscribers agreed to purchase, and FREYR agreed to sell to the Subscribers, an aggregate of 60,000,000 ordinary shares (the “PIPE Shares”), for a purchase price of $10.00 per share and an aggregate purchase price of $600.0 million, in a private placement pursuant to the subscription agreements (the “PIPE Investment”). The PIPE Investment closed simultaneously with the consummation of the Business Combination.
The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Alussa was treated as the “acquired” company for financial reporting purposes. See Note 1 - Business and Basis of Presentation for further details. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of FREYR issuing shares for the net assets of Alussa, accompanied by a recapitalization. The net assets of Alussa were stated at historical cost, with no goodwill or other intangible assets recorded.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | |
| | | | |
Construction in progress | | $ | 88,879 | | | $ | 20,017 | |
Office equipment and other | | 1,889 | | | 1,180 | |
| | 90,768 | | | 21,197 | |
Less: Accumulated depreciation | | (376) | | | (135) | |
Total | | $ | 90,392 | | | $ | 21,062 | |
Construction in progress primarily includes costs related to the construction of the CQP and Giga Arctic facilities and the related production equipment in Mo i Rana, Norway. Depreciation expense was $0.3 million and $0.1 million for the nine months ended September 30, 2022 and 2021, respectively, and is included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive loss.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consisted of the following (in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | |
| | | | |
Accrued purchases | | $ | 20,528 | | | $ | 8,165 | |
Accrued payroll and payroll related expenses | | 10,437 | | | 6,476 | |
Operating lease liabilities (Note 6) | | 3,061 | | | — | |
Accrued other operating costs | | — | | | 436 | |
Total | | $ | 34,026 | | | $ | 15,077 | |
6. LEASES
We currently lease our corporate headquarters, the building for the CQP, the land for the Giga Arctic facilities, as well as other facilities and properties. Our leases have remaining lease terms of up to 50 years, some of which include options to extend the leases and some of which include options to terminate the leases at our sole discretion. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured. As of September 30, 2022, all of our leases are operating leases.
The components of lease liabilities included in our condensed consolidated balance sheet consisted of the following (in thousands):
| | | | | | | | |
| | September 30, 2022 |
| |
| | |
Accrued liabilities and other (Note 5) | | $ | 3,061 | |
Operating lease liability | | 9,933 | |
Total | | $ | 12,994 | |
Components of lease expenses were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Three months ended September 30, 2022 | | Nine months ended September 30, 2022 |
| | | | |
Operating lease cost | | $ | 558 | | | $ | 1,577 | |
Variable lease cost | | 65 | | | 167 | |
Short-term lease cost | | 45 | | | 60 | |
Total lease cost | | $ | 668 | | | $ | 1,804 | |
The remaining minimum lease payments due on our long-term leases are as follows (in thousands):
| | | | | | | | |
| | September 30, 2022 |
| |
| | |
For the remainder of 2022 | | $ | 900 | |
2023 | | 2,664 | |
2024 | | 1,740 | |
2025 | | 1,783 | |
2026 | | 1,778 | |
Thereafter | | 18,173 | |
Total undiscounted lease payments | | 27,038 | |
Less: imputed interest | | (14,044) | |
Present value of lease liabilities | | $ | 12,994 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Weighted average remaining lease term and discount rate are as follows:
| | | | | | | | |
| | September 30, 2022 |
| |
| | |
Weighted-average remaining lease term (in years) | | 24.7 |
Weighted-average discount rate | | 6.93 | % |
Supplemental cash flow information related to leases were as follows (in thousands):
| | | | | | | | |
| | Nine months ended September 30, 2022 |
| | |
Cash paid for amounts included in the measurement of lease liabilities | | |
Operating cash flows | | $ | 1,308 | |
Lease liabilities arising from obtaining right-of-use assets | | 13,578 | |
| | |
7. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, we may be subject to legal and regulatory actions that arise in the ordinary course of business. The assessment as to whether a loss is probable or reasonably possible, and as to whether such loss or a range of such loss is estimable, often involves significant judgment about future events. Management believes that any liability of ours that may arise out of or with respect to these matters will not materially, adversely affect our condensed consolidated financial position, results of operations, or liquidity.
8. WARRANTS
Public and Private Warrants
As of September 30, 2022 and December 31, 2021, we had 24,625,000 warrants outstanding (the “Warrants”), consisting of 14,375,000 public warrants (the “Public Warrants”) and 10,250,000 private warrants (the “Private Warrants”). The Warrants entitle the holder thereof to purchase one of our ordinary shares at a price of $11.50 per share, subject to adjustments. The Warrants will expire on July 9, 2026, or earlier upon redemption or liquidation.
The Public and Private Warrants were exchanged for public and private warrants of Alussa as part of the Business Combination, as described in Note 3 – Business Combination. The Warrants are subject to the terms and conditions of the warrant agreement entered into between Alussa, Continental Stock Transfer & Trust Company, and FREYR (the “Amended and Restated Warrant Agreement”).
We may call the Public Warrants for redemption once they become exercisable, in whole and not in part, at a price of $0.01 per Public Warrant, so long as we provide at least 30 days prior written notice of redemption to each Public Warrant holder, and if, and only if, the reported last sales price of our ordinary shares equals or exceeds $18.00 per share for each of 20 trading days within the 30 trading-day period ending on the third trading day before the date on which we send the notice of redemption to the Public Warrant holders. We determined that the Public Warrants are equity classified as they are indexed to our ordinary shares and qualify for classification within shareholders’ equity. As such, the Public Warrants are presented as part of additional paid-in capital on the condensed consolidated balance sheets.
The Private Warrants are identical to the Public Warrants, except that so long as they are held by the Sponsor or any of its permitted transferees, the Private Warrants: (i) may be exercised for cash or on a cashless basis and (ii) shall not be redeemable by FREYR. We determined that the Private Warrants are not considered indexed to our ordinary shares as the holder of the Private Warrants impacts the settlement amount and thus, they are liability classified. The Private Warrants are presented as warrant liability on the condensed consolidated balance sheets. See also Note 9 – Fair Value Measurement.
EDGE Warrants
On March 1, 2019, FREYR Legacy entered into a consulting agreement with EDGE Global LLC (“EDGE”) for FREYR Legacy’s CEO and Chief Commercial Officer to be hired to perform certain services related to leadership, technology selection, and operational services (the “2019 EDGE Agreement”). FREYR Legacy issued 1,488,862 warrants to EDGE under the 2019 EDGE Agreement with a subscription price of $0.95 per share and an expiration date of May 15, 2024.
On September 1, 2020, FREYR Legacy amended the 2019 EDGE Agreement, effective as of July 1, 2020 (the “2020 EDGE Agreement”). FREYR Legacy issued an additional 687,219 warrants to EDGE under the 2020 EDGE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Agreement with an initial subscription price of $0.99 per share, which was modified to $1.22 per share on September 25, 2020. The warrants vested over an eighteen months graded vesting period and expire on September 30, 2025.
We determined that the EDGE Warrants are equity classified as they are indexed to our ordinary shares. Upon the consummation of the Business Combination on July 9, 2021, all unvested warrants under the 2019 and 2020 Edge Agreements vested immediately. As such, on July 9, 2021, compensation cost was recognized for the remaining unrecognized fair value of these awards.
9. FAIR VALUE MEASUREMENT
The following table sets forth, by level within the fair value hierarchy, the accounting of our financial assets and liabilities at fair value on a recurring basis according to the valuation techniques we use to determine their fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | | | | | | | | | | |
Convertible Note | | $ | — | | | $ | — | | | $ | 20,498 | | | $ | 20,498 | | | $ | — | | | $ | — | | | $ | 20,231 | | | $ | 20,231 | |
Liabilities: | | | | | | | | | | | | | | | | |
Warrant Liabilities | | $ | — | | | $ | — | | | $ | 94,712 | | | $ | 94,712 | | | $ | — | | | $ | — | | | $ | 49,124 | | | $ | 49,124 | |
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
We measured our Private Warrants and the Convertible Note as of September 30, 2022 and December 31, 2021 at fair value based on significant inputs not observable in the market, which caused them to be classified as Level 3 measurements within the fair value hierarchy. The valuation of the Private Warrants and the Convertible Note used assumptions and estimates that we believed would be made by a market participant in making the same valuation. Changes in the fair value of the Private Warrants related to updated assumptions and estimates were recognized as a warrant liability fair value adjustment within the condensed consolidated statements of operations and comprehensive loss. Changes in the fair value of the Convertible Note related to updated assumptions and estimates were recognized as a convertible note fair value adjustment within the condensed consolidated statement of operations and comprehensive loss.
As of September 30, 2022 and December 31, 2021, the carrying value of all other financial assets and liabilities approximated their respective fair values.
Private Warrants
The Private Warrants outstanding on September 30, 2022 and December 31, 2021, were valued using the Black-Scholes-Merton option pricing model. See Note 8 – Warrants above for further detail. Our use of the Black-Scholes-Merton option pricing model for the Private Warrants as of September 30, 2022 and December 31, 2021, required the use of subjective assumptions:
•The risk-free interest rate assumption was based on the United States Treasury Rates, which was commensurate with the contractual terms of the Private Warrants, which expire on the earlier of (i) five years after the completion of the Business Combination or July 9, 2026 and (ii) redemption or liquidation. An increase in the risk-free interest rate, in isolation, would increase the fair value measurement of the Private Warrants and vice versa.
•The expected term was determined to be 3.78 and 4.53 years as of September 30, 2022 and December 31, 2021, respectively, given the expiration of the Private Warrants as noted above. An increase in the expected term, in isolation, would increase the fair value measurement of the Private Warrants and vice versa.
•The expected volatility assumption was based on the implied volatility from a set of comparable publicly traded companies as determined based on the size and industry. An increase in expected volatility, in isolation, would increase the fair value measurement of the Private Warrants and vice versa.
Using this approach, an exercise price of $11.50 and a share price of $14.24 and $11.18 as of September 30, 2022 and December 31, 2021, respectively, we determined that the fair value of the Private Warrants was $94.7 million and $49.1 million, respectively.
Convertible Note
As of September 30, 2022 and December 31, 2021, we had an investment in a convertible note from 24M that was fair valued pursuant to the election of the fair value option under ASC 825, Financial Instruments. See Note 14 – Convertible Note for further detail. The Company considers this to provide a more accurate reflection of the current economic environment of the instrument. The Convertible Note was valued using a scenario-based framework. This analysis assumed various scenarios that were weighted based on the likelihood of occurrence. Within each scenario, an income approach, specifically the discounted cash flow approach, was utilized based on the expected payoffs upon the event, the discount rate, and the expected timing and then the expected probability of occurrence was applied, all of which management determined
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
were significant assumptions. We noted that a change in the expected payoffs, discount rate, timing, or expected probability would result in a change to the fair value ascribed to the Convertible Note.
Redeemable Preferred Shares
On November 11, 2020, 7,500,000 redeemable preferred shares were issued, each with a nominal value of NOK 0.01 per share for an aggregate subscription amount of NOK 71.5 million ($7.5 million) to two affiliates of Alussa in exchange for a cash contribution of $7.5 million (the “Preferred Share Preference Amount”). Concurrently, FREYR Legacy issued 92,500,000 warrants that were subscribed together with the redeemable preferred shares and considered an embedded feature as they were not separately exercisable. On February 16, 2021, an additional 7,500,000 redeemable preferred shares were issued, each with a nominal value of NOK 0.01 per share for an aggregate subscription amount of NOK 64.1 million ($7.5 million) to three affiliates of Alussa in exchange for a Preferred Share Preference Amount of $7.5 million. As part of the Business Combination and after the Norway demerger, the FREYR Legacy preferred shares were repurchased by FREYR at an adjusted Preferred Share Preference Amount of $14.9 million and the holders received 1,489,500 ordinary shares of FREYR. Before settlement, the preferred shares were valued using a scenario-based framework. Within each scenario, an income approach, specifically the discounted cash flow approach, was utilized based on the expected payoffs upon the conversion or redemption event, the estimated yield, and the expected probability of occurrence, which we determined was a significant assumption. Prior to settlement, changes in the fair value of the redeemable preferred shares related to updated assumptions and estimates were recognized as redeemable preferred shares fair value adjustment within the consolidated statements of operations and comprehensive loss.
The changes in the Level 3 instruments measured at fair value were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the nine months ended September 30, 2022 | | For the nine months ended September 30, 2021 |
| | Asset | | Liability | | Asset | | Liability |
| | Convertible Note | | Private Warrants | | Convertible Note | | Private Warrants | | Redeemable Preferred Shares |
| | | | | | | | | | |
Balance (beginning of period) | | $ | 20,231 | | | $ | 49,124 | | | $ | — | | | $ | — | | | $ | 7,574 | |
Additions | | — | | | — | | | — | | | 27,265 | | | 7,500 | |
Fair value measurement adjustments | | 267 | | | 45,588 | | | — | | | 11,173 | | | (74) | |
Foreign currency exchange effects | | — | | | — | | | — | | | — | | | — | |
Settlements | | — | | | — | | | — | | | — | | | (15,000) | |
Balance (end of period) | | $ | 20,498 | | | $ | 94,712 | | | $ | — | | | $ | 38,438 | | | $ | — | |
10. SHAREHOLDERS' EQUITY
Ordinary Shares
As of September 30, 2022 and December 31, 2021, 245,000,000 ordinary shares without par value were authorized and 116,703,504 and 116,853,504 ordinary shares were outstanding as of September 30, 2022 and December 31, 2021, respectively. Holders of ordinary shares are entitled to one vote per share and are entitled to receive dividends when, as, and if, declared by our Board of Directors. As of September 30, 2022, we have not declared any dividends.
Share Repurchase Program
In May 2022, the board of directors approved a share repurchase program (the “Share Repurchase Program”). The shares purchased under the program are to be used to settle the exercise of employee options granted under the Company’s equity compensation plans. We were authorized to repurchase up to 150,000 of the Company’s Ordinary Shares, or approximately 0.13% of the current outstanding share capital. The Share Repurchase Program had no time limit and was able to be suspended or discontinued at any time. We purchased 150,000 ordinary shares at an average price of $6.97 per share, excluding fees, during the nine months ended September 30, 2022 (no comparative amounts for the nine months ended September 30, 2021). As of September 30, 2022, the authorized share repurchase was completed and no ordinary shares remain available for repurchase under the program.
Employee Awards – 2019 Plan
FREYR Legacy had an Incentive Stock Option Plan (the “2019 Plan”) issued on September 11, 2019. According to the 2019 Plan, options or warrants could be granted to eligible employees, and a total of 895,190 ordinary shares could be issued. On December 1, 2020, the board of directors increased the number of ordinary shares available under the 2019 Plan by 895,190 ordinary shares.
As a result of the consummation of the Business Combination on July 9, 2021, the stock options and warrants and performance stock options and warrants already granted or earmarked for an employee’s first year of employment vested immediately. As such, on July 9, 2021, share-based compensation was recognized for the remaining unrecognized fair value of the 2019 Plan awards. Effective as of the close of the Business Combination, the 2019 Plan was modified to require cash-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
settlement after a lock-up period of either (i) one year for all non-executive employees or (ii) two years for all executive employees. The awards granted under the 2019 Plan are liability-classified awards, and as such, these awards are remeasured to fair value at each reporting date with changes to the fair value recognized as stock compensation expense in general and administrative expense or research and development expense within the consolidated statements of operations and comprehensive loss. Cumulative stock compensation expense cannot be reduced below the grant date fair value of the original award.
During the nine months ended September 30, 2022, 300,352 of the 2019 Plan awards were exercised.
Employee Awards – 2021 Plan
We have a Long-Term Incentive Plan (the “2021 LTIP”) that was issued on July 9, 2021. According to the 2021 LTIP, at the discretion of our board of directors, but at least on an annual basis, stock options may be granted to eligible employees and directors. The aggregate number of additional shares authorized under the 2021 LTIP is not to exceed 10% of the current number of issued shares over the subsequent five years, excluding any options or warrants granted prior to the 2021 LTIP.
All options and restricted stock units (“RSUs”) granted under the 2021 LTIP vest annually in equal thirds and options can be exercised up to five years after the grant date. There are no performance or market conditions for vesting. During the nine months ended September 30, 2022, 3.8 million options were granted to employees and directors, 81,191 RSUs were granted, and 166,777 options were forfeited.
CEO Option Awards
On June 16, 2021, our Chief Executive Officer (“CEO”) entered into a stock option agreement, as an appendix to an employment agreement, effective upon the consummation of the Business Combination. In accordance with the stock option agreement, on July 13, 2021 our CEO was granted 850,000 options to acquire our shares at an exercise price of $10.00 (the “CEO Option Awards”). The CEO Option Awards are subject to nine separate performance criteria, each of which is related to 1/9th of the total award amount. If any of the performance criteria are achieved and certified by the board of directors during their first quarter 2022 meeting, the corresponding awards will vest in equal thirds on December 31, 2022, September 30, 2023, and June 1, 2024. If achieved and certified during the first quarter 2023 meeting, the awards will vest in equal halves on September 30, 2023 and June 1, 2024. Compensation cost is recognized to the extent that achievement of the performance criteria is deemed probable. During the nine months ended September 30, 2022, 94,444 of the CEO Option Awards were deemed probable.
11. GOVERNMENT GRANTS
On February 12, 2021, we were awarded a grant of NOK 39.0 million ($4.6 million based on NOK/USD exchange rate at the time of the transaction) for research, development, and innovation in environmental technology. The grant was awarded to assist with the costs incurred associated with employees and staff, contract research and consultants, overhead and operating expenses and intellectual property, patents, and licenses. The grant is paid out in three installments based on meeting certain milestones in the agreement, in which the last milestone is payable after the final project report is approved. The grant is subject to meeting certain business size thresholds and conditions, such as documenting and supporting costs incurred, obtaining a third-party attestation of our related records, and implementing policies that demonstrate good corporate governance. For the portion of any grant received for which costs have not yet been either incurred or supported through the appropriate documentation, we recognize deferred income in the condensed consolidated balance sheets. The first milestone of 30% and the second milestone of 50% were met during 2021 and payment was received. However, as of September 30, 2022, the appropriate documentation of the financing of project costs and third-party attestation had only occurred for the second milestone. As such, we recorded $1.3 million as of September 30, 2022 and $1.4 million as of December 31, 2021, as deferred income within the condensed consolidated balance sheet. For the nine months ended September 30, 2022 and 2021, no other income was recognized within the condensed consolidated statements of operations and comprehensive loss related to this grant.
On March 1, 2021, we were awarded a grant of NOK 142.0 million ($16.5 million based on NOK/USD exchange rate at the time of the transaction) for the development and construction of the pilot plant in Mo i Rana, Norway. The grant was awarded to assist with the costs incurred associated with the pilot plant including research and development, general and administrative, and construction in progress. The grant is paid in arrears upon request based on progress and accounting reports with the last milestone becoming payable after the final project report is approved. The grant is subject to achieving successful financing of the pilot plant and other conditions, such as documenting and supporting costs incurred and obtaining a third-party attestation of our related records. For the nine months ended September 30, 2022, we satisfied the requirements for payments totaling $11.9 million of which $1.4 million related to costs which were expensed and were recognized as other income and $10.5 million related to costs which were capitalized and were recognized as a reduction of the carrying amount of the CQP’s construction in progress. For the nine months ended September 30, 2021, no amounts were recognized in relation to this grant.
12. INCOME TAXES
The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. There is no provision for income taxes because the Company has incurred operating losses in each year since inception. The Company’s effective income tax rate
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
was 0% for the three and nine months ended September 30, 2022 and 2021 as the Company continues to maintain a full valuation allowance against its deferred tax assets.
13. RELATED PARTY TRANSACTIONS
EDGE Agreements
The 2020 EDGE Agreement provided that FREYR Legacy should pay EDGE a monthly retainer fee. Additionally, FREYR Legacy agreed to make certain milestone payments to EDGE based on the closing of certain additional financing rounds as defined within the 2020 EDGE Agreement. See Note 10 – Shareholders' Equity for further discussion on the warrant agreements between FREYR Legacy and EDGE. On January 18, 2021, the board resolved to terminate the 2020 EDGE Agreement and enter into an employment contract with the continuing CEO and a consulting contract with the prior Chief Commercial Officer, subject to the closing of the Business Combination. See below for further detail on the consulting agreement with the prior Chief Commercial Officer.
The expenses incurred in relation to the consulting services provided for the three and nine months ended September 30, 2021 were $4.0 million and $4.3 million, respectively. No expenses were recorded in the corresponding periods of 2022. These expenses are recognized as general and administrative expenses within the condensed consolidated statements of operations and comprehensive loss. There was no unpaid amount in accounts payable and accrued liabilities – related party as of September 30, 2022 and December 31, 2021.
Consulting Agreement
Concurrent with the consummation of the Business Combination, we agreed to a consulting agreement with the prior Chief Commercial Officer and current member of the board of directors. Per the consulting agreement, the consultant will provide services related to scaling sustainable energy storage, as well as any other services requested by us, for a term of three years. During this term, we will pay the consultant an annual fee of $0.4 million plus expenses. Per the agreement, the consultant is also entitled to participate in our benefit plans made available to our senior executives. The expenses incurred for consulting services for the three and nine months ended September 30, 2022 were $0.1 million and $0.4 million, respectively, and $0.1 million for both the three and nine months ended September 30, 2021. These expenses are recognized as general and administrative expenses within the condensed consolidated statements of operations and comprehensive loss. The unpaid amount of less than $0.1 million was recognized in accounts payable and accrued liabilities - related party as of September 30, 2022 and December 31, 2021.
Metier
In 2020, we entered into a framework agreement with Metier OEC, which provides primarily project management and administrative consulting services. The CEO of Metier OEC is the brother of our current Executive Vice President Project Execution. The expenses incurred for consulting services for the three and nine months ended September 30, 2022 were $1.3 million and $4.1 million, respectively, and $1.1 million and $3.5 million for the three and nine months ended September 30, 2021, respectively. These expenses are recognized as general and administrative expenses within the condensed consolidated statements of operations and comprehensive loss. The unpaid amount of $0.7 million and $0.3 million was recognized in accounts payable and accrued liabilities - related party as of September 30, 2022 and December 31, 2021, respectively.
Equity Method Investment
We hold a 50% common stock ownership in a joint venture with Koch Strategic Platforms (“Koch”) that is accounted for under the equity method. The joint venture was formed in October 2021 to advance the development of clean battery cell manufacturing in the United States. As part of this agreement, both parties agreed to contribute $3.0 million for the initial costs related to developing the first gigafactory to project concept selection, and these contributions were made in January 2022. Project concept selection remained under development as of September 30, 2022. The joint venture reported a net loss of $2.3 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2022, we recorded $1.1 million of expenses related to the joint venture. There were no unpaid amounts due to the joint venture as of September 30, 2022 and December 31, 2021.
14. CONVERTIBLE NOTE
On October 8, 2021, we invested $20.0 million in an unsecured convertible note receivable from 24M, our battery platform technology licensor for our current planned manufacturing facilities in Norway. The Convertible Note matures on October 8, 2024, carries an annual interest rate of 5%, and is convertible into common stock or preferred stock at our option beginning on October 8, 2023 or automatically upon a qualified initial public offering or direct listing in excess of our conversion price. Additionally, the Convertible Note contains a change of control provision that would result in repayment of 1.75x the note’s original investment value plus any accrued interest. We have elected to account for the Convertible Note using the fair value option. See Note 9 – Fair Value Measurement for details on the valuation methodology.
15. NET LOSS PER SHARE
The Company’s basic net loss per share attributable to ordinary shareholders for the three and nine months ended September 30, 2022 was computed by dividing net loss attributable to ordinary shareholders by the weighted-average ordinary shares outstanding.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended September 30, 2021, we computed net loss per share using the two-class method required for participating securities. Under the two-class method, undistributed earnings for the period are allocated to participating securities, including the redeemable preferred shares that were settled as part of the Business Combination, based on the contractual participation rights of the security to share in the current earnings as if all current period earnings had been distributed. As there was no contractual obligation for the redeemable preferred shares to share in losses, our basic net loss per share attributable to ordinary shareholders for the three and nine months ended September 30, 2021, was computed by dividing net loss attributable to ordinary shareholders by the weighted-average number of ordinary shares outstanding.
No dividends were declared or paid for the nine months ended September 30, 2022 and 2021.
Diluted net loss per share attributable to ordinary shareholders adjusts basic net loss per share attributable to ordinary shareholders to give effect to all potential ordinary shares that were dilutive and outstanding during the period. For the nine months ended September 30, 2022 and 2021, the treasury stock method was used to assess our warrants and share-based payment awards while the if-converted method was used to assess our redeemable preferred shares.
The following table sets forth the computation of our basic and diluted net loss per share attributable to ordinary shareholders for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Numerator: | | | | | | | | |
Net loss attributable to ordinary shareholders – basic and diluted | | $ | (93,850) | | | $ | (45,419) | | | $ | (124,086) | | | $ | (65,342) | |
Denominator: | | | | | | | | |
Weighted average ordinary shares outstanding – basic and diluted | | 116,704 | | | 108,713 | | | 116,795 | | | 61,467 | |
| | | | | | | | |
| | | | | | | | |
Net loss per ordinary share: | | | | | | | | |
Basic and diluted | | $ | (0.80) | | | $ | (0.42) | | | $ | (1.06) | | | $ | (1.06) | |
| | | | | | | | |
The following table discloses the outstanding securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share as the impact would be anti-dilutive (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Public Warrants | | 14,375 | | | 14,375 | | | 14,375 | | | 14,375 | |
Private Warrants | | 10,250 | | | 10,250 | | | 10,250 | | | 10,250 | |
EDGE warrants | | 2,176 | | | 2,176 | | | 2,176 | | | 2,176 | |
Share-based compensation liability awards (1) | | 567 | | | — | | | 567 | | | — | |
Employee awards | | 5,697 | | | 3,358 | | | 5,697 | | | 3,358 | |
RSUs | | 81 | | | — | | | 81 | | | — | |
CEO option awards (2) | | 94 | | | — | | | 94 | | | — | |
Other nonemployee warrants | | — | | | 413 | | | — | | | 413 | |
| | | | | | | | |
Total | | 33,240 | | | 30,572 | | | 33,240 | | | 30,572 | |
(1) Share-based compensation liability awards exclude 140,597 of the total outstanding 707,532 option and warrant liability awards, as these awards are required to be cash-settled due to the expiration of the lock-up period specified in the BCA. See Note 10 – Shareholders' Equity for further details.
(2) For the three and nine months ended September 30, 2022, the Company excluded 755,556 of the total 850,000 CEO Option Awards, as it is not yet probable that the performance conditions for these options will be achieved.
16. SUBSEQUENT EVENTS
Restricted Cash
In October 2022, an additional $133.8 million, or 32% of our September 30, 2022 cash and cash equivalents balance, was classified as restricted cash after the Company entered into contractual obligations with a contractor for the Giga Arctic construction.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Giga America
On November 11, 2022, FREYR announced the launch of the Giga America clean battery cell manufacturing project in Coweta County, Georgia. Construction of Giga America is expected to take place in multiple phases. The first cell production module is expected to be approximately 34 GWh and will be established with the United States-based 24M production platform, which is intended to produce highly capital efficient and clean battery cells. FREYR made an additional $49.0 million capital contribution to its joint venture in the United States in November 2022, primarily to fund the land acquisition for Giga America and to take a controlling interest in the joint venture.