UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-41279
5E ADVANCED MATERIALS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
87-3426517
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
19500 State Highway 249, Suite 125
Houston, TX
77070
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (346) 439-9656
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange
on which registered
Common Stock, $0.01 par value
FEAM
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
Non-accelerated filer
☒
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 10, 2022, there were 43,889,172 shares of the Registrant’s common stock outstanding.
Table of Contents
Page
Part I - Financial Information
Item 1.
Financial Statements
3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
Item 4.
Controls and Procedures
Part II - Other Information
Legal Proceedings
19
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
20
Signatures
21
2
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except share data)
September 30,
June 30,
2022
ASSETS
Current assets:
Cash and cash equivalents
$
74,205
31,057
Prepaid expenses and other current assets
1,533
1,506
Total current assets
75,738
32,563
Mineral rights and properties, net
8,362
8,364
Construction in progress
33,294
25,625
Properties, plant and equipment, net
2,847
2,871
Reclamation bond deposit
1,086
Right of use asset
327
371
Other assets
6
Total assets
121,660
70,886
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
9,394
7,212
Lease liabilities, current
161
164
Total current liabilities
9,555
7,376
Long-term debt, net
31,632
148
Convertible note derivative liability
10,987
—
Lease liabilities
170
211
Accrued reclamation liabilities
492
489
Total liabilities
52,836
8,224
Commitments and contingencies (Note 12)
Stockholders’ Equity:
Common stock, $0.01 par value; 180,000,000 shares authorized; 43,355,315 and 43,305,315 shares outstanding September 30 and June 30, respectively
434
433
Additional paid-in capital
171,148
169,593
Retained earnings (accumulated deficit)
(102,758
)
(107,364
Total stockholders’ equity
68,824
62,662
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
Three Months Ended September 30,
2021
Operating expenses:
Project expenses
3,595
4,786
General and administrative
4,886
5,841
Research and development
39
Depreciation and amortization expense
37
Total operating expenses
8,557
10,647
Income (loss) from operations
(8,557
(10,647
Non-operating income (expense)
Other income
14
10
Interest income
61
1
Derivative gain (loss)
13,909
Interest expense
(821
(2
Net foreign exchange gain (loss)
1,169
Total non-operating income (expense)
13,163
1,178
Income (loss) before income taxes
4,606
(9,469
Income tax provision (benefit)
Net income (loss)
Net income (loss) per common share:
Basic
0.11
(0.24
Diluted
Weighted average common shares outstanding — basic
43,350
38,712
Weighted average common shares outstanding — diluted
48,519
Comprehensive income (loss):
Reporting currency translation gain (loss)
(1,606
Comprehensive income (loss)
(11,075
The accompanying notes are an integral part of these unaudited financial statements.
4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
For the Three Months Ended September 30,
Cash Flows From Operating Activities:
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Depreciation and amortization
Share based compensation
1,300
1,777
Common stock issued for consulting fees
1,539
Unrealized (gain) loss on convertible note derivative instrument
(13,909
Accretion of reclamation liability
Amortization of debt issuance costs
550
Amortization of right of use asset
44
Net foreign exchange (gain) loss
(1,169
Change in:
(27
(42
(416
2,527
Net cash used in operating activities
(7,812
(4,816
Cash Flows From Investing Activities:
(5,115
(953
Mineral rights and properties
(86
Properties, plant and equipment
(11
(898
Net cash used in investing activities
(5,126
(1,937
Cash Flows From Financing Activities:
Proceeds from issuance of convertible note
55,840
Payments on note payable
(10
(1
Proceeds from exercise of stock options
256
Net cash provided by financing activities
56,086
1,085
Net increase (decrease) in cash and cash equivalents
43,148
(5,668
Effect of exchange rate fluctuation on cash
(438
Cash and cash equivalents at beginning of period
40,811
Cash and cash equivalents at end of period
34,705
Supplemental Disclosure Of Cash Flow Information:
Interest paid in cash
Noncash Investing And Financing Activities:
Accounts payable change related to construction in progress
2,554
252
Recognition of operating lease liability and right of use asset
17
5
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional
Accumulated
Total
Common Stock
Paid-in
Comprehensive
Stockholders'
Shares
Amount
Capital
Income (loss)
Deficit
Equity
Balance at June 30, 2021
38,391
384
101,179
1417
(40,651
62,329
Shares issued for:
Exercise of stock options
303
1,083
Consulting fees
150
1,538
Other comprehensive income (loss), net of tax
Balance at September 30, 2021
38,843
388
105,577
(189
(50,120
55,656
Balance at June 30, 2022
43,305
50
255
Balance at September 30, 2022
43,355
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. Basis of Financial Statement Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and should be read in the context of the consolidated financial statements and footnotes thereto for the year ended June 30, 2022 included in our annual report filed with the Securities and Exchange Commission on Form 10-K. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of our financial position as of September 30, 2022, and our results of operations and cash flows for the three months ended September 30, 2022 and 2021 have been included. Operating results for the three months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2023.
Basis of Consolidation
The unaudited condensed consolidated financial statements comprise the financial statements of 5E Advanced Materials, Inc. and its wholly owned subsidiaries, American Pacific Borates Pty Ltd. and 5E Boron Americas, LLC (formerly Fort Cady (California) Corporation), (collectively, “5E,” “we,” “our,” “us” or the “Company”).
Risk and Uncertainties
We are subject to a number of risks similar to those of other companies of similar size in our industry, including but not limited to, the success of our exploration activities, need for significant additional capital (or financing) to fund operating losses, competition from substitute products and services from larger companies, protection of proprietary technology, patent litigation, and dependence on key individuals. We currently generate no revenues from operations and will need to rely on raising additional capital or financing to sustain operations in the long-term. There is no guarantee that we will be able to raise such additional capital or financing. We believe, based on our current forecasts, that we have sufficient cash on hand to fund our operations for at least the next twelve months from the date of the issuance of these condensed consolidated financial statements.
Significant Accounting Policies
Convertible Debt
Upon the issuance of convertible debt, we evaluate the embedded conversion features to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for separately as a derivative. If the conversion feature does not require derivative treatment, the instrument is evaluated for consideration of any beneficial conversion features. If a conversion feature is deemed to be beneficial, the intrinsic value of the conversion feature is recorded as additional paid in capital.
Derivative Financial Instruments
We record derivative instruments on the consolidated balance sheet at fair value as either an asset or a liability with changes in fair value recognized currently in earnings. The related cash flow impact of our derivative activities is reflected as cash flows from operating activities unless the derivatives are determined to have a significant financing element at inception, in which case they are classified within financing activities. Currently, our only derivative instrument is the conversion feature of our convertible note that was recorded as a stand-alone derivative at inception (see note 7 - Long-term Debt).
Debt Issue Costs
Costs incurred in connection with the issuance of debt are recorded as a reduction of the related debt and are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amount is expensed in the period of conversion.
7
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The authoritative guidance requires disclosure of the framework for measuring fair value and requires that fair value measurements be classified and disclosed in one of the following categories:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We consider active markets as those in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that can be valued using observable market data. Substantially all of the inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
Level 3 - Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity).
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy. We periodically review our inputs to ensure the fair value level classification is appropriate. When transfers between levels occur, it is our policy to assume that the transfer occurred at the date of the event or change in circumstances that caused the transfer.
Recently Issued and Adopted Accounting Pronouncements
In August 2020, FASB issued ASU No. 2020-06–Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update is to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. We adopted this standard during the quarter ended September 30, 2022. The adoption of this standard did not have an effect on our previously reported consolidated financial statements as we had no transactions that were the subject of the pronouncement. During the current quarter we issued convertible debt and accounted for it in accordance with the updates provided for by ASU No. 2020-06.
In May 2021, FASB issued ASU No. 2021-04—Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The update is to clarify and reduce diversity in accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The adoption of this standard during the quarter ended September 30, 2022 did not have an effect on our consolidated financial statements.
2. Mineral Rights and Properties, Net
Mineral Rights and Properties, net consist of the following.
(in thousands)
Mineral properties
6,733
Hydrology wells
547
Mineral interest – Elementis lease
908
Asset retirement cost, net of accumulated amortization of $8 and $6 at September 30 and June 30, 2022, respectively(1)
174
176
8
3. Construction in Progress
Construction in Progress consisted of the following.
Engineering services
8,919
8,656
Equipment
19,010
13,548
Construction
1,849
Injection and recovery wells
3,516
3,421
Total construction in progress
4. Properties, Plant and Equipment, Net
Properties, plant, and equipment, net consisted of the following.
Asset category
Depreciation method
Estimated useful life (in years)
September 30, 2022
June 30, 2022
Land
N/A
-
Buildings
Straight-line
7-15
873
Vehicles
276
Plant and equipment
5-10
351
340
3,033
3,022
Less accumulated depreciation
(186
(151
For the three months ended September 30, 2022 and 2021, we recognized depreciation expense of approximately $34.9 thousand and $20.3 thousand, respectively.
. 5. Reclamation Liabilities
The change in our ARO during the periods presented, and the balance of our accrued reclamation liabilities at the end of each period is set forth below.
Asset retirement obligation — beginning of period
191
79
Obligation incurred during the period
106
Revisions to previous estimates
(3
Accretion
9
Asset retirement obligation — end of period
194
Accrued reclamation costs
298
Total accrued reclamation liabilities
Accrued reclamation costs of $298 thousand relate to surface reclamation obligations at Fort Cady.
6. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following at the end of each period presented.
Accounts payable - trade
4,713
3,459
Accrued expenses
3,927
2,935
Accrued payroll
446
780
Accrued interest
269
Current portion of debt
38
7. Long-term Debt
Long-term debt consisted of the following at the end of each period presented.
Convertible note
60,000
Vehicle notes payable
177
186
Total debt
60,177
Long-term debt
60,138
Unamortized convertible note discount - embedded conversion feature
(24,426
Unamortized debt issuance costs - convertible note
(4,080
Interest expense consisted of the following.
Convertible note interest
Notes payable interest
Vehicle notes payable interest
Amortization of debt issuance costs and discount - convertible note
Total interest expense
821
Convertible Note
On August 11, 2022, we executed a $60 million private placement of Senior Secured Convertible Note (“the Note” or "Convertible Note"), with Bluescape Energy Partners (“Bluescape”). The Note, which is convertible into our common stock and matures in August 2027, closed on August 26, 2022. At our election, the Note bears interest at an annual rate of 4.50% if paid in cash, or at an annual rate of 6.00% if paid through the issuance of additional notes and contains a financial covenant requiring us to maintain a cash balance of at least $10 million. The purchaser may convert the Note at any time before August 2027 at a conversion price of $17.60 (“Conversion Price”). We have the right, at any time on or before the twenty-four (24) month anniversary of the closing date of the Note (“Closing Date”), to convert the Note to our common stock in whole or in part if the closing price of our common stock is at least 200% of the Conversion Price of the Note (“Threshold Price”) for each of the twenty (20) consecutive trading days prior to the time we deliver a conversion notice. The Threshold Price for our right to convert the Note decreases to 150% after the twenty-four (24) month anniversary of the Closing Date and on or before the thirty-six (36) month anniversary of the Closing, and to 130% at any time after the thirty-six (36) month anniversary of the Closing Date.
The conversion feature of the Note was deemed an embedded derivative requiring separate accounting as a stand-alone derivative instrument (convertible note derivative). The Note was recorded at its face amount of $60 million less debt issuance costs of $4.2 million and the fair value of the convertible note derivative of $24.9 million (Note 8). Fair value information for the convertible instrument follows.
August 26, 2022(Inception)
Fair value of convertible note (Level 2)
33,611
35,104
Fair value of embedded conversion feature (Level 3)
24,896
Total fair value of convertible note instrument
44,598
8. Convertible Note Derivative
Our convertible note derivative relates to the Convertible Note (Note 7) and valued upon initial recognition at fair value using a with-and-without methodology utilizing a binomial lattice model (Level 3). The convertible note derivative is re-measured at fair value at each period end using a Black-Scholes option valuation model with the resulting gain or loss recognized in the Condensed Consolidated Statement of Operations. The components of the convertible note derivative are summarized as follows.
Convertible note derivative — beginning of period
Additions
Fair value adjustment
Convertible note derivative — end of period
The valuation model requires the input of subjective assumptions including expected share price volatility, risk-free interest rate and debt rate. Changes in the input assumptions as well as our underlying share price can materially affect the fair value estimate and reported net income (loss). The assumptions used in the valuation model include the following, with a change in volatility and debt rate having the most significant impact on the valuation.
Risk-free interest rate
4.1%
3.2%
Volatility
40.0%
Debt rate
18.6%
17.3%
9. Financial Instruments and Fair Value Measurements
At September 30, 2022, cash equivalents as well as trade and other payables approximate their fair value due to their short-term nature. Our financial instruments also consist of environmental reclamation bonds which are invested in certificates of deposit and money market funds which are classified as Level 1, and the convertible note derivative is classified as Level 3. There were no transfers into or out of level 3 during the three months ended September 30, 2022. The reconciliation of changes in the fair value of assets and liabilities classified as Level 3 can be found in Note 7 and 8.
11
10. Share Based Compensation
Share based compensation expense is included in general and administrative expense and consisted of the following for the periods presented.
Share based compensation expense - service based
Employee share option plan
961
1,528
2022 Equity Compensation Plan - Options
175
2022 Equity Compensation Plan - RSU and DSU's
Total service based compensation
Options issued to suppliers
249
Consulting stock awards
Total share based compensation
3,316
Stock Options
All options outstanding prior to the three-month period ended September 30, 2022 were granted under our predecessor parent company's employee share option plan. New option grants are made under the 2022 Equity Compensation Plan and vest ratably over three years. The tables below reflect all options granted under both plans. The significant assumptions used to estimate the fair value of stock option awards granted under the plans during the three months ended September 30, 2022 and 2021, using the Black-Scholes option valuation model are as follows.
Exercise price
$25.62
$14.62 - $18.27
Share price
$18.03
$10.38
79%
85%
Expected term in years
0.9 - 3.9
2.91%
0.01%
Dividend rate
Nil
The following table summarizes stock option activity for each of the periods presented.
Number of Options
Weighted Average Exercise Price
(In thousands, except per share data)
Outstanding at beginning of the period
4,874
9.67
5,554
5.19
Granted
400
25.62
1,400
15.20
Exercised
(50
5.12
(303
3.29
Expired/forfeited
(477
5.48
Outstanding at end of the period
5,224
10.94
6,174
7.53
Vested at the end of the period
3,664
8.02
4,835
7.60
The weighted average remaining life of vested options at September 30, 2022 and 2021 was 1.4 years and 2.4 years, respectively.
As of September 30, 2022, there was $7.8 million of unrecognized compensation cost related to 1.6 million unvested stock options. This cost is expected to be recognized over a weighted-average remaining period of approximately 2.3 years.
12
The following table summarizes the activity for unvested options for each of the periods presented.
Weighted Average Grant Date Fair Value per share
Unvested at beginning of the period
1,507
6.05
270
5.79
10.52
Vested
(347
5.96
(331
6.21
Unvested at end of the period
1,560
7.15
1,339
5.98
As of September 30, 2022, the intrinsic value of both the outstanding stock options and vested options was $13.2 million and $13.2 million, respectively. The intrinsic value of stock options exercised during the three months ended September 30, 2022 and 2021 was $0.8 million and $2.9 million, respectively.
Restricted Share Units, Director Share Units and Performance Share Units
The following table summarizes restricted share ("RSU"), director restricted share ("DSU") and performance share ("PSU") activity under the 2022 Equity Compensation Plan for each of the periods presented.
Serviced-Based Shares
Weighted Average Grant Date Fair Value per Share
Performance- Based Shares
Weighted Average Grant Date Fair Value per Unit
Total Shares
Non-vested shares/units outstanding at July 1, 2022
48.8
18.03
19.2
12.19
68.0
101.3
14.67
63.5
(2)
14.79
164.8
Non-vested shares/units outstanding at September 30, 2022
150.1
(1)
15.76
82.7
14.23
232.8
(1) Includes approximately 35.6 thousand director share units
(2) On September 1, 2022, we granted approximately 63.5 thousand performance share units, which based on the achievement of certain operational targets, could vest within a range of 0% to 100%. The operational targets are; 1) commissioning and operation of the SSBF; 2) obtaining formation flow, head grade and impurity profile data from the SSBF; and 3) generate product data to ensure process design for detailed engineering. The determination of the percentage of shares that ultimately vest will be made at the three-year anniversary of the grant date based upon achievement of the performance targets over the period.
13
11. Net Income (Loss) Per Common Share
The following is the calculation of basic and diluted weighted-average shares outstanding and earnings (loss) per share (EPS) for the indicated periods.
Three Months ended September 30,
(in thousands, except per share data)
Basic earnings (loss) per share:
Net income (loss) - numerator
Weighted-average shares — denominator
Basic earnings (loss) per share
Diluted earnings (loss) per share:
Interest expense on convertible note
819
5,425
Weighted-average shares (denominator):
Dilution effect of stock options and unvested restricted stock units and performance share units outstanding at end of period
1,760
Additional shares assuming conversion of convertible note
3,409
Weighted-average shares — diluted
Diluted earnings (loss) per share
Stock options and unvested restricted stock units and performance share units excluded due to anti-dilutive effect
920
4,305
12. Commitments and Contingencies
We had purchase order commitments of $21.7 million for the construction works in progress, software, drilling, and technical reports.
References herein to the “Company,” “we,” “our,” and “us,” refer to 5E Advanced Materials, Inc. and its subsidiaries.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q for the three months ended September 30, 2022 (this “Form 10-Q”) contain various forward-looking statements relating to the Company’s future financial performance and results, financial condition, business strategy, plans, goals and objectives, including certain projections, business trends and other statements that are not historical facts. These statements constitute forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “budget,” “target,” “aim,” “strategy,” “estimate,” “plan,” “guidance,” “outlook,” “intend,” “may,” “should,” “could,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions, although not all forward-looking statements contain these identifying words. Forward-looking statements reflect the Company’s beliefs and expectations based on current estimates and projections. While the Company believes these expectations, and the estimates and projections on which they are based, are reasonable and were made in good faith, these statements are subject to numerous risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other important factors, which include, but are not limited to, the risks described under the heading “Risk Factor Summary” and “Item 1A. – Risk Factors” in our annual report on Form 10-K, any of which could cause the Company’s actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Therefore you should not rely on any of these forward-looking statements.
These forward-looking statements speak only as of the date of this Form 10-Q and, except as required by law, the Company undertakes no obligation to correct, update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required under federal securities laws. You are advised, however, to consult any additional disclosures we make in our reports to the U.S. Securities and Exchange Commission (the “SEC”). All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in our latest annual report on Form 10-K and this Form 10-Q.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10K filed on September 28, 2022. This discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions and other important factors, which include, but are not limited to, the risks described in our annual report on Form 10-K filed with the SEC, any of which could cause the Company’s actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth elsewhere in this Form 10-Q and under “Item 1A. Risk Factors” and elsewhere in our Form 10-K. In addition, see “Cautionary Note Regarding Forward-Looking Statements.” References to the “Company,” “we,” “our,” and “us,” refer to 5E Advanced Materials, Inc. and its subsidiaries.
Highlights for the Three Months Ended September 30, 2022
Results of Operations
Comparison of the Three Months Ended September 30, 2022 and 2021
The following table summarizes our results of operations for the periods presented:
Change
%
($ in thousands)
COSTS AND EXPENSES
(1,191
-25
(955
-16
85
Total costs and expenses
(2,090
-20
LOSS FROM OPERATIONS
2,090
NON-OPERATING INCOME (EXPENSE)
40
60
*
(819
-100
11,985
NM
NET INCOME (LOSS)
14,075
-149
* Represents a percentage change greater than +/- 300%
Project expenses include drilling, plug and abandonment, site-preparation, engineering, consumables, testing and sampling, hydrology, permits, surveys, and other expenses associated with further progressing our project. Project expenses decreased 25% during the current period versus the comparable period in 2021. The decrease was primarily due to a reduction in drilling activity specific to water monitoring wells ($4.2 million) partially offset by costs related to our plug and abandonment program incurred during the period ($2.6 million) and increases in site related costs ($0.4 million).
General and administrative expenses
The $955 thousand decrease in general and administrative expenses during the three months ended September 30, 2022 was primarily driven by one-time costs incurred during the three months ended September 30, 2021 related to the preparation of our Form-10, our reorganization, and consulting fees paid to Blue Horizon Advisors LLC for services provided ($2 million). The absence of these costs during the current period were partially offset by an increase in salaries and benefits ($621 thousand) and liability insurance ($333 thousand). Salaries and benefits increased primarily due to an increase in headcount from 11 at September 30, 2021 to 27 at September 30, 2022.
Non-operating (income) expense
During the current period we recognized an unrealized gain of $13.9 million resulting from the change in fair value of the embedded conversion feature of our convertible notes that was required to be bifurcated and accounted for separately as a stand-alone derivative instrument. The increase in interest income during the three months ended September 30, 2022 was attributable to one-month certificates of deposit purchased in September 2022. Interest expense increased due to the issuance of the convertible note on August 26, 2022 and includes $550 thousand of debt issuance cost amortization. During the three months ended September 30, 2022, we had no foreign exchange gains or losses. All foreign denominated cash balances that existed in the comparative period were transferred during the quarter ended June 30, 2022 to our bank account in the U.S. and are held in U.S. dollars.
Income Tax
We did not have any income tax expense or benefit for the three months ended September 30, 2022, nor for the three months ended September 30, 2021, as we have recorded a full valuation allowance against our net deferred tax asset.
16
Liquidity and Capital Resources
Overview
As of September 30, 2022, we had cash and cash equivalents of $74.2 million and working capital of $66.2 million compared to $31.1 million and $25.2 million as of June 30, 2022, respectively. Our predominant source of cash has been generated through equity financing from issuances of our common stock and hybrid equity and debt securities. Since inception, we have not generated revenues, and as such, have relied on equity financing and hybrid equity and debt instruments to fund our operating and investing activities.
Outlook
We believe our current cash balances are sufficient to fund our cash requirements for at least the next 12 months based on our 2023 plan. In the event costs were to significantly exceed our 2023 plan, we have the ability to reduce or eliminate current and/or planned discretionary spending as well as raise additional capital. Historically, we have been able to raise cash through equity financing and hybrid equity and debt instruments; however, no assurance can be given that additional financing will be available in amounts sufficient to meet our needs or on terms that are acceptable to us. If we issue additional shares of our common stock, it could result in dilution to our existing shareholders. There are many factors that could significantly impact our ability to raise funds through equity and debt financing as well as influence the timing of future cash flows. These factors include, but are not limited to, our ability to access capital markets, stock price volatility, uncertain economic conditions, unforeseen delays in our project, and access to labor. See “Part I. Item 1A. Risk Factors” and elsewhere in our annual report on Form 10-K.
For the three months ended September 30,
(2,996
62
(3,189
165
55,001
5069
48,816
-861
Operating Activities
Net cash used in operating activities for each of the above periods was primarily the result of expenses incurred in preparing us for operation of the SSBF. During the three months ended September 30, 2022, we used approximately $3 million more from operations than in the comparative period. The increase in cash used in operations during the current period was due to an increase in cash compensation resulting from an increase in headcount combined with an increase in cash professional fees. During the three months ended September 30, 2021, approximately $1.8 million of professional fees were settled by issuing shares of our common stock. The remaining increase was due to timing of settlement of accounts payable and accrued expenses.
Investing Activities
The increase in cash used in investing activities during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was primarily due to the construction of our SSBF which commenced during the fourth quarter of fiscal year 2022. Cash used in investing activities during the three months ended September 30, 2021, was primarily for construction and equipment purchases for the SSBF.
Financing Activities
The increase in cash provided by financing activities during the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was primarily due to net proceeds of $55.8 million received from the issuance of a convertible note in August 2022 (see Note 7 - Long-term Debt in the unaudited condensed consolidated financial statements in this 10-Q). Net cash provided by financing activities for the three months ended September 30, 2021 was from proceeds received upon the exercise of stock options.
Critical Accounting Policies
Our derivative instruments are accounted for on a mark-to-market basis. We have in the current quarter and are likely in the future to experience non-cash volatility in our reported earnings during periods of high interest rate and stock market volatility. As of September 30, 2022, we had a derivative liability of approximately $11 million related to the bifurcated embedded conversion feature of our convertible notes. The derivative fair value was determined using a with-and-without methodology utilizing a binomial lattice model. The model considers various inputs including time value, volatility, credit risk and the current share price of our common stock. As a result, the value of the embedded conversion feature and respective settlement dates could be significantly different than its fair value as of September 30, 2022, See Note 8 to our unaudited consolidated financial statements in item 1 of this report for additional information.
Contractual Commitments and Contingencies
Purchase Obligations
The Company had purchase order commitments of $21.7 million for the construction works in progress, drilling, software and technical reports.
Mineral Lease Payments
We have a mineral lease agreement with Elementis for the purposes of obtaining exploration and mining privilege. The mineral lease agreement requires us to make an annual minimum royalty payment of $75 thousand, escalated annually based on inflation, until the expiration date of the lease (March 31, 2023). Payments made during the three months ended September 30, 2022 and 2021, were $0 and $86 thousand, respectively.
Salt Wells Earn-in Agreement
On August 2, 2022, Great Basin Resources, Inc. agreed to amend our Salt Wells Earn-in Agreement. To fully realize the mineral interest rights under the agreement, we must incur exploration expenses of $900 thousand by December 31, 2023, $800 thousand by December 31, 2024, and approximately $756 thousand by December 31, 2025.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4. Controls and Procedures.
During our fiscal year end June 30, 2022, management identified a material weakness in our internal control over financial reporting related to a lack of segregation of duties in the administrative rights of our accounting system. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. During the quarter ended September 30, 2022, we have taken steps towards remediating the design deficiency that led to the material weakness by hiring additional accounting personnel, removing the offending access to the old accounting system, and effective October 1, 2022, transitioned to a new more robust accounting system. Material weaknesses are not considered remediated until new internal controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. We are in the process of assessing and documenting the design and implementation of the controls to address the material weakness and testing the operating effectiveness of the mitigating controls. We expect to complete the remediation process by the end of the quarter ending March 31, 2023.
Our management, under supervision and with the participation of Mr. Anthony Hall (performing the functions of our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial Officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2022. Based on the evaluation of our disclosure controls and procedures as well as the potential impact of the material weakness described above, Mr. Hall and our Chief Financial Officer have concluded that our disclosure controls and procedures were ineffective as of September 30, 2022 . Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Changes in Internal Control over Financial Reporting
Except as described above, there were no changes in internal control over financial reporting identified in the evaluation for the quarter ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As of September 30, 2022, we were not a party to any material legal proceedings.
Item 1A. Risk Factors.
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part 1, Item 1A. “Risk Factors” in our annual report on Form 10-K, which could materially affect our business, financial condition, and future results. The risks described in our Form 10-K are not the only risks that we face. Additional risk and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our financial condition, operating results and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable because we do not currently operate any mines subject to the U.S. Federal Mine Safety and Health Act of 1977.
Item 5. Other Information.
Item 6. Exhibits.
Exhibit Index
ExhibitNumber
Description
10.1*
Contractor Agreement dated February 14, 2022 - Anthony Hall
10.2*
Amendment No. 1 to Contractor Agreement dated September 6, 2022 - Anthony Hall
31.1*
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document - embedded within the Inline XBRL document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover page Interactive Data file (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
5E Advanced Materials, Inc.
(Registrant)
Date: November 10, 2022
By:
/s/ Paul Weibel
Paul Weibel
Chief Financial Officer (Principal Financial Officer)