What changed in this filing

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Item 1. Financial Statements

2023-02-09 compared with 2022-11-10 · 248 added, 156 removed, 386 unchanged (51% of the section changed)

3 unchanged sentences

(In thousands, except share data)

September 30,

Current assets:

13 unchanged sentences

Long-term debt, net

Convertible note derivative liability

Lease liabilities

5 unchanged sentences

180,000 shares authorized;

43,355,315 and

43,305,315 shares outstanding September 30 and June 30, respectively

43,305 shares outstanding December 31 and June 30, respectively

Additional paid-in capital

2 unchanged sentences

Total liabilities and stockholders’

The accompanying notes are an integral part of these unaudited consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5E ADVANCED MATERIALS, INC.

1 unchanged sentence

(In thousands, except per share amounts)

Three Months Ended September 30,

Three months ended December 31,

Six Months Ended December 31,

Operating expenses:

9 unchanged sentences

Interest expense

Net foreign exchange gain (loss)

Other income (expense)

Total non-operating income (expense)

2 unchanged sentences

Net income (loss)

Net income (loss) per common share:

Weighted average common shares outstanding —

Net income (loss) per common share —

basic and diluted

Weighted average common shares outstanding —

basic and diluted

Comprehensive income (loss):

2 unchanged sentences

Comprehensive income (loss)

The accompanying notes are an integral part of these unaudited financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5E ADVANCED MATERIALS, INC.

1 unchanged sentence

(In thousands)

For the Three Months Ended September 30,

For the six months ended December 31,

Cash Flows From Operating Activities:

6 unchanged sentences

Accretion of reclamation liability

Amortization of debt issuance costs

Amortization of debt issuance costs and discount —

convertible note

Amortization of right of use asset

Interest earned on reclamation bond

Net foreign exchange (gain) loss

4 unchanged sentences

Construction in progress

Mineral rights and properties

Properties, plant and equipment

Mineral rights and properties additions

Properties, plant and equipment additions

Net cash used in investing activities

2 unchanged sentences

Payments on note payable

Proceeds from issuance of common stock

Share offering costs

Proceeds from exercise of stock options

5 unchanged sentences

Supplemental Disclosure of Cash Flow Information:

Interest paid in cash

Cash paid for interest

Noncash Investing and Financing Activities:

Accounts payable change related to construction in progress

Accounts payable and accrued liabilities change related to construction in progress

Construction in progress transferred to properties, plant and equipment

Equipment acquired with notes payable

Recognition of operating lease liability and right of use asset

The accompanying notes are an integral part of these unaudited financial statements.

Increase (decrease) in asset retirement costs

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5E ADVANCED MATERIALS, INC.

7 unchanged sentences

Exercise of stock options

Consulting fees

Share based compensation

Net income (loss)

Other comprehensive income (loss), net of tax

Balance at September 30, 2022

Shares issued for:

Exercise of stock options

Vesting of restricted share units

Share based compensation

Convertible note derivative

liability reclassification

Net income (loss)

Balance at December 31, 2022

Comprehensive

Stockholders'

Income (loss)

Balance at June 30, 2021

1 unchanged sentence

Exercise of stock options

Consulting fees

Share based compensation

Net income (loss)

Other comprehensive income (loss),

Balance at September 30, 2021

The accompanying notes are an integral part of these unaudited financial statements.

Shares issued for:

Exercise of stock options

Consulting fees

Share issuance costs

Share based compensation

Net income (loss)

Other comprehensive income (loss),

Balance at December 31, 2021

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5E ADVANCED MATERIALS, INC.

1 unchanged sentence

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.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position as of December 31, 2022, results of operations for the three and six months ended December 31, 2022 and 2021 and cash flows for the six months ended December 31, 2022 and 2021 have been included.

Operating results for the three and six months ended December 31, 2022 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2023 .

Basis of Consolidation

9 unchanged sentences

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.

It is our opinion, based on our current capital resources, that with a modified business plan, we will have sufficient assets to discharge our liabilities as they become due, construct and operate our small scale facility ( the "Small-Scale Facility"), and to meet our administrative and overhead requirements for at least the next 12 months from the date these interim financial statements are issued.

Future financings to fund additional engineering and capital expenditures to scale our business are anticipated through efforts to raise additional equity, issue new corporate debt or project specific debt, pursuit of government funding opportunities and incentives, and/or other means.

Our continued operations beyond 12 months are dependent on our ability to obtain additional financing prior to the second half of calendar year 2023 or alter the timing of controllable expenditures by May 2023 to the extent needed to maintain adequate liquidity and preserve ongoing environmental obligations.

However, there can be no assurance that we will be successful in our efforts to raise additional capital on terms favorable to us, or at all, or our ability to adequately reduce expenses, if necessary, to maintain sufficient liquidity or capital resources.

As of today, we are currently operating under our normal business plan which indicates that available cash resources are expected to be exhausted in the fourth quarter of calendar year 2023.

Absent additional financing as outlined above, we would no longer be able to meet our ongoing obligations or progress operations under that plan.

We have prepared and approved a modified business plan that, if necessary and initiated beginning in May 2023, would alter the timing of controllable expenditures and would preserve available liquidity into the first quarter of calendar year 2024.

This modified business plan alleviates substantial doubt about our ability to continue as a going concern.

As discussed in Note 7, our Convertible Note contains a financial covenant requiring us to maintain a cash balance of at least $10 million.

Our available liquidity will fall below $10 million by the end of February 2024 based on our modified business plan.

If we are not able to procure other financing cash flows and our cash balance falls below $10 million, an event of default under the Convertible Note indenture would occur if not cured within 30 days.

An event of default would cause our Convertible Note balance outstanding to become immediately due and payable, of which we would not have the resources to repay without additional financing.

Significant Accounting Policies

4 unchanged sentences

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.

We record derivative instruments on the 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

21 unchanged sentences

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.

During the quarter ended September 30, 2022, we issued convertible debt and accounted for it in accordance with the updates provided for by ASU No.

In May 2021, FASB issued ASU No.

5 unchanged sentences

Mineral Rights and Properties, Net

Mineral Rights and Properties, net consist of the following.

September 30,

Mineral rights and properties, net consisted of the following.

(in thousands)

4 unchanged sentences

Asset retirement cost, net of accumulated amortization

of $ 8 and $ 6 at September 30 and June 30, 2022, respectively (1)

of $ 12 and $ 6 at December 31 and June 30, 2022, respectively (1)

Mineral rights and properties, net

2 unchanged sentences

Construction in progress consisted of the following.

September 30,

(in thousands)

1 unchanged sentence

Injection and recovery wells

Capitalized interest

Total construction in progress

1 unchanged sentence

Properties, plant, and equipment, net consisted of the following.

Estimated useful

Asset category

Depreciation method

Estimated useful life (in years)

September 30, 2022

June 30, 2022

life (in years)

(in thousands)

5 unchanged sentences

Properties, plant and equipment, net

For the three months ended September 30, 2022 and 2021, we recognized depreciation expense of approximately $ 34.9 thousand and $ 20.3 thousand, respectively.

For the three and six months ended December 31, 2022 and 2021 , we recognized depreciation expense of approximately $ 38.5 and $ 73.4 thousand, and $ 17.9 and $ 38.2 thousand, respectively.

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.

September 30, 2022

June 30, 2022

(in thousands)

10 unchanged sentences

Accounts payable and accrued liabilities consisted of the following at the end of each period presented.

September 30,

(in thousands)

1 unchanged sentence

Accrued expenses

Accrued capital expenditures

Accrued payroll

2 unchanged sentences

Accounts payable and accrued liabilities

(1) includes $ 2.1 million and $ 1.6 million related to capital expenditures, respectively

Long-term Debt

Long-term debt consisted of the following at the end of each period presented.

September 30,

(in thousands)

3 unchanged sentences

Long-term debt

Unamortized convertible note discount - embedded conversion feature

Unamortized convertible note discount —

embedded conversion feature

Unamortized debt issuance costs - convertible note

Long-term debt, net

At December 31, 2022 the fair value of the convertible note was $ 43.1 million.

Interest expense consisted of the following.

Three Months Ended September 30,

Six months ended December 31,

(in thousands)

2 unchanged sentences

Vehicle notes payable interest

Amortization of debt issuance costs and discount - convertible note

Total interest expense

Amortization of debt issuance costs and discount —

convertible note

Gross interest expense

amount capitalized to construction in progress

Interest expense, net of amounts capitalized

Effective interest rate —

convertible note

Convertible Note

On August 11, 2022, we executed a $ 60 million private placement of Senior Secured Convertible Note (“the Note”

5 unchanged sentences

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).

Due to a provision in the Convertible Note agreement that allowed for a change in the conversion price upon a digressive issuance by us within three months of the closing date, t he 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.

Fair value information for the convertible instrument follows.

September 30,

August 26, 2022

The provision resulting in the separate derivative accounting for the conversion feature expired November 26, 2022, and accordingly, the fair value of the convertible note derivative at expiration of the provision was transferred to additional paid-in capital (see Note 8).

(Termination)

(in thousands)

3 unchanged sentences

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.

Our convertible note derivative relates to the Convertible Note described above and was 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 statement of operations.

As described above in Note 7, the fair value of the convertible note derivative was transferred to additional paid-in capital during the three months ended December 31, 2022.

The components of changes to the fair value of the convertible note derivative are summarized below.

September 30,

2 unchanged sentences

beginning of period

Fair value adjustment

Fair value adjustment (gain) loss

Reclassified to additional paid-in capital

Convertible note derivative —

4 unchanged sentences

September 30,

August 26, 2022

(Termination)

Risk-free interest rate

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.

At December 31, 2022 , cash equivalents as well as trade and other payables approximate their fair value due to their short-term nature.

The reconciliation of changes in the fair value of liabilities classified as Level 3 can be found in Notes 7 and 8.

Share Based Compensation

Share based compensation expense is included in general and administrative expense and consisted of the following for the periods presented.

Three Months Ended September 30,

Three months ended December 31,

Six months ended December 31,

(in thousands)

Share based compensation expense - service based

Share based compensation expense —

service based

Employee share option plan

2022 Equity Compensation Plan - Options

2022 Equity Compensation Plan - RSU and DSU's

2022 Equity Compensation Plan —

RSU and DSU's

Total service based compensation

6 unchanged sentences

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.

Three Months Ended September 30,

The significant assumptions used to estimate the fair value of stock option awards granted under the plans during the six months ended December 31, 2022 and 2021, using the Black-Scholes option valuation model are as follows.

Six months ended December 31,

Exercise price

2 unchanged sentences

Risk-free interest rate

0.01 % - 0.1 %

Dividend rate

The following table summarizes stock option activity for each of the periods presented.

Three Months Ended September 30,

Six months ended December 31,

Number of Options

7 unchanged sentences

Vested at the end of the period

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.

Unvested at the end of the period

The weighted average remaining life of vested options at December 31, 2022 and 2021 was 1.7 years and 2.24 years, respectively.

As of December 31, 2022 , there was $ 5.6 million of unrecognized compensation cost related to 927 thousand unvested stock options.

This cost is expected to be recognized over a weighted-average remaining period of approximately 1.7 years.

The following table summarizes the activity for unvested options for each of the periods presented.

Three Months Ended September 30,

Six months ended December 31,

Number of Options

6 unchanged sentences

Unvested at end of the period

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.

As of December 31, 2022 , the intrinsic value of both the outstanding stock options and vested options was $ 5.1 million.

The intrinsic value of stock options exercised during the six months ended December 31, 2022 and 2021 was $ 4.6 million and $ 14.2 million, respectively.

Restricted Share Units, Director Share Units and Performance Share Units

8 unchanged sentences

Non-vested shares/units outstanding

at September 30, 2022

at December 31, 2022

(1) Includes approximately 32 thousand director share units

1 unchanged sentence

The operational targets are;

1) commissioning and operation of the SSBF;

2) obtaining formation flow, head grade and impurity profile data from the SSBF;

1) commissioning and operation of the small-scale facility;

2) obtaining formation flow, head grade and impurity profile data from the small-scale facility;

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.

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 —

Basic earnings (loss) per share

Diluted earnings (loss) per share:

Net income (loss)

Interest expense on convertible note

Net income (loss) - numerator

Weighted-average shares (denominator):

Dilution effect of stock options and unvested restricted stock units and performance share units

outstanding at end of period

Additional shares assuming conversion of convertible note

Weighted-average shares —

Diluted earnings (loss) per share

Stock options and unvested restricted stock units and performance share units excluded due to

anti-dilutive effect

Earnings (Loss) Per Common Share

Basic earnings (loss) per share (EPS) is calculated by dividing net income (loss) less any applicable adjustments (the numerator) by the weighted-average number of shares of common stock (excluding unvested restricted stock units) outstanding during the period (the denominator).

Diluted EPS incorporates the dilutive impact of outstanding stock options and unvested restricted stock units (using the treasury stock method).

Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of unrecognized compensation expense related to unvested restricted stock units and the amount of excess tax benefits that would be recorded when the award becomes deductible are assumed to be used to repurchase shares.

Diluted earnings (loss) per share equals basic loss per share as the inclusion of normally dilutive options and restricted stock units would be antidilutive due to reported net losses for those periods.

For the six months ended December 31, 2022 and 2021 respectively, stock options and unvested restricted stock units of 5,052 and 4,810 were excluded from the computation of diluted earnings (loss) per share.

Commitments and Contingencies

We had purchase order commitments of $21.7 million for the construction works in progress, software, drilling, and technical reports.

We had purchase order commitments of $ 20 million for the construction works in progress, equipment, software, drilling, and technical reports of which $ 6.2 million is reflected in accounts payable and accrued liabilities on our balance sheet at December 31, 2022.

References herein to the “Company,”

5 unchanged sentences

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.

Certain statements included in this Quarterly Report on Form 10-Q for the three months ended December 31, 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.

48 unchanged sentences

and its subsidiaries.

Highlights for the Three Months Ended September 30, 2022

In August 2022, we completed a $60 million private placement of Senior Secured Convertible Note with Bluescape Energy Partners.

In September 2022, we were included in the S&P/ASX 300 Index.

In September 2022, we entered into a research agreement with Boston College for the advancement of boron-based materials research in solar energy systems.

We had zero lost time incidents with over 23,000 man hours recorded in the quarter.

Mechanical completion of SSBF is on track for completion around calendar year end.

Significant progress during the quarter included pouring of foundations, installation of electrical houses, receipt of fiberglass reinforced tanks, and installation of piping racks and structural steel.

Recruitment of U.S.

based directors, culminating in appointment of three additional board members in October 2022.

5E Advanced Materials, Inc.

is focused on becoming a vertically integrated global leader and supplier of boron specialty and advanced materials whose mission is to enable decarbonization, increase food security, and ensure domestic supply of critical materials.

We hold 100% of the rights –

either through ownership or leasehold interest –

in the 5E Boron Americas (Fort Cady) Complex (the “Project”) located in southern California, through our wholly owned subsidiary 5E Boron Americas, LLC.

Our Project is underpinned by a mineral resource that includes boron and lithium, with the boron being contained in a conventional boron mineral known as colemanite.

In 2022, our facility was designated as Critical Infrastructure by the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency.

Our vision is to safely process boric acid and lithium carbonate through sustainable best practices to enable decarbonization, food security and domestic supply surety.

2023 Outlook and Goals

Small-Scale Facility

During the quarter ended December 31, 2022, we substantially advanced construction of our Small-Scale Facility and commenced pre-commissioning activities prior to quarter end.

We continue to focus on and target commencing operations for initial production of boric acid in late first quarter or early second quarter of calendar year 2023.

The timing of initial production of boric acid is contingent upon the successful completion of commissioning activities and the final clearance to commence mining from the Environmental

Protection Agency under our Underground Injection Control permit, which are expected to be issued in the ordinary course of business.

In January 2023, the United States Geological Survey issued a new report and there were only two companies that produced borates in calendar year 2022, and our production of boric acid would make us the third producer of boron in the United States.

We continue to target initial production of lithium carbonate in the second calendar quarter of 2023.

Larger Scale Facility

As announced on December 20, 2022, we are considering opportunities to accelerate the timeline for initial commercial production based on the learnings from our Small-Scale Facility.

The opportunities to accelerate the timeline for initial commercial production are underpinned on the belief that the sooner we can enter commercial production, the sooner we can achieve positive earnings and cash flow.

There have been significant increases in prices for boron and lithium over recent quarters, largely driven by supply constraints which appear unlikely to dissipate in the near term.

Our independent market research indicates medium-to-long term strength in boric acid demand and pricing, which further reinforces the need to explore all of our options to accelerate initial commercial production.

The initial focus to accelerate includes developing model estimates for capital cost, operating expenses and revenue based on modular design options.

We anticipate using the data and flow sheet optimization derived from the initial production from our Small-Scale Facility to optimize our larger scale production strategy.

We aim to quickly transition into engineering and long lead time item acquisitions required to support our plans to achieve commercial production as soon as possible.

Revenue Opportunities from Small-Scale Facility

We are assessing partner-led initiatives to produce downstream derivatives (including, but not limited to, boron specialties and advanced materials) from our Small-Scale Facility.

While this is a secondary focus for us, we have made progress with respect to certain initiatives with the opportunity to deliver revenue prior to our planned larger scale facility becoming operational.

Funding and Financial Markets

Commercial Initiatives

During the quarter, we entered into a non-binding letter-of-intent with Estes Energetics, a current supplier to the U.S.

Department of Defense, to collaborate on producing boron advanced materials for solid rocket motors to support U.S.

space and military industries.

The letter-of-intent aligns with on-going U.S.

government initiatives and programs to on-shore production of critical materials.

We continue to have discussions with prospective and already engaged customers with respect to broader collaboration on boric acid and lithium carbonate sales including customer funded development options.

Government Initiatives

We continue to pursue various government funding opportunities and incentives.

We are targeting funding opportunities in areas of interest for the U.S.

government, including defense, clean energy, agriculture, and food security.

Our focus to date has been the Department of Defense, via the Defense Production Act Title III and the Defense Logistics Agency, as well as the Department of Energy through, the Office of Fossil Energy and Carbon Management and Loans Program Office.

While discussions are ongoing with multiple governmental entities, we expect to be able to have more meaningful discussions with the Loans Program Office upon completing an updated technical report.

In October 2022, we received a partial exemption for use tax within the State of California for plant and equipment procured to process boric acid and lithium carbonate.

The partial exemption is being retroactively applied to our Small-Scale Facility and we expect to apply the exemption to our larger facility.

Capital Market’s Activities

During the quarter, our activities were primarily focused on the United States but included a two-week Australia non-deal roadshow where senior management presented extensively in four Australian states and territories.

We have multiple non-deal roadshows scheduled for the upcoming quarter and continue to work with investment banks to increase awareness of the Company to investors in the United States.

Given the nature of the project and its location, we have commenced a process to consider non-dilutive debt financing options for our larger scale facility.

Highlights for the Three Months Ended December 31, 2022

Pre-commissioning activities commenced prior to quarter-end with plan to commence operations in late Q1 or early Q2 of calendar year 2023;

Continued track record of zero lost time incidents with over 83,000 man hours recorded in the quarter;

Commenced workstream exploring options to accelerate the large-scale boron and lithium complex;

Signed letter of intent with Estes Energetics to collaborate in producing boron-based materials for solid rocket motors;

Recruitment efforts for CEO well underway.

Our latest liquidity forecast indicates that available cash resources are expected to be exhausted by fourth quarter calendar year 2023.

We are actively exploring various financing options, including government funding opportunities.

However, if additional financing is not secured prior to the second half of calendar year 2023, we would need to implement a modified business plan.

We have prepared and approved an alternative liquidity forecast that, if necessary and initiated beginning in May 2023, would alter the timing of controllable expenditures and would preserve available liquidity into the first quarter of calendar year 2024.

See “Liquidity and Capital Resources”

below for more information.

inflation rate has been steadily increasing since 2021 and throughout 2022.

These inflationary pressures have resulted in and may result in additional increases to the cost of our goods, services, and personnel, which in turn cause our capital expenditures and labor costs to rise, including the estimated costs for our reclamation activities.

Sustained levels of high inflation have caused the U.S.

Federal Reserve and other central banks to increase interest rates, which could have the effects of raising the cost of capital and depressing economic growth, either of which or the combination thereof, could adversely affect our business.

COVID-19 Response

We have implemented policies at our offices in Houston, TX, Hesperia, CA, and Newberry Springs, CA designed to ensure the safety and well-being of all employees and the people associated with them.

In that regard, to reduce risk, our employees have been encouraged to get fully vaccinated against COVID-19, have been asked to work remotely at times, avoid non-essential business travel when applicable, adhere to good hygiene practices, and engage in social distancing.

Continuation of COVID-19 in 2023 and beyond could impact employee health, workforce productivity, insurance premiums, ability to travel, the availability of industry experts, personnel and equipment, restrictions or delays to field work, construction, procurement, studies, lab results, and other factors that will depend on future developments that may be beyond our control.

The forward-looking information contained in this section is subject to the risk factors and assumptions contained in the “Cautionary Note Regarding Forward-Looking Statements”

and “Risk Factor”

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:

Three Months Ended September 30,

Three Months Ended December 31, 2022

Six Months Ended December 31, 2022

($ in thousands)

3 unchanged sentences

Research and development

Depreciation and amortization expense

Depreciation and amortization

Total costs and expenses

4 unchanged sentences

Interest expense

Net foreign exchange gain (loss)

Total non-operating income (expense)

Other expense

Total non-operating income

NET INCOME (LOSS)

* Represents a percentage change greater than +/- 300%

* Represents a percentage change greater

than +/- 300%

Comparison of the three and six months ended December 31, 2022 and 2021

Project expenses

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).

For the six months ended December 31 2022, project expenses decreased 10% versus the comparable period in 2021.

The decrease was primarily due to a reduction in drilling activity specific to water monitoring wells ($6.3 million) incurred in the comparable 2021 period partially offset by costs related to our plug and abandonment program ($5 million), increases in construction related insurance ($0.4 million) and other site related costs ($0.2 million) incurred during the current period.

For the quarter ended December 31, 2022, project expenses increased 14% as plugging and abandonment costs during the current quarter exceeded the reduction in costs related to the prior year’s quarter water monitoring well activity (approximately $272 thousand) combined with construction related insurance costs of approximately $194 thousand that were incurred in the current year quarter.

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.

The decrease in general and administrative expenses during the three and six months ended December 31, 2022 was primarily driven by one-time costs incurred during the prior three and six months periods related to the preparation of our Form-10, our reorganization, and consulting fees paid to Blue Horizon Advisors LLC for services provided.

The absence of these costs during the current three and six month periods were partially offset by an increase in salaries and benefits, stock based compensation, and travel costs resulting from an increase in headcount from 11 at June 30, 2021 to 30 at December 31, 2022.

All employee costs across our business are currently accounted for within general and administrative expenses.

Insurance costs increased during the three and six months ended December 31, 2022 as a result of our monthly amortization of insurance premiums for our public company Director and Officer insurance.

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.

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.

The derivative gain (loss) during the three and six months ended December 31, 2022 related to changes 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 during the quarter ended September 30, 2022.

The unrealized loss during the three months ended December 31, 2022 was primarily due to our stock price increasing from $10.16 at September 30, 2022 to $11.63 at November 26, 2022 (termination).

The unrealized gain during the six months ended December 31, 2022, was primarily due to the decrease in our stock price to $11.63 at the termination date from $15.83 on August 26, 2022 (inception date).

The provision resulting in the separate derivative accounting for the conversion feature expired on November 26, 2022.

The expiration resulted in the transfer of the fair value of the convertible note derivative at expiration to additional paid-in capital and no future related gains or losses are expected.

The increase in interest income during the three and six months ended December 31, 2022 was attributable to short-term investments (original maturities of three months or less) in highly liquid treasury bills and a certificate of deposit starting at the end of the quarter ending September 30, 2022.

The weighted average interest rate earned on these investments was approximately 3.42% for the three and six months ended December 31, 2022.

Interest expense increased primarily due to the issuance of the convertible note on August 26, 2022 and includes $1.5 million and $2 million of debt issuance cost amortization during the three and six months ended December 31, 2022, respectively.

During the six month period ended December 31, 2022, we capitalized approximately $144 thousand to construction in progress.

Interest expense for the six months ended December 31, 2021 related to a note that was paid off during the year ended June 30, 2022.

Other expense consists primarily of foreign exchange gains and losses.

The decrease during the three and six months ended December 31, 2022 compared to the comparative period was due to the transfer and conversion to U.S.

dollars of all foreign denominated cash balances during the quarter ended June 30, 2022 to our bank account in the U.S.

We did not have any income tax expense or benefit for the three and six months ended December 31, 2022 and 2021, as we have recorded a full valuation allowance against our net deferred tax asset.

Liquidity and Capital Resources

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.

As of December 31, 2022, we had cash and cash equivalents of $56.8 million and working capital of $45.3 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.

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.

Risk Factors”

and elsewhere in our annual report on Form 10-K.

For the three months ended September 30,

($ in thousands)

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

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.

In August 2022, we executed a $60 million private placement of senior secured convertible notes to complete construction and commissioning of our Small-Scale Facility, fund operation of our Small-Scale Facility, commence detail engineering and procure long lead items for our large-scale complex and general corporate purposes.

With our current capital resources, we believe that we have sufficient funds to construct and commission our Small-Scale Facility and operate the facility to complete flow sheet optimization activities and produce product for customer qualification.

Over the next 12 months we also have plans to do the following below that will require additional capital:

Pursue and optimize infrastructure capital expenditures for our larger-scale facility which could include expansion of non-potable water resources, upgrading shore power, connection to a natural gas network, and constructing new access roads into and out of the location for our larger-scale facility;

Progress detailed engineering and procure long lead item equipment, specifically our crystallization units;

Optimize well-field design in an effort to reduce future mining capital and operational expenditure through various drilling techniques such as directional, horizontal and radial drilling;

Further define our advanced materials strategy with consideration to engineering and repurposing our Small-Scale Facility to produce boron advanced materials once sufficient data has been obtained for flow sheet optimization and the production of product for customer qualification;

Continue hiring team members necessary to support our operation efforts of becoming a global producer of boric acid, lithium carbonate and gypsum.

It is our opinion, based on our current capital resources, that with a modified business plan, we will have sufficient assets to discharge our liabilities as they become due, construct and operate our Small-Scale Facility, and to meet our administrative and overhead requirements for at least the next 12 months from the date these quarterly financial statements are issued.

As of today, we are currently operating under our normal business plan which indicates that available cash resources are expected to be exhausted in the fourth quarter of calendar year 2023.

Absent additional financing as outlined above, we would no longer be able to meet our ongoing obligations or progress operations under that plan.

This modified business plan alleviates substantial doubt about our ability to continue as a going concern.

Our Convertible Note contains a financial covenant requiring us to maintain a cash balance of at least $10 million (see note 7 to our unaudited condensed consolidated financial statements in item 1 of this report for additional information).

Our available liquidity will fall below $10 million by the end of February 2024 based on our modified business plan.

An event of default would cause our Convertible Note balance outstanding to become immediately due and payable, of which we would not have the resources to repay without additional financing.

Critical Accounting Policies

1 unchanged sentence

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.

During the current quarter, our only derivative instrument, the convertible note derivative, was derecognized through a transfer to additional paid in capital.

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.

As a result, the value of the embedded conversion feature could be significantly different than the fair value transferred to additional paid in capital of $13.2 million, See Notes 7 and 8 to our unaudited condensed 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.

The Company had purchase order commitments $20 million for the construction works in progress, equipment, software and technical reports, of which $6.2 million is reflected in accounts payable and accrued liabilities on our unaudited condensed consolidated balance sheet at December 31, 2022.

The majority of the commitments will be settled by June 30, 2023.

Mineral Lease Payments

1 unchanged sentence

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.

Payments made during the six months ended December 31, 2022 and 2021, were $0 and $86 thousand, respectively.

Salt Wells Earn-in Agreement

5 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements