5E Advanced Materials, Inc. 10-Q

Item 1. Financial Statements. 5E ADVANCED MATERIALS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (In thousands, except share data) December 31, June 30, 2022 2022 ASSETS Current assets: Cash and cash equivalents $ 56,751 $ 31,057 Prepaid expenses and other current assets 1,032 1,506 Total current assets 57,783 32,563 Mineral rights and properties, net 8,525 8,364 Construction in progress 46,914 25,625 Properties, plant and equipment, net 3,006 2,871 Reclamation bond deposit 1,086 1,086 Right of use asset 287 371 Other assets 6 6 Total assets $ 117,607 $ 70,886 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 12,312 $ 7,212 Lease liabilities, current 163 164 Total current liabilities 12,475 7,376 Long-term debt, net 33,075 148 Lease liabilities 129 211 Accrued reclamation liabilities 665 489 Total liabilities 46,344 8,224 Commitments and contingencies (Note 12) Stockholders’ Equity: Common stock, $ 0.01 par value; 180,000 shares authorized; 43,889 and 43,305 shares outstanding December 31 and June 30, respectively 439 433 Additional paid-in capital 188,445 169,593 Retained earnings (accumulated deficit) ( 117,621 ) ( 107,364 ) Total stockholders’ equity 71,263 62,662 Total liabilities and stockholders’ equity $ 117,607 $ 70,886 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 5E ADVANCED MATERIALS, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited) (In thousands, except per share amounts) Three months ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Operating expenses: Project expenses $ 3,404 $ 2,990 $ 6,999 $ 7,775 General and administrative 7,701 7,830 12,587 13,671 Research and development 39 — 78 — Depreciation and amortization expense 42 20 79 40 Total operating expenses 11,186 10,840 19,743 21,486 Income (loss) from operations ( 11,186 ) ( 10,840 ) ( 19,743 ) ( 21,486 ) Non-operating income (expense) Other income 22 — 36 10 Interest income 465 1 526 2 Derivative gain (loss) ( 2,166 ) — 11,743 — Interest expense ( 1,985 ) — ( 2,806 ) ( 2 ) Other income (expense) ( 13 ) ( 200 ) ( 13 ) 969 Total non-operating income (expense) ( 3,677 ) ( 199 ) 9,486 979 Income (loss) before income taxes ( 14,863 ) ( 11,039 ) ( 10,257 ) ( 20,507 ) Income tax provision (benefit) — — — — Net income (loss) $ ( 14,863 ) $ ( 11,039 ) $ ( 10,257 ) $ ( 20,507 ) Net income (loss) per common share — basic and diluted $ ( 0.34 ) $ ( 0.28 ) $ ( 0.24 ) $ ( 0.52 ) Weighted average common shares outstanding — basic and diluted 43,772 39,878 43,561 39,294 Comprehensive income (loss): Net income (loss) $ ( 14,863 ) $ ( 11,039 ) $ ( 10,257 ) $ ( 20,507 ) Reporting currency translation gain (loss) — 776 — ( 829 ) Comprehensive income (loss) $ ( 14,863 ) $ ( 10,263 ) $ ( 10,257 ) $ ( 21,336 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 5E ADVANCED MATERIALS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In thousands) For the six months ended December 31, 2022 2021 Cash Flows From Operating Activities: Net income (loss) $ ( 10,257 ) $ ( 20,507 ) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 79 40 Share based compensation 3,533 3,087 Common stock issued for consulting fees — 3,408 Unrealized (gain) loss on convertible note derivative instrument ( 11,743 ) — Accretion of reclamation liability 9 3 Amortization of debt issuance costs and discount — convertible note 2,001 — Amortization of right of use asset 84 — Interest earned on reclamation bond — ( 1 ) Net foreign exchange (gain) loss — ( 969 ) Change in: Prepaid expenses and other current assets 474 ( 295 ) Accounts payable and accrued liabilities ( 363 ) 2,416 Net cash used in operating activities ( 16,183 ) ( 12,818 ) Cash Flows From Investing Activities: Construction in progress ( 15,908 ) ( 1,662 ) Mineral rights and properties additions — ( 87 ) Properties, plant and equipment additions ( 208 ) ( 1,058 ) Net cash used in investing activities ( 16,116 ) ( 2,807 ) Cash Flows From Financing Activities: Proceeds from issuance of convertible note 55,840 — Payments on note payable ( 19 ) ( 1 ) Proceeds from issuance of common stock — 26,309 Share offering costs — ( 797 ) Proceeds from exercise of stock options 2,172 2,907 Net cash provided by financing activities 57,993 28,418 Net increase (decrease) in cash and cash equivalents 25,694 12,793 Effect of exchange rate fluctuation on cash — 139 Cash and cash equivalents at beginning of period 31,057 40,811 Cash and cash equivalents at end of period $ 56,751 $ 53,743 Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 4 $ — Noncash Investing and Financing Activities: Accounts payable and accrued liabilities change related to construction in progress $ 5,381 $ 844 Construction in progress transferred to properties, plant and equipment — 55 Equipment acquired with notes payable — 227 Recognition of operating lease liability and right of use asset — 17 Increase (decrease) in asset retirement costs 167 — The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 5E ADVANCED MATERIALS, INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (In thousands) Additional Accumulated Total Common Stock Paid-in Comprehensive Accumulated Stockholders' Shares Amount Capital Income (loss) Deficit Equity Balance at June 30, 2022 43,305 $ 433 $ 169,593 $ — $ ( 107,364 ) $ 62,662 Shares issued for: Exercise of stock options 50 1 255 — — 256 Share based compensation — — 1,300 — — 1,300 Net income (loss) — — — — 4,606 4,606 Balance at September 30, 2022 43,355 434 171,148 — ( 102,758 ) 68,824 Shares issued for: Exercise of stock options 525 5 1,911 — — 1,916 Vesting of restricted share units 9 — — — — — Share based compensation — — 2,233 — — 2,233 Convertible note derivative liability reclassification — — 13,153 — — 13,153 Net income (loss) — — — — ( 14,863 ) ( 14,863 ) Balance at December 31, 2022 43,889 $ 439 $ 188,445 $ — $ ( 117,621 ) $ 71,263 Additional Accumulated Total Common Stock Paid-in Comprehensive Accumulated Stockholders' Shares Amount Capital Income (loss) Deficit Equity Balance at June 30, 2021 38,391 $ 384 $ 101,180 $ 1,417 $ ( 40,652 ) $ 62,329 Shares issued for: Cash — — Exercise of stock options 303 3 1,083 — — 1,086 Consulting fees 150 1 1,538 — — 1,539 Share based compensation — — 1,776 — — 1,776 Net income (loss) — — — — ( 9,468 ) ( 9,468 ) Other comprehensive income (loss), net of tax — — — ( 1,606 ) — ( 1,606 ) Balance at September 30, 2021 38,844 388 105,577 ( 189 ) ( 50,120 ) 55,656 Shares issued for: Cash 1,760 17 26,291 — — 26,308 Exercise of stock options 865 9 1,813 — — 1,822 Consulting fees 150 2 1,867 — — 1,869 Share issuance costs — — ( 797 ) — — ( 797 ) Share based compensation — — 1,311 — — 1,311 Net income (loss) — — — — ( 11,039 ) ( 11,039 ) Other comprehensive income (loss), net of tax — — — 776 — 776 Balance at December 31, 2021 41,619 $ 416 $ 136,062 $ 587 $ ( 61,159 ) $ 75,906 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 5E ADVANCED MATERIALS, INC. 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, as amended. 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 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 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. 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 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. 7 Derivative Financial Instruments 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. 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. 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 quarter ended September 30, 2022, 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. 8 2. Mineral Rights and Properties, Net Mineral rights and properties, net consisted of the following. December 31, June 30, 2022 2022 (in thousands) Mineral properties $ 6,733 $ 6,733 Hydrology wells 547 547 Mineral interest – Elementis lease 908 908 Asset retirement cost, net of accumulated amortization of $ 12 and $ 6 at December 31 and June 30, 2022, respectively (1) 337 176 Mineral rights and properties, net $ 8,525 $ 8,364 (1) Asset retirement costs represent the carrying value of capitalized costs associated with asset retirement obligations discussed in Note 5. 3. Construction in Progress Construction in progress consisted of the following. December 31, June 30, 2022 2022 (in thousands) Engineering services $ 9,119 $ 8,656 Equipment 25,224 13,548 Construction 8,678 — Injection and recovery wells 3,749 3,421 Capitalized interest 144 — Total construction in progress $ 46,914 $ 25,625 4. Properties, Plant and Equipment, Net Properties, plant, and equipment, net consisted of the following. Depreciation Estimated useful December 31, June 30, Asset category method life (in years) 2022 2022 (in thousands) Land N/A — $ 1,533 $ 1,533 Buildings Straight-line 7 - 15 873 873 Vehicles Straight-line 3 - 5 344 276 Plant and equipment Straight-line 5 - 10 480 340 3,230 3,022 Less accumulated depreciation ( 224 ) ( 151 ) Properties, plant and equipment, net $ 3,006 $ 2,871 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. . 9 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. December 31, June 30, 2022 2022 (in thousands) Asset retirement obligation — beginning of period $ 191 $ 79 Obligation incurred during the period — 106 Revisions to previous estimates 167 ( 3 ) Accretion 9 9 Asset retirement obligation — end of period 367 191 Accrued reclamation costs 298 298 Total accrued reclamation liabilities $ 665 $ 489 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. December 31, June 30, 2022 2022 (in thousands) Accounts payable - trade (1) $ 2,883 $ 3,459 Accrued expenses 807 1,584 Accrued capital expenditures 6,207 1,351 Accrued payroll 1,431 780 Accrued interest 945 — Current portion of debt 39 38 Accounts payable and accrued liabilities $ 12,312 $ 7,212 (1) includes $ 2.1 million and $ 1.6 million related to capital expenditures, respectively 7. Long-term Debt Long-term debt consisted of the following at the end of each period presented. December 31, June 30, 2022 2022 (in thousands) Convertible note $ 60,000 $ — Vehicle notes payable 167 186 Total debt 60,167 186 Current portion of debt 39 38 Long-term debt 60,128 148 Unamortized convertible note discount — embedded conversion feature ( 23,181 ) — Unamortized debt issuance costs - convertible note ( 3,872 ) — Long-term debt, net $ 33,075 $ 148 At December 31, 2022 the fair value of the convertible note was $ 43.1 million. 10 Interest expense consisted of the following. Six months ended December 31, 2022 2021 (in thousands) Convertible note interest $ 945 $ — Notes payable interest — 2 Vehicle notes payable interest 4 — Amortization of debt issuance costs and discount — convertible note 2,001 — Gross interest expense 2,950 2 Less: amount capitalized to construction in progress 144 — Interest expense, net of amounts capitalized $ 2,806 $ 2 Effective interest rate — convertible note 25.70 % — 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. 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. 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). November 26, August 26, 2022 2022 (Termination) (Inception) (in thousands) Fair value of convertible note (Level 2) $ 36,388 $ 35,104 Fair value of embedded conversion feature (Level 3) 13,153 24,896 Total fair value of convertible note instrument $ 49,541 $ 60,000 11 8. Convertible Note Derivative 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. December 31, September 30, 2022 2022 (in thousands) Convertible note derivative — beginning of period $ 10,987 $ — Additions — 24,896 Fair value adjustment (gain) loss 2,166 ( 13,909 ) Reclassified to additional paid-in capital ( 13,153 ) — Convertible note derivative — end of period $ — $ 10,987 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. November 26, August 26, 2022 September 30, 2022 (Termination) 2022 (Inception) Risk-free interest rate 3.9 % 4.1 % 3.2 % Volatility 40.0 % 40.0 % 40.0 % Debt rate 17.7 % 18.6 % 17.3 % 9. Financial Instruments and Fair Value Measurements At December 31, 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 which was classified as Level 3 before its derecognition and transfer to additional paid-in capital during the current period. The reconciliation of changes in the fair value of liabilities classified as Level 3 can be found in Notes 7 and 8. 10. 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 December 31, Six months ended December 31, 2022 2021 2022 2021 (in thousands) Share based compensation expense — service based Employee share option plan $ 1,261 $ 1,310 $ 2,222 $ 2,838 2022 Equity Compensation Plan — Options 351 — 526 — 2022 Equity Compensation Plan — PSU's 34 — 59 — 2022 Equity Compensation Plan — RSU and DSU's 587 — 726 — Total service based compensation 2,233 1,310 3,533 2,838 Options issued to suppliers — — — 249 Consulting stock awards — 1,869 — 3,408 Total share based compensation $ 2,233 $ 3,179 $ 3,533 $ 6,495 12 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 six months ended December 31, 2022 and 2021, using the Black-Scholes option valuation model are as follows. Six months ended December 31, 2022 2021 Exercise price $ 25.62 $ 14.62 - $ 18.27 Share price $ 18.03 $ 12.43 Volatility 79 % 85 % Expected term in years 5 0.9 to 3.9 Risk-free interest rate 2.91 % 0.01 % - 0.1 % Dividend rate Nil Nil The following table summarizes stock option activity for each of the periods presented. Six months ended December 31, 2022 2021 Number of Options Weighted Average Exercise Price 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 1,700 15.42 Exercised ( 575 ) 3.78 ( 1,168 ) 2.49 Expired/forfeited ( 460 ) 15.33 ( 477 ) 5.48 Outstanding at end of the period 4,239 11.37 5,609 8.84 Vested at the end of the period 3,312 $ 9.01 3,970 $ 6.29 Unvested at the end of the period 927 19.76 1,639 14.95 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. Six months ended December 31, 2022 2021 Number of Options Weighted Average Grant Date Fair Value per share Number of Options Weighted Average Grant Date Fair Value per share (In thousands, except per share data) Unvested at beginning of the period 1,507 $ 6.05 270 $ 5.79 Granted 400 10.52 1,700 6.26 Vested ( 880 ) 5.71 ( 220 ) 6.62 Expired/forfeited ( 100 ) 6.85 ( 111 ) 8.11 Unvested at end of the period 927 8.11 1,639 6.01 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. 13 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 (In thousands, except per share data) Non-vested shares/units outstanding at July 1, 2022 48.8 $ 18.03 19.2 $ 12.19 68.0 Granted 106.5 14.47 63.5 (2) 14.79 170.0 Vested ( 8.9 ) 12.27 — — ( 8.9 ) Forfeited ( 14.5 ) 14.25 ( 35.1 ) 14.09 ( 49.6 ) Non-vested shares/units outstanding at December 31, 2022 131.9 (1) $ 15.96 47.6 $ 14.26 179.5 (1) Includes approximately 32 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 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. 11. 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. 12 12. Commitments and Contingencies 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. 14 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 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. 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. Overview 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 15 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; 16 • Signed letter of intent with Estes Energetics to collaborate in producing boron-based materials for solid rocket motors; • Recruitment efforts for CEO well underway. Liquidity 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 The U.S. 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” sections. 17 Results of Operations The following table summarizes our results of operations for the periods presented: Three Months Ended December 31, 2022 Change Six Months Ended December 31, 2022 Change 2022 2021 $ % 2022 2021 $ % ($ in thousands) COSTS AND EXPENSES Project expenses $ 3,404 $ 2,990 $ 414 14 % $ 6,999 $ 7,775 $ (776 ) -10 % General and administrative 7,701 7,830 (129 ) -2 % 12,587 13,671 (1,084 ) -8 % Research and development 39 — 39 N/A 78 — 78 N/A Depreciation and amortization expense 42 20 22 110 % 79 40 39 98 % Total costs and expenses 11,186 10,840 346 3 % 19,743 21,486 (1,743 ) -8 % LOSS FROM OPERATIONS (11,186 ) (10,840 ) (346 ) 3 % (19,743 ) (21,486 ) 1,743 -8 % NON-OPERATING INCOME (EXPENSE) Other income 22 — 22 N/A 36 10 26 260 % Interest income 465 1 464 * 526 2 524 * Derivative gain (loss) (2,166 ) — (2,166 ) N/A 11,743 — 11,743 N/A Interest expense (1,985 ) — (1,985 ) N/A (2,806 ) (2 ) (2,804 ) * Other expense (13 ) (200 ) 187 -94 % (13 ) 969 (982 ) -101 % Total non-operating income (expense) (3,677 ) (199 ) (3,478 ) NM 9,486 979 8,507 * NET INCOME (LOSS) $ (14,863 ) $ (11,039 ) $ (3,824 ) 35 % $ (10,257 ) $ (20,507 ) $ 10,250 -50 % * 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. 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 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. 18 Non-operating (income) expense 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. Income Tax 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 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. 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; and • Continue hiring team members necessary to support our operation efforts of becoming a global producer of boric acid, lithium carbonate and gypsum. 19 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. 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. 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. 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. Critical Accounting Policies Derivative Financial Instruments Our derivative instruments are accounted for on a mark-to-market basis. 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 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 $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 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 six months ended December 31, 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. 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not required.