What changed in this filing

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Item 1. Financial Statements

2023-11-09 compared with 2023-05-15 · 279 added, 305 removed, 340 unchanged (63% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

(In thousands, except per share data)

September 30,

Current assets:

14 unchanged sentences

Lease liabilities

Accrued reclamation liabilities

Asset retirement obligations

Total liabilities

3 unchanged sentences

180,000 shares authorized;

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

44,187 shares outstanding September 30, 2023 and June 30, 2023, respectively

Additional paid-in capital

6 unchanged sentences

(In thousands, except per share amounts)

Three months ended March 31,

Nine Months Ended March 31,

For the three months ended September 30,

Operating expenses:

9 unchanged sentences

Interest expense

Other income (expense)

Other expense

Total non-operating income (expense)

2 unchanged sentences

Net income (loss)

Net income (loss) per common share —

basic and diluted

Net income (loss) per common share:

Weighted average common shares outstanding —

basic and diluted

Weighted average common shares outstanding —

Comprehensive income (loss):

Net income (loss)

Reporting currency translation gain (loss)

Comprehensive income (loss)

3 unchanged sentences

(In thousands)

For the nine months ended March 31,

For the three months ended September 30,

Cash Flows From Operating Activities:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash used by operating activities:

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation and amortization

Share based compensation

Common stock issued for consulting fees

Unrealized (gain) loss on convertible note derivative instrument

Accretion of reclamation liability

Accretion of asset retirement obligations

Amortization of debt issuance costs and discount —

1 unchanged sentence

Amortization of right of use asset

Interest earned on reclamation bond

Net foreign exchange (gain) loss

Prepaid expenses and other current assets

3 unchanged sentences

Construction in progress

Mineral rights and properties additions

Properties, plant and equipment additions

2 unchanged sentences

Proceeds from issuance of convertible note

Debt issuance costs

Payments on note payable

Proceeds from issuance of common stock

Share offering costs

Proceeds from exercise of stock options

Net cash provided by financing activities

Net cash provided by (used for) financing activities

Net increase (decrease) in cash and cash equivalents

Effect of exchange rate fluctuation on cash

Cash and cash equivalents at beginning of period

5 unchanged sentences

Interest paid through issuance of additional convertible notes

Equipment acquired with notes payable

Recognition of operating lease liability and right of use asset

Increase (decrease) in asset retirement costs

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

2 unchanged sentences

(In thousands)

Comprehensive

Stockholders'

Income (loss)

Stockholders’

Balance at June 30, 2022

4 unchanged sentences

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

Shares issued for:

Exercise of stock options

Vesting of restricted share units

Share based compensation

Net income (loss)

Balance at March 31, 2023

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

5E ADVANCED MATERIALS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands)

Comprehensive

Stockholders'

Income (loss)

Balance at June 30, 2023

Shares issued for:

Exercise of stock options

Consulting fees

Vesting of restricted share units

Share based compensation

Net income (loss)

Other comprehensive income (loss),

Balance at September 30, 2023

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

Shares issued for:

Exercise of stock options

Consulting fees

Share based compensation

Net income (loss)

Other comprehensive income (loss),

Balance at March 31, 2022

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

5E ADVANCED MATERIALS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Financial Statement Presentation

These unaudited condensed consolidated financial statements (herein after referred to as “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.

These unaudited condensed consolidated financial statements (herein after referred to as “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, 2023 included in the Company's 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 March 31, 2023, results of operations for the three and nine months ended March 31, 2023 and 2022 and cash flows for the nine months ended March 31, 2023 and 2022 have been included.

Operating results for the three and nine months ended March 31, 2023 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 September 30, 2023, results of operations for the three months ended September 30, 2023 and 2022 and cash flows for the three months ended September 30, 2023 and 2022 have been included.

Operating results for the three months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2024 .

Basis of Consolidation

1 unchanged sentence

and its wholly owned subsidiaries, American Pacific Borates Pty Ltd.

and 5E Boron Americas, LLC (formerly Fort Cady (California) Corporation), (collectively, “5E,”

and 5E Boron Americas, LLC (formerly Fort Cady (California) Corporation, "5EBA"), (collectively, “5E,”

“we,”

3 unchanged sentences

Going Concern

We evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that these consolidated financial statements are issued.

This evaluation initially does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date the financial statements are issued.

When substantial doubt exists under this methodology, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern.

The mitigating effect of our plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued.

In performing our analysis, we excluded certain elements of our operating plan that cannot be considered probable.

The future receipt of potential funding from equity or debt issuances cannot be considered probable at this time because these plans are not entirely within our control as of the date of these consolidated financial statements.

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

Our available liquidity is expected to fall below $10 million in the latter part of calendar year 2023 based on our most recently updated modified business plan, which includes an increase in Small-Scale Facility costs due to increases in third-party construction cost estimates.

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

Our plans include reduced spending and the pursuit of additional capital.

Given that raising additional capital is not entirely within our control combined with our expectation of incurring significant operating and development costs in the foreseeable future, there exists substantial doubt regarding our ability to continue as a going concern for a period of one year after the date that these financial statements are issued.

Management evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued.

When substantial doubt exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company's ability to continue as a going concern.

The mitigating effect of management's plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued.

In performing this analysis, management excluded certain elements of its operating plan that cannot be considered probable.

The future receipt of potential funding from equity or debt issuances cannot be considered probable at this time because these plans are not entirely within management's control as of the date of these condensed consolidated financial statements.

During the quarter ended September 30, 2023, Bluescape Special Situations IV (the "Lender"), the holder of the Company's senior secured convertible note (the "Convertible Note"), communicated an immaterial alleged breach of the Convertible Note agreement regarding a nonfinancial covenant.

However, the Lender elected not to pursue any remedies related thereto.

The Company disagreed with the Lender's contention.

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

On November 9, 2023, the Company entered into a standstill agreement (the "Agreement") with the Lender.

The Agreement enables the Company, the Lender and other strategic investors to advance discussions towards a resolution for a recapitalization plan for the Company.

Under the Agreement, the parties have agreed to a period of standstill, which pauses rights, remedies, powers, privileges and defenses, temporarily allowing the Company to go below its current cash covenant of $ 10 million until December 1, 2023.

If the Company is not able to obtain additional financing and agree to a successful recapitalization plan, its cash balance is expected to fall below $10 million during the fourth calendar quarter of 2023, and an event of default under the Convertible Note agreement would occur.

However, it is expected that any recapitalization plan will waive any defaults under the Convertible Note agreement.

Management's plans include reduced spending and a pursuit of additional capital through a recapitalization plan.

Given that raising additional capital and the achievement of a successful recapitalization plan are not entirely within management's control combined with the expectation of incurring significant operating and development costs in the foreseeable future, there exists substantial doubt regarding the Company's ability to continue as a going concern for a period of one year after the date that these financial statements are issued.

If the anticipated recapitalization plan is successfully consummated in the fourth quarter 2023, available liquidity may still not be sufficient to eliminate the aforementioned substantial doubt regarding the Company's ability to continue as a going concern.

These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties described above.

Risk and Uncertainties

We are subject to a number of risks that we believe are similar to those of other companies of similar size in our industry, including but not limited to, the success of our exploration activities, need for significant additional capital (or financing) to fund operating losses, competition from substitute products and services from larger companies, protection of proprietary technology, patent litigation, and dependence on key individuals.

We currently generate no revenues from operations and will need to rely on raising additional capital or financing to sustain operations in the long-term.

There 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.

We expect our available liquidity will fall below $10 million within the next 12 months.

If we are not able to secure additional financing and our cash balance falls below $10 million, an event of default under a 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.

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 end of the period in which the change in circumstances that caused the transfer occurred.

Financial Instruments

The Company's financial instruments consist of cash and cash equivalents, a convertible note, vehicle notes, and accounts payable and accrued liabilities.

It is management’s opinion that we are not exposed to significant interest, currency or credit risks arising from these financial instruments.

The fair values of these instruments, with the exception of the convertible note and vehicle notes, approximate their carrying value.

See Note 7 for fair value information related to the convertible notes.

Concentration of Risk

The Company maintains cash deposits at several major banks, which at times may exceed amounts covered by insurance provided by the United States Federal Deposit Insurance Corporation (“FDIC”).

Management monitors the financial health of the banks and believes the Company is not exposed to any significant credit risk, and the Company has not experienced any such losses.

Risks and Uncertainties

The Company is subject to a number of risks that management believes are 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.

The Company currently generates no revenues from operations and will need to rely on raising additional capital or financing to sustain operations in the long-term.

There can be no assurance that management will be successful in its efforts to raise additional capital on terms favorable to the Company, or at all, or in management's ability to adequately reduce expenses, if necessary, to maintain sufficient liquidity or capital resources.

Management expects the Company's available liquidity will fall below $10 million within the next 12 months.

If we are not able to secure additional financing and our cash balance falls below $10 million, an event of default under the Convertible Note indenture would occur.

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

Reclassifications

4 unchanged sentences

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.

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.

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified effective date.

Unless otherwise discussed, management believes that the impact of recently issued standards did not or will not have a material impact on the Company’s consolidated financial statements upon adoption.

Mineral Rights and Properties, Net

Mineral rights and properties, net consisted of the following.

September 30,

(in thousands)

1 unchanged sentence

Hydrology wells

Mineral interest –

Elementis lease (1)

Asset retirement cost, net of accumulated amortization

of $ 17 and $ 6 at March 31, 2023 and June 30, 2022, respectively (2)

of $ 28 and $ 23 at September 30, 2023 and June 30, 2023, respectively (1)

Mineral rights and properties, net

(1) During the quarter ended March 31, 2023, we elected not to renew our mineral lease with Elementis Specialties, Inc.

and the mineral lease expired on March 31, 2023 resulting in the recognition of approximately $ 908 thousand of related impairment expense during the current quarter.

(1) Asset retirement costs represent the carrying value of capitalized costs associated with asset retirement obligations discussed in Note 5.

1 unchanged sentence

Construction in progress consisted of the following.

September 30,

(in thousands)

Engineering services

Construction services

Injection and recovery wells

4 unchanged sentences

Estimated useful

September 30,

Asset category

7 unchanged sentences

Properties, plant and equipment, net

For the three and nine months ended March 31, 2023 and 2022 , we recognized depreciation expense of approximately $ 46.7 and $ 119 thousand, and $ 34.1 and $ 72.4 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.

For the three months ended September 30, 2023 and 2022, we recognized depreciation expense of approximately $ 47 thousand and $ 35 thousand, respectively.

Asset Retirement Obligations

The change in our ARO during the periods presented and the balance of our accrued reclamation liabilities at the end of each period are set forth below.

September 30,

(in thousands)

5 unchanged sentences

end of period

Accrued reclamation costs

Total accrued reclamation liabilities

(1) attibutable to revised cost estimates provided by a third-party engineering firm and is reflected as an increase to mineral rights and properties (see Note 2).

Accrued reclamation costs of $ 298 thousand relate to surface reclamation obligations at Fort Cady.

(1) The revision for the prior period is attributable to revised cost estimates provided by a third-party engineering firm and was reflected as an increase to mineral rights and properties (see Note 2) .

Accounts Payable and Accrued Liabilities

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

September 30,

(in thousands)

6 unchanged sentences

Accounts payable and accrued liabilities

(1) includes $ 3.8 million and $ 1.6 million related to capital expenditures, respectively

(1) Includes $ 1,324 thousand and $ 699 thousand 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)

7 unchanged sentences

Long-term debt, net

At March 31, 2023 the fair value of the convertible note was $ 39.7 million.

On August 15, 2023 the Company elected to issue additional notes as payment for $ 1.85 million of interest accrued during the period from February 16, 2023 through August 15, 2023.

Interest expense consisted of the following.

Nine months ended March 31,

Three months ended September 30,

(in thousands)

Convertible note interest

Notes payable interest

Vehicle notes payable interest

1 unchanged sentence

convertible note

Other interest

Gross interest expense

4 unchanged sentences

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.

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

or "Convertible Note"), with Bluescape Energy Partners.

The Note, which is convertible into the Company's common stock and matures in August 2027 , closed on August 26, 2022.

At the Company's 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.

Interest is paid semi-annually on February 15 and August 15 of each year.

The Note contains a financial covenant requiring us to maintain a cash balance of at least $10 million and is secured by a security interest in substantially all of our assets.

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.

On February 15, 2023 we elected to issue additional notes as payment for $1.7 million of interest accrued during the period August 26, 2022 through February 15, 2023.

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 Company has 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 into the Company's common stock in whole or in part if the closing price of the Company's 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 the Company's 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 the Company 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 (the "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).

The provision resulting in the separate accounting for the conversion feature of the Convertible Note Derivative 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).

Fair value information for the Convertible Note and Convertible Note Derivative follows.

September 30,

(in thousands)

Fair value of convertible note (Level 2)

Fair value of embedded conversion feature (Level 3)

Total fair value of convertible note instrument

The valuation model for the Convertible Note and related Convertible Note Derivative 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 the Company's underlying share price can materially affect the fair value estimates.

Prior to the expiration of the provision that required separate accounting for the Convertible Note Derivative, the changes in fair value of the Convertible Note Derivative materially affected reported net income (loss) but had no related impact on our cash position or cash flows.

Changes in the reported fair value of the Convertible Note are not recognized in net income and therefore have no effect on reported net income (loss).

The significant assumptions used in the fair value model for the Convertible Note and related Convertible Note Derivative include the following, with a change in volatility and debt rate having the most significant impact on the related fair values.

September 30,

Risk-free interest rate

Stock price per share

On November 6, 2026, the Company entered into a standstill agreement with its Lender and holder of the Convertible Note.

Refer to Notes 1 and 13 for additional information.

Convertible Note Derivative

The convertible note derivative, which related to the Convertible Note described above, was valued upon initial recognition at fair value using a with-and-without methodology utilizing a binomial lattice model (Level 3).

Changes in fair value were recognized in the statement of operations prior to the derecognition of the convertible note derivative during the quarter ended December 31, 2022.

The Convertible Note Derivative, which related to the Convertible Note described above in Note 7, was valued upon initial recognition and at each reporting period at fair value using a with-and-without methodology utilizing a binomial lattice model (Level 3).

Changes in the fair value were recognized in Derivative gain (loss) in the statement of operations prior to the derecognition of the Convertible Note Derivative during the quarter ended December 31, 2022.

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.

Refer to Note 7 for additional information about the fair value assumptions utilized on the valuation of the Convertible Note Derivative.

The components of changes to the fair value of the Convertible Note Derivative are summarized below.

Three months ended September 30, 2022

(in thousands)

Convertible note derivative —

June 30, 2022

Fair value adjustment (gain)

Reclassified to additional paid-in capital

Convertible note derivative —

March 31, 2023

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.

September 30,

(Termination)

Risk-free interest rate

Convertible note derivative (asset) liability —

beginning of period

Fair value adjustment (gain) loss

Convertible note derivative (asset) liability —

end of period

Financial Instruments and Fair Value Measurements

At March 31, 2023 , 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.

At September 30, 2023 , 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 quarter ended December 31, 2022.

The reconciliation of changes in the fair value of the Convertible Note Derivative can be found in Note 8 and fair value as of September 30, 2023 in Note 7.

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 March 31,

Nine months ended March 31,

Three months ended September 30,

(in thousands)

6 unchanged sentences

RSU and DSU's

Total service based compensation

Options issued to suppliers

Consulting stock awards

Total share based compensation expense

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 .

All options outstanding prior to the three-month period ended September 30, 2022 were granted under the predecessor parent company's employee share option plan.

New option grants are made under the 2022 Equity Compensation Plan and vest ratably over the vesting period which is generally three years or less.

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 nine months ended March 31, 2023 and 2022, using the Black-Scholes option valuation model are as follows.

Nine months ended March 31,

The significant assumptions used to estimate the fair value of stock option awards granted under the plans during the three months ended September 30, 2023 and 2022, using the Black-Scholes option valuation model are as follows.

Three months ended September 30,

Exercise price

$ 14.62 - $ 18.27

Expected term in years

Risk-free interest rate

0.01 % - 0.1 %

Dividend rate

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

Nine months ended March 31,

Three months ended September 30,

Number of Options

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Unvested at the end of the period

The weighted average remaining life of vested options at March 31, 2023 and 2022 was 1.65 years and 2.03 years, respectively.

As of March 31, 2023 , there was $ 4.6 million of unrecognized compensation cost related to 793 thousand unvested stock options.

The weighted average remaining life of vested options at September 30, 2023 and 2022 was 1.2 years and 1.4 years, respectively.

As of September 30, 2023 , there was $ 2.4 million of unrecognized compensation cost related to 853 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.

Nine months ended March 31,

Three months ended September 30,

Number of Options

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Unvested at end of the period

As of March 31, 2023 , the intrinsic value of both the outstanding stock options and vested options was $ 1.3 million.

The intrinsic value of stock options exercised during the nine months ended March 31, 2023 and 2022 was $ 6.2 million and $ 14.4 million, respectively.

As of September 30, 2023 , all outstanding stock options and vested stock options had no intrinsic value as the exercise prices of the respective options exceeded the Company's stock price on September 30, 2023 .

The intrinsic value of stock options exercised during the three months ended September 30, 2022 was $ 0.8 million.

There were no options exercised during the three months ended September 30, 2023.

Restricted Share Units, Director Share Units and Performance Share Units

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(In thousands, except per share data)

Non-vested shares/units outstanding

at July 1, 2022

Non-vested shares/units outstanding

at March 31, 2023

(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;

Non-vested shares/units

outstanding at June 30, 2023

Non-vested shares/units

outstanding at September 30, 2023

Serviced-Based Shares

Weighted Average Grant Date Fair Value per Share

Performance- Based Shares

Weighted Average Grant Date Fair Value per Unit

(In thousands, except per share data)

Non-vested shares/units

outstanding at June 30, 2022

Non-vested shares/units

outstanding at September 30, 2022

(1) During the quarter ended September 30, 2023, approximately 121.6 thousand performance share units were granted, which based on the achievement of certain financial and operational targets, could vest within a range of 0 % to 100 %.

The targets are 1) construction of the large-scale commercial facility commencing prior to September 1, 2026;

2) the budget for the large-scale commercial facility remaining within a range of $ 342 - 418 million;

and 3) an approved final investment decision in the large-scale commercial facility at a modeled internal rate of return of 20 %.

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.

(2) During the quarter ended September 30, 2022, approximately 63.5 thousand performance share units were granted, which based on the achievement of certain operational targets, could vest within a range of 0 % to 100 %.

The 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;

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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 nine months ended March 31, 2023 and 2022 respectively, stock options and unvested restricted stock units of 4,769 and 5,040 were excluded from the computation of diluted earnings (loss) per share.

The following is the calculation of basic and diluted weighted-average shares outstanding and earnings (loss) per share for the indicated period.

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

(1) Interest expense of $ 2.4 million related to the Convertible Notes for the quarter ended September 30, 2023, and the issuance of 3.6 million additional shares assuming the conversion of the Convertible Note on September 30, 2023 were excluded from the calculation of diluted earnings per share as such effects would be anti-dilutive.

Commitments and Contingencies

We had purchase order commitments of $ 16.2 million for the construction works in progress, equipment, software, drilling, and technical reports of which approximately $ 8.7 million is reflected in accounts payable and accrued liabilities on our balance sheet at March 31, 2023.

Purchase Obligations

We had purchase order commitments of $ 6.8 million for the construction works in progress, equipment, software, drilling and technical reports.

On July 17, 2023, we filed a complaint (the “Complaint”) against a previous construction contractor in the United States District Court for the Central District of California, Eastern Division, alleging, among other things, numerous breaches by the contractor of its contractual obligations to 5EBA under the Procurement and Construction Contract, effective April 26, 2022, by and between 5EBA and the contractor, relating to the construction of the Small-Scale Facility in California (the “Contract”).

On August 10, 2023, the contractor filed an answer to the Complaint as well as a counterclaim for, among other things, alleged breaches by 5EBA of its contractual obligations to the contractor under the Contract and has requested relief in the approximate amount of $ 5.5 million.

We plan on filing a response disputing the counterclaims asserted by the contractor and reaffirming the grounds for recovery raised in the Complaint.

Discovery has begun and is ongoing.

An estimate of reasonably possible losses, if any, cannot be made at this time.

Subsequent Events

On November 9, 2023, the Company entered into an Agreement with its Lender.

The Agreement enables the Company, the Lender and other strategic investors to advance discussions towards a resolution for a recapitalization plan for the Company.

Under the Agreement, the parties have agreed to a period of standstill, temporarily allowing the Company to go below its current cash covenant of $ 10 million until December 1, 2023.

References herein to the “Company,”

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“our,”

and “us,”

refer to 5E Advanced Materials, Inc.

“us,”

and "5E" 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 March 31, 2023 (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 September 30, 2023 (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.

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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.

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 “Item 1A.

Risk Factors”

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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.

These forward-looking statements speak only as of the date of this report 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.

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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.

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2024 Outlook and Goals

Small-Scale Facility

During the quarter ended March 31, 2023, we have substantially completed construction of our Small-Scale Facility and progressed commissioning activities.

Step-Rate Testing

Initial production of boric acid can commence upon final clearance from the U.S.

Environmental Protection Agency (EPA) under our Underground Injection Control Permit as well as successful completion of commissioning activities.

Key required reports and documentation were submitted to the EPA for their approval in 2022 and we believe we are in full compliance with the terms of the permit.

Upon final review of required documentation by the EPA, we expect to receive authorization to commence mining operations.

Data gathered from the construction and future operation of the Small-Scale Facility will be used to optimize and improve accuracy of our capital and operating estimates for our larger-scale operations, provide customer samples for qualification and future off-take agreements, and offset future operating expenses.

Technical Report Update and Larger Scale Facility Target

During the quarter, our team spent significant time completing an update to our initial assessment Technical Report Summary, which has been filed with the Securities and Exchange Commission.

A dedicated internal and external team pooled their professional and technical expertise to publish a report that we believe demonstrates a world-class resource, management's firm understanding and direction for the business, and a phased approach to scale production, which can position the company to achieve profitability, generate cash flow, and reduce risk.

The updated initial assessment includes a a revised mineral resource estimate for boric acid and lithium carbonate, estimates for capital costs and operating expenses, and a bottoms-up economic analysis based on a phased approach to scaling production.

The financial model for the economic analysis includes preliminary market studies and independent pricing forecasts for boric acid and lithium carbonate.

As part of our updated technical report, we engaged two external EPC firms to assist management with our capital cost estimate, which we expect to use as the basis to stage a formal process to request proposals for detail design of the large-scale facility.

The updated Technical Report Summary outlines three phases for the larger-scale facility:

Phase 1 targets production of 90,000 short tons of boric acid and 1,100 short tons of lithium carbonate with a targeted go-live date of the second calendar quarter of 2026.

Phase 2 and Phase 3 targets incremental production increases of 180,000 short tons of boric acid and 2,200 short tons of lithium carbonate in each phase with a targeted go live date in the fourth calendar quarter of 2028 (Phase 2) and second calendar quarter of 2031 (Phase 3).

Full operation includes targeting 450,000 short tons of boric acid and 5,500 short tons of lithium carbonate per annum.

CEO Appointment

During the quarter, we announced the appointment of Ms.

Susan Seilheimer Brennan as our new Chief Executive Officer.

Brennan started on April 24, 2023 and has an extensive global leadership background, particularly in the battery technology and electric vehicle industries.

Brennan's first two weeks, she has implemented general, administrative and fixed cost cutting measures and will relocate the Company's headquarters to California in an effort to focus on production of boric acid and lithium carbonate.

Highlights for the Three Months Ended March 31, 2023

Construction of the Small-Scale Facility substantially completed and operation pending authorization from EPA;

Continued track record of zero lost time incidents with over 175,000 man hours recorded;

Completion of update to initial assessment technical report with estimates for capital costs and operating expenses;

Appointment of new CEO, Ms.

Susan Seilheimer Brennan.

Our latest liquidity forecast indicates that available cash resources are expected to be exhausted in the next 12 months.

Environmental Protection Agency (EPA) under our Underground Injection Control Permit as well as successful completion of commissioning activities, including step-rate testing which establishes the porosity of the ore body and forms a base-line parameter.

During the quarter, the EPA approved step-rate testing, and we believe that this approval to commence testing under the terms of the Company's existing permit marks a meaningful step closer towards conducting boric acid and lithium carbonate extraction operations.

Small-Scale Facility

During the quarter ended September 30, 2023, we have substantially completed construction of our Small-Scale Facility.

Currently, the only open item to complete is the final electrical work for the back-end of the facility where boric acid, gypsum, and lithium carbonate production will occur.

In October 2023, Step-Rate Testing was completed, results were submitted to the EPA, and the well-field was reassembled post-Step-Rate Testing.

Upon final clearance from the EPA, the Small-Scale Facility will be ready to commence production and historical data suggests the well-field will take less than a month to condition before producing boric acid, gypsum, and lithium carbonate.

During well-field conditioning, we expect to focus on completing final electrical work and commissioning.

Standstill Agreement with Senior Secured Lender

During the quarter ended September 30, 2023, Bluescape Special Situations IV (the "Lender"), the holder of our senior secured convertible note (the "Convertible Note"), communicated an alleged breach of the Convertible Note agreement regarding a nonfinancial covenant.

However, the Lender elected not to pursue any remedies related thereto.

We disagreed with the Lender's contention.

As discussed in Note 7 of the unaudited condensed consolidated financial statements, the Convertible Note agreement contains a financial covenant requiring us to maintain a cash balance of at least $10 million.

On November 9, 2023, we entered into a Standstill Agreement (the "Agreement") with the Lender.

The Agreement enables 5E, the Lender, and other strategic investors to advance discussions towards a resolution for a recapitalization plan for the Company.

Under the Agreement, the parties have agreed to a period of standstill, temporarily allowing the Company to go below its current cash covenant of $10 million until December 1, 2023.

We are committed to protecting the interests of our stakeholders and are working diligently to enhance our financial health.

Our latest liquidity forecast indicates that available cash resources are expected to be exhausted in the next six months.

We are actively exploring various financing options.

However, if additional financing is not secured 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.

While we believe the that our plan to obtain sufficient funding will be successful, it is not entirely within our control and accordingly there is substantial doubt regarding our ability to continue as a going concern for a period of one year after the date that these unaudited condensed consolidated financial statements are issued.

See Note 1 - "Going Concern" in the notes to the unaudited condensed consolidated financial statements and “Liquidity and Capital Resources”

However, if additional financing is not secured and our cash balance falls below $10 million, an event of default under the Convertible Note indenture would occur.

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

On November 9, 2023, we entered into an Agreement with our Lender and other strategic investors.

The Agreement enables 5E, the Lender and other strategic investors to advance discussions towards a recapitalization plan for the Company.

Under the Agreement, the parties have agreed to a period of standstill, temporarily allowing the Company to go below its current cash covenant of $10 million until December 1, 2023.

If we are not able to obtain additional financing and agree to a successful recapitalization plan by December 1, 2023, our cash balance is expected to fall below $10 million, and an event of default would occur.

However, it is expected that any recapitalization plan will waive any default under the Convertible Note agreement.

While we believe that the standstill period will result in a successful recapitalization, it is not entirely within our control and accordingly there is substantial doubt regarding our ability to continue as a going concern for a period of one year after the date that these unaudited condensed consolidated financial statements are issued.

Further, even if the anticipated recapitalization plan is successfully consummated in the fourth quarter 2023, available liquidity may still not be sufficient to eliminate the aforementioned substantial doubt regarding the Company's ability to continue as a going concern.

Refer to the "Going Concern" discussion within Note 1 of the unaudited condensed consolidated financial statements and “Liquidity and Capital Resources”

below for more information.

inflation rate has been steadily increasing since 2021 and into 2023.

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.

inflation rate rose steadily beginning in 2021 and continued a steep climb into 2022.

Although the inflation rate has somewhat moderated in 2023 it continues to be higher than historic averages.

These inflationary pressures have resulted in and may result in additional increases to the cost of our goods, services, and personnel, which in turn causes 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.

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COVID-19 Response

We have implemented policies at our offices in Houston, TX and Hesperia, CA as well as our project site in 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.

We have implemented policies at our offices in Hesperia, CA and Houston, TX and at our project site in 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 possible, adhere to good hygiene practices, and engage in social distancing.

Continuation of COVID-19 or other widespread outbreak of contagious disease in 2024 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.

At the onset of the COVID-19 pandemic and through 2022, we experienced, at times, significant shipping delays due to congestion and slowdowns at U.S.

and international ports caused by shortages in vessels, containers, and truckers, also disrupting the global supply chain.

This contributed to certain cost and schedule pressures related to the construction of the Small-Scale Facility.

We continue to monitor the global situation, including the impacts of new and potential future variants of COVID-19, or other factors that may affect international shipping, logistics, and supply chain, or involve responses to government actions such as strikes or other disruptions.

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”

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The following table summarizes our results of operations for the periods presented.

Three Months Ended March 31, 2023

Nine Months Ended March 31, 2023

Three Months Ended September 30,

(in thousands)

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Research and development

Depreciation and amortization

Depreciation and amortization expense

Total costs and expenses

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Other expense

Total non-operating income

Total non-operating income (expense)

NET INCOME (LOSS)

* Represents a percentage change greater

than +/- 300%

Comparison of the three and nine months ended March 31, 2023 and 2022

Comparison of the three months ended September 30, 2023 and 2022

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 nine months ended March 31 2023, project expenses decreased 16% versus the comparable period in 2022.

The decrease was primarily due to a reduction in drilling activity specific to water monitoring wells ($6.4 million) and costs related to technical reports ($1.6 million) incurred in the comparable 2022 period.

These decreases were partially offset by costs related to our plug and abandonment program ($5.1 million), increases in construction related insurance ($0.5 million) and other site related costs ($0.8 million) incurred during the current period.

For the quarter ended March 31, 2023, project expenses decreased 38% primarily due to costs related to technical reports incurred during the quarter ended March 31, 2022, partially offset by increases in construction related insurance ($0.2 million) and site related costs ($0.7 million) incurred during the current quarter.

For the three months ended September 30, 2023, project expenses decreased $2.0 million or 56% versus the comparable period in 2022 as there was decreased activity related to the Project.

Specifically, the decrease was primarily due to a reduction in expenses incurred relating to our plug and abandonment program ($2.5 million), reduced expenses incurred for engineering and technical reports that were not eligible for capitalization as construction in progress ($0.2 million), and a reduction in general site-related operating costs ($0.2 million).

These decreases were partially offset by increased Environmental Protection Agency compliance costs ($0.6 million), testing and analysis ($0.2 million) and construction related insurance costs ($0.1 million).

General and administrative expenses

The decrease in general and administrative expenses during the three and nine months ended March 31, 2023 was primarily driven by one-time costs incurred during the prior three and nine months periods related to the preparation of our Form-10, our reorganization, and consulting fees paid to Blue Horizon Advisors LLC for services provided ($25.6 million and $30.9 million, respectively).

The absence of these costs during the current three and nine month periods were partially offset by an increase in salaries and benefits, and other employee related costs ($1.3 million and $4.1 million, respectively) resulting from an increase in headcount from 11 at June 30, 2021 to 48 at March 31, 2023.

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

Insurance costs increased $0.2 million and $0.9 million during the three and nine months ended March 31, 2023, respectively, as a result of our public company Director and Officer insurance which began in March 2022.

Non-operating (income) expense

The derivative gain (loss) during the three and nine months ended March 31, 2023 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 gain during the nine months ended March 31, 2023, 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 nine months ended March 31, 2023 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 4.06% and 3.66 % for the three and nine months ended March 31, 2023, respectively.

Interest expense increased primarily due to the issuance of the convertible note on August 26, 2022 and includes $1.5 million and $3.5 million of debt issuance cost amortization during the three and nine months ended March 31, 2023, respectively.

During the three and nine months ended March 31, 2023, we capitalized interest to construction in progress of approximately $392 thousand and $589 thousand, respectively.

Interest expense for the three and nine months ended March 31, 2022 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 nine months ended March 31, 2023 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 nine months ended March 31, 2023 and 2022, as we have recorded a full valuation allowance against our net deferred tax asset.

General and administrative expenses include professional fees, costs associated with marketing, on-going SEC and public company costs, public relations, rent, salaries, sponsorships, share based compensation and other expenses.

For the three months ended September 30, 2023 general and administrative expenses increased $1.2 million or 24% versus the comparable period in 2022.

The increase was primarily due to an increase in professional fees ($1.0 million), an increase in non-incentive employee compensation and benefits ($0.6 million) and an increase in compliance and filing fees ($0.2 million).

The increase in professional fees was primarily due to an increase in legal fees, and the increase in salaries and benefits resulted from the hiring of additional personnel for the construction and operation of the Small-Scale Facility.

Currently, all salaries and benefits are reported in general and administrative expenses.

These increases were partially offset by a decrease in share based compensation costs ($0.7 million), and specifically a reduction in option awards.

Depreciation and amortization expense

Depreciation and amortization expense increased $16 thousand or 43% versus the comparable period in 2022.

The increase was primarily due to additional assets placed in service during the second and third fiscal quarters of 2023.

Interest income

The increase in interest income during the three months ended September 30, 2023 versus the comparable period in 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 5.3% and 2.8 % for the three months ended September 30, 2023 and 2022, respectively.

Derivative gain

The derivative gain (loss) during the three months ended September 30, 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 gain during the three months ended September 30, 2022, was primarily due to the decrease in our stock price to $10.16 as of September 30, 2022 from $15.83 on August 26, 2022 (inception date).

Interest expense

The increase in interest expense of $1.0 million, or 118%, during the three months ended September 30, 2023 versus the comparable period in 2022 was primarily due to the issuance of the convertible note on August 26, 2022.

We recognized $2.4 million of interest on the principal balance, debt issuance cost and discount amortization during the three months ended September 30, 2023 compared to $0.8 million for the comparable period in 2022.

Additionally, during the three months ended September 30, 2023 we capitalized $0.6 million of interest to construction in progress compared to none in the comparable period of 2022.

We did not have any income tax expense or benefit for the three months ended September 30, 2023 and 2022, as we have recorded a full valuation allowance against our net deferred tax asset.

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

During the three months ended September 30, 2023, we used $6.9 million of cash for operating activities, a decrease of $0.9 million or 12% compared to the comparable period in 2022.

Cash used by operating activities decreased between periods primarily due to a decrease in project related expenses that was offset by a lesser extent to an increase in general and administrative expenses net of non-cash share based compensation expense.

Refer to the preceding discussion for more information on increases and decreases in certain expenses between periods.

During the three months ended September 30, 2023, we used $1.6 million of cash for investing activities, a decrease of $3.5 million or 68% compared to the comparable period in 2022.

The reduction in investing cash flows was due to reduced spending on construction in progress related to the Small-Scale Facility between periods.

Cash flows provided by financing activities during the three months ended September 30, 2022 were the result of the issuance of the Convertible Notes net of debt issuance costs with no comparable activity during the same period in 2023.

Liquidity and Capital Resources

As of March 31, 2023, we had cash and cash equivalents of $36.2 million and working capital of $26.6 million compared to $31.1 million and $25.2 million as of June 30, 2022, respectively.

As of September 30, 2023, we had cash and cash equivalents of $11.8 million and working capital of $3.8 million compared to $20.3 million and $13.3 million as of June 30, 2023, 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;

With our current capital resources and constructing nearly complete, we believe that we have sufficient funds to construct and commission our Small-Scale Facility;

however, delay of final authorization to commence mining could push out operation of the facility until we raise additional capital.

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

Over the next 12 months we have plans to achieve the following milestones that will require additional capital:

Operate the Small-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;

Progress FEL2, FEL3, and 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 expenditures through various drilling techniques such as directional, horizontal and radial drilling;

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;

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

As of today, we are currently operating under our most recently updated modified business plan until we secure additional financing.

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

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 agreement would occur if not cured within 30 days.

Our available liquidity is expected to fall below $10 million in the latter part of calendar year 2023 based on our most recently updated 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.

See Note 1 - Going Concern in the notes to the unaudited condensed consolidated financial statements.

We are currently operating under a modified business plan until we secure additional financing.

Absent additional financing as outlined above, we may no longer be able to meet our ongoing obligations, progress operations or achieve the milestones outlined above.

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 agreement would occur.

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

On November 9, 2023, we entered into an Agreement with our Lender and other strategic investors.

The Agreement enables 5E, the Lender, and other strategic investors to advance discussions towards a recapitalization plan for the Company.

Under the Agreement, the parties have agreed to a period of standstill, temporarily allowing the Company to go below its current cash covenant of $10 million until December 1, 2023.

Given that raising additional capital and a successful recapitalization are not entirely within our control combined with our expectation of incurring significant operating and development costs for the foreseeable future, there exists substantial doubt regarding our ability to continue as a going concern for a period of one year after the date that these financial statements are issued.

Further, if the anticipated recapitalization plan is successfully consummated in the fourth quarter 2023, available liquidity may still not be sufficient to eliminate the aforementioned substantial doubt regarding the Company's ability to continue as a going concern.

Refer to the “Going Concern”

discussion within Note 1 of the unaudited condensed consolidated financial statements for more information.

Material Cash Requirements

Our material short-term cash requirements include general and administrative expenses including recurring payroll and benefit obligations for our employees, construction related costs necessary to complete the Small-Scale Facility, project related costs, payments under certain lease agreements and working capital needs.

Our long-term material cash requirements from currently known obligations include repayment of outstanding borrowings and interest payment obligations under our Convertible Notes (which may be avoided to the extent the notes are converted to shares of our common stock and/or interest is paid-in-kind) and future obligations to reclaim, remediate, or otherwise restore properties to a condition that existed prior to our operations.

Refer to the “Construction in Progress,”

“Asset Retirement Obligations,”

“Accounts Payable and Accrued Liabilities,”

“Long-term Debt”

and “Commitments and Contingencies”

footnotes in the unaudited condensed consolidated financial statements for more information on certain of these expenditures and obligations.

Critical Accounting Policies

Derivative Financial Instruments

Our derivative instruments are accounted for on a mark-to-market basis.

During the quarter ended December 31, 2022, 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.

A complete discussion of our critical accounting policies is included in our Form 10-K for the year ended June 30, 2023.

There have been no significant changes in our critical accounting policies during the three months ended September 30, 2023.

Contractual Commitments and Contingencies

Purchase Obligations

The Company had purchase order commitments $16.2 million for the construction works in progress, equipment, software and technical reports, of which $8.7 million is reflected in accounts payable and accrued liabilities on our unaudited condensed consolidated balance sheet at March 31, 2023.

The majority of the commitments are expected to be settled by June 30, 2023.

Mineral Lease Payments

During the quarter ended March 31, 2023, we elected not to renew our mineral lease with Elementis Specialties, Inc.

and the mineral lease expired on March 31, 2023 resulting in the recognition of approximately $908 thousand of related impairment expense during the current quarter.

We determined that with increasing boric acid and lithium carbonate prices, sufficient mineral resource established on fee lands already owned by us, and the opportunity to further expand the mineral resource with additional exploration work at a later date, that there is sufficient mineral resource to fully execute on our long-term business plan of producing boric acid and lithium carbonate.

The Company will be updating its Initial Assessment Report accordingly.

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.

We had purchase order commitments of $6.8 million for the construction works in progress, equipment, software, drilling and technical reports.

Quantitative and Qualitative Disclosures About Market Risk.

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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