5E Advanced Materials, Inc. 10-Q

Item 1. Financial Statements. 5E ADVANCED MATERIALS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (In thousands, except per share data) December 31, June 30, 2023 2023 ASSETS Current assets: Cash and cash equivalents $ 2,045 $ 20,323 Prepaid expenses and other current assets 1,442 1,808 Total current assets 3,487 22,131 Mineral rights and properties, net 7,627 7,637 Construction in progress 72,572 67,553 Properties, plant and equipment, net 3,012 3,056 Reclamation bond deposit 308 309 Right of use asset 127 207 Other assets 6 6 Total assets $ 87,139 $ 100,899 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 8,853 $ 8,728 Lease liabilities, current 104 136 Total current liabilities 8,957 8,864 Long-term debt, net 42,406 37,671 Lease liabilities 25 74 Asset retirement obligations 759 724 Total liabilities 52,147 47,333 Commitments and contingencies (Note 12) Stockholders’ equity: Common stock, $ 0.01 par value; 180,000 shares authorized; 44,237 and 44,187 shares outstanding December 31, 2023 and June 30, 2023, respectively 442 441 Additional paid-in capital 192,524 191,113 Retained earnings (accumulated deficit) ( 157,974 ) ( 137,988 ) Total stockholders’ equity 34,992 53,566 Total liabilities and stockholders’ equity $ 87,139 $ 100,899 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, 2023 2022 2023 2022 Operating expenses: Project expenses $ 1,431 $ 3,404 $ 3,014 $ 6,999 General and administrative 7,396 7,701 13,434 12,587 Research and development 6 39 45 78 Depreciation and amortization expense 53 42 106 79 Total operating expenses 8,886 11,186 16,599 19,743 Income (loss) from operations ( 8,886 ) ( 11,186 ) ( 16,599 ) ( 19,743 ) Non-operating income (expense): Interest income 10 465 142 526 Other income — 22 3 36 Derivative gain (loss) — ( 2,166 ) — 11,743 Interest expense ( 1,739 ) ( 1,985 ) ( 3,526 ) ( 2,806 ) Other expense ( 1 ) ( 13 ) ( 6 ) ( 13 ) Total non-operating income (expense) ( 1,730 ) ( 3,677 ) ( 3,387 ) 9,486 Income (loss) before income taxes ( 10,616 ) ( 14,863 ) ( 19,986 ) ( 10,257 ) Income tax provision (benefit) — — — — Net income (loss) $ ( 10,616 ) $ ( 14,863 ) $ ( 19,986 ) $ ( 10,257 ) Net income (loss) per common share — basic and diluted $ ( 0.24 ) $ ( 0.34 ) $ ( 0.45 ) $ ( 0.24 ) Weighted average common shares outstanding — basic and diluted 44,237 43,772 44,229 43,561 Comprehensive income (loss): Net income (loss) $ ( 10,616 ) $ ( 14,863 ) $ ( 19,986 ) $ ( 10,257 ) Comprehensive income (loss) $ ( 10,616 ) $ ( 14,863 ) $ ( 19,986 ) $ ( 10,257 ) 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) Six months ended December 31, 2023 2022 Cash Flows From Operating Activities: Net income (loss) $ ( 19,986 ) $ ( 10,257 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 106 79 Share based compensation 1,505 3,533 Unrealized (gain) loss on convertible note derivative instrument — ( 11,743 ) Accretion of asset retirement obligations 35 9 Amortization of debt issuance costs and discount — convertible note 2,905 2,001 Amortization of right of use asset 80 84 Change in: Prepaid expenses and other current assets 366 474 Accounts payable and accrued liabilities 217 ( 363 ) Net cash used in operating activities ( 14,772 ) ( 16,183 ) Cash Flows From Investing Activities: Construction in progress ( 3,435 ) ( 15,908 ) Properties, plant and equipment additions ( 51 ) ( 208 ) Net cash used in investing activities ( 3,486 ) ( 16,116 ) Cash Flows From Financing Activities: Proceeds from issuance of convertible note — 60,000 Debt issuance costs — ( 4,160 ) Payments on note payable ( 20 ) ( 19 ) Proceeds from exercise of stock options — 2,172 Net cash provided by (used in) financing activities ( 20 ) 57,993 Net increase (decrease) in cash and cash equivalents ( 18,278 ) 25,694 Cash and cash equivalents at beginning of period 20,323 31,057 Cash and cash equivalents at end of period $ 2,045 $ 56,751 Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 21 $ 4 Noncash Investing and Financing Activities: Accounts payable and accrued liabilities change related to construction in progress $ 1,584 $ 5,381 Interest paid through issuance of additional convertible notes 1,851 — 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 Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital 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 Total Common Stock Paid-in Accumulated Stockholders’ Shares Amount Capital Deficit Equity Balance at June 30, 2023 44,187 $ 441 $ 191,113 $ ( 137,988 ) $ 53,566 Shares issued for: Vesting of restricted share units 50 1 ( 32 ) — ( 31 ) Share based compensation — — 599 — 599 Net income (loss) — — — ( 9,370 ) ( 9,370 ) Balance at September 30, 2023 $ 44,237 $ 442 $ 191,680 $ ( 147,358 ) $ 44,764 Shares issued for: Vesting of restricted share units — — ( 62 ) — ( 62 ) Share based compensation — — 906 — 906 Net income (loss) — — — ( 10,616 ) ( 10,616 ) Balance at December 31, 2023 $ 44,237 $ 442 $ 192,524 $ ( 157,974 ) $ 34,992 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 (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 December 31, 2023, results of operations for the three and six months ended December 31, 2023 and 2022 and cash flows for the six months ended December 31, 2023 and 2022 have been included. Operating results for the three and six months ended December 31, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2024 . 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, (“5EBA”), (collectively, “we,” “our,” or the “Company”). Out-of-Court Restructuring In fiscal year 2023, the Company increased efforts to identify appropriate funding solutions to address the Company’s liquidity profile. With the EPA approval still an open item at the time, capital providers were reluctant to invest. As time progressed, even with cost saving measures implemented, the Company approached the $ 10 million liquidity covenant (as discussed within Note 7) and therefore began discussions with its lender. The combination of the EPA status, and the approaching liquidity floor required a commercial resolution. On November 9, 2023, the Company entered into a standstill agreement (the "Standstill Agreement") with Bluescape Special Situations IV ( “Bluescape”), Alter Domus (US) LLC (the “Collateral Agent”), Ascend Global Investment Fund SPC for and on behalf of Strategic SP (“Ascend”), and Mayfair Ventures Pte Ltd in connection with the Company’s senior secured convertible notes (the “Convertible Notes”). Pursuant to the Standstill Agreement, Bluescape and the Collateral Agent agreed to not exercise their respective rights, remedies, powers, privileges, and defenses under the Note Purchase Agreement, dated August 11, 2022 (the “Note Purchase Agreement”) with respect to the occurrence of any default or event of default, and all parties to the Standstill Agreement agreed to forbear from instituting or pursuing legal action with respect to the Convertible Notes. The Standstill Agreement also temporarily allowed the Company to go below its current cash covenant of $ 10 million (as discussed in Note 7). On December 1, 2023, we extended the effectiveness of the Standstill Agreement from December 1, 2023 to December 5, 2023 and then on December 5, 2023 entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with Bluescape, the Collateral Agent, and Ascend in connection with certain restructuring transactions with respect to the Company’s capital structure, including the Company’s Convertible Notes. Pursuant to the Restructuring Support Agreement, the parties agreed to implement the restructuring transactions either as an out-of-court restructuring (the “Out-of-Court Restructuring”) or an in-court restructuring under voluntary pre-packaged cases under chapter 11 of title 11 of the United States Code in a U.S. Bankruptcy Court. On January 12, 2024 (as discussed in Note 13), the Company held a special meeting of stockholders (the “Special Meeting”) where the Company’s stockholders approved the Out-of-Court Restructuring, including (i) an amendment to the Company’s certificate of incorporation to increase the number of authorized shares of the Company’s common stock, par value $ 0.01 (the “Common Stock”) from 180,000,000 to 360,000,000 , (ii) the issuance of up to $ 35 million of Common Stock at a price of $ 1.025 per share (the “Securities Offering”) to Ascend and Bluescape, if Bluescape decided to exercise its option to participate in the Securities Offering, and (iii) the issuance of additional shares of the Company’s Common Stock upon conversion of the Convertible Notes in connection with an amendment to the Convertible Notes (the “Convertible Notes Amendment”). On January 18, 2024, pursuant to a subscription agreement with Ascend, dated December 5, 2023 and an amended and restated subscription agreement with 5ECAP LLC (“5ECAP”), dated January 18, 2024 (the “5ECAP Subscription Agreement”), we issued (i) 5,365,854 shares of Common Stock to Ascend at a price of $ 1.025 per share, which shares included the placement fee to Ascend in shares of Common Stock and (ii) 5,365,854 shares of Common Stock to 5ECAP at a price of $ 1.025 per share, which shares included the placement fee to 5ECAP in shares of Common Stock (the “First Closing”). On January 18, 2024, in connection with the Out-of-Court Restructuring, we entered into an amended and restated note purchase agreement (the “Amended and Restated Note Purchase Agreement”) with Bluescape, Ascend, and Meridian Investments Corporation “Meridian”) related to the Convertible Notes. Pursuant to the Amended and Restated Note Purchase Agreement, the Convertible Notes 7 bear interest at a rate of 4.50 % per annum, payable semi-annually , or 10.00 % per annum if we elect to pay such interest through the delivery of additional Convertible Notes and are convertible into 66,261,621 shares of Common Stock at a conversion price of $ 1.5375 per share of Common Stock (including accrued interest paid-in-kind). The Convertible Notes mature on August 15, 2028 . Following certain corporate events that may occur prior to the maturity date, we will, in certain circumstances, increase the conversion rate of a holder who elects to convert its Convertible Notes in connection with a corporate event. In addition, the minimum cash condition has been waived through June 28, 2024, with a reduction in such covenant thereafter from $ 10 million to $ 7.5 million. On January 29, 2024, pursuant to the 5ECAP Subscription Agreement, the Company issued 8,317,074 shares of Common Stock to 5ECAP at a price of $ 1.025 per share (the “Second Closing”). The completion of the Out-of-Court Restructuring marks a crucial step to strengthen the Company’s balance sheet, funds the next phase of its development, and supports the commencement of mining operations for boric acid and lithium. Going Concern 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 for 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 for one year after the date that the condensed consolidated financial statements are issued. In performing this analysis, and considering the impacts of the Out-of-Court Restructuring described above, management concluded there continues to exist substantial doubt regarding the Company’s ability to continue as a going concern. Although the Out-of-Court Restructuring significantly improved the Company’s cash position, and the Company continues to operate under a business plan that includes reductions in certain spending, management expects the Company to incur significant operating and development costs for the foreseeable future, and anticipates the need for additional financing within the next twelve months to maintain a cash balance in excess of the $ 7.5 million minimum cash covenant which goes into effect June 28, 2024 (as discussed in Note 7). If the Company is not able to secure additional financing and the Company’s cash balance falls below $ 7.5 million after June 28, 2024, an event of default under the Amended and Restated Convertible Note Agreement would occur. An event of default would cause the Convertible Notes balance outstanding to become immediately due and payable, for which the Company would not have the resources to repay without additional financing. The receipt of potential funding from equity or debt issuances, beyond those that are part of the Out-of-Court Restructuring, 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. Therefore, 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. Even if additional debt or equity financing is successfully consummated, 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. Financial Instruments The Company's financial instruments consist of cash and cash equivalents, a convertible note, vehicle notes, and accounts payable and accrued liabilities. Management believes the Company is 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. 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 our 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 8 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. Refer to the Going Concern discussion above for additional details. Recently Issued and Adopted Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board 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. 2. Mineral Rights and Properties, Net Mineral rights and properties, net consisted of the following. December 31, June 30, 2023 2023 (in thousands) Mineral properties $ 6,733 $ 6,733 Hydrology wells 547 547 Asset retirement cost, net of accumulated amortization of $ 33 and $ 23 at December 31, 2023 and June 30, 2023, respectively (1) 347 357 Mineral rights and properties, net $ 7,627 $ 7,637 (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, 2023 2023 (in thousands) Engineering services $ 9,122 $ 9,122 Equipment 32,726 31,692 Construction 24,176 21,579 Injection and recovery wells 4,097 4,002 Capitalized interest 2,451 1,158 Total construction in progress $ 72,572 $ 67,553 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) 2023 2023 (in thousands) Land N/A — $ 1,533 $ 1,533 Buildings Straight-line 7 - 15 873 873 Vehicles Straight-line 3 - 5 345 345 Plant and equipment Straight-line 5 - 10 676 623 3,427 3,374 Less accumulated depreciation ( 415 ) ( 318 ) Properties, plant and equipment, net $ 3,012 $ 3,056 For the three months ended December 31, 2023 and 2022 , we recognized depreciation expense of approximately $ 48 and $ 39 thousand, respectively. For the six months ended December 31, 2023 and 2022, we recognized depreciation expense of approximately $ 96 and $ 73 , respectively. 9 5. Asset Retirement Obligations The change in our ARO during the period presented and the balance of our accrued reclamation liabilities at the end of the period is set forth below. Six months ended December 31, 2023 (in thousands) Asset retirement obligation — beginning of period $ 724 Obligation incurred during the period — Revisions to previous estimates — Accretion 35 Asset retirement obligation — end of period $ 759 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, 2023 2023 (in thousands) Accounts payable - trade (1) $ 2,897 $ 1,492 Accrued expenses 384 1,350 Accrued capital expenditures 2,847 3,386 Accrued payroll 1,254 1,072 Accrued interest 1,430 1,388 Current portion of debt 41 40 Accounts payable and accrued liabilities $ 8,853 $ 8,728 (1) Includes $ 1,529 thousand and $ 699 thousand 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, 2023 2023 (in thousands) Convertible note $ 63,561 $ 61,710 Vehicle notes payable 128 148 Total debt 63,689 61,858 Current portion of debt 41 40 Long-term debt 63,648 61,818 Unamortized convertible note discount — embedded conversion feature ( 18,202 ) ( 20,691 ) Unamortized debt issuance costs - convertible note ( 3,040 ) ( 3,456 ) Long-term debt, net $ 42,406 $ 37,671 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 for each period presented. Three months ended December 31, Six months ended December 31, 2023 2022 2023 2022 (in thousands) (in thousands) Convertible note interest $ 953 $ 675 $ 1,893 $ 945 Vehicle notes payable interest 1 1 3 4 Amortization of debt issuance costs and discount — convertible note 1,453 1,453 2,905 2,001 Other interest — — 18 — Gross interest expense 2,407 2,129 4,819 2,950 Less: amount capitalized to construction in progress 668 144 1,293 144 Interest expense, net of amounts capitalized $ 1,739 $ 1,985 $ 3,526 $ 2,806 Effective interest rate — convertible note 22.6 % 25.6 % 22.5 % 25.7 % 10 Convertible Note On August 11, 2022, the Compa ny executed a $ 60 million private placement of Convertible Notes with Bluescape, which is secured by a security interest in substantially all of the Company’s assets, which closed on August 26, 2022 (the “Original Closing Date”). The Convertible Notes are convertible into shares of the Company’s Common Stock. As discussed within Note 1 and Note 13, on January 12, 2024, at the Special Meeting, the Company’s shareholders approved certain proposals that allowed for an Out-of-Court Restructuring, and on January 18, 2024, the Amended and Restated Note Purchase Agreement was executed in accordance with the Out-of-Court Restructuring which modified certain terms of the Convertible Notes. In connection with the execution of the Amended and Restated Note Purchase Agreement, the maturity date of the Convertible Notes was extended one year to August 15, 2028 . Additionally, at the Company’s election, the Convertible Notes bear interest at an annual rate of 4.50 % if paid in cash, and 10.00 % if paid through the issuance of additional notes. Interest is paid semi-annually on February 15 and August 15 of each year. The Convertible Notes contain a financial covenant requiring the Company to maintain a cash balance of at least $ 10 million which was waived during the effective periods of both the Standstill Agreement and Restructuring Support Agreement, which has been further waived through June 28, 2024 and reduced thereafter to $ 7.5 million in connection with the Amended and Restated Note Purchase Agreement. The purchaser may convert the Convertible Notes into shares of our Common Stock at any time before the Convertible Notes mature based upon a conversion price of $ 1.5375 . Prior to entering into the Amended and Restated Note Purchase Agreement, the Company had the right to convert the Convertible Notes into shares of the Company’s Common Stock based upon the Company’s Common Stock trading above certain threshold prices at certain dates. However, in connection with the Amended and Restated Note Purchase Agreement, the Company’s ability to convert the Convertible Notes and force conversion into Common Stock was eliminated. Furthermore, in connection with entry into the Amended and Restated Note Purchase Agreement and Out-of-Court Restructuring, fifty percent ( 50 %) of the outstanding Convertible Notes were acquired by Ascend and 5ECAP from Bluescape . The Company is currently in the process of evaluating if the Amended and Restated Note Purchase Agreement represents either a modification of the Convertible Note, or the in-substance extinguishment of the Convertible Note and establishment of a new debt, and expects such evaluation to be complete within the third fiscal quarter of 2024. Prior to entering into the Amended and Restated Note Purchase Agreement, the terms of the Convertible Notes permitted a change in the applicable conversion price upon a digressive issuance by the Company within three months of the Original Closing Date. As a result, t he conversion feature of the Convertible Notes was deemed to have an embedded derivative requiring separate accounting as a stand-alone derivative instrument (the "Convertible Note Derivative"). The Convertible Notes were initially 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, which was determined to be $ 24.9 million. The provision that resulted in 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 (refer to Note 8). Fair value information for the Convertible Notes follows. December 31, June 30, 2023 2023 (in thousands) Fair value of convertible note (Level 2) $ 46,664 $ 40,316 Total fair value of convertible note $ 46,664 $ 40,316 The valuation model for the Convertible Notes 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, changes in the 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 Notes 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 Notes 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. December 31, June 30, 2023 2023 Risk-free interest rate 4.0 % 4.4 % Volatility 55.0 % 50.0 % Debt rate 15.2 % 17.5 % Stock price per share $ 1.41 $ 3.28 11 8. Convertible Note Derivative The Convertible Note Derivative, which related to the Convertible Notes 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 (a model which utilizes Level 3 fair value inputs). 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 for the valuation of the Convertible Note Derivative. The components of changes to the fair value of the Convertible Note Derivative for the period presented are summarized below. Six months ended December 31, 2022 (in thousands) Convertible note derivative (asset) liability — beginning of period $ — Additions, at fair value, August 26, 2022 24,896 Fair value adjustment (gain) loss ( 11,743 ) Reclassified to additional paid-in capital, at fair value, November 26, 2022 ( 13,153 ) Convertible note derivative (asset) liability — end of period $ — 9. Financial Instruments and Fair Value Measurements At December 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 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 December 31, 2023 in Note 7. 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, 2023 2022 2023 2022 (in thousands) Share based compensation expense — service based Employee share option plan $ 109 $ 1,261 $ 206 $ 2,222 2022 Equity Compensation Plan — Options 175 351 $ 308 526 2022 Equity Compensation Plan — PSUs 77 34 $ 124 59 2022 Equity Compensation Plan — RSU and DSUs 545 587 $ 867 726 Total share based compensation expense $ 906 $ 2,233 $ 1,505 $ 3,533 Stock Options 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 six months ended December 31, 2023 and 2022, using a Black-Scholes option valuation model are as follows. Six months ended December 31, 2023 2022 Exercise price $ 7.73 $ 25.62 Share price $ 2.46 $ 18.03 Volatility 99 % 79 % Expected term in years 9.6 5.0 Risk-free interest rate 4.3 % 2.9 % Dividend rate Nil Nil 12 The following table summarizes stock option activity for each of the periods presented. Six months ended December 31, 2023 2022 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 4,187 $ 10.91 4,874 $ 9.67 Granted 300 7.73 400 25.62 Exercised — — ( 575 ) 3.78 Expired/forfeited ( 398 ) 20.23 ( 460 ) 15.33 Outstanding at end of the period 4,089 9.76 4,239 11.37 Vested at the end of the period 3,302 10.03 3,312 9.01 Unvested at the end of the period 787 $ 8.64 927 $ 19.76 The weighted average remaining life of vested options at December 31, 2023 and 2022 was approximately 1.0 years and 1.7 years, respectively. As of December 31, 2023 , there was $ 2.1 million of unrecognized compensation cost related to 787 thousand unvested stock options. This cost is expected to be recognized over a weighted-average remaining period of approximately 1.6 years. The following table summarizes the activity for unvested options for each of the periods presented. Six months ended December 31, 2023 2022 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 838 $ 6.42 1,507 $ 6.05 Granted 300 2.08 400 10.52 Vested ( 73 ) 15.58 ( 880 ) 5.71 Expired/forfeited ( 278 ) 10.48 ( 100 ) 6.85 Unvested at end of the period 787 $ 3.35 927 $ 8.11 As of December 31, 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 December 31, 2023 . There were no options exercised during the six months ended December 31, 2023 . As of December 31, 2022, the intrinsic value of both outstanding stock options and vested stock options was $ 5.1 million. The intrinsic value of stock options exercised during the six months ended December 31, 2022 was $ 4.6 million. 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 June 30, 2023 209.8 $ 6.78 139.1 $ 7.20 348.9 Granted 283.1 2.35 121.6 (1) 2.46 404.7 Vested ( 77.1 ) 6.31 — — ( 77.1 ) Forfeited ( 15.5 ) 6.75 ( 10.5 ) 8.80 ( 26.0 ) Non-vested shares/units outstanding at December 31, 2023 400.3 $ 3.74 250.2 $ 4.83 650.5 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 June 30, 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 $ 15.96 47.6 $ 14.26 179.5 (1) During the six months ended December 31, 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 six months ended December 31, 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; and 3) generating 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 loss per share is computed by dividing the net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if stock options, warrants, and convertible securities were exercised or converted into common stock. Diluted loss per share equals basic loss per share for the three and six months ended December 31, 2023 and 2022 as the effect of including dilutive securities in the calculation would be antidilutive. For the three and six months ended December 31, 2023 and 2022, the following effects are excluded from the computation of dilutive loss per share as such effects would have an anti-dilutive effect. Three months ended December 31, Six Months Ended December 31, 2023 2022 2023 2022 (in thousands) Interest expense on convertible note $ 2,406 $ 2,128 $ 4,798 $ 2,947 Additional shares assuming conversion of convertible note 3,611 3,409 3,611 3,409 Stock options and unvested restricted stock units and performance share units 4,740 4,406 4,740 5,052 As discussed in Note 13, subsequent to December 31, 2023 the Company completed the Out-of-Court Restructuring. This restructuring resulted in the issuance of approximately 19.0 million shares of our common stock. Additionally, as part of the Out-of-Court Restructuring, and as discussed in Note 7, the conversion price related to our Convertible Notes was reduced to $ 1.5375 . If the 14 Convertible Notes were converted into our common stock as of December 31, 2023 at the reduced conversion price, it would have resulted in the issuance of approximately 41.3 million shares. The impacts of the Out-of-Court Restructuring are not reflected in the computation of earnings per share for the three and six months ended December 31, 2023 and 2022, as it would have served to reduce the net loss per share . 12. Commitments and Contingencies Purchase Obligations We had purchase order commitments of $ 5.1 million for the construction works in progress, equipment, software, drilling and technical reports. Litigation 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. 13. Subsequent Events As discussed in Note 1 and Note 7, on January 12, 2024, the Company held a Special Meeting where the Company’s stockholders approved the Out-of-Court Restructuring, including (i) an amendment to the Company’s certificate of incorporation to increase the number of authorized shares of the Company’s Common Stock from 180,000,000 to 360,000,000 , (ii) the issuance of up to $ 35 million of Common Stock at a price of $ 1.025 per share to Ascend and Bluescape, if Bluescape decided to exercise its option to participate in the Securities Offering, and (iii) the issuance of additional shares of the Company’s Common Stock upon conversion of the Convertible Notes in connection with an amendment to the Convertible Notes Amendment. On January 18, 2024, pursuant to a subscription agreement with Ascend, dated December 5, 2023 (the “Ascend Subscription Agreement”) and an amended and restated subscription agreement with 5ECAP, dated January 18, 2024, we issued (i) 5,365,854 shares of Common Stock to Ascend at a price of $ 1.025 per share, which shares included the placement fee to Ascend in shares of Common Stock and (ii) 5,365,854 shares of Common Stock to 5ECAP at a price of $ 1.025 per share, which shares included the placement fee to 5ECAP in shares of Common Stock. On January 18, 2024, in connection with the Out-of-Court Restructuring, we entered into the Amended and Restated Note Purchase Agreement with Bluescape, Ascend, and Meridian related to the Convertible Notes. Pursuant to the Amended and Restated Note Purchase Agreement, the Convertible Notes bear interest at a rate of 4.50 % per annum, payable semi-annually, or 10.00 % per annum if we elect to pay such interest through the delivery of additional Convertible Notes and are convertible into 66,261,621 shares of Common Stock at a conversion price of $ 1.5375 per share of Common Stock (including accrued interest paid-in-kind). The Convertible Notes mature on August 15, 2028 . Following certain corporate events that may occur prior to the maturity date, we will, in certain circumstances, increase the conversion rate of a holder who elects to convert its Convertible Notes in connection with a corporate event. In addition, the minimum cash condition has been waived through June 28, 2024, with a reduction in such covenant thereafter from $ 10 million to $ 7.5 million. On January 29, 2024, pursuant to the 5ECAP Subscription Agreement, the Company issued 8,317,074 shares of Common Stock to 5ECAP at a price of $ 1.025 per share. A portion of the January 18, 2024 offering was the result of the Ascend Subscription Agreement dated December 5, 2023, but was contingent upon shareholder approval for the Out-of-Court Restructuring. Since the probability of shareholders approving the Out-of-Court Restructuring could not be ascertained as of December 31, 2023, the stock subscription from Ascend was not reflected as a receivable within the Company’s equity balance as of December 31, 2023. 15 References herein to the “Company,” “we,” “our,” “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 six months ended December 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. These statements constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “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 and management’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 “Item 1A. – Risk Factors” in our annual report on Form 10-K and our quarterly report on Form 10-Q for the period ended September 30, 2023, 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 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. 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.