5E Advanced Materials, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K filed on August 30, 2023, as amended. This discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions and other important factors, which include, but are not limited to, the risks described in our annual report on Form 10-K filed with the SEC, any of which could cause the Company’s actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth elsewhere in this Form 10-Q and under “Item 1A. Risk Factors” and elsewhere in our Form 10-K, as amended, and our quarterly report on Form 10-Q for the period ended September 30, 2023. In addition, see “Cautionary Note Regarding Forward-Looking Statements.” References to the “Company,” “we,” “our,” and “us,” refer to 5E Advanced Materials, Inc. and its subsidiaries. Overview 5E Advanced Materials, Inc. is focused on becoming a vertically integrated global leader and supplier of specialty boron and advanced materials whose mission is to enable decarbonization, increase food security, and ensure domestic supply of critical materials. We hold 100% of the rights through ownership in the 5E Boron Americas (Fort Cady) Complex (the “Project”) located in southern California, through our wholly owned subsidiary 5E Boron Americas, LLC. Our Project is underpinned by a mineral resource that includes boron and lithium, with the boron being contained in a conventional boron mineral known as colemanite. In 2022, our facility was designated as Critical Infrastructure by the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency. Our vision is to safely process boric acid and lithium carbonate through sustainable best practices to enable decarbonization, food security and domestic supply surety. 16 2024 Outlook and Goals Highlights for the Three Months ended December 31, 2023 EPA Authorization In November 2023, we received final authorization from the U.S. Environmental Protection Agency (the “EPA”) under our Underground Injection Control (“UIC”) permit to commence initial production of boric acid at the 5E Boron Americas Complex. Pursuant to the authorization, we will continue to engage with the EPA in 2024 to modify our UIC permit to update its terms associated with monitoring, modeling, and injection intervals to facilitate long-term injection and operations and maximize boron and lithium extraction. Commencement of Mining Operations In early January 2024, we began wellfield operations under our UIC permit to begin extracting valuable minerals from the Project. Historical data suggests the wellfield will take 30-to-60 days to condition before producing boric acid, gypsum, and lithium carbonate. While conditioning the wellfield, we will remobilize our contractors to fully complete the facility, and once completed in mid-to-late February, we will focus on completing final commissioning activities for the Small-Scale Facility. We expect to begin lab production in the short-term, and assuming commissioning remains on schedule, production of boric acid and lithium carbonate from the Small-Scale Facility by the end of the first calendar quarter of 2024. This initial production will be used for customer qualification as the Company seeks to obtain bankable offtake agreements and future sales to support FEL 2 engineering while we focus on developing the Project to a commercial scale. The commencement of mining operations marks an important step in our goal to become the newest domestic producer of boric acid and lithium carbonate. Out-of-Court Restructuring Beginning in fiscal year 2023, we worked to identify appropriate funding solutions to address the Company’s liquidity profile. With the EPA approval still an open item, 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 to the unaudited condensed consolidated financial statements) and began discussions with its lender. The combination of the EPA status, and the approaching liquidity floor required a commercial resolution. On November 9, 2023, we 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 our 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 us to go below our current cash covenant of $10 million (as discussed in Note 7 to the unaudited condensed consolidated financial statements). 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 our capital structure, including our 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 to the unaudited condensed consolidated financial statements), we held a special meeting of stockholders (the “Special Meeting”) where our stockholders approved the Out-of-Court Restructuring, including (i) an amendment to our 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”). 17 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 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 our balance sheet, funds the next phase of our development, and supports the commencement of mining operations for boric acid and lithium. Liquidity Although the equity offerings associated with our Out-of-Court Restructuring significantly improved our cash position by providing $16.7 million of net proceeds to the Company, and we continue to operate under a business plan that includes reductions in certain spending, we expect to incur significant operating and development costs for the foreseeable future, and anticipate 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 to the unaudited condensed consolidated financial statements). If we are not able to secure additional financing and our cash balance falls below $7.5 million after June 28, 2024, an event of default under the Amended and Restated Convertible Note Purchase Agreement would occur. An event of default would cause the Convertible Notes balance outstanding to become immediately due and payable, for which we 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 the condensed consolidated financial statements. Therefore, 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. Even if additional debt or equity financing is successfully consummated, available liquidity may still not be sufficient to eliminate the aforementioned substantial doubt regarding our 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 The U.S. inflation rate rose steadily beginning in 2021 and continued a steep climb into 2022. Although the inflation rate moderated somewhat during the second half of 2023, it continues to be higher than historic averages. These inflationary pressures have resulted in and may continue to result in additional increases to the cost of 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. Federal Reserve and other central banks to increase interest rates, which could have the effects of raising the cost of capital and depressing economic growth, either of which or the combination thereof, could adversely affect our business. COVID-19 Response We have implemented policies at our offices in Hesperia, California and Houston, Texas and at our project site in Newberry Springs, California 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” and “Risk Factor” sections. 18 Results of Operations The following table summarizes our results of operations for the periods presented. Three Months Ended December 31, Variance Six Months Ended December 31, Change 2023 2022 $ % 2023 2022 $ % (in thousands) (in thousands) COSTS AND EXPENSES Project expenses $ 1,431 $ 3,404 $ (1,973 ) -58 % $ 3,014 $ 6,999 $ (3,985 ) -57 % General and administrative 7,396 7,701 (305 ) -4 % $ 13,434 12,587 847 7 % Research and development 6 39 (33 ) -85 % 45 78 (33 ) -42 % Depreciation and amortization expense 53 42 11 26 % 106 79 27 34 % Total costs and expenses 8,886 11,186 (2,300 ) -21 % 16,599 19,743 (3,144 ) -16 % LOSS FROM OPERATIONS (8,886 ) (11,186 ) 2,300 -21 % (16,599 ) (19,743 ) 3,144 -16 % NON-OPERATING INCOME (EXPENSE) Interest income 10 465 (455 ) -98 % 142 526 (384 ) -73 % Other income — 22 (22 ) -100 % 3 36 (33 ) -92 % Derivative gain (loss) — (2,166 ) 2,166 -100 % — 11,743 (11,743 ) -100 % Interest expense (1,739 ) (1,985 ) 246 -12 % (3,526 ) (2,806 ) (720 ) 26 % Other expense (1 ) (13 ) 12 -92 % (6 ) (13 ) 7 -54 % Total non-operating income (expense) (1,730 ) (3,677 ) 1,947 -53 % (3,387 ) 9,486 (12,873 ) -136 % NET INCOME (LOSS) $ (10,616 ) $ (14,863 ) $ 4,247 -29 % $ (19,986 ) $ (10,257 ) $ (9,729 ) 95 % Comparison of the three and six months ended December 31, 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 three months ended December 31, 2023, project expenses decreased $2.0 million or 58% 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 ($2.4 million) which occurred primarily in 2022 and was related to closing historic wells required by our permits ahead of operating the Small-Scale Facility. This decrease was partially offset by increases in site-related operating costs ($0.2 million), testing and analysis ($0.1 million) and Environmental Protection Agency compliance costs ($0.1 million). For the six months ended December 31, 2023 , project expenses decreased $4.0 million or 57% 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 ($4.9 million), as discussed above, and reduced expenses incurred for engineering and technical reports that were not eligible for capitalization as construction in progress ($0.2 million). These decreases were partially offset by increases in Environmental Protection Agency compliance costs ($0.7 million), testing and analysis ($0.3 million) and construction related insurance costs ($0.2 million). General and administrative expenses 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. Currently, all salaries and benefits are reported in general and administrative expenses. For the three months ended December 31, 2023, general and administrative expenses decreased $0.3 million or 4% versus the comparable period in 2022. The decrease was primarily due to decreases in costs associated with employee compensation and benefits ($2.1 million) primarily due to reduced headcount which includes a reduction in share based compensation expense ($1.3 million), and a reduction in travel related costs ($0.3 million) due to cost containment efforts. These decreases were partially offset by increased professional fees ($2.2 million) which were primarily the result of legal fees incurred in connection with our Out-of-Court restructuring efforts. For the six months ended December 31, 2023, general and administrative expenses increased $0.8 million or 7% versus the comparable period in 2022. The increase was primarily due to increased professional fees ($3.2 million) which were primarily the result of legal fees incurred in connection with our Out-of-Court restructuring efforts. This increase was partially offset by a decrease in costs associated with employee compensation and benefits ($2.1 million) due to reduced headcount which includes a reduction in share based compensation expense ($2.0 million), and various cost containment efforts across a broad range of expense categories ($0.3 million). 19 Research and development Research and development expense includes costs incurred under research agreements with Georgetown University and Boston College that aim to enhance the performance of permanent magnets through increased use of boron. Both engagements have been completed, resulting in decreased research and development costs versus the comparable periods in 2022. Depreciation and amortization expense Depreciation and amortization relates to use of our owned or leased vehicles, buildings and equipment and the amortization of our asset retirement obligations. For the three months ended December 31, 2023, depreciation and amortization expense increased $11 thousand or 26% versus the comparable period in 2022. Similarly, for the six months ended December 31, 2023, depreciation and amortization expense increased $27 thousand or 34% versus the comparable period in 2022. These increases were primarily due to additional assets placed in service during the second and third fiscal quarters of 2023. Interest income Interest income is derived from the investment of our excess cash and cash equivalents in short-term (original maturities of three months or less) investments of highly liquid treasury bills and certificates of deposit beginning in the first fiscal quarter of 2022 and corresponding with the issuance of the Convertible Note. For the three months ended December 31, 2023, interest income decreased $455 thousand or 98% versus the comparable period in 2022. Similarly, for the six months ended December 31, 2023, interest income decreased $384 thousand or 73% versus the comparable period in 2022. Such decreases correspond to decreases in our average cash and cash equivalent balances between the periods, respectively. Derivative gain The derivative gain (loss) during the three and six months ended December 31, 2022 related to changes in fair value of the embedded conversion feature of our Convertible Notes that was required to be bifurcated and accounted for separately as a stand-alone derivative instrument during the quarter ended September 30, 2022. The unrealized loss during the three months ended December 31, 2022 was primarily due to our stock price increasing from $10.16 at September 30, 2022 to $11.63 at November 26, 2022, the termination date of the embedded conversion feature requiring separate accounting. The unrealized gain during the six months ended December 31, 2022, was primarily due to the decrease in our stock price to $11.63 at the termination date from $15.83 on August 26, 2022, the inception date of the Convertible Note. 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. Interest expense Interest expense primarily relates to interest expense incurred on the Convertible Notes issued on August 26, 2022, and is net of amounts capitalized to construction in progress. The Convertible Notes accrues interest at a rate of 6% when interest is paid-in-kind through the issuance of additional notes, and we recognize interest expense for the amortization of debt issuance costs and the amortization of the discount on the note. For the three months ended December 31, 2023, interest expense decreased $246 thousand or 12% versus the comparable period in 2022. This decrease was primarily due to additional interest being capitalized between period due to an increase in our average construction in progress balance between period ($524 thousand reduction in interest expense) offset to a lesser extent by accruing additional interest on $1.7 million and $1.9 million of interest that was paid-in-kind during February of 2023 and August of 2023, respectively ($278 thousand increase in interest expense). For the six months ended December 31, 2023, interest expense increased $720 thousand or 26%. This increase was due to the aforementioned increase in principal balance on the Convertible Notes between periods as well as a full six months of interest incurred on the Convertible Notes in 2023 versus a partial period in 2022. This increase in interest expense was offset by an increase in the amount of interest capitalized during the same period of $1.1 million resulting from an increase in our average construction in progress balance during the period. As part of our Out-of-Court Restructuring and associated amendment and restatement of our Convertible Notes Agreement in January 2024, the paid-in-kind interest rate associated with the Convertible Notes increased to 10%. Income Tax We did not have any income tax expense or benefit for the three and six months ended December 31, 2023 and 2022, as we have recorded a full valuation allowance against our net deferred tax asset. 20 Cash flows For the six months ended December 31, Change 2023 2022 $ % ($ in thousands) Net cash used in operating activities $ (14,772 ) $ (16,183 ) $ 1,411 -9 % Net cash used in investing activities (3,486 ) (16,116 ) 12,630 -78 % Net cash provided by (used in) financing activities (20 ) 57,993 (58,013 ) -100 % Net increase (decrease) in cash and cash equivalents $ (18,278 ) $ 25,694 $ (43,972 ) -171 % During the six months ended December 31, 2023, we used $14.8 million of cash for operating activities, a decrease of $1.4 million or 9% compared to the comparable period in 2022. Cash used by operating activities decreased between periods primarily due to a decrease in project related expenses which was offset to a lesser extent by 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 six months ended December 31, 2023, we used $3.5 million of cash for investing activities, a decrease of $12.6 million or 78% 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 six months ended December 31, 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 December 31, 2023, we had cash and cash equivalents of $2.0 million and working capital deficit of $5.5 million compared to $20.3 million and positive working capital of $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 equity-linked debt securities. Since inception, we have not generated revenues, and as such, have relied on equity financing and equity-linked 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, and general corporate purposes. In January 2024, we completed two closings of a private placement of our common stock which resulted in approximately $17.75 million of proceeds to the Company to strengthen our balance sheet and to help fund the next state of mining and Small-Scale Facility operation. In January 2024, we also executed an amended and restated note purchase agreement which modified certain terms of our Convertible Note; however, such modifications did not provide incremental capital to the Company. With our current capital resources and construction nearly complete, we believe that we have sufficient funds to construct and commission our Small-Scale Facility. Over the next 12 months we have plans to achieve the following milestones that will require additional capital: • Operate the Small-Scale Facility; • 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; and • Continue hiring team members necessary to support our operation efforts of becoming a global producer of boric acid, lithium carbonate and gypsum. Although the Out-of-Court Restructuring transaction discussed above significantly improved our cash position, and we continue to operate under a business plan that includes reductions in certain spending, we expect to incur significant operating and development costs for the foreseeable future, and anticipate 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. 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 secure additional financing cash flows and our cash balance falls below $7.5 million after June 28, 2024, an event of default under the Amended and Restated Convertible Notes Agreement would occur. An event of default would cause our 21 Convertible Notes balance outstanding to become immediately due and payable, for which we 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 the condensed consolidated financial statements. Therefore, 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. Even if additional debt or equity financing is successfully consummated, available liquidity may still not be sufficient to eliminate the aforementioned substantial doubt regarding our 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. Contractual 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. Critical Accounting Policies 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 six months ended December 31, 2023. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not required.