Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) summarizes the significant factors affecting the operating results, financial condition and liquidity, and cash flows of our Company and its predecessor for the years ended June 30, 2022 and 2021. The discussion is based on the historical financial statements of ABR as of and for the periods ending June 30, 2022 and 2021 and all periods prior to the Reorganization and of the Company for periods after the Reorganization. The Company was incorporated under the laws of the state of Delaware to become the holding company of our business pursuant to the Reorganization. Prior to completion of the Reorganization, the Company had no business or operations and following completion of the Reorganization, the business and operations of the Company consists solely of the business and operations of the subsidiaries of ABR. Accordingly, financial information for the Company and a discussion and analysis of its results of operations and financial condition for the period of its operation prior to the Reorganization would not be meaningful and are not presented. Following the Reorganization, the historical financial statements of ABR as of and for the periods ending June 30, 2022 and 2021 are our financial statements as a continuation of the predecessor. Our financial statements will continue to consolidate ABR as an operating subsidiary. This MD&A should be read in conjunction with our consolidated financial statements, the accompanying notes to consolidated financial statements and other financial information included in this annual report. Except for historical information, the matters discussed in this MD&A contain various forward-looking statements that involve risks and uncertainties and are based upon judgments concerning various factors beyond our control. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this annual report. All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.
Overview
5E Advanced Materials, Inc. is an exploration stage company focused on becoming a vertically integrated global leader and supplier of boron specialty and advanced materials, complemented by lithium production capabilities. Our business is based on our large domestic boron and lithium resource which is located in Southern California.
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Results of Operations
Year Ended June 30
Change
2022
2021
$
%
($ in thousands)
COSTS AND EXPENSES
Project expenses
$
12,853
$
5,966
$
6,887
115
%
General and administrative
54,733
11,637
43,096
*
Research and development
133
—
133
N/A
Depreciation and amortization expense
112
31
81
261
%
Total costs and expenses
67,831
17,634
50,197
285
%
LOSS FROM OPERATIONS
(67,831
)
(17,634
)
(50,197
)
285
%
NON-OPERATING INCOME (EXPENSE)
Other income
65
45
20
44
%
Interest income
3
9
(6
)
-67
%
Interest expense
(6
)
(5
)
(1
)
20
%
Net foreign exchange gain (loss)
1,056
(1,668
)
2,724
-163
%
Total non-operating income (expense)
1,118
(1,619
)
2,737
-169
%
NET INCOME (LOSS)
$
(66,713
)
$
(19,253
)
$
(47,460
)
247
%
*
Represents a percentage change of greater than +/- 300%
Project Expenses
Project expenses include drilling, environmental, site-prep, engineering, consumables, testing and sampling, hydrology, permits, surveys, and other expenses associated with further progressing Fort Cady. The $6.9 million increase in project expenses during 2022 compared to 2021 was due to increased activity related to the preparation for construction of the SSBF, primarily expenses related to drilling water monitoring wells and engineering and technical reports that were not eligible for capitalization as construction in progress.
General and administrative expense
General and administrative expenses include professional fees, costs associated with marketing, press releases, on-going
SEC and public company costs, public relations, rent, salaries, sponsorships, share based compensation and other expenses. The $43.1 million increase in 2022 was primarily driven by $37.7 million of share based compensation costs, $4.3 million in costs related to the reorganization and subsequent listing of our shares on the NASDAQ, and increased salaries related to hiring additional employees. Our head count increased to 23 at the end of the current period from 11 at the end of the previous year. Share based compensation was driven by $31 million in shares issued as payment for consulting fees under our Advisory Agreement with Blue Horizon Advisors, LLC (“BHA”) for services related to assessing Fort Cady, recruiting a U.S. based management team, and advising in connection with our listing on the NASDAQ.
Research and development
Research and development expense includes costs incurred under our research agreement with Georgetown University that aims to enhance the performance of permanent magnets through increased use of boron.
Depreciation and amortization expense
The $81,000 increase in depreciation and amortization expense was primarily due to additional assets placed in service, including the addition of three hybrid trucks to our fleet, and the placement in service of field buildings included in construction in progress at the end of last year. Depreciation and amortization also increased as we had a full year of depreciation related to assets that were placed in service in the prior year.
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Non-operating
(income) expense
The change from net non-operating
expense to non-operating
income during the year ended June 30, 2022 was primarily driven by net foreign exchange gains of $1.1 million resulting from the impact of the strengthening U.S. dollar (vis a vis the Australian dollar) as we had no foreign cash holdings during the year ended June 30, 2022. All cash balances have been transferred to our bank account in the U.S. and were held in U.S. dollars at June 30, 2022.
Income Tax
We did not have any income tax expense or benefit for the years ended June 30, 2022 and 2021, as we did not generate any net income for either period.
Liquidity and Capital Resources
Overview
As of June 30, 2022, we had cash and cash equivalents of $31.1 million and working capital of $25.2 million compared to $40.8 and $39.3 million as of June 30, 2021, respectively. Our predominant source of cash has been generated through equity financing from issuances of our common stock. Since inception, we have not generated revenues, and as such, have relied on equity financing to fund our operating and investing activities.
Outlook
The full scope of our current business plan for the next 12 months includes, among other things: achieving mechanical completion and commissioning of the SSBF, potential additional drilling of wells to support operation of the SSBF, operation of the SSBF for several months and hiring additional personnel to support our development of Fort Cady. While the total cost is subject to change, we currently estimate the total cost of the SSBF (including the drilling and installation costs for our injection recovery wells of $3.4 million) to be between $45 million and $55 million, of which $25.6 million had been spent (including costs for our injection recovery wells of $3.4 million) as of June 30, 2022, and the remainder is expected to be incurred prior to March 31, 2023.
On August 11, 2022, we entered into Convertible Notes of $60.0 million through a private placement, which closed on August 26, 2022. We believe our current cash balances, which include the proceeds from the Convertible Notes, are sufficient to fund our cash requirements for at least the next 12 months. We expect our expenditures to increase in connection with our ongoing development activities and pursuit of our business plan, as we continue construction and operation of the SSBF and progress engineering of our proposed large- scale complex.
Accordingly, we will need to obtain substantial additional funding in connection with the development of our operations. There are many factors that could significantly impact our ability to raise funds through equity and debt financing as well as influence the timing of future cash flows. These factors include, but are not limited to, our ability to access capital markets, stock price volatility, uncertain economic conditions, unforeseen delays in our project, and access to labor. See “Part I. Item 1A. Risk Factors” in this report. A summary of our cash flows for the years ended June 30 follows.
For the Year Ended June 30,
2022
2021
$ Change
($ in thousands)
Net cash used by operating activities
$
(28,976
)
$
(10,888
)
$
(18,088
)
Net cash used by investing activities
(11,400
)
(12,958
)
1,558
Net cash provided by financing activities
30,622
37,770
(7,148
)
Net increase (decrease) in cash and cash equivalents
$
(9,754
)
$
13,924
$
(23,678
)
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Cash Flows from Operating Activities
Net cash used in operating activities for each of the above periods was primarily the result of expenses incurred in preparing us for operations. During the year ended June 30, 2022, we used $18.1 million more from operations than in the previous year. The increase in cash used in operations during the current period was due to increased salaries and benefits resulting from increased headcount combined with an increase in project expenses related to the preparation for construction of the SSBF.
Cash Flows from Investing Activities
Our cash flows from investing activities did not change significantly from the prior year as we continued to invest in the SSBF. Substantially all our investing activities relate to equipment purchases, engineering, and the construction of our SSBF. Net cash used in investing activities for the fiscal year ended June 30, 2021 also included the purchase of $776,650 in reclamation bonds required by the Environmental Protection Agency.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended June 30, 2022 consisted primarily of $25.5 million of proceeds (net of share issuance costs) from the issuance of 1.76 million shares of Common Stock and $5.2 million of proceeds from the exercise of stock options.
Net cash provided by financing activities for the year ended June 30, 2021 primarily consisted of $30.1 million of proceeds from the issuance of Common Stock and $9.2 million of proceeds from the exercise of stock options, less $1.6 million from share offering costs.
Future Capital Requirements
At June 30, 2022, we had sufficient cash on hand, and together with the subsequent $60 million private placement of Convertible Notes on August 11, 2022, we believe we have sufficient capital to fund our fiscal year 2023 capital budget and operating expenses.
If we complete a bankable feasibility study for the Project and decide to further develop and commercialize the Project, this will require substantial additional funds, which would require future debt or equity financings.
Contractual Obligations
Purchase Obligations
As of June 30, 2022, we had purchase order commitments of $28.6 million in respect of construction works in progress, drilling, and technical reports.
Mineral Lease Payments
We have a mineral lease agreement with Elementis for the purposes of obtaining exclusive rights to exploration at Fort Cady. The mineral lease agreement requires us to make an annual minimum royalty payment of $75 thousand, escalated annually based on inflation, until the expiration date of the lease. The initial expiration date of the lease agreement was October 1, 2021. FCCC and Elementis executed a lease extension until March 31, 2023. Payments made during the years ended June 30, 2022 and 2021 were $187 and $108 thousand, respectively.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
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and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting periods. Actual results could differ materially from those estimates. Our significant estimates and assumptions may include the estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties, deferred tax assets, reclamation liabilities and share-based compensation. See Note 1, “Description of Company and Summary of Significant Accounting Policies,” to our consolidated financial statements in Item 8 of this report for a full description of the critical accounting policies and estimates below, as well as other accounting policies and estimates we make. Below are the most significant policies we apply in preparing our financial statements. We also describe the most significant estimates and assumptions we make in applying these policies.
Reclamation Liabilities
Our mining and exploration activities are subject to various laws and regulations, including legal and contractual obligations to reclaim, remediate, or otherwise restore properties at the time the property is removed from service. We estimate these costs based upon internally generated information and information obtained from outside sources. These estimates are then inflated and discounted based on when the expenditures are expected to be incurred and recorded at fair value as an asset and corresponding liability on our consolidated balance sheet. Because these costs typically extend many years into the future, estimation is difficult and requires judgments that are subject to revisions based upon numerous factors, including inflation, changing technology and the political and regulatory environment in which we operate. Changes in cost estimates, discount rates, timing of abandonment activities or inflation, among others, could have a significant impact on our future results of operations or liquidity. We review our assumptions and estimates of future development and abandonment costs annually, or more frequently if circumstances change. See Note 5, “Asset Retirement Obligations and Accrued Reclamation Liabilities,” to our consolidated financial statements in Item 8 of this report.
Share-Based Compensation
We apply a fair value-based method of accounting for stock-based compensation, which requires recognition in the financial statements of the cost of services received in exchange for equity awards. Compensation expense is based on the fair value on the grant or modification date and is recognized in our financial statements over the vesting period with a corresponding increase in additional paid-in
capital. We utilize the Black-Scholes option-pricing model to measure the fair value of stock options and a Monte Carlo lattice-based model for our market-based restricted stock units. See Note 11, “Share Based Compensation,” to our consolidated financial statements in Item 8 of this report for a full discussion of our stock-based compensation.
New Accounting Requirements
See Note 1, “Organization and Summary of Significant Accounting Policies,” to our consolidated financial statements in Item 8 of this report for a discussion of new accounting requirements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required.
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