5E Advanced Materials, Inc. 10-K

Item 8. Financial Statements Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors 5E Advanced Materials, Inc. Houston, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of 5E Advanced Materials, Inc. (the “Company”) as of June 30, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ BDO USA, LLP We have served as the Company’s auditor since 2021. Spokane, Washington September 28, 2022 77 Table of Contents 5E ADVANCED MATERIALS, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share data) June 30, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 31,057 $ 40,811 Prepaid expenses and other current assets 1,506 159 Total current assets 32,563 40,970 Mineral rights and properties, net 8,364 8,081 Construction in progress 25,625 12,765 Properties, plant and equipment, net 2,871 1,495 Reclamation bond deposit 1,086 1,085 Right of use asset 371 213 Other assets 6 — Total Assets $ 70,886 $ 64,609 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities $ 7,212 $ 1,594 Lease liability, current 164 91 Total current liabilities 7,376 1,685 Long-term debt 148 93 Lease liability 211 125 Accrued reclamation liabilities 489 377 Total liabilities 8,224 2,280 Commitments and contingencies (Note 13) Stockholders’ Equity: Common stock 43,305,315 and 38,391,412 shares outstanding at June 30, respectively 433 384 Additional paid-in capital 169,593 101,179 Accumulated other comprehensive income (loss) — 1,417 Retained earnings (accumulated deficit) ( 107,364 ) ( 40,651 ) Total stockholders’ equity 62,662 62,329 Total liabilities and stockholders’ equity $ 70,886 $ 64,609 The accompanying notes are an integral part of these consolidated financial statements 7 8 Table of Contents 5E ADVANCED MATERIALS, INC. CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands, except per share amounts) For the Year Ended June 30, 2022 2021 Operating expenses: Project expenses $ 12,853 $ 5,966 General and administrative 54,733 11,637 Research and development 133 — Depreciation expense 112 31 Total operating expenses 67,831 17,634 Income (loss) from operations ( 67,831 ) ( 17,634 ) Non-operating income (expense) Other income 65 45 Interest income 3 9 Interest expense ( 6 ) ( 5 ) Net foreign exchange gain (loss) 1,056 ( 1,668 ) Total non-operating income (expense) 1,118 ( 1,619 ) Income (loss) before income taxes ( 66,713 ) ( 19,253 ) Income tax provision (benefit) Current — — Deferred — — Total income tax provision (benefit) — — Net income (loss) $ ( 66,713 ) $ ( 19,253 ) Net income (loss) per common share—basic and diluted $ ( 1.63 ) $ ( 0.56 ) Weighted average common shares outstanding—basic and diluted 40,807 34,175 Comprehensive income (loss): Net income (loss) $ ( 66,713 ) $ ( 19,253 ) Reporting currency translation gain (loss) ( 1,417 ) 1,916 Comprehensive income (loss) $ ( 68,130 ) $ ( 17,337 ) The accompanying notes are an integral part of these consolidated financial statements 79 Table of Contents 5E ADVANCED MATERIALS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (In thousands) Common Stock Additional Paid-in Capital Accumulated Comprehensive Income (loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance at June 30, 2020 30,456 $ 305 $ 57,078 $ ( 499 ) $ ( 21,398 ) $ 35,486 Shares issued for: Cash 5,128 51 30,059 — — 30,110 Exercise of stock options 2,799 28 9,208 — — 9,236 Consulting fees 8 — 32 — — 32 Share issuance costs — — ( 1,574 ) — — ( 1,574 ) Share based compensation — — 6,376 — — 6,376 Net income (loss) — — — — ( 19,253 ) ( 19,253 ) Other comprehensive income (loss), net of tax — — — 1,916 — 1,916 Balance at June 30, 2021 38,391 384 101,179 1,417 ( 40,651 ) 62,329 Shares issued for: Cash 1,760 18 26,291 — — 26,309 Exercise of stock options 1,904 19 5,203 — — 5,222 Consulting fees 1,250 12 31,021 — — 31,033 Share issuance costs — — ( 797 ) — — ( 797 ) Share based compensation — — 6,696 — — 6,696 Net income (loss) — — — — ( 66,713 ) ( 66,713 ) Other comprehensive income (loss), net of tax — — — ( 1,417 ) — ( 1,417 ) Balance at June 30, 2022 43,305 $ 433 $ 169,593 $ — $ ( 107,364 ) $ 62,662 The accompanying notes are an integral part of these consolidated financial statements 8 0 Table of Contents 5E ADVANCED MATERIALS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) For the Year Ended June 30, 2022 2021 Cash Flows From Operating Activities: Net loss $ ( 66,713 ) $ ( 19,253 ) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 112 31 Interest earned on reclamation bond ( 1 ) ( 3 ) Share based compensation 6,696 6,376 Common stock issued for consulting fees 31,033 32 Accretion of reclamation liability 9 — Amortization of right of use asset 125 — Net foreign exchange (gain) loss ( 1,056 ) 1,669 Change in: Prepaid expenses and other current assets ( 1,347 ) 16 Accounts payable and accrued liabilities 2,533 244 Other assets ( 6 ) — Net cash used by operating activities ( 28,615 ) ( 10,888 ) Cash Flows From Investing Activities: Construction in progress ( 9,994 ) ( 12,029 ) Mineral rights and properties ( 186 ) ( 113 ) Properties, plant and equipment ( 1,220 ) ( 39 ) Reclamation bonds — ( 777 ) Net cash used by investing activities ( 11,400 ) ( 12,958 ) Cash Flows From Financing Activities: Payments on note payable ( 112 ) ( 2 ) Proceeds from issuance of common stock 26,309 30,110 Proceeds from exercise of stock options 5,222 9,236 Share issuance costs ( 797 ) ( 1,574 ) Net cash provided by financing activities 30,622 37,770 Net increase (decrease) in cash and cash equivalents ( 9,393 ) 13,924 Effect of exchange rate fluctuation on cash ( 361 ) 247 Cash and cash equivalents at beginning of period 40,811 26,640 Cash and cash equivalents at end of period $ 31,057 $ 40,811 Supplemental Disclosure Of Cash Flow Information: Interest paid in cash $ 6 $ 3 Noncash Investing And Financing Activities: Accounts payable change related to construction in progress $ 2,922 $ ( 1,404 ) Construction in progress transferred to properties, plant and equipment 55 798 Recognition of operating lease liability and right of use asset 283 237 Notes payable issued for properties, plant and equipment 206 — Increase (decrease) in asset retirement costs 103 — The accompanying notes are an integral part of these consolidated financial statements 8 1 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Company and Summary of Significant Accounting Policies Nature of Business 5E Advanced Materials, Inc. (“5E,” “we,” “our,” or “us” or the “Company”) is an exploration stage company focused on becoming a vertically integrated global leader in boron specialty advanced materials and lithium with a focus on enabling decarbonization. Reorganization 5E Advanced Materials, Inc. acquired all of the issued and outstanding shares of American Pacific Borates Limited (“ABR”), our Australian predecessor and wholly owned subsidiary, pursuant to a Scheme of Arrangement (“Scheme”) under Australian law, which was approved by ABR’s shareholders on December 2, 2021, and the Supreme Court of Western Australia on February 24, 2022. As part of the Scheme, we changed our place of domicile from Australia to the State of Delaware in the United States, effective on March 8, 2022. In accordance with the Scheme, all ordinary shares of ABR have been transferred to us and pursuant to the Scheme, we issued to the shareholders of ABR, either one share of our common stock for every ten ordinary shares of ABR or one CHESS Depository Interest (“CDIs”) over our common stock for every one ordinary share of ABR, in each case, as held on the Scheme record date. We maintain an Australian Stock Exchange (“ASX”) listing for our CDIs, with each CDI representing 1/10th of a share of common stock. Holders of CDIs are able to trade their CDIs on the ASX under the symbol “5EA” and holders of shares of our common stock are able to trade their shares on NASDAQ under the symbol “FEAM.” All share and per share data presented in our consolidated financial statements have been retroactively adjusted to reflect a one for ten (1:10) exchange ratio (“Exchange Ratio”) of all of our issued and outstanding common stock. As a result of the reorganization, we became the parent company of ABR, and for financial reporting purposes the historical financial statements of ABR have become our historical financial statements as a continuation of the predecessor. Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The financial statements are presented in U.S. dollars. Basis of Consolidation The consolidated financial statements comprise the financial statements of 5E and its wholly owned subsidiaries, ABR, Fort Cady Holdings Pty Ltd, and Fort Cady (California) Corporation (“FCCC”). In preparing the consolidated financial statements, all intercompany balances and transactions, income and expenses and profit and losses resulting from intra-company transactions have been eliminated in full. Concentration of Risk We maintain cash deposits at several major banks, which at times may exceed amounts covered by insurance provided by the United States Federal Deposit Insurance Corporation (“FDIC”). We monitor the financial health of the banks and have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk. Risk and Uncertainties We are subject to a number of risks similar to those of other companies of similar size in our industry, including but not limited to, the success of our exploration activities, need for significant additional capital (or financing) to 8 2 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS fund operating losses, competition from substitute products and services from larger companies, protection of proprietary technology, patent litigation, and dependence on key individuals. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, assumptions, and allocations that affect amounts reported in the consolidated financial statements and related notes. Items that are subject to such estimates and assumptions include, but are not limited to, estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties, deferred tax assets, estimation of future costs, useful life, and discount rates used to calculate our reclamation liabilities, and fair value of stock-based compensation. Actual results could differ due to the uncertainty inherent in the nature of these estimates. Significant Accounting Policies Foreign Currency Translation Functional and reporting currency— Items included in our consolidated financial statements and each of our subsidiaries are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). As of June 30, 2022, the U.S. dollar was the functional currency of ABR and Fort Cady Holding Pty Ltd. The change in functional currency during fiscal year 2022 was due to all cash and cash equivalents, operating and capital costs being denominated in the U.S. dollar. The change in functional currency will be applied prospectively with effect from June 30, 2022 in accordance with U.S. GAAP. To give effect to the change in functional currency, the assets and liabilities of entities with an Australian dollar functional currency on June 30, 2022 were converted into U.S. dollars at a fixed exchange rate of 1.454 U.S. dollars to one AUD dollar and the stockholders’ equity and accumulated deficit were converted at applicable historical rates. Our functional currency and the functional currency of FCCC is the U.S. dollar. The reporting currency for these consolidated financial statements is U.S. dollars. During the fourth quarter ended June 30, 2022, ABR transferred substantially all of its assets to us and has no ongoing operations. Accordingly, we recognized the remaining accumulated foreign currency translation adjustment of $ 248 thousand as a gain in our consolidated statement of operations and comprehensive income (loss). Transactions in foreign currency— Transactions made in a currency other than the functional currency are remeasured to the functional currency at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are remeasured to the functional currency at the exchange rate at that date and non-monetary assets and liabilities are remeasured at historical rates. Foreign currency transaction gains and losses are included in profit or loss. Translation to reporting currency— The results and financial position of entities that have a functional currency different from the reporting currency are translated into the reporting currency as follows: • Assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the reporting date; • Income and expenses for each statement of operations are translated at average exchange rates, unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions; and • All resulting exchange differences are recognized in other comprehensive income or loss. 8 3 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cash and Cash Equivalents — Cash and cash equivalents consist of cash and liquid investments with an original maturity when acquired of three months or less. As of June 30, 2022 and 2021, cash and cash equivalents consisted of $ 31.1 million and $ 431 thousand, respectively, of funds held in bank accounts with financial institutions in the United States and $ 0.0 and $ 40.38 million, respe ctiv ely, of funds held in bank accounts with financial institutions in Australia. Mineral Rights and Properties and Exploration and Evaluation Costs — Mineral property acquisition costs, including indirectly related acquisition costs, are capitalized when incurred. Acquisition costs include cash consideration. Mineral lease payments are capitalized. Exploration and evaluation costs are classified as project expenses and expensed as incurred. When it is determined that a mining deposit can be economically and legally extracted or produced, development costs related to such reserves and incurred after such determination will be considered for capitalization. The establishment of proven and probable reserves is based on results of feasibility studies. Upon commencement of commercial production, capitalized costs will be amortized over their estimated useful lives or units of production, whichever is a more reliable measure. Capitalized amounts relating to a property that is abandoned or otherwise considered uneconomic for the foreseeable future will be written off. Drilling, development and related costs are either classified as project expenses and charged to operations as incurred, or capitalized, based on the following criteria: • whether the drilling or development costs relate to a project that has been determined to be economically feasible, and a decision has been made to put the project into production; and • whether, at the time the cost is incurred: (a) the expenditure embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows, (b) we can obtain the benefit and control others’ access to it, and (c) the transaction or event giving rise to our right to or control of the benefit has already occurred. Impairment of Long-Lived Assets — The carrying amount of long-lived assets is reviewed for impairment when events and circumstances indicate that such assets might be impaired. An asset is considered impaired when estimated future undiscounted cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flo ws . Properties, Plant and Equipment— Properties, plant and equipment are recorded at historical cost. Depreciation and amortization are provided in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value. Expenditures for improvements that significantly extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to operations when incurred. Assets under construction (“Construction in progress”) include roads, fencing, tailings facility, equipment for our small-scale boron facility, injection-recovery wells, and land improvements and will be depreciated in accordance with our depreciation policy once placed in service. 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. Reclamation obligations are recognized when incurred and recorded as liabilities at estimated costs of future expenditures. Reclamation obligations are based on when spending for an existing disturbance will occur. The disturbance from construction, exploration, and development activities is 8 4 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reclaimed on an ongoing basis. Reclamation associated with environmental monitoring programs will be classified as a long-term liability; however, because we have not declared proven and probable reserves, the timing of these reclamation activities is uncertain as the reclamation areas will only be utilized once the mineral property is operating. For activities that do not qualify for asset capitalization, the costs associated with the obligation are charged to operations. For other activities, the costs will be added to the capitalized costs of the property and amortized over the useful life of the mineral property. The reclamation obligation in connection with mineral properties and interests are reviewed on an annual basis unless otherwise deemed necessary. Environmental compliance costs related to maintaining our existing permits are expensed in the period incurred. Reclamation obligations are secured by certificate of deposits held for the benefit of the state of California in amounts determined by applicable federal and state regulatory agencies. Reclamation bond deposits as of June 30, 2022 and 2021 were $ 1,086 thousand and $ 1,085 thousand, respectively. Fair Value Measurements — The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data. We use a Black-Scholes option valuation model to determine the grant date fair value our employee stock options and a Monte Carlo Simulation model to determine the grant date fair value of market-based stock grants. Both models use Level 2 inputs. See note 11—Share Based Compensation for a description of the inputs used. Leases — We determine if a contractual arrangement is, or contains, a lease at the inception date. Right-of-use (“ROU”) assets and liabilities related to operating leases are separately reported in the consolidated balance sheet. We have made an accounting policy election to exclude short-term leases (leases with a term of 12 months or less and which do not include a purchase option that we are reasonably certain to exercise) from the balance sheet presentation. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the lease term. When the rate implicit to the lease cannot be readily determined, we utilize our incremental borrowing rate in determining the present value of the future lease payments. The incremental borrowing rate is derived from information available at the lease commencement date and represents the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The ROU asset includes any lease payments made and lease incentives received prior to the commencement date. Operating lease ROU assets could also include any cumulative prepaid or accrued rent when the lease payments are uneven throughout the lease term. The ROU assets and lease liabilities may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. 8 5 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lease liabilities are increased by interest and reduced by payments each period, and the ROU asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the ROU asset result in straight-line rent expense over the lease term. Variable lease expenses are recorded when incu rred . Financial Instruments — Our financial instruments consist of cash and cash equivalents, vehicle notes, and accounts payable and accrued liabilities. It is management’s opinion that we are not exposed to significant interest, currency or credit risks arising from its financial instruments. The fair values of these instruments approximate their carrying value unless otherwise note d . Share Based Compensation — The fair value of share based compensation awards is measured at the date of grant and amortized over the requisite service period, which is generally the vesting period, with a corresponding increase in additional paid-in capital. In the case of a share based compensation award that is either cancelled or forfeited prior to vesting, the amortized expense associated with the unvested awards is reversed. A forfeiture rate is not estimated when determining the fair value of the options on the grant dat e . Loss per Common Share — Basic net loss per common share is computed by dividing net loss, by the weighted average number of common shares outstanding. Diluted loss per share includes any additional dilution from common stock equivalents. Diluted loss per share is not separately presented for the years ended June 30, 2022 and 2021, as the effect on the basic loss per share would be anti-dilutive. Income Taxes — We use the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. In evaluating our ability to recover our deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we develop assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and the assumptions are consistent with the plans and estimates that we use to manage the underlying businesses. A valuation allowance is recorded against deferred tax assets if we believe it is more likely than not the related tax benefits will not be realized. We evaluate uncertain tax positions in a two-step process, whereby (i) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (ii) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is greater than 50 % likely of being realized upon ultimate settlement with the related tax authority would be recognized. Reclassifications Certain reclassifications have been made to prior years’ reported amounts in order to conform to the current year presentation. These reclassifications did not impact our previously reported net income (loss), stockholders’ equity or cash flows. Recently Issued Accounting Pronouncements In August 2020, FASB issued ASU No. 2020-06–Debt–Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for 8 6 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Convertible Instruments and Contracts in an Entity’s Own Equity. The update addresses issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years and with early adoption permitted. We do not expect ASU 2020-06 to have a material effect on our consolidated financial statements. In May 2021, FASB issued ASU No. 2021-04—Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The update is to clarify and reduce diversity in accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years and with early adoption permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements. 2. Mineral Rights and Properties, Net We own surface properties and the associated mineral rights for the Fort Cady Project (“Fort Cady”). We have capitalized the cost of drilling hydrology wells, which provide water for the Project. For the years ended June 30, 2022 and 2021, we recognized hydrology income of $ 62 thousand and $ 45 thousand, respectively. On October 1, 2011, FCCC executed a 10-year net royalty lease agreement with Elementis Specialties, Inc. (“Elementis”) to explore, develop and mine boron and lithium on claims held by Elementis. During the year ended June 30, 2022, we extended the mineral lease agreement with Elementis until March 31, 2023 . Amounts paid prior to production are considered mineral lease payments and capitalized. For the years ended June 30, 2022 and 2021, we paid Elementis mineral lease payments of $ 186 thousand and $ 108 thousand, respectively. Mineral Interests and Properties consisted of the following at June 30. 2022 2021 (in thousands) Mineral properties—Fort Cady $ 6,733 $ 6,733 Hydrology wells 547 547 Mineral interest—Elementis lease 908 722 Asset retirement cost, net of accumulated amortization of $ 6 and $ 0 at June 30, 2022 and 2021, respectively (1) 176 79 $ 8,364 $ 8,081 (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 work in progress represents the equipment which has been acquired and is not in use and prepayments for design, engineering, and construction services in relation to the development of Fort Cady. 8 7 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Construction in Progress consisted of the following at June 30. 2022 2021 (in thousands) Engineering services $ 9,073 $ 3,825 Equipment 13,131 8,940 Injection and recovery wells 3,421 — $ 25,625 $ 12,765 4. Properties, Plant and Equipment Properties, plant, and equipment consisted of the following at June 30: Asset category Depreciation method Estimated useful life (in years) 2022 2021 (in thousands) Land N/A — $ 1,533 $ 658 Buildings Straight-line 7 - 15 873 717 Vehicles Straight-line 5 276 73 Plant and equipment Straight-line 5 - 10 340 92 3,022 1,540 Less accumulated depreciation ( 151 ) ( 45 ) Properties, plant and equipment, net $ 2,871 $ 1,495 We recognized depreciation expense of $ 106 thousand and $ 31 thousand for the years ended June 30, 2022 and 2021, respectively. 5. Asset Retirement Obligations and Accrued Reclamation Liabilities On June 30, 2021, we established an asset retirement obligation (“ARO”) relating to water monitoring wells and injection recovery wells as required by our Underground Injection Permit. Total estimated reclamation and closure costs for wells completed was $ 777 thousand and $ 299 thousand as of June 30, 2022 and 2021, respectively. These estimated costs were inflated using rates of 1.13 % - 2.02 % and then discounted using credit adjusted, risk-free interest rates of 6.6 – 11.3 % from the time we incurred the obligation to the time we expect to pay the retirement obligation. In a ddition to our asset retirement obligations, we have accrued reclamation costs of $ 298 thousand as a liability at June 30, 2022 and 2021 related to prior land disturbance at Fort Cady. 8 8 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The change in our ARO for the years ended June 30 and the balance of our accrued reclamation liabilities at the end of each period, is set forth below. 2022 2021 (in thousands) Asset retirement obligation—beginning of period $ 79 $ — Obligation incurred during the period 106 79 Revisions to previous estimates ( 3 ) — Accretion 9 — Asset retirement obligation—end of period 191 79 Accrued reclamation costs 298 298 Total accrued reclamation liabilities $ 489 $ 377 6. Leases We lease offices in Hesperia, CA and Houston, TX under operating lease agreements, which expire in February 2024 and December 2024 , respectively. In June 2022, we entered into a three-year operating lease for the field office we have been utilizing in Newberry Springs, CA. Previously, the field office was leased on a month-to-month basis and was classified as a short-term lease. Other operating leases include lodging for employees working in the field. Rent expense is included in general and administrative expense on the consolidated statement of operations. A summary of our leases including short-term leases follows. Lease inception Weighted average remaining lease term (in years) Weighted average discount rate Cash Paid for Rent Rent Expense Years ended 2022 2021 2022 2021 Operating Leases (in thousands) Office space 2021 - 2022 2.4 1.6 % $ 92 $ 22 $ 93 $ 24 Other operating leases 2021 0.3 0.1 % 32 2 32 2 Total operating leases 124 24 125 26 Short term leases N/A N/A N/A 57 55 57 55 Total for all leases $ 181 $ 79 $ 182 $ 81 Future minimum annual lease pa yments under our existing lease agreements are as follows. 2022 (in thousands) Year ending June 30, 2023 $ 164 2024 143 2025 72 Total 379 Less imputed interest ( 4 ) Net lease liability 375 Current portion 164 Long-term portion $ 211 8 9 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consisted of the following as of June 30. 2022 2021 (in thousands) Accounts payable—trade $ 3,459 $ 1,188 Accrued expenses 2,935 265 Accrued payroll 780 141 Current portion of debt 38 — Accounts payable and accrued liabilities $ 7,212 $ 1,594 8. Debt At June 30, our debt consisted of the following. 2022 2021 (in thousands) Note payable for land $ — $ 93 Vehicle notes payable 186 — Total debt 186 93 Current portion of debt 38 — Long-term debt $ 148 $ 93 Payments on the vehicle notes are $ 38 , $ 40 , $ 42 , $ 44 and $ 22 (all thousands) over the next five years and bear interest at 3.9 %. During the years ended June 30, 2022 and 2021, we recognized interest expense of $ 6 thousand and $ 5 thousand, respectively. 9. Equity We are authorized to issue up to 180,000,000 shares of common stock, par value $ 0.01 per share, and 20,000,000 shares of preferred stock, par value, $ 0.01 per share. We have no outstanding shares of preferred stock. During the years ended June 30, 2022 and 2021, we issued 4.9 million and 7.9 million shares of our common stock for cash proceeds of $ 31.5 million and $ 39.4 million, respectively . Share issue costs of $ 797 thousand and $ 1,574 thousand were incurred, respectively. 10. Net Loss Per Common Share Basic loss per share is computed by dividing 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 as the effect of including dilutive securities in the calculation would be antidilutive. For the years ended June 30, 2022 and 2021, respectively, stock options of 5,092 thousand and 5,554 thousand were excluded from the computation of diluted loss per share as our reported net losses for those periods would cause their exercise to have no effect on the calculation of loss per share. 9 0 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Share Based Compensation For the years ended June 30, our share based compensation expense included in general and administrative expense consisted of the following. 2022 2021 (in thousands) Share based compensation expense—service based Employee share option plan $ 5,812 $ 4,653 2022 Equity compensation plan—RSU’s 646 — Total service based compensation 6,458 4,653 Options issued to suppliers 238 1,723 Consulting stock awards 31,033 — Total share based compensation $ 37,729 $ 6,376 As of June 30, 2022, we had approximately $ 5.0 million of total unrecognized stock-based compensation expense related to unvested stock-based compensation awards that vest within three years . Employee Share Option Plan Our predecessor parent company ABR established an employee share option plan (“ESOP”). The objective of the ESOP was to assist in the recruitment, reward, retention and motivation of employees and contractors. Individuals may receive the options or nominate a relative or associate to receive the options. The plan was open to executive officers, employees, and eligible contractors. Additionally, the board authorized the awards of options outside of the plan to suppliers and vendors. Vesting periods of options granted varied as determined by the ABR board of directors. The total number of shares authorized for award of share options under the ESOP was limited to 5 % of common stock over a 3 -year period. During fiscal year 2022, as part of reorganization, we canceled each of the outstanding options to acquire ordinary shares of ABR and issued replacement options representing the right to acquire shares of our common stock at an exchange ratio of one replacement option for every ten ABR options held. It is our policy to issue new shares of common stock to satisfy stock option exercises. The fair value of stock option awards granted to directors, officers, employees and/or consultants are estimated on the grant date using the Black-Scholes option valuation model and the closing price of our common shares on the grant date. The significant assumptions used to estimate the fair value of stock option awards granted during the years ended June 30, 2022 and 2021, respectively, using the Black-Scholes option valuation model are as follows: 2022 2021 Exercise price $ 14.62 - $ 18.27 $ 6.58 - $ 18.27 Share price $ 9.87 - $ 12.35 $ 4.20 - $ 14.76 Volatility 69 % - 85 % 73 % - 110 % Expected term in years 0.9 to 3.9 1 to 4 Risk free interest rate 0.10 % - 1.5 % 0.75 % Dividend rate Nil Nil 9 1 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes stock option activity for each of the periods presented. The number of options has been adjusted for the Exchange Ratio and exercise prices have been converted to U.S. dollars using a rate of 1.368 U.S. dollars to one AUD dollar, the exchange rate that existed on the date prior to implementation of the Scheme: Year ended June 30 2022 2021 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price (In thousands, except per share data) Outstanding at beginning of the period 5,554 $ 5.19 6,742 $ 3.36 Granted 1,700 15.39 1,700 9.21 Exercised ( 1,904 ) 2.75 ( 2,799 ) 3.22 Expired/forfeited ( 476 ) 5.48 ( 89 ) 7.09 Outstanding at end of the period 4,874 9.67 5,554 5.19 Vested at the end of the period 3,367 $ 7.30 5,284 $ 4.75 Number of Options Weighted Average Grant Date Fair Value per share Number of Options Weighted Average Grant Date Fair Value per share Unvested options at beginning of the period 270 $ 5.79 335 $ 1.20 Granted 1,700 6.26 1,700 4.65 Vested ( 463 ) 4.65 ( 1,676 ) 3.79 Expired/forfeited — — ( 89 ) 4.35 Unvested options at end of the period 1,507 6.05 270 5.79 The following table provides information about stock options outstanding and exercisable at the end of each period presented. Number of Shares Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (In thousands) (In years) (In thousands) Outstanding and exercisable at: June 30, 2022 3,367 $ 7.30 1.1 $ 24,568 June 30, 2021 5,284 4.75 1.8 21,200 2022 Equity Compensation Plan In March 2022, our Board of Directors adopted the 5E Advanced Materials, Inc. 2022 Equity Compensation Plan (the “Incentive Plan”). A total of 2.5 million shares of common stock are reserved for issuance under the Incentive Plan. The Incentive Plan authorized the grant of stock options, restricted share units, performance share units, director share units, performance cash units and other equity-based awards. Our Compensation Committee 9 2 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS determines the exercise price for stock options and other equity-based awards, which may not be less than the fair market value of our common stock on the date of grant. As of June 30, 2022, approximately 2.4 million shares of common stock were available for issuance under the Incentive Plan. The following table summarizes the activity for our Incentive Plan. Serviced- based Shares Weighted Average Grant Date Fair Value per Share Performance- Based Shares Weighted Average Grant Date Fair Value per Share Total Shares (In thousands, except per share data) Non-vested shares/units outstanding at July 1, 2021 — $ — — $ — — Granted 48.8 (1) 18.03 19.2 (2) — 68.0 Forfeited — — — — — Vested — — — — — Non-vested shares/units outstanding at June 30, 2022 48.8 19.2 68.0 (1) Includes approximately 29.6 thousand restricted share units issued to our directors. (2) On June 29, 2022, we granted approximately 19.2 thousand performance share units, which based on the achievement of certain revenue targets, could vest within a range of 0 % to 150 %. Consulting Stock Awards Pursuant to an agreement ABR had in place with its U.S.-based advisory board Blue Horizon Advisors LLC (“BHA”), we issued 400,000 shares of common stock to BHA in March 2022 upon the listing of our shares on the NASDAQ . The fair value of these shares of $ 13.2 million was recognized as share based compensation and included in general and administrative expenses in the consolidated statement of operations for the year ended June 30, 2022. Additionally, during the year ended June 30, 2022, we issued a total 600,000 shares to Blue Horizon Advisors LLC, pursuant to the terms of the Advisory Agreement dated April 16, 2021 and as consideration for Advisory Board services provided. Share based compensation recognized related to these issuances was $ 10.0 million and is included in general and administrative expense in our consolidated statement of operations. The agreement also includes a provision enabling BHA to earn an additional 1,000,000 shares of common stock upon meeting four different market-based milestones ( 250,000 shares per milestone). The market-based milestones are based on our common stock achieving a ten-day volume weighted average price of $ 21.94 , $ 29.25 , $ 36.57 , and $ 43.88 before December 31, 2022. The first milestone was reached in March 2022. The fair value of these awards was determined using a Monte Carlo Simulation valuation model, which incorporates assumptions as to stock price volatility, the expected life of awards, a risk-free interest rate and dividend yield. We recognized related share based compensation expense of $ 7.8 million in general and administrative expense in our consolidated statement of operations as all services required for the awards have been fulfilled. 9 3 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The assumptions used to estimate the fair value of the market-based stock grants under the Monte Carlo Simulation model for the period ended June 30, 2022 are as follows: Hurdle stock price $ 21.94 $ 29.25 $ 36.57 $ 43.88 Volatility 76.82 % 76.82 % 76.82 % 76.82 % Expected term in years 1.12 1.12 1.12 1.12 Risk-free interest rate 0.22 % 0.22 % 0.22 % 0.22 % Expected dividend yield 0 % 0 % 0 % 0 % Estimated fair value per share $ 10.68 $ 9.01 $ 6.63 $ 4.88 12. Defined Contribution Plan We sponsor a defined contribution plan under Section 401(k) of the Internal Revenue Code. This plan covers all of our employees that have attained the age of 21 and have completed three months service with us. We match employee deferrals 100 % up to 4 % and 50 % up to 6 % of an employee’s eligible earnings, subject to limitations imposed by the IRS. Our contributions to this plan were $ 128 thousand and $ 41 thousand for the years ended June 30, 2022 and 2021, respectively. 13. Commitments and Contingencies 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. 14. Income Taxes We did no t record a U.S. federal or state income tax benefit for losses incurred during the years ended June 30, 2022 and 2021. We have concluded that it is more likely than not that our deferred tax assets will not be realized which resulted in the recording of a full valuation allowance during those periods. Domestic and foreign components of loss before income taxes for the years ended June 30 are as follows: 2022 2021 (in thousands) Australia $ 15,479 $ 11,214 United States 51,234 8,039 Total net loss $ 66,713 $ 19,253 9 4 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents a reconciliation of t h e United States statutory income tax rate to our effective income tax rate for the years ended June 30: 2022 2021 (in thousands) Loss before income taxes $ 66,713 $ 19,253 Statutory income tax rate 21 % 21 % Income tax benefit at statutory tax rates 14,010 4,043 State income tax benefit 2,801 561 Foreign rate differential 822 379 Share based compensation ( 751 ) ( 1,376 ) Disallowed exploration costs ( 861 ) — Other 97 ( 97 ) Change in valuation allowance ( 16,118 ) ( 3,510 ) Income tax benefit $ — $ — Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of deferred taxes at June 30 are as follows: 2022 2021 Deferred tax assets: (in thousands) Net operating loss carryforward $ 14,282 $ 4,352 Amortization of exploration expenditures 6,423 3,225 Unrealized loss - translation 308 447 Share based compensation 1,946 — Other deferred tax assets 867 429 Total deferred tax assets 23,826 8,453 Less: valuation allowance ( 23,671 ) ( 7,941 ) Deferred tax assets, net of valuation allowance to offset 155 512 Deferred tax liabilities: Unrealized gain - translation — ( 425 ) Other ( 102 ) ( 60 ) Depreciation ( 53 ) ( 27 ) Net deferred tax assets $ — $ — As of June 30, 2022, we had U.S. federal, state, and Australian net operating loss (“NOL”) carryforwards of $ 35.1 million, $ 29.2 million and $ 16.2 million, respectively. As of June 30, 2021, we had U.S. federal and state NOL carryforwards of $ 7.5 million and Australian NOL carryforwards of $ 7.5 million. U.S. net operating loss carryforwards for the periods arising before December 31, 2018 have a 20 year carryforward, the earliest of which could expire in 2037 . The amount of the post-tax reform U.S. federal NOL generated after tax year 2017, of approximately $ 34.9 million, can be carried forward indefinitely. California net operating losses have a 20-year carryforward, the earliest of which could expire beginning in 2037 . Australia can carryforward all its NOL indefinitely. The utilization of our net operating loss or tax attributes may be subject to annual limitations provided by the Internal Revenue Code and similar state provisions to the extent certain ownership changes are deemed to occur. Such an annual limitation could result in the expiration of the attributes before utilization. The tax attributes reflected above have not been reduced by any limitations. To the extent it is determined upon completion of the 9 5 Table of Contents 5E ADVANCED MATERIALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS analysis that such limitations so apply, we will adjust the tax attributes accordingly. We face the risk that our ability to use our tax attributes will be substantially restricted if we undergo an “ownership change” as defined in Section 382 of the U.S. Internal Revenue Code, or Section 382. We evaluate both the positive and negative evidence available to determine the realizability of our deferred tax assets. As of June 30, 2022 and 2021, there is a valuation allowance of $ 23.7 million and $ 7.9 million, respectively, of which both primarily relate to net operating losses and exploration costs. Changes in the balance of our deferred tax asset valuation allowance during the years ended June 30 related primarily to increases in net operating loss carryforwards and exploration costs and were as follows: 2022 2021 (in thousands) Valuation allowance $ 15,730 $ 2,883 We had no unrecognized tax benefits as of June 30, 2022 or 2021. We recognize interest accrued related to unrecognized tax benefits and penalties in our income tax provision, if applicable. We have not recognized any interest or penalties in the fiscal years presented in these financial statements. We are subject to income tax in the U.S. federal jurisdiction and Australia. Tax years 2018 and forward remain subject to examination but there are currently no ongoing exams in any taxing jurisdictions. 15. Subsequent Events On July 1, 2022, Fort Cady (California) Corporation converted from a Maryland corporation to a Delaware LLC, and changed its name to 5E Boron Americas, LLC. On August 2, 2022, Great Basin Resources, Inc. agreed to amend our Salt Wells Earn-in Agreement. To fully realize the mineral interest rights under the Salt Wells Earn-In Agreement, we must incur exploration expenses of $ 900,000 by December 31, 2023, $ 800,000 by December 31, 2024, and approximately $ 756,000 by December 31, 2025. On August 11, 2022, we secured a $ 60 million private placement of Senior Secured Convertible Notes (“the Notes”), with Bluescape Energy Partners (“Bluescape”). The Notes, which are convertible into our common stock and mature August 2027 , closed on August 26, 2022. At our election, the Notes will bear interest at an annual rate of 4.50 % if paid in cash, or at an annual rate of 6.00 % if paid through the issuance of additional Notes. The purchaser may convert its notes at any time before August 2027 at a conversion price of $ 17.60 (“Conversion Price”). We have the right, at any time on or before the twenty-four (24) month anniversary of the closing date of the Notes (“Closing Date”), to convert the Notes to our common stock in whole or in part if the closing price of our common stock is at least 200 % of the Conversion Price of the Notes (“Threshold Price”) for each of the twenty ( 20 ) consecutive trading days prior to the time we deliver a conversion notice. The Threshold Price for our right to convert the Notes decreases to 150 % after the twenty-four (24) month anniversary of the Closing Date and on or before the thirty-six (36) month anniversary of the Closing, and to 130 % at any time after the thirty-six (36) month anniversary of the Closing Date. 9 6 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.