Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of the consolidated financial results and condition of Westwater for the three and nine months ended September 30, 2020 has been prepared based on information available to
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us as of November 12, 2020. This discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included herewith and the audited Consolidated Financial Statements of WWR for the period ended December 31, 2019 and the related notes thereto filed with our Annual Report on Form 10-K, which have been prepared in accordance with U.S. GAAP. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See “Cautionary Note Regarding Forward-Looking Statements.”
INTRODUCTION
Westwater Resources, Inc. is a 40-year-old public company trading on the Nasdaq Capital Market focused on battery graphite development under the symbol “WWR. ” Originally incorporated in 1977 as Uranium Resources, Inc. to mine uranium in Texas, our company has been reborn as an energy materials developer. Westwater now is focused on battery-ready graphite materials after its acquisition of Alabama Graphite Corp. (“Alabama Graphite”) and its Coosa Graphite Project (“Coosa Project”) in Alabama in April 2018 . Westwater recently discovered significant vanadium concentrations at the Coosa Project and has developed an exploration plan to further investigate the size and extent of those concentrations.
RECENT DEVELOPMENTS
Sale of Uranium Business
On September 1, 2020, Westwater signed a binding letter of intent (“LOI”) to sell its U.S. uranium assets located in New Mexico and Texas to enCore Energy Corp. (“enCore”), a corporation incorporated under the laws of British Columbia, Canada, and a Toronto Venture Exchange-listed company (TSX.V:EU). Total compensation accruing to Westwater as part of the deal is expected to be in excess of $2.0 million in enCore shares and royalties from future production from Westwater’s New Mexico uranium properties. All remaining reclamation liabilities and bonding obligations for the Company’s Texas uranium properties will be transferred to enCore at the time of sale, with the transaction expected to close on or before December 31, 2020. The transaction is subject to further due diligence, the execution of a definitive agreement, and other customary conditions., and there can be no assurance that the transaction will be completed. The transaction does not include Westwater’s uranium interests in Turkey, which are subject to an ongoing international arbitration proceeding.
As a result of the estimated value of consideration received and carrying values of asset/liabilities transferred, the Company has recorded a $5.2 million impairment charge. However, and importantly, the Company will continue its participation in the uranium sector as a significant shareholder of enCore and a royalty holder on the New Mexico uranium properties, while transferring responsibility for remaining reclamation to enCore. At the same time, the Company expects to save over $4.0 million per year for the next several years in land payments, reclamation expenses and operating costs associated with the uranium properties, funds that can be invested in developing our graphite business. The successful closing of this transaction will complete the Company’s strategic shift to battery graphite materials, and will allow the Company to devote its full focus and attention on advancing its battery-grade graphite product business.
Graphite Business Developments
Westwater’s graphite business plan continues without pause. Westwater remains focused on the battery materials markets, the end markets for those products, and the role that can be played in supplying critical materials to serve them.
In June 2020, Westwater announced that independent testing of Westwater’s ULTRA-PMG TM battery graphite material has shown outstanding resistivity values as a conductive additive. This milestone achievement is a critical step in developing Westwater’s battery graphite business. ULTRA-PMG TM is one of the key products in the Coosa Project business plan being produced at laboratory-scale using proprietary processes that Westwater intends to utilize in the pilot program later this year. Successful performance testing demonstrates that Westwater can manufacture ULTRA-PMG TM as a premium-grade, conductive enhancement material for all types of batteries at larger scale.
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In July 2020, Westwater announced that independent performance testing of Westwater’s ULTRA-CSPG TM (Coated Spherical Purified Graphite "CSPG”) material produced in a laboratory setting shows that it performs as well or better than benchmark commercially available natural flake and synthetic materials. ULTRA-CSPG TM is Westwater’s anode material which is utilized in lithium ion batteries, which are used in the fast-growing electric vehicle market. Current estimates of the savings in CO2 emissions once our projected plant reaches full production range above 322,000 metric tons per year through the use of our ULTRA-CSPG TM U product in electric vehicles her in the United States.
In August 20, 2020, Westwater announced it had engaged Dorfner Anzaplan of Hirschau, Germany to execute its pilot plant that will advance the development of processes needed to purify graphite concentrates and to produce Westwater’s battery grade products: ULTRA-PMG TM , ULTRA-CSPG TM and ULTRA-DEXDG TM . Dorfner Anzaplan is an internationally recognized and highly regarded organization that specializes in high-purity industrial and strategic metals businesses. Dorfner Anzaplan will employ state-of-the-art analytical methods and facilities and use innovative processing technologies to provide effective solutions tailored to Westwater’s requirements. Planning and construction of an operational pilot plant is underway, and operation of the pilot plant is anticipated by the end of the year.
Westwater has developed proprietary processes for the production of battery grade graphite from non-Chinese sources that are designed to manufacture high performing products while ensuring a sustainable environmental footprint and low production costs. Test work on the products from these processes has been performed already in laboratories in Germany and the United States, and those results show that the performance of the Coosa Project’s graphite is on par with or exceeds that of currently available battery products. The next step in Westwater’s development process is the operation of a pilot plant that is designed to process approximately 30-tonnes of graphite concentrate and to produce more than ten metric tons of ULTRA-PMG TM , ULTRA-CSPG TM and ULTRA-DEXDG TM products, now scheduled for the fourth quarter of this year and the first quarter of 2021.
Westwater has filed a provisional patent application with the U.S. Patent and Trademark Office for its proprietary graphite purification technology. This proprietary process, which does not utilize hydrofluoric acid, is a purification methodology that has a more environmentally sustainable footprint than those processes currently used in China and elsewhere. Our purification process is an integral component in our pilot plant program, which we announced on August 8, 2020. Westwater also announced the filing of the Provisional Patent application on September 8, 2020.
The invention claimed in the provisional patent application relates to a method of obtaining highly purified graphite – having a graphitic carbon (Cg) grade of at least 99.95% – from a natural flake graphite concentrate sample. The method consists of three steps: (1) caustic roasting of the graphite concentrate sample; (2) acid leaching of the roasted sample; and (3) thermal treatment of the sample. Additional steps involving water washing and drying are included in some methods. The methods provided in the application may further include any combination of varying the weight percentage of the caustic solution, varying the temperature of and time for the caustic roasting, varying the temperature of and time for the acid leaching, and/or varying the temperature of, time for, and the atmosphere used in the thermal treatment.
Sales and Marketing Executive
Westwater hired Jay Wago as Vice President – Sales and Marketing on July 1, 2020. Mr. Wago is a proven sales leader, whose unique skills and experience will be instrumental in leading Westwater’s sales and marketing efforts for our battery graphite materials business. The addition of Mr. Wago will help position Westwater to scale its marketing efforts to generate greater awareness of our American-made battery graphite materials to end-users throughout the world.
Graphite and Vanadium Listed as Critical Materials
On September 30, 2020, the President signed an Executive Order (the “Order”) that addresses the threat to the U.S. domestic supply chain from reliance on critical minerals from foreign adversaries. The critical minerals referred to in the Order were previously identified by the Department of Interior in May 2018, and include both natural graphite and vanadium.
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The President’s declaration that the United States' heavy reliance on foreign nations for critical minerals is a national emergency, highlights the importance of the Westwater’s plans to develop the Coosa Graphite Deposit in east-central Alabama. Westwater’s business plan for the Coosa Graphite Project over the next two and a half years is to develop a U.S. domestic supply for natural graphite for use in all types of batteries in the United States. During recent exploration activities along the Roscoe Ridge at the mine site, Westwater has also discovered wide spread and significant levels of vanadium mineralization.
The U.S. is 100% dependent on imports for graphite, which is the primary anode material in lithium-ion batteries that power smartphones, laptops, electric vehicles, and stores power from intermittent renewable energy sources. Graphite, was specifically named as one of the critical minerals in which the U.S. is heavily dependent on China for its supply. Also, vanadium is an essential component in the manufacture of high-strength steel, is used as a catalyst in chemical manufacturing, and is also used as a component in the manufacturing of some ceramic, glass and pigment products. The U.S. imports virtually all of its industrial vanadium requirements from mines located in South Africa, China and Russia.
In the Order the President says, "a strong America cannot be dependent on imports from foreign adversaries for the critical minerals that are increasingly necessary to maintain our economic and military strength in the 21st century." The President said the heavy dependence on imports for critical minerals makes the U.S. vulnerable to adverse foreign government action, natural disaster, or other supply disruptions.
"I therefore determine that our nation's undue reliance on critical minerals, in processed or unprocessed form, from foreign adversaries constitutes an unusual and extraordinary threat, which has its source in substantial part outside the United States, to the national security, foreign policy, and economy of the United States. I hereby declare a national emergency to deal with that threat," President Trump penned in the Executive Order.
Further details on President Trump's critical mineral Executive Order can be read at: https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-domestic-supply-chain-reliance-critical-minerals-foreign-adversaries
Westwater is uniquely positioned to benefit from the action the U.S. government is taking to ensure that the United States and its technology manufacturers can rely on a safe and secure source of graphite to drive our next generation of power and technology needs and possibly to meet needs for vanadium as well. The action by the President orders the Office of Science and Technology, the Secretary of Defense, the Secretary of Energy and the Secretary of the Interior to provide guidance to clarify which minerals and projects are eligible for government support, which can include loans or grants, under Title XVII of the Energy Policy Act of 2005. Furthermore, these agencies are directed along with the Secretary of Commerce, the Administrator for the Environmental Protection Agency and the Secretary of the Army, to use all available authorities to accelerate the issuance of permits in connection with expanding and protecting the U.S. domestic supply chain for minerals such as graphite.
Westwater is evaluating the Order and how best to approach the relevant agencies in the U.S. Government to emphasize the importance of battery graphite, its importance to the nation’s security, and how the Coosa Graphite Project in Alabama fits into the enactment of critical minerals policy.
Global Pandemic and our Actions to Ensure Safety
On March 11, 2020, the World Health Organization designated COVID-19 as a global pandemic. The pandemic spread outside of China during the first quarter of 2020 and has impacted businesses throughout the world. In the U.S., many state and local governments have, based on local conditions, either recommended or mandated actions to slow the transmission of COVID-19. These measures range from limitations on crowd size, together with closures of bars and dine-in restaurants, to mandatory orders for non-essential citizens to “shelter in place” or “stay at home” until further direction. Borders between many countries have been closed to contain the spread of COVID-19. Uncertainty with respect to the economic effects of the pandemic has introduced significant volatility in the financial markets.
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This pandemic, and the resultant uncertain economic conditions it has created, could adversely affect our operations, major facilities, or employees’ health. Westwater has the following priorities while managing business activities during this period of volatility and uncertainty:
● First, to ensure the health and safety of employees and the communities where they work.
● Second, to work with business partners to maintain the advanced graphite product development schedule.
● Third , to ensure adequate financial liquidity to support key operations and business activities.
Westwater’s corporate business activities are largely unaffected at this time. Even though Westwater has reduced utilization of its offices, remote working arrangements were instituted to ensure that employees were able to work remotely using systems that already were in place. Westwater’s continued focus on the health and safety of employees, the safety of operations, and the safety of the communities in which our employees live and work remains paramount. To that end, Westwater eliminated unnecessary travel, instituted health protocols for working together, and ensured that employees are permitted to take time off due to illness or the illness of those around them without penalty. As a result, our corporate business activities will continue on as before, without interruption.
During this quarter, our South Texas employees continued to perform normal reclamation and compliance work activities without incident, while utilizing protocols enacted by Westwater management earlier in the year.
To the extent that the COVID-19 pandemic continues or worsens, local governments or governmental agencies may impose additional restrictions. The result of COVID-19 and those restrictions could result in a number of adverse impacts to Westwater’s business, including but not limited to additional disruption to the economy, additional work restrictions, and supply chains being interrupted, slowed, or rendered inoperable. As a result, it may be challenging to obtain and process raw materials to support business needs, and individuals could become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Also, governments may impose other laws, regulations or taxes which could adversely impact Westwater’s business, financial condition or results of operations. The potential effects of COVID-19 could also impact Westwater in a number of other ways including, but not limited to, laws and regulations affecting business, the availability of future borrowings, the cost of borrowings, and potential impairment of the carrying value of long-lived tangible assets.
Payroll Protection Loan
On May 4, 2020, URI, Inc, a wholly owned subsidiary of Westwater, received loan proceeds in the amount of $0.3 million under the Paycheck Protection Program in accordance with the terms of a promissory note executed in favor of Celtic Bank Corporation, a Salt Lake City based SBA Preferred Lender. The loan and accrued interest are forgivable as long as the loan proceeds are used for eligible purposes, including payroll and benefits costs, rent and utilities. Any unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%. Payments of principal and interest are deferred until 10 months after the end of the 24-week covered period beginning on the day loan proceeds were received. URI’s covered period ended on October 19, 2020 making the first payment of any unforgiven amount due August 19, 2021.
The Company used the loan proceeds for funding its payroll and benefits costs for its South Texas operations over 10 weeks during the months of May, June and July, purposes consistent with the PPP. The deadline to apply for loan forgiveness is the maturity date of the loan, April 30, 2022. Celtic Bank is currently developing an online forgiveness application for its borrowers in order to streamline the process. The Company plans to apply for loan forgiveness as soon as the lender makes the electronic application available. While the Company currently believes that its use of the loan proceeds meets the conditions for forgiveness of the loan, no assurance can be provided that the Company will obtain forgiveness of the Loan, in whole or in part.
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Equity Financings
Significant Capital Raise in October Pursuant to Sales Agreement with Cantor Fitzgerald
Between September 9, 2020 and October 26, 2020, the Company sold 9.5 million shares of common stock for gross proceeds of $46.9 million and net proceeds of $45.7 million pursuant to its Controlled Equity Offering Sales Agreement (”ATM Offering Agreement”) with Cantor Fitzgerald & Co. (“Cantor”). These shares were sold pursuant to two prospectus supplements filed pursuant to Rule 424(b)(5) as takedowns off the Company’s base shelf registration statement which had been declared effective by the Securities and Exchange Commission on April 13, 2020.
The receipt of net proceeds in the amount of $45.7 million from the ATM Offering Agreement combined with the receipt of net proceeds in the amount of $11.7 million from sales of common stock to Lincoln Park, as noted below, has resulted in a cash balance of approximately $53.3 million at October 31, 2020. The significant treasury balance has mitigated the Company’s capital risk through 2021 as the Company’s pilot plant program for processing battery-grade graphite and the remaining product development are now fully funded, and the Company will be able to make substantial initial investment in the commercial graphite plant in the latter half of 2021.
2020 Purchase Agreement (“2020 Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”)
At the Annual Shareholders Meeting conducted on April 28, 2020, the Company received shareholder approval to sell up to 8.0 million shares of common stock under the 2020 Purchase Agreement. On May 21, 2020, the Company entered into the 2020 Purchase Agreement, as amended on May 29, 2020, with Lincoln Park to place up to $12.0 million in the aggregate of the Company’s common stock on an ongoing basis when required by the Company over a term of 24 months. As an initial purchase on May 21, 2020, Lincoln Park bought $250,000 worth of Common Stock of the Company at a price of $1.2989 per share. The Company issued 156,250 shares of Common Stock to Lincoln Park as consideration for its commitment to purchase shares of Common Stock under the 2020 Purchase Agreement.
The Company entered into a registration rights agreement with Lincoln Park pursuant to which the Company filed registration statements on Form S-1 with the SEC, which were declared effective on June 26, 2020 relating to the resale of an initial tranche of 1,971,000 shares and October 4, 2020 relating to the resale of 3,243,000 shares. During the period from July 8, 2020 to October 6, 2020, the Company sold 2.8 million shares of common stock for net proceeds of $11.7 million.
Turkish Government Taking of Temrezli and Sefaatli Licenses and Westwater’s Arbitration Filing and Proceedings
On January 27, 2020, Westwater filed a Claimant’s Memorial (the “Memorial”) in its arbitration proceeding against the Republic of Turkey (“Turkey”). The Memorial relates to Westwater’s request for arbitration submitted to the International Centre for the Settlement of Investment Disputes (“ICSID”) in December 2018 as a result of Turkey’s unlawful actions against Westwater’s investments at the Temrezli and Sefaatli uranium projects owned by Westwater’s Turkish subsidiary Adur Madencilik Limited Sirketi.
The Memorial sets forth the basis for Westwater’s claims under the treaty between the United States and Turkey concerning the reciprocal encouragement and protection of investments and international law generally, as well as the basis for the jurisdiction of the tribunal constituted on May 1, 2019 following ICSID’s registration of Westwater’s request for arbitration. The Memorial also establishes the reparations owed by Turkey for breach of its international obligations towards Westwater, consisting of no less than $36.5 million, plus costs and post-award interest, as compensation for Westwater’s resulting loss of its investment. Accompanying the Memorial is an expert report regarding the reparations owed to Westwater. In determining the amount of Westwater’s loss, the expert report considered (i) the projected future cash flows from the expropriated projects, discounted to present value by a risk-adjusted discount rate, (ii) valuations from transactions for similar projects, and (iii) in the case of the Sefaatli project, the amounts invested in the project.
On March 11, 2020, Turkey filed a request to bifurcate the arbitration proceeding, and on March 30, 2020, Westwater filed a response in opposition to Turkey’s request for bifurcation. On April 28, 2020, the arbitral tribunal denied Turkey’s bifurcation request. On May 13, 2020, Turkey filed with the arbitral tribunal a request, which Westwater elected not to oppose, to extend the date on which their Counter-Memorial must be filed (and to change dates for subsequent
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pleadings as well as document production and witness identification deadlines), which the tribunal approved on June 3, 2020. As a result of these decisions by the tribunal, Turkey filed its Counter-Memorial on September 14, 2020. The hearing on the substantive issues and damages is scheduled for September 13-17, 2021.
Additional information regarding the ICSID arbitration proceeding is presented in Part II, Item 1 below.
RESULTS OF OPERATIONS
Summary
Our consolidated net loss for the three months ended September 30, 2020 was $9.8 million, or $1.23 per share, as compared with a consolidated net loss of $1.8 million, or $0.95 per share for the same period in 2019. The $8.0 million increase in our consolidated net loss from the respective prior period in 2019 was largely due to the $6.4 million net loss from discontinued operations. During the third quarter of 2020, the Company entered into an agreement to sell its U.S. uranium assets to enCore in order to focus its efforts on the development of battery-grade graphite. Management believes this major strategic shift in its business model qualifies its uranium and lithium segments for treatment as discontinued operations. Accordingly, the assets and related liabilities of these segments were classified as held for sale. Upon initial held for sale recognition, the carrying value of the long-lived assets belonging to these segments was compared to the assets’ fair value less costs to sell. Following this evaluation, it was determined that the $11.4 million carrying value of the property, plant and equipment belonging to the uranium segment was greater than its estimated fair value less disposal costs. As a result, an impairment loss of $5.2 million was recognized for the quarter and is included in the net loss from discontinued operations for the period. In addition to impairment, product development expenses related to our graphite projects has increased by $1.6 million from the same period in 2019.
The factors identified above that led to the increased net loss for the third quarter of 2020 also contributed to the $7.8 million increase in our consolidated net loss for the nine months ended September 30, 2020 from the respective prior year period. The Company’s enhanced focus on developing its graphite business and dedication of resources to that pursuit is reflective of the $1.9 million increase in product development spending year to date 2020 compared with 2019. Likewise, the $5.5 million increase to net loss from discontinued operations for the three months ended September 30, 2020 is mostly comprised of the $5.2 million write down on Texas uranium property, plant and equipment recognized in September, 2020.
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Mineral Property Expenses
The following table details our mineral property expenses for the three and nine months ended September 30, 2020 and 2019:
For the Three months Ended
For the Nine months ended
September 30,
September 30,
2020
2019
2020
2019
(thousands of dollars)
Restoration/Recovery expenses
Kingsville Dome project
$
—
$
—
$
3
$
—
Rosita project
—
7
—
—
Vasquez project
2
(8)
8
69
Total restoration/recovery expenses
2
(1)
11
69
Standby care and maintenance expenses
Kingsville Dome project
249
158
583
444
Rosita project
118
97
321
298
Vasquez project
92
93
274
236
Total standby care and maintenance expenses
459
348
1,178
978
Exploration and evaluation costs
Coosa project
—
—
—
58
Other projects
—
1
—
3
Total exploration and evaluation costs
—
1
—
61
Land maintenance and holding costs
303
484
753
1,150
Total mineral property expenses
764
832
1,942
2,258
(Less) Mineral Property expenses attributable to Discontinued Operations
(752)
(820)
-
(1,924)
(2,181)
Mineral Property expenses for Continued Operations
$
12
$
12
$
18
$
77
For the nine months ended September 30, 2020, mineral property expenses decreased by $0.3 million from the corresponding period in 2019. The decrease was primarily due to the decision not to renew the leases for the lithium mineral properties in Nevada and Utah that were due in August 2020.
General and Administrative Expenses
Significant expenditures for general and administrative expenses for the three and nine months ended September 30, 2020 and 2019 were:
For the Three months ended
For the Nine months ended
September 30,
September 30,
2020
2019
2020
2019
(thousands of dollars)
Stock compensation expense
$
142
$
239
$
170
$
255
Salaries and payroll burden
811
197
2,344
1,619
Legal, accounting, and public company expenses
558
635
1,681
2,105
Insurance and bank fees
160
171
494
355
Consulting and professional services
46
1
149
52
Office expenses
128
107
329
235
Sales and marketing
97
6
196
17
Other expenses
(1)
3
16
126
Total General and Administrative Expenses
$
1,941
$
1,359
$
5,379
$
4,764
(Less) General and Administrative Expenses attributable to Discontinued Operations
(405)
(356)
(1,273)
(1,181)
General and Administrative Expenses for Continued Operations
$
1,536
$
1,003
$
4,106
$
3,583
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General and administrative expenses for the three and nine months ended September 30, 2020 increased by $0.5 million and $0.6 million from their respective periods in 2019. The increase was due primarily to a reversal of executive bonuses of approximately $0.4 million in 2019.
Arbitration Costs
The majority of cost in the third quarter associated with the Request for Arbitration against the Republic of Turkey was related to review and evaluation of the Republic of Turkey’s Counter-Memorial which was filed with ICSID on September 14, 2020. During the nine months ended September 30, 2020, the Company incurred arbitration related legal and expert consulting costs of $0.9 million, a $0.3 million increase over the $0.6 million of costs incurred during the same period in 2019. The increase was due to the significant activity in January 2020 leading up to and following the filing of the Company’s Memorial with ICSID on January 27, 2020 and costs in September 2020 to review and evaluate the Republic of Turkey’s Counter-Memorial. For further reference, see discussion in the Recent Developments section of this Part I and below at Part II, Item 1.
Other Income and Expenses
For the nine months ended September 30, 2020, the $0.4 million increase in other income compared to the nine months ended September 30, 2019 was primarily due to the $0.7 million loss on the sale of securities comprised of Laramide shares and warrants in the first half of 2019 offset by $0.3 million of interest income from the Laramide promissory note. No such losses or interest income was recorded over the same period in 2020.
FINANCIAL POSITION
Operating Activities
Net cash used in operating activities was $10.1 million for the nine months ended September 30, 2020, as compared with $7.2 million for the same period in 2019. The $2.9 million increase in cash used in operating activities was primarily due to increased graphite product development expenses, general and administrative expenses and arbitration costs in 2020 compared to 2019.
Investing Activities
Net cash used for investing activities for the nine months ended September 30, 2020 was $0.1 million for the purchase of equipment, as compared with $3.8 million of cash provided by investing activities for the nine months ended September 30, 2019. For the 2019 period, the Company received installment payments on the Laramide note in the amount of $0.8 million in cash. Additionally, the Company received net proceeds of $0.5 million from the sale of Laramide securities and $2.5 million from Uranium Royalty (USA) Corp. and Uranium Royalty Corp. (together “URC”) in accordance with the terms of the Asset Purchase Agreement signed on March 5, 2019. See Note 3 to our unaudited Condensed Consolidated Financial Statements included herewith for more information on the URC transaction and the Laramide note and securities.
Financing Activities
Net cash provided by financing activities was $13.9 million for the nine months ended September 30, 2020, resulting primarily from the proceeds of sales of common stock through the Company’s ATM Offering Agreement with Cantor Fitzgerald and the Company’s 2019 Purchase Agreement and 2020 Purchase Agreement with Lincoln Park. Additionally, $0.3 million was received from the PPP loan in May 2020. Net cash provided by financing activities for the same period in 2019 was $2.6 million. The $11.3 million increase was due to greater shelf registration capacity with which to offer registered shares under the Company’s financing agreement with Cantor and increased sales activity under the Company’s financing agreements with Lincoln Park in the first nine months of 2020 compared to the same period in 2019.
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LIQUIDITY AND CAPITAL RESOURCES
The Company last recorded revenues from operations in 2009. Since 2009, the Company has relied on equity financings, debt financings and asset sales to fund its operations. The Company expects to rely on debt and equity financing to fund its operations into the near future. The Company will also continue its cost reduction initiatives to identify ways to reduce its cash expenditures.
In 2016, the Company began to incorporate energy-related materials into its business plan. Between 2016 and 2020 the Company obtained mineral leases in Nevada and Utah and evaluated a green-fields exploration program for lithium. In 2018, the Company acquired Alabama Graphite Corp. and its Coosa Graphite Project for the purpose of developing the only commercial sized graphite mineral deposit in the contiguous United States and production of advanced graphite products for use in batteries. In the third quarter of 2020, as further discussed below and as further discussed in Note 8, the Company made the strategic decision to focus most of its resources on its graphite business, agreeing to the sale of its uranium business and discontinuing its investment in its lithium mineral properties.
As of September 30, 2020, execution of the business plan for development of the Coosa Graphite Project was underway, with the commissioning of pilot plants for processing flake graphite into battery grade graphite products. The start-up of operations for those plants is expected to commence before the end of 2020 or shortly thereafter. The Company expects the pilot plant phase to last into mid-2021. The Company will use the data generated from the pilot plant operations to inform the requirements and specifications for building a commercial sized graphite processing facility. Pursuant to the Company’s Preliminary Economic Assessment of the Coosa Graphite Project as modified, financing required for the estimated capital expenditures to construct the commercial plant is approximately $120 million. Subject to financing, the Company expects the construction phase for the commercial plant to begin in the second half of 2021 and be completed in mid-2022. The Company expects to begin generating revenues from sales of advanced graphite products from the Coosa Graphite Project in 2023.
While executing on its graphite business plan, the Company has continued to fulfill its obligation to restore and reclaim its legacy uranium properties in South Texas. These activities have resulted in expenditures of approximately $3.5 million per year, and these reclamation activities are expected to continue for an additional 4-5 years before completion. The Company has provided $9.3 million in performance obligation bonds to the Texas Commission for Environment Quality as financial assurance related to its permits and licenses in South Texas, and has a recorded liability of approximately $6.0 million for asset retirement obligations on its balance sheet (see Note 9). In addition to its South Texas uranium operations, the Company has spent about $0.5 million to $1.0 million annually to maintain its uranium mineral property holdings in New Mexico.
In furtherance of the Company’s strategic shift to graphite battery materials, on September 1, 2020 the Company entered into a Letter of Intent (“LOI”) to sell its U.S. uranium business, including its U.S. uranium exploration assets in New Mexico and idled production assets in Texas to enCore Energy Corp. (“enCore”) (see Note 8). The pending sale includes the elimination of the $9.3 million bonding liability, the elimination of the $6.0 million in asset retirement obligations, and the elimination of more than $4.0 million in annual expenditures related to reclamation and compliance costs at the Company’s Kingsville, Vasquez, and Rosita sites in South Texas and its New Mexico land holding costs. The Company anticipates that it will receive approximately US$2.0 million of enCore common stock and retain royalty interests on the New Mexico uranium properties as consideration for the sale. This transaction is expected to close on or before December 31, 2020. The Company will retain its uranium interests in Turkey, which are subject to ongoing international arbitration proceeding. The Company’s strategic shift to focus solely on its graphite business also resulted in its decision not to renew its lithium mineral leases in Nevada and Utah when the annual rentals of approximately $0.2 million came due in late August 2020.
At September 30, 2020 the Company’s cash balances were $5.5 million. During the month of October 2020, the Company sold 8.5 million shares of common stock for net proceeds of $50.2 million pursuant to its Controlled Equity Offering SM Sales Agreement with Cantor Fitzgerald & Co. (“Cantor”) and its Purchase Agreement with Lincoln Park Capital LLC (“Lincoln Park”) (see Note 17). The funding provided by these financing facilities has resulted in a cash balance of approximately $53.3 million at October 31, 2020. Management believes the significant treasury balance has mitigated the Company’s capital risk through 2021 as the Company’s 2021 non-discretionary budget, budgeted graphite pilot plant program and the remaining budgeted product development initiatives are now fully funded. The Company is
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pursuing project financing to support primary funding of the capital expenditures for construction of the commercial plant set to occur in the second half of 2021.
Management believes the Company’s current cash balance is sufficient to fund its planned non-discretionary expenditures through 2022. In addition to pursuing other project financing, the Company is evaluating the renewal of the Cantor and Lincoln Park financing facilities for use in funding any required contributions by the Company to support project financing for construction of the commercial graphite facility. While the Company has been successful in the past in raising funds through equity and debt financings as well as through the sale of non-core assets, no assurance can be given that additional financing will be available to it in amounts sufficient to meet its needs, or on terms acceptable to the Company. Stock price volatility and uncertain economic conditions caused by the COVID-19 pandemic could significantly impact the Company’s ability to raise funds through equity financing. In the event funds are not available for project financing to complete construction of the commercial facility in 2022, the Company will be able to fund its non-discretionary expenditures, however, the Company may be required to change our planned business strategies.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
With the exception of historical matters, the matters discussed in this report are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from projections or estimates contained herein. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, statements regarding the adequacy of funding, liquidity, the timing or occurrence of any future drilling or production from the Company’s properties, the ability of the Company to acquire additional properties or partner with other companies, the construction of pilot plant facilities and construction of commercial production facilities, the realization of expected benefits from recent business combinations and the Company’s anticipated cash burn rate and capital requirements. Words such as “may,” “could,” “should,” “would,” “believe,” “estimate,” “expect,” “anticipate,” “plan,” “forecast,” “potential,” “intend,” “continue,” “project” and variations of these words, comparable words and similar expressions generally indicate forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, among others:
● the spot price and long-term contract price of graphite and vanadium;
● the ability of the Company to enter into and successfully close acquisitions, dispositions or other material transactions;
● the Company’s ability to raise capital in the future;
● government regulation of the mining industry in the United States and a new federal administration;
● risks associated with our operations and the operations of our partners, including the impact of COVID-19;
● our expectations regarding the use of funds from the Company’s PPP Loan and the potential for loan forgiveness under the terms of the PPP Loan;
● operating conditions at our projects;
● the world-wide supply and demand of graphite and vanadium;
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● weather conditions;
● unanticipated geological, processing, regulatory and legal or other problems we may encounter;
● the results of our exploration activities, and the possibility that future exploration results may be materially less promising than initial exploration results;
● any graphite or vanadium discoveries not being in high enough concentration to make it economic to extract the metals;
● currently pending or new litigation or arbitration;
● our ability to continue to satisfy the listing requirements of the Nasdaq Capital Market;
● our ability to maintain and timely receive mining and other permits from regulatory agencies.
as well as other factors described elsewhere in this Quarterly Report on Form 10-Q, our 2019 Annual Report on Form 10-K and the other reports we file with the SEC. Most of these factors are beyond our ability to predict or control. Future events and actual results could differ materially from those set forth herein, contemplated by or underlying the forward-looking statements. Forward-looking statements speak only as of the date on which they are made. We disclaim any obligation to update any forward-looking statements made herein, except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information in our Quarterly Reports.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.