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 months ended March 31, 2021 has been prepared based on information available to us as of May 13, 2021. 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, 2020 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 44-year-old public company trading on the NYSE American Stock Exchange (“NYSE American”) 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 is focused on battery-grade 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
Graphite Processing Pilot Programs
During the quarter ended March 31, 2021, the Company continued its pilot plant operations at Dorfner Anzaplan’s facilities near Amberg, Germany, as well as at facilities in Frankfurt, Germany, Chicago, Illinois and Buffalo, New York. The combined effort at these facilities produced more than 11 metric tonnes of Westwater’s three battery-grade graphite products: ULTRA-PMG™, ULTRA-CSPG™ and ULTRA-DEXDG™, which were previously produced at a bench scale.
As of March 31, Westwater had produced:
● 9.7 metric tonnes of ULTRA-PMG™ in six sizes (6, 8, 10, 15, 30 and 44 microns): Production is now complete, and samples will be packaged and shipped to a laboratory for testing.
● 1.5 metric tonnes of the precursor (Spherical Purified Graphite) for ULTRA-CSPG™ in three sizes (10, 18 and 24 microns): Production of this product will continue until the first week of April, when samples will be packaged and shipped to a laboratory for testing and coating to make ULTRA-CSPG™.
● 0.2 metric tonnes of ULTRA-DEXDG™: Samples will be packaged and shipped to a laboratory for testing once production is finished in mid-April.
Westwater undertook its pilot program operations to inform and enhance design work for its commercial production facility and to produce products for testing by potential customers. The information from those operations is being incorporated into a Definitive Feasibility Study (“DFS”).
Definitive Feasibility Study on the Coosa Graphite Project
On February 4, 2021, Westwater entered into a Master Services Agreement (the “Master Services Agreement”) with Samuel Engineering, Inc. (“Samuel”) for various engineering support and consulting services in connection with the Company’s Coosa Graphite Project DFS.
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Under the terms of the Master Services Agreement and as a part of the DFS, Samuel is, among other things, conducting studies that address the Coosa Project’s location, raw materials, product quality, infrastructure and other preliminary assessments, which will provide cost estimates for Phases I and II of the Coosa Project, identifying long-lead items and providing detailed specifications for these items to be ordered, as well as preparing designs and drawings for the detailed engineering phase prior to construction.
The DFS is expected to be completed by the end of the second quarter of 2021. Westwater plans to utilize the DFS as a basis for engaging financial institutions and to start the construction of the plant, which is anticipated to begin around the end of 2021. Completion of Phase I is planned for the end of 2022, with production anticipated in 2023.
Vanadium Target Identification
In late November 2018, Westwater announced the discovery of significant concentration of vanadium mineralization at several locations, hosted in the graphitic schists at the Coosa Project. Westwater subsequently commenced the first of a four-phase exploration program designed to determine the extent, character and quality of the vanadium mineralization at the Coosa Project. As announced by the Company on February 19, 2019, the first phase demonstrated widespread positive values for vanadium that extended beyond the Coosa graphite deposit, as defined in the 2015 Preliminary Economic Assessment for the Coosa Project.
The second phase of this project began in April 2021. Scope for this effort includes drilling various targets to expand our knowledge of the geology, examining the core and/or cuttings for mineral constituents, and adding to our geologic model. In addition, vanadium mineralization is expected to be evaluated using extractive metallurgy techniques to ascertain any economic potential.
Graphite and Vanadium Listed as Critical Materials
On February 24, 2021, the President signed an Executive Order that seeks to provide for more resilient supply chains to revitalize and rebuild domestic manufacturing capacity and maintain America’s competitive edge in research and development. Graphite and vanadium are specifically named as critical minerals in which the U.S. is heavily dependent on China for its supply.
The President’s declaration asks the Secretary of Energy, as part of larger study involving several branches of the U.S. government, to submit a report within 100 days identifying risks to the supply chain for high-capacity batteries including those that power electric vehicles. This effort could be important to Westwater’s plans to develop its battery graphite business in the United States. The new order builds upon the prior Administration’s Executive Order issued on September 30, 2020 related to critical minerals.
The U.S. is 100% dependent on imports for battery-grade graphite, which is currently the primary anode material in the Lithium-Ion batteries that power smartphones, laptops, electric vehicles, and store power generated from intermittent renewable energy sources. Westwater intends to develop the Coosa Graphite Project to supply natural flake graphite for beneficiation into battery-grade graphite for all types of batteries.
Further details on the Executive Order on America’s Supply Chains can be found at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains/.
Westwater will work to support the efforts by the relevant agencies in the U.S. government and will ensure that they remain aware of the importance of battery-grade graphite, its importance to the nation’s security, and how the Coosa Graphite Project fits into the critical minerals-equation.
The COVID-19 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 and economies 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 to mandatory orders for non-
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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.
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 our employees and the communities where they work.
● Second, to work with our business partners to maintain the advanced graphite product development schedule in a safe and measured manner.
● Third , to ensure the Company has access to adequate financial liquidity to support key operations and business activities.
Westwater’s corporate business activities are largely unaffected at this time. Prior to March 1, 2021, Westwater reduced utilization of its offices and remote working arrangements were instituted to ensure that some employees were able to work remotely using systems that already were in place. On March 1, 2021, Westwater reopened its Centennial corporate facility and allowed employees to return to the office to work together with appropriate health protocols 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 has continued to restrict unnecessary travel, and ensured that employees are permitted to take time off due to illness or the illness of those around them without penalty.
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. Governments may also 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.
Equity Financings
Significant Capital Raises during the Quarter ended March 31, 2021
During the month of January 2021, the Company sold 9.3 million shares of common stock for net proceeds of $47.3 million pursuant to the ATM Offering Agreement with Cantor. These shares were sold pursuant to a prospectus supplement filed on December 4, 2020 pursuant to Rule 424(b)(5) as a takedown off the Company’s shelf registration statement which had been declared effective by the Securities and Exchange Commission on December 1, 2020.
During the months of February and March 2021, the Company sold 3.8 million shares of common stock for net proceeds of $24.9 million pursuant to the Purchase Agreement (the “December 2020 PA”) entered into with Lincoln Park. These shares were sold pursuant to a prospectus supplement filed on December 4, 2020 pursuant to Rule 424(b)(5) as a takedown off the Company’s shelf registration statement which had been declared effective by the Securities and Exchange Commission on December 1, 2020.
The receipt of combined net proceeds in the amount of $72.2 million from these financing facilities has resulted in a cash balance of approximately $118 million at March 31, 2021. The significant treasury balance has mitigated the Company’s capital risk through 2021 and 2022 as the Company’s budgeted pilot program for processing battery-grade
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graphite, the DFS and the remaining budgeted product development costs are now fully funded, and the Company will be able to make substantial initial investment in the commercial graphite processing facility in the latter half of 2021.
Transfer of Common Stock Listing to the NYSE American Stock Exchange
On March 8, 2021, Westwater Resources, Inc., acting pursuant to authorization from its Board of Directors, determined to voluntarily withdraw the listing of the Company's common stock, par value $0.001 per share, from The Nasdaq Capital Market (“Nasdaq”) and transfer the listing to the NYSE American. The Company informed Nasdaq on March 8, 2021 of its intent to transfer the listing of its common stock to the NYSE American. The Company’s listing and trading of its common stock on Nasdaq ended at market close on March 18, 2021, and trading began on the NYSE American on March 19, 2021. The Company’s common stock continues to trade under the ticker symbol “WWR” on the NYSE American.
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 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. Westwater filed its reply to the Counter-Memorial on March 17, 2021. The hearing on the substantive issues and damages is scheduled for September 13-17, 2021.
RESULTS OF OPERATIONS
Summary
Our consolidated net loss for the three months ended March 31, 2021 was $5.4 million, or $0.190 per share, as compared with a consolidated net loss of $3.3 million, or $0.82 per share for the same period in 2020. The $2.1 million increase in our consolidated net loss from the respective prior period in 2020 was primarily due to an increase in product development costs, arbitration costs and general and administrative costs, offset by the elimination of costs from discontinued operations.
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Product development expenses
For the three month period ended March 31, 2021, $1.8 million was spent on product development. Of that, approximately $1.2 million was related to our graphite processing pilot program with the remaining attributable to product testing, other lab work, shipping, travel, and other auxiliary costs associated with the Coosa Project.
Arbitration Costs
During the first quarter of 2021, Westwater incurred arbitration related legal and expert consulting costs of $1.5 million. This represents an increase of 114% or $0.8 million in costs associated with the Request for Arbitration against The Republic of Turkey since December 31, 2020. For further reference, see discussion above in the Recent Developments section of this Part I, Item 2 and in Part II, Item 1 below.
General and Administrative Expenses
Significant expenditures for general and administrative expenses for the three months ended March 31, 2021 and 2020 were:
For the Three months ended
March 31,
2021
2020
(thousands of dollars)
Stock compensation expense
$
91
$
—
Salaries and payroll burden
666
767
Legal, accounting, public company expenses
750
653
Insurance and bank fees
181
167
Consulting and professional services
204
30
Office expenses
94
90
Sales and marketing
20
14
Other expenses
78
58
Total general and administrative expenses
$
2,084
$
1,779
(Less) General and adminitrative expenses from discontinued operations
—
(417)
General and adminitrative expenses from continuing operations
$
2,084
$
1,362
General and administrative expenses for the three months ended March 31, 2021 increased by $0.3 million from the respective period in 2020. The difference is primarily due to increased legal and consulting expenses related to the Company’s Coosa Graphite Project.
FINANCIAL POSITION
Operating Activities
Net cash used in operating activities was $4.9 million for the three months ended March 31, 2021, as compared with $3.5 million for the same period in 2020. The $1.4 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 2021 compared to 2020.
Investing Activities
Net cash provided by investing activities was $0.3 million for the three months ended March 31, 2021 with no investing cash flows for the same period in 2020. The sole investing activity that resulted in cash flows for the three months
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ended March 31, 2021 was the receipt of $333,120 held in escrow for the balance of the outstanding PPP loan and accrued interest at December 31, 2020 when the loan was transferred to enCore with the sale of uranium subsidiaries (see Note 3). The loan was officially forgiven in full by the SBA on March 31, 2021 and the entire balance of the escrow fund was transferred to the Company’s operating account.
Financing Activities
Net cash provided by financing activities was $72.1 million for the three months ended March 31, 2021, resulting primarily from the proceeds of sales of common stock through the Company’s ATM Offering Agreement with Cantor and the Company’s 2020 Purchase Agreement with Lincoln Park. Net cash provided by financing activities for the same period in 2019 was $2.5 million. The $69.6 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 three months of 2021 compared to the same period in 2020.
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 for the foreseeable future. The Company will also continue its cost reduction initiatives to identify ways to reduce its cash expenditures.
In 2016, the Company began to expand its business plan into acquisition and development of energy-related materials. Between 2016 and 2020 the Company obtained lithium mineral leases in Nevada and Utah and acquired Alabama Graphite Corp. and its Coosa Graphite Project in Alabama in 2018 for the purpose of developing and mining a commercial sized graphite mineral deposit and processing the flake graphite into advanced graphite products for use in batteries. In the third quarter of 2020, the Company executed the strategic decision to focus most of its resources on its graphite business, discontinuing its investment in its lithium mineral properties and announced a proposed transaction to sell its uranium business enCore Energy Corp. (“enCore”). As discussed in Note 3, the sale to enCore closed on December 31, 2020 and included the elimination of a $9.3 million bonding liability, the elimination of $5.2 million in asset retirement obligations, and the elimination of more than $4.0 million in annual expenditures related to reclamation and compliance costs. The Company received approximately $1.8 million of enCore common stock and retained royalty interests on the New Mexico uranium properties as consideration for the sale. The Company retained its uranium interests in Turkey, which are subject to ongoing international arbitration proceeding.
During the first quarter of 2021, the Company primarily focused on graphite process development activities including operation of the pilot programs for processing flake graphite into battery-grade graphite products and the kickoff of a Definitive Feasibility Study (“DFS”) on the Coosa Graphite Project. The data generated and experience gained from operating the pilot programs will be used to inform the DFS and will also inform the requirements and specifications for building a commercial graphite processing facility.
On March 31, 2021, the Company’s cash balances were approximately $118 million. During the quarter ended 2021, the Company sold 9.3 million shares of common stock for net proceeds of $47.3 million pursuant to its Controlled Equity Offering SM Sales Agreement with Cantor Fitzgerald & Co. (“Cantor”) and 3.8 million shares of common stock for net proceeds of $24.9 million pursuant to the December 2020 PA (as defined below) with Lincoln Park Capital Fund, LLC (“Lincoln Park”) (see Note 7). As of March 31, 2021, the Company has no shares of common stock registered for sale under the ATM Offering Agreement and has sold approximately 19.9% of the outstanding shares of common stock as of the date of the Lincoln Park December 2020 PA.
The December 2020 PA specifically provides that the Company may not issue or sell any shares of its common stock under the agreement if such issuance exceeds 19.99% of the shares of the Company’s common stock outstanding immediately prior to the execution of the December 2020 PA unless (i) shareholder approval is obtained or (ii) the average price of all applicable sales of common stock to Lincoln Park under the December 2020 PA equals of exceeds $6.15 per share. The Company has scheduled its Annual Shareholders Meeting for May 21, 2021 and has included a proposal in its Proxy Statement which seeks shareholder approval of the issuance of more than 19.99% of the shares of the Company’s common stock outstanding on December 4, 2020. The December 2020 PA provides the Company with a reliable source
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of capital at low cost as compared to other sources, and the ability to access that capital when and as needed, which de-risks the Coosa Graphite Project.
The Company is also considering 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. The alternative sources of project financing could include, but are not limited to, convertible debt facility or pursuing a partnership or joint venture. The Company may pursue any one of the forgoing options, others not listed, or a combination of one or more. There can be no assurance that the Company will be able to access project financing at terms acceptable to the Company or at all.
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 continued use 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 processing 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 graphite processing facility in 2022, the Company will be able to fund its non-discretionary expenditures, however, the Company may be required to change its planned business development 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 (both flake graphite feedstock and purified graphite products) and vanadium, and the world-wide supply and demand of graphite and vanadium;
● government regulation of the mining industry in the United States;
● risks associated with our operations and the operations of our partners, including the impact of COVID-19;
● operating conditions at our mining and processing industries in the United States;
● unanticipated geological, processing, regulatory and legal or other problems we may encounter;
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● 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;
● our ability to finance growth plans;
● currently pending or new litigation or arbitration; and
● our ability to maintain and timely receive mining and other permits from regulatory agencies.
as well as other factors described in our Annual Report on Form 10-K for the year ended December 31, 2020 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.
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