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 six months ended June 30, 2021, has been prepared based on information available to us as of August 11, 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 Westwater 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 pivoted to 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 vanadium concentrations at the Coosa Project and is executing an exploration plan to further investigate the size and extent of those concentrations and increase our knowledge of the deposit as a whole.
RECENT DEVELOPMENTS
Graphite Processing Pilot Programs
During the quarter ended June 30, 2021, the Company continued, and is nearing completion of, its pilot program 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 approximately 13 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 June 30, 2021, Westwater had produced:
● 10.8 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.
● 2.0 metric tonnes of the precursor (Spherical Purified Graphite) for ULTRA-CSPG™ in three sizes (10, 18 and 24 microns): Production of this product is now complete and has been sent to a laboratory for pitch coating to make ULTRA-CSPG™, and test its electrical performance.
● 0.4 metric tonnes of ULTRA-DEXDG™: Production is now complete and samples were packaged and shipped to a laboratory for testing.
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 the DFS.
Graphite Processing Site Selection
On June 22, 2021, AGP entered into incentive agreements with the State of Alabama and local municipalities for the siting of the Company’s proposed graphite processing plant in Coosa County, Alabama. The incentive agreements provide certain tax credits and incentives under the Alabama Jobs Act in connection with the construction of the processing facility. The estimated tax credits and incentives pursuant to the incentive agreements are estimated by
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the State of Alabama at approximately $36 million. However, our ability to realize the tax credits and incentives is dependent upon actual capital invested, creating and maintaining jobs in Alabama, and the generation of future taxable income in Alabama.
On July 23, 2021, AGP entered into a land lease with the Lake Martin Area Industrial Development Authority, providing AGP rights to approximately 70 acres to construct and operate its commercial graphite processing facility in Coosa County, Alabama. The lease has a term of 10-years, a nominal lease payment, and transfer of title to AGP at the end of the lease term. Further, the lease provides AGP the option to purchase the land for a nominal amount during the term of the lease. At lease inception, the Company estimated the fair value of the land to be approximately $1.4 million.
Additions to the Executive Team
After a comprehensive search process that yielded many highly qualified candidates, Westwater hired Chad M. Potter as Westwater’s Chief Operating Officer on August 2, 2021. Mr. Potter is a proven operations leader, whose unique skills and experience will be instrumental in leading Westwater and its subsidiaries through the construction, development, and future operation the Coosa Graphite Project. The addition of Mr. Potter will help position Westwater’s American-made battery graphite operations as best in class with a focus on safety, quality, integrity, and the protection of our environment.
In the second quarter, after completing a comprehensive search process, Westwater hired Steven M. Cates as Westwater’s Chief Accounting Officer and Controller on May 10, 2021. Mr. Cates is a proven financial manager whose skills and experience will be instrumental in this stage of anticipated growth and value creation at Westwater.
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 Project DFS.
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 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 third quarter of 2021. Westwater plans to utilize the DFS as a basis for Board approval of the project, engaging one or more engineering, procurement, construction and management (“EPCM”) companies to complete the design and start the construction of the commercial plant. Construction is anticipated to begin around the end of 2021. Completion of construction of Phase I of the plant is planned for the end of 2022, with operations anticipated in 2023.
Vanadium Target Identification
In late November 2018, Westwater announced the discovery of a concentration of vanadium mineralization at several locations 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 graphite deposit, as defined in the 2015 Preliminary Economic Assessment for the site.
The second phase of the vanadium exploration project began in April 2021 and is expected to continue throughout the remainder of the year. Scope for this effort includes drilling various targets to expand the Company’s knowledge of the geology, examining the core and/or cuttings for mineral constituents, and adding to the existing geologic model. In addition, vanadium mineralization is expected to be evaluated using extractive metallurgy techniques to ascertain any economic potential.
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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 asked the Secretary of Energy, as part of larger study involving several branches of the U.S. government, to submit a report identifying risks to the supply chain for high-capacity batteries including those that power electric vehicles. On June 8, 2021, the White House released a response to the findings of this study in support of securing an end-to-end domestic supply chain for advanced batteries, including investment in domestic production and processing of critical minerals. Key recommendations in the June 8 th release include, among other things, providing funding and financial incentives to encourage consumer adoption of electric vehicles, providing financing to support advanced batter production, and investing in the development of next generation batteries. The new order, and the key recommendations in the June 8 th White House release, build upon the prior Administration’s Executive Order issued on September 30, 2020, related to critical minerals, and could be important to Westwater’s plans to develop its battery graphite business in the United States.
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 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/.
Further details on the June 8, 2021 White House press release can be found at https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/08/fact-sheet-biden-harris-administration-announces-supply-chain-disruptions-task-force-to-address-short-term-supply-chain-discontinuities/
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 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-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.
To the extent that the COVID 19 pandemic continues or worsens, including by reason of the emergence of variant strains of the virus, 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
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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.
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.
Equity Financings
Capital Raises during the three and six months ended June 30, 2021
During the month of June 2021, the Company sold 1.2 million shares of common stock for net proceeds of $5.7 million pursuant to 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.
During the first six months of 2021, the Company has received net proceeds of $77.9 million from its equity facilities, resulting in a cash balance of approximately $119 million at June 30, 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 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 Coosa County, Alabama 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.
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RESULTS OF OPERATIONS
Summary
Our consolidated net loss for the three months ended June 30, 2021, was $3.5 million, or $0.11 per share, as compared with a consolidated net loss of $2.5 million, or $0.43 per share for the same period in 2020. The $1.0 million increase in our consolidated net loss from the respective prior period in 2020 was due to an increase in product development, exploration, and general and administrative costs; offset partially by the elimination of costs from discontinued operations, and an unrealized gain related to the enCore common stock.
For the six months ended June 30, 2021, our consolidated net loss was $8.9 million, or $0.29 per share, as compared with a consolidated net loss of $5.8 million, or $1.18 per share for the same period in 2020. The $ 3.1 million increase in our consolidated net loss from the respective prior period in 2020 was primarily due to an increase in product development, arbitration, general and administrative, and exploration expenses; offset partially by the elimination of costs from discontinued operations, and an unrealized gain related to the enCore common stock.
Product development expenses
For the three and six month period ended June 30, 2021, $2.1 million and $3.9 million was spent on product development, respectively. Of that, approximately $0.7 million and $1.9 million was related to our graphite processing pilot program for the three and six months ended June 30, 2021, respectively. The remaining product development costs for both the three and six month periods related to product testing, other lab work, shipping, required travel, and other auxiliary costs associated with the Coosa Project.
Arbitration Costs
During the first two quarters 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 compared to the six months ended June 30, 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 and six months ended June 30, 2021, and 2020 were:
For the Three months ended
For the Six months ended
June 30,
June 30,
2021
2020
2021
2020
(thousands of dollars)
Stock compensation expense
$
204
$
28
$
295
$
28
Salaries and payroll burden
593
766
1,259
1,533
Legal, accounting, public company expenses
786
470
1,536
1,123
Insurance and bank fees
142
167
323
333
Consulting and professional services
181
74
385
104
Office expenses
114
110
207
201
Sales and marketing
158
41
237
99
Other expenses
20
3
40
17
Total general and administrative expenses
$
2,198
$
1,659
$
4,282
$
3,438
(Less) General and administrative expenses from discontinued operations
—
(433)
—
(850)
General and administrative expenses from continuing operations
$
2,198
$
1,226
$
4,282
$
2,588
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General and administrative expenses for the three and six month periods ended June 30, 2021, increased by $0.5 million and $0.8 million from their respective periods in 2020, due primarily to higher costs related to the annual shareholder meeting, an increase in stock compensation in 2021, and higher costs related to the Company’s sales and marketing efforts. These increases were offset partially by lower personnel costs due to the sale of our uranium business at December 31, 2020.
FINANCIAL POSITION
Operating Activities
Net cash used in operating activities was $9.1 million for the six months ended June 30, 2021, as compared with $6.1 million for the same period in 2020. The $3.0 million increase in cash used in operating activities was primarily due to increased graphite product development, exploration, general and administrative and arbitration costs in 2021 compared to 2020.
Investing Activities
Net cash provided by investing activities was $0.2 million for the six months ended June 30, 2021, as compared to net cash used of $0.1 million in investing activities for the same period in 2020. The change was a result of the receipt of $0.3 million held in escrow for the balance of the outstanding Paycheck Protection Program 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 Small Business Administration 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 $77.7 million for the six months ended June 30, 2021, due to sales of common stock through the Company’s ATM Offering Agreement with Cantor and the Company’s December 2020 PA with Lincoln Park. Net cash provided by financing activities for the same period in 2020 was $6.6 million. The $71.1 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 during the first six 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. First, in 2016 the Company obtained lithium mineral leases in Nevada and Utah as an exploration opportunity. Then, in 2018 the Company acquired Alabama Graphite Corp. and its Coosa Graphite Project in Alabama for the purpose of developing 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 its resources on the graphite business in Alabama, discontinuing its investment in its lithium mineral properties and selling its uranium business, located in Texas and New Mexico, to 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 proceedings, in which the Company is seeking damages.
During the first six months of 2021, the Company focused on graphite process development activities including operation of a pilot program for processing flake graphite into battery-grade graphite products and the initiation of a
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Definitive Feasibility Study (“DFS”) on the Coosa Graphite Project. The data generated and experience gained from operating the pilot program are being used to inform the DFS and will also inform the requirements and specifications for building a commercial graphite processing facility.
On June 30, 2021, the Company’s cash balance was approximately $119 million. During the six months ended June 30, 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 and 5.0 million shares of common stock for net proceeds of $30.6 million pursuant to the December 2020 PA with Lincoln Park (see Note 7). As of June 30, 2021, the Company has no shares of common stock registered for sale under the ATM Offering Agreement and has 10,800,000 of common stock available for future sales pursuant to the Lincoln Park December 2020 PA.
Management believes the Company’s current cash balance is sufficient to fund its planned non-discretionary expenditures through 2022. The Company is evaluating the continued use of the Cantor and Lincoln Park financing facilities to support 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 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, including the recent emergence of variant strains of the virus, could significantly impact the Company’s ability to raise funds through equity financing. Market conditions, including but not limited to, inflation and supply change disruptions could adversely impact the planned cost of the Company’s commercial graphite processing facility. Along with evaluating the continued use of the Cantor and Lincoln Park financing facilities, the Company may consider project financing to fund the construction of the commercial graphite processing facility. The alternative sources of project financing could include, but are not limited to, convertible debt or pursuing a partnership or joint venture.
In the event funds are not available for project financing to complete construction of the commercial graphite processing facility in 2022, the Company expects to 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 and processing industries in the United States;
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● risks associated with our operations and the operations of our partners, including the impact of COVID-19 and supply chain disruptions;
● operating conditions at our mining and processing facilities in the United States;
● 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;
● 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.
In addition, other factors are 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.
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.