5E Advanced Materials, Inc. — Form 10-Q Summary
Reporting period: The supplied filing is for the quarter ended December 31, 2022 (the second quarter of fiscal 2023), not 2021 Q2 as stated in the request metadata. Amounts below are in U.S. dollars.
Business context
5E is developing its Fort Cady boron and lithium project in California and had not generated revenue from operations. The company was constructing a Small-Scale Facility and pursuing a larger-scale complex. Its shares trade on Nasdaq as FEAM.
Financial performance and position
| Metric | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Revenue | None | None |
| Operating expenses / operating loss | $11.2 million | $19.7 million |
| Net loss | $14.9 million; $0.34 per share | $10.3 million; $0.24 per share |
| Net cash used in operations | $16.2 million | |
| Cash used in investing | $16.1 million, including $15.9 million for construction in progress |
Quarterly operating expenses rose 3% from the prior-year quarter, while six-month expenses fell 8% year over year. The quarterly net loss widened 35%; the six-month net loss narrowed 50%, in part because results included an $11.7 million six-month derivative gain. No income tax expense or benefit was recorded. Margins are not meaningful because there was no operating revenue.
At December 31, cash and cash equivalents were $56.8 million, compared with $31.1 million at June 30, 2022; working capital was $45.3 million, versus $25.2 million. Total assets were $117.6 million and total liabilities $46.3 million. Construction in progress increased to $46.9 million from $25.6 million.
The company issued a $60 million senior secured convertible note in August 2022, due August 2027, convertible at $17.60 per share. Its carrying value, net of discount and issuance costs, was $33.1 million at quarter-end. It bears 4.5% annual interest if paid in cash or 6.0% if paid in additional notes and requires at least $10 million in cash. The reported effective interest rate was 25.7%. The note’s fair value was $43.1 million.
Material changes and unusual items
- Cash increased principally from $55.8 million of net proceeds from the convertible-note financing and $2.2 million from stock-option exercises.
- The embedded conversion feature was accounted for as a derivative until a related provision expired on November 26, 2022. Its $13.2 million fair value was transferred to additional paid-in capital. Fair-value changes drove a $2.2 million quarterly loss and an $11.7 million gain for the six-month period; management said no future related gains or losses were expected.
- Capital spending accelerated: construction in progress reached $46.9 million. The company reported $20 million of purchase-order commitments, including $6.2 million already reflected in liabilities; most commitments were expected to be settled by June 30, 2023.
- Quarterly project expenses increased 14%, while six-month project expenses declined 10%, primarily reflecting lower prior-year water-monitoring-well drilling costs, partly offset by current-period plugging and abandonment and construction-related costs.
Outlook, liquidity and risks
Management targeted initial boric-acid production in late Q1 or early Q2 of calendar 2023 and initial lithium-carbonate production in Q2 2023. Timing depended on commissioning and final EPA clearance to commence mining under the Underground Injection Control permit. The company was evaluating ways to accelerate larger-scale commercial production, seeking government funding and financing, and exploring customer and partner opportunities. A non-binding letter of intent with Estes Energetics contemplated collaboration on boron materials for solid rocket motors.
Under its normal business plan, management expected available cash to be exhausted in Q4 2023 absent additional financing. A modified plan, if initiated beginning in May 2023, was expected to preserve liquidity into Q1 2024; management said this plan alleviated substantial doubt about going concern. Financing remained uncertain, and the modified plan projected cash below the note’s $10 million covenant threshold by the end of February 2024. If not cured within 30 days, a covenant default could make the note immediately payable, which the company said it could not repay without further financing.
Risks cited include the need for additional capital, construction and commissioning execution, inflation and higher financing costs, macroeconomic conditions, and management turnover, including the search for a permanent CEO. Management disclosed a material weakness in internal control over financial reporting; although it had designed remediation measures, controls had not operated long enough to establish effectiveness. Disclosure controls were deemed ineffective as of December 31, 2022. No material legal proceedings were reported.
Important facts for investors to verify
- Confirm commissioning progress, EPA clearance, and whether targeted boric-acid and lithium-carbonate production dates were achieved.
- Track financing plans and cash burn against the Q4 2023 normal-plan runway, modified-plan assumptions, and the $10 million note covenant.
- Review the convertible note’s terms, carrying value, interest burden, conversion dilution potential, and any covenant compliance updates.
- Assess construction costs, outstanding purchase commitments, and the funding required for larger-scale development.
- Check whether the internal-control material weakness has been remediated and whether a permanent CEO has been appointed.