5E Advanced Materials, Inc. (FEAM) Earnings Call Transcript & Summary

All right. As folks start filtering in, I really appreciate you guys making it right at the top of the IR. I'll say good morning, good afternoon or good evening, depending on where in the world you're heading in from. It's a very international audience today. So I appreciate everybody spending the time with us. I'm joined today by 5E Advanced Materials CEO, Paul Weibel; and Chairman, Graham van't Hoff. Gentlemen, thanks for joining me today.

Thanks very much.

Yes. No problem. So here's how today is going to work. I'm first going to throw it to Paul and Graham, beginning with Graham for just an overview on recent news for the company. Then I'll have some questions to go through, including those submitted in advance via e-mail, which I appreciate you guys sending those through. And finally, we're going to take a couple of questions from today's live audience. Now if for whatever reason, we don't get to your question today in the chat in the bottom right hand of your screen, whether that's because we ran out of time or already been covered, et cetera, don't worry, I'm still going to make sure that the 5E team gets them, so they can get back to you as soon as possible. I'll say that today's event is being recorded and will be available for replay probably tomorrow morning around afternoon time. I'm going to really quickly go through some legal text, so give me 1 second. I'll say before we begin, please note that certain information presented on this webinar will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve many risks and uncertainties that could cause actual results to materially differ from 5E's current expectations. Further information on these risks and uncertainties is contained in 5E's filings with the SEC and the risk factors of such filings in the forward-looking statement portions of the press release 5E issued earlier on the morning of January 14, 2025. Copies are available from the SEC on the 5E website at www.5eadvancedmaterials.com. The forward-looking statements made during today's call are based on 5E's current expectations, forecasts and beliefs, and 5E does not intend nor does take any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. With that out of the way, and my housekeeping generally, I'll pass it to Graham to start us off today.

Well done, Romeo, for getting through that quickly. So welcome, everyone, and thanks for joining us. As incoming Chairman, I wanted to make a few remarks before Paul will then go into the details of where we are. I'm sure a majority of you on this call share the vision of us bringing on a new world source of boron as boric acid, but also other boron derivatives. And that is the promise of what 5E Advanced Materials is all about. At the same time, I'm sure all of you are bitterly disappointed with our share price performance. And I can say that I am and everybody else on the team is also. The reality is that has stemmed from a number of big mistakes that were made in the period around 2021 and 2022, they stem from over-optimism, overpromise and a lack of attention to details. The consequences of that was that the small-scale facility that we brought on stream took too long for us to build. It was too expensive. It had design flaws, it had procurement flaws and that led to quality flaws, both in construction and in operations. And the consequence of that is costs and delays. And, of course, with cost and delays, that then created a liquidity drain, which is what we've been struggling with for the last 18 months. At the same time, if you go back to like middle of 2022, if you looked at the size of the management team, it was the kind of management team that you would have expected from a midsized revenue-generating company, not a pre-revenue startup. And so that meant we had too high G&A levels, which also was a drain on the liquidity. We still have some issues with the SSF, but the team has done an unbelievable job managing through those, and I'm completely confident we'll continue to do so. I think the team that we now have in place is a great team. It is small, it is highly motivated and it is high performing. This is not the team that created the problems, this is the team that is fixing the problems. Similarly, we've reduced the size of the Board. So we've cut down on the G&A from the Board. And what we have as a Board is now highly focused and driven to achieve the very best that we possibly can. I'm sure that many of you are disappointed with the share dilution involved with this deal. The reality is we needed money and the money was not forthcoming from other sources. The deal we now have is not perfect, but it does position us to have an ownership structure to attract new funds and to have committed backers into the future. We've made tremendous progress with our commercial plant design. It is really important to get this right for all the reasons that I've just spoken to that were negatively demonstrated with a small-scale facility. And we are continuing to uncover opportunities for improvement. The challenge is for us to get this finalized at a high quality as soon as we possibly can. And with that, we will enable a new technical report. We will enable the start of FEED and with that, the opportunity for new investment from third parties and from government. So that's the work of the next few months, and the team is absolutely committed to doing that as well as we possibly can. I'd like to thank all of you for being on this journey with us. I know it's been disappointing. And I think we all feel it, but you feel it a lot. So -- but thank you for being on this journey and staying on this journey with us. And with that, I'd like to hand over to Paul, and Paul is going to go into a lot more detail. So over to you, Paul.

Thanks, Graham. First here, I want to thank all in attendance for today's call. And I also want to thank and acknowledge 5E's team for their continued dedication and hard work and really determination as we continue to execute on the business plan, following up on Graham's remarks. Before I want to summarize the transaction, I want to emphasize that my expectation here for 2025 is that, we continue to build upon our operational success that we achieved in 2024, started authorization and mining activities, and then that segued to first product, samples going out and really steady state and ultimately culminated at the end of the year where we sold 22 super sacks and feedback on that has actually been really, really good, as that product went directly into blow and insulation in the U.S. market. But with that, yesterday, we did announce our restructuring support agreement, and that includes the following highlights. The company issued $5 million of convertible notes that had a conversion price of approximately $0.29. And then that outlines a path here where we will call a special meeting of shareholders. And upon a favorable a successful vote that RSA achieves the following. It will be a full equitization of all convertible notes where the company is going to issue approximately 312 million shares of common stock. Lenders who will then, at that point in time, be shareholders will subscribe to $5 million of the company's equity. That equity price will be struck at the conversion price of approximately $0.29 or a lower of 5-day VWAP or volume weighted average price post equitization. Lenders will receive 1-year warrants to purchase a number of shares of common stock with a value equal to an aggregate of $20 million. And then Ascend and Bluescape will each have a right to nominate 2 directors to the company's Board, which will be trimmed down to 4 on a go-forward basis. So with that, that kind of summarizes the high-level terms of the transaction, and I'll kind of pass it back off to Romeo here to kind of run through some Q&A.

I appreciate that very much, Paul. So I'm going to go through some questions. As a reminder, especially the folks who joined a bit late that you can answer questions in the chat box at the bottom right of your screen at any point during this presentation. So I'll start first off, and look, this was reflected in a few of the questions that were submitted via e-mail. How did you arrive at 80%, Paul?

Yes. And I think it's give or take, dependent on time and conversion. I think before it was approximately 79% and change. And then with the equity, it kind of ticks up to 81%. It depends if you're looking at it on a fully dilutive or non-dilutive basis. But what I think needs to be noted and Graham spoke to some of this is that we did test the equity markets on 3 different occasions in 2024. And if you look back and what was the result of that, we brought in $4 million of equity. And at each time, we had to go back to the noteholders, and we raised them $17 million in convertible debt. And each time we went to the market, the feedback was adamantly consistent. And yes, you're operationally excelling and you're progressing the business forward. But those notes, they're a problem, and they're an overhang. And so given that structure and the feedback we received on 3 different occasions, lenders were essentially becoming the majority of the financial support and that needed to change. And so with an equitization, what that solves for is ultimately a healthy and investable capital structure where, listen, lenders are going to forgo their priority on the cap structure, any rights under the notes, but this is contingent upon a successful vote, and that's going to be required. And from approximately this 80% level, this was agreed based on a negotiation that really struck a balance between what is shareholders' interest, hey, we needed money now and capital to continue funding the business. And then it compensates the lenders with an ownership level that they're comfortable to equitize and really give up that seniority in the capital structure.

I appreciate that. Not one that was written in, why weren't existing shareholders given to look to participate at these levels?

Yes. I think you can -- this dovetails on the back of the last question, which is like one leads to another. But we did test the markets on 3 different occasions and we had spoken with various groups of larger shareholders. And there was no term sheets submitted. And I was in an Australian trip in July and kind of walking through where we are today, where we're going. And someone tell me like, I am investing, I am buying the stock as long as the notes are there. And people were candid about the notes. And they were a barrier for the -- whether it's issuing capital or buying in the open market. And so as we -- kind of into December, we really needed to work through a structure to equitize the notes and secure immediate funding as essentially we had a cash covenant that had relief, but that was expiring December 31. And so we knew we needed to solve for that, and those are our 2 priority items. And so having an unlevered balance sheet that really is healthy with no debt really sets up the company for a longer-term success and positions the company to excel operationally. I'll say that the RSA docks do restrict our ability to offer securities during the pendency of this transaction without lenders' consent. But our Board and our lenders understand that, listen, this is a $300 million project and there's going to be additional capital required.

Appreciate that, too. So I have one question. Now that you're free from the restrictive debt levels, what are the anticipated use of funds in the near term?

Listen, I think the restructuring aside, like we're business as usual here, and we're focused on delivering. Funds are going to go to continuing production of boric acid for customer qualification. We continue to really track well with Fluor and our pre-FEED, and we've already kicked off our vendor testing program on with specific OEMs. Milestone-wise, we're really focused on getting enough tonnage here for specialty glass tank testing in the Asian markets as well as the offtakes on boric acid and calcium chloride. Following a successful vote here for shareholders this quarter, we're going to be free from restrictions, covenants once we can close this restructuring. And this comes with lenders giving a priority in the cap structure.

Makes sense. After the restructuring, how much, if any, debt will still be remaining on the balance sheet?

At least 3 small truckloads. So it goes from [indiscernible]. Okay.

I appreciate that. Graham, I'm going to get you in for the next one, if you don't mind. Curious if management or the Board are going to get retainment bonuses or any other additional financial incentives as part of this transaction.

Yes. So first of all, let me be clear that as part of the transaction, there is no cash retention. So that is not in the transaction. I think the Board and Compensation Committee will need to consider what may be an appropriate incentives to retain our talent going forward. I would say, as I look at it now, I do not envisage that any form of retention is needed for Board members. I think -- and I can say I've been contacted by more than one investor saying that I really hope that we're not going to lose some of our key management. And I would say I share that sentiment. And it is very important that we have enough incentive structure to make sure that, that indeed is the case. So our key management, and we're small, lean, and there's no real overlap of capabilities here. So we need to retain what we've got and we're happy with what we've got. And so I envisage we will probably need to do something, but we have not landed that at this point.

Appreciate that very much. Paul, what changed -- to the best of your ability to answer, what changed to give your lenders the confidence to rotate their positions from creditors to equity investors?

Listen, I think there's -- we've gotten to know the Bluescape team. We've gotten to know the Ascend team. It's visits with both of them and getting -- management getting to know our investors. And while I can't speak for the lenders, I believe it's a relationship we're building. They're our financial partner and our sponsors. And it's continued execution, commercial progress on what Mark and Kenneth are doing. Listen, the Ascend and Bluescape are both financial investors. They're going to listen to what the capital markets are telling us, what's the market saying? And it was saying that the current corporate structure is a challenge. And so that feedback with listening and knowing what the company has been doing and the progress we're making, while I can't speak for them is why I believe they're going to equitize. And so -- but we got to get a favorable shareholder vote. Their preference has really been want to see share price go higher. There's value and convexity in the con note. And their preference is to have investors -- other investors in the company. And so if the investment community and market are saying and the feedback is that minimal capital is going to come into the company with the notes on the balance sheet, we needed to work a solution to remove the debt. And so that's kind of -- that's where we -- which is where we are today.

And maybe just to add, Paul, at the risk of slight duplication, but just an add. I think that we all know that the discount that they're getting off the current share price is a frustration to -- or it would be a frustration to me sitting in an average investor shoes, frankly. So we understand that. At the same time, I'd say the -- what they are doing here is a huge positive, and that's for 2 reasons. And I think Paul said them, but I'll restate them, which is, first of all, I think that both of them recognize that them staying as notes holders was fundamentally not going to unlock our ability to get new investment into the future. And it was blocking it. And as long as they sat there, that was really not going to work. And the second thing I think is by stepping now to becoming equity holders like everybody else, obviously, they're exposed. And I think the fact that they are exposed means that they also have to be fundamentally committed. And I think that commitment is an excellent thing for us for the longer term. So I think we get into a fundamentally much better position. It does come with some level of pain right now, which we appreciate. But we think it's -- ultimately, it's the right thing going forward.

Thanks for additional context. The next question that's echoed by Adrian in the chat, which is how far do the funds from equitization and the additional equity purchases take you in terms of operations and advancing pre-FEED engineering? So really, with the new capital, how long of a time line does this fund based on anticipated burn rate?

Great. Thanks for the question. I appreciate the activity in the chat. So the first part of the funding package will give us runway to complete pre-FEED engineering. There was -- when we kind of announced that the byproduct is going to be calcium chloride that did push out pre-FEED a bit into a little bit later in the spring. So it gets us through that. We think that the move to calcium chloride, it's an industrial mineral. It's a better product to sell than gypsum. We've gotten that feedback already as we're talking to various groups. So it gets us through pre-FEED, PFS, all the vendor testing, really getting that builds and kind of stage gates over into the FEL-3 and the equitization also eliminates those cash covenants and kind of onerous rules that come with the notes and they could keep us running until June. And I think that kind of harmoniously aligns with -- I expect we will be at a point where we can stage gate to FEL-3, technical report will be in the market. And then obviously, the warrants then provide an additional pathway to continue funding the business. And we believe the exercise of the warrants fully funds the company to FID. So I think this -- yes, there's optionality with the warrants, but it's a tool in the toolbox and essentially as Bluescape and Ascend are essentially financial partners.

Next question also reflected in the chat. Just given the current price level and the volume of new shares, will you guys do anything like a reverse split to cure issues with the NASDAQ? And if so, what does that look like?

Yes. So, okay. I've gotten one-offs, whether just calls or e-mails on this -- and this ties directly to the NASDAQ deficiency. So there's 2 rules. One, you need to maintain a dollar stock. There's kind of exemptions you get 6-month periods to kind of work through that. Two is that, our book value of equity essentially is below $10 million and that's an accounting mechanism, but NASDAQ requires it to be above $10 million. And there's kind of nuances of why we got there. Some of are like crazy debt restructure and we had a loss last year because of the restructure. And while we're depreciating the small-scale facility over a smaller period because what we plan on building a much larger commercial facility. So all this kind of complicates into, well, you have a NASDAQ deficiency, couple of storms colliding. So we have a proxy statement that is scheduling our annual meeting on January 21. On that proxy, there's a proposal for a reverse split to maintain NASDAQ compliance. Barring any unforeseen changes, I anticipate that proposal will get passed and then essentially, the Board can effectuate the reverse split in a few weeks. And I think the range is like 13:1 to maybe 25:1. Don't hold me to it, but there's a range. And that final ratio is to be determined. And then additionally, a successful -- there will be another vote and a special meeting that essentially has -- if it's a favorable vote, notes equitized. And right now, you have a big liability that will go into equity and that satisfies the other NASDAQ deficiency and we would maintain the minimum book value deficiency. So there's solutions now proposed and at the table for what we hope will solve or we think will solve both deficiencies.

Okay. Post transaction, will 5E need any additional capital raises just to keep the company solvent?