ENERGY FUELS INC - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-36204
ENERGY FUELS INC.
(Exact name of registrant as specified in its charter)
| Ontario, | Canada | 98-1067994 | ||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 225 Union Blvd., | Suite 600 | |||||||
| Lakewood, | Colorado | 80228 | ||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(303) 974-2140
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common shares, no par value | UUUU | NYSE American | ||||||
| EFR | Toronto Stock Exchange | |||||||
| Warrants to purchase common shares | UUUU-WT | NYSE American | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes ☐ No ☒
As of October 30, 2020, the registrant had 131,074,328 common shares, without par value, outstanding.
ENERGY FUELS INC.
FORM 10-Q
For the Quarter Ended September 30, 2020
INDEX
| Page | |||||
PART I – FINANCIAL INFORMATION | |||||
PART II – OTHER INFORMATION | |||||
SIGNATURES | |||||
3
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report and the exhibits attached hereto (the “Quarterly Report”) contain “forward-looking statements” within the meaning of applicable United States ("U.S.") and Canadian securities laws, which are included but are not limited to statements with respect to Energy Fuels Inc.’s (the “Company” or “Energy Fuels”) anticipated results and progress of the Company’s operations in future periods, planned exploration, if warranted, development of its properties, plans related to its business, and other matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management.
Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, schedules, assumptions, future events, or performance (often, but not always, using words or phrases such as “expects” or “does not expect,” “is expected,” “is likely,” “budget,” “scheduled," "forecasts,” "intends,” “anticipates” or “does not anticipate,” "continues," “plans,” “estimates,” or “believes,” and similar expressions or variations of such words and phrases or statements stating that certain actions, events or results “may,” “could,” “would,” “might,” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements.
Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made. Energy Fuels believes that the expectations reflected in these forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct, and such forward-looking statements included in, or incorporated by reference into, this Quarterly Report should not be unduly relied upon. This information speaks only as of the date of this Quarterly Report.
Readers are cautioned that it would be unreasonable to rely on any such forward-looking statements and information as creating any legal rights, and that the statements and information are not guarantees and may involve known and unknown risks and uncertainties, and that actual results are likely to differ (and may differ materially) and objectives and strategies may differ or change from those expressed or implied in the forward-looking statements or information as a result of various factors. Such risks and uncertainties include global economic risks such as the occurrence of a pandemic and risks generally encountered in the exploration, development, operation, and closure of mineral properties and processing and recovery facilities, as well as risks related to the activities proposed in the President’s Budget for fiscal year 2021, including the establishment of a Uranium Reserve for the United States, and risks related to any additional recommendations of the United States Nuclear Fuel Working Group not benefiting the Company in any material way. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:
•global economic risks, including the occurrence of unforeseen or catastrophic events, such as the emergence of a pandemic or other widespread health emergency (or concerns over the possibility of such an emergency), which could create economic and financial disruptions and require the Company to reduce or cease operations at some or all of its facilities for an indeterminate period of time, and which could have a material impact on the Company’s business, operations, personnel and financial condition;
•risks associated with mineral reserve and resource estimates, including the risk of errors in assumptions or methodologies;
•risks associated with estimating mineral extraction and recovery, forecasting future price levels necessary to support mineral extraction and recovery, and the Company’s ability to increase mineral extraction and recovery in response to any increases in commodity prices or other market conditions;
•uncertainties and liabilities inherent to conventional mineral extraction and recovery and/or in-situ uranium recovery operations;
•risks associated with the activities proposed in the President’s Budget for fiscal year 2021, including the establishment of a Uranium Reserve for the United States, being subject to appropriation by the Congress of the United States, and the details of implementation of the President’s Budget not yet having been defined;
•risks associated with any additional recommendations of the U.S. Nuclear Fuel Working Group not benefiting the Company in any material way;
•geological, technical and processing problems, including unanticipated metallurgical difficulties, less than expected recoveries, ground control problems, process upsets, and equipment malfunctions;
•risks associated with the depletion of existing mineral resources through mining or extraction, without replacement with comparable resources;
•risks associated with identifying and obtaining adequate quantities of alternate feed materials and other feed sources required for operation of the White Mesa Mill in Utah;
•risks associated with labor costs, labor disturbances, and unavailability of skilled labor;
4
•risks associated with the availability and/or fluctuations in the costs of raw materials and consumables used in the Company’s production processes;
•risks and costs associated with environmental compliance and permitting, including those created by changes in environmental legislation and regulation, and delays in obtaining permits and licenses that could impact expected mineral extraction and recovery levels and costs;
•actions taken by regulatory authorities with respect to mineral extraction and recovery activities;
•risks associated with the Company’s dependence on third parties in the provision of transportation and other critical services;
•risks associated with the ability of the Company to obtain, extend or renew land tenure, including mineral leases and surface use agreements, on favorable terms or at all;
•risks associated with the ability of the Company to negotiate access rights on certain properties on favorable terms or at all;
•the adequacy of the Company's insurance coverage;
•uncertainty as to reclamation and decommissioning liabilities;
•the ability of the Company’s bonding companies to require increases in the collateral required to secure reclamation obligations;
•the potential for, and outcome of, litigation and other legal proceedings, including potential injunctions pending the outcome of such litigation and proceedings;
•the ability of the Company to meet its obligations to its creditors;
•the ability of the Company to access credit facilities on favorable terms;
•risks associated with paying off indebtedness at its maturity;
•risks associated with the Company’s relationships with its business and joint venture partners;
•failure to obtain industry partner, government, and other third-party consents and approvals, when required;
•competition for, among other things, capital, mineral properties, and skilled personnel;
•failure to complete and integrate proposed acquisitions and incorrect assessments of the value of completed acquisitions;
•risks posed by fluctuations in share price levels, exchange rates and interest rates, and general economic conditions;
•risks inherent in the Company’s and industry analysts’ forecasts or predictions of future uranium, vanadium and copper price levels;
•fluctuations in the market prices of uranium, vanadium and copper, which are cyclical and subject to substantial price fluctuations;
•risks associated with the Company's uranium sales, if any, being required to be made at spot prices, unless the Company is able to enter into new long-term contracts at satisfactory prices in the future;
•risks associated with the Company's vanadium sales, if any, generally being required to be made at spot prices;
•failure to obtain suitable uranium sales terms at satisfactory prices in the future, including spot and term sale contracts;
•failure to obtain suitable vanadium sales terms at satisfactory prices in the future;
•risks associated with asset impairment as a result of market conditions;
•risks associated with lack of access to markets and the ability to access capital;
•public resistance to nuclear energy or uranium extraction and recovery;
•Governmental resistance to nuclear energy or uranium extraction or recovery;
•risks associated with inaccurate or nonobjective media coverage of the Company's activities and the impact such coverage may have on the public, the market for the Company's securities, government relations, permitting activities and legal challenges, as well as the costs to the Company of responding to such coverage;
•uranium industry competition, international trade restrictions and the impacts on world commodity prices of foreign state subsidized production;
•risks associated with the Company's involvement in industry petitions for trade remedies, including the costs of pursuing such remedies and the potential for negative responses or repercussions from various interest groups, consumers of uranium and participants in other phases of the nuclear fuel cycle;
•risks associated with governmental actions, policies, laws, rules and regulations with respect to nuclear energy or uranium extraction and recovery;
5
•risks related to potentially higher than expected costs related to any of the Company's projects or facilities;
•risks associated with the Company’s ability to recover vanadium from pond solutions at the White Mesa Mill;
•risks related to the Company’s ability to recover copper from our Canyon uranium project ores;
•risks related to securities regulations;
•risks related to stock price and volume volatility;
•risks related to the Company's ability to maintain our listing on the NYSE American and Toronto Stock Exchanges;
•risks related to the Company's ability to maintain our inclusion in various stock indices;
•risks related to dilution of currently outstanding shares, from additional share issuances, depletion of assets or otherwise;
•risks related to the Company's lack of dividends;
•risks related to recent market events;
•risks related to the Company's issuance of additional common shares ("the Common Shares") under our At-the-Market ("ATM") program or otherwise to provide adequate liquidity in depressed commodity market circumstances;
•risks related to acquisition and integration issues;
•risks related to defects in title to the Company's mineral properties;
•risks related to the Company's securities; and
•risks related to any material weakness that may be identified in our internal controls over financial reporting. If we are unable to implement and maintain effective internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
This list is not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the section heading: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report. Although we have attempted to identify important factors that could cause actual results to differ materially from those described in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated, or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by law, we disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Statements relating to “Mineral Reserves” or “Mineral Resources” are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the Mineral Reserves and Mineral Resources described may be profitably extracted in the future.
We qualify all the forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements.
6
Cautionary Note to United States Investors Concerning Disclosure of Mineral Resources
The Company is a U.S. Domestic Issuer for United States ("U.S.") Securities and Exchange Commission ("SEC") purposes, most of its shareholders are U.S. residents, the Company is required to report its financial results under U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), and its primary trading market is the NYSE American. However, because the Company is incorporated in Canada and also listed on the Toronto Stock Exchange ("TSX"), this Quarterly Report contains certain disclosure that satisfies the additional requirements of Canadian securities laws, which differ from the requirements of United States’ securities laws. Unless otherwise indicated, all reserve and resource estimates included in this Quarterly Report, and in the documents incorporated by reference herein, have been prepared in accordance with Canadian National Instrument 43-101 - Standards of Disclosure for Mineral Projects (“NI 43-101”) and the Canadian Institute of Mining, Metallurgy and Petroleum (“CIM”) classification system. NI 43-101 is a rule developed by the Canadian Securities Administrators (the “CSA”), which establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects.
Canadian standards, including NI 43-101, differ significantly from the requirements of SEC Industry Guide 7, and reserve and resource information contained herein, or incorporated by reference in this Quarterly Report, and in the documents incorporated by reference herein, may not be comparable to similar information disclosed by companies reporting reserve and resource information under SEC Industry Guide 7. In particular, and without limiting the generality of the foregoing, the term “resource” does not equate to the term “reserve” under SEC Industry Guide 7. Under SEC Industry Guide 7 standards, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. Under SEC Industry Guide 7 standards, a “final” or “bankable” feasibility study is required to report reserves; the three-year historical average price, to the extent possible, is used in any reserve or cash flow analysis to designate reserves; and the primary environmental analysis or report must be filed with the appropriate governmental authority.
SEC Industry Guide 7 disclosure standards historically have not permitted the inclusion of information concerning “Measured Mineral Resources,” “Indicated Mineral Resources” or “Inferred Mineral Resources” or other descriptions of the amount of mineralization in mineral deposits that do not constitute “reserves” by SEC Industry Guide 7 standards. United States investors should also understand that “Inferred Mineral Resources” have a great amount of uncertainty as to their existence and as to their economic and legal feasibility. It cannot be assumed that all or any part of an “Inferred Mineral Resource” will ever be upgraded to a higher category. Under Canadian rules, estimated “Inferred Mineral Resources” may not form the basis of feasibility or pre-feasibility studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into mineral reserves. Investors are cautioned not to assume that all or any part of an “Inferred Mineral Resource” exists or is economically or legally mineable.
Disclosure of “contained pounds” or “contained ounces” in a resource estimate is permitted and typical disclosure under Canadian regulations; however, SEC Industry Guide 7 historically only permitted issuers to report mineralization that does not constitute “reserves” by SEC standards as in-place tonnage and grade without reference to unit measures. The requirements of NI 43-101 for identification of “reserves” are also not the same as those of SEC Industry Guide 7, and reserves reported by the Company in compliance with NI 43-101 may not qualify as “reserves” under SEC Industry Guide 7 standards. Accordingly, information concerning mineral deposits set forth herein may not be comparable to information made public by companies that report in accordance with SEC Industry Guide 7 standards.
On October 31, 2018, the SEC adopted the Modernization of Property Disclosures for Mining Registrants (the “New Rule”), introducing significant changes to the existing mining disclosure framework to better align it with international industry and regulatory practice including NI 43-101. The SEC adopted a two-year transition period for registrants to come into compliance with the New Rule. Accordingly, the Company will need to bring its disclosure into compliance in 2021. At this time, the Company does not know the full effect of the New Rule on its mineral resources and reserves and therefore the disclosure related to the Company’s mineral resources and reserves may be significantly different when computed using the requirements set forth in the New Rule.
7
PART I
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ENERGY FUELS INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited) (Expressed in thousands of U.S. dollars, except per share amounts)
| Three months ended | Nine months ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Uranium concentrates | $ | — | $ | — | $ | — | $ | 66 | |||||||||||||||
| Vanadium concentrates | — | 16 | — | 1,957 | |||||||||||||||||||
| Alternate feed materials processing and other | 486 | 407 | 1,274 | 3,141 | |||||||||||||||||||
| Total revenues | 486 | 423 | 1,274 | 5,164 | |||||||||||||||||||
| Costs and expenses applicable to revenues | |||||||||||||||||||||||
| Costs and expenses applicable to uranium concentrates | — | — | — | 63 | |||||||||||||||||||
| Costs and expenses applicable to vanadium concentrates | — | 16 | — | 1,476 | |||||||||||||||||||
| Costs and expenses applicable to alternate feed materials and other | — | — | — | 2,079 | |||||||||||||||||||
| Total costs and expenses applicable to revenues | — | 16 | — | 3,618 | |||||||||||||||||||
| Other operating costs | |||||||||||||||||||||||
| Impairment of inventories | 138 | 2,330 | 1,644 | 8,412 | |||||||||||||||||||
| Development, permitting and land holding | 1,944 | 2,310 | 2,681 | 8,051 | |||||||||||||||||||
| Standby costs | 3,451 | 869 | 8,104 | 3,204 | |||||||||||||||||||
| Accretion of asset retirement obligation | 478 | 484 | 1,434 | 1,478 | |||||||||||||||||||
| Selling costs | 3 | 30 | 15 | 167 | |||||||||||||||||||
| General and administration | 3,820 | 3,216 | 11,020 | 10,692 | |||||||||||||||||||
| Total operating loss | (9,348) | (8,832) | (23,624) | (30,458) | |||||||||||||||||||
| Interest expense | (218) | (419) | (913) | (1,110) | |||||||||||||||||||
| Other income | 628 | 2,312 | 1,745 | 3,181 | |||||||||||||||||||
| Net loss | (8,938) | (6,939) | (22,792) | (28,387) | |||||||||||||||||||
| Items that may be reclassified in the future to profit and loss | |||||||||||||||||||||||
| Foreign currency translation adjustment | (171) | 241 | (398) | (666) | |||||||||||||||||||
| Other comprehensive income (loss) | (171) | 241 | (398) | (666) | |||||||||||||||||||
| Comprehensive loss | $ | (9,109) | $ | (6,698) | $ | (23,190) | $ | (29,053) | |||||||||||||||
| Net loss attributable to: | |||||||||||||||||||||||
| Owners of the Company | $ | (8,855) | $ | (6,840) | $ | (22,699) | $ | (28,279) | |||||||||||||||
| Non-controlling interests | (83) | (99) | (93) | (108) | |||||||||||||||||||
| $ | (8,938) | $ | (6,939) | $ | (22,792) | $ | (28,387) | ||||||||||||||||
| Comprehensive loss attributable to: | |||||||||||||||||||||||
| Owners of the Company | $ | (9,026) | $ | (6,599) | $ | (23,097) | $ | (28,945) | |||||||||||||||
| Non-controlling interests | (83) | (99) | (93) | (108) | |||||||||||||||||||
| $ | (9,109) | $ | (6,698) | $ | (23,190) | $ | (29,053) | ||||||||||||||||
| Basic and diluted loss per share | $ | (0.08) | $ | (0.07) | $ | (0.19) | $ | (0.30) | |||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
8
ENERGY FUELS INC.
Condensed Consolidated Balance Sheets
(unaudited) (Expressed in thousands of U.S. dollars, except share amounts)
| September 30, 2020 | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 26,584 | $ | 12,810 | |||||||
| Marketable securities | 1,538 | 4,838 | |||||||||
| Trade and other receivables, net | 964 | 1,254 | |||||||||
| Inventories, net | 27,420 | 22,808 | |||||||||
| Prepaid expenses and other assets | 1,903 | 1,462 | |||||||||
| Total current assets | 58,409 | 43,172 | |||||||||
| Inventories, net | 1,149 | 1,149 | |||||||||
| Operating lease right of use asset | 722 | 922 | |||||||||
| Investments accounted for at fair value | 566 | 654 | |||||||||
| Property, plant and equipment, net | 24,299 | 26,203 | |||||||||
| Mineral properties, net | 83,539 | 83,539 | |||||||||
| Restricted cash | 20,228 | 20,081 | |||||||||
| Total assets | $ | 188,912 | $ | 175,720 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable and accrued liabilities | $ | 3,002 | $ | 5,438 | |||||||
| Current portion of operating lease liability | 281 | 288 | |||||||||
| Current portion of warrant liabilities | 2,499 | — | |||||||||
| Current portion of asset retirement obligation | 46 | 46 | |||||||||
| Current portion of loans and borrowings | 7,898 | 16,866 | |||||||||
| Total current liabilities | 13,726 | 22,638 | |||||||||
| Warrant liabilities | — | 2,791 | |||||||||
| Operating lease liability | 544 | 758 | |||||||||
| Asset retirement obligation | 20,360 | 18,926 | |||||||||
| Total liabilities | 34,630 | 45,113 | |||||||||
| Equity | |||||||||||
Share capital Common shares, without par value, unlimited shares authorized; shares issued and outstanding 130,273,504 at September 30, 2020 and 100,735,889 at December 31, 2019 | 540,690 | 493,958 | |||||||||
| Accumulated deficit | (392,735) | (370,036) | |||||||||
| Accumulated other comprehensive income | 2,591 | 2,989 | |||||||||
| Total shareholders' equity | 150,546 | 126,911 | |||||||||
| Non-controlling interests | 3,736 | 3,696 | |||||||||
| Total equity | 154,282 | 130,607 | |||||||||
| Total liabilities and equity | $ | 188,912 | $ | 175,720 | |||||||
| Commitments and contingencies (Note 14) | |||||||||||
See accompanying notes to the condensed consolidated financial statements.
9
ENERGY FUELS INC.
Condensed Consolidated Statements of Changes in Equity
(unaudited) (Expressed in thousands of U.S. dollars, except share amounts)
| Common Stock | Deficit | Accumulated other comprehensive income | Total shareholders' equity | Non-controlling interests | Total equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 100,735,889 | $ | 493,958 | $ | (370,036) | $ | 2,989 | $ | 126,911 | $ | 3,696 | $ | 130,607 | ||||||||||||||||||||||||||||
| Net loss | — | — | (5,657) | — | (5,657) | (7) | (5,664) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | 152 | 152 | — | 152 | ||||||||||||||||||||||||||||||||||
| Shares issued for cash by public offering | 11,300,000 | 16,611 | — | — | 16,611 | — | 16,611 | ||||||||||||||||||||||||||||||||||
| Shares issued for cash by at-the-market offering | 2,388,815 | 4,047 | — | — | 4,047 | — | 4,047 | ||||||||||||||||||||||||||||||||||
| Share issuance cost | — | (1,563) | — | — | (1,563) | — | (1,563) | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 997 | — | — | 997 | — | 997 | ||||||||||||||||||||||||||||||||||
| Shares issued for the vesting of restricted stock units | 490,453 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Cash paid to fund employee income tax withholding due upon vesting of restricted stock units | — | (415) | — | — | (415) | — | (415) | ||||||||||||||||||||||||||||||||||
| Shares issued for consulting services | 30,000 | 57 | — | — | 57 | — | 57 | ||||||||||||||||||||||||||||||||||
| Contributions attributable to non-controlling interest | — | — | — | — | — | 133 | 133 | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | 114,945,157 | $ | 513,692 | $ | (375,693) | $ | 3,141 | $ | 141,140 | $ | 3,822 | $ | 144,962 | ||||||||||||||||||||||||||||
| Net loss | — | — | (8,187) | — | (8,187) | (3) | (8,190) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (379) | (379) | — | (379) | ||||||||||||||||||||||||||||||||||
| Shares issued for cash by at-the-market offering | 5,559,548 | 8,969 | — | — | 8,969 | — | 8,969 | ||||||||||||||||||||||||||||||||||
| Share issuance cost | — | (202) | — | — | (202) | — | (202) | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 704 | — | — | 704 | — | 704 | ||||||||||||||||||||||||||||||||||
| Shares issued for consulting services | 30,000 | 33 | — | — | 33 | — | 33 | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | 120,534,705 | $ | 523,196 | $ | (383,880) | $ | 2,762 | $ | 142,078 | $ | 3,819 | $ | 145,897 | ||||||||||||||||||||||||||||
| Net loss | — | — | (8,855) | — | (8,855) | (83) | (8,938) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (171) | (171) | — | (171) | ||||||||||||||||||||||||||||||||||
| Shares issued for cash by at-the-market offering | 9,708,799 | 17,168 | — | — | 17,168 | — | 17,168 | ||||||||||||||||||||||||||||||||||
| Share issuance cost | — | (388) | — | — | (388) | — | (388) | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 668 | — | — | 668 | — | 668 | ||||||||||||||||||||||||||||||||||
| Shares issued for consulting services | 30,000 | 46 | — | — | 46 | — | 46 | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | 130,273,504 | $ | 540,690 | $ | (392,735) | $ | 2,591 | $ | 150,546 | $ | 3,736 | $ | 154,282 | ||||||||||||||||||||||||||||
10
| Common Stock | Deficit | Accumulated other comprehensive income | Total shareholders' equity | Non-controlling interests | Total equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 91,445,066 | $ | 469,303 | $ | (332,058) | $ | 3,843 | $ | 141,088 | $ | 3,766 | $ | 144,854 | ||||||||||||||||||||||||||||
| Net loss | — | — | (12,127) | — | (12,127) | (7) | (12,134) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (136) | (136) | — | (136) | ||||||||||||||||||||||||||||||||||
| Shares issued for cash by public offering | 754,712 | 2,471 | — | — | 2,471 | — | 2,471 | ||||||||||||||||||||||||||||||||||
| Share issuance cost | — | (62) | — | — | (62) | — | (62) | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 1,121 | — | — | 1,121 | — | 1,121 | ||||||||||||||||||||||||||||||||||
| Shares issued for exercise of stock options | 33,906 | 102 | — | — | 102 | — | 102 | ||||||||||||||||||||||||||||||||||
| Shares issued for the vesting of restricted stock units | 850,150 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued for consulting services | 18,848 | 52 | — | — | 52 | — | 52 | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2019 | 93,102,682 | $ | 472,987 | $ | (344,185) | $ | 3,707 | $ | 132,509 | $ | 3,759 | $ | 136,268 | ||||||||||||||||||||||||||||
| Net loss | — | — | (9,312) | — | (9,312) | (2) | (9,314) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (771) | (771) | — | (771) | ||||||||||||||||||||||||||||||||||
| Shares issued for cash by at-the-market offering | 2,141,817 | 6,595 | — | — | 6,595 | — | 6,595 | ||||||||||||||||||||||||||||||||||
| Shares issued to settle liabilities | 266,272 | 847 | 847 | 847 | |||||||||||||||||||||||||||||||||||||
| Share issuance cost | — | (151) | — | — | (151) | — | (151) | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 663 | — | — | 663 | — | 663 | ||||||||||||||||||||||||||||||||||
| Shares issued for exercise of stock options | 20,899 | 44 | — | — | 44 | — | 44 | ||||||||||||||||||||||||||||||||||
| Shares issued for exercise of warrants | 1,450 | 5 | — | — | 5 | — | 5 | ||||||||||||||||||||||||||||||||||
| Shares issued for consulting services | 18,237 | 63 | — | — | 63 | — | 63 | ||||||||||||||||||||||||||||||||||
| Contributions attributable to non-controlling interest | — | — | — | — | — | 46 | 46 | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | 95,551,357 | $ | 481,053 | $ | (353,497) | $ | 2,936 | $ | 130,492 | $ | 3,803 | $ | 134,295 | ||||||||||||||||||||||||||||
| Net loss | — | — | (6,840) | — | (6,840) | (99) | (6,939) | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | 241 | 241 | — | 241 | ||||||||||||||||||||||||||||||||||
| Shares issued for cash by at-the-market offering | 2,618,297 | 5,978 | — | — | 5,978 | — | 5,978 | ||||||||||||||||||||||||||||||||||
| Share issuance cost | — | (134) | — | — | (134) | — | (134) | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | 714 | — | — | 714 | — | 714 | ||||||||||||||||||||||||||||||||||
| Shares issued for consulting services | 18,848 | 57 | — | — | 57 | — | 57 | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2019 | 98,188,502 | $ | 487,668 | $ | (360,337) | $ | 3,177 | $ | 130,508 | $ | 3,704 | $ | 134,212 | ||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
11
ENERGY FUELS INC.
Condensed Consolidated Statements of Cash Flows
(unaudited) (Expressed in thousands of U.S. dollars)
| Nine months ended | |||||||||||
| September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net loss for the period | $ | (22,792) | $ | (28,387) | |||||||
| Items not involving cash: | |||||||||||
| Depletion, depreciation and amortization | 1,911 | 921 | |||||||||
| Share-based compensation | 2,369 | 2,498 | |||||||||
| Change in value of Convertible Debentures | (153) | (447) | |||||||||
| Change in value of warrant liabilities | (215) | (3,281) | |||||||||
| Accretion of asset retirement obligation | 1,434 | 1,478 | |||||||||
| Unrealized foreign exchange gain | (860) | (142) | |||||||||
| Impairment of inventories | 1,644 | 8,412 | |||||||||
| Revision of asset retirement obligation | — | 151 | |||||||||
| Other non-cash expenses | 649 | 2,367 | |||||||||
| Changes in assets and liabilities | |||||||||||
| Increase in inventories | (5,748) | (12,854) | |||||||||
| Decrease in trade and other receivables | 291 | 234 | |||||||||
| Increase in prepaid expenses and other assets | (442) | (236) | |||||||||
| Decrease in accounts payable and accrued liabilities | (3,364) | (2,688) | |||||||||
| Changes in deferred revenue | — | (2,724) | |||||||||
| (25,276) | (34,698) | ||||||||||
| INVESTING ACTIVITIES | |||||||||||
| Purchase of property, plant and equipment | (515) | — | |||||||||
| Maturities and sales of marketable securities | 3,707 | 19,530 | |||||||||
| 3,192 | 19,530 | ||||||||||
| FINANCING ACTIVITIES | |||||||||||
| Issuance of common shares for cash, net of issuance cost | 44,642 | 14,696 | |||||||||
| Proceeds from notes payable | — | 801 | |||||||||
| Cash paid to fund employee income tax withholding due upon vesting of restricted stock units | (415) | — | |||||||||
| Repayment of loans and borrowings | (8,303) | (79) | |||||||||
| Cash received from exercise of warrants | — | 5 | |||||||||
| Cash received from exercise of stock options | — | 146 | |||||||||
| Cash received from non-controlling interest | 133 | 46 | |||||||||
| 36,057 | 15,615 | ||||||||||
| CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH DURING THE PERIOD | 13,973 | 447 | |||||||||
| Effect of exchange rate fluctuations on cash held in foreign currencies | (52) | 43 | |||||||||
| Cash, cash equivalents and restricted cash - beginning of period | 32,891 | 34,292 | |||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH - END OF PERIOD | $ | 46,812 | $ | 34,782 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Net cash paid during the period for: | |||||||||||
| Interest | $ | 720 | $ | 1,110 | |||||||
| Warrant liability transferred to equity upon exercise | $ | — | $ | 2 | |||||||
See accompanying notes to the condensed consolidated financial statements.
12
ENERGY FUELS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020
(unaudited) (Tabular amounts expressed in thousands of U.S. Dollars, except share and per share amounts)
1. THE COMPANY AND DESCRIPTION OF BUSINESS
Energy Fuels Inc. was incorporated under the laws of the Province of Alberta and was continued under the Business Corporations Act (Ontario).
Energy Fuels Inc. and its subsidiary companies (collectively “the Company” or “EFI”) are engaged in uranium extraction, recovery and sales of uranium from mineral properties and the recycling of uranium bearing materials generated by third parties. As a part of these activities the Company also acquires, explores, evaluates and, if warranted, permits uranium properties. The Company’s final uranium product, uranium oxide concentrate (“U3O8” or “uranium concentrate”), is sold to customers for further processing into fuel for nuclear reactors. The Company produces vanadium as a co-product of its uranium recovery from certain of its mines as market conditions warrant and from time to time from solutions in its tailing impoundment system. The Company is also evaluating potentially processing rare earth element ("REE") ores for the recovery of REEs and uranium.
The Company is an exploration stage mining company as defined by the U.S. SEC Industry Guide 7 as it has not established the existence of proven or probable reserves on any of its properties.
2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) and are presented in thousands of U.S. dollars, except for share and per share amounts. Certain footnote disclosures have share prices which are presented in Canadian dollars (“Cdn$”).
The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.
In management’s opinion, these unaudited condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company’s financial position, results of operations and cash flows on a basis consistent with that of the Company’s audited consolidated financial statements for the year ended December 31, 2019. However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto and summary of significant accounting policies included in the Company’s annual report on Form 10-K for the year ended December 31, 2019.
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated.
Certain prior period amounts have been reclassified in order to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
3. MARKETABLE SECURITIES
The following table summarizes our marketable securities by significant investment categories as of September 30, 2020:
| Cost Basis | Gross Unrealized Losses | Gross Unrealized Gains | Fair Value | |||||||||||
Marketable debt securities(1) | $ | 493 | $ | — | $ | 9 | $ | 502 | ||||||
| Marketable equity securities | 824 | (480) | 692 | 1,036 | ||||||||||
| Marketable securities | $ | 1,317 | $ | (480) | $ | 701 | $ | 1,538 | ||||||
(1) Marketable debt securities are comprised primarily of U.S. government notes, and also include U.S. government agencies and tradeable certificates of deposits.
The following table summarizes our marketable securities by significant investment categories as of December 31, 2019:
13
| Cost Basis | Gross Unrealized Losses | Gross Unrealized Gains | Fair Value | |||||||||||
Marketable debt securities (1) | $ | 4,171 | $ | — | $ | 37 | $ | 4,208 | ||||||
| Marketable equity securities | 824 | (543) | 349 | 630 | ||||||||||
| Marketable securities | $ | 4,995 | $ | (543) | $ | 386 | $ | 4,838 | ||||||
(1) Marketable debt securities are comprised primarily of U.S. government notes, and also include U.S. government agencies, and tradeable certificates of deposits.
During the nine months ended September 30, 2020 and 2019, we did not recognize any other-than-temporary impairment losses.
The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:
| Due in less than 12 months | $ | 502 | |||
| Due in 12 months to two years | — | ||||
| Due in greater than two years | — | ||||
| $ | 502 | ||||
4. INVENTORIES
| September 30, 2020 | December 31, 2019 | ||||||||||
Concentrates and work-in-progress(1) | $ | 25,556 | $ | 20,893 | |||||||
| Inventory of ore in stockpiles | 241 | 241 | |||||||||
| Raw materials and consumables | 2,772 | 2,823 | |||||||||
| $ | 28,569 | $ | 23,957 | ||||||||
| Inventories - by duration | |||||||||||
| Current | $ | 27,420 | $ | 22,808 | |||||||
| Long term - raw materials and consumables | 1,149 | 1,149 | |||||||||
| $ | 28,569 | $ | 23,957 | ||||||||
(1) For the three and nine months ended September 30, 2020, the Company recorded an impairment loss of $0.14 million and $1.64 million in the statement of operations related to concentrates and work in progress inventories (September 30, 2019 - $2.33 million and $8.41 million).
5. PROPERTY, PLANT AND EQUIPMENT AND MINERAL PROPERTIES
The following is a summary of property, plant and equipment:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Cost | Accumulated Depreciation | Net Book Value | Cost | Accumulated Depreciation | Net Book Value | ||||||||||||||||||||||||||||||
| Property, plant and equipment | |||||||||||||||||||||||||||||||||||
| Nichols Ranch | $ | 29,210 | $ | (15,641) | $ | 13,569 | $ | 29,210 | $ | (14,115) | $ | 15,095 | |||||||||||||||||||||||
| Alta Mesa | 13,626 | (3,861) | 9,765 | 13,626 | (3,179) | 10,447 | |||||||||||||||||||||||||||||
| Equipment and other | 13,415 | (12,450) | 965 | 12,900 | (12,239) | 661 | |||||||||||||||||||||||||||||
| Property, plant and equipment total | $ | 56,251 | $ | (31,952) | $ | 24,299 | $ | 55,736 | $ | (29,533) | $ | 26,203 | |||||||||||||||||||||||
14
The following is a summary of mineral properties:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Mineral properties | |||||||||||
| Uranerz ISR properties | $ | 25,974 | $ | 25,974 | |||||||
| Sheep Mountain | 34,183 | 34,183 | |||||||||
| Roca Honda | 22,095 | 22,095 | |||||||||
| Other | 1,287 | 1,287 | |||||||||
| Mineral properties total | $ | 83,539 | $ | 83,539 | |||||||
6. ASSET RETIREMENT OBLIGATIONS AND RESTRICTED CASH
The following table summarizes the Company’s asset retirement obligations:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Asset retirement obligation, beginning of period | $ | 18,972 | $ | 19,104 | |||||||
| Revision of estimate | — | (2,063) | |||||||||
| Accretion of liabilities | 1,434 | 1,931 | |||||||||
| Asset retirement obligation, end of period | $ | 20,406 | $ | 18,972 | |||||||
| Asset retirement obligation: | |||||||||||
| Current | $ | 46 | $ | 46 | |||||||
| Non-current | 20,360 | 18,926 | |||||||||
| Asset retirement obligation, end of period | $ | 20,406 | $ | 18,972 | |||||||
The asset retirement obligations of the Company are subject to legal and regulatory requirements. Estimates of the costs of reclamation are reviewed periodically by the Company and the applicable regulatory authorities. The above provision represents the Company’s best estimate of the present value of future reclamation costs, discounted using credit adjusted risk-free interest rates ranging from 9.5% to 11.5% and an inflation rate of 2.0%. The total undiscounted decommissioning liability at September 30, 2020 is $41.75 million (December 31, 2019 - $41.75 million).
The following table summarizes the Company’s restricted cash:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Restricted cash, beginning of period | $ | 20,081 | $ | 19,652 | |||||||
| Additional collateral posted | 179 | 429 | |||||||||
| Refunds of collateral | (32) | — | |||||||||
| Restricted cash, end of period | $ | 20,228 | $ | 20,081 | |||||||
The Company has cash, cash equivalents and fixed income securities as collateral for various bonds posted in favor of the applicable state regulatory agencies in Arizona, Colorado, New Mexico, Texas, Utah and Wyoming, and the U.S. Bureau of Land Management and U.S. Forest Service for estimated reclamation costs associated with the White Mesa Mill, Nichols Ranch, Alta Mesa and other mining properties. Cash equivalents are short-term highly liquid investments with original maturities of three months or less. The restricted cash will be released when the Company has reclaimed a mineral property or restructured the surety and collateral arrangements. See Note 14 for a discussion of the Company’s surety bond commitments.
Cash, cash equivalents and restricted cash are included in the following accounts at September 30, 2020 and December 31, 2019:
| September 30, 2020 | December 31, 2019 | ||||||||||
| Cash and cash equivalents | $ | 26,584 | $ | 12,810 | |||||||
| Restricted cash included in other long-term assets | 20,228 | 20,081 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 46,812 | $ | 32,891 | |||||||
15
7. LOANS AND BORROWINGS
The Company’s interest-bearing loans and borrowings, which are recorded at amortized cost, and the Company’s Convertible Debentures, which are recorded at fair value, are as follows.
| September 30, 2020 | December 31, 2019 | ||||||||||
| Current portion of loans and borrowings: | |||||||||||
| Convertible Debentures | $ | 7,898 | $ | 16,382 | |||||||
| Notes payable | — | 484 | |||||||||
| Total current loans and borrowings | $ | 7,898 | $ | 16,866 | |||||||
On July 24, 2012, the Company completed a bought deal public offering of 22,000 floating-rate convertible unsecured subordinated debentures originally maturing June 30, 2017 (the “Convertible Debentures”) at a price of Cdn$1,000 per Debenture for gross proceeds of Cdn$21.55 million (the “Offering”). The Convertible Debentures are convertible into Common Shares at the option of the holder. Interest is paid in cash and in addition, unless an event of default has occurred and is continuing, the Company may elect, from time to time, subject to applicable regulatory approval, to satisfy its obligation to pay interest on the Convertible Debentures, on the date it is payable under the indenture: (i) in cash; (ii) by delivering sufficient Common Shares to the debenture trustee, for sale, to satisfy the interest obligations in accordance with the indenture in which event holders of the Convertible Debentures will be entitled to receive a cash payment equal to the proceeds of the sale of such Common Shares; or (iii) any combination of (i) and (ii).
On August 4, 2016, the Company, by a vote of the Debenture holders, extended the maturity date of the Convertible Debentures from June 30, 2017 to December 31, 2020, and reduced the conversion price of the Convertible Debentures from Cdn$15.00 to Cdn$4.15 per Common Share of the Company. In addition, a redemption provision was added that will enable the Company, upon giving not less than 30 days' notice to Debenture holders, to redeem the Convertible Debentures, for cash, in whole or in part at any time after June 30, 2019, but prior to maturity, at a price of 101% of the aggregate principal amount redeemed, plus accrued and unpaid interest (less any tax required by law to be deducted) on such Convertible Debentures up to but excluding the redemption date. A right (in favor of each Debenture holder) was also added which gave the Debenture holders the option to require the Company to purchase, for cash, on the previous maturity date of June 30, 2017, up to 20% of the Convertible Debentures held by the Debenture holders at a price equal to 100% of the principal amount purchased plus accrued and unpaid interest (less any tax required by law to be deducted). In the three months ended June 30, 2017, Debenture holders elected to redeem Cdn$1.13 million ($0.87 million) under this right. No additional purchases are allowed under this right. In addition, certain other amendments were made to the Indenture, as required by the U.S. Trust Indenture Act of 1939, as amended, and with respect to the addition of a U.S. Trustee in compliance therewith, as well as to remove provisions of the Indenture that no longer apply, such as U.S. securities law restrictions.
The Convertible Debentures accrue interest, payable semi-annually in arrears on June 30 and December 31 of each year at a fluctuating rate of not less than 8.5% and not more than 13.5%, indexed to the simple average spot price of uranium as reported on the UxC, LLC ("UxC") Weekly Indicator Price. The Convertible Debentures may be redeemed in whole or part, at par plus accrued interest and unpaid interest by the Company between June 30, 2019 and December 31, 2020 subject to certain terms and conditions, provided the volume weighted average trading price of the Common Shares of the Company on the TSX during the 20 consecutive trading days ending five days preceding the date on which the notice of redemption is given is not less than 125% of the conversion price.
Upon redemption or at maturity, the Company will repay the indebtedness represented by the Convertible Debentures by paying to the debenture trustee in Canadian dollars an amount equal to the aggregate principal amount of the outstanding Convertible Debentures which are to be redeemed or which have matured, as applicable, together with accrued and unpaid interest thereon.
Subject to any required regulatory approval and provided no event of default has occurred and is continuing, the Company has the option to satisfy its obligation to repay the Cdn$1,000 principal amount of the Convertible Debentures, in whole or in part, due at redemption or maturity, upon at least 40 days’ and not more than 60 days’ prior notice, by delivering that number of Common Shares obtained by dividing the Cdn$1,000 principal amount of the Convertible Debentures maturing or to be redeemed as applicable, by 95% of the volume-weighted average trading price of the Common Shares on the TSX during the 20 consecutive trading days ending five trading days preceding the date fixed for redemption or the maturity date, as the case may be.
16
On July 14, 2020, the Company redeemed Cdn$10.43 million principal amount of the Cdn$20.86 million Convertible Debentures. The Convertible Debentures were redeemable for an amount equal to 101% of the aggregate principal amount plus accrued and unpaid interest thereon, up to but excluding July 14, 2020. On October 6, 2020, the Company redeemed the remaining Cdn$10.43 million principal amount of the Cdn$10.43 million Convertible Debentures outstanding. The Convertible Debentures were redeemable for an amount equal to 101% of the aggregate principal amount plus accrued and unpaid interest thereon, up to but excluding October 6, 2020. As a result of the final redemption, no Debentures remain outstanding. The Convertible Debentures are no longer subject to the terms of the Indenture, and cease to be listed on the Toronto Stock Exchange.
The Company currently has no other remaining short- or long-term debt.
The Convertible Debentures are measured at fair value based on the closing price on the TSX (a Level 1 measurement) and changes are recognized in earnings. For the three and nine months ended September 30, 2020, the Company recorded a gain on revaluation of Convertible Debentures of $0.15 million and $0.15 million (September 30, 2019 – gain of $0.94 million and $0.45 million), respectively.
8. LEASES
The Company’s leases primarily include operating leases for corporate offices. These leases have remaining lease terms of less than one year to four years, and include options to extend the leases for up to five years. Certain of our leases include variable payments for lessor operating expenses that are not included within right-of-use ("ROU") assets and lease liabilities in the Condensed Consolidated Balance Sheets. The Company’s lease agreements do not contain any material residual value guarantees or restrictive covenants.
Beginning January 1, 2019, operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of January 1, 2019. Because most of the Company's leases do not provide an explicit rate of return, the Company's incremental secured borrowing rate based on lease term information available at the commencement date of the lease will be used in determining the present value of lease payments. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in General and Administration expenses. Short-term leases, which have an initial term of 12 months or less, are not recorded in the Condensed Consolidated Balance Sheets.
Total lease cost includes the following components:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Operating leases | $ | 78 | $ | 99 | $ | 262 | $ | 309 | |||||||||||||||
| Short-term leases | 74 | 96 | 223 | 222 | |||||||||||||||||||
| Sublease income | — | (9) | — | (65) | |||||||||||||||||||
| Total lease expense | $ | 152 | $ | 186 | $ | 485 | $ | 466 | |||||||||||||||
The weighted average remaining lease term and weighted average discount rate were as follows:
| Nine months ended September 30, | |||||||||||
| 2020 | 2019 | ||||||||||
| Weighted average remaining lease term of operating leases | 2.7 years | 3.5 years | |||||||||
| Weighted average discount rate of operating leases | 9.0 | % | 9.0 | % | |||||||
Supplemental cash flow information related to leases was as follows:
17
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Operating cash flow information: | |||||||||||||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 85 | $ | 105 | $ | 282 | $ | 243 | |||||||||||||||
Future minimum payments of operating lease liabilities as of September 30, 2020 are as follows:
| Years Ending December 31: | |||||
| 2020 (excluding the nine months ended September 30, 2020) | $ | 85 | |||
| 2021 | 343 | ||||
| 2022 | 350 | ||||
| 2023 | 147 | ||||
| 2024 | — | ||||
| Thereafter | — | ||||
| Total lease payments | $ | 925 | |||
| Less: interest | (100) | ||||
| Present value of lease liabilities | $ | 825 | |||
9. CAPITAL STOCK
Authorized capital stock
The Company is authorized to issue an unlimited number of Common Shares without par value, unlimited Preferred Shares issuable in series, and unlimited Series A Preferred Shares. The Series A Preferred Shares issuable are non-redeemable, non-callable, non-voting and with no right to dividends. The Preferred Shares issuable in series will have the rights, privileges, restrictions and conditions assigned to the particular series upon the Board of Directors approving their issuance.
Issued capital stock
On February 20, 2020, the Company completed a bought deal public offering of 11.30 million Common Shares at a price of $1.47 per share. The Company received net proceeds, after commissions and fees, of $15.14 million.
In the nine months ended September 30, 2020, the Company issued 17.66 million Common Shares under the Company’s ATM for net proceeds of $29.50 million after share issuance costs.
Share Purchase Warrants
The following table summarizes the Company’s share purchase warrants denominated in U.S. dollars. These warrants are accounted for as derivative liabilities as the functional currency of the entity issuing the warrants, Energy Fuels Inc., is Canadian dollars.
| Month Issued | Expiry Date | Exercise Price USD$ | Warrants Outstanding | Fair value at September 30, 2020 | |||||||||||||||||||
September 2016(1) | September 20, 2021 | 2.45 | 4,166,030 | $ | 2,499 | ||||||||||||||||||
(1) The warrants issued in September 2016 are classified as Level 1 under the fair value hierarchy (Note 16). Each warrant is exercisable until September 20, 2021 and entitles the holder thereof to acquire one common share upon exercise at an exercise price of $2.45 per common share. These warrants are accounted for as a derivative liability, as the functional currency of the entity issuing the warrant is Cdn$.
10. BASIC AND DILUTED LOSS PER COMMON SHARE
The calculation of basic and diluted earnings per share after adjustment for the effects of all potential dilutive Common Shares, is as follows:
18
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Loss attributable to shareholders | $ | (8,855) | $ | (6,840) | $ | (22,699) | $ | (28,279) | |||||||||||||||
| Basic and diluted weighted average number of common shares outstanding | 115,295,589 | 96,840,539 | 117,487,582 | 94,321,950 | |||||||||||||||||||
| Loss per common share | $ | (0.08) | $ | (0.07) | $ | (0.19) | $ | (0.30) | |||||||||||||||
For the three and nine months ended September 30, 2020, 6.16 million (September 30, 2019 - 5.66 million) options and warrants and the potential conversion of the Convertible Debentures have been excluded from the calculation as their effect would have been anti-dilutive.
11. SHARE-BASED PAYMENTS
The Company, under the 2018 Amended and Restated Omnibus Equity Incentive Compensation Plan (the “Compensation Plan”), maintains an equity incentive plan for directors, executives, eligible employees and consultants. Equity incentive awards include employee stock options, restricted stock units (“RSUs”) and stock appreciation rights ("SARs"). The Company issues new shares of common stock to satisfy exercises and vesting under all of its equity incentive awards. At September 30, 2020, a total of 13,027,350 Common Shares were authorized for equity incentive plan awards.
Employee Stock Options
The Company, under the Compensation Plan, may grant options to directors, executives, employees and consultants to purchase Common Shares of the Company. The exercise price of the options is set as the higher of the Company’s closing share price on the day before the grant date or the five-day volume weighted average price ("VWAP"). Stock options granted under the Compensation Plan generally vest over a period of two years or more and are generally exercisable over a period of five years from the grant date not to exceed 10 years. The value of each option award is estimated at the grant date using the Black-Scholes Option Valuation Model. There were 0.71 million options granted in the nine months ended September 30, 2020 (September 30, 2019 – 0.30 million options). At September 30, 2020, there were 1.99 million options outstanding with 1.59 million options exercisable, at a weighted average exercise price of $2.83 and $3.04, respectively, with a weighted average remaining contractual life of 3.06 years. The fully vested options had no intrinsic value at September 30, 2020.
The fair value of the options granted under the Compensation Plan for the nine months ended September 30, 2020 was estimated at the date of grant, using the Black-Scholes Option Valuation Model, with the following weighted average assumptions:
| Risk-free interest rate | 0.16% - 1.55% | |||||||
| Expected life | 3 - 5 years | |||||||
| Expected volatility | 61.6% - 62.5% | * | ||||||
| Expected dividend yield | — | % | ||||||
| Weighted average expected life of option | 5.0 years | |||||||
| Weighted average grant date fair value | $0.71 - $0.85 | |||||||
* Expected volatility is measured based on the Company’s historical share price volatility over a period equivalent to the expected life of the options.
The summary of the Company’s stock options at September 30, 2020 and December 31, 2019, and the changes for the fiscal periods ending on those dates is presented below:
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| Range of Exercise Prices | Weighted Average Exercise Price | Number of Options | |||||||||||||||
| Balance, December 31, 2018 | $1.70 - $15.61 | $ | 3.84 | 1,732,754 | |||||||||||||
| Granted | 2.92 | 2.92 | 296,450 | ||||||||||||||
| Exercised | 1.70 - 2.92 | 2.27 | (54,805) | ||||||||||||||
| Forfeited | 1.70 - 7.42 | 3.94 | (342,866) | ||||||||||||||
| Expired | 6.97 | 6.97 | (144,100) | ||||||||||||||
| Balance, December 31, 2019 | $1.70 - $15.61 | $ | 3.43 | 1,487,433 | |||||||||||||
| Granted | 1.76 - 1.79 | 1.77 | 706,774 | ||||||||||||||
| Exercised | — | — | — | ||||||||||||||
| Forfeited | 1.70 - 5.18 | 2.51 | (106,176) | ||||||||||||||
| Expired | 4.12 - 5.22 | 4.40 | (98,512) | ||||||||||||||
| Balance, September 30, 2020 | $1.70 - $15.61 | $ | 2.83 | 1,989,519 | |||||||||||||
A summary of the status and activity of non-vested stock options for the nine months ended September 30, 2020 is as follows:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Non-vested December 31, 2019 | 223,381 | $ | 1.32 | ||||||||
| Granted | 706,774 | 0.82 | |||||||||
| Vested | (506,310) | 0.94 | |||||||||
| Forfeited | (22,176) | 1.96 | |||||||||
| Non-vested September 30, 2020 | 401,669 | $ | 0.94 | ||||||||
Restricted Stock Units
The Company grants RSUs to directors, executives and eligible employees. Awards are determined as a target percentage of base salary and generally vest over periods of three years. Prior to vesting, holders of restricted stock units do not have voting rights. The RSUs are subject to forfeiture risk and other restrictions. Upon vesting, the employee is entitled to receive one share of the Company’s common stock for each RSU for no additional payment. During the nine months ended September 30, 2020, the Company's Board of Directors issued 0.74 million RSUs under the Compensation Plan (September 30, 2019 - 0.72 million).
A summary of the status and activity of non-vested RSUs at September 30, 2020 is as follows:
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Non-vested December 31, 2019 | 1,315,536 | $ | 2.45 | ||||||||
| Granted | 740,998 | 1.66 | |||||||||
| Vested | (746,477) | 2.46 | |||||||||
| Forfeited | (146,980) | 2.15 | |||||||||
| Non-vested September 30, 2020 | 1,163,077 | $ | 1.99 | ||||||||
The total intrinsic value and fair value of RSUs that vested and were settled for equity in the nine months ended September 30, 2020 was $1.97 million (September 30, 2019 – $2.51 million).
Stock Appreciation Rights
During the nine months ended September 30, 2019, the Company's Board of Directors issued 2.20 million stock appreciation rights (SARs) under the Compensation Plan with a fair value of $1.25 per SAR. These SARs are intended to provide additional long-term performance-based equity incentives for the Company's senior management. The SARs are performance based, because they only vest upon the achievement of performance goals designed to significantly increase shareholder value.
Each SAR outstanding entitles the holder, on exercise, to a payment in cash or shares (at the election of the Company) equal to the difference between the market price of the Common Shares at the time of exercise and $2.92 (the market price at the time of grant) over a five-year period, but vest only upon the achievement of the following performance goals: as to one-third of the
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SARs granted upon the VWAP of the Common Shares on the NYSE American equaling or exceeding $5.00 for any continuous 90-calendar day period; as to an additional one-third of the SARs granted, upon the VWAP of the Common Shares on the NYSE American equaling or exceeding $7.00 for any continuous 90 calendar-day period; and as to the final one-third of the SARs granted, upon the VWAP of the Common Shares on the NYSE American equaling or exceeding $10.00 for any continuous 90 calendar-day period. Further, notwithstanding the foregoing vesting schedule, no SARs may be exercised by the holder for an initial period of one year from the Date of Grant; the date first exercisable being January 22, 2020.
The share-based compensation recorded during the three and nine months ended September 30, 2020 was $0.67 million and $2.37 million (three and nine months ended September 30, 2019 - $0.71 million and $2.50 million).
At September 30, 2020, there were $0.08 million, $0.89 million and $0.49 million of unrecognized compensation costs related to the unvested stock options, RSU awards and SARs, respectively. These costs are expected to be recognized over a period of approximately two years.
12. INCOME TAXES
As of September 30, 2020, the Company does not believe it is more likely than not that it will fully realize the benefit of the deferred tax assets. As such, the Company recognized a full valuation allowance against the net deferred tax assets as of September 30, 2020 and December 31, 2019.
13. SUPPLEMENTAL FINANCIAL INFORMATION
The components of other income are as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Interest income | $ | (4) | $ | 134 | $ | 124 | $ | 386 | |||||||||||||||
| Change in value of investments accounted for at fair value | 258 | (589) | 394 | (576) | |||||||||||||||||||
| Change in value of warrant liabilities | 307 | 2,166 | 215 | 3,281 | |||||||||||||||||||
| Change in value of Convertible Debentures | 153 | 940 | 153 | 447 | |||||||||||||||||||
| Foreign exchange gain (loss) | (105) | (15) | 876 | (34) | |||||||||||||||||||
| Other | 19 | (324) | (17) | (323) | |||||||||||||||||||
| Other income | $ | 628 | $ | 2,312 | $ | 1,745 | $ | 3,181 | |||||||||||||||
14. COMMITMENTS AND CONTINGENCIES
General legal matters
Other than routine litigation incidental to our business, or as described below, the Company is not currently a party to any material pending legal proceedings that management believes would be likely to have a material adverse effect on our financial position, results of operations or cash flows.
White Mesa Mill
In January 2013, the Ute Mountain Ute tribe filed a Petition to Intervene and Request for Agency Action challenging the Corrective Action Plan approved by the State of Utah Department of Environmental Quality (“UDEQ”) relating to nitrate contamination in the shallow aquifer at the White Mesa Mill site. This challenge is currently being evaluated and may involve the appointment of an administrative law judge to hear the matter. The Company does not consider this action to have any merit. If the petition is successful, the likely outcome would be a requirement to modify or replace the existing Corrective Action Plan. At this time, the Company does not believe any such modification or replacement would materially affect our financial position, results of operations or cash flows. However, the scope and costs of remediation under a revised or replacement Corrective Action Plan have not yet been determined and could be significant.
On January 19, 2018, UDEQ renewed, and on February 16, 2018 reissued with minor corrections, the White Mesa Mill’s license for another ten years, and Groundwater Discharge Permit for another five years, after which renewal periods further applications for renewal for the license and permit will need to be submitted. During the review period for each application for renewal, the Mill can continue to operate under its then existing license and permit until such time as the renewed license or permit is issued. In March 2018, the Grant Canyon Trust, Ute Mountain Ute Tribe and Uranium Watch (the “Petitioners”)
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served Petitions for Review challenging UDEQ’s renewal of the license and permit. Petitioners subsequently filed with UDEQ Requests for Appointment of an Administrative Law Judge, which they later agreed to suspend pursuant to a Stipulation and Agreement with UDEQ, effective June 4, 2018. The Company has met with representatives from all parties in order to determine whether pending administrative proceedings can be settled. Discussions are ongoing. The Company does not consider these challenges to have any merit. If such challenges are heard by the agency and are successful, the likely outcome would be a requirement to modify the renewed license and/or permit. At this time, the Company does not believe any such modification would materially affect its financial position, results of operations or cash flows.
Canyon Project
In March of 2013, the Center for Biological Diversity, the Grand Canyon Trust, the Sierra Club and the Havasupai Tribe (the “Canyon Plaintiffs”) filed a complaint in the U.S. District Court for the District of Arizona (the “District Court”) against the Forest Supervisor for the Kaibab National Forest and the U.S. Forest Service (“USFS”) seeking an order (a) declaring that the USFS failed to comply with environmental, mining, public land, and historic preservation laws in relation to our Canyon Project, (b) setting aside any approvals regarding exploration and mining operations at the Canyon Project, and (c) directing operations to cease at the Canyon Project and enjoining the USFS from allowing any further exploration or mining-related activities at the Canyon Project until the USFS fully complies with all applicable laws. In April 2013, the Plaintiffs filed a Motion for Preliminary Injunction, which was denied by the District Court in September 2013. On April 7, 2015, the District Court issued its final ruling on the merits in favor of the Defendants and the Company and against the Canyon Plaintiffs on all counts. The Canyon Plaintiffs appealed the District Court’s ruling on the merits to the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) and filed motions for an injunction pending appeal with the District Court. Those motions for an injunction pending appeal were denied by the District Court on May 26, 2015. Thereafter, Plaintiffs filed urgent motions for an injunction pending appeal with the Ninth Circuit Court of Appeals, which were denied on June 30, 2015.
The hearing on the merits at the Court of Appeals was held on December 15, 2016. On December 12, 2017, the Ninth Circuit Court of Appeals issued its ruling on the merits in favor of the Defendants and the Company and against the Canyon Plaintiffs on all counts. The Canyon Plaintiffs petitioned the Ninth Circuit Court of Appeals for a rehearing en banc. On October 25, 2018, the Ninth Circuit panel ruled on the petition for rehearing en banc. The panel withdrew its prior opinion and filed a new opinion, which affirmed with one exception the District Court’s decision. The one exception relates to one of the Plaintiffs’ claims, which had been dismissed by the District Court for lack of standing. The Ninth Circuit panel reversed itself on its standing analysis, concluded that the Plaintiffs have standing to assert this claim and remanded the claim back to the District Court to hear the merits of Plaintiffs’ claim. On September 11, 2019, the Canyon Plaintiffs filed their Motion for Summary Judgment and Memorandum in Support with the District Court, after which the Company filed its Intervenors-Defendants’ Motion for Summary Judgment on October 23, 2019. On November 15, 2019, the Canyon Plaintiffs filed their Reply in Support of their Motion for Summary Judgment. On May 22, 2020, the District Court issued its final order in favor of the Company and the U.S. Forest Service.
On July 20, 2020, the Plaintiffs filed their Notice of Appeal of the District Court’s final order, and the Ninth Circuit has since issued its Time Schedule Order setting due dates for the parties' briefs and actions required to perfect the appeal. As a part of the appeal, the Company may be required to maintain the Canyon Project on standby pending resolution of the matter. Such a prolonged delay of mining activities could have a significant impact on our future operations.
Daneros Project
On February 23, 2018, the BLM issued the Environmental Assessment ("EA"), Decision Record and FONSI for the Mine Plan of Operations Modification for the Daneros Mine. On March 29, 2018, the Southern Utah Wilderness Alliance and Grand Canyon Trust (together, the “Appellants”) filed a Notice of Appeal to the Interior Board of Land Appeals (“IBLA”) regarding the BLM’s Decision Record and FONSI and challenging the underlying EA, and the Company was subsequently permitted to intervene. This matter has been briefed and remains under consideration by IBLA at this time. The Company does not consider these challenges to have any merit; however, the scope and costs of amending or redoing the EA have not yet been determined and could be significant.
Surety Bonds
The Company has indemnified third-party companies to provide surety bonds as collateral for the Company’s asset retirement obligation. The Company is obligated to replace this collateral in the event of a default and is obligated to repay any reclamation or closure costs due. The Company currently has $20.23 million posted against an undiscounted asset retirement obligation of $41.75 million (December 31, 2019 - $20.08 million posted against an undiscounted asset retirement obligation of $41.75 million).
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Commitments
The Company is contractually obligated under a Sales and Agency Agreement appointing an exclusive sales and marketing agent for all vanadium pentoxide produced by the Company.
15. RELATED PARTY TRANSACTIONS
On May 17, 2017, the Board of Directors of the Company appointed Robert W. Kirkwood and Benjamin Eshleman III to the Board of Directors of the Company.
Mr. Kirkwood is a principal of the Kirkwood Companies, including Kirkwood Oil and Gas LLC, Wesco Operating, Inc., and United Nuclear LLC (“United Nuclear”). United Nuclear, owns a 19% interest in the Company’s Arkose Mining Venture while the Company owns the remaining 81%. The Company acts as manager of the Arkose Mining Venture and has management and control over operations carried out by the Arkose Mining Venture. The Arkose Mining Venture is a contractual joint venture governed by a venture agreement dated as of January 15, 2008 entered into by Uranerz Energy Corporation (a subsidiary of the Company) and United Nuclear (the “Venture Agreement”).
United Nuclear contributed $0.13 million to the expenses of the Arkose Joint Venture based on the approved budget for the nine months ended September 30, 2020 (September 30, 2019 - $46 thousand).
Mr. Benjamin Eshleman III is President of Mesteña LLC, which became a shareholder of the Company through the Company’s acquisition of Mesteña Uranium, L.L.C. (now EFR Alta Mesa LLC) in June 2016. Pursuant to the Purchase Agreement, the Alta Mesa Properties are subject to a royalty of 3.125% of the value of the recovered U3O8 from the Alta Mesa Properties sold at a price of $65.00 per pound or less, 6.25% of the value of the recovered U3O8 from the Alta Mesa Properties sold at a price greater than $65.00 per pound and up to and including $95.00 per pound, and 7.5% of the value of the recovered U3O8 from the Alta Mesa Properties sold at a price greater than $95.00 per pound. The royalties are held by Mr. Eshleman and his extended family. In addition, Mr. Eshleman and certain members of his extended family are parties to surface use agreements that entitle them to surface use payments from the Acquired Companies in certain circumstances. The Alta Mesa Properties are currently being maintained on care and maintenance to enable the Company to restart operations as market conditions warrant. Due to the price of U3O8, the Company did not pay any royalty payments to the Sellers or to Mr. Eshleman or his immediate family members in the nine months ended September 30, 2020 and does not anticipate paying any royalty payments to the Sellers or to Mr. Eshleman or his immediate family members during the remainder of 2020. The Company makes surface use payments on an annual basis to Mr. Eshleman and his immediate family members and has accrued $0.32 million as of September 30, 2020.
16. FAIR VALUE ACCOUNTING
Assets and liabilities measured at fair value on a recurring basis
The following tables set forth the fair value of the Company's assets and liabilities measured at fair value on a recurring basis (at least annually) by level within the fair value hierarchy as of September 30, 2020. As required by accounting guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
As of September 30, 2020, the fair values of cash and cash equivalents, restricted cash, short-term deposits, receivables, accounts payable and accrued liabilities approximate their carrying values because of the short-term nature of these instruments.
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Investments at fair value | $ | 566 | $ | — | $ | — | $ | 566 | |||||||||||||||
| Marketable equity securities | 1,036 | — | — | 1,036 | |||||||||||||||||||
| Marketable debt securities | — | 502 | — | 502 | |||||||||||||||||||
| Warrant liabilities | (2,499) | — | — | (2,499) | |||||||||||||||||||
| Convertible Debentures | (7,898) | — | — | (7,898) | |||||||||||||||||||
| $ | (8,795) | $ | 502 | $ | — | $ | (8,293) | ||||||||||||||||
The Company's investments are marketable equity securities which are exchange-traded and are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy. The fair value of the investments is calculated as the quoted market price of the marketable equity security multiplied by the quantity of shares held by the Company.
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17. SUBSEQUENT EVENTS
Full Redemption of Convertible Debentures
On October 6, 2020, the Company redeemed the remaining Cdn$10.43 million principal amount of the Cdn$10.43 millions Convertible Debentures outstanding. The Convertible Debentures were redeemable for an amount equal to 101% of the aggregate principal amount plus accrued and unpaid interest thereon, up to but excluding October 6, 2020. As a result of the final redemption, no Convertible Debentures remain outstanding. The Convertible Debentures are no longer subject to the terms of the Indenture, and cease to be listed on the Toronto Stock Exchange.
The Company currently has no other remaining short- or long-term debt.
Sale of shares in the Company's ATM program.
From October 1, 2020 through October 30, 2020, the Company issued 0.80 million Common Shares at a weighted average price of $1.72 for net proceeds of $1.35 million using the ATM.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements for the three and nine-month periods ended September 30, 2020, and the related notes thereto, which have been prepared in accordance with U.S. GAAP. Additionally, the following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2019. This Discussion and Analysis contains forward-looking statements and forward-looking information that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements and information as a result of many factors. See "Cautionary Statement Regarding Forward-Looking Statements” above.
While the Company has uranium extraction and recovery activities and generates revenue, it is considered to be in the Exploration Stage (as defined by SEC Industry Guide 7) as it has no Proven or Probable Reserves within the meaning of SEC Industry Guide 7. Under U.S. GAAP, for a property that has no Proven or Probable Reserves, the Company capitalizes the cost of acquiring the property (including mineral properties and rights) and expenses all costs related to the property incurred subsequent to the acquisition of such property. Acquisition costs of a property are depreciated over its estimated useful life for a revenue generating property or expensed if the property is sold or abandoned. Acquisition costs are subject to impairment if so indicated.
All dollar amounts stated herein are in U.S. dollars, except share and per share amounts and currency exchange rates unless specified otherwise. References to Cdn$ refer to Canadian currency, and $ to United States currency.
Overview
We provide the raw materials for the generation of clean nuclear electricity. Our primary product is a uranium concentrate (“U3O8”), or yellowcake, which when further processed becomes the fuel for nuclear energy. According to the Nuclear Energy Institute, nuclear energy provides nearly 20% of the total electricity, and 55% of the clean, carbon-free electricity, generated in the United States. The Company generates revenues from extracting and processing materials for our own account, as well as from toll processing materials for others.
Our uranium concentrate is produced from multiple sources:
•Conventional recovery operations at our White Mesa Mill (the "Mill") including:
•Processing ore from uranium mines; and
•Recycling of uranium bearing materials that are not derived from conventional ore ("Alternate Feed Materials"); and
•In-situ recovery (“ISR”) operations.
In addition, the Company has a long history of conventional vanadium recovery at the Mill, when vanadium prices support those activities. The Company recently completed a campaign to recover vanadium from solutions in the tailings management system at the Mill ("Pond Return") from which it recovered over 1.8 million pounds of high-purity vanadium. The Company is also evaluating opportunities for copper recovery from our Canyon Project and the extraction of REEs from uranium-bearing ores.
The Mill, located near Blanding, Utah, processes ore mined from the Four Corners region of the United States, as well as Alternate Feed Materials that can originate worldwide. We have the only operating uranium mill in the United States, which is also the last operating facility left in the U.S. with the ability to recover vanadium from primary ore sources. The Mill is licensed to process an average of 2,000 tons of ore per day and to produce approximately 8.0 million pounds of U3O8 per year. The Mill has separate circuits to process conventional uranium and vanadium ores as well as Alternate Feed Materials.
For the last several years, no mines have operated commercially in the vicinity of the Mill due to low uranium prices. As a result, in recent years, Mill activities have focused on processing Alternate Feed Materials for the recovery of uranium, under multiple toll processing arrangements as well as Alternate Feed Materials for our own account. Additionally, in recent years, the Mill has recovered dissolved uranium and vanadium from the Mill’s tailings management system that was not fully recovered during the Mill’s prior forty years of operations through its Pond Return program. During the three and nine months ended September 30, 2020, Mill activities focused primarily on the recovery of vanadium, along with relatively small amounts of uranium, from Pond Returns, and the recovery of uranium from Alternate Feed Materials. The Company is actively pursuing additional Alternate Feed Materials for processing at the Mill.
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The Mill also continues to pursue additional sources of feed materials. For example, a significant opportunity exists for the Company to potentially participate in the clean-up of abandoned uranium mines in the Four Corners Region of the U.S. The U.S. Justice Department and Environmental Protection Agency have announced settlements in various forms in excess of $1.5 billion to fund certain clean-up activities on the Navajo Nation. Additional cleanup settlements with other parties are also pending. Our Mill is within economic trucking distance and is uniquely positioned in this region to receive uranium-bearing materials from these cleanups and thus recycle the contained U3O8, while at the same time permanently disposing of the cleanup materials outside the boundaries of the Navajo Nation in our licensed tailing management system. There are no other facilities in the U.S capable of providing this service. In addition, as previously announced, during the second quarter of 2019, the Company began receiving shipments of material generated in the cleanup of a large, historically producing conventional uranium mine located in northwest New Mexico. In addition to generating revenue for the Company, this project, also demonstrates the ability of the Mill to responsibly cleanup projects similar to those required on the Navajo Nation.
Energy Fuels is also currently conducting process test work and evaluating minor modifications to its operations, complementary to its uranium business, to potentially enable the processing of uranium- and thorium-bearing REE ores at the Mill. These ores are expected to come from third parties, either through ore purchase, tolling, or other arrangements, and Energy Fuels expects to produce a commercially viable rare earth concentrate or concentrates, while also recycling and recovering uranium from these ores. The rare earth concentrates would then be available for commercial sale to third party REE oxide separation and recovery facilities in the U.S. and elsewhere, and/or potentially for further refinement and REE separation and recovery at the Mill (see Recent Developments - Update on Rare Earth Element Initiative, below).
The Company’s ISR operations consist of our recently producing Nichols Ranch Project and our standby operation at the Alta Mesa Project. At our Nichols Ranch Project, the Company placed its ninth header house into production in March 2017. In order to save cash and resources, the Company is deferring additional wellfield development until uranium prices recover. The Project is now on standby. The Alta Mesa Project will remain on standby in the current uranium price environment.
We believe the current spot price of uranium does not support production for the majority of global uranium producers and, accordingly, we believe that prices will recover at some point in the future, either as a result of improving market fundamentals or in response to U.S. government action to support domestic uranium production which began with the Company’s Section 232 Petition submitted on January 16, 2018 (see Recent Developments - U.S. Nuclear Fuel Working Group Update, below). In anticipation of potential price recoveries or other actions that could support increased U.S. uranium mining, we continue to maintain and advance our resource portfolio. Once prices recover or other supportive actions are taken, we stand ready to resume wellfield construction at our Nichols Ranch Project; resume wellfield construction, perform plant upgrades, conduct exploration, and resume production at our Alta Mesa facility; and mine and process resources from our Canyon Project, Daneros Project, La Sal Project and/or Whirlwind Project. The Company believes we can bring this new production to the market within approximately six to eighteen months of a positive production decision. Longer term, we expect to resume production at our other conventional mines on standby and develop our large conventional mines at Roca Honda, Henry Mountains, and/or Sheep Mountain.
Recent Developments
COVID-19
The Company is evaluating the effects of the global, novel coronavirus ("COVID-19") crisis on the Company’s objectives and projections. Due to the current uncertainty, the Company is engaged in cost-cutting measures, while retaining the operational readiness of the Company’s main production assets. The Company is also continuing to work to secure U.S. government support for U.S. uranium miners. To date, although the Company has made some operational adjustments to ensure its workforce remains protected, the Company has not been required to shut down any operations as a result of COVID-19. The Company has evaluated any potential shut down of Company production facilities as a result of COVID-19, and has determined that any such shut down could be accommodated by the Company in a manner consistent with a typical shut down of Company facilities as a result of depressed commodity prices. Management believes the Company is well-capitalized and is able to withstand any facility shutdowns or depressed share prices as a result of COVID-19 for at least the next twelve months.
Full Redemption of Convertible Debentures
On July 14, 2020, the Company redeemed Cdn$10.43 million principal amount of the Cdn$20.86 million Debentures outstanding for approximately $7.78 million. The Debentures were redeemable for an amount equal to 101% of principal plus accrued and unpaid interest thereon, up to but excluding July 14, 2020. On October 6, 2020, the Company redeemed the remaining Cdn$10.43 million principal amount of the Cdn$10.43 million Debentures outstanding for approximately $7.82 million. The Debentures were redeemable for an amount equal to 101% of principal plus accrued and unpaid interest thereon, up to but excluding October 6, 2020. As a result of the final redemption, no Debentures remain outstanding or are subject to the terms of the Indenture, and the Debentures have ceased to be listed on the Toronto Stock Exchange. See “Note 11 to the Financial Statements: Loans and Borrowings.”
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The Company proactively managed its outstanding indebtedness to ensure it had the ability to pay it off on the Company’s own timing and terms and with minimal operational disruption. The Company decided to redeem all of the Debentures prior to maturity because the U.S.-Canada exchange rate was favorable, the Company has sufficient cash available, and the Company avoided approximately US$0.46 million in interest payments in 2020 by doing so.
The Company currently has no other remaining short- or long-term debt.
Agreement to Acquire Prompt Fission Neutron (PFN) Borehole Logging Technology and Equipment
On May 6, 2020, the Company announced it had entered into an agreement to acquire from GeoInstruments Logging LLC ("GIL") all of its Prompt Fission Neutron ("PFN") technology and equipment, including all of its related intellectual property, giving Energy Fuels the exclusive right to use, license, and service this particular PFN technology globally. PFN is critical to successful uranium production particularly from many in situ recovery ("ISR") deposits, as it more accurately measures downhole in-situ U3O8 ore grade versus traditional Total Gamma and Spectral Gamma methods. On July 31, 2020, the parties closed the transaction and all such equipment and technology was transferred to the Company.
The PFN equipment and technology acquired by Energy Fuels includes: four (4) PFN tools; nine (9) gamma tools; two (2) low-mileage, heavy-duty logging trucks with logging and associated equipment; power supplies, computers, communication, and other technology; and all associated intellectual property, and the sole right to utilize and license the acquired PFN technology globally. The total consideration paid by Energy Fuels to GIL was $0.5 million cash, of which $0.15 million was paid in the second quarter of 2020 and the remainder was paid at closing in the third quarter of 2020.
Energy Fuels currently has some PFN equipment in various states of repair, which it has used for its mining operations in the past, as do other companies in the U.S. and around the world. With the acquisition of this additional PFN equipment and technology from GIL, Energy Fuels is not only able to utilize the additional equipment to ramp-up production from its ISR properties more quickly and efficiently in the event of improved market conditions, but has also secured the ability to service, repair and maintain PFN equipment currently held by the Company and others, as well as license this technology to others in the future.
Update on Rare Earth Element Initiative
On April 13, 2020, the Company announced its intent to enter the REE market following several months of review and testing, including discussions with various technical experts and the U.S. government. The U.S. government is actively seeking a domestic source of REE minerals, which are needed for national defense among other applications.
REEs are a group of 17 chemical elements (the 15 elements in the lanthanum series, plus yttrium and scandium) that have a variety of industrial, energy, military and defense uses, including automotive components, communications technology, clean energy production, consumer electronics, weapons systems, advanced magnets, lasers and numerous other applications. According to a 2017 report by the United States Geological Survey ("USGS"), China has controlled more than 90% of the global supply of REEs since the late-1990s and has placed restrictions on REE exports since 2010.
Energy Fuels believes the White Mesa Mill is uniquely suited to potentially receive and process a number of different types of ores for the recovery of REEs (along with uranium), which, if achievable on a commercial basis and subject to the receipt of any required license or permit amendments, would eliminate the current need to ship those ores to China for processing. If successful, the Company expects to offer customers tolling or processing arrangements at the White Mesa Mill. Energy Fuels does not plan to mine REE ore itself at this time.
On May 21, 2020, the Company announced it had entered into consulting agreements with Constantine Karayannopoulos and Brock O'Kelley, two REE industry experts who each have decades of experience producing commercially viable rare earth products, to aid in the development and implementation of commercial and technical REE strategies for the Company’s REE program. A chemical engineer by training with more than 25 years of experience in the rare earth industry, Mr. Karayannopoulos, was at the time of the announcement Chairman of Neo Performance Materials (TSX:NEO) (“Neo”), one of the world's leading producers of advanced industrial materials, including rare earth-based engineered products, for multiple global markets. Mr. O'Kelley played a key role in the operation of the Mountain Pass, California rare earth processing facility during the 1990s and 2000s. Both are industry veterans with extensive knowledge of REE processing facility design, start-up, operations, and downstream value-added manufacturing of advanced REE products. On July 7, 2020, Mr. Karayannopoulos was appointed President and CEO of Neo, positions he held previously with Neo. As a result of his new executive roles with Neo, his consulting agreement with the Company will end on August 6, 2020. On July 31, 2020, the Company entered into a non-exclusive Letter of Intent with Neo, under which: (i) Mr. Karayannopoulos and other Neo personnel will continue to assist Energy Fuels in developing commercial and technical aspects of the Company’s REE strategy, including the potential production of a rare earth oxide concentrate at the Mill that can be sold to REE separation facilities; and (ii) the Company and
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Neo will work together toward potentially creating a longer term mutually beneficial relationship, which may involve commitments to buy and sell all or a portion of the REE concentrate produced at the Mill or other commercial arrangements.
Energy Fuels is currently conducting process test work and evaluating minor modifications to its White Mesa Mill operations, complementary to its uranium business, to enable the processing of uranium- and thorium-bearing rare earth ores at the Mill. These ores are expected to come from third parties, either through ore purchase, tolling, or other arrangements, and Energy Fuels expects to produce a commercially viable rare earth concentrate or concentrates, while also recycling and recovering uranium from these ores. The rare earth concentrates would then be available for commercial sale to third party REE oxide separation and recovery facilities in the U.S. and elsewhere, and/or potentially for further refinement and REE separation and recovery at the Mill.
Removal and recovery of the uranium and thorium from rare earth ores is the key aspect of Energy Fuels' value proposition, as many REE separation and recovery facilities are not able to handle uranium or thorium from a technical or regulatory standpoint. The White Mesa Mill has a 40-year history of responsibly handling, processing and recycling uranium and thorium bearing materials. Therefore, it has the potential to provide a crucial link in a commercially viable U.S REE supply chain.
U.S. Nuclear Fuel Working Group Update
On January 16, 2018, the Company participated in the joint filing of a Petition for Relief under Section 232 of the Trade Expansion Act of 1962 (as amended) from Imports of Uranium Products that Threaten National Security (the “Petition”). The Petition describes how uranium and nuclear fuel from state-owned and state-subsidized enterprises in Russia, Kazakhstan, Uzbekistan and China are believed to represent a threat to U.S. national security.
On July 18, 2018, the U.S. Department of Commerce ("DOC") initiated the investigation (the “Section 232 Investigation”).
On April 14, 2019, the DOC completed the Section 232 Investigation, and the Secretary of Commerce submitted a report to the President of the United States (the “President”) containing his findings (the “Section 232 Report”).
On July 12, 2019, in response to the Section 232 Report, the President issued a memorandum, where he stated that “I agree with the Secretary that the United States uranium industry faces significant challenges in producing uranium domestically and that this is an issue of national security.” In order “to address the concerns identified by the Secretary regarding domestic uranium production and to ensure a comprehensive review of the entire domestic nuclear supply chain,” the President formed the United States Nuclear Fuel Working Group (the “Working Group”) to “examine the current state of domestic nuclear fuel production to reinvigorate the entire nuclear fuel supply chain, consistent with United States national security and nonproliferation goals.” The President instructed the Working Group to “develop recommendations for reviving and expanding domestic nuclear fuel production,” and to submit a report to the President within 90 days “setting forth the Working Group’s findings and making recommendations to further enable domestic nuclear fuel production if needed.”
On February 10, 2020, the President published his Budget for fiscal year 2021 (October 1, 2020 through September 30, 2021). The President’s Budget “Supports Nuclear Fuel Cycle Capabilities,” and states that “[o]n July 12, 2019, the President determined that ‘...the United States uranium industry faces significant challenges in producing uranium domestically and that this is an issue of national security.’ The President’s Budget establishes a Uranium Reserve for the United States to provide additional assurances of availability of uranium in the event of a market disruption.” Table 25-1 of the President’s Budget seeks congressional appropriations of $150 million per year over the next 10 years (totaling $1.5 billion over that time frame) for uranium purchases. For fiscal 2021 (October 1, 2020 through September 30, 2021), the President’s Budget seeks an appropriation of $150 million, “to remain available until expended,” as the appropriation for the first year of this 10-year program. The President’s Budget states that “Establishing a Uranium Reserve provides assurance of availability of uranium in the event of a market disruption and supports strategic U.S. fuel cycle capabilities. This action addresses immediate challenges to the production of domestic uranium and reflects the Administration’s Nuclear Fuel Working Group (NFWG) priorities. The NFWG will continue to evaluate issues related to uranium supply chain and fuel supply.”
On April 23, 2020, the Working Group published its report: Restoring America’s Competitive Nuclear Energy Advantage: A strategy to assure U.S. national security. This comprehensive strategy seeks to revive and strengthen U.S. nuclear fuel capabilities, starting with uranium mining, with the goals of supporting U.S. energy and national security, preventing geopolitical adversaries (particularly those in Russia) from using their nuclear capabilities to influence the U.S. and the world, and promoting global non-proliferation objectives and nuclear safety. The report states that "the clear outcome of the Working Group's efforts is confirmation that it is in the nation's national security interests to preserve the assets and investments of the entire U.S. nuclear enterprise and to revitalize the sector to regain U.S. global nuclear leadership." The report recommends government purchases to establish a Uranium Reserve as contemplated by the President’s Budget and other actions aimed to strengthen the entire nuclear fuel cycle.
The appropriations process is currently underway.
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The proposed budgeted activities are subject to appropriation by the Congress of the United States, and as the details of implementation of activities pursuant to the President’s Budget have not yet been defined, there can be no certainty of the outcome of the President’s Budget or any further evaluations of the Working Group. Therefore, the outcome of this process remains uncertain. If the required appropriations are not made by Congress, or if the U.S. President does not implement the activities contemplated by the President’s Budget, or implements them in a way that does not provide the required support for the Company’s activities, and uranium and vanadium markets do not otherwise improve, or as general market conditions may otherwise dictate, we may reduce our operational activities as required in order to minimize our cash expenditures while preserving our asset base for increased production in the future as market conditions may warrant.
On September 14, 2020, the DOC announced that it had obtained Russia's agreement to extend limits on uranium imports into the U.S. from Russia through 2040 under an extended Russian Suspension Agreement. This is an important step toward maintaining the long-term health of the U.S. uranium mining industry. The DOC won important concessions from Russia, including lower quotas starting in the mid-2020's, allowing only a portion of the quotas to be used for the sale of U3O8 and conversion into the U.S., and strict controls on Russian enrichment service contracts, reducing U.S. dependence on Russian uranium in the long term. While the extended Russian Suspension Agreement is an important step toward maintaining the long-term health of the U.S. uranium mining industry, it does not supplant the need for the uranium reserve as contemplated by the President's Budget and as recommended by the Working Group.
Management Streamlining
On August 20, 2020 the Company announced that it was making a number of changes to its management team in order to reduce costs, flatten the organizational structure, and focus on the ongoing growth of a new generation of U.S. uranium and REE professionals, including the following, effective September 1, 2020: (a) Mr. Scott Bakken, the Senior Director, Regulatory Affairs, became the Vice President of Regulatory Affairs, responsible for permitting and regulatory matters relating to all of the Company's operations, both conventional and ISR, and also for overall worker health and safety matters at the Company; (b) Mr. Bernard Bonifas, the Director, Wyoming Operations, became the Director of ISR Operations, responsible for all of the Company's ISR operations, including its Nichols Ranch ISR project in Wyoming and its Alta Mesa ISR project in Texas; (c) Ms. Sarai Luksch, CPA, joined the Company as Controller; (d) Ms. Dee Ann Nazarenus, the Director, Human Resources & Administration, became the Vice President of Human Resources & Administration, responsible for planning, developing, organizing, implementing, directing and evaluating all human resource functions of the Company, and directing and managing all administrative functions of the Company; and (e) Mr. Logan Shumway, the Manager of the Company's White Mesa Mill, became Director of Conventional Operations, including advancement of the Company's REE objectives, in addition to being responsible for overall White Mesa Mill management. In addition, and in support of the objective to reduce costs, effective as of August 31, 2020, Chief Operating Officer, Mr. W. Paul Goranson left the Company to pursue other opportunities, and effective as of October 31, 2020, Chief Accounting Officer, Mr. Matt Tarnowski, will be leaving the Company to pursue other opportunities.
Uranium Market Update
According to monthly price data from TradeTech LLC (“TradeTech”), uranium spot prices fell moderately during the third quarter of 2020. The uranium spot price began the quarter at $33.00 per pound on June 30, 2020 and fell 9% to $30.10 per pound on September 30, 2020. The uranium spot price was at its high of $33.00 at the beginning of the quarter on June 30, 2020, and a low of $30.00 during the week ended September 25, 2020. TradeTech price data also indicates that long-term U3O8 prices fell $2.00 during the quarter, beginning the quarter at $39.00 per pound and ending the quarter at $37.00 per pound. On October 23, 2020, TradeTech reported a spot price of $29.70 per pound.
During the quarter, significant production cuts continued in response to the global COVID-19 crisis, including Kazatomprom announcing a one-month extension to the staffing reduction at its production sites in Kazakhstan through July 2020, resulting in a total of four months of reduced activity (TradeTech, NMR, July 10, 2020). In addition, Cameco Corporation’s Cigar Lake Mine in Saskatchewan, Canada, which had been shut-down due to the pandemic, announced that this facility would restart production at the beginning of September 2020 (TradeTech, NMR, July 31, 2020). TradeTech estimates that the COVID-19 pandemic will result in reduced uranium production of approximately 14 million pounds (TradeTech, NMR, July 31, 2020). In addition, on October 5, 2020, the governments of the United States and Russia completed an amendment to the Russian Suspension Agreement, extending limits on Russian uranium imports into the United States (TradeTech, NMR, October 9, 2020). This action supports non-Russian suppliers to U.S. nuclear utilities.
The Company believes that certain uranium supply and demand fundamentals continue to point to higher uranium prices in the future, including significant production cuts in recent years and sharply reduced production in 2020 due to COVID-19 and increased demand from utilities, financial entities, traders, and producers. The Company also continues to believe a large degree
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of uncertainty exists in the market, primarily due to the size of mobile uranium inventories, transportation issues, premature reactor shutdowns in the U.S., trade issues, and the length of time of any uranium mine, conversion or enrichment shut-downs. However, the Company believes that there also exists considerable uncertainty as to the timing of a recovery in uranium markets, due to the opaque nature of inventories, secondary supplies, unfilled utility demand, and the market activity of state-owned uranium and nuclear companies.
Vanadium Market Update
During the quarter, the mid-point price of vanadium in Europe rose slightly from $5.30 per pound as of June 30, 2020 to $5.35 per pound as of September 30, 2020. According to Metal Bulletin, vanadium prices rose dramatically in the second half of 2018 due to anticipated increased demand in China, which implemented new standards requiring increased quantities of vanadium in rebar. However, in late-2018, prices began to drop sharply “when market participants realized the enforcement of the revised rebar policy was not as stringent as had been expected and after steel mills increased their use of ferro-niobium to reduce consumption of more costly vanadium” (Metal Bulletin, January 20, 2020). During the third quarter of 2020 prices have generally been flat, as a result of a quiet European spot market due to COVID-19 and a majority of material being shipped to China (Metal Bulletin, Battery Raw Material Market Report). As of October 23, 2020, the midpoint spot price of vanadium in Europe was $5.35 per pound.
Operations Update and Outlook for Year Ending December 31, 2020
Overview
Operations and Sales Outlook Overview
The Company plans to extract and/or recover limited amounts of uranium from its Nichols Ranch Project in 2020, which was placed on standby in the first quarter of 2020 due to the depletion of its existing wellfields. In addition, during 2020 the Company expects to recover uranium at the White Mesa Mill from in-circuit uranium inventories extracted from the recent vanadium Pond Return campaign, from Alternate Feed Materials and from other Pond Return activities. The vanadium Pond Return campaign conducted in 2019 was brought to a close in early 2020.
Both ISR and conventional uranium recovery is expected to be maintained at reduced levels, as a result of current uranium market conditions, until such time when market conditions improve sufficiently. Until such time that improvement in uranium market conditions is observed or suitable sales contracts can be entered into, the Company expects to defer further wellfield development at its Nichols Ranch Project. In addition, the Company expects to keep the Alta Mesa Project and its conventional mining properties on standby.
The Company is also seeking new sources of revenue, including new sources of Alternate Feed Materials and new fee processing opportunities at the White Mesa Mill that can be processed under existing market conditions (i.e., without reliance on current uranium sales prices). The Company is also evaluating opportunities to potentially recover REEs at the White Mesa Mill and will continue its support of U.S. governmental activities to support the U.S. uranium mining industry. In addition, the Company is in discussions with several parties to potentially sell certain of its non-material properties, although there are not currently any binding offers, and there can be no assurance at this time that a sale will be completed. The Company will evaluate additional acquisition and disposition opportunities that may arise.
Extraction and Recovery Activities Overview
During the nine months ended September 30, 2020, the Company recovered approximately 169,400 pounds of U3O8, all of which were for the account of the Company, which falls within the Company's previously published guidance of 125,000 to 175,000 pounds of U3O8 in the year ending December 31, 2020. The Company also recovered approximately 67,000 pounds of high-purity vanadium pentoxide (“V2O5” or “black flake”) during the nine months ended September 30, 2020 from its vanadium Pond Return campaign, which was suspended during the first quarter of 2020.
The Company has strategically opted not to enter into any uranium sales commitments for 2020. Therefore, subject to general market conditions, all 2020 uranium production is expected to be added to existing inventories, which are expected to total between 670,000 and 700,000 pounds of U3O8 at year-end. Both ISR and conventional uranium extraction and/or recovery is expected to continue to be maintained at reduced levels until such time that improvements in uranium market conditions are observed or suitable sales contracts can be entered into. All V2O5 production is expected to be sold on the spot market if prices rise significantly above current levels, but otherwise maintained in inventory.
ISR Activities
During the nine months ended September 30, 2020, the Company extracted and recovered approximately 6,200 pounds of U3O8 from its Nichols Ranch Project, which was placed on standby during the first quarter of 2020, due to the depletion of its existing
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wellfields. This amount of uranium production falls within the Company’s published guidance of approximately 6,000 pounds of U3O8 from Nichols Ranch during the year ended December 31, 2020.
As of September 30, 2020, the Nichols Ranch wellfields had nine header houses that previously extracted uranium, which are now depleted. Until such time as improvement in uranium market conditions is observed or suitable sales contracts can be procured, the Company expects to defer development of further header houses at its Nichols Ranch Project. The Company currently holds 34 fully-permitted, undeveloped wellfields at Nichols Ranch, including four additional wellfields at the Nichols Ranch wellfield, 22 wellfields at the adjacent Jane Dough wellfield, and eight wellfields at the Hank Project, which is fully permitted to be constructed as a satellite facility to the Nichols Ranch Plant.
The Company expects to continue to keep the Alta Mesa Project on standby until such time as improvements in uranium market conditions are observed or suitable sales contracts can be procured.
Conventional Activities
Conventional Extraction and Recovery Activities
During the nine months ended September 30, 2020, the Company produced 67,000 pounds of high-purity V2O5 from its Mill Pond Return program and 163,200 pounds of uranium from Alternate Feed Materials. During 2020, the Company expects to recover approximately 170,000 to 200,000 pounds of U3O8 at the White Mesa Mill and Pond Return activities from in-circuit uranium inventories extracted from the recent vanadium Pond Return campaign, from Alternate Feed Materials and from other Pond Return activities. In addition, there remains an estimated 1.5 to 3 million pounds of solubilized recoverable V2O5 inventory remaining in the tailings management facility awaiting future recovery from Pond Return as market conditions may warrant, placing the Company in a unique position to restart vanadium production quickly.
The White Mesa Mill has historically operated on a campaign basis whereby uranium and/or vanadium recovery is scheduled as mill feed, cash needs, contract requirements, and/or market conditions may warrant. The Company currently expects that planned uranium production from Alternate Feed Materials, Pond Return, and the receipt of uranium-bearing materials from mine cleanup activities will keep the Mill in operation through the remainder of 2020. The Company is also actively pursuing opportunities to process new and additional Alternate Feed Material sources and new and additional low-grade ore from third parties in connection with various uranium clean-up requirements. Successful results from these activities would allow the Mill to extend the current campaign through 2020 and beyond. In addition, if improvements in uranium market conditions are observed, or conventional mines are ramped up in response to U.S. government actions to support domestic uranium mining and/or recommendations of the Working Group, the Company would expect to be able to keep the Mill operating over a considerably longer period of time. The Company is also evaluating the recovery of REEs at the White Mesa Mill, which if successful could allow the Company to keep the Mill operating into the future.
However, in the event the Company is unable to justify full operation of the Mill through 2020, the Company expects to place uranium and/or vanadium recovery activities at the Mill on standby at that time. While on standby, the Mill would continue to dry and package material from the Nichols Ranch Plant, if operating, and continue to receive and stockpile Alternate Feed Materials for future milling campaigns. Each future milling campaign would be subject to receipt of sufficient mill feed and resulting cash flow that would allow the Company to operate the Mill on a profitable basis or to recover all or a portion of the Mill's standby costs.
Conventional Standby, Permitting and Evaluation Activities
During the nine months ended September 30, 2020, standby and environmental compliance activities continued to occur at the Canyon Project. Subject to general market conditions, during 2020, the Company plans to continue carrying out engineering, metallurgical testing, procurement and construction management activities at its low-cost Canyon Project. The timing of the Company’s plans to extract and process mineralized materials from this project will be based on the results of this additional evaluation work, along with market conditions, available financing, sales requirements, and/or permits required for copper recovery at the Mill.
The Company is selectively advancing certain permits at its other major conventional uranium projects, such as the Roca Honda Project, a large, high-grade conventional project in New Mexico. The Company will also maintain required permits at the Company’s conventional projects, including the Sheep Mountain Project, La Sal Complex, and Tony M, Whirlwind and Daneros mines. In addition, the Company will continue to evaluate the Bullfrog Property at its Henry Mountains Project. Expenditures for certain of these projects have been adjusted to coincide with expected dates of price recoveries based on the Company’s forecasts. The Company is also in discussions with several parties to potentially sell the Tony M, Daneros and other non-material properties. The Company will only sell these properties if sufficient cash and/or equity consideration is received. All of these projects potentially serve as important pipeline assets for the Company’s future conventional production capabilities, as market conditions warrant.
Sales
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During the nine months ended September 30, 2020, the Company completed no uranium sales. The Company currently has no remaining contracts, and therefore all existing uranium inventory and future production is fully unhedged to future uranium price increases.
During the nine months ended September 30, 2020, the Company did not complete the sale of any vanadium. The Company expects to continue to sell finished vanadium product, when justified, into the metallurgical industry, as well as other markets that demand a higher purity product, including the aerospace, chemical, and potentially the vanadium battery industries. The Company expects to sell to a diverse group of customers in order to maximize revenues and profits. The vanadium produced in the recent Pond Return campaign was a high-purity vanadium product of 99.6%-99.7% V2O5. The Company believes there may be opportunities to sell certain quantities of this high-purity material at a premium to reported spot prices. The Company may also retain vanadium product in inventory for future sale, depending on vanadium spot prices and general market conditions.
The Company also continues to pursue new sources of revenue, including additional Alternate Feed Materials and other sources of feed for the White Mesa Mill, in addition to evaluating the potential to recover REEs at the Mill.
The Company’s Plans in Response to U.S. Government Actions
In response to potential Congressional appropriations for the creation of a U.S. uranium reserve, and/or implementation of policy recommendations contained in the Working Group’s report, the Company is evaluating activities aimed towards increasing uranium production at all or some of its production facilities, including the currently operating White Mesa Mill, the recently operating Nichols Ranch ISR Facility, and the Alta Mesa ISR Facility, La Sal Complex and Canyon Mine, which are all currently on standby, as market conditions may warrant. The Company may commence such activities, prior to confirmation of Congressional appropriations and prior to the definition of all implementation details, as market conditions may warrant, recognizing that there can be no guarantee that the required appropriations will be forthcoming or that the implementation details will be satisfactory, and that the outcome of this process is therefore uncertain. Alternatively, the Company may defer any such activities until further clarification on implementation of the U.S. uranium reserve and/or Congressional appropriations are obtained, or market conditions otherwise warrant. No decisions on any project-specific actions to be taken in response to U.S. government actions have been made at this time.
Continued Efforts to Minimize Costs
The Company will continue to seek ways to minimize the costs of maintaining its critical properties in a state of readiness for potential improvements in market conditions and is evaluating whether additional cost-cutting measures may be warranted at this time as a result of general market conditions.
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Results of Operations
The following table summarizes the results of operations for the three and nine months ended September 30, 2020 and 2019 (in thousands of U.S. dollars):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Uranium concentrates | $ | — | $ | — | $ | — | $ | 66 | |||||||||||||||
| Vanadium concentrates | — | 16 | — | 1,957 | |||||||||||||||||||
| Alternate feed materials processing and other | 486 | 407 | 1,274 | 3,141 | |||||||||||||||||||
| Total revenues | 486 | 423 | 1,274 | 5,164 | |||||||||||||||||||
| Costs and expenses applicable to revenues | |||||||||||||||||||||||
| Costs and expenses applicable to uranium concentrates | — | — | — | 63 | |||||||||||||||||||
| Costs and expenses applicable to vanadium concentrates | — | 16 | — | 1,476 | |||||||||||||||||||
| Costs and expenses applicable to alternate feed materials and other | — | — | — | 2,079 | |||||||||||||||||||
| Total costs and expenses applicable to revenues | — | 16 | — | 3,618 | |||||||||||||||||||
| Impairment of inventories | 138 | 2,330 | 1,644 | 8,412 | |||||||||||||||||||
| Gross margin (loss) | 348 | (1,923) | (370) | (6,866) | |||||||||||||||||||
| Other operating costs and expenses | |||||||||||||||||||||||
| Development, permitting and land holding | 1,944 | 2,310 | 2,681 | 8,051 | |||||||||||||||||||
| Standby costs | 3,451 | 869 | 8,104 | 3,204 | |||||||||||||||||||
| Accretion of asset retirement obligation | 478 | 484 | 1,434 | 1,478 | |||||||||||||||||||
| Total other operating costs and expenses | 5,873 | 3,663 | 12,219 | 12,733 | |||||||||||||||||||
| Selling, general and administration | |||||||||||||||||||||||
| Selling costs | 3 | 30 | 15 | 167 | |||||||||||||||||||
| General and administration | 3,820 | 3,216 | 11,020 | 10,692 | |||||||||||||||||||
| Total selling, general and administration | 3,823 | 3,246 | 11,035 | 10,859 | |||||||||||||||||||
| Total operating loss | (9,348) | (8,832) | (23,624) | (30,458) | |||||||||||||||||||
| Interest expense | (218) | (419) | (913) | (1,110) | |||||||||||||||||||
| Other income | 628 | 2,312 | 1,745 | 3,181 | |||||||||||||||||||
| Net loss | $ | (8,938) | $ | (6,939) | $ | (22,792) | $ | (28,387) | |||||||||||||||
| Basic and diluted loss per share | $ | (0.08) | $ | (0.07) | $ | (0.19) | $ | (0.30) | |||||||||||||||
Revenues
Previously, the Company’s revenues from uranium were based on delivery schedules under long-term contracts, which could vary from quarter to quarter. As of December 31, 2018, the Company no longer had any uranium sales contacts. Any future sales of uranium will be subject to sale in the spot market until a time when the Company can agree to terms for long-term sales contracts or potentially pursuant to direct government purchases as contemplated by the President's Budget. In the year ended December 31, 2019, the Company initiated the selling of vanadium recovered from Pond Return at the White Mesa Mill under a Sales and Agency Agreement appointing an exclusive sales and marketing agent for all vanadium pentoxide produced by the Company.
Revenues for the three months ended September 30, 2020 totaled $0.49 million, all of which was related to fees for ore received from a third-party uranium mine.
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Revenues for the three months ended September 30, 2019 totaled $0.42 million, of which $0.02 million was related to sales of 2,000 pounds of vanadium concentrates and $0.41 million related to toll processing of uranium concentrates for third parties.
Revenues for the nine months ended September 30, 2020 totaled $1.27 million, all of which was related to fees for ore received from a third-party uranium mine.
Revenues for the nine months ended September 30, 2019 totaled $5.16 million; $1.96 million was related to sales of 152,000 pounds of vanadium concentrates and $3.14 million was related to toll processing of uranium concentrates.
Operating Expenses
Uranium and Vanadium recovered and costs and expenses applicable to revenue
In the three months ended September 30, 2020, the Company recovered approximately 90 pounds of U3O8 from ISR recovery activities for the Company's own account and approximately 86,200 pounds of U3O8 from Alternate Feed Materials at White Mesa Mill. In the three months ended September 30, 2019, the Company recovered 16,000 pounds of U3O8 from ISR recovery activities for the Company's own account and 530,000 pounds of V2O5 from the Company's pond solutions.
There are no costs and expenses applicable to revenue for the three months ended September 30, 2020 as the Company did not make any concentrate sales of U3O8 or V2O5 and only collected a fee to receive ore from a third-party uranium mine for which the Company incurred de minimis costs, compared with $0.02 million for the three months ended September 30, 2019. Costs and expenses applicable to revenue for the three months ended September 30, 2019 consisted of $0.02 million from V2O5 and nil related to Alternate Feed Materials.
In the nine months ended September 30, 2020, the Company recovered 6,200 pounds of U3O8 from ISR recovery activities for the Company's own account and 67,000 pounds of V2O5 from Pond Return. The Company recovered approximately 163,200 pounds of U3O8 from the pond solutions and Alternate Feed Materials at White Mesa Mill. In the nine months ended September 30, 2019, the Company recovered 56,000 pounds of U3O8 from ISR recovery activities for the Company's own account and 1,300,000 pounds of V2O5 from the Company's pond solutions.
There are no costs and expenses applicable to revenue for the nine months ended September 30, 2020 as the Company did not make any concentrate sales of U3O8 or V2O5 and only collected a fee to receive ore from a third-party uranium mine for which the Company incurred de minimis costs, compared with $3.62 million for the nine months ended September 30, 2019. Costs and expenses applicable to revenue for the nine months ended September 30, 2019 consisted of $1.48 million from V2O5 and $2.08 million related to Alternate Feed Materials.
Other Operating Costs and Expenses
Development, permitting and land holding
For the three months ended September 30, 2020, the Company spent $1.94 million for development of the Company's properties. For the three months ended September 30, 2019, the Company spent $2.31 million primarily due to the development of the V2O5 test-mining program at the La Sal Project as well as expenses associated with ramping up V2O5 production at the White Mesa Mill.
For the nine months ended September 30, 2020, the Company spent $2.68 million for development of the Company's properties. For the nine months ended September 30, 2019, the Company spent $8.05 million primarily due to the development of the V2O5 test-mining program at the La Sal Project as well as expenses associated with ramping up V2O5 production at the White Mesa Mill.
While we expect the amounts relative to the items listed above have added future value to the Company, we expense these amounts as we do not have proven or probable reserves at any of the Company's projects under SEC Industry Guide 7.
Standby costs
The Company’s La Sal and Daneros Projects were placed on standby in 2012, as a result of market conditions. In February 2014, the Company placed its Arizona 1 Project on standby. In the beginning of 2018 as well as the beginning of 2020, the White Mesa Mill was operated at lower levels of uranium recovery, including prolonged periods of standby. Costs related to the care and maintenance of the standby mines, along with standby costs incurred while the White Mesa Mill was operating at low levels of uranium recovery or on standby, are expensed.
For the three months ended September 30, 2020, standby costs totaled $3.45 million, compared with $0.87 million in the prior year. For the nine months ended September 30, 2020, standby costs totaled $8.10 million, compared with $3.20 million in the
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prior year. The increase is primarily related to a reduction in recovery activities at the Nichols Ranch and increased project standby activities at the Mill.
Accretion
Accretion related to the asset retirement obligation for the Company’s properties were $0.48 million and $1.43 million for the three and nine months ended September 30, 2020, compared with $0.48 million and $1.48 million for the three and nine months ended September 30, 2019, respectively. This decrease is primarily due to the Company delaying the timing of estimated reclamation activities at some of its projects.
Selling, general and administrative
Selling, general and administrative expenses include costs associated with marketing uranium, corporate, general and administrative costs and intangible asset amortization from favorable contracts. Selling, general and administrative expenses consist primarily of payroll and related expenses for personnel, contract and professional services, share-based compensation expense and other overhead expenditures. Selling, general and administrative expenses totaled $3.82 million and $11.04 million for the three and nine months ended September 30, 2020, compared to $3.25 million and $10.86 million for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2020, the Company incurred approximately $0.80 million in one-time management streamlining restructuring expenses.
Impairment of Inventories
For the three and nine months ended September 30, 2020, the Company recognized $0.14 million and $1.64 million, respectively, in impairment charges related to inventory. For the three and nine months ended September 30, 2019, the Company recognized $2.33 million and $8.41 million, respectively, in inventory impairment. The impairment of inventories is due to continued lower uranium prices versus our cost to produce at the Nichols Ranch Project.
Interest Expense and Other Income and Expenses
Interest expense
Interest expense for the three months ended September 30, 2020 was $0.22 million, compared with $0.42 million for the three months ended September 30, 2019, respectively. Interest expense for the nine months ended September 30, 2020 was $0.91 million, compared with $1.11 million for the nine months ended September 30, 2019, respectively.
Other income and expense
For the three months ended September 30, 2020, other income and expense was $0.63 million income, net. These amounts primarily consist of a mark-to-market gain on the change in the fair value of the Convertible Debentures of $0.15 million, a mark-to-market gain on the decrease in fair value of warrant liabilities of $0.31 million, a $0.26 million mark-to-market gain on investments accounted for at fair value, offset by a loss on foreign exchange of $0.11 million.
For the three months ended September 30, 2019, other income and expense was $2.31 million income, net. These amounts primarily consist of a mark-to-market gain on the change in fair value of the Convertible Debentures of $0.94 million, a mark-to-market gain on the decrease in fair value of warrant liabilities of $2.17 million, and interest income of $0.13 million, offset by a $0.59 million mark-to-market loss on investments accounted for at fair value.
For the nine months ended September 30, 2020, other income and expense was $1.75 million income, net. These amounts primarily consist of a gain on foreign exchange of $0.88 million, a $0.39 million mark-to-market gain on investments accounted for at fair value, a mark-to-market gain on the change in the fair value of the Convertible Debentures of $0.15 million, a mark-to-market gain on the decrease in fair value of warrant liabilities of $0.22 million, and interest income of $0.12 million.
For the nine months ended September 30, 2019, other income and expense was $3.18 million income, net. These amounts primarily consist of a mark-to-market gain on the change in fair value of the Convertible Debentures of $0.45 million, mark-to-market gain on the decrease in fair value of warrant liabilities of $3.28 million, and interest income of $0.39 million, offset by $0.58 million mark-to-market gain on investments accounted for at fair value.
LIQUIDITY AND CAPITAL RESOURCES
Shares issued for cash
On November 5, 2018, the Company filed a prospectus supplement to its U.S. registration statement, qualifying for distribution up to $24.50 million in aggregate Common Shares under the ATM. Then, on the same date, the Company filed a base shelf prospectus whereby the Company may sell any combination of the "Securities" as defined thereunder in one or more offerings
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having an aggregate offering price of up to $150.00 million. On May 5, 2019, the prospectus supplement to its U.S. registration statement expired, and was replaced on May 7, 2019 by a new prospectus supplement in the same amount, qualifying for distribution up to $24.50 million in aggregate Common Shares under the ATM. On December 31, 2019, the Company filed a prospectus supplement to its U.S. registration statement, qualifying for distribution up to $30.00 million in additional Common Shares under the ATM.
From October 1, 2020 through October 30, 2020, the Company issued 0.80 million Common Shares at a weighted average price of $1.72 for net proceeds of $1.35 million using the ATM.
Working capital at September 30, 2020 and future requirements for funds
At September 30, 2020, the Company had net working capital of $44.68 million, including $26.58 million in cash, $1.54 million of marketable securities, approximately 663,300 pounds of uranium finished goods inventory and approximately 1,672,000 pounds of vanadium finished goods inventory. The Company believes it has sufficient cash and resources to carry out its business plan for at least the next twelve months.
The Company is actively focused on its forward-looking liquidity needs, especially in light of the current depressed uranium markets. The Company is evaluating its ongoing fixed cost structure as well as decisions related to project retention, advancement and development. If current uranium prices persist for any extended period of time, the Company will likely be required to raise capital or take other measures to fund its ongoing operations. Significant development activities, if warranted, will require that we arrange for financing in advance of planned expenditures. In addition, we expect to continue to augment our current financial resources with external financing as our long-term business needs require. We cannot provide any assurance that we will pursue any of these transactions or that we will be successful in completing them on acceptable terms or at all.
The Company manages liquidity risk through the management of its working capital and its capital structure.
Cash and cash flows
Nine months ended September 30, 2020
Cash, cash equivalents and restricted cash were $46.81 million at September 30, 2020, compared to $32.89 million at December 31, 2019. The increase of $13.92 million was due primarily to cash provided by financing activities of $36.06 million, cash provided by investing activities of $3.19 million, offset by cash used in operating activities of $25.28 million and loss on foreign exchange on cash held in foreign currencies of $0.05 million.
Net cash used in operating activities of $25.28 million is comprised of the net loss of $22.79 million for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were $1.91 million of depreciation and amortization of property, plant and equipment, $1.64 million impairment on inventory, share-based compensation expense of $2.37 million, accretion of asset retirement obligation of $1.43 million, other non-cash expenses of $0.65 million, a decrease in trade and other receivables of $0.29 million, offset by an increase in inventories of $5.75 million, a decrease in accounts payable and accrued liabilities of $3.36 million, an increase in prepaid expenses and other assets of $0.44 million, a $0.22 million change in warrant liabilities, an unrealized foreign exchange gain of $0.86 million, and a change in the value of Convertible Debentures of $0.15 million.
Net cash provided by investing activities was $3.19 million comprised of $3.71 million cash received from maturities of marketable securities partially offset by $0.52 million cash used for the purchase of mineral properties and property, plant and equipment.
Net cash provided by financing activities totaled $36.06 million consisting of $44.64 million net proceeds from the issuance of Common Shares from a public offering and the issuance of shares under the Company's ATM facility, and $0.13 million cash received from non-controlling interest partially offset by $8.30 million to repay loans and borrowings and $0.42 million cash paid to fund employee income tax withholding due upon vesting of restricted stock units.
Nine months ended September 30, 2019
Cash, cash equivalents and restricted cash were $34.78 million at September 30, 2019, compared to $34.29 million at December 31, 2018. The increase of $0.49 million was due primarily to cash provided by financing activities of $15.62 million, cash provided by investing activities of $19.53 million, offset by cash used in operating activities of $34.70 million and loss on foreign exchange on cash held in foreign currencies of $0.04 million.
Net cash used in operating activities of $34.70 million is comprised of the net loss of $28.39 million for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were $0.92 million of depreciation and amortization of property, plant and equipment, $8.41 million impairment on inventory, share-based
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compensation expense of $2.50 million, accretion of asset retirement obligation of $1.48 million, $3.28 million change in warrant liabilities, $0.45 million change in value of convertible debentures, other non-cash expenses of $2.37 million, a decrease in trade and other receivables of $0.23 million, an increase in prepaid expenses and other assets of $0.24 million, unrealized foreign exchange gain of $0.14 million, offset by a decrease in accounts payable and accrued liabilities of $2.69 million, an increase in inventories of $12.85 million and changes in deferred revenue of $2.72 million.
Net cash provided by investing activities was $19.53 million, related to cash received from the sale and maturities of marketable securities.
Net cash provided by financing activities totaled $15.62 million consisting of $14.70 million proceeds from the issuance of stock using the Company's ATM offering, $0.80 million in proceeds from notes payable and $0.15 million cash received from exercise of stock options.
Critical accounting estimates and judgments
The preparation of these consolidated financial statements in accordance with U.S. GAAP requires the use of certain critical accounting estimates and judgments that affect the amounts reported. It also requires management to exercise judgment in applying the Company’s accounting policies. These judgments and estimates are based on management’s best knowledge of the relevant facts and circumstances taking into account previous experience. Although the Company regularly reviews the estimates and judgments made that affect these financial statements, actual results may be materially different.
Significant estimates made by management include:
a. Exploration Stage
SEC Industry Guide 7 defines a reserve as “that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.” The classification of a reserve must be evidenced by a bankable feasibility study using the latest three-year price average. While the Company has established the existence of mineral resources and has successfully extracted and recovered saleable uranium from certain of these resources, the Company has not established proven or probable reserves, as defined under SEC Industry Guide 7, for these operations or any of its uranium projects. As a result, the Company is in the Exploration Stage as defined under Industry Guide 7. Furthermore, the Company has no plans to establish proven or probable reserves for any of its uranium projects.
While in the Exploration Stage, among other things, the Company must expense all amounts that would normally be capitalized and subsequently depreciated or depleted over the life of the mining operation on properties that have proven or probable reserves.
Items such as the construction of wellfields and related header houses, additions to our recovery facilities and advancement of properties will all be expensed in the period incurred. As a result, the Company’s consolidated financial statements may not be directly comparable to the financial statements of mining companies in the development or production stages.
b. Resource estimates utilized
The Company utilizes estimates of its mineral resources based on information compiled by appropriately qualified persons. The information relating to the geological data on the size, depth and shape of the deposits requires complex geological judgments to interpret the data. The estimation of future cash flows related to resources is based upon factors such as estimates of future uranium prices, future construction and operating costs along with geological assumptions and judgments made in estimating the size and grade of the resource. Changes in the mineral resource estimates may impact the carrying value of mining and recovery assets, goodwill, reclamation and remediation obligations and depreciation and impairment.
c. Depreciation of mining and recovery assets acquired
For mining and recovery assets actively extracting and recovering uranium we depreciate the acquisition costs of the mining and recovery assets on a straight-line basis over our estimated lives of the mining and recovery assets. The process of estimating the useful life of the mining and recovery assets requires significant judgment in evaluating and assessing available geological, geophysical, engineering and economic data, projected rates of extraction and recovery, estimated commodity price forecasts and the timing of future expenditures, all of which are, by their very nature, subject to interpretation and uncertainty.
Changes in these estimates may materially impact the carrying value of the Company’s mining and recovery assets and the recorded amount of depreciation.
d. Impairment testing of mining and recovery assets
The Company undertakes a review of the carrying values of its mining and recovery assets whenever events or changes in circumstances indicate that their carrying values may exceed their estimated net recoverable amounts determined by reference to estimated future operating results and net cash flows. An impairment loss is recognized when the carrying value of a mining or recovery asset is not recoverable based on this analysis. In undertaking this review, the management of the Company is
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required to make significant estimates of, among other things, future production and sale volumes, forecast commodity prices, future operating and capital costs and reclamation costs to the end of the mining asset’s life. These estimates are subject to various risks and uncertainties, which may ultimately have an effect on the expected recoverability of the carrying values of mining and recovery assets.
e. Asset retirement obligations
Asset retirement obligations are recorded as a liability when an asset that will require reclamation and remediation is initially acquired. For disturbances created on a property owned that will require future reclamation and remediation the Company records asset retirement obligations for such disturbance when occurred. The Company has accrued its best estimate of its share of the cost to decommission its mining and milling properties in accordance with existing laws, contracts and other policies. The estimate of future costs involves a number of estimates relating to timing, type of costs, mine closure plans, and review of potential methods and technical advancements. Furthermore, due to uncertainties concerning environmental remediation, the ultimate cost of the Company’s decommissioning liability could differ from amounts provided. The estimate of the Company’s obligation is subject to change due to amendments to applicable laws and regulations and as new information concerning the Company’s operations becomes available. The Company is not able to determine the impact on its financial position, if any, of environmental laws and regulations that may be enacted in the future. Additionally, the expected cash flows in the future are discounted at the Company’s estimated cost of capital based on the periods the Company expects to complete the reclamation and remediation activities. Differences in the expected periods of reclamation or in the discount rates used could have a material difference in the actual settlement of the obligations compared with the amounts provided.
Recently Adopted Accounting Pronouncements
Fair Value Measurement
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-13, which amended the fair value measurement guidance by removing and modifying certain disclosure requirements, while also adding new disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty would be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments would be applied retrospectively to all periods presented upon their effective date. The Company adopted this pronouncement effective January 1, 2020.
Recently Issued Accounting Pronouncements Not Yet Adopted
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The new standard is effective for reporting periods beginning after December 15, 2022 (January 1, 2023 for the Company) for Smaller Reporting Companies. The standard replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740),” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2020 (January 1, 2021 for the Company). Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2019-12 will have on its consolidated financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to risks associated with commodity prices, interest rates, foreign currency exchange rates and credit. Commodity price risk is defined as the potential loss that we may incur as a result of changes in the market value of uranium or vanadium. Interest rate risk results from our debt and equity instruments that we issue to provide financing and liquidity for our business. The foreign currency exchange rate risk relates to the risk that the value of financial commitments, recognized assets or liabilities will fluctuate due to changes in foreign currency rates. Credit risk arises from the extension of credit throughout all aspects of our business. Industry-wide risks can also affect our general ability to finance exploration, and development of exploitable resources; such effects are not predictable or quantifiable. Market risk is the risk to the Company of adverse financial impact due to change in the fair value or future cash flows of financial instruments as a result of fluctuations in interest rates and foreign currency exchange rates. The Company currently does not have any contracts in place for the sale of vanadium.
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Commodity Price Risk
The Company is subject to market risk related to the market price of U3O8 and V2O5. The Company's existing long-term uranium contracts have expired, following the Company's April 2018 deliveries, and all uranium sales will now be required to be made at spot prices until the Company enters into new long-term contracts at satisfactory prices in the future. Future revenue beyond our current contracts will be affected by both spot and long-term U3O8 price fluctuations, which are affected by factors beyond our control, including: the demand for nuclear power; political and economic conditions; governmental legislation in uranium producing and consuming countries; and production levels and costs of production of other producing companies. The Company continuously monitors the market to determine its level of extraction and recovery of uranium and vanadium in the future.
Interest Rate Risk
The Company is exposed to interest rate risk on its cash equivalents, deposits, restricted cash, and debt. Our interest income is earned in the United States dollars and is not subject to interest rate risk. The Company was previously exposed to an interest rate risk associated with the Convertible Debentures, which is based on the spot market price of U3O8. However, all of the Convertible Debentures were redeemed as of October 6, 2020. See “Note 7 to the Financial Statements: Loans and Borrowings.” The Company does not use derivatives to manage interest rate risk.
Currency Risk
The foreign currency exchange rate risk relates to the risk that the value of financial commitments, recognized assets or liabilities will fluctuate due to changes in foreign currency rates. The Company does not use any derivative instruments to reduce its exposure to fluctuations in foreign currency exchange rates. As the U.S. Dollar is the functional currency of our U.S. operations, the currency risk has been reduced. We maintain a nominal balance in foreign currency, resulting in a low currency risk relative to our cash balances. Our Convertible Debentures were denominated in Canadian Dollars and, accordingly, prior to their redemption on October 6, 2020 were exposed to currency risk.
The following table summarizes, in United States dollar equivalents, the Company’s major foreign currency (Cdn$) exposures as of September 30, 2020 ($000):
| Cash and cash equivalents | $ | 1,472 | |||
| Accounts payable and accrued liabilities | (399) | ||||
| Loans and borrowings | (7,898) | ||||
| Total | $ | (6,825) | |||
The table below summarizes a sensitivity analysis for significant unsettled currency risk exposure with respect to our financial instruments as of September 30, 2020 (assuming the Convertible Debentures were not redeemed) with all other variables held constant. It shows how net income would have been affected by changes in the relevant risk variables that were reasonably possible at that date.
| ('000s) | Change for Sensitivity Analysis | Increase (decrease) in other comprehensive income | ||||||
| Strengthening net earnings | +1% change in US dollar | $ | (91) | |||||
| Weakening net earnings | -1% change in U.S. dollar | $ | 91 | |||||
Credit Risk
Credit risk relates to cash and cash equivalents, investments available for sale, trade, and other receivables that arise from the possibility that any counterparty to an instrument fails to perform. The Company only transacts with highly rated counterparties and a limit on contingent exposure has been established for any counterparty based on that counterparty’s credit rating. The Company’s sales are attributable mainly to multinational utilities. The Company carries credit risk insurance relating to its vanadium sales, which it considers to be adequate. As of September 30, 2020, the Company’s maximum exposure to credit risk was the carrying value of cash and cash equivalents, investments available for sale, trade receivables and taxes recoverable.
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ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the U.S. SEC and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of September 30, 2020 and, based on their evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to material weaknesses in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the second quarter of fiscal year 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Remediation
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, we began implementing a remediation plan to address the material weakness described therein. The material weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal year 2020.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
We are not aware of any material pending or threatened litigation or of any proceedings known to be contemplated by governmental authorities that are, or would be, likely to have a material adverse effect upon us or our operations, taken as a whole that was not disclosed in the Company's Form 10-K for the year ended December 31, 2019, or in this Form 10-Q for the quarter ended September 30, 2020.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURE.
The mine safety disclosures required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K are included in Exhibit 95.1 of this Quarterly Report, which is incorporated by reference into this Item 4.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibits
The following exhibits are filed as part of this report:
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| Exhibit | ||||||||
| Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
| 4.5 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 10.7 | ||||||||
| 10.8 | ||||||||
| 10.9 | ||||||||
| 10.10 | ||||||||
| 23.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 95.1 | ||||||||
| 101.INS | XBRL Instance Document | |||||||
| 101.SCH | XBRL Taxonomy Extension – Schema | |||||||
| 101.CAL | XBRL Taxonomy Extension – Calculations | |||||||
| 101.DEF | XBRL Taxonomy Extension – Definitions | |||||||
| 101.LAB | XBRL Taxonomy Extension – Labels | |||||||
| 101.PRE | XBRL Taxonomy Extension – Presentations | |||||||
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| (1) | Incorporated by reference to Exhibit 3.1 of Energy Fuels’ Form F-4 filed with the SEC on May 8, 2015. | ||||
| (2) | Incorporated by reference to Exhibit 3.2 of Energy Fuels’ Form F-4 filed with the SEC on May 8, 2015. | ||||
| (3) | Incorporated by reference to Exhibit 3.3 of Energy Fuels’ Form F-4 filed with the SEC on May 8, 2015. | ||||
| (4) | Incorporated by reference to Exhibit 10.9 to Energy Fuels’ Form F-4 filed on May 8, 2015. | ||||
| (5) | Incorporated by reference to Exhibit 4.1 to Energy Fuels' Form 8-K filed on September 20, 2016. | ||||
| (6) | Incorporated by reference to Exhibit 4.2 to Energy Fuels' Form S-8 filed on June 24, 2015. | ||||
| (7) | Incorporated by reference to Schedule B to Energy Fuels' Schedule 14A filed on April 11, 2018. | ||||
| (8) | Incorporated by reference to Schedule C to Energy Fuels’ Schedule 14A filed on April 11, 2018. | ||||
| (9) | Incorporated by reference to Exhibit 10.1 to Energy Fuels’ Form 10-Q filed with the SEC on August 5, 2019. | ||||
| (10) | Incorporated by reference to Exhibit 10.3 to Energy Fuels’ Form 10-Q filed with the SEC on May 8, 2019. | ||||
| (11) | Incorporated by reference to Exhibit 10.4 to Energy Fuels’ Form 10-Q filed with the SEC on May 8, 2019. | ||||
| (12) | Incorporated by reference to Exhibit 1.1 to Energy Fuels’ Form 8-K filed on April 3, 2018. | ||||
| (13) | Incorporated by reference to Exhibit 14.16 to Energy Fuels’ Form 10-Q filed with the SEC on November 5, 2018. | ||||
| (14) | Incorporated by reference to Exhibit 10.10 to Energy Fuels’ Form 10-K filed with the SEC on March 17, 2020. | ||||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENERGY FUELS INC.
(Registrant)
| Dated: October 30, 2020 | By: | /s/ Mark S. Chalmers | ||||||
| Mark S. Chalmers | ||||||||
| President & Chief Executive Officer | ||||||||
| Dated: October 30, 2020 | By: | /s/ David C. Frydenlund | ||||||
| David C. Frydenlund | ||||||||
| Chief Financial Officer | ||||||||
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