Electra Battery Materials (ELBM) - 2023 Q4 - Annual Report

Management's Accountability and Auditor's Reports This section covers management's responsibility for financial statements and independent auditor opinions, including going concern uncertainties Report of Management's Accountability Management identified material weaknesses in internal controls for 2023 but implemented processes to ensure fair financial statement presentation - Management identified material weaknesses in internal controls over financial reporting and disclosure controls and procedures for the year ending December 31, 2023, specifically related to the design of process level and financial statement close controls[4] - Management has implemented appropriate processes to support representations that the consolidated financial statements fairly present the Company's financial condition, performance, and cash flows[5] Report of Independent Registered Public Accounting Firm (MNP LLP) MNP LLP affirmed fair presentation of 2023 financial statements but noted material uncertainty regarding going concern due to recurring losses - The consolidated financial statements for December 31, 2023, present fairly, in all material respects, the financial position, performance, and cash flows of Electra Battery Materials Corporation in conformity with IFRS[10] - A material uncertainty exists regarding the Company's ability to continue as a going concern due to recurring net losses from operations, negative cash flows, and an accumulated deficit as of December 31, 2023[12] Report of Independent Registered Public Accounting Firm (KPMG LLP) KPMG LLP opined on 2022 financial statements' fair presentation before retrospective adjustments, which they did not audit - The 2022 consolidated financial statements, before the effects of the adjustments to retrospectively apply the change in segment composition described in Note 24, present fairly the financial position, performance, and cash flows of the Company[18] - KPMG LLP was not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in segment composition described in Note 24 and, accordingly, does not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied[19] Consolidated Financial Statements This section presents the Company's financial position, performance, cash flows, and changes in equity for the reported periods Consolidated Statements of Financial Position Total assets decreased to CAD 148,692 thousand in 2023, driven by reduced property, plant, and equipment and a substantial decline in shareholders' equity Consolidated Statements of Financial Position (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | ASSETS | | | | | Current Assets | 10,592 | 13,518 | (2,926) | | Non-Current Assets | 138,100 | 174,006 | (35,906) | | Total Assets | 148,692 | 187,524 | (38,832) | | LIABILITIES | | | | | Current Liabilities | 15,986 | 54,109 | (38,123) | | Non-Current Liabilities | 49,409 | 6,906 | 42,503 | | Total Liabilities | 65,394 | 61,015 | 4,379 | | SHAREHOLDERS' EQUITY | | | | | Common shares | 304,721 | 288,871 | 15,850 | | Reserve | 25,579 | 17,892 | 7,687 | | Accumulated other comprehensive income | (1,557) | 525 | (2,082) | | Deficit | (245,445) | (180,779) | (64,666) | | Total Shareholders' Equity | 83,298 | 126,509 | (43,211) | | Total Liabilities and Shareholders' Equity | 148,692 | 187,524 | (38,832)| - Property, plant and equipment decreased significantly from CAD 82,288 thousand in 2022 to CAD 51,258 thousand in 2023, largely due to an impairment charge on the Refinery[24][104] - Non-current liabilities saw a substantial increase from CAD 6,906 thousand in 2022 to CAD 49,409 thousand in 2023, primarily driven by the recognition of convertible notes payable (CAD 40,101 thousand) and an increase in asset retirement obligations[24] Consolidated Statements of Income (Loss) and Other Comprehensive Income (Loss) A net loss of CAD 64,666 thousand was reported in 2023, a significant decline from 2022's net income, primarily due to a large impairment charge Consolidated Statements of Income (Loss) (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Operating expenses | 13,983 | 16,754 | (2,771) | | Unrealized loss on marketable securities | (253) | (589) | 336 | | Gain on financial derivative liability - Convertible Notes | 6,683 | 27,686 | (21,003) | | Changes in fair value of US Warrant | 1,243 | 1,531 | (288) | | Other non-operating income (loss) | (6,472) | 677 | (7,149) | | Impairment | (51,884) | — | (51,884) | | Net Income (loss) | (64,666) | 12,551 | (77,217) | | Foreign currency translation gain | (2,082) | — | (2,082) | | Net income (loss) and other comprehensive loss | (66,748) | 12,551 | (79,299) | | Basic income (loss) per share | (1.49) | 0.38 | (1.87) | | Diluted loss per share | (1.49) | (0.37) | (1.12) | | Weighted average number of common shares outstanding - Basic | 43,430,951 | 32,646,906 | 10,784,045 | | Weighted average number of common shares outstanding - Diluted | 43,430,951 | 40,763,386 | 2,667,565 | - A significant impairment charge of CAD 51,884 thousand was recognized in 2023, contributing heavily to the net loss, compared to no impairment in 2022[26] - The gain on financial derivative liability from Convertible Notes decreased substantially from CAD 27,686 thousand in 2022 to CAD 6,683 thousand in 2023, impacting overall profitability[26] Consolidated Statements of Shareholders' Equity Total shareholders' equity decreased to CAD 83,298 thousand in 2023, primarily driven by the CAD 64,666 thousand net loss and other comprehensive loss Changes in Shareholders' Equity (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Balance – January 1 | $126,509 | $99,964 | | Net income (loss) for the year | (64,666) | 12,551 | | Other comprehensive loss for the year | (2,082) | — | | Share-based payment expense | 1,226 | 1,282 | | Directors' fees paid in deferred share units | 595 | 115 | | Proceeds from issuance of share, net of transaction costs | 19,960 | 3,114 | | Convertible Notes Conversion | 998 | 4,835 | | Settlement of interest on 2028 Notes | 795 | — | | Settlement of transaction costs on 2028 Notes | 240 | — | | 2022 Private Placement transaction costs | (284) | — | | Settlement of easement | 7 | — | | Exercise of restricted share units | — | 947 | | ATM Program sales | — | 3,701 | | Balance – December 31 | $83,298 | $126,509 | | Common Shares (Number) | 55,851,327 | 35,185,977 | - The accumulated deficit increased significantly from CAD 180,779 thousand in 2022 to CAD 245,445 thousand in 2023, reflecting the net loss for the year[27] - The Company issued 19,545,454 units in a private placement in August 2023, generating net proceeds of CAD 19,960 thousand, contributing to an increase in common shares[27][142] Consolidated Statements of Cash Flows Cash used in operating activities increased to CAD 23,046 thousand in 2023, while cash from financing activities significantly increased to CAD 36,537 thousand Consolidated Statements of Cash Flows (CAD thousands) | Activity | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Cash used in operating activities | (23,046) | (15,845) | (7,201) | | Cash used in investing activities | (14,047) | (43,553) | 29,506 | | Cash provided by financing activities | 36,537 | 8,484 | 28,053 | | Change in cash during the year | (556) | (50,914) | 50,358 | | Cash, beginning of year | 7,952 | 58,626 | (50,674) | | Cash, end of year | 7,560 | 7,952 | (392) | - Additions to property, plant and equipment decreased significantly from CAD 47,591 thousand in 2022 to CAD 13,705 thousand in 2023, reflecting reduced capital expenditure[28] - Proceeds from 2028 Notes contributed CAD 68,049 thousand to financing activities in 2023, a major factor in the increased cash provided by financing[28] Notes to the Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements 1. Significant Nature of Operations The Company produces battery materials for EVs, facing going concern risk due to recurring losses and negative cash flows, actively seeking financing Company Overview Electra Battery Materials Corporation focuses on building a North American integrated battery materials facility for the EV supply chain - Electra Battery Materials Corporation is focused on producing battery materials for the electric vehicle supply chain, specifically cobalt, nickel, and recycled battery materials[29] - The Company is constructing its expanded hydrometallurgical cobalt refinery and assessing optimizations for a recycled battery material (black mass) program[31] Going Concern Basis of Accounting Substantial doubt exists about the Company's going concern ability due to recurring losses and suspended refinery construction, necessitating new financing - The Company has recurring net operating losses and negative cash flows from operations, with an accumulated deficit of CAD 245,445 thousand as of December 31, 2023, raising substantial doubt about its ability to continue as a going concern[33] - Construction of the refinery was suspended due to lack of sufficient funding, and the Company is actively pursuing government grants, strategic partnerships, equity, and debt financing to increase liquidity[33][35] - The consolidated financial statements do not include adjustments that might result if the Company is unable to continue as a going concern, and such adjustments may be material[36] 2. Material Accounting Policies and Basis of Preparation This note details accounting policies including IFRS, functional currency, consolidation, financial instruments, impairment, and share-based payments Basis of Presentation and Statement of Compliance Consolidated financial statements are prepared under IFRS on a historical cost basis, with certain instruments at fair value, all in thousands of Canadian dollars - Consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB[37] - Statements are prepared on a historical cost basis, except for certain financial instruments classified as fair value through profit or loss (FVTPL), and all amounts are in thousands of Canadian dollars[37] Functional Currency The Company's functional currency is Canadian dollars, with exceptions for Australian and US subsidiaries, and a prospective change for US subsidiaries in 2023 - The functional currency of the Company and its subsidiaries is Canadian dollars, except for Cobalt One Limited (Australian Dollars) and Idaho Cobalt Company (US Dollars)[38] - During 2023, the functional currency of US subsidiaries changed from Canadian dollars to US Dollars, applied prospectively from January 1, 2023[41] Basis of Consolidation Consolidated financial statements include the Company and its 100% controlled entities, with all inter-company transactions fully eliminated - The consolidated financial statements include the accounts of the Company and its controlled entities, where control is defined as the power to govern financial operating policies to obtain benefits[42] - All inter-company transactions, balances, income, and expenses are eliminated in full upon consolidation[43] Cash and Cash equivalents Cash and cash equivalents include cash on hand, bank deposits, and highly liquid investments with original maturities of three months or less - Cash and cash equivalents consist of cash on hand, deposits in banks and highly liquid investments with an original maturity of three months or less[44] Restricted cash Restricted cash comprises escrow funds for vendor settlements and long-term deposits for refinery closure plans - Restricted cash includes escrow funds for vendor settlements (term less than one year) and long-term amounts on deposit for the refinery closure plan as financial assurance[45] Marketable Securities Marketable securities are classified as FVTPL, held for trading, and expected to be liquidated within twelve months - Marketable securities are held for trading purposes, classified as financial assets measured at FVTPL, and are expected to be liquidated within a twelve-month period[46][47] Financial instruments Financial instruments are initially recognized at fair value and classified as FVTPL, fair value through OCI, or amortized cost, with specific categories for each type - Financial assets and liabilities are initially recognized at fair value and classified into FVTPL, fair value through other comprehensive income, or amortized cost[49] Financial Instrument Measurement Categories | Financial assets or liabilities | Measurement Category | | :--- | :--- | | Cash and cash equivalents | Amortized Cost | | Restricted cash | Amortized Cost | | Receivables | Amortized Cost | | Marketable securities | FVTPL | | Account payable and accrued liabilities | Amortized Cost | | Convertible notes payable | FVTPL | | Government loan payable | Amortized Cost | | Warrants | FVTPL | | Royalty | Amortized Cost | Exploration and Evaluation Assets Mineral property acquisition costs are capitalized, while subsequent exploration costs are expensed until technical feasibility is demonstrated, with regular impairment reviews - Acquisition costs of mineral property interests are capitalized as exploration and evaluation assets; subsequent costs are expensed until technical feasibility and commercial viability are demonstrated[53] - Mineral property interests are reviewed for impairment at each reporting period, considering adverse changes in legal, regulatory, environmental, or political factors, and future work plans[55] Property, Plant and Equipment Property, plant, and equipment are recorded at cost less depreciation and impairment, with depreciation commencing when assets are ready for use, but not yet for the Refinery - Plant and equipment are recorded at cost less accumulated depreciation and impairment losses, including purchase/construction costs and directly attributable costs[57] - Depreciation commences when the asset is ready for its intended use, using the straight-line method; however, no depreciation has been recorded for the Refinery as it is not yet in service[58][59] Capital Long-Term Prepayments Milestone payments for major equipment are initially recorded as capital long-term prepayments and reclassified to property, plant, and equipment upon delivery - Milestone payments for major equipment items are initially recorded as capital long-term prepayments and reclassified to property, plant and equipment upon delivery to the Refinery site[61] Leases The Company recognizes ROU assets and lease liabilities for identified assets, depreciating ROU assets over the lease term and measuring liabilities at present value - The Company recognizes a right-of-use (ROU) asset and a lease liability at the lease commencement date for contracts conveying the right to control the use of an identified asset[62] - ROU assets are depreciated using the straight-line method over the lease term, and lease liabilities are measured at the present value of lease payments[63][64] Borrowing Costs Borrowing costs are expensed as incurred, except when capitalized for qualifying asset construction like the Refinery - Borrowing costs are expensed as incurred, except when related to the financing of construction or development of qualifying assets, where they are capitalized as property, plant and equipment[65] - Proceeds from convertible notes and government grants are utilized for Refinery construction, which is considered a qualifying asset under IAS 23[66] Impairment Financial assets are assessed for expected credit losses, and non-financial assets are evaluated for impairment when carrying value exceeds recoverable amount - Financial assets measured at amortized cost are assessed for expected credit losses under IFRS 9[67] - Non-financial assets are evaluated for impairment indicators at each reporting period, and an impairment loss is recognized if the carrying amount exceeds the recoverable amount (fair value less costs to sell or value in use)[68] Assets Held for Sale Non-current assets are classified as held-for-sale if recovery is primarily through sale, measured at the lower of carrying amount and fair value less costs to sell - Non-current assets or disposal groups are classified as held-for-sale if recovery is highly probable through sale, measured at the lower of carrying amount and fair value less costs to sell[70] - Once classified as held-for-sale, property, plant, and equipment are no longer amortized or depreciated[70] Share capital Common shares are classified as equity, with transaction costs deducted from equity, and non-cash issuances valued at the fair value of goods or services - Common shares are classified as equity, with transaction costs directly attributable to their issue recognized as a deduction from equity[71] - Common shares issued for consideration other than cash are valued based on the fair value of goods or services received[71] Warrants classified as equity/liabilities Equity-classified warrants are recorded at fair value on issuance, while derivative liability warrants are revalued at each balance sheet date with changes in profit or loss - Warrants classified as equity are recorded at fair value on issuance with no further valuation adjustments[72] - Warrants classified as derivative liabilities are revalued at each balance sheet date using option pricing models, with fair value changes recognized in profit or loss[73] Share-based payment transactions The Company grants stock options, DSUs, RSUs, and PSUs, valued using Black-Scholes or fair value on grant date, and expensed over vesting periods - The Company grants stock options, DSUs, RSUs, and PSUs under its long-term incentive plan to officers, directors, employees, and consultants[74] - Stock options are valued using the Black-Scholes model and expensed over the vesting period, while DSUs, RSUs, and PSUs are measured at fair value on grant date and expensed over their respective vesting periods[75][77] Environmental rehabilitation An obligation for environmental costs is recognized when disturbance occurs, capitalized to the asset, and amortized over its economic life - An obligation for restoration, rehabilitation, and environmental costs is recognized when environmental disturbance occurs, with estimated costs capitalized to the asset's carrying amount[78] - Costs are amortized over the economic life of the related asset, and the liability is adjusted for changes in discount rates or underlying cash flows[78] Income taxes Income tax expense includes current and deferred taxes, with deferred tax assets recognized when future taxable profits are probable - Income tax expense comprises current and deferred taxes, recognized in profit or loss unless related to items recognized directly in equity[79] - Deferred tax assets are recognized for unused tax losses, tax credits, and deductible temporary differences, to the extent that it is probable that future taxable profits will be available[81] Income / Loss per share Basic income/loss per share is calculated using weighted average common shares, while diluted adjusts for potential shares, excluding anti-dilutive effects - Basic income/loss per share is calculated by dividing income/loss attributable to common shareholders by the weighted average number of common shares outstanding[82] - Diluted income/loss per share adjusts for potential common shares from outstanding stock options and warrants, excluding anti-dilutive effects[82] Operating Segments The Chief Operating Decision Maker reviews the Refinery and exploration and evaluation activities as separate operating segments - The Company's operating segments are the Refinery and exploration and evaluation assets, as reviewed by the Chief Operating Decision Maker[84][85] Related Party Transactions Related parties include key management and entities under common control, with transactions involving resource, service, or obligation transfers - Related parties include key management personnel, directors, and corporate entities subject to common control[85] - A related party transaction involves the transfer of resources, services, or obligations between related parties[85] Government Loans Non-interest-bearing government loans are recorded at present value, with the difference recognized as a government grant liability amortized over the Refinery asset's life - Non-interest-bearing government loans are recorded at present value, with the difference between funding and present value recognized as a government grant liability[86] - The government grant liability is amortized to income over the life of the Refinery asset to which the funding relates[86] Government Grant Non-repayable grants for Refinery construction are recorded as a liability and amortized to income over the Refinery asset's life - Non-repayable grants from the Ontario Government, received as reimbursement for Refinery construction costs, are recorded as a liability and amortized to income over the Refinery asset's life[88] 3. Recently Adopted and Issued Not Yet Effective Accounting Standards Several accounting standard amendments were adopted in 2023, with no significant impact on financial statements, though IAS 1's effect on liability classification is pending - Amendments to IFRS 17 (Insurance contracts), IAS 12 (Deferred tax, International Tax Reform), IAS 8 (Definition of Accounting Estimates), and IAS 1 (Disclosure of Accounting Policies) were adopted effective January 1, 2023[89][90][91][92][94] - The adoption of these amendments did not have a significant impact on the Company's consolidated financial statements, except for IAS 1 amendments on liability classification, whose impact is still being determined[89][90][91][93][94][96] 4. Significant Accounting Judgments and Estimates Significant judgments and estimates are made for impairment of Refinery and Exploration assets, fair value of financial derivative liabilities, and environmental rehabilitation provisions - Significant judgments and estimates are required for assessing potential impairment of the Refinery asset, considering technological, market, economic, or legal changes[98][100] - The net carrying value of mineral properties (Exploration and Evaluation Assets) is regularly reviewed for impairment, considering adverse changes in legal, regulatory, environmental, or political factors[101] - The fair value of financial derivative liabilities, including convertible notes and US dollar denominated warrants, involves significant estimation based on risk-free rates, share price, equity volatility, and credit spread[102] - Environmental rehabilitation provisions require significant estimations for reclamation and closure activities, including probable costs and timing[103] 5. Property, Plant and Equipment and Capital Long-Term Prepayments Net book value of property, plant, and equipment decreased to CAD 51,258 thousand in 2023, primarily due to a CAD 51,884 thousand impairment charge on the Refinery Net Book Value of Property, Plant and Equipment (CAD thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Property, Plant and Equipment | $5,979 | $5,979 | | Construction in Progress | $45,074 | $76,048 | | Right-of-use Assets | $205 | $261 | | Total Net Book Value | $51,258 | $82,288 | - An impairment charge of CAD 51,884 thousand was recognized on the Refinery in Ontario during 2023, based on a recoverable amount of CAD 44,899 thousand (value in use, 20% discount rate, commercial production in 2026)[105] - Capital long-term prepayments, which were CAD 3,087 thousand at December 31, 2022, were fully transferred to property, plant and equipment by December 31, 2023, resulting in a zero balance[109] 6. Exploration and Evaluation Assets Exploration and evaluation assets, mainly Iron Creek, decreased slightly to CAD 85,634 thousand in 2023, with Canadian Cobalt Camp assets sold post-impairment reversal Exploration and Evaluation Assets (CAD thousands) | Property | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Iron Creek, USA | $85,634 | $87,693 | $(2,059) | | Cobalt Camp, Ontario | — | — | — | | Total | $85,634 | $87,693 | $(2,059) | - All Iron Creek mineral properties are pledged as security for the 2028 Notes and will be released upon successful commissioning of the Refinery[110] - The Canadian Cobalt Camp assets were sold in January 2023, following an impairment reversal of CAD 1,338 thousand at December 31, 2022, which brought their book value to market value[112][113][115] 7. Marketable Securities Marketable securities, primarily Kuya Silver Corp shares, increased in value to CAD 595 thousand in 2023 despite an unrealized loss Marketable Securities Value (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total value of marketable securities | $595 | $433 | | Unrealized loss on marketable securities | $(253) | $(589) | - The Company completed the sale of remaining Canadian Cobalt Camp assets to Kuya Silver Corp on January 31, 2023, receiving 3,108,108 shares as consideration and settlement of payables[115] 8. Disposal Group Held for Sale Canadian Cobalt Camp assets were classified as held-for-sale at CAD 1,000 thousand in 2022 and sold in January 2023, resulting in a nil balance - At December 31, 2022, the Canadian Cobalt Camp assets and liabilities were classified as a disposal group held for sale with a fair value of CAD 1,000 thousand, comprising CAD 1,338 thousand in assets and CAD 338 thousand in asset retirement obligations[116][117] - An impairment reversal was recorded at December 31, 2022, to reflect the market value of the Cobalt Camp assets based on the agreement with Kuya Silver Corp[116] 9. Receivables Receivables, mainly HST refunds, decreased from CAD 3,079 thousand in 2022 to CAD 1,081 thousand in 2023 Receivables (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Receivables | $1,081 | $3,079 | $(1,998) | - Receivables primarily comprise HST refunds due to the Company from the Canada Revenue Agency[118] 10. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities significantly decreased to CAD 8,828 thousand in 2023, primarily due to reduced trade payables for Refinery development Accounts Payable and Accrued Liabilities (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Accounts payable and accrued liabilities | $8,828 | $18,850 | $(10,022) | | Withholding tax liability | — | 14 | (14) | | Total | $8,828 | $18,864 | $(10,036) | - Accounts payable and accrued liabilities primarily consist of trade payables incurred in the normal course of business, mainly for Refinery development[119] - Included in accrued liabilities are amounts due to related parties, which decreased from CAD 389 thousand in 2022 to CAD 78 thousand in 2023[119] 11. Asset Retirement Obligations Refinery asset retirement obligation increased to CAD 3,126 thousand in 2023 due to revised estimates, with a CAD 3,450 thousand surety bond maintained Asset Retirement Obligation Continuity (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Balance at January 1 | $1,790 | $1,674 | | Change in estimate from discounting | 126 | (274) | | Change in estimate of costs | 1,210 | 728 | | Transferred to held for sale (Note 8) | — | (338) | | Balance at December 31 | $3,126 | $1,790 | - The estimated cost of closure for the Refinery is CAD 3,142 thousand as of December 31, 2023, and the Company maintains a surety bond for CAD 3,450 thousand as financial assurance[120] - Key assumptions for calculating the asset retirement obligation include a closure activities date of 2037, a risk-free discount rate of 3.98%, and a long-term inflation rate of 3.0% for 2023[121] 12. Long-Term Government Loan Payable and Government Grant Government loan payable increased to CAD 4,299 thousand in 2023, and a CAD 5,000 thousand investment was approved, with CAD 4,000 thousand received post-year-end Government Loan and Grant Balances (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Government Loan | $4,299 | $3,777 | | Government Grant | $849 | $1,121 | | Total | $5,148 | $4,898 | - The Company received approval for a CAD 5,000 thousand investment from the Government of Canada for refinery construction in December 2023, with CAD 4,000 thousand received subsequent to year-end[127] - The FedNor loan is non-interest-bearing and discounted using a market rate of 7%, with repayment in 19 equal quarterly installments starting June 30, 2026[122][123] 13. Convertible Note Arrangement In February 2023, the Company issued CAD 68,049 thousand (US51,000 thousand) 2028 Notes, replacing 2026 Notes, resulting in an CAD 18,727 thousand loss on extinguishment - On February 13, 2023, the Company completed a private placement of CAD 68,049 thousand (US51,000 thousand) principal amount of 8.99% senior secured notes due February 2028 ('2028 Notes')[128] - The 2028 Notes replaced the outstanding 2026 Notes, resulting in an CAD 18,727 thousand loss on extinguishment and recognition of the 2028 Notes as a new financial liability[132] Financial Derivative Liability Components (CAD thousands) | Component | Initial Recognition (Feb 13, 2023) | Dec 31, 2023 Balance | | :--- | :--- | :--- | | Convertible Notes Payable | $60,108 | $40,101 | | Warrants | $13,519 | $1,421 | | Royalty | $721 | $858 | | Total | $74,348 | $42,380 | - The 2028 Notes are secured by a first priority security interest in substantially all of the Company's assets and require maintaining a minimum liquidity balance of US2,000 thousand[137] 14. Lease Office lease ROU asset decreased to CAD 205 thousand in 2023 due to depreciation, and lease liability decreased to CAD 175 thousand Lease Balances (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Right-of-use assets | $205 | $261 | | Lease liability | $175 | $218 | - The right-of-use asset for the office lease is depreciated by CAD 56 thousand in 2023, contributing to the decrease in its balance[139] 15. Shareholder's Equity Common shares outstanding increased to 55,851,327 in 2023, driven by a private placement generating CAD 19,960 thousand net proceeds Authorized Share Capital The Company is authorized to issue an unlimited number of common shares without par value - The Company is authorized to issue an unlimited number of common shares without par value[141] Issued Share Capital In 2023, the Company issued 19,545,454 units in a private placement for CAD 19,960 thousand net proceeds, and additional shares for interest and note conversions - On August 11, 2023, the Company completed a private placement, issuing 19,545,454 units for net proceeds of CAD 19,960 thousand[142] - In 2023, 660,800 common shares were issued to settle CAD 795 thousand in interest payments to a convertible noteholder, and 302,411 common shares were issued for CAD 840 thousand of convertible note conversions[144] - As of December 31, 2023, the Company had 55,851,327 common shares outstanding, an increase from 35,185,977 in 2022[141] 16. Share-Based Payments Stock options, DSUs, RSUs, and PSUs are part of the incentive plan; warrants outstanding significantly increased in 2023 due to private placement and 2028 Notes Stock Options Stock options outstanding decreased to 772,568 in 2023, with 416,319 granted at an average exercise price of CAD 2.40 and CAD 513 thousand expensed Stock Options Outstanding | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Balance at January 1 | 991,960 | 834,351 | | Granted | 416,319 | 461,162 | | Exercised | — | (55,554) | | Expired / Forfeited / Cancelled | (635,711) | (331,212) | | Balance at December 31 | 772,568 | 991,960 | - In 2023, 416,319 stock options were granted with an exercise price of CAD 2.40 per share, and a fair value of CAD 577 thousand using the Black-Scholes model[148] - The Company expensed CAD 513 thousand for stock options as share-based payment expense in 2023[149] DSUs, RSUs and PSUs DSUs increased to 616,163, RSUs to 533,153, and PSUs decreased to 34,029 units, with total share-based payment expense of CAD 1,306 thousand in 2023 DSUs, RSUs, and PSUs Outstanding | Unit Type | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Deferred Share Units (DSUs) | 616,163 | 235,312 | | Restricted Share Units (RSUs) | 533,153 | 78,289 | | Performance Share Units (PSUs) | 34,029 | 63,889 | - Share-based payment expense for DSUs, PSUs, and RSUs in 2023 totaled CAD 1,306 thousand (CAD 586 thousand for DSUs, CAD 79 thousand for PSUs, CAD 641 thousand for RSUs)[150] Warrants Total warrants outstanding significantly increased to 33,724,658 in 2023, primarily due to 20,445,454 Canadian dollar warrants and 10,796,054 US dollar warrants Warrants Outstanding | Type | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Canadian dollar denominated warrants | 20,445,454 | 981,027 | | United States dollar denominated warrants | 13,279,204 | 2,483,150 | | Total Warrants | 33,724,658 | 3,464,177 | - In 2023, 20,445,454 Canadian dollar denominated warrants were issued in a private placement, with a total value of CAD 6,321 thousand recorded in reserves[154] - 10,796,054 US dollar denominated warrants were issued in conjunction with the 2028 Notes in 2023[158] 17. Income Tax No income tax expense in 2023 or 2022, but CAD 149,773 thousand in unrecognized deductible temporary differences, including significant loss carry-forwards Income Tax Expense (Recovery) (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | (Loss) income before income taxes | $(64,666) | $12,551 | | Expected expense (recovery) at statutory rate (26.5%) | $(17,136) | $3,326 | | Change in unrecognized deferred tax assets | 17,699 | (40) | | Income tax expense (recovery) | $— | $— | Unrecognized Deductible Temporary Differences (CAD thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Non-capital loss carry-forwards | $51,652 | $29,192 | | Exploration and evaluation properties | 20,630 | 19,937 | | Property, Plant and Equipment | 39,973 | — | | Capital loss carry forward | 26,835 | 21,542 | | Other | 10,683 | 11,445 | | Total unrecognized temporary differences | $149,773 | $82,116 | - The Company has Canadian non-capital loss carryforwards of approximately CAD 48,769 thousand, expiring between 2037 and 2043, and non-capital loss carryforwards in Australia and the US that mostly do not expire[160] 18. Other Non-Operating Income (Expense) Other non-operating income shifted to a CAD 6,472 thousand expense in 2023, driven by increased interest expense and a foreign exchange gain Other Non-Operating Income (Expense) (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Foreign exchange gain (loss) | $1,485 | $(780) | | Interest (expense) income | $(8,147) | $328 | | Realized gain (loss) on marketable securities | $90 | $(220) | | Other non-operating (expense) income | $100 | $11 | | Reversal of impairment (Note 8) | $— | $1,338 | | Year ended December 31 | $(6,472) | $677 | - Interest expense significantly increased to CAD 8,147 thousand in 2023 from interest income of CAD 328 thousand in 2022[161] - A foreign exchange gain of CAD 1,485 thousand was recognized in 2023, contrasting with a loss of CAD 780 thousand in 2022[161] 19. Income (Loss) Per Share Basic and diluted loss per share was CAD 1.49 in 2023, a significant decrease from 2022's basic income per share of CAD 0.38 Income (Loss) Per Share (CAD) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Net income (loss) for the year – basic | $(64,666) | $12,551 | | Net loss for the year - diluted | $(71,349) | $(15,135) | | Basic - weighted average number of shares outstanding | 43,430,951 | 32,646,906 | | Diluted - adjusted weighted average number of shares outstanding | 43,430,951 | 40,763,386 | | Income (loss) Per Share - Basic | $(1.49) | $0.38 | | Loss Per Share – Diluted | $(1.49) | $(0.37) | - Share purchase warrants and stock options were excluded from the calculation of diluted weighted average common shares outstanding for both 2023 and 2022 because their effect was anti-dilutive[163] 20. Financial Instruments The Company faces liquidity, credit, foreign currency, and interest rate risks, with liquidity being a material uncertainty due to insufficient refinery funding Liquidity Risk The Company faces significant liquidity risk due to insufficient funds for refinery construction, recurring losses, and negative cash flows, raising going concern doubts - The Company does not have sufficient financial resources to complete the construction and final commissioning of the Refinery, posing a material uncertainty to its going concern ability[165] Contractual Maturities of Financial Liabilities (CAD thousands) | Category | < 1 Year (2023) | Between 1 – 2 Years (2023) | >2 Years (2023) | | :--- | :--- | :--- | :--- | | Accounts payable and accrued liabilities | $8,828 | $— | $— | | Long-term government loan payable | $— | $— | $4,299 | | Convertible notes payable | $— | $— | $67,453 | | Lease payable | $122 | $125 | $160 | | Total | $8,950 | $125 | $71,912 | Fair Value Fair values of most current financial instruments approximate carrying values; long-term government loan payable is estimated at CAD 4,299 thousand using discounted cash flow - The fair values of cash and cash equivalents, restricted cash, receivables, and accounts payable and accrued liabilities approximate their carrying values due to their current nature[169] - The fair value of long-term government loan payables is estimated at CAD 4,299 thousand (2023) using a discounted cash flow calculation based on a 7% market interest rate[169] Credit Risk Primary credit risk is on cash and cash equivalents held with major Canadian banks, with no significant risk from HST refund receivables - The Company's primary exposure to credit risk is on its cash and cash equivalents and restricted cash, held with high credit quality Canadian banks[170] - Receivables, primarily HST refunds from the Canada Revenue Agency, present no significant credit risk[171] Foreign Currency Risk Significant foreign currency risk from US Dollar denominated instruments; a 10% USD fluctuation would impact net income by CAD 3,610 thousand - The Company is exposed to foreign currency risk on US Dollar denominated financial instruments, including cash, payables, derivative liabilities, and long-term debts[172] USD Denominated Financial Instruments (CAD thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $385 | $2,561 | | Accounts payable and accrued liabilities | $(1,686) | $(1,264) | | Interest accrual | $(5,730) | $(1,300) | | Long-term convertible notes payable | $(40,101) | $(25,662) | | Royalty | $(858) | $— | | Financial derivative liability – Convertible Notes | $(1,421) | $(6,674) | | Embedded derivative liability (US Warrant) | $(7) | $(1,271) | | Total | $(49,418) | $(33,610) | - A 10% depreciation or appreciation of the US Dollar against the Canadian Dollar would result in a CAD 3,610 thousand decrease or increase in the Company's net income before tax for 2023[173] Interest Rate Risk The Company has no financial instruments linked to floating market interest rates, so changes do not impact its financial position as of December 31, 2023 - The Company does not have any financial instruments linked to LIBOR, SOFR, or any form of a floating market interest rate as of December 31, 2023[174] - Changes in market interest rates do not have an impact on the Company's financial position as of December 31, 2023[174] 21. Management of Capital Capital management aims to ensure sufficient cash for Refinery expansion and exploration, and compliance with debt covenants, including minimum liquidity - The Company's capital management objectives are to ensure sufficient cash for future Refinery expansion and exploration activities and to comply with debt covenants[175] - The Company is required to maintain a minimum liquidity balance of US2,000 thousand under the terms of the convertible notes arrangement[177] 22. Fair Value Measurements Financial assets and liabilities are categorized into a three-level fair value hierarchy, with marketable securities as Level 1 and convertible notes, warrants, and royalty as Level 3 Assets and Liabilities Measured at Fair Value As of December 31, 2023, marketable securities are Level 1 at CAD 595 thousand, while convertible notes, warrants, and royalty are Level 3 liabilities totaling CAD 42,380 thousand Fair Value Hierarchy of Financial Instruments (CAD thousands) - Dec 31, 2023 | Category | FVTPL | Amortized Cost | Level 1 | Level 2 | Level 3 | Total Fair Value | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Assets: | | | | | | | | Cash and cash equivalents | $— | $7,560 | $— | $— | $— | $7,560 | | Restricted cash | $— | $2,096 | $— | $— | $— | $2,096 | | Receivables | $— | $1,081 | $— | $— | $— | $1,081 | | Marketable securities | $595 | $— | $595 | $— | $— | $595 | | Total Assets | $595 | $10,737 | $595 | $— | $— | $11,332 | | Liabilities: | | | | | | | | Accounts payable and accrued liabilities | $— | $8,828 | $— | $— | $— | $8,828 | | Accrued interest | $— | $5,730 | $— | $— | $— | $5,730 | | Long-term government loan payable | $— | $4,299 | $— | $— | $— | $4,299 | | Convertible notes payable | $— | $40,101 | $— | $— | $— | $40,101 | | Warrants – Convertible Notes payable | $1,421 | $— | $— | $— | $1,421 | $1,421 | | Royalty | $— | $— | $— | $— | $858 | $858 | | Warrants derivative liability | $7 | $— | $— | $— | $7 | $7 | | Total Liabilities | $1,428 | $58,958 | $— | $— | $2,286 | $61,244 | - Marketable securities are classified as Level 1 due to quoted prices in active markets[182] Valuation techniques Convertible notes, warrants, and royalty are Level 3 instruments valued using finite difference, Monte Carlo, and discounted cash flow models, relying on significant unobservable inputs - Convertible notes payable are valued using a finite difference method, classified as Level 3 due to significant unobservable inputs such as equity volatility (62% in 2023) and credit spread (27.8% in 2023)[136][182][186] - Warrants issued in foreign currency are valued using a Monte Carlo Simulation Model, classified as Level 3 due to significant unobservable inputs like equity volatility (62% for Convertible Notes Warrants, 68.22% for US Warrants)[136][187][190][191] - The Royalty is valued using a discounted cash flow model, classified as Level 3, with key unobservable inputs including an effective interest rate of 21.48% and future operating and gross revenue estimates[189] 23. Commitments and Contingencies Total commitments are CAD 104,920 thousand as of December 31, 2023, primarily for convertible notes and government loan payments, with legal claims settled Commitments as of December 31, 2023 (CAD thousands) | Category | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Purchase commitments | $135 | $— | $— | $— | $— | $135 | | Convertible notes payments | $5,797 | $6,262 | $6,064 | $6,064 | $73,326 | $97,513 | | Government loan payments | $— | $— | $1,032 | $1,032 | $3,084 | $5,148 | | Royalty payments | $— | $— | $— | $224 | $1,900 | $2,124 | | Total | $5,932 | $6,262 | $7,096 | $7,320 | $78,310 | $104,920 | - Legal claims related to unpaid invoices, which included liens on the Company's assets, have been settled, with amounts due recorded in accounts payable and accrued liabilities[192] - Convertible notes payments are based on contractual maturities of the 2028 Notes, with the option to pay interest through common shares during the first 12 months[194] 24. Segmented Information The Company operates in Refinery and Exploration and Evaluation segments; in 2023, Refinery reported a CAD 53,892 thousand loss before taxes due to impairment Segmented Operating Results (CAD thousands) - Dec 31, 2023 | Metric | Refinery | Exploration and Evaluation | Corporate and Other | Total | | :--- | :--- | :--- | :--- | :--- | | Operating expenses | $2,008 | $781 | $11,194 | $13,983 | | Impairment | $(51,884) | $— | $— | $(51,884) | | Loss before taxes | $(53,892) | $(781) | $(9,993) | $(64,666) | Segmented Assets and Liabilities (CAD thousands) - Dec 31, 2023 | Segment | Total Assets | Total Liabilities | | :--- | :--- | :--- | | Refinery | $59,701 | $8,935 | | Exploration and Evaluation | $85,741 | $75 | | Corporate and Other | $3,250 | $56,384 | | Total | $148,692 | $65,394 | - The Chief Operating Decision Maker reviews the Refinery and exploration and evaluation activities as discrete business units[196] 25. Related Party Transactions Key management and directors received CAD 2,352 thousand in compensation in 2023, including CAD 1,258 thousand in share-based payments Key Management Personnel Compensation Compensation for key management personnel and directors totaled CAD 2,352 thousand in 2023, with CAD 1,258 thousand from share-based payments Key Management Personnel Compensation (CAD thousands) | Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Management | $2,194 | $2,751 | | Directors | $158 | $154 | | Total Compensation | $2,352 | $2,905 | | Share-based payments | $1,258 | $620 | Due to Related Parties Accrued liabilities due to related parties, mainly for year-end compensation, decreased to CAD 78 thousand in 2023 Accrued Liabilities Due to Related Parties (CAD thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Accrued liabilities balance | $78 | $389 | 26. Subsequent Events Post-year-end, warrant terms were amended, new stock options and RSUs issued, interest payments postponed, and a Nasdaq compliance extension received - On January 15, 2024, the Company amended terms for 10,796,054 warrants, reducing the exercise price to CAD1.00 and adding an acceleration clause if the share price exceeds CAD1.20 for ten consecutive trading days[204][205] - On February 12, 2024, the Company issued 3,074,398 incentive stock options and 102,410 restricted share units, and settled CAD 134 thousand of performance-based cash payments by issuing 165,257 common shares[210][214] - On February 27, 2024, Noteholders agreed to postpone unpaid interest payments on the 2028 Notes, with accrued interest treated as additional principal[210] - The Company received an additional 180-day extension from Nasdaq until September 16, 2024, to regain compliance with the US1.00 minimum bid price requirement[211][212]