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-month period ended March 31, 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 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:
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Conventional recovery operations at our White Mesa Mill (the "Mill") including:
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Processing ore from uranium mines; and
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Recycling of uranium bearing materials that are not derived from conventional ore ("Alternate Feed Materials");
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In-situ recovery (“ISR”) operations.
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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 systems at the Mill ("Pond Return") from which it recovered over 1.8 million pounds of high-quality vanadium. The Company is also evaluating opportunities for copper recovery from our Canyon Project and the extraction of rare earth elements from uranium-bearing ores and Alternate Feed Materials.
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 (“Pond Return”). During the three months ended March 31, 2020, Mill activities focused primarily on the recovery of vanadium, along with relatively small amounts of uranium, from Pond Returns. The Company is actively pursuing additional Alternate Feed Materials for processing at the Mill.
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 Q2-2019, the Company began receiving shipments of material generated in the cleanup of a large, historically producing conventional uranium mine located in northwest New Mexico. The Company expects to generate significant revenue from this project, as well as demonstrate the responsible operations of the Mill for cleanup projects similar to those required on the Navajo Nation.
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). 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 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 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 US government support for US 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.
Bought Deal Financing
On February 20, 2020, the Company closed a bought deal public offering of common shares. Pursuant to the Offering, the Company issued an aggregate of 11,300,000 common shares at a price of $1.47 per share for gross proceeds of $16.61 million. The Company received net proceeds, after commissions and fees, of $15.14 million million from the offering.
Potential Entry into Rare Earth Element Market
On April 13, 2020, the Company announced that it had made the decision to potentially enter the rare earth element (“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 of 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 and Alternate Feed Materials for the recovery of REEs (along with uranium), which, if achievable on a commercial basis and subject to the receipt of any required license 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.
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 proposed budgeted activities are subject to appropriation by the Congress of the United States, and the details of implementation of activities pursuant to the President’s Budget have not yet been defined. As a result, 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.
Uranium Market Update
According to monthly price data from TradeTech LLC (“TradeTech”), uranium spot prices rose significantly during Q1-2020. The uranium spot price began the quarter at $24.85 per pound on December 31, 2019 and rose 10% to $27.30 per pound by the end
of the quarter on March 31, 2020. The uranium spot price reached a high at quarter-end on March 31, and a low of $23.90 during the week of March 20, 2020. TradeTech price data also indicates that long-term U3O8 prices rose $1.00 during the quarter, beginning the quarter at $33.00 per pound and ending the quarter at $34.00 per pound. On April 30, 2020, TradeTech reported a spot price of $33.75 per pound and a long-term price of $39.00 per pound.
Following the end of the quarter, significant production cuts were announced in response to the global COVID-19 crisis, including uranium facilities in Canada, Kazakhstan, and Namibia. It is unknown at this time exactly how long the shutdowns will last or how much uranium production will ultimately be removed from the market as a result of these shutdowns. However, between March 1, 2020 and April 30, 2020, uranium prices rose over 30%. The Company believes that certain uranium supply and demand fundamentals continue to point to higher uranium prices in the future, including significant production cuts, and increased demand from utilities, financial entities, traders, and producers. It is the Company’s belief that the recent shutdowns are only going to further tighten the market. The Company also continues to believe a large degree of uncertainty exists in the market, primarily due to the size of mobile uranium inventories, transportation issues, premature reactor shutdowns in the U.S., and the length of time of any uranium mine, conversion or enrichment shut downs.
Vanadium Market Update
During the three months ended March 31, 2020, the mid-point price of vanadium in Europe rose 5% from $5.33 per pound to $5.58 per pound. 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). Prices were generally flat during the first quarter of 2020, however prices jumped in April 2020 after an “extended South Africa lockdown sparks supply concerns.” (Metal Bulletin, April 17, 2020). As of May 1, 2020, the mid-point spot price of vanadium in Europe was $6.88 per pound.
Operations Update and Outlook for Year Ending December 31, 2020
Overview
Operations and Sales Outlook Overview
In response to the President’s Budget, 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 President’s Budget is published and/or Congressional appropriations are obtained, or market conditions otherwise warrant. No decisions on any project-specific actions to be taken in response to the President’s Budget have been made at this time.
Subject to any actions the Company may take in response to the President’s Budget, 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, and from Alternate Feed Materials. The vanadium Pond Return campaign conducted in 2019 was brought to a close in early 2020.
Subject to any actions the Company may take in response to the President’s Budget, 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. Subject to any actions the Company may take in response to the President’s Budget, 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, subject to any actions the Company may take in response to the President’s Budget, 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), and is evaluating opportunities to potentially recover REEs at the White Mesa Mill. The Company will also
continue its support of U.S. governmental activities to support the U.S. uranium mining industry and will evaluate additional acquisition and disposition opportunities that may arise.
Extraction and Recovery Activities Overview
During the three months ended March 31, 2020, the Company recovered approximately 5,900 pounds of U3O8, all of which were for the account of the Company. In the year ending December 31, 2020, the Company expects to recover a quantity of uranium within its previously published guidance of 125,000 to 175,000 pounds of U3O8. The Company also recovered approximately 67,000 pounds of high-purity vanadium pentoxide (“V2O5” or “black flake”) during the three months ended March 31, 2020 from its vanadium Pond Return campaign, which was suspended during the quarter.
The Company has strategically opted not to enter into any uranium sales commitments for 2020. Therefore, subject to any actions the Company may take in response to the President’s Budget and general market conditions, all 2020 uranium production is expected to be added to existing inventories. Subject to any actions the Company may take in response to the President’s Budget, 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 three months ended March 31, 2020, we extracted and recovered approximately 5,900 pounds of U3O8 from the Nichols Ranch Project, which was placed on standby during the quarter, due to the depletion of its existing 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 March 31, 2020, the Nichols Ranch wellfields had nine header houses that had extracted uranium, which are now depleted. Subject to any actions the Company may take in response to the President’s Budget, 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 wellfields, 22 wellfields at the adjacent Jane Dough wellfields, and eight wellfields at the Hank Project, which is fully permitted to be constructed as a satellite facility to the Nichols Ranch Plant.
Subject to any actions the Company may take in response to the President’s Budget, 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 three months ended March 31, 2020, the Company produced 67,000 pounds of high-purity V2O5 from its Mill Pond Return program and no uranium. During 2020, the Company expects to recover approximately 120,000 to 170,000 pounds of U3O8 at the White Mesa Mill from in-circuit uranium inventories extracted from the recent vanadium Pond Return campaign and from Alternate Feed Materials. In addition, there remains an estimated 1.5-3 million pounds of solubilized recoverable V2O5 inventory remaining in the tailings management facility awaiting future recovery from Pond Return as market conditions may warrant.
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 and receipt of uranium-bearing materials from mine cleanup activities will keep the Mill in operation through all or most 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 the President’s Budget 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.
However, subject to any actions the Company may take in response to the President’s Budget, 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 quarter ended March 31, 2020, standby and environmental compliance activities occurred at the Canyon Project. Subject to any actions the Company may take in response to the President’s Budget and general market conditions, during 2020, the Company plans to continue carrying out engineering, metallurgical testing, procurement and construction management activities at its Canyon Project, including additional bench and pilot plant scale metallurgical test work of the uranium/copper mineralization, and to continue pursuing any additional permitting actions that may be required to potentially recover copper at the White Mesa Mill. Subject to any actions the Company may take in response to the President’s Budget, 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 and the Daneros Project. 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. All of these projects serve as important pipeline assets for the Company’s future conventional production capabilities, as market conditions warrant.
Sales
During the three months ended March 31, 2020, the Company completed no uranium sales. The Company currently has no remaining contracts and is therefore fully unhedged to future uranium price increases.
During the three months ended March 31, 2020, the Company did not complete the sale 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 the President’s Budget
As stated above, in response to the President’s Budget, the Company is evaluating activities aimed towards increasing uranium production at all or some of its production facilities, subject to general market conditions. No decisions on any project-specific actions to be taken in response to the President’s Budget 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 recent declines in general market conditions.
Results of Operations
The following table summarizes the results of operations for the three months ended March 31, 2020 and 2019 (in thousands of U.S. dollars):
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Three Months Ended March 31,
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2020
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2019
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Revenues
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Vanadium concentrates
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$
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—
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$
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1,168
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Alternate feed materials processing and other
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393
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502
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Total revenues
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393
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1,670
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Costs and expenses applicable to revenues
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Costs and expenses applicable to vanadium concentrates
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—
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532
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Costs and expenses applicable to alternate feed materials and other
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—
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384
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Total costs and expenses applicable to revenues
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—
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916
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Impairment of inventories
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1,078
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1,176
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Gross loss
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(685
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)
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(422
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)
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Other operating costs and expenses
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Development, permitting and land holding
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677
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4,342
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Standby costs
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1,924
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1,084
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Accretion of asset retirement obligation
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478
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513
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Total other operating costs and expenses
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3,079
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5,939
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Selling, general and administration
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Selling costs
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12
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|
10
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General and administration
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4,030
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3,751
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Total selling, general and administration
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4,042
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3,761
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Total operating loss
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(7,806
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)
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(10,122
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)
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Interest expense
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(350
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)
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|
(329
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)
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Other income (loss)
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2,492
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(1,683
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)
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Net loss
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$
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(5,664
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)
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$
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(12,134
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)
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Basic and diluted loss per share
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$
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(0.05
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)
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$
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(0.13
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)
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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 March 31, 2020 totaled $0.39 million, all of which was related to fees for ore received from a third-party uranium mine.
Revenues for the three months ended March 31, 2019 totaled $1.67 million, of which $1.17 million was related to sales of 53,000 pounds of vanadium concentrates and $0.50 million related to toll processing of uranium concentrates for third parties.
Operating Expenses
Uranium and Vanadium recovered and costs and expenses applicable to revenue
In the three months ended March 31, 2020, the Company recovered 5,900 pounds of U3O8 from ISR recovery activities for the Company's own account and 67,000 pounds of V2O5 from Pond Return. In the three months ended March 31, 2019, the Company recovered 20,000 pounds of U3O8 from ISR recovery activities for the Company's own account and 325,000 pounds from the Company's Alternate Feed Material sources.
There are no costs and expenses applicable to revenue for the three months ended March 31, 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 $0.92 million for the three months ended March 31, 2019. Costs and expenses applicable to revenue for the three months ended March 31, 2019 consisted of $0.53 million from V2O5 and $0.39 million related to Alternate Feed Materials.
Other Operating Costs and Expenses
Development, permitting and land holding
For the three months ended March 31, 2020, the Company spent $0.68 million for development of the Company's properties. For the three months ended March 31, 2019, the Company spent $4.34 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 March 31, 2020, standby costs totaled $1.92 million compared with $1.08 million in the prior year. The increase is primarily related to a reduction in recovery activities at the White Mesa Mill.
Accretion
Accretion related to the asset retirement obligation for the Company’s properties was $0.48 million for the three months ended March 31, 2020 compared with $0.51 million for the three months ended March 31, 2019. 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 and 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 $4.04 million for the three months ended March 31, 2020 compared to $3.76 million for the three months ended March 31, 2019.
Impairment of Inventories
For the three months ended March 31, 2020, the Company recognized $1.08 million in impairment charges related to inventory. Included in impairment were depreciation expenses of $0.51 million. For the three months ended March 31, 2019, the Company recognized $1.18 million 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 March 31, 2020 was $0.35 million compared with $0.33 million for the three months ended March 31, 2019, respectively.
Other income and expense
For the three months ended March 31, 2020, other income and expense was $2.49 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 $0.47 million, a mark-to-market gain on the decrease in fair value of warrant liabilities of $1.15 million, a gain on foreign exchange of $1.24 million, and interest income of $0.07 million, mostly offset by a $0.39 million mark-to-market loss on investments accounted for at fair value.
For the three months ended March 31, 2019, other income and expense was $1.68 million expense, net. These amounts primarily consist of a mark-to-market loss on the change in fair value of the Convertible Debentures of $1.44 million, a mark-to-market loss on the increase in fair value of warrant liabilities of $0.73 million, offset by a $0.38 million mark-to-market gain on investments accounted for at fair value and interest income of $0.11 million.
LIQUIDITY AND CAPITAL RESOURCES
Shares issued for cash
On December 29, 2017, 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. 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 up to an initial aggregate offering price of $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 January 1, 2020 through May 1, 2020, the Company issued 2.55 million Common Shares at an average price of $1.57 for net proceeds of $3.90 million using the ATM.
Working capital at March 31, 2020 and future requirements for funds
At March 31, 2020, the Company had working capital of $35.10 million, including $23.54 million in cash, $2.43 million of marketable securities, approximately 520,000 pounds of uranium finished goods inventory and approximately 1,675,000 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.
The Company manages liquidity risk through the management of its working capital and its capital structure.
Cash and cash flows
Three months ended March 31, 2020
Cash, cash equivalents and restricted cash were $43.66 million at March 31, 2020, compared to $32.89 million at December 31, 2019. The increase of $10.77 million was due primarily to cash provided by financing activities of $18.57 million, cash provided by investing activities of $2.20 million, offset by cash used in operating activities of $8.32 million and loss on foreign exchange on cash held in foreign currencies of $1.68 million.
Net cash used in operating activities of $8.32 million is comprised of the net loss of $5.66 million for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were $0.30 million of depreciation and amortization of property, plant and equipment, $1.08 million impairment on inventory, share-based compensation expense of $1.00 million, accretion of asset retirement obligation (“ARO”) of $0.48 million, other non-cash expenses of $0.80 million, unrealized foreign exchange loss of $0.39 million, a decrease in trade and other receivables of $0.04 million, offset by an increase in inventories of $2.12 million, an increase in prepaid expenses and other assets of $0.50 million, a decrease in accounts payable and accrued liabilities of $2.51 million, $1.15 million change in warrant liabilities, and a $0.47 million change in value of the Convertible Debentures.
Net cash provided by investing activities was $2.20 million related to cash received from maturities of marketable securities.
Net cash provided by financing activities totaled $18.57 million consisting of $19.10 million net proceeds from the issuance of common shares from public offerings and $0.13 million cash received from non-controlling interest partially offset by $0.42 million cash paid to fund employee income tax withholding due upon vesting of restricted stock units and $0.24 million to repay loans and borrowings.
Three months ended March 31, 2019
Cash, cash equivalents and restricted cash were $34.99 million at March 31, 2019, compared to $34.29 million at December 31, 2018. The increase of $0.70 million was due primarily to cash provided by financing activities of $2.51 million, cash provided by investing activities of $9.95 million, offset by cash used in operating activities of $11.55 million and loss on foreign exchange on cash held in foreign currencies of $0.21 million.
Net cash used in operating activities of $11.55 million is comprised of the net loss of $12.13 million for the period adjusted for non-cash items and for changes in working capital items. Significant items not involving cash were $0.31 million of depreciation and amortization of property, plant and equipment, $1.18 million impairment on inventory, stock based compensation expense of $1.12 million, accretion of ARO of $0.51 million, $0.73 million change in warrant liabilities, $1.44 million change in value of Convertible Debentures, other non-cash expenses of $0.09 million, a decrease in trade and other receivables of $0.33 million, a decrease in prepaid expenses and other assets of $0.15 million, unrealized foreign exchange loss of $0.50 million, offset by a decrease in accounts payable and accrued liabilities of $2.03 million, a decrease in inventories of $3.25 million and changes in deferred revenue of $0.50 million.
Net cash provided by financing activities totaled $2.51 million consisting of $2.41 million proceeds from the issuance of stock using the Company's ATM offering and $0.10 million cash received from exercise of stock options.
Net cash provided by investing activities was $9.95 million, related to cash received from the sale of marketable securities.
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 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 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.