5N Plus Inc. — Interim / Quarterly Report 2023

Nov 8, 2023

3 Condensed Interim Consolidated Financial Statements

Quarter Ended September 30, 2023

		September 30	December 31
	Notes	2023	2022
		$	$
Assets
Current
Cash and cash equivalents		29,875	42,691
Accounts receivable		38,686	32,872
Inventories	3	102,344	86,254
Income tax receivable		1,682	5,488
Derivative financial assets	10	45	-
Other current assets	10	8,147	19,857
Total current assets		180,779	187,162
Property, plant and equipment	6	78,604	77,951
Right-of-use assets		28,466	30,082
Intangible assets	6	29,598	31,563
Goodwill		11,825	11,825
Deferred tax assets		6,729	6,002
Other assets	10	3,218	3,400
Total non-current assets		158,440	160,823
Total assets		339,219	347,985
Liabilities
Current
Trade and accrued liabilities		31,281	40,200
Income tax payable		6,418	8,780
Current portion of deferred revenue	4	12,453	11,730
Current portion of lease liabilities		2,080	2,136
Current portion of long-term debt	5	25,000	-
Total current liabilities		77,232	62,846
Long-term debt	5	83,500	121,000
Deferred tax liabilities		5,749	6,959
Employee benefit plan obligations		11,188	11,643
Lease liabilities		26,977	28,266
Deferred revenue	4	5,198	2,354
Other liabilities		3,599	2,141
Total non-current liabilities		136,211	172,363
Total liabilities		213,443	235,209
Equity		125,776	112,776
Total liabilities and equity		339,219	347,985

Commitments and contingencies (Note 11)

(in thousands of United States dollars, except per share information) (unaudited)

		Three months		Nine months
	Notes	2023	2022	2023	2022
		$	$	$	$
Revenue		62,946	66,372	177,308	203,181
Cost of sales	3, 6	50,389	53,410	135,156	167,806
Selling, general and administrative expenses	6	6,249	6,468	20,711	21,382
Other expenses (income), net	6	943	8,935	(1,891)	18,828
		57,581	68,813	153,976	208,016
Operating earnings (loss)		5,365	(2,441)	23,332	(4,835)
Financial expense
Interest on long-term debt		2,081	1,531	6,254	3,579
Imputed interest and other interest expense		308	290	451	897
Foreign exchange and derivative (gain) loss		(238)	(196)	(497)	539
		2,151	1,625	6,208	5,015
Earnings (loss) before income taxes		3,214	(4,066)	17,124	(9,850)
Income tax expense (recovery)
Current		2,293	2,158	6,062	6,822
Deferred		(597)	744	(2,053)	(1,819)
		1,696	2,902	4,009	5,003
Net earnings (loss)		1,518	(6,968)	13,115	(14,853)
Basic earnings (loss) per share	7	0.02	(0.08)	0.15	(0.17)
Diluted earnings (loss) per share	7	0.02	(0.08)	0.15	(0.17)

Net earnings (loss) are completely attributable to equity holders of 5N Plus Inc.

(in thousands of United States dollars) (unaudited)

			Three monthsNine months
	2023	2022	2023	2022
	$	$	$	$
Net earnings (loss)	1,518	(6,968)	13,115	(14,853)
Other comprehensive loss
Items that may be reclassified subsequently to net earnings (loss)
Currency translation adjustment	(783)	(3,097)	(1,166)	(6,679)
	(783)	(3,097)	(1,166)	(6,679)
Items that will not be reclassified subsequently to net earnings (loss)
Remeasurement of employee benefit plan obligations	695	1,385	301	6,469
Income taxes	(219)	(415)	(96)	(2,023)
	476	970	205	4,446
Other comprehensive loss	(307)	(2,127)	(961)	(2,233)
Comprehensive income (loss)	1,211	(9,095)	12,154	(17,086)

Comprehensive income (loss) is completely attributable to equity holders of 5N Plus Inc.

5N PLUS INC.

INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the nine-month periods ended September 30 (in thousands of United States dollars, except per share information) (unaudited)

				Accumulated
		other
	Number	Share	Contributed	comprehensive		Total
2023	of shares	Capital	Surplus	loss	Deficit	equity
		$	$	$	$	$
Balances at beginning of period	88,330,236	21,004	342,985	(5,987)	(245,226)	112,776
Net earningsfor the period	-	-	-	-	13,115	13,115
Other comprehensiveloss	-	-	-	(961)	-	(961)
Comprehensive (loss) income	-	-	-	(961)	13,115	12,154
Exercise of stock options	374,488	880	(247)	-	-	633
Share-based compensation	-	-	213	-	-	213
Balances at endof period	88,704,724	21,884	342,951	(6,948)	(232,111)	125,776

2022	Numberof shares	ShareCapital	ContributedSurplus	Accumulatedothercomprehensiveloss	Deficit	Totalequity
Balances at beginning of period	88,330,236	$21,004	$342,659	$(5,189)	$(222,227)	$136,247
Net loss for the periodOther comprehensiveloss	--	--	--	-(2,233)	(14,853)-	(14,853)(2,233)
Comprehensiveloss	-	-	-	(2,233)	(14,853)	(17,086)
Share-based compensation	-	-	240	-	-	240
Balances at endof period	88,330,236	21,004	342,899	(7,422)	(237,080)	119,401

Equity is completely attributable to equity holders of 5N Plus Inc.

5N PLUS INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine-month periods ended September 30

(in thousands of United States dollars) (unaudited)

	Notes	2023	2022
		$	$
Operating activities
Net earnings (loss)		13,115	(14,853)
Adjustments to reconcile net earnings (loss) to cash flows
Depreciation of property, plant and equipment		7,668	9,221
Depreciation of right-of-use assets		1,931	1,991
Amortization of intangible assets		2,454	2,469
Amortization of other assets		193	184
Impairment of non-current assets	6	608	12,478
Share-based compensation expense (recovery)		1,914	(279)
Deferred income taxes		(2,053)	(1,819)
Imputed interest		500	439
Employee benefit plan obligations		(55)	(289)
Loss on disposal of assets held for sale		-	216
Loss (gain) on disposal of property, plant and equipment		1,025	(10)
Unrealized (gain) loss on non-hedge financial instruments		(896)	1,340
Unrealized foreign exchange gain on assets and liabilities		(236)	(2,037)
Funds from operations before the following:		26,168	9,051
Net change in non-cash working capital balances	9	(20,691)	1,285
Cash from operating activities		5,477	10,336
Investing activities
Additions to property, plant and equipment	9	(10,590)	(12,761)
Additions to intangible assets		(501)	(170)
Proceeds on settlement of indexed deposit agreement	10	6,506	-
Proceeds on disposal of assets held for sale		-	2,816
Proceeds on disposal of property, plant and equipment		320	16
Cash used in investing activities		(4,265)	(10,099)
Financing activities
Repayment of long-term debt		(12,500)	(2,500)
Proceeds from issuance of long-term debt		-	10,000
Deferred costs related to long-term debt		-	(567)
Issuance of common shares		633	-
Principal elements of lease payments		(2,164)	(2,216)
Cash flows (used in) from financing activities		(14,031)	4,717
Effect of foreign exchange rate changes on cash and cash equivalents		3	(722)
Net (decrease) increase in cash and cash equivalents		(12,816)	4,232
Cash and cash equivalents, beginning of period		42,691	35,940
Cash and cash equivalents, end of period		29,875	40,172
Supplemental information(1)
Income tax paid		4,460	3,319
Interest paid		5,869	3,539

(1) Amounts paid for income tax and interest were reflected as cash flows from operating activities in the interim consolidated statements of cash flows.

1. Nature of Activities

5N Plus Inc. ("5N Plus" or the "Company") is a Canadian-based international company. 5N Plus is a leading global producer of specialty semiconductors and performance materials. The Company's ultra-pure materials often form the core element of its customer products. These customers rely on 5N Plus's products to enable performance and sustainability in their own products. 5N Plus deploys a range of proprietary and proven technologies to develop and manufacture its products. The Company's products enable various applications in a number of key industries including renewable energy, security, space, pharmaceutical, medical imaging, and industrial. The Company is headquartered at 4385 Garand Street, Montreal, Quebec (Canada) H4R 2B4. The Company operates R&D, manufacturing and commercial centers in strategically located facilities around the world including Europe, North America and Asia. The Company's mission is to be critical to its customers, valued by its employees and trusted by its shareholders. The Company's core values focus on integrity, commitment and customer development along with emphasis on sustainable development, continuous improvement, health and safety. The Company's shares are listed on the Toronto Stock Exchange ("TSX"). 5N Plus and its subsidiaries represent the "Company" mentioned throughout these consolidated financial statements. The Company has two reportable business segments, namely Specialty Semiconductors and Performance Materials.

These condensed interim consolidated financial statements were approved by the Board of Directors on November 7, 2023.

2. Basis of Presentation

These condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by IASB (IFRS) and as applicable to the preparation of interim financial statements, including IAS 34, "Interim Financial Reporting". These condensed interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2022, which have been prepared in accordance with IFRS.

The preparation of financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company's accounting policies. The accounting policies followed in these unaudited condensed interim financial statements are consistent with those of the previous financial year, with the additional policy described below.

The functional and presentation currency of the Company is the United States dollar.

Income taxes

Taxes on income in interim periods are accrued using the tax rate that would be applicable to expected total annual earnings.

3. Inventories

	September 30	December 31
	2023	2022
	$	$
Raw materials	33,677	28,436
Finished goods	68,667	57,818
Total inventories	102,344	86,254

For the three and nine-month periods ended September 30, 2023, a total of $27,516 and $73,487 of inventories was included as an expense in cost of sales ($27,777 and $92,720 for the three and nine-month periods ended September 30, 2022).

For the three and nine-month periods ended September 30, 2023, a total of $30 and $38 previously written down was recognized as a reduction of expenses in costs of sales concurrently with the related inventories being sold ($15 and $15 for the Specialty Semiconductors segment and $15 and $23 for the Performance Materials segment). For the three and nine-month periods ended September 30, 2022, a total of $354 and $581 previously written down was recognized as a reduction of expenses in costs of sales concurrently with the related inventories being sold ($1 and $22 for the Specialty Semiconductors segment and $353 and $559 for the Performance Materials segment).

4. Deferred revenue

	September 30	December 31
	2023	2022
	$	$
Prepayments from clients	10,566	9,409
Current portion of deferred revenue related to long-term contracts	1,887	2,321
Current portion of deferred revenue	12,453	11,730
Non-current portion of deferred revenue related to long-term contracts	5,198	2,354
Non-current portion of deferred revenue	5,198	2,354
Total deferred revenue	17,651	14,084

For the nine-month period ended September 30, 2023, $7,411 (2022 - $5,376) of revenue was realized in relation to the deferred revenue balance outstanding at the beginning of the period.

5. Long-Term Debt

	September 30	December 31
	2023	2022
	$	$
Senior secured revolving facility of $124,000 with a syndicate of banks, maturing in April 2026	83,500	96,000
Subordinated term loan, maturing in March 2024	25,000	25,000
	108,500	121,000
Less current portion of long-term debt	25,000	-
	83,500	121,000

Senior secured revolving facility

In June 2022, the Company signed a senior secured multi-currency revolving credit facility of $124,000 maturing in April 2026 to replace its existing $124,000 senior secured revolving facility maturing in April 2023. At any time, the Company has the option to request that the credit facility be expanded through the exercise of an additional $30,000 accordion feature, subject to review and approval by the lenders. This revolving credit facility can be drawn in US dollars, Canadian dollars or Hong Kong dollars (up to $4,000). Drawings bear interest at either the Canadian prime rate, US base rate, Hong Kong base rate or SOFR, plus a margin based on the Company's senior net debt to consolidated EBITDA ratio. Under the terms of its credit facility, the Company is required to satisfy certain restrictive covenants as to financial ratios. As at September 30, 2023 and December 31, 2022, the Company had met all covenants.

Subordinated term loan

In February 2019, the Company signed a five-year subordinated term loan with Investissement Québec. The loan was disbursed in two tranches: the first tranche of $5,000 on February 6, 2019 and the second tranche of $20,000 on March 22, 2019. The two tranches of the term loan bear interest equivalent to the 5-year US dollar swap rate plus a margin of 4.19%, which equals to 6.82% and 6.64% respectively. Under the terms of the loan, the Company is required to satisfy certain restrictive covenants as to financial ratios. As at September 30, 2023 and December 31, 2022, the Company has met all covenants.

6. Expenses by Nature

	Three months		Nine months
	2023	2022	2023	2022
	$	$	$	$
Wages and salaries	12,443	12,749	39,931	41,440
Depreciation of property, plant and equipment	2,541	2,591	7,668	9,221
Depreciation of right-of-use assets	619	653	1,931	1,991
Amortization of other assets	64	56	193	184
Other expenses (income), net
Amortization of intangible assets	819	752	2,454	2,469
Share-based compensation expense	305	10	1,018	1,170
(Gain) loss on disposal of property, plant and
equipment(1)	-	(13)	1,025	(10)
Loss on disposal of assets held for sale(2)	-	216	-	216
Impairment of non-current assets(3)	-	7,092	608	12,478
Research and development, net of tax credit(4)	(157)	678	1,859	2,125
Litigation and restructuring costs (income), net(5)	-	241	(8,772)	613
Other income	(24)	(41)	(83)	(233)

(1) Includes a loss on disposal of $1,051 on production equipment following a change of technical requirements and functionalities by the Company. The Company disposed this production equipment in a non-monetary transaction with the supplier in exchange for a credit to be applied against future purchases of production equipment (Note 9).

• (2) During the third quarter of 2022, the Company recorded a loss of $216 on the disposal of assets held for sale. The asset, which was previously presented as held for sale within the Specialty Semiconductors segment, pertains to a reclass from buildings for an amount of $3,032 in the second quarter of 2022. The reclassification relates to the planned relocation of operations from Canada of one of the Company's subsidiaries situated in Asia, announced in the third quarter of 2020.
• (3) During the second quarter of 2023, the Company recorded an impairment of non-current assets of $608 in relation to Property, plant and equipment included within the Performance Materials segment, to reflect the assessment of the carrying value of production equipment following the Company's decision to switch to higher capacity equipment.

During the third quarter of 2022, the Company recorded an impairment charge on non-current assets of $7,092 ($2,374 for buildings, $4,599 for machinery and $119 for furniture and fixtures), included in the Performance Materials segment, to reflect the assessment of the carrying value of property, plant and equipment following the intention to halt production at its manufacturing facility in Tilly, Belgium. Consequently, the Company's projections regarding the future cashflows from the property, plant and equipment of Tilly are minimal.

During the first quarter of 2022, the Company recorded an impairment of non-current assets of $5,386 ($5,123 for customer relationships and $263 for other intangibles), included in the Specialty Semiconductors segment, to reflect the assessment of the carrying value of intangible assets impacted by the invasion of Ukraine by Russia, more precisely in reference to Russia based customers. The Company's initial assumptions regarding the timing of future cashflows from these customers could no longer be supported given the uncertainty associated with international sanctions against Russia, and the unknown duration of the conflict.

(4) Reduced research and development, net of tax credit by an amount of $1,700 and $3,075 for the three and nine-month periods ended September 30, 2023 resulting from research and development subsidies. There is an outstanding receivable related to this grant as at September 30, 2023 for an amount of $1,738 included within Accounts receivable.

Reduced research and development, net of tax credit by an amount of $1,106 and $2,625 for the three and nine-month periods ended September 30, 2022 resulting from research and development subsidies.

(5) Litigation and restructuring income includes $8,974 received from the previous shareholder of AZUR. The income was received as per stipulations in the share purchase agreement and is not related to AZUR's performance post-acquisition.

During the third quarter of 2022, following a change to its senior executive management during the third quarter, the Company recorded litigation and restructuring costs of $241. These costs, in combination with a cost of $372 recorded in the second quarter relating to the settlement of a contract by mutual agreement brought the total litigation and restructuring costs to $613 for 2022.

7. Earnings per Share

The following table reconciles the numerators and denominators used for the computation of basic and diluted net earnings (loss) per share:

		Three months	Nine months
Numerators	2023	2022	2023	2022
	$	$	$	$
Net earnings (loss) for the period	1,518	(6,968)	13,115	(14,853)
	Three months		Nine months
Denominators	2023	2022	2023	2022
Basic weighted average number of sharesDilutive effect:	88,601,463	88,330,236	88,475,482	88,330,236
Stock options	568,341	-	521,319	-
Diluted weighted average number of shares	89,169,804	88,330,236	88,996,801	88,330,236

For the three and nine-month periods ended September 30, 2023, 188,924 and 219,864 stock options were excluded from the diluted weighted average number of shares due to their anti-dilutive effect.

For the three and nine-month periods ended September 30, 2022, 1,598,938 stock options were excluded from the diluted weighted average number of shares due to their anti-dilutive effect due to the net loss for each respective period.

8. Operating Segments

The following tables summarize the information reviewed by the entity's chief operating decision maker when measuring performance:

	Three months		Nine months
	2023	2022	2023	2022
	$	$	$	$
Specialty Semiconductors	41,766	32,022	110,818	89,967
Performance Materials	21,180	34,350	66,490	113,214
Total revenue	62,946	66,372	177,308	203,181
Specialty Semiconductors	4,714	6,547	20,064	18,628
Performance Materials	6,637	5,090	17,333	13,280
Corporate and unallocated	(1,702)	(2,523)	(8,107)	(8,585)
Adjusted EBITDA (1)	9,649	9,114	29,290	23,323
Interest on long-term debt, imputed interest and
other interest expense	2,389	1,821	6,705	4,476
Share-based compensation expense	305	10	1,018	1,170
Foreign exchange and derivative (gain) loss	(238)	(196)	(497)	539
Depreciation and amortization	3,979	3,996	12,053	13,681
Impairment of non-current assets (Note 6)	-	7,092	608	12,478
Loss on disposal of property, plant and
equipment (Note 6)	-	-	1,051	-
Loss on disposal of assets held for sale (Note 6)	-	216	-	216
Litigation and restructuring costs (income), net (Note 6)	-	241	(8,772)	613
Earnings (loss) before income tax	3,214	(4,066)	17,124	(9,850)

(1) Earnings (loss) before income tax, depreciation and amortization, impairment of non-current assets, share-based compensation expense, loss on disposal of property, plant and equipment, loss on disposal of assets held for sale, litigation and restructuring costs (income), and financial expense (income).

5N PLUS INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine-month periods ended September 30

(in thousands of United States dollars, unless otherwise indicated) (unaudited)

		Three months		Nine months
Capital expenditures	2023	2022	2023	2022
	$	$	$	$
Specialty Semiconductors	929	4,647	6,431	8,680
Performance Materials	1,612	1,427	4,159	4,049
Corporate and unallocated	-	-	-	32
Total	2,541	6,074	10,590	12,761

	September 30	December 31
Assets excluding deferred tax assets	2023	2022
	$	$
Specialty Semiconductors	188,461	180,473
Performance Materials	127,306	129,901
Corporate and unallocated	16,723	31,609
Total	332,490	341,983

The geographic distribution of the Company's revenue based on the location of the customers for the three and ninemonth periods ended September 30, 2023 and 2022, and the identifiable non-current assets as at September 30, 2023 and December 31, 2022 are summarized as follows:

		Nine monthsThree months
Revenues	2023	2022	2023	2022
	$	$	$	$
Asia
China	3,302	2,648	9,469	7,695
Japan	868	868	3,729	3,714
Other(1)	3,881	3,722	12,390	24,008
Americas
United States	28,796	27,202	77,307	62,420
Other	2,028	3,939	7,350	16,487
Europe
Germany	14,670	10,671	34,123	35,570
Belgium	1,987	1,055	2,506	5,664
Netherlands	630	3,806	2,645	10,643
France	1,559	3,020	8,578	11,141
Other(1)	4,590	8,060	18,061	21,923
Other	635	1,381	1,150	3,916
Total	62,946	66,372	177,308	203,181

(1) None exceeding 10%

	September 30	December 31
Non-current assets (other than deferred tax assets)	2023	2022
	$	$
Asia	3,012	3,411
United States	12,596	13,590
Canada	29,841	29,156
Germany	106,262	108,664
Total	151,711	154,821

For the three and nine-month periods ended September 30, 2023, one customer represented approximately 26% and 23% of the revenues (26% and 23% within the Specialty Semiconductors segment and nil within the Performance Materials segment). For the three and nine-month periods ended September 30, 2022, one customer represented approximately 17% and 16% of the revenues (14% and 13% within the Specialty Semiconductors segment and 3% within the Performance Materials segment).

9. Supplemental Cash Flow Information

Net change in non-cash working capital balances related to operations consists of the following:

		Nine months
	2023	2022
	$	$
(Increase) decrease in assets:
Accounts receivable	(6,041)	(167)
Inventories	(16,538)	2,352
Income tax receivable	3,801	(526)
Other current assets	6,141	(313)
(Decrease) increase in liabilities:
Trade and accrued liabilities	(9,358)	(4,559)
Income tax payable	(2,362)	3,699
Deferred revenue	3,666	799
Net change	(20,691)	1,285

The interim consolidated statements of cash flows exclude or include the following transactions:

	Nine months
	2023	2022
	$	$
Excluded additions unpaid at end of the period:
Additions to property, plant and equipment	2,370	2,191
Included additions unpaid at beginning of the period:
Additions to property, plant and equipment	2,329	3,095
Excluded non-cash proceeds on the disposal of
Property, plant and equipment	2,515	-

Additions to property, plant and equipment consist of the following:

		Nine months
	2023	2022
	$	$
Additions to property, plant and equipment before prepayments	9,607	8,981
Prepayments for construction in progress	3,498	3,780
Less: Non-cash deposits for construction in progress	(2,515)	-
Additions to property, plant and equipment	10,590	12,761

As at September 30, 2023, property, plant and equipment includes $7,396 of prepayments for construction in progress ($4,001 as at December 31, 2022).

10. Fair Value of Financial Instruments

Fair value hierarchy

The following table presents the financial instruments, by level, which are recognized at fair value in the interim consolidated statements of financial position:

As at September 30, 2023	Level 1	Level 2	Level 3
	$	$	$
Financial assets (liabilities)
At fair value through profit or loss
Total return swap(1)	-	45	-
Investment in equity instruments(2)	-	-	2,000
Restricted investment(3)	-	-	632
Total	-	45	2,632
As at December 31, 2022	Level 1	Level 2	Level 3
	$	$	$
Financial assets
At fair value through profit or loss
Indexed deposit agreement(1)	-	5,517	-
Investment in equity instruments(2)	-	-	2,000
Restricted investment(3)	-	-	620
Total	-	5,517	2,620

(1) In March 2023, the indexed deposit agreement entered with a major Canadian financial institution in June 2017, was amended to a total return swap wherein share price fluctuations are settled via cash annually. As part of this amendment, the Company received, $6,506 which represents the fair value of the indexed deposit agreement as at the amendment date.

The Company entered into the total return swap, previously the indexed deposit agreement, to reduce its income exposure to fluctuations in its share price relating to the DSU, PSU, RSU and SAR programs. Pursuant to the agreement, the Company receives the economic benefit of the share price appreciation while providing payments to the financial institution for the institution's cost of funds and any share price depreciation. The net effect of the total return swap partly offset movements in the Company's share price impacting the cost of the DSU, PSU, RSU and SAR programs. As at September 30, 2023, the total return swap covered 2,571,569 common shares of the Company.

(2) In January 2021, the Company acquired a minority equity stake in Microbion Corporation for an amount of $2,000 recorded in Other assets.

(3) The fair value of the restricted investment is recorded in Other assets.

11. Commitments and Contingencies

Commitments

In the normal course of business, the Company contracted letters of credit for an amount of up to $540 as at September 30, 2023 ($883 as at December 31, 2022).

Contingencies

In the normal course of operations, the Company is exposed to events that could give rise to contingent liabilities or assets. As at the date of issue of the condensed interim consolidated financial statements, the Company was not aware of any significant events that would have a material effect on its consolidated financial statements.