Aqua Metals, Inc. Q2 FY2023 Earnings Call

Good afternoon and welcome to the Aqua Metals Second Quarter Financial Results Call. Please note that this conference is being recorded. It's now my pleasure to turn the conference over to your host, Bob Meyers of FNK Investor Relations. Bob, please begin.

Thank you, operator and thank you everybody for joining. Earlier today, Aqua Metals issued a press release providing an operational update and discussing financial results for the second quarter ended June 30, 2023. This release is available on the Investor Relations section of the company's website at aquametals.com. Hosting the call today are Steve Cotton, President and Chief Executive Officer; and Judd Merrill, Chief Financial Officer. Before we begin, I would like to remind participants that during the call, management will be making forward-looking statements. Please refer to the company's report on Form 10-K filed March 9 or Form 10-Q filed today, August 9, for a summary of the forward-looking statements and the risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements. Aqua Metals cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by law. As a reminder, after the formal remarks, we will be taking questions. Questions will be accepted over the phone from analysts and all other investors can submit a question using the online webcast portal provided in today's and last week's press releases. We will take as many questions as we can in our available time slot. And with that, I'd like to turn the call over to Steve Cotton, CEO of Aqua Metals. Steve, the call is yours.

Thank you, Bob and thank you to everyone who joined us today. Aqua Metals continues to make significant progress and has recently marked a number of major milestones towards commercialization of our patented AquaRefining recycling technology. We are delivering tangible results across every critical facet of our business, and our vision for the future of the company is coming into clearer focus. In recent months, we've advanced our core recycling technology, announced innovative new partnerships, secured a multiyear diversity of raw materials, started inking our first global licensing deal, and raised $25 million in new operating capital. Each of these milestones is substantial on its own, and taken all together, we are painting an evocative picture of what a sustainable lithium battery recycling company is and how we plan to grow within and transform the electrification and energy storage industry. During the second quarter, we successfully completed commissioning of our state-of-the-art pilot facility and transitioned to a 24-hour by 5-day operation. We are currently producing high-purity saleable quantities of recycled battery materials in what we believe is the first operational sustainable lithium battery recycling facility in the United States. Our patented and patent-pending low-carbon technology is now further demonstrated as both readily scalable and cost-effective compared to other approaches. Many companies in this sector are currently building material preprocessing or shredding capacity and beginning to make black mass at scale. Aqua Metals is the first among peers to take black mass and actually recycle it into critical materials and high-value products without using polluting furnaces or trainloads of one-time use chemicals. This achievement is the foundation of our future success and is attracting interest from industry leaders and strategic investors around the world. We are actively shaping that future by establishing key partnerships, supply agreements, and customer relationships across the battery and EV value chain to capitalize on our demonstrated and continuously operating pilot facility. That begins with our own supply of materials. In the second quarter, we contracted for an additional 3,000 tonnes of lithium battery black mass which is the ground-up mixture of valuable metals from spent batteries that we recycle. This is enough to supply our commercial scale operations and meet customer demand well into 2025, and we continue to build a diverse array of black mass processing partners to ensure a steady supply to fuel our growth and to create deeper partnering opportunities with these key suppliers. While metal prices continue to fluctuate, each ton of black mass is worth roughly $20,000 in the recycled components. This confirmed supply represents an estimated $60 million in revenue once we recycle it. With our proven capability to produce high-purity metals from black mass, our next step is our growing ecosystem of off-takers and customers for the critical minerals we deliver. During the quarter, we announced a first-of-kind partnership with 6K Energy to develop the next generation of sustainable materials for domestic battery manufacturing. We are executing on our nonrecurring engineering agreement to jointly develop and commercialize our low-carbon battery metal conversion process. We are on schedule to complete that work this year, and the company's plan to jointly pilot this conversion technology in Tennessee next year. More importantly though, 6K plans to use recycled materials from Aqua Metals to feed a 13,000-ton per year PlusCAM manufacturing facility in Jackson, Tennessee which uses their low-carbon UniMelt plasma technology. We are currently finalizing that long-term agreement to supply thousands of tonnes of high-value critical minerals each year starting in 2025. This is a big deal and central to our commercial growth domestically. PlusCAM is a massive manufacturing facility that will produce cathode materials to power millions of electric vehicles, many gigawatt hours per year, and the ability to use our recycled content is essential to their operations. Meeting demand for PlusCAM alone will represent the lion's share of recycled material that we produce in Phase 1 of our commercial scale facility and will be a key revenue driver as we ultimately scale our own Tahoe-Reno campus to 10,000 tonnes per year. But our growth as a company is not limited to recycling at the facilities we build and operate ourselves; more recently, we announced a new strategic investment in a global partnership with South Korea-based Yulho Materials. Yulho is already established as a leading black mass producer in South Korea and is currently building the nation's largest black mass processing facility. South Korea is one of the biggest global markets for critical battery minerals and is home to some of the world's leading electric vehicle and battery companies, who already supply Yulho with both end-of-life batteries and manufacturing scrap to convert into black mass. Yulho Materials has made a $5 million strategic equity investment to help accelerate our commercial growth in the U.S., underscoring their confidence in Aqua Metals' transformative technology and demonstrated results at our pilot scale facility. That in itself is great news. But in addition, Yulho will be our first licensing agreement for our AquaRefining technology for use in their own facilities in South Korea. This is a realization of our strategy for future global expansion and will deliver immense benefits for our company and for all of our shareholders. We are negotiating final terms and expect the initial licensing agreement to cover up to 100,000 tonnes of material processed each year in South Korea. At an average value of $20,000 a tonne, that represents a $2 billion market opportunity annually that the companies will share. We expect Yulho will commence with their first AquaRefining in South Korea in 2024-2025, and they plan to embed part of their technical team with Aqua Metals to accelerate the commissioning of their own facility. With their growing partnerships in global EV and battery leaders, Yulho is also poised for success and rapid growth. Beyond this initial license, both companies have also agreed to explore further expansion in Asia and the European Union as those markets continue to build out global battery and EV manufacturing hubs to meet the rapid demand for electrification of the transportation sector. With our innovative recycling process proven at scale and an expanding roster of industry-leading customers for our products and our technology, the next gate in our commercial strategy, we have successfully traversed, was securing the funding needed for our accelerating growth. In addition to the $5 million investment from Yulho last month, we completed a public offering which raised an additional $20 million in operating capital for the company. This offering was quickly oversubscribed, demonstrating the confidence expressed by investors in our fundamentals and our strategy for Aqua Metals' growth going forward. This capital will be used in part to continue building our first commercial scale facility in our 5-acre recycling campus right here in Tahoe-Reno, a short distance from our innovation center. This capital is also a necessary component of other non-dilutive funding sources that Aqua Metals is pursuing. As we have previously discussed, Aqua Metals is applying for a loan with very favorable terms guaranteed by the USDA. One of the requirements of these types of loans is necessary capital in hand which we now have. Similarly, many of the grant and loan application programs managed by the Department of Energy and federal agencies would also have cost share and capital requirements. By raising these funds today, we not only obtain necessary capital for equipment and operations but we are also able to access larger funding opportunities in the future, including traditional debt financing. Our company now has a more robust balance sheet, cash position, and overall value because of the investments received, and we are confident this makes Aqua Metals an even stronger company going forward. In short, we've made tremendous progress in a short period of time. With the necessary capital in hand to reach commercial scale, new innovative partnerships spanning the globe, and the growing list of industry-first achievements under our belt, we believe there is no stopping our vision of transforming the critical minerals and battery materials industry. In the coming months and the remainder of 2023, you can expect Aqua Metals to continue to make strides, including but not limited to finalizing a multiyear supply agreement with 6K Energy for their PlusCAM facility, signing the first licensing deal with Yulho for AquaRefining technology in South Korea, generating initial revenues from sales of recycled materials at our pilot facility, providing updates on Department of Energy grant and USDA loan funding applications, and continuing to advance construction and commissioning of Phase 1 at our new commercial scale facility with plans to be operational by mid-2024 and reach our target of a 3,000 ton per year run rate by the end of 2024. The future of Aqua Metals as a global leader in sustainable battery recycling is coming into clear focus, and we expect to finish 2023 as a commercial company selling the valuable battery minerals that we recover. We are solving difficult challenges in building a truly sustainable energy storage industry that is destined to become as large as oil and gas, and ultimately eclipse it as electrification and decarbonization take hold. We are capitalizing on our unique opportunities to pass our peers before they are even up and running. I look forward to sharing further updates with you all soon, and I'll turn it over to Chief Financial Officer Judd Merrill to discuss the results for the second quarter.

Thanks, Steve. Let me start my comments with our balance sheet. As of June 30, 2023, we had total assets of $22 million and working capital of $4 million. We ended the quarter with total cash of approximately $6.2 million. On July 21, 2023, we completed a public offering of approximately 18 million shares, resulting in $20 million of gross proceeds. In addition to the capital investment, the company entered into an agreement to execute a license agreement with Yulho. Yulho invested $5 million into Aqua Metals, and that money was received last week. Cash on hand and cash received from these transactions total approximately $30 million of cash available to the company to fortify our balance sheet, enabling the company to find and pursue debt for the first phase of development of our 10,000 ton per year campus facility. Also, changes on the balance sheet include a reduction in both the lease receivable assets and the ability to purchase deposit liability, both of these went away as we completed the sale of the 2,500 Peru asset which netted approximately $6 million after paying off the $6 million bridge note without issue. There are no other significant changes to our balance sheet since our last quarterly report, so I'll move to the income statement. In Q2, we were focused on advancing and executing our operations at our pilot facility. The costs related to operating this facility were approximately $1.5 million for the quarter. Although no revenue was recognized during the quarter, we did record modest service fees from our development agreement with 6K, and those fees are recorded in other income. Research and development costs were consistent compared to the quarter ended June 30, 2022. Included in R&D expenses are costs related to our agreement with 6K. General and administrative expenses increased approximately 19% for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022. This was in line with expectations and guidance. Non-cash charges included in G&A totaled approximately $0.6 million. For the second quarter of 2023, we had an operating loss of $4.9 million, compared to an operating loss of $4 million for the same period in 2022. Our net loss for the quarter ended June 30, 2023, was $4.8 million or a negative $0.06 per basic and diluted share compared to a net loss of $3.2 million or a negative $0.04 per basic and diluted share for the same period in 2022. Moving to the cash flow statement, cash provided by operating activities for the 6 months ended June 30, 2023, was $5.5 million and includes approximately $12.3 million cash received related to our lease receivable, offset by operating expenses. Net cash used in investing activities for the quarter was $5.5 million. This consisted mainly of $4.3 million utilized towards the purchase of property and equipment. Net cash used in financing activities was $0.8 million for the quarter. This consisted of $2.8 million in net proceeds from the sale of Aqua Metals shares pursuant to the market offering and $2.9 million in proceeds from the loan agreement secured with Summit Investment, offset by $6 million used to pay off the note payable as noted in Note 11 of our financial statement report. We have bolstered our balance sheet and managed our operations responsibly. When we include our cash balance and the $25 million from the capital raise and the direct investment from Yulho that we completed subsequent to quarter-end, we believe we've sufficient capital to fund our proposed operating plan through 2024. This would include the commencement of the Phase 1 build-out of our recently acquired 5-acre recycling campus at the TRI Center. And with that, that concludes my remarks on the financials. I will now turn it back over to the moderator for Q&A.

Our first question today is coming from Sameer Joshi from H.C. Wainwright.

The Yulho agreement, is there any revenue sharing once the plant is up and running?

For Yulho, the licensing agreement, we will share in the revenue from that production facility. So as it scales, we will share with them a percentage of that revenue.

So it's like a royalty kind of payment or...

Exactly. Yes, in the form of licensing royalty. Correct.

Is there any commitment for Aqua Metals to spend a certain amount to make sure that Yulho does what it says it will do?

So the beauty of this arrangement is that the $5 million they've invested is earmarked to help us ensure that we continue to quickly build our Phase 1 facility. They're going to be sending technical and management folks here to embed with us to help us stand that up and effectively put together the plans for the twin of that in their facility where they will have an AquaRefining operation. So there's really no capital cost to Aqua Metals. In fact, the $5 million investment really helps support what it is that we're doing here. So that's why that deal was attractive to both parties: to move as quickly as we could while they spend capital in South Korea and we focus our capital spend here in the U.S. into the Tahoe-Reno Industrial Center.

Understood. And just another clarification on that. Is this a license for development within a certain region or up to a certain extent? Like is it up to 100,000 tonnes and then beyond that it doesn't apply? Or is it applicable to South Korea and maybe Asia? What is the scope?

Yes. So the tonnage is up to 100,000 tonnes. They're going to start with 8,000 tonnes and then go to 24,000 tonnes in that first facility of theirs. So the 100,000 tonnes is kind of the overall licensing umbrella that we've agreed to with them. We're going to be exploring opportunities even beyond South Korea together, because some of their partners that are in South Korea have global deployments in battery cell manufacturing. There are potential opportunities but the licensing arrangement in South Korea really is for up to 100,000 tonnes. And that would equate to about $2 billion worth of material being processed where the companies would share.

On the 6K Energy front, again, similar questions. Is there any commitment from Aqua Metals to spend a certain amount of money?

On the 6K Energy deal to date, what we've agreed to is that 6K Energy has been paying Aqua Metals a nonrecurring engineering, or NRE dollars towards our development of this connector technology that allows us to take our pure metals and get them into a specialized slurry concentrate for them so that they can deploy that technology in their Jackson, Tennessee PlusCAM facility that they recently broke ground on. That is the money that has exchanged hands so far. 6K Energy is spending money to Aqua Metals to develop that technology. That program is on budget, on time and going very well, expected to wrap up by the end of the year and then move forward with a pilot of that connector technology in their facility as its next step, as well as considering offtake arrangements for what we produce in the campus environment Phase I and beyond out here in Tahoe-Reno, as well as considering how we get our process closer to their process in Jackson, Tennessee, and working out what that might look like in the longer run. So there's no real capital cost dollars for Aqua Metals. In fact, if anything, we're getting money.

Should we expect initial revenue dollars in Q3 or Q4? And then the second question is, what is the expected burn over the next 2 quarters? Is it around the $5 million range or something else?

Yes. So we believe we will have some small revenues from the pilot plant in this quarter and in the last quarter of this year, the third and fourth quarter. The purpose of the pilot plant is to get us ready for the demonstration commercial size 3,000-ton facility that will generate significantly better revenues. We've been building that out. So we'll see some revenues there. The burn should remain consistent. We’ve been on a cash basis for our base G&A and operating of about $900,000 a month. So we're staying budget-wise about $1 million a month for maintaining our cash needs.

Thanks for taking my questions and congrats on all the progress.

Your next question is coming from Colin Rusch from Oppenheimer.

Can you remind us of the CapEx plans for the balance of this year and 2024 to get to the commercial ramp?

Thanks, Colin. The commercial demonstration facility is going to have about a $30 million CapEx need. We started spending a little bit on that already, ordered some long lead time equipment. We're already doing that work, getting ready for the facility. But in total, between now and the first part of next year, it will be about a $30 million CapEx spend.

That's helpful. And then with the debt facility that you're looking at, can you give us a sense of how big a facility you're looking at? And kind of what the spread is kind of penciling out in a rough way versus any of the benchmarks that you may be back to?

Yes. With the USDA guaranteed notes, we are getting very close to applying for that. We think that's probably interest rates below 10%, it's probably closer to 8% on that. The size of that is $25 million, and that would be used to fund the $30 million CapEx.

Okay. And then the final one is just how far along you are in customer conversations and starting to qualify any product that might get used in the battery?

We've definitely been sharing materials with battery manufacturers. One of our announced battery manufacturer partners is Dragonfly Energy, which is actually right here in Tahoe-Reno developing silicon anode, solid-state, next-generation LFP, lithium iron phosphate batteries. We've shared our materials with them and we've gotten great feedback so far on the high purity and quality that people are seeing from the products we produce, particularly the lithium in the form of lithium hydroxide. We've already validated some great progress on customer receptivity to the materials we're producing which is quite heartening. In fact, we've been told by one partner that the lithium hydroxide that we provide is the purest lithium hydroxide they've seen, even compared to mined materials.

I'd like to turn the floor back over to Bob for any web questions.

A few questions from the webcast. First, why did Aqua Metals decide to raise equity capital now?

Our decision to initiate an equity offering for the first time in over 4 years was made from a position of strength. The timing aligned seamlessly with our long-term strategy. This capital injection empowers us to accelerate the phase development plan of our commercial scale campus. It also strategically positions us to seize imminent growth opportunities. One of the pivotal benefits of this move is the enhancement of our creditworthiness. As we continue the process that Judd was just talking about to apply for government programs, including the USDA loan, this capital serves as a robust financial backstop. The confidence level in our financial stability is now quite bolstered, and that sets us up for success in gaining access to these non-dilutive types of funding sources. When viewed with our recent strategic investments, this equity raise is also a testament to our commitment to being prudent stewards of our balance sheet and keeping it strong to unlock additional financing opportunities.

Can you discuss the evolving strategy around both owning and operating a recycling plant and the opportunity around licensing agreements and potential JVs the company is exploring with current and potential partners?

This is critical to understanding the future of Aqua Metals and how we'll grow and evolve in the coming years. Our core business is owning and operating our own commercial scale sustainable recycling facilities that are central to our growth, as evidenced by our 10,000 tonne per year campus we're building in the Tahoe Reno lithium loop right here in Reno, Nevada. At the same time, we don't want to limit ourselves to sole ownership. For future AquaRefining campuses and other facilities, we can develop these alongside partners, black mass supplier partners, or even offtake partners, EV manufacturers, cell manufacturers, and explore joint ventures or other arrangements. We've previously shared that we are in discussions with 6K Energy to jointly develop and operate a pilot on our innovative low-carbon battery materials conversion process. This structure can work in many scenarios, especially in co-located facilities with large battery and CAM or pre-CAM manufacturers. Our exciting announcement with Yulho embodies our licensing strategy, because with our technology proven out and demonstrated to scale, licensing enables us to rapidly and capital efficiently scale this AquaRefining technology globally. There's a financial advantage to licensing arrangements that creates another revenue stream for Aqua Metals, allowing us to expand rapidly in markets otherwise inaccessible to us at this time. Each pathway to future growth is equally viable because our groundbreaking technology and success to date have gone very well. It comes down to identifying the right partners and our expanding roster of industry-leading partners reflects our multifaceted growth strategy.

Regarding our commercial plan, can you provide an update on the production timeline of the new facility at the Waltham site?

Things are going great over our commercial campus and progressing on time and on budget. We recently started concrete demolition for some of the internal structures we're building to create more square footage in the facility. We've upgraded electrical and other systems and even painted the outside, which looks just like the picture we shared of what the facility will look like. We've outfitted brand new office space that is housing several of our engineers and project management to oversee the build while they’re on site. Equipment is being purchased and moved into the location, including our state-of-the-art R&D lab, which operates on the campus as well. We expect to complete the installation and upfitting of the building early in '24 and begin commissioning and ramping up operations at that point in time. Our plan is to ramp to the commercial scale through the second half of '24, projecting to achieve a 3,000 tonnes run rate of black mass processed towards the end of '24, achieving a $60 million a year revenue run rate. With our successful completion of the pilot, we can dedicate our senior engineering and operations team to the build-out, as they've handed over the operations of the innovation center pilot, with pilots operating 24 hours a day, soon to be 7 days a week.

Can you talk a little bit about what we're doing with the material that we produce at the pilot beyond the comments made in the prepared remarks?

The initial materials produced at the pilot facility have several purposes. We're using some of the material for our own testing and providing samples to partners. We're stockpiling some material to help commission our commercial scale facility, priming the pumps as we bring the equipment online. There's significant demand for samples from leading companies across the battery and electric vehicle supply chains because as the first non-smelting or chemical-intensive recycler, we believe we are the only company that can share representative samples of recycled materials with manufacturers. These leading companies are rushing to secure supplies of U.S.-based and sustainably produced critical minerals, creating a double whammy in demand for our high-purity samples. All materials being produced at our pilot facility are being used effectively. Anyone is welcome to come and see the metals and lithium products we're generating to support our operations and advance our commercial interests.

Can you provide some granularity on the differences between Aqua Metals technology as compared to competitors who have been afforded much higher valuations?

AquaRefining is very differentiated in that we've decarbonized the process, generating a tiny fraction of CO2 emissions. Smelting and burning batteries create massive CO2 emissions, in fact, more than black mass processed by weight. The hydro processes are slightly better but still produce triple the amount of CO2. We capture the carbon and don't emit CO2 gas with our process. The carbon can be reused in scenarios like cement. The key aspect is that we don't create excess emissions. We regenerate chemicals in our process using electricity, which is unique to Aqua Metals. As a result, we don't need to bring in trainloads of caustic chemicals, eliminating the environmental waste associated with traditional mining processes. This advantage allows for improved economics, no need for fossil fuels or costly crystallization systems for chemical waste disposal. That differentiates us from competitors, and while their valuations differ, we believe the steady progress towards producing materials will adjust those disparities in time.

Do the partnerships announced to date preclude you from doing licensing deals with other companies? What does the landscape look like for additional partners?

The landscape is exciting; we're talking to players throughout the ecosystem. This includes black mass suppliers, offtake partners making cathode active materials like 6K Energy, cell manufacturers, and EV manufacturers interested in closing their supply loop. We are carefully evaluating each partnership to ensure that we do not get hindered in any part of our business by overcommitting to one particular entity. Our goal is to propagate AquaRefining technology quickly while maximizing opportunities for partners. There are significant opportunities for not only our company but also the overall industry, with rapidly changing dynamics fueling sustainable practices.

What are the prospects for Aqua Metals becoming a contracted recycling provider for large automobile manufacturers? Are we talking to Tesla and other brands?

The question refers to what I would call tolling. There are merchant businesses where you buy black mass feedstock, process it at a cost, and sell the offtake to others. We are seeing great opportunities with EV manufacturers wanting to close their loops. These arrangements leverage our existing black mass and offtake partnerships and are discussions with EV manufacturers to enhance their supply chain with sustainably produced materials. It’s important to ensure that one deal does not constrain others, allowing us to continue our technology’s propagation in the marketplace.

Do you expect to be eligible for other sources of government grants through DOE and USDA? Can you provide an update?

Yes, we expect to be eligible. We've read some language from the IRA and Build Back Better plan and believe we are solid fits for the DOE's next round. Our team is already working aggressively to prepare applications for these grants. We’ve also worked with a consulting firm to ensure we’re ready for these opportunities. We believe there are greater possibilities now than in the past which is crucial to our financial future. We recently applied for a $5 million grant related to our recycling process that we’re waiting to hear back on.

How does your cost of recycling compare to mining? What do you see for the future?

The cost per tonne of material produced from mining high-grade materials like black mass is significantly less, giving us a cost advantage. Our vision is for a future where materials are continuously recycled rather than mined, thereby reducing costs per kilowatt hour of energy storage as we continue to recycle and reuse materials. It may take time for the industry to reach that point, but recycling is the key to advancing towards a closed-loop battery society, saving resources while reducing costs.

Will your clients be able to apply for renewable energy credits for using your products versus other more hazardous or polluting processes?

We are looking into the opportunity for renewable energy credits as we are net-zero in our approach, and we might have the ability to monetize that. Although we're still confirming details, we have our eyes on that opportunity. Furthermore, our commitment to a carbon-free supply chain provides benefits for EV manufacturers and cell manufacturers as they aim to improve sustainability.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Steve for any further or closing comments.

Thanks again, everyone, for your time and attention today. We're rapidly advancing our operational and commercial initiatives on a global scale, and it's a really exciting time for Aqua Metals. We look forward to providing continued updates on our progress. If anyone has questions, you can always go to our website for more information or contact us directly. Thank you again, everybody.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.