Earnings Call Transcript - AQMS Q3 2023

Operator, Operator

Good afternoon and welcome to the Aqua Metals' Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 Meyers, Investor Relations

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 third quarter ended September 30th, 2023. This release is available on the Investor Relations section of the company's website. 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 9th or Form 10-Q filed today, November 8th, 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. 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.

Steve Cotton, CEO

Thank you, Bob, and thank you to everyone who joined us today. Our strategy focus is paying off as we have made significant progress in commercializing our innovative technology. This strategy, honed on lessons learned as the industry has matured, is based on self-sustainability and measured growth. The rechargeable battery industry is still in its early stages and is susceptible to growth in the electrification of cars, the slow expansion of a charging infrastructure, and technological innovation in batteries themselves. The overall trajectory, however, remains steep, but short-term fluctuations in growth rates, investments, and commercialization are to be expected. In contrast to others in the industry, Aqua Metals has built a strategy that can expand with multiple revenue streams at a measured pace, and most importantly, does not involve a singular mass of capital expenditure. Unlike others, we do not plan to build first a massive and expansive plant requiring government grants or loans to succeed. Put another way, we do not need to spend $1 billion in capital expenditure to make $1 billion in revenue. With our unique technology and engineering design, our commercial plant is expected to require about half of the capital expenditure per ton of our closest competitor due to the inherent efficiency of our process and our ability to scale at a metered pace. This gives us significantly greater flexibility in our funding mechanisms. We can certainly apply for government grants and loans, and we are doing so. If those avenues do not come to fruition, we can use traditional debt to finance our growth because we will be in a better position to service that debt due to our greater efficiency and significantly smaller capital needs. Additionally, partnerships, joint ventures, and similar structures create a viable pathway to scaling. And finally, our industry involves valuable tax credits, which create additional monetization pathways that are available to us due to our lower capital expenditure requirements compared to others. Simply put, we have the strategy in place, supported by the right partners, based on the previously announced expansion of our campus recycling facility in Tahoe-Reno, Nevada, and the projects we have announced with key partners to succeed. We are not overextending ourselves either financially or strategically, and we are developing multiple pathways to near-term success. As we watch the challenges of others in our industry amidst this environment where the cost of capital is high, we increasingly believe that our strategy is the right one. Let me speak to the expansion of our partner ecosystem. Expanding our relationships with partners is a critical part of our commercialization strategy, and we have made significant progress in this area. As an IP company, our strategy involves Aqua Metals positioned as an owner/operator and also licensing our proven technology to partners. Licensing represents a highly capital-efficient way to grow revenue and profitability. During the third quarter, Dragonfly Energy announced it had successfully used high purity lithium hydroxide recovered by Aqua Metals from recycled lithium-ion batteries to manufacture a lithium-based battery cell using Dragonfly's patented Dry Battery Electrode Coating Technology. This is a major milestone for Aqua Metals and its partners, proving that we can deliver a closed lithium loop right here in Nevada, sourcing, manufacturing, and recycling key lithium battery materials, all within the state. We also secured a strategic investment in partnership with South Korea-based Yulho and their Yulho Materials division. This partnership is intended to expand our geographic footprint through licensing of our lithium AquaRefining technology in Yulho's plant in South Korea. This is a large project, and we are working closely with Yulho, giving them sufficient time to complete their build-out of their first black mass processing facility and ramp operations. We are targeting to complete a licensing agreement with Yulho in the first part of 2024. Recently, we advanced our previously advanced plans with 6K Energy and subsequently signed a multipart memorandum of understanding that enhanced the scope of our collaboration. The agreement outlines the future joint venture to co-locate a lithium battery recycling facility with 6K in the Eastern United States to be engineered and operated by Aqua Metals. The plant will support 6K Energy's proprietary UniMelt sustainable can manufacturing process that significantly reduces carbon pollution and waste stemming from the battery supply chain. This is another prime example of the value proposition that Aqua Metals provides to our potential partners and customers. We expect to finalize the formal supply agreement with 6K by the end of this year. We believe that these partnerships, strategic investments, and achievements serve as powerful validation for our technology, our strategy, and our position in the marketplace. As a result of our partner ecosystem, we have agreements in place to receive black mass as we expand capacity at our own commercial campus. We have multiple partners to purchase our recycled components, so buyers for our output are not likely to be a challenge. Effectively, we have created a closed loop, significantly derisking our business model. We are squarely focused on building a circular supply chain that is sustainable with everything we produce, aligning with battery manufacturing qualifications for steadily increasing our IRA incentives. These incentives can serve as another tailwind for our core strategy. In the third quarter, we generated modest revenue from the sale of some inventory. We also generated modest revenues from our non-recurring engineering fees associated with our lithium AquaRefining program. However, our primary focus is on scaling our lithium-ion battery recycling business, enabling us to reach saleable truckload quantities and materials while retaining samples to provide to partners like 6K and Dragonfly so they can develop and execute their own testing programs. A truckload of materials is approximately 20 tons. We expect to begin producing salable quantities and materials from our Sierra ARC in the second half of 2024 and expect significant and consistent growth in revenues from recycled materials beginning in 2025. The build-out of our Sierra ARC in Tahoe-Reno is progressing as planned. We have Black Mass input material and funding to begin the commissioning for this expansion, and we are pursuing non-dilutive financing options for the remaining amounts. Our primary strategy for this is in the form of our already submitted USDA loan guarantee application that includes strong third-party validation in the form of a feasibility study of our overall business and strong third-party validation by a global engineering firm in the form of a detailed technical lifecycle analysis and validation of our novel processes. This package also includes detailed line-by-line hard quotes for the entire Phase 1 build-out already underway of the Sierra ARC, which gives us great confidence in the overall costs. In the event the USDA loan guarantee does not work out for us, we have solid alternative debt-based backup plans in the works. I'd add that the government grants we are pursuing are for new lines of business, not for the core business with the ARC, and we are not dependent on securing those particular grants to move forward with the ARC. If successful, those grants will accelerate our overall expansion efforts. We raised capital in the third quarter and successfully strengthened our balance sheet to carry us through market fluctuations that can be expected. With our flexible business model and funding options that are not solely reliant on government entities, we believe we are well-positioned to execute. In summary, we said that 2023 was the year that we would transition from pilot phase to commercialization, and that initiative is well underway and accelerating. We have successfully proven our technology at pilot scale and have leveraged that success to numerous announcements and developing partnerships. We have secured input and offtake partners with more coming. We are scaling operations in a measured and phased way to minimize capital expenditures and limit risk. We have a healthy balance sheet and a growing number of options to secure the remaining growth capital. Our strategy is rapidly coming together, and we believe that 2024 will be a watershed year for Aqua Metals. I look forward to sharing further updates with you all soon. And now I'm going to turn it over to Judd Merrill, our Chief Financial Officer, to discuss the results for the third quarter.

Judd Merrill, CFO

Thanks, Steve. Let me start my comments with our balance sheet. As of September 30th, 2023, we had total assets of $42 million and working capital of $23.1 million. We ended the quarter with total cash of approximately $25.6 million. During the quarter, we completed a public offering of approximately 18 million shares, resulting in $20 million of gross proceeds. In addition, we entered into an agreement to execute a license agreement with Yulho, which included Yulho investing $5 million into Aqua Metals. This capital supports our planned Phase 1 of our 10,000-ton per year campus facility. There were no other significant changes on the balance sheet since our last quarterly report. So, I'll move to the income statement. In Q3, we were focused on advancing and executing our operations at our pilot facility. The costs related to operating this facility were approximately $1.8 million for the quarter. We generated a small amount of revenue, as Steve mentioned, primarily related to the sale of lead inventory. We also recorded modest service fees from our development agreement with 6K. Those fees are recorded in other income. Research and development costs decreased approximately 21% compared to the quarter ended September 30th, 2022. Included in R&D expenses are costs related to our agreement with 6K. General and administrative expenses increased approximately 7.8% for the quarter ended September 30th, 2023, compared to the quarter ended September 30th, 2022, in line with expectations and guidance. For the third quarter of 2023, we had an operating loss of $4.9 million compared to an operating loss of $3.9 million for the same period in 2022. Our net loss for the quarter was $4.5 million or a negative $0.04 per basic and diluted share compared to a net loss of $3.9 million or a negative $0.05 per basic and diluted share for the same period in 2022. Moving to the cash flow statement. Cash provided by operating activities for the quarter ended September 30th, 2023, was $2.2 million and consisted primarily of cash received from the sale of our old lead recycling facility. Net cash used in investing activities for the quarter was $6.3 million. This consisted mainly of $4.3 million utilized towards the purchase of our campus property and $1.8 million of equipment, primarily related to the build-out of our first commercial demonstration facility. Net cash provided from financing activities was $22.6 million for the quarter. This consisted of $3.8 million in net proceeds from the sale of Aqua Metals' shares pursuant to that market offering, $2.9 million of proceeds from the loan agreement secured with Summit Investment and $18.3 million in net proceeds from our July 2023 public offering and $4.6 million in net proceeds from the Yulho transaction. These inflows were offset mainly by the $6 million used to pay off the note payable as reported in Note 11 of our 10-Q report. We have bolstered our balance sheet and are managing our cash wisely by actively reviewing and considering every dollar spent. One of the positives of higher interest rates is that we are earning a nice return on the cash balance we currently have in the bank. We believe that 2024 is an important year as we finish construction and began production at our first commercial demonstration plant. It is an important milestone as we believe that the plant will generate positive cash flows for the company. As we noted in our 10-Q report, we believe that we will need additional capital to fund our proposed business plan beyond the next 12 months, including the completion of the Phase 1 buildout of our recycling campus and the start of our full-scale commercial operations. We are actively pursuing non-dilutive options such as the USDA government guaranteed loan for $25 million. However, we are not reliant on the USDA loan, as we have been securing funds from other sources, such as conventional lenders, the DOE, strategic partners, and possible dilutive options. Our access to cash is key to ensure our funding success and bridge us to positive cash generation as we expect from our first commercial demonstration plant. We are confident in our financial strength and our ability to execute on our business strategy. And with that, that concludes my remarks on the financials. I will now turn it back over to the moderator for Q&A.

Sameer Joshi, Analyst

Yes. Thanks for taking my questions. The Sierra ARC facility, can you remind us what CapEx has already been spent on it? And what is the remaining amount to be spent on this?

Judd Merrill, CFO

Yes, Sameer, this is Judd. The total CapEx for this project is just about $30 million. So in this quarter, we spent about $1.8 million towards that. In the fourth quarter, we'll see that spend tick up quite a bit, with the goal of getting that facility built by early Q2 of next year.

Sameer Joshi, Analyst

And that will be the Phase 1 with around 3,000 tons per year capacity, is that correct?

Judd Merrill, CFO

3,000 tons of black mass processed per year, that's the capacity.

Sameer Joshi, Analyst

Got it. So, just looking at the next 12 to 18 months, what are the milestones that we should be looking at? And also within the next six months, between now and this facility coming online, what can investors expect to see? Should we see more relationships like 6K or Dragonfly or some other milestones?

Steve Cotton, CEO

Yes. So, lots of milestones to come. For 6K and Dragonfly, we'll, of course, see progressing those relationships. We believe that we'll be announcing new relationships and partnerships, both from the feedstock and offtake part of the ecosystem. There will be those commercial developments that continue to work through the cycle of engaging with these other parties, and the tool that we're using to do that, of course, is not only our own organizational capability, but leveraging the fact that people can come and witness our pilot operating and producing these materials, see it for themselves, and those commercial partnerships will continue to progress. But of course, we'll also see the pilot progress into the Sierra ARC facility, which is just about 1.8 miles down the road from the pilot operation. As Judd mentioned earlier, that is expected to start coming online, black mass material into it in Q2 of next year, which really isn't that far away. It's only a matter of a few months until we begin to start commissioning and then ultimately producing tonnage of materials from that facility. So, we'll see that type of progress. And then further with our existing relationships, I mentioned 6K and Dragonfly, but also our licensing partner and investor Yulho Materials in South Korea. We anticipate that we'll be able to work out the details of the licensing agreement tied to some due diligence that both parties are completing, including our business and technical trip we'll be making to South Korea soon, and we'll be able to announce some news there. On the financial development side, we're continuing to keep that balance sheet strong. Judd mentioned where we are with the USDA loan application, which we're very confident in. But we also have alternatives that don't have quite as nice terms as the USDA has for the loan guarantee program. But we will see continued strength of the balance sheet as we progress through the year as our planned set of milestones.

Sameer Joshi, Analyst

I know you mentioned this, but I wanted to clarify that the additional funding you are seeking is not required for the completion of Phase 1 of the Sierra ARC, is that correct?

Judd Merrill, CFO

So, Sameer, if I got the question right, you're talking about the funding for Phase 1 CapEx. Is that right?

Sameer Joshi, Analyst

Yes. Yes.

Judd Merrill, CFO

Yes. So, we do require either the USDA or some type of debt instruments to complete that project. We ended the quarter with just almost $26 million in cash, but the bigger cash outlays for the CapEx are coming in the next few months. So that's what we've been working towards to ensure that we have the funding to do that, and the intent is to do that with the debt finance.

Sameer Joshi, Analyst

Okay. So, are there any long-lead items that need to be purchased now so that you can have the facility up and running mid-next year?

Steve Cotton, CEO

We already purchased some really long lead items last year, which is the switchgear, and there's a global supply chain challenge with getting a switchgear. That's the equipment that takes the main power from a power drop to a facility and distributes the power throughout the facility. So, we've secured delivery dates of that for early next year. So, that long lead-time has already been taken care of as well as the electrical supply itself. Other long lead-time parts and materials have been ordered already, and that's what Judd was talking about in terms of our CapEx expenditures ramping as we go through the quarter. And Judd may have something to add.

Judd Merrill, CFO

Yes. I mean a lot of what we've spent so far is putting deposits down on the long lead-time equipment. Once we've gone through the process of selecting the vendor, we've spent quite a bit of time ensuring that we understand the sources and evaluating them to make sure that they fit our needs before putting deposits down. So, now we're moving into bringing things on-site and starting the installation process. A lot of foundational work has been done. Now, we're going to be very rapid in installation and construction.

Sameer Joshi, Analyst

Understood. And just one more clarification. The revenues, roughly $25,000, these are from lead metal held over from previous or maybe I did not hear it right?

Judd Merrill, CFO

Yes, there were a few sources of cash coming in other than the raise that we did, but there's about $25,000 of lead in inventory that we sold in the quarter, and there were some other income, mainly related to our partnership with 6K and the work we're doing with them. So, those are the big pieces of those amounts that came in during the quarter.

Sameer Joshi, Analyst

Okay. Thanks for taking my questions. Good luck.

Steve Cotton, CEO

Thanks, Sameer.

Judd Merrill, CFO

Thank you.

Operator, Operator

Thank you. I'd like to turn the floor back over to Bob for further questions.

Bob Meyers, Investor Relations

Thank you, operator. The first question, in your sector there are companies announcing delays, cost overruns, and layoffs. Can you tell us how Aqua Metals is able to navigate some of the recent market fluctuations and the ones we can probably anticipate?

Steve Cotton, CEO

Sure, Bob. And thanks for whoever asked the question. Yes, as we've seen, the EV sector and even energy transition is showing like any other nascent and rapidly growing industry, it does not have a linear growth. But if you look at the year-over-year shipments of EV models announced and energy storage systems that are now being deployed, it is still growing at a rapid pace. However, there is going to be some variation in that market. Others in the EV battery recycling space specifically continue to pursue what we view as very capital-intensive approaches and may potentially run into challenges as they relate to the fluctuations in the market. This is why we set our strategy which is a phased expansion plan and having a flexible business model. We are not building gigantic initial facilities, but rather one facility that will carry the company and allow us to scale up to 3,000 tons and ultimately 10,000 tons with our first facility. The flexible business model allows us to consider licensing our technology because we have the intellectual property that will enable us to partner and license our technology, as seen in our relationship with Yulho and other prospective licensees. Our capital requirements are substantially lower, by about half, compared to some of our competitors because we don't need expensive sodium sulfate crystallization equipment and many other costly waste-handling mechanisms that aren't part of our process. Thus, we can build for less, and with less capital, we can scale rationally, particularly with our modular approach. Moreover, we designed the business not to be reliant on government grants or loans, but to view those as an added benefit to our core business plan. Our high-purity products can also attract numerous buyers because we can sell metals before we move to salts and pre-cathode active materials, such as those we will be working with 6K Energy to produce cathode active materials. We have options to sell those metals in global markets, which draws interest from many buyers looking for high purity cobalt and nickel. That summarizes our strategy and how we navigate the challenges that influence the industry.

Bob Meyers, Investor Relations

Great. Thank you. The next question: During the call, you mentioned your CapEx could be about half of that of other companies in the industry. Are you able to expand on that?

Judd Merrill, CFO

Yes. Thanks for the question. If we look at the public estimates out there for the competing hydro technologies, we've said that our initial plant takes about $30 million in capital expenditure, but the full build-out of the campus is about $100 million in total, including that initial $30 million. That will process 10,000 tonnes of black mass per year, which is about half the cost of what the competing hydro processes are quoting publicly. A significant part of this is due to our very low consumption of chemicals. We save on storage space, have minimal waste, and do not have big-footing furnaces or one-time-use chemicals, which drive the significant reduction in capital expenditure that we are achieving.

Bob Meyers, Investor Relations

Great. Thank you. The next question has several parts, so I'll try and address them one at a time. Many of the partnerships you have announced to date have seemingly been overlooked by the market. Can you perhaps provide some more granularity on economics? Do license agreements require capital expenditures? What kind of royalty rate should we expect? And congratulations on the success so far.

Steve Cotton, CEO

Yes. Good questions. In terms of the partnerships that we've announced to date, I could take you through them one by one to explain their economics. Starting with 6K Energy, we've already announced a memorandum of understanding to develop a co-located facility to supply 6K Energy enough material for their 13,000 tonnes per year facility called PlusCAM, which is based in Jackson, Tennessee. We will start supplying material out of our facility in Tahoe-Reno when the Sierra ARC begins producing tonnage. We're currently supplying 6K Energy with samples, which they are putting in the hands of EV manufacturers and cell manufacturers as they develop their connections to our technology. This facility is expected to generate substantial revenue for Aqua Metals, initially in the tens of millions and ultimately hundreds of millions annually. This is a very exciting supply agreement. The second partnership to highlight is with Dragonfly Energy, who is local here in the Tahoe-Reno area and very interested in obtaining lithium from Aqua Metals. They have already taken lithium we've provided and have built and cycled lithium cell, proving that our sustainably-sourced lithium is a valuable raw material for their new battery cells. As they scale their pilot line—a significant pilot—they will be generating revenue both for them and Aqua Metals through our lithium supply. Moving on to Yulho Materials in South Korea, they are completing their initial 8,000 tonnes per year facility that will take feedstock from the major battery makers in Korea. This will include a twin to our Phase 1 facility in Sierra ARC, ultimately scaling to 8,000 tonnes, which can generate significant revenue—even tens of millions, plus a large percentage coming back to Aqua Metals in licensing and running royalty fees. They plan to eventually scale to 24,000 tonnes per year, which could similarly provide significant revenue to Aqua Metals as well. That's just the beginning—many other parties are interested in potentially licensing our technology, and we are working through the due diligence discussions to make sure they are right fits. I hope that sheds some light on what the economics of these deals look like and underscores the diversity of our business model, which allows us to build, own, and operate, as well as license our technology.

Bob Meyers, Investor Relations

Great. Thank you. Next question: Have you seen any decrease in commercial interest from potential partners given the recent, and likely near-term, downdraft in prices for some of the battery metals?

Steve Cotton, CEO

No, in short. There might be a downturn, as I mentioned earlier, and undulation in the rapid growth of this sector. But EV penetration is not a fad; it's happening. All the major cell manufacturers are working hard to secure tax-benefited domestically-sourced mineral production for which we are one of the few companies in North America already producing lithium, along with other battery metals like nickel and cobalt. We have seen no decline in activity, and in fact, there seems to be a bit more interest since some earlier movers have run into challenges, leading others to seek alternative long-term suppliers. The EV manufacturers are committed to continuing to grow this industry.

Bob Meyers, Investor Relations

Perfect. Thank you. A couple on commercialization—I'll try and combine them. When do you see enough revenue to breakeven? And then when do you see sustainable revenue streams?

Steve Cotton, CEO

Yes. In my comments at the beginning of the call, I mentioned that our first commercial demonstration plant we are building now, the 3,000 tonnes facility, is a key milestone because it will generate positive cash flows. This is where our breakeven concept comes into play, and that is what we are currently constructing. Once operational, we expect to see sustainable revenues, given the high interest in our materials, even as we have only produced them in limited pilot operations. We will then work to construct the second phases of the campus facility to enjoy revenues from that too.

Bob Meyers, Investor Relations

Great. Thank you. And then on the partnerships, could you provide a bit more on the timeframes around 6K and Yulho?

Steve Cotton, CEO

In terms of timelines for agreements, we intend to announce by around the end of this year what the go-forward plan with 6K looks like, based upon that already announced MOU. This will outline what the future holds, including co-location and the potential to generate tens, if not hundreds of millions of dollars, per year, beginning in year two and beyond with 6K Energy. For Yulho, we have business meetings lined up in a few weeks in South Korea for further discussions on the licensing agreement, alongside the due diligence on their soon-to-be-commissioned facility. Further technical meetings are planned for Q1, and we expect to collectively announce our go-forward plan on licensing arrangements following those due diligence complete discussions. We're excited to partner with them as they bring their facility online in Q1 of next year, so stay tuned for news.

Operator, Operator

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

Steve Cotton, CEO

Thank you. I just want to conclude by thanking everyone for your interest, support, and attention today. Our management team believes we possess the right technology, which is environmentally friendly, and we have a strong balance sheet, which we have already secured. We are using a very rational and methodical approach to our business and growth plans. We feel our multi-faceted business model differentiates us in the industry and allows us to collaborate rather than compete with others. We see this as a significant advantage for Aqua Metals, which we can further leverage through our relationships with 6K Energy, Yulho, and Dragonfly Energy. Thank you for your time, and we look forward to providing updates soon.

Operator, Operator

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.