Aqua Metals - Q1 2023

Transcript

Operator (participant)

Good afternoon, and welcome to the Aqua Metals' First 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. You could submit a question via the web at any time by typing them into the ask a question field. Please note this conference is being recorded. I will now turn the call over to your host, Bob Meyers of FNK IR. Please go ahead, Bob.

Bob Meyers (Head of Investor Relation)

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 first quarter ending March 31, 2023. This release is available in the investor relations section on 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, May 4, 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. To start the call, we will show a brief video that highlights our progress. For those that have dialed in, you will be able to hear the narration, and the replays will be available on the website. Steve will lead the call from

Steve Cotton (President and CEO)

Everyone who joined us today, though it's only been a short time since we last shared a quarterly update, Aqua Metals is already making major progress this year. As you just saw in our highlight video, Aqua Metals has made operational progress by all measures in the first quarter of 2023, building upon the many milestones achieved last year. We are rapidly demonstrating the capabilities and expertise to drive toward full commercialization. We are proving our innovative, sustainable and closed loop technology in our lithium AquaRefining pilot facility. After securing property for our commercial growth, we are already well underway in upgrading the existing building number one, the first phase of our 5-acre clean metals campus, into a 3,000 input tons per year recycling facility, which we'll expect to begin commissioning by Q1 of next year.

As we previously announced, we plan to expand our first campus to a target of 10,000 in-input tons per year, which could generate $200 million or more of revenue. Perhaps most importantly today, though, is that we are now fully operational at our revolutionary Li AquaRefining pilot. In Q1, Aqua Metals became the first sustainable lithium-ion battery recycling facility in operation that does not use polluting smelters to recover valuable materials from black mass. We are now producing high-quality metals like copper, nickel and lithium hydroxide from spent lithium batteries and operating our innovative pilot facility 24 hours a day, five days a week.

We couldn't be more excited for our continued operational progress. We continue to share samples of our high purity, sustainably recycled battery materials with manufacturers and OEMs across the supply chain who've also been here visiting our operation. Those ongoing supply agreements and partnership discussions are bearing fruit. On the supply side, we have recently announced agreements for all of the lithium battery black mass we need for 2023 and now into 2024, meaning that the raw materials needed to reach commercial scale production at our new recycling campus are secured. We continue to work with and identify a diverse array of black mass suppliers and are now placing orders for material at scale.

On the offtake side, we announced earlier this week that Aqua Metals has initiated a development partnership with 6K Energy and signed a letter of intent to supply their first of kind PlusCAM cathode manufacturing facility in Jackson, Tennessee, where 6,000 plans to produce 13,000 tons of cathode material each year, which would equate to approximately 100,000-200,000 average EV battery packs, depending upon battery chemistry and size. 6,000 Energy is an ideal offtake partner to announce for Aqua Metals. Both Aqua Metals and 6000 Energy share the vision of creating a low carbon and circular supply chain for critical battery materials domestically, while at the same time advancing cost-effective production methods for sustainable lithium-ion batteries. Our partnership signifies a major step towards U.S. leadership in the next generation of net zero battery materials and technologies.

Funded by our development partnership with 6,000, Aqua Metals will be building on our patented and patent-pending state-of-the-art AquaRefining technology to commercialize a sustainable PCAM production process that replaces chemical catalysts with clean electricity. PCAM, or cathode precursor materials, is an essential input for 6,000 high-performance, low-carbon cathode materials that will power the future of American-made lithium-ion batteries. Aqua Metals has already filed the IP for this suite of technology earlier this year, and this development project with 6,000, upon completion, will allow us to license our innovative metal-to-PCAM technology to take battery metals in metal form sourced from us and even the open metals markets to a 6,000-specific process that 6K will operate to create input-ready material. The initial engineering agreement will also generate modest revenues under $1 million for Aqua Metals during the remainder of this year.

Our jointly anticipated development success expected later this year will pave the way for a supply agreement that the companies are currently negotiating based on 6K's expected manufacturing volume at PlusCAM as it comes online in 2024, 2025. This supply agreement would be for thousands of tons of material each year and represents $hundreds of millions in potential revenue for Aqua Metals throughout the contract term. Not only does this partnership build on Aqua Metals' intellectual property and cutting-edge engineering capabilities, but it also reinforces the value of our inherent flexibility in the battery metals marketplace. Because we produce high-purity metals instead of alloys or sulfates when recycling, we believe that AquaRefining offers greater certainty and flexibility in meeting the exacting standards of Tier one battery and cathode manufacturers by starting with pure inputs.

Each manufacturer has a specific recipe for exactly what they are looking for, and in our ongoing partner discussions, our pure metals input stands out as a key selling point. The process of turning pure metals into battery metals is well understood, and that fundamentally de-risks Aqua Metals as a supplier. We are also currently negotiating agreements with traditional metals buyers based on LME value and purity, meaning we plan to always have an offtaker for any metals we produce not assigned to a specific offtaker or OEM. In the near term, we expect to sell limited quantities of recycled materials to metals buyers while also reserving finished materials for testing, product samples, and of course, future R&D work. This flexible business strategy and demonstrated success is bolstered by our steadily improving financial position. Just a few days ago, we received the final $12 million payment from Comstock Inc.

as part of the previously announced industrial lease agreement and sale of our previous property. This transaction resulted in net proceeds of approximately $6 million after paying off our interim loan. This amount, combined with our quarter-end cash balance, totals more than $9 million in cash, an amount sufficient to execute our 2023 plans. Our continued progress is garnering significant attention, not just from partners and potential customers, but from politicians as well. In April, U.S. Senator Catherine Cortez Masto and her staff visited and toured our pilot facility in Tahoe Reno. As you saw in the highlighted reel, the next day, the senator took our message of building a circular domestic supply chain for critical minerals to the floor of the Nevada legislature.

The senator's enthusiasm and praise were welcomed by the entire team. We are glad that Aqua Metals' vision is resonating with political leaders. She is a tremendous advocate for Nevada businesses and has offered great counsel in our ongoing discussions with other government offices and agencies. As you can see, Aqua Metals is progressing on all fronts. Our technology is being proven out every day as we reach new operational milestones. We have secured the necessary supply of black mass feedstock to reach commercial scale. We are generating revenues. We now have announced two planned offtake agreements for 6,000 and for Dragonfly Energy for our sustainably recycled materials, with more anticipated to come. Aqua Metals is accelerating. This is just the beginning. Now I'll turn the call over to Judd Merrill, our CFO, to discuss the results.

Judd Merrill (CFO)

Thanks, Steve. Let me start my comments with our balance sheet. As of March 31st, 2023, we had total assets of $34 million and working capital of $7.4 million. We ended the quarter with total cash of approximately $3.4 million. After the quarter closed, we collected the remaining balance of $12 million for the 2500 Peru property sale. Part of the proceeds were used to retire the $6 million note with Alpen we secured in 2022. Cash on hand and cash received from this asset sale sufficiently cover costs related to operating the pilot plant, initial outfitting of our Walton Campus facility, and general corporate needs for the remainder of 2023.

Property, plant and equipment increased approximately $4.5 million during the quarter, largely driven by the purchase of our new campus processing site located in the Tahoe Reno Industrial Center, which we secured with a $3 million note. There were no other significant changes on our balance sheet since our last quarterly report. I'll move to the income statement. In Q1, we were focused on advancing and executing our operations at our pilot facility and began the initial work to build out our commercial facility. We had limited commercial scale production during the first quarter. As a result, no revenues were generated during the quarter. Plant operating costs were related to operating our pilot facility in Q1 2023. Q1 2022 plant operating costs included cleanup costs related to the recently sold 2500 Peru plant.

Research and development costs increased by approximately 19% compared to this quarter ending March 31, 2022. As we expected, our Q1 2023 R&D expenses were lower than last year as we focused in Q1 more on plant operations. We will see R&D expenses related to our agreement with 6K in the next 2 quarters. General and administrative expenses increased approximately 8.7% for the quarter ending March 31, 2023 compared to the quarter ending March 31, 2022. This was in line with expectations and guidance. Non-cash charges included in G&A, including stock comp, were approximately $0.7 million. The first quarter 2023, we had an operating loss of $4.5 million, compared to an operating loss of $4.3 million for the same period in 2022.

Our net loss for the quarter ending March thirty-first, 2023 was $4.6 million, or -$0.06 per basic and diluted share, compared to a net loss of $4.4 million, or -$0.06 per basic and diluted share for the same period in 2022. We continued to manage our cash utilization efficiently. Cash used in operating activities for the quarter ending March thirty-first, 2023 was $2.9 million. Q1 cash needs were approximately $900,000 per month, as expected, largely due to the addition of more employees and consultants as we invest more in the lithium-ion battery recycling technology. Net cash used in investing activities for the quarter was $5.2 million. This consisted mainly of $4.3 million utilized towards the purchase of the campus building and property.

Net cash provided by financing activities was $4.4 million for the quarter. This consisted mainly of $3 million from the note received and of net proceeds from the sale of Aqua Metals shares pursuant to the ATM. We have maintained a healthy balance sheet and have grown our company responsibly. Our current cash balance, including the sale of the 2,500 Peru asset and our expected revenues later this year, support our base company costs needed to operate our pilot plant throughout the year. Expansion of our campus property and equipment needed will require additional investments. We are actively pursuing non-dilutive options, including debt, USDA-backed notes, government grants, and strategic partnership investments. We are confident in our technology, partnerships, and team to be able to deliver on our plans this year. With that concludes my remarks on the financials.

I will now turn it back over to the moderator for Q&A.

Operator (participant)

Thank you. We'll now conduct a question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. You also have the option to type your question via the webcast using the Ask a Question feature. One moment please while we poll for questions. Once again, that's star one to be placed into question queue, and we ask you please limit yourselves to two questions and one follow-up. Our first question is coming from Colin Rusch from Oppenheimer. Your line is now live.

Colin Rusch (Managing Director and Head of Sustainable Growth and Resource Optimization Research)

Thanks so much, you guys. You know, can you talk, or just remind us the contributions that 6,000 is gonna make to this partnership, both financial and otherwise?

Judd Merrill (CFO)

Hey, Colin. Yeah, 6,000 is exciting 'cause it's not only a non-recurring engineering source of revenue for Aqua Metals this year, to really finish out the development of the ability to go straight from metal to the materials that tey need to do their cathode active material production, but it's also in contemplation of a supply agreement where we would provide to 6 ,000 the output from our first campus facility and potentially even in co-located operations, the cobalt and nickel and copper and lithium hydroxide.

Steve Cotton (President and CEO)

In the form that helps them to develop their cathode active materials. It's really an engineering and technology cooperative agreement that also contemplates completing very soon the supply agreement, which could be worth, as I said earlier, you know, $hundreds of millions to Aqua Metals over the term of the contract.

Colin Rusch (Managing Director and Head of Sustainable Growth and Resource Optimization Research)

Great. In terms of the USDA loan and, you know, the grant funding, can you just give us a sense of where you're at in terms of maturity of those conversations and those processes?

Steve Cotton (President and CEO)

Yeah. The USDA is moving along nicely. We're in the kind of the pre-application phase. We expect to submit something by, you know, end of June, early July, and be able to hear back, you know, shortly after that. We're very active in that area. We've got some different consultants that are working. We're doing a feasibility study, we're doing an engineering study, and putting together all the models that are required. We're moving forward on that. I don't know if you asked about it, but just on the grant front, you know, there's one grant I think that we talked about that we applied for. It was $5 million, and we'll hear back probably late summer on that.

you know, a significant portion would come to us, we have some partners on that as well. we're optimistic, but we don't know until probably August, you know, September timeframe on that. We expect the next big round of grants from the Department of Energy to come out this summer, which we are preparing to apply to those as well.

Colin Rusch (Managing Director and Head of Sustainable Growth and Resource Optimization Research)

Okay. Thanks so much. The final one from me is just I know it's early days with this pilot facility, but can you give us a sense of where you're seeing from a yield standpoint at this point in terms of material in, material out, and you know, the range of quality that you're getting off that process?

Steve Cotton (President and CEO)

That's a great question. In terms of, the yield that we're getting, in terms of the value of the metals that, we talked about, we're getting pretty much all but, like, $20 a ton of black mass worth of value out of that material. The yield is very high, and we're seeing great, process flow and, throughput is beginning to kick in. We mentioned on the call, we've gone to 24 hours a day by 5 days a week operations. That means there's, people working at the pilot facility, and the pilot is operating for 24 hours a day during, the Monday to Friday timeframe.

We expect it will begin to produce enough quantity of material that we're not only using that material for our own testing and samples to our offtake partners and things along those lines, but also to sell that material in the metals market. You need to get to, you know, probably a minimum of a ton of each type of metal, and we expect that we'll be there in a matter of weeks, that we have the opportunity to begin selling those materials. That takes time when you make your first sale to get through the full qualification and payment and things like that. We do expect to begin selling those materials relatively soon.

Colin Rusch (Managing Director and Head of Sustainable Growth and Resource Optimization Research)

Great. Thanks so much, guys.

Steve Cotton (President and CEO)

Thanks.

Operator (participant)

Thank you. Next question is coming from Sameer Joshi from H.C. Wainwright & Co. Your line is now live.

Sameer Joshi (Senior Equity Research Analyst)

Hey. Hey, guys. Thanks for taking my question.

Steve Cotton (President and CEO)

Yeah

Sameer Joshi (Senior Equity Research Analyst)

congratulations on this progress. Just a few questions on the 6K. What is the financial commitments or requirements from, you know, Aqua Metals that are required for this?

Steve Cotton (President and CEO)

What we've disclosed publicly is that it's the NRE portion, which I think is what you're asking about, which is the non-recurring engineering fees that 6K will be paying to Aqua Metals will be less than $1 million, but a significant amount. The exact amount will depend upon how everything goes throughout the remainder of this year. We expect it will look, you know, let's say several hundred thousand dollars of revenues from 6,000 for the non-recurring engineering portion. That is to connect our process where we get to the pure metals production as well as the lithium hydroxide, and be able to take that material and get it through our IP, through some customization of our IP to fit their process by the end of the year.

In the meantime, we're working on our negotiations for a long-term supply contract that was mentioned earlier. It could be worth hundreds of millions of dollars to Aqua Metals over the term of the contract. That's really to fulfill their facility plans for their Jackson, Tennessee, PlusCAM facility. That is slated at about 13,000 tons per year of cathode active material production. We'll be a significant portion of that supply.

What's also really cool about this relationship with 6,000 is it's not just sustainable battery recycled materials from the metals that we extract, but this technology that we're working on with 6,000 will also allow for the ability to retrieve metals from the mining world such as nickel and cobalt as examples or even lithium, and get those converted into the form that they need in order to make those cathode active materials with their really innovative process that matches well with our carbon free solution.

Sameer Joshi (Senior Equity Research Analyst)

Understood. That was the intention of my question, to understand if the development agreement you were getting paid for by 6,000 for the development. Just an accounting question on that. Will this be considered revenues or will it be netted against R&D or some other line item?

Judd Merrill (CFO)

Yeah. It won't be considered, you know, revenues from our pilot operations, but it would be a revenue line item offset by some R&D expense.

Sameer Joshi (Senior Equity Research Analyst)

Understood. In terms of your capacity versus 6,000 goal of 13,000 tons, would their facility take all your capacity, or how should we think about that?

Steve Cotton (President and CEO)

Yeah. We don't intend to sell out the entire capacity of our campus to one partner, 6,000 will certainly achieve a significant portion of that capacity. As we've already announced, we have a relationship with Dragonfly Energy, for example, for this the lithium hydroxide. There's a growing number of clients that we will and partners that we'll be working with from the output of that facility. We do say in that announcement that we're contemplating co-location and the ability to add to the capacity of our additional campus as we develop our partner network. In the longer term, we'll see some additional projects potentially coming to light that is AquaRefining, Li AquaRefining technology and locations beyond our own campus facility.

Sameer Joshi (Senior Equity Research Analyst)

Understood. In terms of, just the pilot facility that is operational now, what kind of revenues should we expect from this during 2023, or will these be just samples and, not significant revenues?

Judd Merrill (CFO)

Yeah. No, thanks for the question. You know, 2023 is all about getting our pilot, you know, tested and running, which we're doing, and it's been successful so far. You know, 2024 is about, you know, operating the demonstration plant, you know, and that's what all the work we're doing now. We are producing metal, and there will be some revenue. There'll be a modest amount of revenue in 2023. But the focus is less on revenues this year, more on it next year, as we operate the bigger plant. But there will still be some revenue that we'll see from that and from 6,000.

Sameer Joshi (Senior Equity Research Analyst)

Yeah. Yeah. Yeah. We understand that, this will be mostly, ramping up and, getting traction on this commercial front. Just a last check, clarification. Did I hear, that, cash balance as of now is around $9 million, or is it about $9 million?

Judd Merrill (CFO)

Right. you know, we ended the quarter with a little over $3 million, $3.3 million. We successfully closed on the sale of the 2500 Peru Drive asset. That was $12 million that we brought in. We used $6 of that to pay off that bridge note, significantly reducing.

Sameer Joshi (Senior Equity Research Analyst)

Yeah

you know, the debt we had. The six the three, you know, is where we came up with the nine.

Got it. Understood. Thanks for that. Good luck for you with the next plan. Thanks.

Judd Merrill (CFO)

Thank you.

Operator (participant)

Thank you. We've reached the end of the phone portion of our Q&A session. I'd like to turn the floor back over to Bob Meyers for the web portion.

Bob Meyers (Head of Investor Relation)

Thank you. Yes, we have a few questions. back to 6,000, what were the most important factors for Aqua Metals that made 6,000 the right partner at this time, and what influenced 6,000, if you're able to expand on that?

Steve Cotton (President and CEO)

Yeah. Thanks, Bob, for asking that question. There's a number of factors that really make 6,000 a great fit for Aqua Metals, and that starts really at a fundamental level with the company's mutual and shared vision of building that domestic and sustainable supply chain for critical battery materials. It's a really natural fit. Their process is powered by electricity, and our process, as we talk about quite a bit, is powered by electricity and not powered by fossil fuels or intensive use of chemicals with waste streams. That's really what the big part of the fit was. For our fit into the ecosystem, you know, we are really good at generating the critical battery minerals in pure form.

What 6K is a pioneer at is creating cathode material production, and their plasma technology really is truly next level. They're scaling operations rapidly and in line really with our strategic growth plan as well. They're a prime example of the types of offtake or partnerships, I'd say, that we are working to develop. The expected demand for raw materials that we all think we're gonna see, will be significant in the coming years. We believe that the combination of our domestic supplies of the recycled critical minerals, and metals and their domestic manufacturing also makes batteries manufactured from our joint products fully eligible for the IRA initiatives and tax credits.

Really all of this combined with the low emissions benefits for our combined technologies, we think, and we know they think, makes for an enduring partnership in this, you know, climate-constrained world that's gonna be powered by lithium batteries as we electrify.

Bob Meyers (Head of Investor Relation)

Great. Thank you. We talked a little bit about some existing material, and the question is how far along are you with cobalt and manganese plating?

Steve Cotton (President and CEO)

We're far along in finishing out the suite of minerals from the pilot facility, and I guess I would say, expect to hear from us very soon on the cobalt or the manganese dioxide.

Bob Meyers (Head of Investor Relation)

Okay, great. Thank you. I think this might be the last question, and we've talked a little bit about it, but when will you be at your target capacity of 6 to 10 metric tons per month at the pilot facility?

Steve Cotton (President and CEO)

We're ramping quickly, towards those numbers. Again, that's 6 to 10 months of input material, so it's actually more tons of the output material, ultimately, as we build molecules that weigh more than atoms. We expect because we have now achieved that we talked about today, the 24 hours a day by five days a week operation. While we're all sleeping at nine on a Tuesday night, we're out there making metals and minerals, and we expect that we'll achieve that ramp, I would say by, as we get into the summer and complete the achievement of that ramp. In the meantime, we're already, as I mentioned earlier, beginning to make stuff at the level of tonnage.

In the very near future, we expect that we'll get to that capacity of the pilot plant. Really that is gonna be constrained in terms of our revenue opportunity. As Judd said earlier, the pilot plant isn't about the revenue as much as it's about informing how to correctly take the next phase, which is our commercial demonstration plant at our campus facility, and build it once and build it right. We wanna be really good stewards to our capital, and we've learned a lot from the pilot already, and that's already informed our design for the next phase facility. That's a lot of what the pilot is about.

Of course, partner development with partners like 6000 and Dragonfly, that already have looked at samples of our materials and others that we're not able to talk about today. That's really more the function of that pilot. Thank you.

Bob Meyers (Head of Investor Relation)

Perfect. Thank you.

Operator (participant)

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

Steve Cotton (President and CEO)

Well, thank you, operator. I'd also like to point out and highlight that we have some really great content on our website. For anyone that wants to learn more, you can always see right on our homepage in what's new summary, what's going on of late. Check out our media tab. In addition to press releases and in the news that you see in most websites, we also have comprehensive materials in our blog that we've called The Current with video and other information. We recently announced our Battery Recyclopedia, which has great content and great information on battery recycling vernacular. It can get anybody up to speed quite quickly in all the things that are battery and battery recycling related.

With that, I'd like to thank everybody for listening in today, or on the replay, if you're listening to the replay, and please make it a great rest of the day. Thanks, everyone.

Operator (participant)

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.