Aqua Metals Inc

NASDAQ:AQMS

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, and welcome to the Aqua Metals First Quarter Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to your host, Bob Myers of FNK IR. Please go ahead, Bob.

[Unknown Executive]

Kevin, can we start the recording?

[Operator]

Yes, you may proceed. One moment, please. Ladies and gentlemen, please stand by. We'll begin to start momentarily. We do thank you for your patience. It's now my pleasure to turn the call over to Bob. Thank you.

[Robert Meyers]

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, 2024. 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 28 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 earlier 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.

[Stephen Cotton, executive]

Thank you, Bob, and thank you to everyone who joined us today. This past quarter, Q2 and subsequent time period has seen quite a bit of activity where we have control and also quite a bit of general industry environment development where we do not have control. Starting with what we cannot control. Since our last update call, critical battery minerals prices have plunged. One specific example is that lithium carbonate has retracted another 25-plus percent just since we signed an up to $33 million loan term sheet in May with 1 of the largest privately held companies in the world. For those of us following lithium-related companies, we have also seen significant drops in market capitalization and, of course, share price during the same time period. We have also seen that interest rates remain stubbornly high while metals and stock market negative trends have taken place.

Based upon these macro dynamics, after exhaustive due diligence on our technology and processes and economics of our processes, our lender concluded and we concur that the squeeze of metals prices coupled with debt service payments and covenants become untenable calculations at this point in time. I will note, however, that both our lender and we agreed after this diligence that even at today's battery metal prices, Aqua Metals can still produce margin without debt service, and that is a testament to the favorable economics of our electrically driven AquaRefining process that does not require expensive front-end, onetime use chemicals or back-end waste stream costs, along with environmental and worker safety benefits. We are still on very good amicable terms with this lender and maintain a solid foundation for a longer-term relationship under better macro circumstances.

Moving on to the middle. What we cannot control and what we can control is how we finance the completion of the CRR commercial plant, given the unfavorable macro circumstances I just described that have taken place and accelerated this past quarter. We believe our alternative financing approaches for which we are well down the path on, inclusive of executed NDAs, data rooms, regular engagement on technoeconomic discussions, can beget success with a bit more time for completing these engagements. The models we are considering as alternatives to debt service for the whole facility include project finance models, joint venture and/or potential strategic investors. At this time, this is the most appropriate path to complete the ARC and operate it with positive economics.

Now on to what we absolutely can control. First, people and cash burn. As you saw in our quarterly press release, the company has downsized staff that are primarily related to the rapid completion of the CRR build, such as commissioning, operations and support staff to make that all happen. This aligns our go-forward cash burn rate with a longer cash runway of another year while retaining the team to continue seeking alternative financing and, of course, continue to operate our state-of-the-art pilot plant at our Innovation Center facility. I also want to take a moment to deeply thank each and every employee that was released today for their shared vision, courage, commitment and positive impact to Aqua Metals. Just this year, we were the only lithium-related finalist for Best Places to Work in Northern Nevada, and that is a testament to the great people and culture we have at Aqua Metals.

Second, commercial partner development continues strongly with no direct impact. We are still operating our showcase pilot, providing battery-grade industry samples to major industry OEMs directly and in partnership with our first CAM or cathode active material producer partner, 6K Energy. Third, what we also control is the conviction we have that our technology and processes can make a huge positive impact on the economic environment and worker safety throughout this burgeoning industry, rolling out the battery age. We all know that renewable energy and battery energy storage, electrification of transportation, the AI-powered data center world with increasingly massive battery storage systems are not all of that, but an inevitability. We are as convicted in our belief as ever that Aqua Metals can ultimately be a leading player in how this industry closes the loop to support a growing domestic supply chain. Going forward, we will continue our engagement with our financing counterparties. We will continue provisioning equipment for the Sierra ARC, albeit more slowly and carefully in the near term. We continue to pursue some exciting strategic partnerships for which I'm hopeful to report in the future, and we will facilitate that with continued operations of North America's and perhaps the world's safest, cleanest, most economical lithium battery recycling facility. Anyone is welcome to visit and see for themselves what we have created. We will, of course, keep the market apprised of our continued development. And I will now turn it over to our CFO, Judd Merrill, to discuss financials for the quarter.

[Judd Merrill, executive]

Thanks, Steve. Our 10-Q reporting is finishing up some final reviews and will not be filed today. These final reviews will be completed shortly, and we expect to file the Q on or before the August 14 deadline. We have included our balance sheet and income statement in the press release that we just filed today. So those numbers are available for your review now.

Based on those financials, I will share a few key financial items with you. Let me start my comments with our balance sheet. As of June 30, 2024, we ended the quarter with total cash of approximately $7.8 million. Cash on hand will support costs related to our go-forward strategy, which includes engaging with leasing and/or equipment lenders to finance the remainder of the ARC equipment purchases the continuation of enhancing and solidifying partnerships and continued pilot facility operations. On the balance sheet, I will also point out that we have increased property, plant and equipment by approximately $6.5 million and other assets by approximately $3.5 million. These increases are related to the purchase and deposit for the ARC equipment, allowing us to be fully ready for installation and construction.

There are no other significant changes on our balance sheet since our last quarterly report, so I'll move to the income statement. The costs related to plant operations were approximately $2.4 million for the quarter and $4.6 million for the year. This represents a 60% and an 80% increase, respectively, over the prior quarter and year-to-date. The increase during the first half of 2024 was driven mainly by preparing to turn on the ARC Phase 1 facility. We expect these costs to decrease significantly as we have reduced expenses going into the second half of this year.

General and administrative expenses were little changed compared to the prior year, both quarter and year-to-date. We expect G&A costs to decrease as we head into the second half of this year and into 2025. Our net loss for the 3 months ended June 30, 2024, were approximately $5.6 million or a negative $0.05 per basic and diluted share compared to a net loss of $4.8 million or a negative $0.06 per basic and diluted share for the same quarter in 2023. Our net loss for the 6 months ended June 30, 2024, were approximately $11.3 million or a negative $0.10 per basic and diluted share compared to a net loss of $9.4 million or a negative $0.11 per basic and diluted share for the same period in 2023.

Our cash flow and stockholders' equity statement and financial footnotes will be available for your review once we file the 10-Q on or before the August 14 deadline. From a cash flow perspective, management believes that the reduction in force, along with nonessential asset dispositions, deferral of certain expenses and more standard equipment leasing, along with the cash on hand, will provide approximately 1 year of cash runway. That concludes my remarks on the company financials. I will now turn it back over to the moderator for Q&A.

[Operator]

[Operator Instructions] Our first question today is coming from Michael Legg from the Benchmark Company.

[Michael Legg, analyst]

Could you give us an update on the DOE grant you were vying for and also on the USDA?

[Stephen Cotton, executive]

Yes. The DOE, the situation there is that we've applied last -- this past March for a grant, the [ Mesa 399 ] initiative, and they have not made decisions on all applicants for that grant and have guided towards an October decision. So we don't expect to hear anything until October, probably at the earliest from the DOE. And as it relates to the USDA, those conversations are ongoing, and we're trying to work through what we would expect in terms of a time line for them to get back to us on our appeal with them.

[Michael Legg, analyst]

Okay. Great. And then when you look at the current change of pace for the build-out, when you look at the supply chain now, are we going to have any disruptions to getting -- assuming you can get the financing in place over the next 6, 12 months, is there going to be any issues with having that supply chain remain intact?

[Stephen Cotton, executive]

So supply chain for us, you mean, Mike?

[Michael Legg, analyst]

Yes, as far as -- as far as getting the facility up and running. I mean I know you had procured most of the equipment to put in place, but is any of that being impacted?

[Stephen Cotton, executive]

So in terms of securing equipment, we're going to continue to cautiously deploy the equipment that we've already purchased and take receipt as necessary, but we are deferring some of the other capital expenses for non long lead time equipment. And that supply chain is still solid, and we've got the team that's working with the vendors. They're being very supportive of us.

[Michael Legg, analyst]

Yes. That's what I meant. The long lead time stuff. Obviously, that's the key component here, and that's good to hear. And then on the relationships with 6K and Dragonfly, what are you hearing from them?

[Stephen Cotton, executive]

So overall, the relationships are solid with 6K and Dragonfly and we're continuing to work quite a bit with 6K. In fact, we are meeting with them with a potential strategic partner out here later this week. Dragonfly Energy right down the road continues to work towards their desire to be in from our process. So those conversations are going very well. We do commensurate on the challenges and the macro challenges I was mentioning earlier in the call and the industry as a whole, but we're strong with those partnerships.

[Michael Legg, analyst]

Okay. Yes. I mean we obviously saw an [ albe ] release a couple of week days ago. So understood where you're coming from and thanks for your time. Appreciate it.

[Operator]

Next question is coming from Sameer Joshi from H.C. Wainright.

[Sameer Joshi, analyst]

Could you remind us what level of battery material prices, mineral prices would be a good level for you to still be profitable? I know you mentioned you can have positive margins without the debt services right now. But what level of prices would be optimal for [ Europe ]?

[Judd Merrill, executive]

Sameer, this is Judd. Thanks for your question. So the company, with our conversion costs and the way we structure things, even at today's kind of low metals price, what we're seeing, the company still generates positive plant margin. And so that's positive. We would like to see it higher. It's probably -- what we said is it's not high enough to service debt. And these debt -- the terms that we're looking at for 5 years, the interest rates are pretty high right now. And so that makes the cost in a short turnaround period is kind of high. So any improvement that we would see in metals prices would not only add to that, but would be better for us. And when we look at kind of where prices are heading to '25 and beyond '26 and some of what we're seeing other people predict the metals prices, if we look at some of the analyst reports who follow that. Those are well within the range for us to be to do very well and to be able to service that if that's what we should choose to do moving forward.

[Sameer Joshi, analyst]

Understood. And just following up on Michael's question, and sort of adding on to that, 6K, Yulho, Dragonfly, since they are still engaged. Is it possible to get some kind of financing going with these partners? Or like can you let us know if those discussions are being had?

[Stephen Cotton, executive]

So in terms of financing, I think every business is financing its own business at this point in time. And then there's no co-financing that we're looking at at the moment with those partners. That answers your question?

[Sameer Joshi, analyst]

Yes. I mean like some investment from them into Aqua Metals. Is that a possibility?

[Stephen Cotton, executive]

Yes. So that's what I was basically saying is that all companies now are seeking financing of their own. And less are investing in each other at this stage.

[Sameer Joshi, analyst]

Understood. And then last question on the cost-cutting initiatives. Should we expect some onetime severance-related costs in the current quarter? And then going forward, what level of CapEx do you expect to incur for these smaller lead time items that you are going to continue to procure?

[Judd Merrill, executive]

Yes, I can't comment in detail, but there will be some severance expense that hits in Q3. And then in terms of CapEx going forward, we actually have purchased most of the equipment for the building. You see that in our balance sheet that we released today, over $6 million of equipment that we bought this year in deposits. And we plan to hold on to that and keep that steady where we need it to be. And so there won't be a whole lot of CapEx, just a few items that we're bringing in, some of those stuff, they're sitting in deposits on the balance sheet will move to equipment once we bring those in. And the idea there is to allow us to be ready. We are looking at some different alternative funding sources that will help us out and get that plant fully constructed. And so we want to keep that equipment that we've already received and bring in the few pieces that we still need that are critical that maybe have long lead time items. So we won't see a whole lot of CapEx spend kind of going into the second half of this year. Almost all of that was done previous.

[Sameer Joshi, analyst]

Got it. Thanks for that. And good luck.

[Operator]

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

[Robert Meyers]

Yes, a few here on the financials that were not asked. First question, was there a breakup fee?

[Judd Merrill, executive]

Yes. So there was no breakup fee. We actually have a great relationship with this lender. It's probably 1 of the better lenders that I have ever worked with. And it's just very professional and kind of mutually agreed that now isn't the right time. We could be working with them again in the future, but no fee from Aqua Metals.

[Robert Meyers]

Next question. Have you thought about unconventional options such as IP lending?

[Judd Merrill, executive]

Yes, we actually have. We did complete a recent IP valuation. It was done by a third-party pretty [ recur ]. They do a lot of these. And they came back with a very meaningful, large number that we can't disclose, but it's part of our ongoing discussions with counterparties. It's actually a valuable asset to [ talking about those ].

[Robert Meyers]

Great. Next question, pivoting to operational activity. And some of this was discussed, but this is pretty specific. The extension of the ARC means an extension for material to be shipped to 6K. Has that been worked out?

[Stephen Cotton, executive]

The ARC was actually ahead of the 6K plus [ CAM 1 ] facility time line in Jackson, Tennessee. So at this point, we do not yet see any impact on our ability to supply that facility. In the meantime, however, we are continuing to enable 6K to produce samples of lower-cost CAM or cathode active materials in our partnership with them. And this is through our pilot operation and also through our nitration work with them from our previously announced nonrecurring engineering development for 6K Energy to produce nitrates as an input to their process and produce those from both [ Virgin Mind ] and, of course, our recycled materials. This combined value proposition of our partnership can turn -- really produce low-cost U.S.-based decarbonized cathode active materials with a significant recycled content to those OEMs that we're both engaged to work towards. We believe that we're going to have more to say about these ongoing activities as we get a little further down the path.

[Robert Meyers]

Next question, also a little bit of a continuation of some of the early remarks, but broadly about the battery materials industry and Aqua Metals projections around getting past the recent market headwinds. Do you -- can you offer some color on that?

[Stephen Cotton, executive]

Sure. Thanks for the question. So on 1 hand, there's a 1.2 terawatt hour build in the U.S. cell manufacturing that was projected to be in place by the end of this decade. That was upgraded from 1 terawatt hour. So it's a lot. And all of these cell manufacturers are looking to source U.S.-based critical battery materials. And that's for production inclusive of recycled materials, right? And so particularly recycled materials at competitive costs and decarbonized are going to contribute towards the entire industry's net 0 emissions goals. The value of those U.S. produced minerals is also in certain tax credit benefits for OEMs and for, frankly, consumers of their products. And recycled materials for producing new cells come from 2 key sources, as we've talked about in the past, that first being from production scrap from all of these new gigafactories ultimately being recycled and put back into the ecosystem and closing that loop. And the second, of course, is from end-of-life batteries that are already being recycled and put into the ecosystem.

But on the other hand, due to the precipitous drop in metals prices, the ecosystem is currently really being squeezed hard. And coupled with the lack of legislation and government attention, in my opinion, to date on preventing black mass from being exported out of the U.S. and/or in support and incentives to keep those materials in the U.S. in a closed loop, we're going to likely actually see recycling capacities turn out to be a little bit lower year-over-year than initially projected in the near term. For example, RC or ARC seeing a delay in its production. We still believe, though, that in the mid- to longer-term, the closed loop within the U.S. and frankly, other regions of the world will have to continue to solidify. The opportunity that we still see in the short term [indiscernible] are completed and produce those first truckloads of materials as soon as possible. And that will have a direct impact in our belief in not only Aqua Metals' success, but will also demonstrate at scale the ability for the U.S. and really ultimately other regions to close the loop.

[Robert Meyers]

Great. Thank you. That's all the time we have in our slot today. I'll now turn it back over to the operator. And I believe Steve will have some closing comments.

[Stephen Cotton, executive]

Well, thank you, everybody, for joining the call today and really appreciate your support and ongoing support of Aqua Metals. We'll be back with more updates soon. Thank you.

[Operator]

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