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. [Operator Instructions] 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. You may begin Bob.

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 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 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. [Operator Instructions] 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. 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 and 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 CapEx to make $1 billion in revenue. With our unique technology and engineering design, our commercial plant is expected to require about half of the CapEx per ton of our closest competitor due to the inherent efficiency of our process and because our ability to scale at a metered pace requires half of the capital cost of other technologies, we have 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 the significantly smaller capital needs. Additionally, partnerships, joint ventures, and similar structures create a viable…

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 for 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 cost 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…

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?

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

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

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

That's not process. Okay. Got it. So, just looking at the next 18 -- 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?

Yes. So, lots of milestones to come. For 6K and Dragonfly, we'll, of course, see progressing those relationships. And we believe that we'll be announcing new relationships and partnerships, both from the feedstock and offtake part of the ecosystem. So, there'll be those commercial developments that are continuing to work through the cycle of engaging with these other parties and really the tool that we're using to do that, of course, is not only our own organizational capability, but leveraging 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 was mentioning 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 inclusive of 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 to 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.

And just -- I know you mentioned this, but I just wanted to clarify. The additional funding that you're seeking is not required for the completion of the Phase 1 of the Sierra ARC, is that correct?

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

Yes. Yes.

Yes. So, we do need -- 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. And so that's what we've been working towards to make sure that we ensure that we have the funding to do that. And the intent is to do that with the debt finance.

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?

We already did purchase 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.

Yes. I mean a lot of the -- 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 and meeting with them. We spent quite a bit of time ensuring that we understand the sources embedding them out and making sure that they fit our needs and then putting deposits down. So, now we're moving into bringing things on site and start the installation process. So, it's a lot of foundational work has been done. Now, we're going to be very rapid on installation and construction.

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?

Yes, there was a few sources of some 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. And so those are kind of the big pieces of those amounts that came in during the quarter.

Okay. Thanks for taking my questions. Good luck.

Thanks Sameer.

Thank you.

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

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

Sure Bob. And thanks for whoever asked the question. So, yes, as we've seen, the EV sector and even energy transition is showing like any other nascent and rapidly growing industry not to have a linear growth. But if you look at the year-over-year shipments of EV models announced and energy storage systems are now being deployed, it is still growing and it's growing at a very rapid pace. But there is going to be some undulation to that market. Others in the EV battery recycling space specifically do continue to pursue what we view as very capital-intensive boom shot types of approaches and we believe could potentially run into some continued challenges as you relate that to the undulation of the market. And so that's why we set our strategy and that really is a phased expansion plan and having a flexible business model. So, we're not building gigantic initial facility, but one facility that will carry the company and be able to grow into the 3,000 tonnes to do that and get to the 10,000 tonnes with our first facility. The flexible business model allows us to have an opportunity to license our technology because we have the IP, the underlying IP that we've prosecuted to make sure that we could be in the business of even partnering and licensing our technology as evidenced by our relationship with Yulho and expected other licensees. We have lower capital requirements, we think about half of what some of the others have because we don't have to have sodium sulphate crystallization equipment that cost millions of dollars per facility and many other things that handle those waste streams are just not part of our process. And so we can build for less and less capital we can scale rationally, particularly with our approach of modular building blocks. And we're also -- we've designed the business to be not reliant on government grants or loans, but have that as being an upside to our core business plan by design. And so I think that really separates Aqua Metals from many of the other parties that are out there in the market is that we view all those types of programs as upside to our business, but not core to our business. And then the high-purity products that we produced can beget many buyers because we go to metals before we go to the salts and pre-cathode active materials that we will be working of course with 6K Energy to produce the cathode active materials. We can also sell those metals into the global metals markets and there's plenty of people that are quite interested in buying high purity cobalt and nickel as well. So, that hopefully provides a general answer to the overall sector question.

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?

Yes. Thanks for the question. If we look at kind of the public estimates out there for the competing hydro technologies, we've said that our initial plant takes about $30 million in CapEx, but the build out full campus is about $100 million in total, including that $30 million CapEx. And that's processing 10,000 tonnes of black mass per year. And based on what we're seeing, that's about half of what the other hydro processes are quoting in the public. And that's part of -- Steve was talking about, we don't use the same amount of chemicals. So, we save on all the storage space. We have less equipments. We have minimal waste. We don't have big footing furnaces. And we're not using one-time use chemicals. So, that's what drives that significant reduction in CapEx that we're seeing on our end.

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 been seemingly overlooked by the market. Can you perhaps provide some more granularity on economics? Do license agreements require CapEx? What kind of royalty rate should we expect? And congratulations on the success so far.

Yes. Good questions. So, in terms of the partnerships that we've announced to date, I could kind of take everybody through them one by one of what that means for the economics ultimately or what that means for Aqua Metals. So, let's start with 6K Energy as an example. We've already announced an MOU to develop a co-located facility to supply 6K Energy enough material to have a significant debt in their supply chain for their 13,000 tonnes per year facility that is called PlusCAM that starts in Jackson, Tennessee. We'll begin supplying that out of our facility right here in Tahoe-Reno when the Sierra ARC is beginning to produce tonnages of materials. We're already supplying 6K Energy with quite a bit of the materials that we produce for samples that they're putting in the hands of EV manufacturers and cell manufacturers by taking the samples that we provide, the connector technology that we did the non-recurring engineering deal with them to ultimately be able to do that. And then the supply of that facility should generate initially tens of millions and then ultimately hundreds of millions of dollars of revenue for Aqua Metals. And so that's a very exciting supply agreement not only in the sense that we can work with them to supply the materials that come off of our own facility here in Sierra ARC, but also off of the facility that we jointly build and then we'll operate for them in the East Coast for their PlusCAM facility. So, lots of opportunity on that to shed some light on that relationship. And we've already received revenue effectively from 6K with the non-recurring engineering fees that we've been charging to develop the connecting technology to get the metals into the material form that they can make their…

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

No, in short. So, there might be a downturn, like I was mentioning earlier, undulation in the rapid growth of the space. But the EV penetration is not a fad, it's happened and it's happening and it's about the speed of the growth rate and all the cell manufacturers, leading manufacturers working very hard to make sure that they can secure the tax-benefited domestically-sourced mineral production for which we're one of the only companies in North America already that's producing lithium, as an example, as well as the other battery metals like the nickel and the cobalt and so on. So, we have seen no decline in activity. And in fact, probably, if anything, a little bit more interest because some of the earlier movers have run into some challenges. And so people are shopping around a little bit for who else they can work with to secure long-term supplies, because those EV manufacturers, the cell manufacturers, if anything else are committed to continue to grow and develop this industry.

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?

Yes. So, in my comments at the beginning of the call, I mentioned that our first commercial demonstration plant that we're building now, the 3,000 tonnes is a milestone for us because that will generate positive cash flows. So, that breakeven concept that we're all looking forward to, that's where our models are predicting that at first plant. So, that's a positive milestone. That's what we're constructing. That's what we're working towards. So, that's good. And once that gets set-up and running, we believe that we'll have sustainable revenues from that. There's a lot of interest in our materials already, even though we just only produced some of the pilot operations. And so once that first phase gets going, we believe we'll have sustainable revenue just from that first phase and then we'll work to construct the second phases of that campus facility and be able to enjoy the revenues from that as well.

Great. Thank you. And then on the partnerships, just a little clarification. Are you able to offer a little bit more on the timeframes around 6K and Yulho?

So, timeframes in terms of agreements, we've said that we would be announcing -- we intend to announce by around the end of this year what the go-forward plan is with 6K based upon that already announced MOU and that will provide the details of what the future looks like, but it will be likely what I was saying before, which is the co-location and the opportunity for us to generate tens, if not hundreds of millions of dollars a year as we get into year two and beyond with 6K Energy and supply agreement with them alone. And that's not cumulative, that's per year. So, that hopefully gives you some insight on to the timing on that. And then on the Yulho side of the equation, we do have a business -- series of business meetings just in a matter of few weeks in South Korea for further discussions on the licensing agreement and due diligence on our part at a business level on their facility that they are just about ready to begin commissioning on their own. And then there's a further series of technical meetings that will be taking place in Q1 and we expect that we'll be able to announce together what the go-forward plan is on the licensing arrangements with Yulho on a more formal level at the conclusion of those due diligence and final meetings that we'll be having. And we're really excited to be out there with them and see the facility as they begin to really bring it online as we get into Q1 of next year. So, coming soon.

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.

All right. Well, thank you. And I'll just conclude by thanking everybody for your interest and support and attention today. And I'll just add that we believe as a management team that we've got the right technology that is environmentally correct technology, a strong balance sheet that we've secured already and we have a very rational and methodical approach to our business plan and our growth plan and we feel that our multi-faceted business model can really differentiate us in the industry to be able to really work with anyone rather than compete. And we see that as a really strong asset for Aqua Metals that we can continue to leverage as evidenced by what we've already done with 6K Energy and Yulho and Dragonfly Energy. We really appreciate everyone's time and look forward to impending updates and see you all next time soon.

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.