Aqua Metals Inc (AQMS) 2021 Q4 法說會逐字稿

Greetings. Welcome to Aqua Metals Full Year 2021 Results Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to Spokesperson, Glen Akselrod. Thank you. You may begin.

Thank you, operator. Welcome to Aqua Metals' Fourth Quarter and Year-end 2021 Results Conference Call. Earlier today, Aqua Metals released financial results for the quarter and year ended December 31, 2021. The release is available on the Investors section of the company's website at www.aquametals.com. Joining us for today's call from management is Steve Cotton, President and CEO; Judd Merrill, the company's Chief Financial Officer; and Ben Taecker, Chief Engineering and Operating Officer.

During today's call, the management will be making forward-looking statements. Please refer to the company's report on Form 10-K filed today, February 24, 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 management's formal remarks, we will be taking questions. Questions will be accepted over the telephone from analysts and all other investors can submit a question using the online webinar portal provided in today's and last week's press release. 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, please go ahead.

Thank you, Glen, and welcome, and thank you, everybody, for attending today's call. And I will start, and I'll read off the slide numbers and all of us will read off the slide numbers as we go through the deck, so you can follow along if you're offline. So the first slide is Slide #1, about Aqua Metals' leading revolution, both in lead and lithium battery recycling. And Slide #2, Glen basically just read to you the safe harbor, it's for reference on the website. Slide #3 starts off with our mission, and that is to provide sustainable metal recycling for materials that are strategic to energy storage applications. And our proven technology, which we call AquaRefining returns those raw materials back into the manufacturing supply chain in a clean way and an economical way that reduces the reliance on mining to meet demand and growing demand for all these minerals.

Slide #4. Clean Metals is really in terms of recycling is key to our future. You can see the quotes there, both from the U.S. Secretary of Energy as well as the U.S. Department of Energy. And I'll point out that AquaRefining uniquely uses the renewable electron versus fire or chemicals as the reagent, which is really in support of what the U.S. Department of Energy is saying here, which is that the vision is for a global production of metals using just air and water and clean energy as inputs. If you use the electron as the reagent, you have the ability to vastly reduce the emissions and make it worthwhile to electrify the world and recycle the batteries in that closed loop.

Slide #5 is pointing out that AquaRefining for lead and AquaRefining for lithium are really the only technologies that are aligned with that vision and supporting that is that it is room temperature in a closed loop in a fundamentally non-polluted process. We've already commercially proven the extraction of lead and proven a cleaner and more cost-efficient recovery and recycling process. We also produce a higher-quality product because we plate metals. We plate ultra-pure metals, in fact, very high purities to command higher values in the marketplace. We're expanding the lead into lithium recycling, and you'll see the listing of minerals there such as cobalt and nickel and manganese and copper and lithium and we'll get into some more detail on how we're doing that and our status as we move forward through our development process in the lithium space.

And this whole area of technologies and suite of AquaRefining technologies is patent protected, and I'll get into more details on that a little bit later.

Slide #6 really shows our journey as a company. And I'm not going to read all of these milestones to you all, but I'm going to point out that in the last quarterly update call, the green area is the future. The blue area is the present and the past. And we've moved to the present and past really the September and the December milestones. And the key milestones that we've had recently that we're reporting on is that we've achieved lab-scale testing of the lithium ion recycling while we also shipped AquaRefining for lead equipment to our first licensee and partner in Taiwan. So if you look forward and look at the green portion of the arrow, you'll notice that in August of '22, we expect to achieve operational testing of a full-size lithium-ion AquaRefining recycling unit. And then by early next year, potentially a full-scale development and deployment of AquaRefining for lithium-ion batteries.

Our ticker on the stock exchange is AQMS on NASDAQ. Our corporate headquarters is in Tahoe-Reno area of Nevada. We are incorporated in 2014. And as of the end of the year, we had 70.4 million shares outstanding. And the cash in hand is $8.1 million as of 12/31, and we are debt free with a strong balance sheet, and Judd will speak to our financials in more detail coming up in our discussion today.

Moving on to Slide #7. We're going to get into the highlights of our accomplishments for 2021. This is the year of 2021 summarized in 2 slides. First off, we wanted to really brag about our innovation center that we did open up in the Tahoe Reno Industrial Center. This is a separate facility that's less than a mile away from the original AquaRefinery that we sold to LiNiCo with the emerging lithium-ion battery recycler. And our innovation center is really focused on the development and prove out of the lithium-ion battery recycling technology.

We also developed our third-generation Aqualyzer for lead and completed that in the year. And that resulted in a 300% improvement in the production as compared to the original model that we ran 24/7 in 2018 and 2019, and that version of shipping to our partner in Taiwan. We also increased our ownership throughout the year in LiNiCo by 20% through some exercised warrants. Our patent portfolio increased pretty significantly for the year to 8 U.S. and 63 international patents from 6 and 40 international patents in the prior year, and the lithium-ion patent application did convert from a provisional recently to a non-provisional patent and expect to see a lot more activity from Aqua Metals in terms of patent prosecution because we do take the IP very seriously, and ensure that we protect it on a global basis.

We signed our agreement with ACME Metal, and that agreement is to deploy and license AquaRefining equipment at its facility in Keelung, Taiwan. And we also did our final insurance settlement payment and collection of $5.25 million, so a total of $30.25 million in total insurance proceeds collected from the 2019 fire event.

Moving on to Slide #8. A little bit more on the progress of the innovation center since we've established it through the year. And that is that the lithium-ion battery recycling R&D is well underway. And we've completed and already lab-tested plating of cobalt. We believe that the cobalt plating is the first cobalt that's been plated from lithium-ion batteries in a metal form. We are also targeting a pilot circuit to produce materials by Q3 of this year in that innovation center on the pilots circuit.

We also established a collaboration agreement, which is really important with LiNiCo. LiNiCo stands for lithium nickel cobalt. And again, that's the company that purchased the AquaRefinery, which is about 140,000 square foot facility that's about a mile away from our innovation center in the Tahoe Reno Industrial Center. And that collaboration agreement anticipates commercial production beginning to scale by late this year and getting into early 2023.

The focus on that collaboration agreement really is that LiNiCo will focus on the lithium-ion battery breaking and separation and creation of black mass which is the amalgam of the minerals that need to be recovered and Aqua Metals will focus its technology and efforts through the innovation center on extraction of the various minerals from that black mass. We also added some very important strategic capabilities for the year. The first is Dave McMurtry as our Chief Strategist. You can find the profile of Dave McMurtry on the "About Us - Management Team" section of our website, and I recommend you go and look at Dave's past background in strategic corporate activities. Dave is also spearheading our relationship with Silver State Government Relations that's also headed up by Sarah Adler, who was really a champion for Aqua Metals in achieving our U.S. Department of Agriculture, $10 million loan that we repaid early to derisk and establish our technology. We're working with her and Silver State Government Relations, as it relates to lithium battery discussions with local and national politicians.

Justin Chen also joined us as our Asia Pac regional leader. Justin comes from a deep background of lithium-ion space and is also helping us with our efforts with ACME in Taiwan and building those relationships with ACME's customers. We also shipped the first shipments to ACME Metals and expect soon to be in the installation and commissioning efforts later this year.

Next Slide #9 summarizes the latest status of our really robust and strategic IP portfolio. And you can see here the coverage being the blue, dark blue of issued and allowed patents and in the lighter blue of the pending patents, really covering the space that we intend to operate in. Because remember, our model as an enabler is technology and licensing, and it's also strategically beneficial because it's geographically unbound and we can take off refining technologies anywhere in the world.

The next Slide #10 talks really about the lithium space and the really truly massive market opportunity as lithium-ion recycling grows. The predicted volumes of used batteries really make it imperative that the recycling is done and to begin with because today, only 5% of lithium-ion batteries are recycled, the rest of it that aren't, and the industry aims to get that to 100%. But to get there is one thing, but to get there sustainably is another. And that's back to the point of the technology that our underlying of refining technology enables, and we'll be getting into some more detail on the differentiators there shortly.

But to summarize here, we really estimate our total addressable market to be about $10 billion by 2025 and $31 billion based on a 2030 time frame and the AquaRefining recovery rates that we'll be getting in some more detail on. So it's a very rapidly changing and growing and new industry, and it's going to be very complementary to the lead industry in the sense of our business mission, because you've got an established lead industry that we're innovating and working to evolve and then a new lithium-ion battery recycling industry that we believe that we've got some really differentiating technology. And to do justice to describe that technology, I'm going to ask Ben Taecker, who is our Chief Engineering and Operations Officer, to take everybody through the next 2 slides and describe what it is about AquaRefining that makes us special and unique. So I'm going to hand it over to Ben. Go ahead, Ben.

Thanks, Steve. When comparing AquaRefinery to existing smelting operations and hydro operations under development, AquaRefinery has some clear advantages. Smelting requires hazardous shipments to large-scale smelters strategically located throughout the world, where AquaRefinery is quite modular and could eliminate that. Smelting also doesn't recover all of the metals and has a high impact on the environmental and worker safety of the operators. For hydro, (inaudible) is one of the largest challenges at cost, and that's driven by the mix of batteries, the ability to set recipes for that mix as well as high chemical usage and high chemical output as a result of the different types of batteries coming in. AquaRefinery, however, can recycle the chemicals and also recovers all of the metals in a very high-value format, which could easily be sold back into the battery industry or into the metals industry, giving them flexibility and potential higher profits.

Moving on to Slide 12. Again, lower operating cost is one of the big advantages, and that's really driven by the reduced processing as well as the lower chemical usage compared to the other operators out there. AquaRefinery well having that lower conversion cost also produces the highest value product output as a result of the high efficiency, recovery of all the metals, higher than any of the other potential options out there as well as the types of formats that they are recovered in.

Looking forward to the business model, again, because of the modularity, because of the environmental assembly process, we can put this anywhere. We can put this right next to the existing operators and support them in their growth in an environmentally friendly way to produce high-value metals to be sold back into the market. The environmental and worker safety, impacts from the low temperature, lower processing, lower chemical usage process are a clear advantage for AquaRefinery. And with that, I'll turn it over to Judd to go through the financials.

Thank you, Ben. Moving on to the financials. We ended the year in solid financial position being our expectation for the year and placing us in good shape for the year to come. Let me first make some comments on our balance sheet. As of December 31, 2021, cash and working capital balances were $8.1 million and $8.4 million, respectively, as compared to cash of $6.5 million, working capital of $4.9 million as of December 31, 2020. This places us in stronger financial strength at the end of this year as compared to the prior year.

We accounted for certain assets with a net book value of $2.6 million as assets held for sale. These are non-core assets and are no longer necessary for our future operating plans. In fact, subsequent to year-end, we sold some of these assets to LiNiCo totaling approximately 800,000 and an additional 600,000 non-core equipments to other vendors. As we've mentioned in prior quarters, we accounted for the lease to buy agreement with LiNiCo as a sales-type lease as a component of the accounting for this agreement, we recognized the fair value of the land and the plant of approximately $17 million of lease receivable. And during the fourth quarter of 2021, LiNiCo made their first required deposit of $1.25 million. The deposit is nonrefundable. However, it will be applied to the purchase price of the building at the time the amount is due in full. We believe that LiNiCo wants to pay off the building later this year. And in fact, they are incentivized to do so.

Accrued liabilities include approximately $2.3 million in remaining cost to repair the plants. The plant repairs were successful, and the portion of the plant damaged by the fire now looks brand new and is in great condition. The plant looks amazing. The cleanup and repair efforts were very successful. LiNiCo has put their sign and are getting close to beginning their installation of equipment.

Moving on to the income statement. Cost of product sales increased approximately 28% for the 12 months ended December 31, 2021, as compared to the prior year. Cost of product sales for the year increased as a result of the planned cleanup costs in preparation for the lease and eventual sale of the trick facility. If we look just at the basic cost of product sales without the cleanup -- without the plant cleanup cost, our cost of product sales have been very consistent even for the last 2 years, and we expect these costs to actually come down somewhat in 2022.

During the 12 months ended December 31, 2021, the research and development costs shifted to primarily lithium-ion recycling as the lead recycling product development concluded, while also decreasing overall for the year by approximately 9% compared to 2020. Research and development is a key part of our business strategy includes our focus on continuous product improvement of the company's proprietary technology for lead-acid battery recycling and further advancing our development related to the application of AquaRefining to the lithium-ion batteries.

General and administrative expense increased approximately 8% for the 12 months ended December 31, 2021, compared to the 12 months ended December 31, 2020. The increases in general rate of expense included changes in stock-based comp, in addition to the increase in legal expenses and insurance premiums. Our G&A expense has been consistent likewise for the last 2 years and in line with our expectations.

In conjunction with our year-end accounting, we recognized a noncash impairment charge for the years ended December 31, 2021, and 2020 of $0.5 million and $11.7 million respectively, subsequent to an analysis of our fixed assets and the write-down to fair market values. We recognized a loss on the sale of assets held for sale of approximately $1.4 million during the year ended December 31, 2021, as a result of disposals completed in conjunction with the plant cleanup.

In addition, we recognized the loss on the sale of assets of $3.5 million recognized in conjunction with the accounting for the lease to purchase arrangement for the company's McCarran, Nevada facility. Net loss for the year was a negative $18.2 million and basic and diluted net loss per share was a negative $0.26 per share. And that was in line with our management guidance and expectations. Just to report the company does have a federal NOL carryforward of approximately $135 million, of which they do not start expiring until 2034.

My final comments are related to cash flows. Net cash used in operating activities for the year ended December 31, 2021, and December 31, 2020, was $7.6 million and $11 million, respectively. This covers our OpEx and our G&A cost and was adjusted for noncash items, the details of which are in our 10-K. We don't see cash used for operations growing in the near term, even with adding new hires and strategic consultants who add to our bench strength and our team. We believe that these costs will be -- these increases in costs will be partially offset by reduced cost elsewhere, such as reduced cost as we moved out of the plant early this year.

Net cash used in investing activities for the year ended December 31, 2021, was $2.2 million compared to the prior year of $6.6 million. Net cash and investment activities during these periods consisted, primarily purchases for fixed assets and insurance proceeds received. And then finally, net cash used, or net cash provided by financing activities for the year ended December 31, 2021, consisted of $10.2 million net proceeds from ATM share sales. The majority of the ATM proceeds happened in Q1 with a very little use for the remainder of the year. And our strategy with the ATM has been -- it continues to be that we try to use it when there's only strategic opportunities to invest.

I will now turn the time over to the moderator to begin the questions-and-answer portion.

(Operator Instructions) Our first question comes from the line of Colin Rusch with Oppenheimer.

Can we start with just monthly cash flow? I just want to make sure we fully understand how much you guys are spending on a monthly basis. And when you're expecting LiNiCo to actually close on the full purchase of the building at this point?

Colin, it's Judd. Thanks for the question. So our monthly cash outflows have been very consistent with what we saw in 2021, which is about $700,000 to $750,000 a month for G&A and OpEx. Now we've added some capabilities to our team, but that number is not going to change a lot because we've been able to reduce some of our OpEx costs in other areas. So that should be pretty similar going forward. That's what we expect. And then on the terms of the LiNiCo, they're incentivized to pay off the building by October 1 of this year. So we have the option to either put a $2 million additional deposit and then the pay update would be striked out to March of 2023.

But if they do that, it costs an extra $1 million, so they're incentivized to make that payment in October. And we believe that they want to do that. If they do, that's $13 million that would be coming in, in a couple of quarters from now.

Okay. That's super helpful. And then in terms of the process for some of these new metals, particularly on the lithium side, can you talk a little bit about where in terms of partnership development, you have customer interest on this? Obviously, there's an enormous opportunity. But I want to understand kind of as you get closer to technical validation where you're at in terms of commercial relationships at this point?

Yes. Colin, it's Steve. So thanks for that question. And yes, we are engaged in both sides of the ecosystem. We would call it on the feedstock side. We already have feedstock coming in, in the form of both Black mass and in the form of lithium-ion batteries for the lithium-ion side of it. Just we haven't announced anything specific to that at this point in time.

On the offtake side as we begin to generate materials, we're in lots of conversations because there's people that are quite interested in the fact that we plate metals and that we create a really interesting combination of materials, including the compound such as like a lithium hydroxide, and so we're setting the stage for analysis of the materials that come off of our pilot systems, and we'll have more to say about the ecosystem side of things in the future.

Our next question comes from the line of Sameer Joshi with H.C. Wainwright.

The units that have been tested right now, expected to be operational by August of this year. What exactly is being done? Are you working on improving yield? Or are you working on improving the purity level? Or is just an optimization improvement overall?

Yes. Thank you. That's a great question. This is Ben. We're currently working on optimizing the size and the layout of each piece of equipment, we're actually running a lab-scale operation and adjusting size and dimensions that needed to allow us to meet that timeline that we are on target for.

Okay, okay. And in terms of cost, I think Judd referred to cost remaining stable over the next few quarters. How much additional cost is this process taking the operational testing? Or is it included in the OpEx and not capitalized?

Yes. So there's 2 pieces kind of to our -- well there's OpEx, and that's -- those numbers are included in that, what I said, the $700 million to $750 million a month. We do have additional R&D work that is related more to the lithium side that we did. And last year, it was about $1 million. We'll see that increase a little bit this year, a little bit to maybe even a little more, but the $750 million includes that OpEx related to the lead work that we're doing.

Okay. Okay. And then do you have milestones internally set up to -- as far as Asia is concerned, what are the next steps there? Should we expect any announcements on any milestones or any key events?

Yes. So we'll be -- we showed the timeline slide showing the major milestones that we'll be talking about for the remainder of the year. But there'll be -- as developments happen, we'll be providing information on the metals that we plate and the progress that we make technologically throughout the process as well as commercial arrangements and things on those lines. So there will be a continual update and communication stream to everybody. As we work through the year.

Got it. And then 1 last one. I think you own around 12% of LiNiCo right now if I read it right, is there any possibility of increasing that further? Or is that now you've reached your whatever agreed to maximum?

Yes. So the original agreement allowed us about 10%, which we invested in last year, and then we had some awards that we could exercise to increase our ownership by 20% which we did just recently. And so we're sitting just around 12% ownership. And then in the fall, we signed a collaboration agreement, which are going to be some work done. So right now, those percentages will probably hold pretty steady. Obviously, there's some great work that we're both doing together. And so we'll see how that plays out. But right now, I don't see any change in that ownership.

Our next question comes from the line of Shawn Severson with Water Tower Research.

Good afternoon, everyone. Steve, I was wondering, when you look at the state and government targets, obviously, spending more effort there. What things that are on the horizon are out there that would be logical for you to go after in terms of grants funds? Or is this look more regulatory environment? Just kind of clarify where you're going down with that path.

Yes. Thanks, Shawn. There's a lot of activity in that area. And as I mentioned earlier in the presentation, we brought in Dave McMurtry, as our Chief Strategist, who's working with Silver State Government Relations. And it's a multilayered approach. One is going for the traditional DOE-type grants and grants that are associated with the extraction of critical minerals are out there. There's more and more coming that are related to this area, particularly with the pass of the infrastructure bill, and there might be more down the line of build back better in some form or another gets passed. But also, we're working with our local government folks here in Nevada because Nevada is becoming quite the minerals state. It's originally called the Silver State for that matter. But there's a lot of activity in this area, and our local politicians are quite interested in what we and other players are doing. So we're interfacing with those folks as well as on the Hill and inclusive of our neighbors state, California, et cetera.

So there's lots of activities on that front. And it seems like not a week goes by where we're all learning of new things that are loan related, grant related, et cetera. So there's no shortage of dollars that are being thrown into the electrification space. And we see Aqua Metals is in a great position to pick up some of those funds, which would be great for all of our shareholders because it's non-dilutive.

Absolutely. Next question is, I was having a conversation with the battery company the other day. And the topic came up really about them having interest in recycling their own lithium metal, lithium-ion batteries. And as we started thinking about it and wondering where in your world, where the drivers might come from for something like this. I mean, have you had conversations with automotive or automotive OEMs thinking about this, like, look, we want to recycle our batteries, we want to pass and track that and reuse it or some of the same with a battery company. Is that something that would seem to have traction? Or trying to understand if this runs straight to kind of a spread out commodity model for recycling?

So it's an interesting question because when you look at that ecosystem, there are cell manufacturers, there's EV manufacturers and there's even major users of lithium batteries that are out there that are interested, some in verticalizing such as you said, which is recycling their own batteries that either they make or build packs from or distribute and use and collect. So some of the opportunities we're talking to are looking at that old verticalization. What's great about our business model is that we're an enabler, and we can help those parties fully vertically integrated they so choose, or if they would like to work with us on a joint venture or other forms to apply our technology in their space, that is another way of doing it.

Look at LiNiCo as an example where we have a co-ownership of LiNiCo. And so that's 1 example of where we've taking the other model.

So again, our model is really geographically unbound, but also kind of business model inbound. And the key to it all is making sure that our technology, which we think is going to extract the highest value of materials with the least amount of waste streams is going to be quite appealing as we continue these conversations with players in each and every category. So it's going to be an exciting year as we work through all these meetings and discussions to see how the commercial pieces of our efforts come together.

My last question is maybe more political management than you, but what types of things should we expect out of them and your relationship there as we look forward in timeline road map, and I know they're running their own business. But what can we look for that's relevant to Aqua Metals coming out of there over the next 6 months and 12 months?

Yes. So as we say, we're going to be getting our pilot operating later this year that will go from the black mass forward. What you'll see with LiNiCo are things about equipment being turned on in the facility to begin their focus, which is on the battery collection, breaking, separation and creation of that black mass. And LiNiCo will provide those updates for LiNiCo. We'll provide our updates for our technology as it goes into that facility. And it's really a great partnership because it's quite an effort to do the equivalent of the spoke, which is the battery breaking and separation, black mass creation, and the hub part of it, which is really our technology combined. So we'll communicate more about the hub, they'll communicate more about the spoke, and they'll communicate more about the overall integration of the 2 in their facility.

We have no other questions in the queue for the phone fortunately now, but we do have a few questions in the queue online. And actually, I think the question that we'll start with is the 1 that you sort of just addressed, but maybe expand on it. And the question is LiNiCo has been promoting their own in-house process for lithium recycling, can you clarify what portion of the process is LiNiCo's job? And what portion is expected to be Aqua Metals?

Yes. So the LiNiCo focus is really on the battery breaking and separation and creating what we -- they and we consider a very innovative way of creating a superior black mass product, which again is the amalgam of all the metals and compounds that can be then extracted. What we're really stepping in to do is to focus and take that black mass forward towards the extraction of the various minerals and compounds. And Ben, you may have something to add on that front.

No. I mean one of the great things about the LiNiCo process is we've been able to work directly with their engineers to set up their front-end process to allow us to come in and take their black mass and extract the different metals and to help recover all of the metals out of the black mass ring.

Super. Just sticking with LiNiCo then. There's a question in terms of where do they get their feedstock? And do they currently have any contracts with, I guess, battery companies that they receive their feedstock from?

Yes. So as Aqua Metals, we won't really release feedstock agreement information and speak on their behalf, but rest assured that there's plenty of discussions that they and we are assisting them with or having with various feedstock providers. So I think people will see communications around that piece of it as we work through the year.

Okay. Super. Now I've got a few questions around this topic. So maybe what I'll do is I'll just paraphrase all the questions into one, and then you could forward there or give us an answer. And it's regarding ACME -- it's regarding the timing of ACME? And then at what point does ACME begin to scale and potentially generate revenues for you?

Yes. This is Ben. I'll take that question. ACME as they're receiving equipment right now on site is preparing for an install that will start here early Q2, and the completion of that install in Q2 with commissioning starting late Q2. At the end of commissioning is when we really see that thing scale to its full potential.

There are no further questions in the queue that I don't believe you've addressed during this question-and-answer period. Some closing comments for you then, and I guess we'll end the call.

Yes. So thanks, everybody, for attending. And again, we will be providing news updates throughout -- obviously, in between these calls, and we're really excited about some of the milestones that we have ahead. I think everybody knows what we're after. And I think that you guys can all just stay tuned and please stay in touch with the company, make sure you subscribe to our Twitter feed. If you haven't already, and we look forward to talking next quarter at a minimum.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.