Aqua Metals Inc (AQMS) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by, and welcome to the Aqua Metals Second Quarter Financial Results. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Glen Akselrod. Please go ahead.

Thank you, operator. Welcome to the Aqua Metals Second Quarter 2021 Conference Call. Earlier today Aqua Metals released financial results for the quarter ended June 30, 2021. This 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 as well as Judd Merrill, the Company's Chief Financial Officer.

During today's call, management will be making forward-looking statements. Please refer to the Company's report on Form 10-Q filed today, July 29, 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 Steve and Judd's formal remarks we'll 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 releases. We will take as many questions as we can in our available time slot.

And with that, I would like to turn the call over to Steve Cotton, CEO of Aqua Metals. Steve, please go ahead.

Thank you, Glen. Thank you everybody for joining us today. I'm going to start with Slide 1 and that is -- that we're leading a revolution in both the lead and lithium battery industries, and I'll talk about that throughout the presentation.

Slide #2 is our safe harbor, which I won't read to you and you can refer to in the deck that we will have up on the website. Slide 3, for those new to our story and a reminder to those who've been following Aqua Metals, I'd like to start with our mission. And that is to provide sustainable metal recycling for materials that are strategic to energy storage applications.

What you see behind you is AquaRefining in a still shot of what it looks like to see lead made one atom at a time. In our proven technology, AquaRefining delivers raw materials right back into the manufacturing supply chain in a very clean way and an economical way that can also reduce overreliance on mining to meet demand with the recovery of these metals.

Slide #4. This is Aqua Metals at a glance. We have developed AquaRefining, which is a commercially-ready sustainable battery recycling technology. AquaRefining is very different than traditional battery recycling technologies and that it uses water instead of fire and organic acids that are biodegradable to create a 99.996% plus ultra-pure lead which, as I mentioned before, we do one atom at a time starting with creating revolution for the $20 billion lead recycling industry.

We're seeking to extend the AquaRefining capabilities to lithium-ion batteries and multi-metal recovery through intellectual property that we've already established with AquaRefining and enhanced with our progress toward lithium recycling, strategic investment, and research and development on an ongoing basis. We believe that AquaRefining is a transformative technology that truly benefits both the industries of batteries and battery recycling as well as the earth itself.

First off, the environmental emissions associated with AquaRefining are vastly reduced compared to incumbent methodologies that use smelting. Second, worker safety is greatly improved because lead in air and other heat-related activities are vastly reduced. And we've seen deaths in the industry related to worker safety and the good news with AquaRefining is it eliminates many of those high-risk points for both exposure to industrial materials as well as heat-related accidents. Battery performance could improve greatly with AquaRefining and that's because when you make metals one atom at a time, you can make ultra-pure metals that have very much less of the impurities, and you can improve the battery performance and improve the battery life through novel ways of taking the link between battery recycling and battery manufacturing and linking that with an ultra-pure metal product.

The economics of AquaRefining are becoming more and more compelling as we improve the AquaRefining capabilities that we've demonstrated already commercially in 2018 and 2019, and when we work with our prospective clients for equipment supply and licensing and look at the entire ecosystem, it's a very compelling economic argument. Our ticker on NASDAQ is AQMS. We're headquartered in Tahoe-Reno in Nevada. We incorporated just in 2014 and we have 69.5 million shares outstanding, cash on hand is $10.7 million as of June 30 report and we are debt free with a very strong balance sheet.

Moving on to Slide #5, I'm going to talk about recent highlights that the company has achieved just in this past quarter. First off, we announced this morning one of the most important announcements in the history of the company, and that is that we signed our first definitive agreement to license and deploy AquaRefining technology and equipment in Taiwan with ACME Metal Enterprise. What's exciting about that announcement is that is a region which has a very large market and a very rapid growth space. And our partner ACME is very excited about working with us to innovate AquaRefining and deliver new ways of deploying AquaRefining throughout the Asia-Pac region.

We, secondly, secured key new AquaRefining patent allowances and that includes China, which is another patent that we received just this past week, the world's largest and fastest growing lead market. This is very important in technology and equipment supply and licensing environment, and we're very proud of our IP portfolio, which I'll discuss more later. Third, we continued research and development and commercial development of AquaRefining for lead as well as for the lithium-ion battery recycling efforts that we are making on a go-forward basis. There's more to come on that in the future.

Next, we further advanced the AquaRefining deployment discussions with several potential licensees inclusive, of course, with the first definitive agreement that we announced but our sales funnel remains robust and we're looking forward to communicating further news as news develops. Second to last bullet point is that we secured our final insurance payment, which we announced today of $5.25 million and that raises our total of collective insurance to $30.25 million, which is within the guidance that we provided, and it puts the insurance collection efforts and related activities behind us and we're very pleased with that news. And it very much strengthens our balance sheet and cash position, of course.

Last bullet point is we have been very busy removing several of the non-core assets from the AquaRefinery, which is being converted to the LiNiCo, which stands for lithium, nickel, cobalt plant to facilitate conversion of the AquaRefinery to the LiNiCo operation of lithium-ion recycling. And we've done that while continuing to operate the Aqualyzer program within a small section of that facility, and that has allowed us to further innovate and further improve the AquaRefining program while we work on the handover of the plant to LiNiCo. So quite a bit of activity as it relates to those efforts.

Moving on to Slide #6. A little bit more about the ACME Metal Taiwan agreement. We did sign a definitive agreement which we previously announced a letter of intent within a short period of time from the letter of intent to the definitive agreement, which we believe is quite a vote of confidence from ACME in AquaRefining technology and as for deployment of the technology in their facility that exists already in Taiwan. We have established ACME as the first licensee and the largest and fastest growing global lead market where they sit. We plan to begin shipping Aqualyzer soon for initial deployment and operations later this year.

We also envision a great partnership not only with ACME, but with other global battery manufacturers to develop a second methodology to produce oxide that comes directly from the AquaRefined material and streamlines the industry. You can see more information about that in our press release, which also references in a hyperlink a prior press release from January of this year to describe a bit more about the oxide direct from AquaRefining to battery manufacturing link. We have the potential to produce oxide using the only two industry-standard processes available with our continuing efforts with ACME in Taiwan to add the second oxide development methodology. And this in some creates a direct link from AquaRefining to battery manufacturing and that allows us to improve the economics, drive emissions towards net zero, improve worker safety and really streamline the link between battery recycling and battery manufacturing across the board.

Slide #7. This is our roadmap to revenue. Aqua Metals has been in revenue before and we're pre-revenue and about to go into revenue again. You can see in the left of the slide that the company was founded in late 2014 and was in the pre-revenue mode with demo plant sales beginning in 2017 of the AquaRefining facility that we built in the Tahoe-Reno Industrial Center in about 140,000 square feet. That plant entered into commercial demonstration production in 2018 and 2019, and we generated and sold 35,000 ingots of AquaRefined lead in that timeframe and certified that lead with the North American -- as a North American supplier to the world's largest battery manufacturing company.

We then went back into pre-revenue in 2020 to take the learnings from 2018-2019 Version 1.0 and improve our Aqualyzer technology to become a product that we could transition toward revenue, not from the sales of demonstration product of lead metal, but rather the equipment and the technology. And that has culminated in our announcement this morning with that signed agreement with ACME Metal to deploy the AquaRefining technology in Taiwan, and we expect to reenter back into revenue as we get into '21 and onwards into 2022 and 2023.

And as we get into 2022 and 2023, we expect revenues not only from the commercialization of AquaRefining technologies for lead recycling, but as we continue to develop and deploy pilot and in commercial systems with our partner LiNiCo and others, we expect for revenue for multi-metal recycling for the rapidly growing lithium-ion battery recycling industry.

Slide 8 summarizes our setup to where we are today, which includes over $200 million invested, and that gets us to the point where we have announced today the deployment of AquaRefining equipment in a customer's facility, which we're very pleased with. And that is only possible with the robust IP portfolio that we've developed and are very proud of and we're the only company with IP for clean lead recycling and additional IP that we filed even for lithium-ion recycling is a really important part of our IP portfolio that's growing.

Since our last report, we are now up to 68 total patents that have been issued and allowed. As I mentioned before, we just recently received another allowance in China, which is a very important market for us for obvious reasons. We've got 49 additional patents that are attending applications. So we expect to see those issued patents and that portfolio grow quite a bit over time as we continue to prosecute those patents. And that new patent allowance for China, as I mentioned, is a really important step for the company as we go forward.

So with that, I'm going to hand it over to Judd Merrill, our CFO for a financial review. Judd?

Thank you, Steve. I will share a few comments related to each of our financial statements.

First on Slide 10 I'll talk about the balance sheet. As of June 30, 2021, cash and working capital balances were both $10.7 million, that is $10.7 million in cash and $10.7 million in working capital. During the second quarter of 2021, we reclassed certain assets with a net book value of $5.2 million to assets held for sale. These non-core assets are no longer necessary for our future operating plans. Of these assets, we successfully disposed of equipment with a net book value of $0.8 million prior to the end of the quarter resulting in total assets held for sale of $4.3 million as of June 30, 2021.

The previously announced lease-to-buy agreement related to our plant located in the Tahoe-Reno Industrial Center commenced on April 1, 2021. We accounted for the lease-to-buy agreement as a sale-type lease. As a component of the accounting for this agreement, we recognized the estimated fair value of the land and plant of $17 million as a lease receivable. This is reflected on the company's condensed consolidated balance sheets and allocated between a current and a non-current portion.

Another component of the accounting for this agreement was the recognition of a non-cash loss on the sale of plant and equipment of $3.5 million. A significant portion of this amount is $2.5 million of anticipated remaining costs for the repair of damages to the building that was caused by the 2019 fire. The $2.5 million included in accrued expense as of June 30, 2021.

Moving on to Slide 11, on the income statement. As we concentrated our efforts on licensing and further enhancing our products offering for future partners, the company did not generate revenue during the second quarter of 2021. Cost of product sales increased by approximately 64% during the second quarter to $2.1 million compared to $1.3 million for the same period in 2020. The increase in cost of product sales was driven by plant clean-up costs in preparation for the lease and planned sale of the facility.

Our general and administrative expenses for the second quarter of 2021 decreased approximately 5% compared to the second quarter of 2020. We did achieve a significant decrease in general and administrative expenses last year during the first quarter of 2020 and these improvements resulted from the swift cost reduction measures implemented during the company's expedited transition to a capital-light business model. We continue to scrutinize all expenses while focusing on efficient capital management.

For the 3 months ended June 30, 2021, the company had a net loss of $8 million or a negative $0.12 per basic and diluted share compared to a net loss of approximately $4 million or a negative $0.07 per basic and diluted share for the 3 months ended June 30, 2020. If we remove the non-cash loss on the disposal of property plant and equipment of approximately $4.3 million, we have an adjusted non-debt net loss of just $3.8 million or a negative $0.055 per basic and diluted share, which is slightly lower than expectation. I want to point out that this non-cash adjustment is a one-time write-down and is aligned with our capital-light strategy.

My final comment's on the statement of cash flows on Slide 12. The net cash used in operating activities for the 6 months ended June 30, 2021 and 2020 was 4.9 and $8.3 million, respectively. Net cash used in operating activities for each of these periods consisted primarily of our net loss, which then was adjusted for depreciation, amortization and stock-based compensation charges and the loss on the sale of property and equipment as well as net change in the working capital. We expect the second half of 2021 to be fairly consistent with the first half in terms of cash needs from operations.

We did receive insurance proceeds of $1.4 million during the second quarter of 2021 related to the 2019 fire and subsequent to the end of the quarter, as Steve mentioned, we finalized discussions with our insurance provider and secured an additional payment of $5.25 million, and this is -- brings the total to approximately $30.25 million. As the amounts that we received from insurance exceeded our original insurance receivable balance that was limited by GAAP accounting standards, the payments that we received from insurance are reported as other income and are netted against related expenses.

Net cash used in investing activities for the 6 months ended June 30, 2021, was $1.1 million and consisted mainly of $1.2 million for the purchase of property plant and equipment and $0.2 million utilized towards the investment in LiNiCo. The net cash provided by financing activities of $10.2 million for the 6 months ended June 30, 2021, consisted of $9.3 million in net proceeds from the sale of Aqua Metal shares pursuant to the ATM and $0.7 million proceeds from the stock options exercises. The majority of the ATM proceeds happened in Q1 with a smaller portion of just over $1.5 million collected in Q2, which is consistent with our current strategy.

In closing, I would like to say that the company is in a very stable position with a strong balance sheet which includes no debt, and a strong cash balance, and a meaningful expensive AR collection from the sale of the building. We are on solid foundation and move forward on our strategic business plan.

With that, I will turn it back over to the operator for questions.

(Operator Instructions) Your first question is from Colin Rusch.

In the first license agreement, can you help us understand some of the financial implications for that and how we can start to see some cash flow start coming into the company over the next couple of quarters from that agreement?

Thanks, Colin. Yes. So the first agreement will be a phased deployment and so we will see the beginnings of revenue likely towards the end of the year as we get the equipment up and running and begin collecting royalties. But we'll be making several tonnes per day. Well, ACME will be making several tonnes per day. So there won't be material amounts of revenue in 2021. And as I pointed out in the presentation it's really 2022 and beyond where the company will begin to see what I would characterize as material amounts of revenue for equipment and for royalties. But it's a transition from pre-revenue for equipment and licensing into revenue as we round the bend towards next year as we deploy the equipment this year and get it operating with our first licensee.

Perfect. That's super helpful. And then in terms of kind of quarterly cash burn, what's the cadence of that here over the next 3 or 4 quarters?

Yes, Colin. So the second half of the year is probably going to look a lot like the first half in terms of the monthly cash burn, the quarterly cash burn. Not a lot of changes in that, but as we go forward into the next year we are hiring some additional people and adding a little bit more strength to the company. We'll see some uptick. It won't be significant but it will be meaningful in terms of supporting our go-forward strategy in the licensing. And some of that will be determined as we get more news on additional licensees besides ACME. And some of that will be determined on the timing of how things progress sooner. You might see a little bit quicker uptick in some of those cash needs for employees and support over takes a little bit longer than it will be pushed out.

Your next question is from Sameer Joshi.

Congratulations on your transaction with ACME. Just following up on Colin's questions a little bit, will you be able to share any -- a little bit more granularity on the number of Aqualyzers during the various phases that you would be deploying in Taiwan over the next several quarters? That would be helpful.

Sure. Yes. So as I mentioned, the first deployment will be several Aqualyzer and as we've noted we've improved the throughput of the Aqualyzers. So they'll make several tonnes per day from the get go as we get that equipment up and running. And then as we enter the further phases of the deployment, we will go to a larger deployment. Particularly as we work with ACME with their connections to global battery manufacturers that they already are doing business with where they can pull the capabilities of the oxide production and help us move forward with that, we expect to see significant increases in the size of deployment to match the needs that we work together with ACME to identify with their client base. So we'll see a ramping of phases as we get moving but the first phase is not a de minimis amount but it's a starting point that will be tacked on to. And that's the beauty of AquaRefining to begin with is that it's a modular system and we can put modular growth steps and step functions as we continue to expand the facility with ACME as appropriate.

That's helpful. So then you mentioned the global reach of ACME, is there a regional feature to this licensing agreement or is it only focused on Taiwan and maybe some additional regions or is it a global license that is being awarded to ACME?

So the deal that we worked out with ACME is that for Taiwan they are our partners, and in Taiwan there are global manufacturers of batteries that have facilities in Taiwan. And so it's a busy center for the manufacturing of batteries. And so it's the access through ACME's long-running relationships at the various highest levels with those types of clients that has a regional Asia-Pac aspect to it as well as the global aspect because some of those manufacturers ship their products globally.

Yes. Understood. Thanks for clarifying that. You mentioned we should expect some further news or more news on the LiNiCo going forward, but is there anything that can be shared now? Is there anything -- or in other words, what are the next milestones that we should be looking for?

So for -- you mean for the lithium development?

For the -- yes.

Yes. So LiNiCo is making great progress preparing what was the AquaRefinery to be the LiNiCo recycling facility, and they've announced already that they are planning on getting some operations up and running late this year and early into next year. Aqua Metals is working with LiNiCo on the adaptation of AquaRefining to add value to the LiNiCo lithium processing facility.

They've also recently announced the planned throughput of the facility to be quite large and maybe one of the largest lithium facility -- recycler facilities in the world. And so we see a great opportunity to continue to partner with LiNiCo to take our AquaRefining technology and deploy the results of our efforts for the multi-metal type of recovery within the facility there. So I would expect further evidencing of the relationship that we have with LiNiCo and with the eco-network that we've built, which is inclusive of not only LiNiCo but Comstock as another owner of LiNiCo and Green Li-ion who's another technology provider.

What we're really working towards is feedstock supply partners that want to see their lithium use spent cells as very large corporations go to clean hydrometallurgical processing facilities as opposed to those that smelt lithium-ion batteries. And so we see great opportunities on that front to expand the eco-network that we should be able to evidence in the not-so-distant future as well as the buyers for the output high-purity metals that we plan to produce along with the cathode-ready materials that LiNiCo plans to produce.

We're using our and Green Li-ion's technology. So that's the path forward but the nice about what we have with this eco-network is there's -- land is there. The building is there. The process flows are well-designed and the equipment is getting put on the floor very soon. And so we feel that this eco-network is ahead of many of the other players in the lithium space that are a little bit more speculative in nature.

Understood. Thanks for that color. And you mentioned the plant and maybe this question is for Judd. Judd, you mentioned the $4.3 million loss is a one-time loss, should we expect some more additional one-time losses in 3Q for any additional equipment that you maybe disposing off?

Yes. No, we pretty much -- we moved the building asset and land to receivable, so that moved out of fixed asset. And then we moved a little bit of some assets for held-for-sale. And then there's the write-off is related partly to the building and the cleanup costs. Not cleanup but the repair costs that's part of that equation. And so all of that we feel like is now on the financials and behind us. The only thing we've left is to sell some of that equipment and depending on where that comes in, there may be a gain or a loss but we feel like that balance fairly represents what we think the market value is as of the date of the financials.

Right. Right. And one -- thanks for that. One last one, there was some recovery of the PPP or rather forgiveness of the PPP loan this quarter as well, do we expect any additional forgiveness or has everything been forgiven so far?

Yes. So everything on the PPP notes has been forgiven. It was a little over $300,000, so we received that money last year and the forgiveness that came in two different pieces because we have the Reno Inc. and the operating company. But both those loans have been forgiven and so that's completely off. So there's absolutely 0 debt on the company's financials.

Your next question is from Shawn Severson.

Steve, I was wondering maybe explain why this seemed to be first one, what was unique about this with ACME that it moved so quickly and the circumstances around that, that brought it forward?

So good question, Shawn. So we've actually known ACME for quite some time and they've expressed interest in our technology because long ago they chose not to smelt. And ACME has been in the business of refining lead bullion into specialized alloys for these very large clients that they have and have always been interested in finding a clean way to produce the pure lead for those same clients.

And so the AquaRefining capabilities that we've developed not only in our operations in our AquaRefinery but as we improved it to the Version 1.25 and the real customer-ready product really got the conversations on a fast track with their interest in being the first customer to move forward as quickly as possible. So we've worked out those arrangements with them. The nice thing about ACME is that they are nimble and quick moving but they also have very strategic relationships with some of those large battery manufacturers. So that's what we see is kind of unique about the deal in the sense that they are a fast moving, well connected, strong track record supplier to those types of organizations in a very fast-growing market in Asia-Pac to help us as well.

And with that in mind, with so many new technologies everybody wants to be second not first, right, in adoption. So how does -- how do you think this impacts those other transactions potentially in the pipeline in terms of how this is viewed? And I assume it helps accelerate but just what do you think the takeaway is going to be in the next year in the pipeline that you expect to move out?

Sure. You've got six people standing up on the cliff, who's going to go first and jump into the ocean. And when the first one goes it's likely that others will follow. I've seen this in prior companies in my career with newer technologies as they get adopted and you gain that momentum factor. The ability even in the Asia-Pac region to have a showcase facility where we can show people in that region the AquaRefining at its finest is certainly going to help. But even before we ramp that facility up in the coming months, I believe that the robust sales funnel that we have seeing that we've consummated the relationship with another entity and another party with great credibility in the industry certainly helps progress those discussions. So we do see a momentum breaker of getting that first one. It's really breaking inertia and then once you break inertia, you can start to propagate. That's our plan.

Will you be able to retain any additional information? I know you talked specifically about some of the technologies but obviously when you roll out at a scale like that, there's going to be some learning curves, right? You're going to discover things and there's going to be data to mine, are you going to be able to keep and utilize and leverage all of that and that you'll be closely engaged with them?

Yes. So it is joint development but the IP rights associated with the joint development are assigned back to Aqua Metals. But of course, ACME will enjoy the licensing of that IP throughout Taiwan. So it's a real win-win situation, so there's no potential conflict in that IP. And we worked that all out with them and feel very confident that we'll be able to jointly develop, particularly this second methodology that we've already developed the first methodology to go direct to oxide because that truly is transformational to -- the link between recycling lead batteries as well as frankly, lithium-ion batteries. If you can take pure metals and go direct to oxide from a multi-metal environment as well as the lead environment it's also quite exciting. So we see great opportunity in that and it really kind of fits in with our overall concept of eco-network with lithium. It's also the same with lead. It takes multiple companies to innovate and solve and put together a better way. And so that's what we're really well matched for with ACME.

Steve, it's Glen here. We've got a few questions in the online queue. I think most of the questions have been covered by the prior Q&A except for one, which is -- and I'll just sum it up in generality because we've got a few questions on this. But can you just comment or update the current status of the Clarios relationship?

Sure. So Clarios has been going through an IPO process. I think we all saw the news today that that's been put on hold, but they're still in a quiet period. And so really, the only comment I can make in Clarios is referred to our Q filing, and you can see the status of the relationship in the Q filing.

Perfect. I don't see any more questions in the queue. I think we're ready to end the call.

This concludes today's conference call. Thank you for participating. You may now disconnect.