Aqua Metals Inc (AQMS) 2020 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Aqua Metals, Inc. Third Quarter 2020 Earnings Call. (Operator Instructions) The conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Glen Akselrod, President of Bristol Capital. Please go ahead.

Thank you, operator. Welcome to the Aqua Metals Third Quarter 2020 Conference Call. Earlier today, Aqua Metals released financial results for the quarter ended September 30, 2020. 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 quarterly report on Form 10-Q filed today, October 22, 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 these 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.

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

Thanks, Glen. Good afternoon, and welcome, everyone. First, I'm happy to report that the company has made substantive progress in the past 90 days by every measure. Our V1.25 electrolyzer program has progressed well through the b iteration and has returned meaningful cost and operational improvements that have been built right into our AquaRefining sales proposal.

The program remains on or even a little ahead of schedule for completion by year-end, which we believe will put us into a product-ready state to finalize our various detailed sales proposal with the V1.25 build and operating specifications required for detailed configuration and pricing. I'm quite proud of our team's diligent progress to achieve and then even overachieve the goals that we laid out for the program earlier in the year.

Judd will go into more details about our financials, and the headline is that we have further strengthened our balance sheet through a combination of careful cash management and the largest quarter of insurance collections to date. We are also very close to retiring the Veritex loan and emerging debt-free by the end of this year, putting us on or ahead of our previously communicated schedule.

We have also made substantial progress on the activities related to sale of the AquaRefinery facility as a key part of our transition to being a capital-light equipment and services provider and technology licensor. We publicly announced on September 22 our intention to engage with potential buyers and set December 11 as the final date for receiving formal bids for the land plus building.

We also indicated that we are interested in engaging with buyers to consider including the plant and equipment with their bid as a package deal. I'm happy to report that we have had quite a bit of interest and activity for the building, ranging from lead acid battery recycling use to lithium-ion battery recycling use to other industrial use. While there are certainly no guarantees, we will be able to enter into a contract by December of this year with a buyer.

The level of interest and amount of interest since our announcement has exceeded our expectations. Coupled with our anticipated insurance collections, we remain optimistic that we will be able to harvest cash from this asset in time to fuel the company's efforts towards licensing our technology. If a battery recycler purchases the property, we'll also have a great prospect for selling AquaRefining equipment and services and licensing our technology right here in our backyard in the Tahoe Reno industrial center.

I'd also like to provide an update on our intellectual property. The company was recently granted a new patent in the United States, which adds to the large and growing number of patents that we own, and we believe continues to add value to our company and our technology. It has been our strategy since we developed AquaRefining to license our technology worldwide. As a result of that vision, our intellectual property strategy has been global in scope since the beginning. Today, we have 45 patents allowed or granted in 17 countries or regions.

Just this year alone, Aqua Metals has secured 15 patents in 10 countries or regions. Of the 15 new patents, 3 are right here in the U.S. and 12 are international. In addition, we have 67 applications pending, both in the U.S. and in foreign jurisdictions.

We are very pleased with the stable of intellectual property that we have developed and anticipate ongoing opportunities to augment. We believe that our patent portfolio alone carries significant monetary value. Now that we have accelerated our licensing strategy, we believe this strong patent portfolio, with its broad geographic coverage, provides Aqua Metals with very broad opportunity for potential licensees.

Regarding our sales and partnership development efforts, we've made substantive progress both growing and progressing our sales funnel inclusive of Clarios. Our discussion and proposals continue to the next stage as we drive towards selecting our first customer and licensee.

I provided some color on what our licensing model will look like in terms of revenues in one of our prior calls. Given that we are now much closer to executing on our first customer, I thought I would spend a few minutes reminding our shareholders on what this means and what it could look like.

Once a prospective customer agrees with the proposal and technical package, we would expect to move on to a paid for engineering package similar to architectural plans where a portion of the revenues could be recognized. The engineering package would be the first revenues we record for our licensing business that potentially range up to significantly over $1 million, depending, of course, on the size and scope of the application.

Once the engineering package has been accepted, the next step would be to move forward with an equipment, supply and licensing and services agreement. This agreement is expected to provide specific cost breakdowns of engineering, furnishing, installing and commissioning of the Aqua Metals-provided equipment and third-party equipment from Aqua Metals' supplier partners, such as the kiln and briquetting system. We expect revenues for equipment and supply to potentially range from millions to tens of millions of dollars and with healthy margin. The total value of which is, of course, dependent upon the size of the deployment.

Once the equipment arrives in site, we would expect there to be services element to install, commission and witness test and gain customer acceptance. These services could add an additional source of healthy margin revenue. Once the refining solution is up and running, we expect to collect a running royalty per tonne of AquaRefining lead produced by the operation.

The expected royalty would be based upon the inherent value of the clean process and the economic and marketing benefits plus the premium value of the ultra-pure AquaRefining lead itself, which is already commanded up to a 10% premium over the standard London Metals Exchange pricing per millions of dollars of lead sold from our own AquaRefinery. For a modest 15,000 tonne a year AquaRefining facility, we could expect to see over $1 million of running royalty per year.

It is important to note that a large deployment of AquaRefining into an existing facility can support in excess of 100,000 tonnes a year of production. I would also like to point out that due to the modular nature of our technology, our technology is compatible with smaller deployments that are below 15,000 tonnes per year.

Day 2 of production and beyond could yield additional value-add to other customer service opportunities. Potential additional revenue streams could include service and maintenance contracts typical for equipment suppliers, future hardware upgrades to improve throughput, cost to operate, product quality and purity, capacity expansions, unwarranted parts and equipment replacement over time are all opportunities for additional revenue when supporting our customers in the long run.

Getting back to the results from the past quarter. In addition to our sales and partnership development efforts, we have also made progress on what we believe can be some interesting new partnerships for the company that will further enhance our offering and our revenue. Stay tuned. The company has also further enhanced our organizational capability with key hires to ensure that we are able to execute upon completion of V1.25L and signing our first customer. As I've said before, we could run into a hurdle or two, but this team has continued to prove that it can clear hurdle.

So to conclude, I would like to say that I'm very proud of our team and our collective efforts thus far this year. We have a strong culture and teamwork that enables us to repeatedly report that we are accomplishing what we previously guided.

I'll now hand it over to Judd to review our Q3 financials. Judd, go ahead.

Thank you, Steve. As of September 30, 2020, cash and working capital balances were $5.6 million and $2.4 million, respectively. As of September 30, 2020, the company had received a total of $21.8 million in insurance payments as a result of the fire damage. In just Q3 alone, we received $6.8 million with another approximate $0.75 million being received this week for a total of approximately $22.6 million. We anticipate total insurance proceeds for building, equipment damages and cleanups to total up to $30 million. We may receive additional insurance payments for business interruption losses.

Assets on our balance sheet as of September 30, 2020, that were not affected by the fire totaled approximately $37 million in book value. These assets are still in good shape, some of them brand-new, and will be either used in future licensing deals or sold. During the third quarter, we sold 1 nonessential asset for $150,000. As part of our accelerated equipment supply and licensing strategy, which includes the disposition of noncore assets, we officially placed our plant up for sale.

As stated previously, we believe we have achieved the demonstration purposes of the plant, resulting in the successful validation of AquaRefining technology and commercial sale of our ultra-pure lead. This step is part of our long-term business strategy, which includes monetization of this noncore asset with the sale of the plant as a means of financing the company's continued acceleration of our core business of becoming an equipment supplier and licensor of AquaRefining technology.

Other items I want to mention on the balance sheet include other assets and notes payable. As of September 30, 2020, we have set aside in an escrow account approximately $7.6 million of insurance proceeds allocated to Veritex to pay off the remaining balance of the loan, which is approximately $8.5 million as of the date of this report and is inclusive of approximate $500,000 prepayment penalty netted against a $1 million CV collateral. This $7.6 million is recognized as other assets on our balance sheet. With the payment from insurance this week, the escrow account now totals approximately $7.9 million. We anticipate that the debt related to the Veritex note will be paid in full by the end of this year.

As we have discussed, our lead recycling facility was not in production during the year. And except for nominal sales of inventory in the first and third quarters of 2020, we did not generate revenue for the 3 and 9 months ended September 30, 2020, as there has been no significant production subsequent to the fire that occurred during the fourth quarter of 2019. The plant will not be in production on a go-forward basis except for the operation and testing of our improved electrolyzers as part of the V1.25 program.

Cost of product sales includes raw material supplies and related costs, salaries and benefits, consulting and outside services costs, depreciation and amortization costs and insurance, travel and overhead costs. Cost of product sales decreased approximately 80% and 78% for the 3 and 9 months ended September 30, 2020, respectively, as compared to the 3 and 9 months ended September 30, 2019.

Cost of product sales decreased during 2020 due to the suspension of production resulting from the fire. For the 3 months ended September 30, 2020, the company had a net loss of $1.8 million or a negative $0.03 per basic and diluted share compared to a net loss of $10.2 million or a negative $0.17 per basic and diluted share for the 3 months ended September 30, 2019.

Net cash used in operating activities for the 3 months ended September 30, 2020, was approximately $0.7 million. Included in cash outflows from operations for the quarter was approximately $2.4 million for outstanding payables and for general working capital purposes, offset by approximately $1.7 million in other income related to insurance proceeds.

Our monthly cash burn rate during the quarter, which includes basic monthly plant expenses and corporate overhead, was approximately $700,000 per month, as it compared to approximately $830,000 per month in Q1 and approximately $2 million per month in the prior year. We anticipate after selling the plant and paying off our mill with Veritex that we will experience another meaningful reduction in cash burn.

As I mentioned before, we have now collected a total of $22.6 million of insurance proceeds. We still have work to do and are meeting on a regular basis with insurance adjusters and consultants. Current work being done includes ongoing third-party assessments of final building, repair and cleanup, final electrical reviews and miscellaneous items. We expect to collect up to $30 million in equipment and building damages and clean-up costs. This number could go higher or lower based on these final assessments.

As soon as assessment is completed, the carriers typically make repayments regardless if it is a large amount or a smaller amount. In the past 45 days, we've seen payments of the largest $5.3 million and as small as $700,000. We are also working on our business interruption claim, which could add to our total expected claim towards our total policy amount of $50 million.

We continue to work with our public adjuster who represents the company in our claims and is very active with their team of experts. It is likely that we will receive additional payments and potentially, the remainder of our claim, in the next 3 to 6 months.

In closing, I want to point out that we still -- we are in a very strong financial position. We ended the quarter with a strong cash balance. We are very close to being essentially a debt-free company. We have significantly reduced our rate of spend and we expect additional insurance collections. Also, over the coming months, we expect to add to our funds, primarily from the sale of plant and equipment that is not required for our accelerated capital-light strategy.

With that, I will turn it back to Steve for closing comments.

Thanks, Judd. We look forward to keeping everyone updated as we make meaningful progress in our efforts and expect to have further updates between now and our next quarterly call. If you haven't already, please watch the Aqua Metals Twitter and YouTube channels as we'll continue to provide information through those venues.

I'll now turn it over to the operator to facilitate the Q&A portion of our call today. Operator?

(Operator Instructions) The first question comes from Colin Rusch from Oppenheimer.

Could you speak to the metrics that you're looking to target for the new electrolyzer, the V1.25L, for the benchmarks that your customers are looking for? Can you just give us a sense of what we might be looking for and how close you are to those performance metrics?

Yes. Hey, Colin. So in terms of the metrics for the electrolyzers, at the highest level, it's the 3 iterations in our progress on those 3 iterations. And as we've indicated today, we've gotten the first iteration, A, behind us. We're operating B and soon to operate L, which is the final licensable version.

And our investor deck goes through the various improvements that we're making, but they're based upon reducing the CapEx expenditure required to deploy these machines, increasing the throughput of material that goes through the machines and therefore, improving the maintenance and the operating expense of operating the machines. And those final specs, we won't really have until we get closer to the end of the program, which is towards the end of the year. And we'll continue to update, as I mentioned, our sales proposal and models that we put forth to the various folks that we're talking to on the specifics of those. So I hope that answers your question.

Yes. I'll have some follow-ups. And then in terms of closing on a building sale, how quickly do you think that might happen? Is that a full-year process? You think you might be to get it done sooner with your instinct or kind of the range of possibilities?

So we have a good amount of interest, both from within the lead acid battery industry, inclusive of some interesting lithium-ion recyclers that are looking to get in the business in the area as well as other industrial use. And so the funnel looks good, but real estate transactions or real estate transactions -- and it will take time to see how that works out.

We're hopeful that we could enter into contract by the end of the year because of the December 11 date and we feel like we will be getting some bids before then. But we have to agree with what those bids are and we have to work out the deal. But I don't foresee it as being a protracted process at this point, holding all other things equal, economy and other things.

All right. That's a fair point. And then just the final one in terms of the number of folks that are looking at being your first customer on the new business model. Can you just give us a sense of how robust that pool of potential customers is at this point? Are we thinking kind of on the order of half a dozen? And how thorough or how far down the road are they in terms of being able to think about a license agreement?

Yes. We're engaged with what I would characterize as several parties and talking through specific site opportunities and configurations, et cetera. And that's, as I mentioned earlier on the call, inclusive of Clarios, of course. So the sales funnel is robust and growing and progressing through the sales cycle process, and it's really us that's holding it up a lot more than anything else to some extent because we have to finish our 1.25 program and get those final specs so we can really figure out, with these various prospects, what the final configuration and everything like that would look like.

So it's a robust group. And it ranges in geographies, inclusive of the U.S., South America, Asia Pacific, a couple of European opportunities. And so it's quite an interesting field and that gives us the opportunity to make sure that the first place we put AquaRefining is the best chance of success for Aqua Metals and for the client.

(Operator Instructions) The next question comes from David Kanen from Kanen Wealth Management.

Congratulations on the progress thus far. First question is, in regards to the burn rate, I see the progress at -- for the quarter, it was only about $700,000. Can you give me a sense, once the plant is sold incrementally, what will be the savings on a yearly basis? And what I'm referring to is any staffing that will not be needed, their security, utilities, insurance, all of the overhead associated with the building. Could you just quantify what that will be?

Yes, Dave, it's Judd. So we anticipate there's probably $150,000 or so and just kind of holding costs in the building. That includes insurance costs, property taxes, utility, those types of things that we could see reductions when the plant sells. The less meaningful, $150,000 a month, that's less meaningful over a year's time. And then, of course, there's some debt holding costs that we're getting very close to paying off. So that's another chunk, about $75,000 to $85,000 a month in just that. So there's a couple of hundred thousand dollars, at least that we're seeing, in that kind of monthly burn. So over a year's time, it's more than a couple of million dollars that -- in reduction.

Now on the staffing team, we're kind of already a small team, strategic members of the team that are here working. And so the people that we have here that are kind of helping the 1 -- the version 1.25 programs, some of these guys will transition over into helping to build the electrolyzers, the modules that we made, shipping through our first licensees next year.

So the staffing won't change a whole lot until we start seeing, in the years beyond, when we start to have several licenses and are working towards that. But just kind of in the near to medium term, the staffing levels won't change a whole lot. So that kind of gives you maybe a little sense on the cash burn, where it's going.

Okay. So about up to $2.5 million in annualized savings once you dispose of that asset, sounds like. And then could you give us a range? I know you said that you expect that it will -- you'll have a contract before the year is over, and we all know that in real life, we can't hold you to that. It's just it's your educated guesstimate. But could you give us also an educated guesstimate on a range for the asset sales, inclusive of any equipment there that you think you can monetize, kind of like a low and high range of what that will bring in, in cash minus commissions to the agent and so forth?

Yes. I mean we kind of start with the number that's on our balance sheet with $37 million. Of course, there's a lot of like install costs and things like that do. But the majority of that balance is the plant and the land itself, which we've got listed right now for $18.3 million. So that's out there and people are looking at that. So that's a big chunk of what that could come in now. There's a lot of interest in this area, could it go higher, maybe it could go a little lower, we don't know, but we feel like that's probably a good number of what that could look like.

And then there's tens of millions of dollars of assets in the plant, including some big pieces such as the kiln and filter presses and the battery breaker. So there's a few million dollars there. And we play around with the ranges a little bit. And even on the low end, those are some pretty good dollars, kind of where our cash burn is now. It's pretty good dollars, but we're going to do the best we can to get those in the hands of the people who do need them and want to pay the fair value.

We've already had some interest in some of the pieces of equipment that we've kind of held off on letting go, except for one little piece that we did sell in the quarter just because of the interest and making sure that anybody who's looking at the plant thinking about maybe more than just having a plant, maybe having some of the equipment that's in there, but they get the first kind of look at that and make sure that those guys are able to buy those. That's kind of kind of our thinking along those lines.

Okay. So it sounds like in terms of the property, the land and the building, minus commissions, probably about $17 million, unless there's a bidding war. That's probably a conservative number. And then with the equipment, assuming it's not a strategic buyer and they don't need that, that could be another $3 million. So we're talking $20 million. And then given the reduction in burn rate, we would potentially have 4-plus years of cash runway going into the pursuit of our first licensing deal. Is that a correct landscape...

It's a fair way to go about it. I think it's a fair way to look at it. There's a lot of value there and that value can provide a good cash inflow for a long period of time.

Okay. And then I missed part of the call. Steve, I think you gave some numbers in terms of possibly engineering services, equipment sales. Could you just reiterate that for me just because I missed it? And then also, could you make an educated guesstimate on when do you think -- what do you think the time frame is of procuring your first licensing deal? And is there the potential for multiple ones next year?

Yes. So Dave, in terms of the engineering piece of it, that's kind of the first tranche of revenue that we would see. And that's like when you hire the architect to design your building or an expansion to your building, you take the detailed specs. And so that could be 6 figures. The numbers, it could go into the 7 figures, depending upon which site and how complex the solution is.

So that could vary, and then that progresses forward towards the purchase of equipment and the deposits for equipment to supply that we would be providing equipment and then ultimately, the running royalty and services dollars afterwards. So there'll be phases of revenue associated with the deployment of this.

Now every deal will probably have a little bit of uniqueness to it and those are just general guidelines. I also want to iterate. The other thing is that you asked about how many licensees we could support. And we want to get it right and focus on the first licensee strongly, but because we have a pretty good sales funnel, we see some potential synergistic opportunities between the opportunity funnel that we have.

So in other words, where one player may be interested in one element of what it is that they can do with us, they can actually help another player within the lead acid battery industry. And so we're looking at opportunities like that where there could be more than one type of an arrangement that we could move forward with. It all depends upon how the sales funnel plays out and how the deal-making happens as we round the bend to the end of the year and into next. So hopefully, that gives you some visibility into what it is that we're doing.

Okay. And then it seemed like when you were referring to the parties that are interested in potentially purchasing the building and the property that there were strategic players involved. I just -- I don't know if you stated that explicitly, but that was sort of my perception. So could you address that? What is the likelihood when you look at, let's say, the funnel of buyers that are interested, what's the likelihood of a strategic buyer that could use the plant for a purpose that potentially is synergistic with our technology and so forth?

Sure. So -- and when we look at the field of potential buyers that are out there, it does, as I mentioned, include players that are in the lead acid battery industry. So that's where, as Joe is referring to, we've kind of held the plant and equipment together to the most part. So if somebody wants to look at it as a package opportunity, we retain that equipment. We're not bringing things out of there and putting them back in. So there are lead acid battery industry opportunities.

And there's also an interesting thing going on in the Tahoe Reno industrial center area, which is there are a fair number of companies trying to move forward with how do we recycle lithium batteries. Because remember, you could recycle lead acid batteries, and Aqua Metals improves the way that you recycle lead acid batteries through AquaRefining greatly. But the prospects of recycling and recovering cobalt and lithium and nickel and other metals from lithium-ion batteries is in its nascent phase.

And obviously, Tahoe Reno industrial center has a large lithium player with Tesla being down the road. And there are some companies that are moving forward in that area and see this as a strategic hub for potentially creating an ecosystem. Our plant has a very interesting location. It is in an opportunity zone, which for those of you that don't know what that means, it's basically a incredibly favorable tax region for job creation and it provides great opportunities for businesses to enter into.

And so because of that, some of these nascent companies are seeing this as an interesting region. We see Aqua Metals is even having an opportunity to look at how we could work with, not only lead acid battery recyclers but recyclers of other types of batteries, and that's another flavor of a possibility and potential for acquisition of a plant of that nature and size and location.

There's others that are also just looking at it more from the opportunity zone and strategic real estate play. The Tahoe Reno industrial center is sold out. There are no new properties being sold since blockchain bought the remaining 67,000 acres last year and so it's all a resale market right now. And as we all know in real estate, when you're in a retail-only and nondeveloped market, it is a supply-and-demand thing, and we think that we've got some favorable opportunity on that front.

And so we are talking to players that are looking at the space from a pure real estate perspective that wouldn't be necessarily related to lead acid battery or other types of battery recycling. But if the financial transaction looks good, that still serves our goal of transitioning the company to a capital-light type of a model and moving forward with licensees, putting AquaRefining elsewhere. It'd be nice to have AquaRefining in our own backyard, there's no doubt about it. And we're definitely, of course, pursuing all things that are going to be the best deal for Aqua Metals and our shareholders.

This concludes the question-and-answer session. I would like to turn the conference back over to Steve Cotton for any closing remarks.

Great. Well, thank you, operator, and thanks, everybody, for joining and attending. And if you have any follow-ups, please contact our IR group and I appreciate the time and continued support from everybody. And we look forward to keeping everybody updated between now and the next call and of course, on our next call. Everybody, have a great rest of the week and weekend. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.