Aqua Metals (NASDAQ:AQMS) Q1 2021 Earnings Call

0:00 Thank you for standing by and welcome to Aqua Metals prerecord. I would now like to turn the call over to Glenn Axelrod. You may begin.

0:09 Thank you, operator, and welcome everybody to Aqua Metals first quarter 2021 conference call. Earlier today, Aqua Metals released financial results for the quarter ended March 31st, 2021. This release is available on the investor section of the company's website at www.aquametals.com. Joining us for today's call for 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 the Form 10-Q filed today, April 29th, 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.

0:58 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's and Judd'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 the available time slot. And with that, I'd like to turn the call over to Steve Cotton, CEO of Aquamental. Steve, go ahead.

1:36 Great, thanks, Glenn, and welcome, everybody, to our quarterly call. I'll move from our title slide to slide number two, which is our safe harbor, which Glenn basically reviewed, so that's for your reference. And now I'm going to move on to slide number three. And that's our mission statement, and I just want to remind everybody that AquaMetal's mission statement is to provide sustainable metal recycling for materials strategic to energy storage applications, inclusive of lead and lithium. Our proven breakthrough technology, aqua refining, does deliver raw materials back into the manufacturing supply chain in a clean and economical way that reduces the over-reliance on mining to meet demand. And with that, I'll move to slide four and summarize aqua metals at a glance. We've already developed our technology, our core technology, called aqua refining, which is now commercially ready, and it's a sustainable battery recycling technology. What's unique about aqua refining is that it uses water and organic acids to create 99.996 plus percent ultra-pure lead, and we create it one atom at a time for the $20 billion in growing lead recycling industry. We're also seeking to extend, for some recent announcements, our aqua refining technologies to apply to the metals recovery associated with lithium-ion batteries. and we've evidenced our commitment to continuing to develop aqua refining for this area through additional IP filing, through strategic investment and research and development that we'll talk about a little further throughout

3:08 the day today. Aqua refining is also a transformative technology that benefits the industry and the earth itself. Aqua refining benefits the environment with reduced emissions, vastly reduced worker safety for their work on battery recycling. It also improves battery performance in life through the ultra-pure metal, resulting in better performance and better lifespan of batteries. And the economics of op refining are becoming more and more favorable when the operators particularly look at all of the aspects of the cost that they spend on worker safety and environmental The ticker on NASDAQ is AQMS, and we're headquartered in Tahoe, Reno, in Nevada.

4:00 The company was incorporated in 2014, and we have about 68 million shares outstanding, and cash on hand in our report of late is 11.7 million, and we have zero debt and a very strong balance sheet. Moving on to slide number five, I'm going to talk about nine recent highlights of our quite active quarter since we last spoke to you. The first is that we continue to advance discussions with several potential licensing partners. As I've stated before, we're currently working through multiple active engagements that are all continuing to progress very well. These engagements include opportunities for off-refining upgrades to existing battery recycling centers, Greenfield builds of new hybrid aqua refining facilities with small efficient furnace and Greenfield builds of standalone aqua refining facilities.

4:53 Some of these engagements also include a focus on our streamlined aqua refining direct to oxide application which we announced recently as well. Geographically, these active engagements currently cover North America, Europe, the Middle East, India, and Southeast Asia. So with the progress we've made in the past quarter, we are still confident that the company will have more to say about this by the end of June as previously guided. Second, we received first business interruption insurance payments of $1.4 million with a total collection to date of $25 million. And we expect future insurance payments, but we made some great progress in the past quarter by breaking into the business interruption element in addition to the property and casualty.

5:38 Appointed two additional board members with key industry experience. I'll talk about those board members when we get further on in the deck, and we're very pleased to welcome Molly and Eddie to the team. We also filed a provisional patent for the aqua refining application to lithium ion recycling. There's a lot of companies that are talking about lithium ion recycling and trade secrets. Aqua Metals, of course, has trade secrets, but Aqua Metals is pursuing IP because in order to be an equipment supplier and licensor of technology, it's very important to secure the intellectual property of the technology and the processes. We've also evidenced our progress in lithium-ion by investing in a clean tech lithium-ion recycling innovator, Linoco. Linoco stands for lithium, nickel, and cobalt, three of the metals in the multi-metal lithium-ion recycling environment.

6:30 And Linoco purchased, with a lease to purchase of our oak refinery, and we expect that we'll be working with them towards helping stand Lineco up very quickly. Commenced our lease to buy agreement for the non-core facility with Lineco and that was an important step for us also from a financial perspective because it released the burden of the capital heavy environment that Aqua Metals wanted to transition to our capital light environment and allows us to have a better financial runway which Judd will be talking about in a little bit here. We also filed another provisional patent which is a patent around creating lead oxide directly from aqua refining and that therefore streamlines the overall link between battery recycling and battery production by eliminating the need to melt and cast and refine metal and instead take the briquettes that come off of the aqua refining process and put them directly towards the battery manufacturing process.

7:33 We've also established a global partnership with BASF, which is one of the world's largest chemical companies in the world, to help secure the supply of one of our key chemicals and work with us to market our solution on a global stage. We've also raised additional net proceeds of a half a million dollars through some opportunistic ATM sales. So I'm going to go on to slide six now. and point out that the company from an IP perspective and execution perspective in developing the technology is quite mature. We have over $200 million invested and that sets up the equipment supply and global licensing opportunities that we are currently engaged in. The robust IP portfolio makes us the only company with IP for clean lead and lithium battery recycling.

8:21 with 61 patents now, total issued and allowed, and 53 additional patents pending. This is a very important area, again, to be a technology and licensing and equipment supply company that you have to get your IP coverage in the markets that you're operating in. As I was mentioning from our sales funnel earlier today, and if you look at the map, it maps together quite well. So slide seven talks about our experienced management team and our engaged board, which is truly focused on execution. We've really de-risked a lot of the technology, particularly in the lead space, and we are focused now on execution as a management team with a great independent directors on our board. And on the management team side, myself, I come from a background of battery monitoring and lead acid battery supply management.

9:12 and understand the battery manufacturing and battery recycling industries quite well and have been with AquaMetals since the very early days in January of 2015. Judd Merrill, our CFO, is from a mining and metals background. So Judd understands very similar processes in terms of metals and metals production and has brought a great deal to the table in terms of not only our financial management but our strategic initiatives. Ben Packer, Our Vice President of Engineering and Operations comes from one of our investors in Aqua Metals, Clarios, which happens to be the world's largest battery manufacturing company. And Ben has joined Aqua Metals years back and has really risen to the task of being a very productive Vice President of Engineering and Operations for the company with that domain experience and background.

10:03 On the independent director side, Shark Yusufzai is our non-executive chairman as an independent chairman, more like the European model, and held various positions at Chevron, including president of global marketing and has been on many boards and brings a steady hand as the chairman of the board for Aqua Metals that has been a wonderful addition to our board for years now. Vinny DeVito has been with us since the beginning and is just a fantastic chair of our audit committee. Molly Zhang, and Eddie Smith are our two recent additions. And Molly is somebody that has quite a bit of licensing, global licensing experience and background in executing and licensing deals through Dow Chemical Company. And Eddie Smith, who's joined us, is president and CEO of SMTC, a manufacturing, contract manufacturing corporation, and has over 25 years of extensive experience in manufacturing and and remember we are going to be an equipment supplier here in electronic components distribution industries.

11:08 So we're very pleased with the team that we have that's focused on that execution because it is an execution play as we move forward and that team is really what you have to believe in to make sure that the execution succeeds. So with that, I'm going to turn over the presentation to Jud Merrill, our CFO, to take everybody through the financial overview. Jud. Thanks, Steve.

11:33 All right, we're going to move now to slide nine, the balance sheet, first financial statement that we'll talk about. So as of March 31st, 2021, the cash and the working capital balances were $11.7 million and $9.4 million, respectively. The fixed assets on our books as of March 31st, 2021, totaled approximately $27.4 million in net book value. These assets Making up this balance is largely the plant building and infrastructure, which we announced this quarter was part of the lease to sell to Linneco. And the remaining fixed assets, including the battery breaker, the melting kettles, kilns, and filter presses and such, are being evaluated to be either sold or used in our first licensing deal.

12:20 Non-current assets now include $1.5 million investment into Linneco Corporation. We also have an option to exercise warrants to invest another $500,000. We are pleased to point out also that our liabilities are now at the lowest level in recent company history since we have retired debt from last year. The lease liability is related to the facility located about a mile from our existing plant located in the Tahoe Reno Industrial Center. We plan to use this facility to continue R&D work. as well as to assemble the electrolyzers for our future licensees. I'm going to move to slide 10 on the income statement. Our lead recycling facility was not in production during 2020 or the first quarter of 2021 as we focused on our licensing strategy.

13:15 Cost of product sales includes raw materials, supplies, and related costs, salaries and benefits, and consulting and outside services costs. appreciation and amortization, insurance, travel, and overhead costs. Cost of product sales did increase approximately 11% over the three months ended March 31st, 2021, as compared to the three months ended March 31st, 2020. The increase in cost of product sales was a result of plant cleanup costs in preparation for the lease and eventual sales facility. For the three-month end of March 31, 2021, the company had a net loss of $4.2 million, or a negative $0.06 per basic and diluted share, compared to a net loss of $4.1 million, or a negative $0.07 per basic and diluted share for the three-month end of March 31, 2020. Now I'm going to move to slide 11 and have a little discussion on the cash flows.

14:17 The net cash used in operations for the three months ended March 31st, 2021, and March 31st, 2020 was $2.0 million and $4.3 million, respectively. The net cash used in operating activities during each of these periods consisted primarily of our net loss adjusted for non-cash items, such as depreciation, amortization, and working stock-based compensation charges as well as net changes in working capital. The net cash used in investing activities for the three months ended March 31st, 2021 was $0.9 million and consisted mainly of $0.5 million for the purchase of property equipment and $0.2 million used towards the investment in Linaco.

15:05 Net cash provided by investing activities for the three months ended March 31st, 2020 was $3.1 million and that consisted primarily of $4.7 million in insurance proceeds partially offset by $1.6 million for purchases of property, plant, and equipment during that quarter. Net cash provided by financing activities was $8.1 million for the three months ended March 31st, 2021, and consisted of $7.5 million in net proceeds from the sale of AquaMetal shares pursuant to the ATM, and $0.7 million from stock options exercise, partially offset by the $0.1 million for forgiveness of the PPP loan. Net cash used in financing activities for the three months ended March 31st, 2020 consisted of 0.1 million for payments on debt.

16:01 I want to point out also that we have only used approximately 0.5 million of the ATM since we last reported. This usage was partially related to our investment into Linetco. and future usage of the ATM is contingent upon strategic investment opportunities. As we guided on our last earnings call, we anticipate starting this month in April 2021 that our monthly cash needs are estimated to be around $650,000 per month. Lease payments began in April and since we still have access to the building, lab and some office space, we expect the company will also realize some savings by not having to move quickly out of the building. And finally, on the last slide, just a couple updates, first on the insurance.

16:52 As of the date of this report, and as of today, we've received approximately 25 million of insurance proceeds from our insurance carriers, and that includes an initial payment of 1.4 million towards our business interruption insurance claim. This completes the first three layers of insurance. We are now working with the fourth and final layer of insurance, which totals up to $25 million in coverage. We do expect another $2 million on the business interruption claim to be made shortly by the fourth layer, and we are getting very close to being done with the insurance collection process. We believe that additional payments will be made both on equipment and business interruption, and we intend to vigorously pursue the receipt of the remaining insurance payments.

17:39 proceeds to satisfy our total claim. In closing, I will reiterate that our cash balance remains strong. Our current cash needs are very manageable, which puts us in solid place to move forward on our strategic business plan and allow us to execute on our goals as we move forward. With that, I will now turn it back over to the operator for questions.

18:29 Operator, do we have any questions?

18:52 No, we can't hear you. Go ahead now. Okay, Colleen Rust, your line is now open. You may ask your question.

19:00 Thanks so much, guys. Could you just give us an update on where you think the insurance element might tap out? You guys have done a great job of collecting what you can so far. I'm just wondering kind of expectations around additional capital that you could bring in over the next several quarters.

19:19 Yeah, I mean, we're very close, I think, to being done with the last little bit of insurance. But we don't want to comment exactly where that might end up. I think there's still some negotiations and some discussions that we'll have as we kind of wrap things up, and that's kind of the normal process. When we kind of get to the end, they've paid on everything that we've presented to date. We believe there's some more room on the business interruption, but we don't want to comment too much on that as we're kind of getting to those final discussions and negotiations. But if you look at where we're at, the $25 million, and we've identified a couple more million on the BI, that kind of set the floor range, and then it could go up from there.

20:09 Okay, that's helpful. And then I know it's early days with Linoco, but obviously you guys are getting started to work with them. Can you talk a little bit about you know, what the initial efforts are around scoping out the opportunity to work together, you know, and critical benchmarks for validating the approach.

20:27 Yeah. Hey, Colin. I'll take that. So, yeah, we're really excited with the growing relationship with Linico. They've gotten into the building and there's quite a crew doing layout and planning for the adopted layout of the facility. They can take advantage of a lot of the layout that we created for the facility with the inbound materials, breaking and separation, and The cells that will go in to the area. But we're working together with them to look at what the aqua refining activity will be as it fits in with the overall facility. And we'll be operating some cells going after individual metals within the lithium suite and hopefully bringing those to the lytical facility to deploy and work out how that looks from an equipment supply and licensing perspective.

21:18 We've also evidenced, like I mentioned earlier in the call, our interest in the space with provisional IP, and that's really important filing around the area of lithium ion recycling as it relates to the capabilities that off-refining can offer to that space. And we feel very confident that we'll be able to say some things in the not-so-distant future about some further progress in that space that will further evidence in addition to the partnership with Linoco and the sale of the facility and the IP that we prosecuted and the research and development that we've already announced. So we're really excited about it, but we're not going to let that distract us from the deal-making that we're in the midst of on getting our first licensing deal for aqua refining in the lead space. But we recognize that lithium is going to be about as big as the lead recycling market in dollar value by about the end of the decade, if not sooner.

22:11 So it's a really important space for us to consider.

22:15 Perfect. And thanks for bridging that segue for me. So, you know, I know it's obviously a little bit difficult to say too much about where you're at with the lead license and supply agreement. But, you know, I guess if you could give us a sense of kind of the progress that you're making and, you know, confidence level as it's changed over the last couple of months since you last reported.

22:40 Sure. Yeah, so as I mentioned in the call, you know, the geographical broadness of the prospects and folks that we're talking to at a very detailed level has grown. The applications have grown from things like AquaFit, which is bolting on aqua refining to an existing battery recycling facility with smelting to Greenfield, net new builds that are government-sponsored. and supported to applications of Ock Refining Bar recently announced other provisional patent filing for direct to oxide where you take those briquettes and you can then put them directly into a battery manufacturing mode bypassing the whole need to refine and kettle and ingot and cast and then just turn it back into what it would look like anyway. So we feel very good about the breadth and depth of the funnel. and the progress that we've made through each stage of the sales funnel with the various candidates that we have.

23:41 So that's why we continue to reiterate our confidence that we'll have something to say soon. We're excited about that.

23:48 Excellent. Thanks so much, guys. Thanks. Again, in order to ask a question, you will need to press start and the number one on your telephone keypad. Next question comes from the line of Amit Dial from AC Wainwright. Your line is now open. You may ask a question.

24:06 Thank you. I appreciate you taking my question, guys. Sure. With respect to the licensing agreement, Steve, should we assume any progress on this will only materialize after June 2021?

24:21 So with the funnel and the stages that we are in the funnel and the guidance that we've already provided, the company is seeking to get something positive to say about where we are. with a deal making between now and the end of June.

24:39 Okay, understood. And if that materializes, right? I mean, if you get something going and a deal comes through, how should we think about the impact on your burn rate?

24:53 So what's important is that the first deployment of aqua refining will likely not be a very large deployment initially. It'll be a phased approach. So there could be initial revenue associated with some equipment and some services and things along those lines. But as I've mentioned earlier on some of these calls, I anticipate that we'll be seeing phased deployments of aqua refining so people get comfortable within their facility of the deployment, and that's particularly when you do the bolt-on type arrangement. And then greenfield announcements could be very exciting, but have a little bit of a longer timeline because you have to build a building and build an entire facility and integrate aqua refining within those facilities. So it's dependent upon the type of deal, how quickly we'll see the revenue.

25:40 Unfortunately, we have a good mix in the sales funnel, so we'll see different types of cadence with the revenue associated with the services and equipment and ultimately the running royalty. Okay, understood. Thank you for that.

25:53 Just one last one. Were there any or have there been any additional improvements to the B125 solution?

26:04 So we've indicated that and even are tweeting photos of we're now operating two aqualizers and we are continuing to make further adjustments and improvements to the technology and the capability. So if The research and development curve continues, and that focuses on things like throughput, cost reduction, and further tightened automation controls, electrical efficiency, which helps with the value proposition even further. So we will continue that product development for the foreseeable future, but that's improvements on what we believe is already possible. a very capable version 1.25 that can be put in the hands of clients in a very near-term scenario.

26:52 Okay. Yeah, that's all I have, Steve. Thank you so much. Great. Thank you. Thank you. Again, in order to ask a question, you will need to press Start and the number 1 on the telephone keypad.

27:05 Steve, it's Glenn here. We've got a number of questions in the queue that came in through the portal, and they all have to do with the licensing deal for the most part, so I think you've answered most of that already. But as a point of clarification, as it relates to the Clarios exclusive, can you comment on whether or not that exclusive also exists outside of North America, and if that's also subject to the June deadline?

27:31 So the June deadline for Clarios is applicable to North America, China, and Europe. That is correct. So that is in those three areas. We have opportunities that are within those areas, but we also have plenty of opportunities outside of those areas. And as I've mentioned before, our negotiations and sales funnel has gone down the path, and that is inclusive of Clarios, obviously. So we're continuing to work out how it'll look.

28:01 Okay, super. Thank you. I think that covers most of the questions in that queue.

28:08 Great.

28:09 I guess if there's no other further questions, moderator, we will conclude the call. Thank you so much. This concludes today's conference call. Thank you all for participating. You may now disconnect.