Earnings Call Transcript - AQMS Q2 2021

Operator, Operator

Good day and thank you for standing by. And welcome to Aqua Metals Second Quarter Financial Results. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Glen Akselrod. Please go ahead.

Glen Akselrod, Investor Relations

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. 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 the 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’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 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.

Steve Cotton, CEO

Thank you, Glen. Thank you everybody for joining us today. I’m going to start with slide one and that is we’re leading a revolution in both the lead and lithium battery industries. And I’ll talk about that throughout the presentation. Slide number two is our Safe Harbor, which I won’t read to you and you can refer to any deck that we will have up on the website. Slide three, for those new to our story, as 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 in an economical way that can also reduce over-reliance on mining to meet demand with the recovery of these metals. Slide number four. 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 in 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 towards lithium recycling, strategic investments, 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 is 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 30th report and we are debt-free with a very strong balance sheet. Moving on to slide number five, I’m going to talk about recent highlights that the company has achieved just 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 it 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. 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 in 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 AquaRefining, which has been converted to the LiNiCo, which stands for lithium, nickel, cobalt plant to facilitate conversion of the AquaRefining 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 number six, a little bit more about the ACME Metal’s 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 number seven illustrates our revenue roadmap. Aqua Metals has previously generated revenue, and we are now transitioning from a pre-revenue phase to a revenue-generating phase again. On the left side of the slide, you can see that the company was founded in late 2014 and began pre-revenue operations, with demo plant sales starting in 2017 at the AquaRefining facility we established in the Tahoe Reno Industrial Center, spanning approximately 140,000 square feet. That plant began commercial demonstration production in 2018 and 2019, during which we produced and sold 35,000 ingots of AquaRefined lead, certified as a North American supplier to the world's largest battery manufacturing company. We then reverted to pre-revenue in 2020 to apply the insights gained from 2018 and 2019's Version 1.0 and enhance our Aqualyzer technology, transitioning to a focus on revenue not from the sales of demonstration lead metal but rather from the equipment and technology. This led to our announcement this morning regarding a signed agreement with ACME Metal to implement the AquaRefining technology in Taiwan. We anticipate returning to revenue as we progress into 2021 and beyond into 2022 and 2023. In those years, we expect to generate revenue not only from the commercialization of AquaRefining technologies for lead recycling but also as we continue developing and deploying pilot and commercial systems with our partner LiNiCo and others, targeting revenue from multi-metal recycling within the rapidly expanding lithium-ion battery recycling industry. Slide eight 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. We’re the only company with IP for clean lead recycling and additional IP that we found 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 pending 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 financial review. Judd?

Judd Merrill, CFO

Thank you, Steve. I will share a few comments related to each of our financial statements. First on slide 10, talking about the balance sheet. As of June 30, 2021 cash and working capital balances were both $10.7 million. During the second quarter of 2021, we re-classed 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 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 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 damage to the building that was caused by the 2019 fire. The $2.5 million is included in accrued expenses 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 product offerings 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 cleanup cost 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 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 three 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 three 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 expectations. 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 comments on the statement of cash flows on slide 12. The net cash used in operating activities for the six months ended June 30, 2021 and 2020 was $4.9 million 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 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 six 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 investment in LiNiCo. The net cash provided by financing activities of $10.2 million for the six months ended June 30, 2021, consisted of $9.3 million in net proceeds from the sale of Aqua Metals 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, had a strong cash balance and a meaningful expensive AR collections from the sale of the building, we are on solid foundations and move forward on our strategic business plan.

Operator, Operator

Thank you, sir. Your first question is from Colin Rusch. Your line is open.

Colin Rusch, Analyst

And the first license agreement, can you help us understand some of the financial implications for that? And how are cash and cash flows starting to come into the company here over the next couple of quarters from that agreement?

Steve Cotton, CEO

Thanks, Colin. Yeah. So the first agreement, it 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 tons per day, well, ACME will be making several tons per day. So they won’t be material amounts of revenue in 2021. 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.

Colin Rusch, Analyst

Perfect. That’s super helpful. And then, in terms of, kind of quarterly cash burn, what was the cadence of that here over the next three quarters, four quarters?

Judd Merrill, CFO

Yeah. Colin, so the second half of the year is probably going to look a lot like first half in terms of the monthly cash burn and 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. So we’ll see some uptake, 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 licenses besides ACME. And some of that will be determined on the timing of how things progress. Sooner, we might feel a little bit quicker uptick in some of those cash needs for employees and support; if it takes a little bit longer than will be pushed out.

Colin Rusch, Analyst

Okay. Thanks so much, guys.

Operator, Operator

Your next question is from Sameer Joshi. Your line is open.

Sameer Joshi, Analyst

Thanks, guys, and congratulations on your transaction with ACME. Just following up on Colin’s questions a little bit, will you be able to share any little bit more granularity on the number of Aqualyzer during the various phases that you will be deploying in Taiwan for the next several quarters that will be helpful?

Steve Cotton, CEO

Sure. Yeah. So, as I mentioned, the first deployment will be several Aqualyzer and as we’ve noted, we’ve improved the throughput of the Aqualyzer. So they’ll make several tons 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’ll 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.

Sameer Joshi, Analyst

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?

Steve Cotton, CEO

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 very highest levels with those types of clients that has a regional Asia-Pac aspect to it, as well as a global aspect, because some of those manufacturers ship their products globally.

Sameer Joshi, Analyst

Thanks for clarifying that. You mentioned we should expect more news on the LiNiCo going forward. Is there anything that can be shared now? What are the next milestones we should be looking for?

Steve Cotton, CEO

LiNiCo is making significant progress in the transition from the AquaRefinery to the LiNiCo recycling facility. They plan to start some operations late this year and early next year. Aqua Metals is collaborating with LiNiCo to adapt AquaRefining, which will enhance the value of the LiNiCo lithium processing facility. Recently, they announced plans for a large throughput, potentially positioning it as one of the largest lithium recycling facilities in the world. We see a tremendous opportunity to partner with LiNiCo and leverage our AquaRefining technology to support multi-metal recovery within their facility. I anticipate further developments in our relationship with LiNiCo and the eco network we have established, which includes not only LiNiCo but also Comstock, another stakeholder, and Green Li-ion, a technology partner. Our goal is to engage feedstock supply partners interested in directing their lithium spent cells from large corporations to clean hydrometallurgical processing facilities instead of traditional smelting. This presents us with great opportunities to expand our eco network, which we hope to showcase in the near future, along with the high-purity metals and cathode-ready materials that LiNiCo plans to produce using our and Green Li-ion’s technology. The advantage of our eco network lies in the availability of land, the existing building, well-designed process flows, and the imminent installation of equipment. We believe this eco network is ahead of many other players in the lithium sector who are more speculative.

Sameer Joshi, Analyst

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 additional one-time losses in 3Q for any additional equipment that you may be disposing of?

Judd Merrill, CFO

We have transferred the building asset and land to receivables, which has removed them from fixed assets. Additionally, we reclassified some assets as held for sale, and the write-off is partially related to the building and repair costs. We believe that all of this is now reflected in our financials. The only remaining item is to sell some equipment, and depending on the outcome, there may be a gain or loss. However, we believe that the remaining balance accurately reflects what we estimate the market value to be at the time of our financials.

Sameer Joshi, Analyst

Right. 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?

Judd Merrill, CFO

Yeah. So everything on the PPP, those have been forgiven; it was just a little over $300,000. So we’re seeing that money last year and the forgiveness that came in two different pieces, because we have the Reno Inc and then operating company. But both those loans have been forgiven and so that’s completely off. So there’s absolutely zero debt on the company’s financials.

Steve Cotton, CEO

Great. Okay. Thanks for that. Congratulations and good luck.

Judd Merrill, CFO

Thank you.

Steve Cotton, CEO

Thank you very much.

Operator, Operator

Thank you for participating. You may now disconnect.