Earnings Call Transcript - AQMS Q4 2021

Operator, Operator

Greetings! Welcome to Aqua Metals Full Year 2021 Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. You may submit a question via the web at any time by using the "Ask a Question" feature on the side of your screen. Please note this conference is being recorded. I will now turn the conference over to spokesperson, Glen Akselrod. Thank you, you may begin.

Glen Akselrod, Spokesperson

Thank you, Operator. Welcome to Aqua Metals fourth quarter and year-end 2021 results conference call. Earlier today Aqua Metals released financial results for the quarter and year ended December 31, 2021. The release is available on the Investors section of the company’s website at www.aquametals.com. Joining us for today’s call from management is Steve Cotton, President and CEO; Judd Merrill, the company’s Chief Financial Officer; and Ben Taecker, Chief Engineering and Operating Officer. During today’s call, management will be making forward-looking statements. Please refer to the company’s report on Form 10-K filed today, February 24 for a summary of the forward-looking statements and the risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements. Aqua Metals cautions investors not to place undue reliance on any forward-looking statements. The company does not undertake and specifically disclaims any obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by law. As a reminder, after management's formal remarks we will be taking questions. Questions will be accepted over the telephone from analysts and all other investors can submit a question using the online webinar portal provided in today's and last week's press 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. And welcome and thank you everybody for attending today's call. I will start and I'll read off the slide numbers, and all of us will read off the slide numbers as we go through the deck so you can follow along if you're offline. So the first slide is Slide 1, about Aqua Metals' leading revolution both in lead and lithium battery recycling. Slide 2, Glen basically just read to you the Safe Harbor; it's for reference on the website. Slide 3 starts off with our mission, and that is to provide sustainable metal recycling for materials that are strategic to energy storage applications. Our proven technology, which we call AquaRefining, returns those raw materials back into the manufacturing supply chain in a clean way and in an economical way that reduces the reliance on mining to meet demand and the growing demand for all these minerals. Slide 4, clean metals, really in terms of recycling, is key to our future. You can see the quotes there from both the U.S. Secretary of Energy as well as the U.S. Department of Energy. I'll point out that AquaRefining uniquely uses renewable electrons versus fire or chemicals as the reagent, which really supports what the U.S. Department of Energy is saying here, which is the vision for global production of metal using just air, water, and clean energy as inputs. If you use the electron as the reagent, you have the ability to vastly reduce emissions and make it worthwhile to electrify the world and recycle the batteries in that closed loop. Slide 5 points out that AquaRefining for lead and AquaRefining for lithium are really the only technologies that are in line with that vision and supporting that is that it’s room temperature in a closed loop in a fundamentally non-polluted process; it's already commercially proven the extraction of lead and a proven and cleaner and more cost-efficient recovery and recycling process. We also produce a higher quality product because we plate metals; we plate ultrapure metals with a very high purity that commands higher values in the marketplace. We're expanding the lead into lithium recycling, and you'll see the listing of minerals there, such as cobalt, nickel, manganese, copper, and lithium. We'll get into some more detail on how we're doing that and our status as we move forward through our development process in our lithium space. This whole area of technologies and suite of AquaRefining technology is patent protected, and I'll get into more details on that a little bit later. Slide 6 shows our journey as a company. I will not read all of these milestones to you, but I will point out that in the last quarterly update call, the green area is the future, and the blue area is the present and the past. We've moved to the present and past with the September and December milestones. The key milestones that we've had recently that we're reporting on is that we've achieved large scale testing of the lithium-ion recycling while we also shifted AquaRefining for lead equipment to our first licensee and partner in Taiwan. Looking forward and looking at the green portion of the area, you will notice that in August '22, we expect to achieve operational testing of the full-size lithium-ion AquaRefining recycling unit, and then by early next year, potentially a full-scale development and deployment of AquaRefining for lithium-ion batteries. Our ticker on the stock exchange is AQMS on NASDAQ; our corporate headquarters is in the Tahoe Reno area of Nevada. We incorporated in 2014, and as of the end of the year, we had 70.4 million shares outstanding, and the cash in hand is $8.1 million as of December 31, and we are debt-free with a strong balance sheet, and Judd will speak to our financials in more detail coming up in our discussion today. Moving on to Slide number 7, we're going to get into the highlights of our accomplishments for 2021. This is the year of 2021 summarized in two slides. First off, we wanted to really brag about our innovation center that we opened up in the Tahoe Reno industrial center, this is a separate facility just less than a mile away from our original AquaRefinery that we sold to LiNiCo with the emerging lithium-ion battery recycler. Our innovation center has really focused on the development and approved out of lithium-ion battery recycling technology. We also developed our third generation Aqualyzer for lead and completed that in a year, and that resulted in a 300% improvement in production compared to the original model that we ran 24/7 in 2018 and 2019; that version is now shipping to our partner in Taiwan. We also increased our ownership throughout the year in LiNiCo by 20% through some exercised warrants. Our patent portfolio increased significantly for the year to eight U.S. and 63 international patents from six and 40 international patents in the prior year, and the lithium-ion patent application did convert from a provisional to a non-provisional patent. We expect to see a lot more activity from Aqua Metals in terms of that prosecution because we take the IP very seriously and ensure that we protect it on a global basis. We signed our agreement with ACME Metal, and that agreement has to deploy and license AquaRefining equipment at its facility in Keelung, Taiwan. We also did our final insurance settlement and payment, collecting a total of $5.25 million, with a total of $30.25 million in insurance proceeds collected from the 2019 fire event. Moving on to Slide 08, a little bit more on the progress of the innovation center since we've established it through the year. The lithium-ion battery recycling R&D is well underway, and we completed lab tests plating cobalt. We believe that the cobalt plating is the first cobalt that has been plated from lithium-ion batteries in a metal form. We're also targeting a pilot circuit to produce materials by Q3 of this year in that innovation center on the pilot circuit. We established a collaboration agreement, which is crucial, with LiNiCo. Again, that's the company that purchased the AquaRefinery, which is about a 140,000 square foot facility that's about a mile away from our innovation center in the Tahoe Reno industrial center. That collaboration agreement anticipates commercial production beginning to scale by late this year and into early 2023. The focus of that collaboration agreement really is that LiNiCo will focus on the lithium-ion battery breaking, separation and creation of black mass, which is the amalgam of the minerals that need to be recovered, and Aqua Metals will focus its technology and efforts through the innovation center on the extraction of the various minerals from that black mass. We also added very important strategic capabilities for the year. The first is Dave McMurtry as our Chief Strategist. You can find the profile of Dave McMurtry on the "About Us" "Management Team" section of our website, and I recommend you go and look at Dave's background in strategic corporate activities. Dave is also spearheading our relationship with Silver State Government Relations, which is headed up by Sarah Adler, who was a champion for Aqua Metals in achieving our U.S. Department of Agriculture $10 million loan that we repaid early to de-risk and establish our technology. We're working with her in Silver State Government Relations related to lithium battery discussions with local and national politicians. Justin Chen also joined us as our Asia PAC regional leader. Justin comes from a deep background in the lithium-ion space and is helping us with our efforts with ACME in Taiwan in building those relationships with ACME's customers. We also shipped the first shipments to ACME metals and expect soon to be in the installation and commissioning efforts later this year. Next, Slide number 9 summarizes the latest status of our robust and strategic IP portfolio. You can see here the coverage, with the dark blue representing issued and allowed patents and the lighter blue representing pending patents covering the space we intend to operate in. Remember, our model as an enabler is technology and licensing, and it's also strategically beneficial because it's geographically unbound; we can take AquaRefining technologies anywhere in the world. The next Slide number 10 talks about the lithium space and the truly massive market opportunity as lithium-ion recycling grows. The predicted volumes of used batteries really make it imperative that recycling is done urgently because today only 5% of lithium-ion batteries are recycled, the rest are not. The industry aims to get back to 100% recycling. But to get there is one thing, and to do so sustainably is another. This brings us back to the point of the technology that underlies AquaRefining, which enables this process; we'll get into more detail on the differentiators there shortly. In summary, we estimate our total addressable market to be about $10 billion by 2025 and $31 billion based on a 2030 timeframe and the AquaRefining recovery rates that we’ll discuss in more detail soon. It's a rapidly changing and growing industry and will complement the lead industry because you have an established lead industry that we're innovating and working to evolve, and then a new lithium-ion battery recycling industry that we believe has some differentiated technology. To do justice to describe that technology, I'm going to ask Ben Taecker, our Chief Engineering and Operations Officer, to take us to the next two slides and describe what makes AquaRefining special and unique. So I'm going to hand it over to Ben.

Ben Taecker, Chief Engineering and Operations Officer

Thanks, Steve. In comparing AquaRefining to existing smelting operations and hydro operations under development, AquaRefining has included advantages. Smelting requires positive shipments to large-scale smelters strategically located throughout the world, while AquaRefining is quite modular and can eliminate that requirement. Smelting also doesn't recover all of the metals and has a significant impact on the environment and worker safety of the operators. Hydro is one of the largest challenges at cost, driven by the mix of battery types and the ability to step recipe for that mix, as well as high chemical usage and outputs as a result of the different types of batteries coming in. AquaRefining, however, can recycle the chemicals and also recover all of the metals in a very high-value format. This could easily be sold back into the battery industry or metals industry, providing flexibility and potential higher profits. Moving on to Slide 12. Again, lower operating costs are one of the big advantages, driven by reduced processing and lower chemical usage compared to other opportunities out there. AquaRefining, even with lower conversion costs, also produces the highest value product output as a result of the high efficiency recovery of all metals, higher than you see in other potential options, as well as incorporating new types of forms of asset. Looking ahead to the business model, again, because of modularity and environmentally friendly processes, we can place these systems anywhere. We can place this right next to existing operators and support them in their growth in an environmentally friendly way to produce high-value metals to be sold back into the market. The environmental and worker safety impact from low-temperature, lower processing, and lower chemical usage process presents a clearer advantage for AquaRefining. I’ll now turn it over to Judd to go through the financials.

Judd Merrill, CFO

Thank you, Ben. Moving on to the financials, we ended the year in a solid financial position, placing us in good shape for the coming year. First, I want to comment on our balance sheet. As of December 31, 2021, cash and working capital balances were $8.1 million and $8.4 million respectively, compared to cash of $6.5 million and working capital of $4.9 million as of December 31, 2020. This reflects stronger financial strength at the end of this year compared to the prior year. We accounted for certain assets with a net book value of $2.6 million as assets held for sale, due to non-core assets that are no longer necessary for our future operating plans. Subsequent to year-end, we sold some of these assets to LiNiCo, totaling approximately $800,000, and an additional $600,000 of non-core equipment to other vendors. As we mentioned in prior quarters, we accounted for the lease-to-buy agreement with LiNiCo as a sales-type lease; as a component, we recognize the fair value of the land and the plan at approximately $70 million of lease receivable. During the fourth quarter of 2021, LiNiCo made their first required deposit of $1.25 million. The deposit is non-refundable, however, it will be applied to the purchase price of the building at that time. We believe that LiNiCo intends to pay for the building later this year, and they are incentivized to do so. Accrued liabilities include approximately $2.3 million in remaining costs to repair the plant; the repairs were successful, and the portion of the plant damaged by the fire now looks brand new and is in excellent condition. The plant looks amazing, and the cleanup and repair efforts were very successful. LiNiCo is prepared to begin their installation of equipment. Moving on to the income statement, the cost of product sales increased approximately 28% for the 12 months ending December 31, 2021, compared to the prior year. The increase in the cost of product sales was attributed to the plant cleanup costs and preparations for the lease and eventual sale of the TRIC facility. If you consider just the basic cost of product sales without the cleanup costs, our costs remained consistent over the last two years. We expect these costs to decrease in 2022. During the 12 months ended December 31, 2021, research and development costs shifted primarily to lithium-ion recycling as lead recycling product development concluded, while decreasing overall by approximately 9% compared to 2020. Research and development is a key part of our business strategy, including our focus on continuous improvement of the company's proprietary technology for lead-acid battery recycling and further advancing our development related to AquaRefining applications on lithium-ion batteries. General and administrative expenses increased approximately 8% for the 12 months ended December 31, 2021, compared to the same period in 2020. The increase in general administrative expenses includes changes in stock-based compensation, in addition to increases in legal expenses and insurance premiums. Our G&A expenses have remained consistent over the last two years and are in line with our expectations. In conjunction with our year-end accounting, we recognized a non-cash impairment charge for the years ended December 31, 2021, and December 31, 2020; $0.5 million and $11.7 million, respectively, following an analysis of our fixed assets. We recognized a loss on the sale of assets held for sale of approximately $1.4 million during the year ending December 31, 2021, as a result of disposals completed with the plant cleanup. Additionally, we recognized a loss on the sale of assets totaling $3.5 million relating to the accounting for the repurchase arrangement at our facility in McCarran, Nevada. Our net loss for the year was $18.2 million, and the basic and diluted net loss per share was $0.26, consistent with our management guidance and expectations. Just to report, the company has a Federal NOL of approximately $135 million, which does not start expiring until 2034. My final comments relate to cash flows: net cash used in operating activities for the year ended December 31, 2021, and December 31, 2020, was $7.6 million and $11 million, respectively. This covers our OpEx and G&A costs and was adjusted for non-cash items, the details of which are in our 10-K. We don’t see cash use for operations growing in the near term, even with added new hires and strategic consultants who will enhance our team. We believe these costs will be partially offset by reductions in other areas, such as decreased costs that have been moved out of the plant early this year. Cash used in investing activities for the year ending December 31, 2021, was $2.2 million, compared to the prior year of $6.6 million. Net cash used in investing activities during these periods consisted primarily of purchases of fixed assets and insurance proceeds received. Finally, net cash provided by financing activities for the year ending December 31, 2021, consisted of $10.2 million in net proceeds from ATM share sales. The majority of ATM proceeds occurred in Q1, with very little use for the remainder of the year. Our strategy has been to utilize the ATM primarily for strategic investment opportunities. I will now turn the time over to the moderator to begin the questions and answers portion.

Operator, Operator

Thank you. Our first question comes from Colin Rusch with Oppenheimer. Please proceed with your question.

Colin Rusch, Analyst

Thanks so much, guys. Can we start with just monthly cash flow? I just want to ensure that we fully understand how much you are spending on a monthly basis and when you expect LiNiCo to actually close on the full works sort of those at this point?

Judd Merrill, CFO

Hi Colin, this is Judd. Thanks for the question. So our monthly cash outflows have been very consistent with what we saw in 2021, which is about $700,000 to $750,000 a month for G&A and OpEx. We've added some capabilities to our team, but that number hasn't really changed a lot, as we've reduced some of our OpEx costs in other areas. So that should remain stable moving forward, which is what we expect. Regarding LiNiCo, they are incentivized to pay off the building by October 1 of this year. They have the option to put a $2 million additional deposit, which would stretch out the payment to March 2023. However, that would cost an extra million dollars, making them more likely to make the payment in October. We believe they are keen to do that, and that $13 million would be coming in a couple of quarters.

Colin Rusch, Analyst

Okay. That's super helpful. In terms of the process for some of these normalizations, particularly on the lithium side, can you talk about where you stand in terms of partnership development and customer interest? Obviously, there's an enormous opportunity, but I want to understand kind of as you get closer to tangible validation, where you stand with commercial relationships at this point?

Steve Cotton, CEO

Yes Colin, it’s Steve. Thanks for that question. Yes, we are engaged in both sides of the ecosystem we would call it. On the feedstock side, we already have feedstock coming in, both in the form of black mass and lithium-ion batteries. We haven't announced anything specific yet. On the offtake side, as we generate materials, we're in lots of conversations because many are quite interested in the fact that we plate metals and create a really interesting combination of materials including compounds like lithium hydroxide. We’re setting the stage for analysis of the materials produced by our pilot systems and will provide more information about the whole ecosystem side of things in the future.

Colin Rusch, Analyst

All right, perfect. Thanks so much guys.

Operator, Operator

Thank you. Our next question comes from Sameer Joshi with H.C. Wainwright. Please proceed with your question.

Sameer Joshi, Analyst

Yes, thanks, Steve, Judd, Ben. Thanks for your time and taking my questions. The units that have been tested right now are expected to be operational by August of this year. What exactly is being done? Are you working on improving yield, or are you focused on improving the purity level, or is it just optimization improvements overall?

Ben Taecker, Chief Engineering and Operations Officer

Yes, thank you. That's a great question. This is Ben. We're currently working on optimizing the size and layout of each piece of equipment. We're rolling out large-scale operations and adjusting size and dimensions as needed to meet that timeline we are on target for.

Sameer Joshi, Analyst

Okay. Regarding costs, I think Judd referred to them remaining stable over the next few quarters. How much additional cost is this perhaps incurring for the operational testing, or is it included in the OpEx and not capitalized?

Steve Cotton, CEO

Yes, so there are two pieces with kind of to our whether it's in OpEx. That number is included in that $700 to $750 a month. We do have additional R&D work related more to the lithium side that we've added. Last year this was about a million dollars; we’ll see that increase a little bit this year, but the $750 includes OpEx related to lead work.

Sameer Joshi, Analyst

Okay. Do you have milestones set up internally regarding Asia? What are the next steps there? Should we expect announcements about milestones or key events?

Steve Cotton, CEO

Yes, we showed a timeline slide outlining the major milestones we’ll be discussing for the remainder of the year. As developments happen, we'll provide information on the metals we plate and our technological progress throughout the process as well as commercial arrangements. There will be continual updates and communication streams as we proceed through the year.

Sameer Joshi, Analyst

Got it. I think you own around 12% of LiNiCo right now; is there any possibility of increasing that further, or have you reached your agreed maximum?

Steve Cotton, CEO

Yes, so the original agreement allowed for an initial 10% investment, which we did last year, and we have some warrants that were exercised to increase our ownership by an additional 20%, which we did recently. Currently, we hold about 12% ownership, and as of now, I don’t foresee any change in that percentage.

Sameer Joshi, Analyst

Got it. Thanks. I will step back in the queue.

Operator, Operator

Thank you. Our next question comes from Shawn Severson with Water Tower Research. Please proceed with your question.

Shawn Severson, Analyst

Hey, thank you. Good afternoon, everyone. Steve, I was wondering when you look at the state and government targets, obviously you're spending more effort there. What things are on the horizon or out there that would be logical for you to pursue in terms of grants, funds, or is this a more regulatory environment? Could you clarify where your efforts are aimed in that direction?

Steve Cotton, CEO

Yes, thanks, Shawn. There is significant activity in that area. As mentioned earlier in the presentation, we brought in Dave McMurtry as our Chief Strategist, who is working with Silver State Government Relations. It's a multi-layered approach. One is pursuing traditional DOE grants and those associated with extracting critical minerals, particularly following the infrastructure bill. There might be even more opportunities as further legislation progresses, like Build Back Better. We're also collaborating with local government folks here in Nevada, as Nevada is becoming a major minerals state. Our local politicians are quite interested in what we're doing, so we're engaging with those folks as well as with stakeholders on the hill.

Shawn Severson, Analyst

Absolutely, next question. I had a conversation with a battery company the other day, and the topic arose about them wanting to recycle their own lithium metal and lithium-ion batteries. I am curious where the drivers might come from for something like this. Have you had conversations with automotive OEMs who are considering this, like wanting to recycle their batteries? Or is this mainly with battery companies? I'm trying to understand if this is trending towards more of a commodity model for recycling.

Steve Cotton, CEO

It’s an interesting question because when you look at that ecosystem, there are cell manufacturers, EV manufacturers, and major users of lithium batteries interested in verticalizing, like recycling their own batteries that they produce or distribute. Some parties we're talking to are considering fully verticalizing with this recycling. Our business model allows us to help those parties fully integrate if they would like to partner with us or do a joint venture to apply our technology in their space. LiNiCo is an example where we co-own LiNiCo; we’re executing our strategy while maintaining our adaptability. Our model is geographically unbound and business model flexible. The key to it all is ensuring that our technology, which we believe extracts the highest value materials with the least waste, will continue to appeal as we engage in these conversations.

Shawn Severson, Analyst

Last question might be more for LiNiCo management than for you but what types of things should we expect from them, and your relationship with them, as we look forward? What could we anticipate that would be relevant for Aqua Metals in the next six to 12 months?

Steve Cotton, CEO

Yes. As we previously indicated, we aim to have our pilot operational later this year, which will move from black mass forward. With LiNiCo, you'll see equipment being turned on in their facility to initiate their focus on battery collection, breaking, separation, and creating that black mass. LiNiCo will provide those updates, while we will share our technology updates. It’s a great partnership since it’s a significant effort involving both the spoke and the hub aspects for battery recycling. With that, we will provide updates on our part, and they will communicate developments on their side.

Shawn Severson, Analyst

Okay, thanks Steve. I’ll take the rest of my questions offline.

Glen Akselrod, Spokesperson

We have no other questions in the queue. Thank you for your contributions during this period. Some closing comments for you, and then we’ll end the call.

Steve Cotton, CEO

Yes. Thanks everybody for attending. We will provide news updates throughout, obviously, in between these calls. We're excited about the milestones we've achieved, and I believe you all know what we're aiming for. Please stay tuned and be sure to stay in touch with the company. Subscribe to our Twitter feed if you haven’t already. We look forward to our next conversation, at a minimum, next quarter.

Operator, Operator

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