Aqua Metals, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Aqua Metals full year 2020 results earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Glenn Axelrod, Investor Relations, Thank you. Please go ahead, sir.

Thank you, Christine. And thank you, everybody, for joining our call today. I want to welcome you to Aqua Metals' fourth quarter and year-end 2020 conference call. Earlier today, Aqua Metals released financial results for the quarter ended December 31, 2020. This release is available on the investor 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. Today's call will also include a PowerPoint presentation, which is available via the webinar portal from the link provided in today's and last week's press releases. If you are not logged in and want to follow the slides along with management's formal comments, please log into that portal now. 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 25th, 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 its statements to reflect new circumstances or unanticipated events as they occur accept as required by law. And as a reminder, after Steve's and Judd's formal comments, we're going to be taking questions. Questions will be accepted over the telephone from analysts and all other investors who want to submit a question. Please do so 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. With that said, I'd like to turn the call over to Steve Cotton, CEO of AquaMetals. Steve, please go ahead.

Thank you, Glenn. Appreciate that. So here's the safe harbor that Glenn was referring to for those of you that are following us with the deck. And I'm going to move on to the first slide, which is a slide about our mission as a company. And that is to provide sustainable metals recycling for metals that are strategic to the energy storage applications out there in the world. and our proven breakthrough technology called Ock Refining delivers raw materials right back in to the manufacturing supply chain in a clean and economical way that's going to reduce the over-reliance of mining to meet demand. So I'm going to take everybody through a Horizon 1 and a Horizon 2 view of our climate-friendly methodology that we see to meet the rapidly growing Energy Storage, and Strategic Metals Demand that's associated with that rapidly growing energy storage market. In Horizon 1, the backdrop is that the recycled lead market is slated to surpass $19 billion by the year 2026. More than 6 million tons of lead collected for reuse each year is a large volume that's going to continue to increase. Lead batteries power 1.4 billion automobiles worldwide. And take note that many automobiles that are put on the road today have two lead-acid batteries in them if they have an internal combustion engine, which is the start-stop for the stop signs and stop lights. So there's more lead in cars that are being produced. As well as in electric vehicles, there's lead batteries in most electric vehicles that are produced as well. And that's feeding the growth of the market. over 80% of lead in every new lead acid battery is secondary or also known as recycled lead. It's an amazing circular economy story that the lead recycling industry has achieved by being able to put most of the lead in the old batteries back into the new ones and supplement the market growth, that 20% or so, with the mining to feed that market growth. But if you look at Horizon 2, in addition to the lead market, Last year, lithium ion batteries containing nearly a billion dollars in multiple strategic metals, not just lead as a singular metal like for the lead acid industry, but multiple metals, which we'll go through as we talk through the deck today, are being landfilled. If this continues by the year 2025, that's $12 billion with the growth of the lithium ion market that would be landfilled of all those strategic metals. Not only the loss of the strategic metals, but not a great environmental solution. 30 million EVs are expected to be produced annually by the year 2027. That's going to require 1.8 million metric tons of lithium, which is five times what is already mined today, let alone the other metals. So let's talk about aqua metals at a glance as a company that's going to be addressing all these things. We've developed aqua refining already, which is a commercially available and commercially ready sustainable battery recycling technology. Akra Refining uses water instead of fire and organic acids that are biodegradable to create a very ultra-pure lead, in our case 99.996%, one atom at a time. So we actually refine the lead as it comes right off of the machines rather than have to refine it in a refinery. And that feeds into the $20 billion lead recycling industry that we've been talking about earlier. seeking on our part to extend Auca Refining into the multiple metal environment of lithium ion batteries. And we're doing that through prosecution of intellectual property, through strategic investment, and through research and development, which we intend to continue to accelerate. We have a transformative technology that really does benefit both industry and the earth. It benefits the environment. It greatly benefits worker safety, which we'll talk about. It benefits battery performance and battery life, and it benefits the economics of the entire supply chain and value proposition, which we'll also speak about. Our ticker, as most of you know, is AQMS. We're on the NASDAQ. We are headquartered here in Tahoe, Reno Industrial Center in about 30 minutes east of Reno, Nevada. The company is not terribly old. It was incorporated in 2014, and we have a strong balance sheet with no debt, which we'll talk about as we go through the financials as well. So this slide talks about the existing way for lead recycling versus aqua refining. On the left, you see what smelting is, and that is the current method, an incumbent method of lead acid battery recycling. At best, it's a dirty process. It uses fire, as you can see, and it can be dangerous, and it can impact worker safety. Aquarefining, as you see on the right, is building the lead one atom at a time. Behind that mound of lead, you see the rotating disks, which are called our cathodes that are in our aqualizers, that manufacture the lead at room temperature with water right before your eyes, and it's clean. It uses water that is a not net water producer because we get water from the batteries that come in, and it's very safe for workers because it's contained in tanks, pipes, and pumps versus being concerned about fugitive emissions. The great story about lead is that 99 plus percent of all lead acid batteries are already recycled, unlike lithium, which is close to zero. and 80% plus of all those recycled batteries that are put out in the marketplace in the secondary market use that recycled lead as I was describing earlier. So now we're going to talk about our report card for 2020 and the beginning of 2021. We really outperformed our 2020 guidance that we provided to our shareholders and we'll take you through each and every measure. First off is we've strengthened the balance sheet and achieved overall debt-free status, which was our initial goal. And we have built a very sophisticated pipeline with multiple candidates in our sales funnel. And we are seeking to announce our site number one for aqua refining for the lead recycling industry in Q1 or Q2 of this year. We completed production and the productization of the first version 1.25 L electrolyzers, which we call aqualizers, and we achieved two times the throughput. Our goal was to achieve a 20% improvement from the learnings of our operations in 2018 and 2019 when we embarked on this program, and we got 500% the result of the plan. which is a direct impact on our value proposition from the capital expenditure value proposition to our clientele and also the operating cost because if you need less electrolyzers, you need less people and you need not to spend as much money on the operations of the machine. We also established a global deal with BASF, which is the world's largest chemical company, to sell the electrolyte and include the BASF-produced electrolyte in our system fills when we deploy off-refining with our first licensee and beyond. And then co-market, because BASF has many relationships with existing battery recyclers where they sell the chemicals to do the refining post-furnaces and in the environment of the kettles and things like that where they refine the lead. You don't need to do that with aqua refining, and there's additional chemical opportunity for BASF to sell, obviously, the key ingredient of the aqua refining electrolyte. And there's a co-marketing opportunity where we're working together to try to access the market through introductions made in both sides. And we also agreed that we're going to work to improve aqua refining. BASF's mantra is about that, and I'll talk about that more a little bit later. We also completed the transition to capital life. very recently with Linico, which stands for Lithium Nickel Cobalt, Lithium Ion Recycler Company, in a lease-to-buy deal for our existing aqua refinery. We'll take you through some of the details of what that is, but we are now officially achieving the Capital Light model. We expanded research and development and invested in lithium ion battery recycling opportunities through battery manufacturing, streamlining with our Ocrefine briquettes, which can go now direct to battery production, which I'll talk about in a subsequent slide. We made a $2 million investment into Linneco, and that pursues the formation of a lithium-ion recycling eco-network. We think that no one company can solve the puzzle of the great challenge of lithium-ion recycling and great opportunity by going it alone, and we believe it's going to take the great minds of multiple companies together to make it work. And that's our goal is to form this eco network and talk more about that soon. We also filed a provisional patent very recently for the lithium ion metals recovery using a leveraged technology of the aqua refining technology and making that extensible and the IP front as well. Our go forward business model is enhanced by a major increase in the total addressable market. Very recently, we were talking about the lead recycling market, which we continue to talk about, achieving about a $19 billion size by the year 2026. It's an existing, very large, very mature market that's ripe for an upgrade for aqua refining with a cumulative annual growth rate of 3.5%, so it's growing at a nice clip. The lithium industry is nascent and new, but is expected in dollar value to reach the same metals value as lead or more by the year 2026, but at a much faster cumulative annual growth rate. So both industries are growing, but by getting into the multiple metals and the lithium ion recycling area, the total addressable market opportunity for aqua metals equipment, licensing, and services has just doubled. So let's move on to what does equipment supply and licensing look like. Our funnel has increased to span three continents. and we are working diligently with sales and detailed proposals and technical proposals and negotiations. And as I said before, expect to announce our first licensee partnership. In the long term, let's talk about what licensing looks like. The model is built and that pipeline is strong and more robust than it's ever been. We are seeking engineering revenues, much like you hire an architect to design a building or an expansion of your house, which would be six to seven figures of revenue per project. and then possible equipment supply revenue of over $10 million for a project of a significant size. It could be much larger than that into the tens of millions and it could be smaller than that if it's a trial or a pilot type of a site. Then once the equipment is deployed and commissioned, witness test and goes into production at the licensee's facility, The recurring revenue for the company of Aqua Metals comes from running royalties, and we believe we can achieve a strong running royalty because already we've achieved a 10% rough premium on the lead that we sold when we were producing lead, proving the technology manufacturing 35,000 ingots in the years 2018 and 2019, and we believe that that premium can be shared with licensees. And that is a very interesting premium value because the demand for premium lead is going up rapidly. As I said before, the second battery in total combustion engines, as an example, is an advanced lead acid battery, much like what you see in the data center batteries. And those require more of a pure lead. And there's a very strong growth in demand for ultra pure lead. And we see a great opportunity to share that premium with our customers. And we think 10% could be a starting point. and that there might be upside in that premium value as aqua refined lead proves itself out in the marketplace further and further. Additional millions of dollars of revenues could take place after this equipment is sold and deployed and could potentially be generated for maintenance and upgrades over the plant lifetime. It's the beginning of the customer journey with aqua metals once they turn on their first set of aqualizers. New sites, expansions of existing sites, equipment upgrades, maintenance programs, feature bidding of capabilities through our PureMetrics platform, et cetera. So now moving on to what aquafining looks like in three scenarios. This slide covers two of them. One is the bolt-on to an existing facility that's already been depreciated and amortized. And the goal there could be to increase the production without increasing the emissions by adding the aqua refining but keeping the same furnace capacity and running those furnaces much more efficiently. In fact, when you divert the paste, which is about 50% of lead through the aqua refining process, the furnaces in the smelting process become more melters at lower temperatures that run much more efficiently and are much more cost-effective to operate and much more safe for the workers because you're really melting instead of smelting. Another scenario, number two, is to keep the total production the same by adding on refining and reducing the furnace usage while reducing emissions. And that provides the ultra-pure lead and metal opportunity and provides for the environmental bragging rights and the sustainability factors, the friendly relationships with the increasingly scrutinizing regulators and court of public opinion that would like to see a change in the existing smelting industry. There's a third model which we're gaining quite a bit of momentum on, and that is designing aqua refining into greenfield builds. If you look at the India market and the Asia Pacific market in particular, that is where a lot of high growth in the automobile deployment and battery manufacturing and battery recycling is taking place. And there are government-sponsored efforts to make sure that those new battery manufacturing facilities and recycling facilities that are to be built are built with state-of-the-art, best-available technologies. When you design off refining in, you're not remodeling your kitchen. You're designing the new kitchen into the new home, and there's some additional benefits that can be achieved. And we're seeing great opportunities with greenfield builds in the regions I referenced just a moment ago in particular, but also in South America. So now let's talk about some of our recent announcements for those of you that haven't heard the details. We just announced on January 25th the BASF relationship. I did take you through that a little bit earlier, but again, the companies will cooperate to offer the aqua refining to the battery recyclers. The companies will explore enhanced BASF-made electrolyte and additives for aqua refining. Think of Tecron for Chevron gas. Think of an additive that improves the performance of aqua refining and extends the life of aqua refining equipment and allows for us to put a lower cost bill of materials into the equipment to increase the value proposition because we are, after all, running acid through our equipment. And if we can use the proper chemistry, upgrades, and additives, we can improve and make aqua refining better, which is right in BASF's wheelhouse. Aqua Bells will supply the BASF electrolyte for aqua refining and get an additional system fill revenue component. And that's a really positive thing for us with the global relationship with BASF to be able to offer that and help our customers to enjoy those benefits on the economic side. And then collaborating on sustainability through improving the chemistry is really the overall goal. We also announced on January 27th the new process that replaces a traditional process as an alternative from taking the briquettes that come out of the aqua refining process that you see in the left with the gloved hand holding the aqua refined briquette, which is the compressed spongy lead that you see in the very left, and putting that directly into the battery manufacturing process. Any time you can streamline the production of a commodity, that's big news. and the battery industry is quite excited about this. Our customer engagements, this is enhanced greatly because the value of putting in Auca Refining now allows two products to come out of Auca Refining for lead, which is the ingots that you see in the upper right, which is the traditional process. We're bypassing that altogether and going straight to a metal oxide type production and going right into battery manufacturing. It's particularly useful when the battery recycling is adjacent to the battery manufacturing facility, which we see in many instances with vertically integrated companies or down the road even because you can transport those briquettes in situ and get them into that new process. So we see that as a very promising opportunity with our prospective client base in the industry. We also announced in February 16th and 17th the sale of the aqua refining in the form of a lease to buy agreement and that's actually a real positive for Aqua Metals for a bunch of reasons that we'll talk about. The company's name is Lineco. Again, lithium, nickel, cobalt and they will begin converting the aquafining to be purpose fit for lithium ion recycling. Some of the equipment and plant they will be purchasing as part of the purchase of the building and some of it we will sell in the third party market to the existing lead acid battery operators because, for example, the breaking and separation system is different so we'll have a breaker and separation system for sale. AquaMetals retains the access for the ongoing Aqualyzer research and development program for 18 to 24 months now with no overhead. AquaMetals avoids the carrying costs and overhead associated with the building and will ultimately receive $14 to $15 million in change proceeds from the sale of the building inclusive of non-refundable initial material amounts of deposits and step-ups of deposits throughout the time cycle. Aqua Metals gets that capitalized access to the feedstock in the facility for ongoing product development as we venture into the lithium space. And that's actually really important as we collaborate with the eco-network that we've proposed forming with Lineco, Green Lion, and Comstock to collaborate together to really provide the best in class technologies and really together solve the lithium ion recycling challenge from an overall mass balance of the facility from input to processing to output. So it's a very exciting opportunity for us to facilitate getting in the market and fast track it for us because we don't have to buy land, we don't have to build a building, we don't have to feed the capital heavy, and we're already in partnership with entities with the physical facilities ready to go. Talking about our IP, we've got $200 million invested in setting up our equipment supply and global licensing opportunity. Our IP strategy is broad and deep and very sophisticated. And we have, as you can see in the map, covered for most of the globe any areas that we intend DeployAqua Refining. And it's very important if you're going to be a technology and licensing company to secure your intellectual property and also trade secrets and know what to put into your patents and what to keep out of them. And we have 51 patents issued and allowed and 62 more applications that are pending. And the significant investment that we've made to date really does allow and secure that future growth and opportunity. We continue to take our patent portfolio very seriously and invest a significant amount of time, effort, and dollars into this stable of patents. Our experienced management team and engaged board is really focused on execution. This is an execution play, and the execution play associated with Aqua Metals is an important stage of the company, and the team that is there really needs to be strong in our ability to execute on the business plan. I myself have a lot of experience in growing businesses in the lead-acid battery industry space. And Judd Merrill, our CFO, has a lot of experience in the mining and metals and process space. Ben Thacker, our Vice President of Engineering and Operations, comes from Clarios, the world's largest battery manufacturer, investor in aqua metals and partner of aqua metals. and was on the launch team of a very large smelter and operations team and understood and picked up and moved his family out to the Tahoe, Reno area to help us build and grow Aqua Metals. Our independent directors, we have our non-executive chairman of the board, Shark Yusefzai, who held numerous positions at very high levels within Chevron for over 20 years and has brought a great set of governance to the company. Vinny DeVito is a very solid chair of our audit committee. and has been with Aqua Metals as long as I have from the get-go right around the IPO timeframe. Stay tuned for more information as we continue to grow the board and enhance the management team. And it will all be about execution and execution focus. With that, I'm gonna turn it over to Judd for the financial overview. Go ahead, Judd.