Aqua Metals Inc (AQMS) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. And welcome to the Aqua Metals' Third Quarter 2017 Corporate Update Conference Call. (Operator Instructions) This conference is being recorded today, November 9, 2017.

Before we get started, I would like to turn the conference over to Greg Falesnik, Managing Director of MZ North America, the company's Investor Relations firm, who will read a disclaimer about forward-looking statements.

Thank you, operator. Welcome, everyone, to Aqua Metals' Third Quarter 2017 Earnings Call. Earlier this afternoon, Aqua Metals released financial results for the quarter ended September 30, 2017. The release is available on the Investors section of the company's website at www.aquametals.com. This earnings call will include forward-looking statements concerning Aqua Metals, Inc. forward-looking statements. They may include but are not limited to our plans, objectives, expectations, intentions and other statements that contain words such as expects, contemplates, anticipates, plans, intends, believes, and variations of such words or similar expressions that predict or indicate future events or trends or that do not relate to historical matters. The forward-looking statements in this earnings call include the strength and efficacy of Aqua Metals' portfolio of patent applications and issued patents, the lead acid battery recycling industry, the future of lead acid battery recycling via traditional smelters, the company's development of its commercial lead acid battery recycling facilities, and the quality and efficiency of the company's proposed lead acid battery recycling operations. These forward-looking statements involve known risks and unknown risks, uncertainties and other factors that could cause actual results to differ materially. Among these factors are: one, the risk that the company has not been able to produce and market AquaRefined lead on a commercial basis or, if it achieves commercial operations, that such operations will be profitable; two, the fact that the company has not recently commenced production and has not generated any significant revenue to date, thus subjecting the company to all of the risks inherent in a pre-revenue start-up; three, the risk no further patents will be issued on the company's patent applications or any other application that the company may file in the future, and that any patents issued to date or in the future will be sufficiently broad to adequately protect the company's technology. The risk that the company's initial patents and any other patents that may be issued to the company may be challenged invalidated or circumvented. Risks related to Aqua Metals' ability to raise sufficient capital as and when needed to develop and operator its recycling facilities and fund operating losses as we endeavor to achieve profitability; changes in federal, state and foreign laws regulating the recycling of lead acid batteries; the company's ability to protect its proprietary technology, trade secrets and knowhow; and those and other risks disclosed in the section Risk Factors included in the company's quarterly report on Form 10-Q filed today, November 9, 2017.

Aqua Metals' cautions readers 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.

Aqua Metals Chairman and CEO, Steve Clarke is your host today, and he'll introduce the rest of the team joining him on this call. So with that, I'll turn the call over to you, Steve.

Thank you, Greg. Joining me today on our call is our Chief Financial Officer, Mark Weinswig. So I'd like to start by welcoming Mark to his first earnings call with Aqua Metals. We're excited to have him on board as we begin to expand our business.

When we started, the accepted wisdom we faced was that electrochemical recycling of lead acid batteries had been proven not to work and that the lead acid industry was waning. There was also doubt that we would be able to get our permits and/or that we would get any patents. During these short 4 years, we have developed the technology, attracted strategic partners and built the world's first AquaRefining facility. We prevailed on permits and we prevailed on patents. And the lead acid battery industry continues to show robust growth with expectations that sales will reach $85 billion by 2025.

With that said, we're significantly behind schedule, still ramping production and expect this to continue into 2018. However, and this, for me, is the critical point, every individual process step has now been taken out of the laboratory and operated at scale at our first facility in Nevada. There is more to do and I'll expand on this later. But first I want to put where we are into context.

When I co-founded this company, when I wrote checks from my savings account to get it started, I had a simple vision. It was for the lead acid battery industry to continue to grow, it would need a better way to recycle its products and to produce higher purity lead than is possible with smelting alone. That's why we set out to develop and commercialize the technology we call AquaRefining. To really make a difference, we always expected that a major part of our business would be the supply of AquaRefining equipment and services to third parties. In other words, our mission was and is to supply the tools that could enable the lead industry to make a better product with less waste and with lower environmental impact. To do this, we believed that we would need to build our own production capacity to a much higher level of scale, and we were thinking 400 to 800 tons a day before the supply to third parties would be feasible. We were wrong, but in a good way. What we missed is that third parties interested in AquaRefining, already have breakers, ingot lines and, in some cases, desulfurization. Those who have opened discussions with us don't appear to be particularly interested in how profitable TRIC is today or how well our breaker separates components. They're primarily focused on can we plate lead, can they add AquaRefining to their existing smelter-based operations and how easy is it to permit. What appears to be driving them, is how to increase their production of high-purity lead without the challenges, costs and inefficiencies associated with smelting and refining. Outside of the AquaRefining process, much of what we do at TRIC is not relevant to their decision to add our patented technology to their operations. As you may recall, earlier this year we secured a strategic relationship with the world's largest battery company, JCI. This relationship contemplates a thoughtful and phased rollout of AquaRefining across their lead supply chain over time. In our quarter 1 earnings call, I mentioned that the potential scope of this opportunity was so large that we needed to reconsider our priorities. One key challenge was how to accelerate a number of future developments and improvements in our process and equipment. We, as you had expected, have a team of highly qualified scientists and engineers to develop and debug the operation of AquaRefining at our facility at TRIC. We don't expect third parties who want to use our process to have such resources. So we put in the effort to accelerate our development. We believe that now our current process is far better suited to operation by third parties. This has taken time but we believe it's important for the future of the company to get this right. As we announced in September, we and JCI sent notifications to each other indicating that we were ready to proceed with the first retrofit of a JCI facility. We expect the Aqua Metals role will be to provide the engineering and the supporting equipment as well as the AquaRefining modules. Our joint objective is to use the first retrofit of AquaRefining to develop a blueprint for future retrofits and as the basis for licensing. So I've talked about how we plan to accelerate what we've called our licensing business. However, I need to point out that we continued to plan for the expansion of our own production capacity. And as part of our planning, we've started to pursue potential strategic partners that would support the expansion of our own production capacity and potentially the rollout of equipment to third parties. We look forward to discussing the details in future calls as we progress.

Now, I want to focus on our Reno facility. To walk through each of the different process steps and provide an update on the status of each. As we've discussed before, our first process includes 5 steps. Our first step is our battery breaker and material separation system. Previously, we've reported difficulties and delays associated with this first step. So I'm pleased to note that we achieved very significant improvements in reliability and throughput over the past few months. And the battery breaker is now running consistently 7 days a week.

The next step in our process is desulfurization and digestion. This is where we've implemented our proprietary electrolyte production process. We believe that it is within desulfurization and digestion that we've solved the critical challenges that many others could not overcome in attempting to develop and commercialize electrochemical-based lead acid battery recycling. Plating lead from an electrolyte is not particularly difficult. Producing the electrolyte from the components of a lead acid battery is where the challenge lies. Producing a useful electrolyte from a mild, biodegradable organic acid took a real technology breakthrough. We believe that our choice of electrolyte on our electrolyte production technology is a key factor in our higher expectations for AquaRefined lead. We changed to derisk our first facility by using a class of equipment for desulfurization that is standard in the lead industry.

However, we believe that there is significant opportunity to improve reaction rates, yield and recycle streams by employing more advanced equipment developed in other industries.

The third step is AquaRefining. Again, we never considered plating lead from an electrolyte to be a particular challenge. This process is well known, as for example, the electronic industry plates lead routinely. However, one key factor in our approach to this is that lead requires very little energy to plate. I'm showing a chart right now comparing the kilowatt hours per ton of lead plated, and what you can see is that lead requires far less energy than other metals to plate, far less energy than metals who are routinely produced through electrowinning. And this feature provides the basis for a compelling advantage over smelting in energy usage and greenhouse gas emissions.

There are multiple ways and multiple equipment choices available to plate lead. We could have used a conventional electrolyzer of the type routinely used in the electrowinning industry, and we still could. These are common and, essentially, available to order.

However, our vision was to be able to supply modular equipment suitable for operation by third parties who don't typically have electrowinning expertise. For these and other reasons, we chose to develop a new class of industrial scale electrolyzer, one that has the potential to work with an exceptionally broad range of electrolyte compositions and one that continually harvests the lead as it is produced. To do this, we focused on a rotating disk electrolyzer, equipment that is commonly used in electrochemical research. Part of our technological breakthrough was to figure out how to scale equipment which is conventionally just 2 inches in diameter and lives in a laboratory by a factor of 400x and then make it modular. We made this breakthrough in 2013, filed patents and proved it out at full scale in December 2014. And this year, we received our first patents protecting this important IP.

I've previously stated that we expect to have all 16 modules assembled and operational by the end of 2017. Well, today, all 16 modules have been delivered, are on-site and in place. Eight of those are fully assembled, which you can see in the photograph, there, is the first line of 8 fully assembled modules. Four of those are being used. The final 8 modules are in place and undergoing final assembly. Limited production of AquaRefined lead is underway and expected to continue with initial quantities produced in 2017 and ramp up continuing through 2018. Currently, the 4 operating modules are being used to achieve the following: The first thing is to accelerate updates aimed at providing a level of robustness suitable for operating by third parties with nonspecialist operators. The second feature -- purpose is to map out operating parameters and performance over the full range of operating conditions. The objective is to achieve the highest level of operational flexibility.

We believe both activities are coming to a successful conclusion, after which we will apply the control parameters across all 16 modules. One of the few challenges we faced is that the lead we produced from batteries that we broke at TRIC appeared to be stickier than the lead which we'd previously produced. When I say stickier, I mean that it plated and was easily removed from the rotating discs, but it slid more slowly down the exit chute and, in some cases, needed manual assistance. One option was to continue to use manual assistance and that would have been perfectly okay. However, we expect that potential licensees would want a higher level of simplicity. For that reason, we invested resources to develop methods of eliminating the slow-moving lead. I'm now pleased to say that we've developed multiple solutions and are in final stages of selecting the option we'll apply to all 16 modules.

The fifth and final stage of production involves processing AquaRefined lead and the metallic lead recovered from batteries through an ingot production line. As we've noted previously, we have successfully produced our first ingots. Currently, we have 2 lead pots operational with 4 additional pots being installed. All 6 will feed a partially automated ingot casting and stacking line. We don't expect to immediately begin selling AquaRefined lead ingots. We expect to proceed stepwise. The first step is to increase the production of lead ingots containing mostly grid lead with some AquaRefined. These will be sold as lead bullion. And it's important to note that lead bullion does not typically need to be certified by a buyer.

The next step will be to produce and sell ingots of lead alloy. These will consist both of lead recovered from grids and AquaRefined lead with alloy metals added to meet the specifications required by customers. The last step will be to produce and sell ingots of AquaRefined lead, which is where we expect to achieve the highest value. Our goal is to become an approved supplier to JCI as well as others through the industry. The key thing to note is that each step in our process works. We can process used batteries and manufacture lead. More specifically, we can take battery paste, convert it into a high-quality electrolyte and then plate lead from it. We believe that we are the first to achieve this at meaningful scale. Clearly, the next step is doing it at a faster rate. So where we are today is synchronizing our individual production processes. Getting this right is critical to maximizing efficiency, optimizing work and procedures and minimizing waste. We expect there to be more hurdles. This is common for every first-of-kind facility. Clearly, we're under significant pressure to ramp up production. At the same time, we know that there are pitfalls in rushing the deliberate testing and adjustments that are at the heart of commissioning. Getting the balance right between these competing pressures is the difficult part. That said, we believe our technical and operations teams have the skills and leadership to be successful in this. And I should mention that our partners have been extremely supportive as we've worked to scale operations.

Moving now to intellectual property, where we've had some significant successes. Currently, 5 key patents have been allowed in the U.S., Canada, Korea, Japan and Australia. We believe that our strategy of using Korea as the lead examining authority has proved effective. We passed rigorous examination of novelty and prior art with all substantive claims intact. On this basis, we believe that we're building significant and comprehensive IP protection. As we've discussed previously, the company has made filings for more than 20 patents organized into several families covering matter, devices and processes in up to 20 different regions. We now have 5 allowed. The importance of our technology continues to be recognized. This year, we won our second consecutive Platts Metals Award. Recognition by the leaders in the metals industry is an exceptional achievement for a company that is just 4 years old. We also won Popular Science Magazines' Best of What's New award in the engineering category, and we were named a global awards finalist in the Innovative Product category by the U.K.'s Institute of Chemical Engineers. We're particularly proud of the fact that we were nominated for peer-reviewed awards in both the metals and chemical engineering industries. We believe this really shows the innovative nature of what we're doing. Before going further, I would like to return the call to our CFO, Mark Weinswig, who will walk you through the third quarter financials before turning back to me to provide guidance for the third quarter and closing remarks.

Thank you, Steve. In the third quarter of 2017, we recognized revenues of $0.6 million compared to $0.6 million of revenue in the second quarter. This was the second consecutive quarter the company had generated revenue. The revenue consisted primarily of plastics and lead compounds. For the 3 months ended September 30, 2017, we had an operating loss of $5.8 million. The current quarter loss was primarily driven by low production at our TRIC facility and ramp up costs. In addition, we continued to invest in technology developments and process improvements. Net loss for the third quarter of 2017 was $6.2 million or $0.28 per share. We had over $17.5 million in cash and cash equivalents as of September 30. In the third quarter, net cash used was $4.5 million and included significant payments for capital expenditures, which were approximately $1.1 million.

For the fourth quarter, we expect to see similar levels of cash outflows from operations. In addition, we expect our CapEx to be in the range of $2 million to $3 million. As we have discussed before, as we expand our business, we will need additional capital. As we increase production in 2018, we believe that our operating results will improve as we ramp up production of our AquaRefining modules and begin selling high purity lead. With that, I will now turn the call over to Steve to discuss the revenue outlook for Q4.

Thank you, Mark. Now looking at the fourth quarter. We expect our revenues to be in the range of $1.2 million to $1.8 million. Sales will continue to include metallic lead, lead compounds and recovered plastic. This will be the first quarter that we expect to ship lead ingots. These will include some amount of lead produced from our AquaRefineries. Before we move on to the Q&A portion of the call, I'd like to leave you with some thoughts. Overall, we've made tremendous progress and excited about what we can accomplish in the future. We've also learned some important lessons. One of the things that runs through my earlier comments, and in many ways it's an important lesson, is that we are far more like a chemical and chemical equipment company than a traditional smelter. It took some time for this important distinction to become apparent, and it took time to adjust the management team and the core skill sets to this reality. With these and other changes, I believe that we have now made an important transition, and I'm proud of the team that we have in place. I'm confident in their ability to ramp up production at TRIC and to continue to expand our battery recycling operations in line with the scale and opportunity that we've secured. Another important thing is that we're transitioning to the supply of equipment and services to third parties. We've made an exceptional start with our agreements with JCI. To have a partner of such scale and credibility as our launch customer is far beyond our expectations. To be able to fully realize the potential of that relationship, we believe that there is scope for additional strategic partners to help provide equipment and services. With those thoughts we thank you for your interest in Aqua Metals and in joining today's call. We are now ready to take questions. Operator?

(Operator Instructions) We'll take our first question from Colin Rusch with Oppenheimer.

I just wanted to make sure that I heard this right. So part of the revenue guidance for the fourth quarter includes AquaRefined lead that would be coming out of the full process, is that correct?

That's correct.

Okay. And then you indicated that you would be...

Let me just -- I need to qualify that. We're not going to be selling it as ingots solely consisting of AquaRefined lead. We're going to start by selling ingots of bullion that will include AquaRefined lead.

That's good enough, as long as it's going through the full process, I think what's at stake and was concerning for investors was around commercial production. So I think that's the benchmark we wanted to understand.

And then the comments around additional capital needing -- to scale the business, obviously that could be in the form of financing for additional facilities, but this pivot towards the licensing model. I guess, how do you think about the puts and takes of ramping up capacity, moving those licensing and module sale agreements down the road and in terms of the strategic kind of proliferation of the technology? What are the puts and takes and when can we see some more concrete decisions around those things coming out into the public markets?

To take the last point first, it's very difficult for us to provide some of the level of detail that you and all of our investors want around exactly where are we with JCI, what's going to be the first facility, how big is it going to be and how many more are we going to do. Quite honestly, we're not going to able to provide the level of granularity that people want because we're talking about highly commercially sensitive matters that neither we or JCI particularly want all of our competitors to know about. But what I can say is that we're thrilled with the relationship we have with JCI, and we're somewhat overwhelmed by the scale and scope of what we could do in rolling out and providing equipment to them. That process has started. It will include engineering and other services as well as providing just AquaRefining modules. And I can't really say too much about that. But in terms of providing capital to the company, it certainly adds another dimension.

Okay. And then, the last one is just around necessary staffing for the initiatives that you have. Do you have enough folks on the team at this point? Or are we going to see some of the OpEx spend growing as we go through the balance of next year? Are we going to see that happening fairly soon? How should we think about that?

Well, actually, yes. So the first part is, the equipment supply business essentially will use the same people that help develop and build the equipment for TRIC. So we ramped up early, part of the reason that our expenses are high is because we -- when we took the decision to bring on board and build an exceptional team of engineers that could support the business going forward. I wouldn't like to pretend that we've hired everybody we'll ever need. I don't think we're even close, but we've certainly got sufficient staff on board now to continue the ramp-up at TRIC and simultaneously service the opportunity that we have in equipment supply.

And we'll take our next question from Bhakti Pavani with Euro Pacific Capital.

Quickly, on some of the details of the current operations, could you maybe provide some additional color on -- as to how many tons per day are you guys currently running through the battery breaking system and through the entire process?

No, at this time we've provided all the color that we're willing to provide at this point.

Okay. With regards to modification or the changes to the existing equipment, I know you guys have been working through a lot of issues with the battery breaking system, which are behind you. At this point, what do you anticipate or what process or what stage do you think will require modification when it comes to production of lead ingots or bullions?

Actually the issues that we faced and resolved with the battery breaker were quite unexpected. But we've got that behind us, and we consider that bit of a surprise, but a serious win. We're now pretty pleased with where we are in meeting the projections we made of having all of the equipment on site and ramping up 16 modules that we've got. I think the simple way to put it is we're solving problems faster than we're finding them, and that's an important inflection point to get through.

Okay. Just a follow-up to that. You mentioned in your prepared remarks that 4 AquaRefine modules are currently being used. Just kind of wondering what kind of utilization rate is with regards to those 4 modules? Are they being operated 24/7? Or are you still running in batches? How is it going?

We're not providing individual tonnage per day, utilization rates or any of that data. What we are saying is that we've got 16 on site. We've got 8 fully assembled. We achieved that. We put 4 on site and assembled them in less than a month, it was a tremendous effort. I'm confident we'll have all 16 assembled by the end of the year. The work to resolve the issues around sticky lead has borne fruit. We're not only -- do we -- we've not got just 1 way of resolving it, we've got 3 different ways. So we've now got a surplus of technologies to deploy. None of them are particularly difficult. There's no major redesigns, they're relatively minor adjustments. And we're confident in what we've planned and I'm proud of the team's efforts.

(Operator Instructions) And we'll take our next question from Amit Dayal with H.C. Wainwright.

Steve, just a question in regards to the sort of evolution from lead bullion to AquaRefined lead. Why are these steps sort of necessary? And how much time do you think it will take to go from lead bullion to full AquaRefined lead?

It's pretty standard starting up any metals business, whether it's lead or copper or anything else, to start off with the high-volume, lowest grade first just to get everything working, and then to increase sequentially -- or move sequentially into alloys and then higher purity grades. We're doing nothing particularly unusual in that regard. And the reason everybody does it and the reason we do it is it is the fastest way of generating revenue with the lowest risk. So it makes total sense to start with bullion and then move last to AquaRefined lead. We're not providing guidance on the timescales we expect for that to take.

Okay. Are you making any margins on the $1.2 million to $1.8 million sort of guidance you're giving for the fourth quarter?

Yes, thank you for the question. As we ramp up capacity, we do expect our gross margins and our margins to improve. But we're still in the early stages of production. And as we ramp up in 2018, we do expect our margins will continue to increase with the ramp-up in overall operations and with the increased production of AquaRefined lead, which we expect will have higher margins for the organization.

Okay. And in regards to JCI. How is the progress you guys are making in terms of perfecting the parameters, et cetera, meeting their expectations? Were they expecting you to have a model ready by this time? Or are they showing some flexibility and patience, et cetera, as you perfect things on your side before you move on to the next steps with them?

We're not going to provide specifics, but I can give you an anecdote. Just a few short weeks ago, I -- we were at the facility standing next to an early prototype of a method for removing the -- or dealing with the sticky lead with a very senior delegation from JCI, who were very pleased with what we were doing and very complimentary in what we'd achieved. And we're thrilled to have them as partners, and I really can't say much more than that.

And this does conclude the question-and-answer session. I'd now like to turn the call back over to Steve Clarke for any closing comments.

Okay, thank you, everybody for joining us today. We look forward to updating you on our progress as we work to scale up operations at the world's first clean lead recycling facility. Thank you very much.

And that does conclude today's conference. Thank you for your participation. And you may now disconnect.