Aqua Metals Inc (AQMS) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Aqua Metals' First Quarter 2018 Corporate Update Call. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the conference over to Greg Falesnik, Managing Director for MZ North America, Aqua Metals' Investor Relations firm. Thank you. You may begin.

Thank you, operator. Welcome, everyone, to Aqua Metals' First Quarter 2018 Earnings Call. Earlier this afternoon, Aqua Metals released financial results for the first quarter ended March 31, 2018. This release is available on the Investors section of the company's website at www.aquametals.com.

This earnings release will include forward-looking statements concerning Aqua Metals, Inc. forward-looking statements include, but are not limited to, our plans, objectives, expectations and 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.

Those forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results to differ materially. Among those factors are the risk that the company does not be able to produce and market AquaRefined lead on a commercial basis or if it achieves commercial operations that such operations will be profitable. The fact that the company will only recently commenced production and has not generated any significant revenue to date, thus subjecting the company to all the risk inherent in a pre-revenue startup, the risk that no further patents will be issued on the company's patent applications or any other application that the company might file in the future, that any patent 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 operate its recycling facilities and fund operating losses 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 know-how; and those and other risks disclosed in the section Risk Factors included in the company's quarterly report on Form 10-Q filed today, May 9, 2018. 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 anticipated events as they occur, except as required by law.

Aqua Metals' Chief Operating Officer, Selwyn Mould, is your host today, and he will introduce the rest of the team joining him on the call.

With that, I'll turn the call over to you, Selwyn.

Thank you, Greg. Joining me on today's call is our Interim Chief Financial Officer and one of the Founders of Aqua Metals, Thomas Murphy. On today's call, I will be providing a brief overview of the history of Aqua Metals for those of you who may be new to the story, followed by an update on our progress since the beginning of the year as well as a full update on the status of our operations today. Afterwards I'll turn the call over to Tom to discuss the financial results and recent enhancements to both the management and board before wrapping up with some milestones to track our progress for the remainder of the year and a Q&A session.

I'd like to start out today's call by thanking Steve Clark, the former President, CEO and Chairman of Aqua Metals, for his considerable contribution to the company. Steve was one of the co-founders of the company and a driving force in its creation. We all wish Steve well and success in the future. Steve's departure came as a result of a planned board refreshment and CEO succession that was planned since late 2017.

As you may know, I am the Chief Operating Officer of Aqua Metals and one of the 6 founders. As some of you will know the history of Aqua Metals is quite extraordinary. Starting with 6 guys in a garage who came together to create the company, with little more than an idea and a lab experiment. In 2013, we built our first lab scale unit, and after many months of trial and error, we developed the unit to a state where we earned our first investors and received funding. With the initial funding, we were able to design and build a full scaled unit and to develop and apply for our first patent. Our first patent was a great success and a tremendous group effort from all the 6 inventors named on the patent. The success of our full-scaled unit enabled us to complete an IPO in July 2015 and to break ground in our first factory shortly after in McCarran, Nevada, which is in the Tahoe Reno Industrial Center, or TRIC. In 2016, we began crushing batteries, and today, we sit on the verge of delivering a revolutionary technology that the lead recycling world is eagerly awaiting due to its economic and environmental benefits.

In less than 3 years, we've gone from sketches in a plan to building the world's first AquaRefining facility. We have applied for and being granted operating permits for that facility and have filed numerous patent applications drawn to the AquaRefining process that covered various aspects of methods, production intermediates and devices. 7 distinct families of patent applications have been filed, totaling 90 patent applications. As of today, Aqua Metals has secured patents in 7 jurisdictions: Korea; Japan; Australia; United States; Canada; African Intellectual Property Organization; and South Africa.

The first quarter of 2018 was one of continued progress and execution. We continued to face challenges and worked diligently to overcome them. Specifically, those related to the sticky lead condition, which we identified in late 2017, where lead was sticking or hanging up on the exit chutes of the modules. In late 2017, we developed a solution to address the sticky lead condition, which involved modifications to the exit chute and improvements to the electrolyte feed system. Initial testing of the solution was undertaken using 1 electrolyzer during the remainder of December 2017. After the concept was validated, the solution was expanded to a full module at 6 electrolyzers. The modified module was operated during the second half of January and throughout February. This included running for 14 days in February for a total of more than 80 hours. The testing culminated with a 24-hour run that demonstrated that the module could meet our throughput target and that it had the potential to operate at 10% less energy consumption than our design basis. Having validated the design, it was then frozen, drawings were approved, parts were ordered and then the process of installing the modifications on the other modules began.

So where are we today? During April and early May, we brought our first 4 modules online and transferred them one by one from the control of the technical team into production. To do this, each of the modules has gone through a conditioning period supervised by the Aqua Metals' technical team before moving to production. To date, we have 4 AquaRefining modules that have completed the conditioning period and are being transferred from control of the technical team to the production team, where they are running on a single shift.

Now the immediate focus is on achieving 24-hour operations with 4 modules, before bringing additional modules online. I'd like to emphasize that the goal remains to have all 16 modules running 24 hours a day. However, we've discovered that by initially operating 4 modules to 24 hours a day, we will increase learning and more rapidly achieve full-scale production. This strategy also allows us to maximize lead production during the scale-up process, while enabling the remaining components of the plant to be synchronized in support of increased AquaRefining output.

This is an important point. I'd like to touch on it bit more. There is no doubt that it was tempting to move directly to operating 16 modules on 1 shift. However, we realized that there were a number of benefits to moving first to 24-hour operation of fewer modules. One of our engineering managers first pointed this out, and then we all saw what an obviously good idea it was given the numerous benefits. It maximizes lead production. It's more efficient. Starting and stopping each day can lose 3 hours a shift. Therefore, a single 8-hour shift only gives 5 effective production hours. Running nonstop for 24 hours maximizes effective production hours. For example, even if we start and stopped once, we still achieved 21 effective production hours. 4 modules running for a 24-hour period produce more than 16 modules on 1 shift. Mathematically, 16 models by 5 hours gives 80 effective production hours and 4 modules by 24 hours gives 96 hours or even 84 effective production hours, if we allow for 1 stop-start occasionally.

Furthermore, real learning comes when it’s operating extended hours. AquaRefining is a continuous process and it is designed to run in a steady-state situation. Running for 24 hours a day increases our experience of steady-state running which is critical to scaling up. And finally, with a 24-hour production team established, it will be easier to add additional modules into production.

So as I stated, we have 4 modules up and running on a single shift, and we are working to move those to 24-hour operations. Once we're satisfied with the operations of the first 4 modules and the supporting plant, we will bring additional modules online, in batches of 4, until all 16 modules are fully operational.

One of the beauties of our technology is that it is already been significantly derisked because of its modular nature, which means that each module is essentially identical. If one works, they will all work. Our challenge now is less about getting the AquaRefining technology to work and more about ensuring that the traditional recycling processes are up to rate and supporting reliably. These processes, of course, include our breaker and separation process, melting and casting and water treatment. This also includes getting the supporting equipment and infrastructure in place and working reliably, such as air compressors and pumps, which are off-the-shelf products as well as recruiting and training staff. It isn't rocket science, but everything needs to work reliably and be synchronized. We remain very confident in our ability to succeed, while also being realistic in knowing there will continue to be challenges in scaling up a first of its kind facility.

So now that we are running 4 modules, what are we doing with the lead produced? We've obviously stated that we will be starting with lead volume. AquaRefined and direct to kettle lead combined into a standardized lead product. We will then progress to high purity grades of AquaRefined lead, and finally, produce specific lead alloys to JCI specification. These will consist of both lead recovered from grids and AquaRefined lead with alloying metals added to meet the alloy specifications required by customers. Our goal is to become an improved supplier of lead to JCI as well as others throughout the industry. Today, all AquaRefined lead produced is being melted in the refinery and cast into 2.5 tonne blocks as refined bullion. The bullion is an alloy of AquaRefined lead and priming lead bullion, previously purchased for the refinery start of the TRIC. We have now successfully sent one shipment 20 tonnes of bullion lead to JCI from our Reno facility and it is on route as we speak. Future shipments will continue to be bullion until we bleed out the priming led. Note, we expect to continue making shipments to JCI as production ramps.

Clearly, our partnership with JCI remains strong and in place. As you may recall, earlier in 2017, we secured a strategic relationship with JCI, which is the world's largest battery company. This relationship contemplates a thoughtful and phased rollout of AquaRefining across their led supply chain over time. We expect that Aqua Metals' role will be to provide the engineering and the supporting equipment as well as the AquaRefining modules to JCI. Our joint objective is to use the first implementation of AquaRefining to develop a blueprint of future implementations and the basis for our technology license.

We continue to work with their technical team on a number of fronts, and recently announced that we have extended the timeliness of our outlined equipment supply agreement by 1 year. The date to conclude negotiation and discussion on the development program will now be no later than April 30, 2019, and the date to enter into the development program no later than June 30, 2019.

Before going further, I'd like to turn the call over to our Interim CFO, Tom Murphy, who will walk you through the first quarter financials and recent changes to the management and Board of Directors, before turning it back to me for a list of milestones to track and closing remarks.

Thank you, Selwyn. In the first quarter of 2018, we recognized revenues of $1.7 million compared to $900,000 of revenue in the fourth quarter of 2017. This was the fourth consecutive quarter the company generated revenue with all the revenue during the period generated by the sale of plastics and lead compounds.

For the 3 months ended March 31, 2018, we had an operating loss of $7 million compared to an operating loss of $4.5 million in the first quarter of 2017. While we had higher revenues during the period, the current quarterly loss was primarily driven by low production at our TRIC facility, product mix and production ramp-up costs, primarily associated with installation of retrofit kits to the modules. In addition, we continue to invest in technology, developments and process improvements.

Net loss for the first quarter of 2018 was $7.5 million or $0.27 per diluted share compared to a net loss of $4.9 million or $0.26 per diluted share in the first quarter of 2017.

We have $17.5 million in cash and cash equivalents as of March 31, 2018. In the first quarter, the company received approximately $2.1 million from the underwriters exercising their overallotment option from the December 2017 capital raise. Capital expenditures were over $1.6 million, all for the plant in TRIC. For the second quarter, while we expect to see slightly less cash used in operating the plant, overall cash flow will be similar to first quarter due to the added costs associated with the proxy fight. In addition, we expect our CapEx will be in the $2 million to $2.5 million range. As we have discussed before, as we expand our business, we will need additional capital. As we increased our production in 2018, we believe that our operating results will improve as we ramp up production of our AquaRefining modules.

This concludes the financial section of the call. But before turning it back to Selwyn for closing remarks, I'd like to briefly touch on the recent changes to management and board of directors, as a result of the company's recently announced plan for CEO succession and process for board refreshment as well as our settlement with Kanen Wealth Management. As part of the process of implementing a plan for CEO succession and board refreshment, Stephen Clarke resigned as President, Chief Executive Officer and Chairman of the Board. The board also agreed to separate the roles of CEO and Board Chairman, and subsequently, elected Eric Prouty, an experienced sustainability focused analyst and successful business development consultant, as an Independent Director.

In February, we also engaged and authorized an executive search firm to conduct a comprehensive search for successor of CEO, which has been ongoing since such time.

In early May, we entered into a settlement agreement with Kanen Wealth Management to expand the board from 5 to 6 directors, all of which are independent. In conjunction, Aqua Metals appointed nominees Shariq Yosufzai and Sam Kapoor to the board. Mr. Yosufzai will serve as Aqua Metals' new Nonexecutive Chairman and lead Independent Director. Also, as part of the settlement, Steve Cotton, the company's former Chief Commercial Officer from January 2015 to June 2017, has rejoined Aqua Metals as the President. Selwyn Mould, who served briefly as the company's interim CEO has resigned from that position and will remain with Aqua Metals as Chief Operating Officer. Steve's appointment to Office of President and Selwyn's resignation as Interim CEO were effective immediately following today's filing of the company's first quarter Form 10-Q.

And finally, in April, Frank Knuettel was appointed as Chief Financial Officer. He will assume the role as of tomorrow, and I will step down. As a reminder, I came out of retirement in March and agreed to serve as Interim CFO until a replacement could be found during this transition period. Frank brings Aqua Metals extensive, strategic and operational, financial leadership with over 20 years of management and business experience in public and venture-backed firms. And we are very excited to have him on board. Having worked with Frank, for the last 3 weeks in transition, I am confident I will be leaving the position in very capable hands.

As previously announced, the company entered into a definitive settlement agreement with David L. Kanen and Kanen Wealth Management, LLC with respect to the solicitation of proxies by the Kanen Group in opposition to the election of the director candidates nominated by the company's board for election at the annual meeting. Pursuant to the settlement agreement, the Kanen Group has terminated its opposition solicitation and has withdrawn its nomination of opposition director candidates, previously submitted to the company and return for the right to name 2 directors and with the appointment of Steve Cotton as the company's President. The 6 director nominees named in the amended proxy statement include these 2 Kanen nominees and have all been approved and recommended by your board. The amended proxy and ballot are in the mail and shareholders of record date April 25 should receive them soon.

More information and detailed biographies and all the changes can be found in the company's SEC filings. 8-K of April 12 was Frank Knuettel appointment; 8-K of April 19 Steve Clarke's resignation and Eric Prouty appointment; and 8-K May 2, announcement of the settlement with Kanen Wealth Management, which includes appointment of Steve Cotton, Shariq Yosufzai and Sam Kapoor.

Changing hats for a minute. From CFO to shareholders. I believe the management and board changes strengthen the company as it moves around development stage into full commercialization. Change can sometimes seem to disquieting, but is almost an inevitable process where the company growing into maturity. I believe we, the shareholders, are in good hands moving forward.

Now I'll turn the call back to Selwyn.

Thank you, Tom. As noted earlier, we're satisfied with our progress to date and the continued derisking of our technology as we work to scale operations. That said, there are several milestones that we are working to deliver upon as we move through 2018 and beyond. Our ultimate goal of getting 16 AquaRefining modules running 24 hours a day is still our top priority. To accomplish this, milestones to track are as follows: getting the first 4 modules running for 24 hours a day; bringing new additional modules online in batches of 4 until all the 16 are running 24 hours a day; continued shipments of lead bullion blocks to partners, such as JCI; and production of pure lead blocks and shipment to JCI. Clearly, we expect our revenues to increase as we ramp up our operations.

Now before we move on to the Q&A portion of the call, I'd like to leave you with some thoughts. Overall, I would like to summarize by saying, we continue to make solid progress with the technology as shown by the 4 modules that are in production. Our relationships with key partners, such as JCI, remain strong. The fortification to the board and management structure will bring real benefits in the future. We will seek to provide more regular updates between earnings calls.

With those thoughts, we thank you for your interest in Aqua Metals and joining today's call. We are now ready to take questions.

(Operator Instructions) Our first question comes from Colin Rusch with Oppenheimer & Company.

Can you talk about a little bit about your expectations for ramp expense as we go through the second quarter and into the back half of the year? With the COGS running a little bit higher, I just want to understand kind of where you're at in terms of utilization and yield and then how we should think about that trend in as you go through the quarter and into the back half?

Well, I don't think in the past, we've gone into detail exactly on what our utilization and yields have been, so can't get really any more specific on that. Again, as we do ramp up and the modules are producing the AquaRefined lead, we will be able to start selling that. And so the product mix up to now has been -- up through the first quarter has been just lead compounds and plastics. And so we have started, made our first delivery of shipment to JCI with a lead bullion and that will continue. And so the lead products and the type of lead that we will be producing and selling will increase in value as the year progresses.

Okay. And then how should we think about OpEx as we go through the second quarter? Obviously, there's been some management changes. Is there any unusual items that we should think about in terms of the recognition of expenses in the second quarter?

Really, the unusual expenses that we will have in the second quarter is the cost of the proxy fight that we had with Kanen and was successfully negotiated and came to, I think, a good resolution for all concerned, but there were certainly cost -- some extraordinary cost associated with that. Other than that, there shouldn't be any other extraordinary expenses for the quarter.

And how much should we expect for the second quarter with that proxy fight?

We have -- in the proxy, we've said that total cost is $950,000 for the proxy fight. There was probably about $150,000 that was incurred in the first quarter. Well, actually, yes, it was in the first quarter, so the balance will be hit in the second quarter.

Our next question comes from Ilya Grozovsky with National Securities.

Just a couple of questions on the 4 modules. What are the gating factors to get the 4 modules up to 24 hours a day? And kind of what type of a time frame do you think that happens in?

At the movement, the -- we're working through training operators, so that we can put these things running 24 hours a day. That's the critical items at the moment. It's bringing these machines so they can operate with our standard operators 24 hours with no technical support and through the dye. So we expect that to happen reasonably quickly.

So I'm just not clear. In terms of the gating factors between if you decided to run it for 24 hours, let's say, next Monday, what needs to happen for that to happen? In other words, is it a headcount issue right now, you need to hire more people to run the full 3 shifts? Is it that the people or is it some technical question or is it just a level of comfort?

It's -- we -- I need to -- we need to train the operators to a sufficient standard, so that they can run the machines for 24 hours. It's -- we've recruited the people, they're undergoing training at this moment.

Okay, got it. And then if I look at the cash, so obviously, you guys did a raise. But if I look at the cash ending Q1 here at $17 million, that is the second lowest cash position that you guys have had in the last, probably, 3 years at this point. What's the thought process there in terms of -- you're -- obviously, Tom, you've said, you will need additional cash, but if you can kind of lay out the thought process in terms of timing, what level are you comfortable going down to?

Yes, we're currently evaluating multiple alternatives for the future growth of the business, and that includes strategic relationships and nondilutive forms of financing if we can -- if we need it. It's a process is -- we are continually evaluating that and that we have several alternatives that we have been talking with over the past -- and some of them a long period of time. But it's something that's been evaluated by the board and with the new members and with Steve Cotton coming onboard. But it's -- again, it's something we're evaluating. We don't have a definitive number that if it gets below that, we would definitely need money. I do think $10 million is kind of a base in my mind that we wouldn't want to get below.

Our next question is from Amit Dayal with H.C. Wainwright.

What's the timeline to get to the 16 modules? Is it going to take 6 months, a year? Where do you think you could be in terms of getting these first 4 modules up to 24 hours and then from there, does it accelerate? And how does this work or play out in terms of the ramp?

We want to bring the first 4 to 24 hours, which should happen in a reasonably short time frame as we train the staff. We then want to run those for a period of time to learn as many lessons as we can about the challenges of running 24 hours. And when we satisfy ourselves with that, we'll then extend that out to 8 and 12 and then 16. We don't -- certainly, don't expect it to take as long as 6 months.

So sooner than 6 months?

I would expect so.

Okay, perfect. Just my last one, I guess, is, your additional need for capital, just trying to get a sense of how much capital you will need if we are looking to ramp-up all 6 modules running 24 hours a day and at the same time, trying to fulfill whatever commitments we have with JCI within a 1-year period. How much capital do you see that you need obviously, some of this will come from cash flows for you guys as you ramp up. But any idea in terms of what your needs on that front are going to be?

We haven't given specific guidance on exact amounts that we may need. And so I hesitate to state anything at this point.

Our next question is from Bhakti Pavani with Euro Pacific Capital.

Just a quick question. While you guys are bringing the 16 or the remaining modules online, and hopefully, it is done by the end of Q2. Should we see production of AquaRefined lead, which is 40 tonnes immediately? Or do you think you would be able to produce some AquaRefined lead, while you're bringing this modules online?

We expect to move to producing the -- a 100% pure lead later this quarter as we sort of bleed out the priming lead from the first kettle. So we were gradually diluting that away, and we should be in the next month or so moving to a pure lead grade of.

We won't have -- we won't receive a premium for any AquaRefined lead in the second quarter, that wouldn't start until sometime in the third quarter.

Okay. One more from my end. Given that the price of lead has improved over the last year, internally, how has it -- I mean, have you guys projected taking into consideration, the price of lead increase? And how has it impacted your model on the operational profit and from that point?

Well, the -- what goes almost hand-in-hand with the increase in lead price is also the increase in price of the dead batteries that we're recycling. So there's, again, a little bit of a tail usually when it goes either way on pricing of one catching up with the other. But in our model, we try to use an -- used an average price so that we're trying to be as consistent as possible. There is volatility, but again, it's reflected in both the revenue and the cost of goods sold.

There are no further questions registered at this time. I would like to turn the call back over to Selwyn Mould for closing remarks.

Thank you, everyone, for joining us today. We look forward to updating you on our progress as we work to scale up operation at the world's first AquaRefining facility. Thank you.

This concludes today's conference call. Thank you for participating, and have a pleasant day.