Aqua Metals Inc (AQMS) 2018 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Aqua Metals Third Quarter 2018 Corporate Update Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Alison Ziegler, Managing Director of Darrow Associates. Please go ahead.

Thank you, operator. Welcome to Aqua Metals' third quarter 2018 conference call. Earlier this afternoon, Aqua Metals released financial results for the quarter ended September 30, 2018. This 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 Kathleen Dotson, VP of Finance and Controller; as well as the company's newly appointed Chief Financial Officer, Judd Merrill.

During today's call, management will be making forward-looking statements. Please refer to the company's quarterly report on Form 10-Q filed today 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.

And with that, I would like to turn the call over to Steve Cotton, President of Aqua Metals. Steve, go ahead.

Thanks, Alison. Good afternoon, and welcome. Since speaking to everyone back in August, we have made substantial progress moving commercial operations of our AquaRefinery forward. We recently announced near steady-state production of our initial 4 AquaRefining modules, with each module now capable of operating over 20 hours per day. We are currently rotating through the 4 modules we have commissioned and are running 1 to 2 modules at a time. From these experiences, we continue to make adjustments with the goal of increasing the number of hours per day any given module is run. In fact, on Monday of this week, we just completed the module run of over 4 days in steady-state based upon recent adjustments in operating parameters. This is in line with the 100-kilogram per hour parameters we have set for the modules and which would result in 2.3 to 2.4 metric tons per day per module. This also means that we have already progressed to measuring our runs in days rather than hours.

While we anticipate continued growth in module utilization and efficiencies in the coming weeks and months, we are laser-focused on completing the infrastructure and operational improvements to recover and recycle our chemical feedstock much more efficiently and thereby improve our contribution margin for AquaRefined lead. With Phase 1 testing complete, equipment installation is progressing to upgrade the pre-AquaRefining digestion in the concentrate production equipment that feeds the modules. We anticipate this will take us up to 75% towards our target for electrolyte recapture and bring us closer to positive contribution margin. We have also begun in-plant testing related to Phase 2, which we anticipate will recapture the remaining 25% among other benefits. Phase 2 remains on target for completion by the end of second quarter 2019.

Once we are conserving enough electrolyte, along with completing planned plant improvements to achieve a neutral to positive contribution margin expected by the end of the year or early Q1 2019, we will be positioned to scale the plant and bring additional modules online.

Turning to the numbers for a minute. Last quarter, we stated that operating time and production by weight of AquaRefined lead was expected to remain flat or even decline in the third quarter as a result of running fewer modules. However, I'm pleased to report that the improvements in module utilization and electrolyte production have offset the reduction in the number of modules we're running at any one time.

In the third quarter ended September 30, 2018, we recognized revenues of $1.2 million compared to sales of $0.6 million in the third quarter of 2017 and sales of $0.5 million in the second quarter of 2018. Contributing to the near doubling of sales in the quarter was the initiation of sales of AquaRefined lead, which represented 21% of total sales in the third quarter. There were no previous sales of pure AquaRefined lead prior to Q3 2018, and this marks a key transition to Aqua Metals deriving revenue from its own products.

In addition to sales of AquaRefined lead, we continue to sell metallic lead, lead compounds and plastics from the lead acid batteries in the quarter. During Q3, we have also made preparations to begin processing a portion of the metallic lead and have begun to commission the remaining 4 of our 6 kettles in the refining area. We anticipate the success of this planned program will unlock additional contribution margin in early 2019 by enabling us to finish a growing proportion of these materials in-house, thus realizing a continually improving margin and positioning us for earning a premium later in 2019 by refining alloys in-house.

I will now turn the floor over to Kathleen Dotson, our VP of Finance and Controller, to review our Q3 financials.

Thank you, Steve. For the 3 months ended September 30, 2018, we had an operating loss of $8.4 million compared to an operating loss of $5.8 million for the 3 months ended September 30, 2017. The third quarter of 2018 saw additional expenses associated with the expansion of the AquaRefining process. We reported a net loss of $9.3 million or negative $0.24 per diluted share in the third quarter 2018 compared to a net loss of $6.3 million or negative $0.31 per diluted share in the third quarter of 2017.

For the 9 months ended September 30, 2018, the company recognized revenue of $3.4 million and had an operating loss of $24.6 million compared to $1.2 million of revenue and an operating loss of $18.3 million in the prior year period. The net loss for the first 9 months of 2018 was $26.7 million or negative $0.82 per diluted share compared to a net loss of $19.5 million or negative $0.99 per diluted share for the first 9 months of 2017.

As of September 30, 2018, the company had $28.8 million in cash and cash equivalents. As noted in our last earnings call, we remain on target for overall capital expenditures in the second half of 2018 to be at or below the previously guided range of $4 million to $5 million. We continue to prioritize our capital expenditures to drive improved margins.

While our current burn rate is approximately $7 million per quarter, we continue to review operations and overhead with an eye to reducing our costs. In October, our corporate headquarters was relocated to McCarran, Nevada, at approximately 1/5 of the cost. We are in the process of seeking a tenant for the Alameda, California, facility and will record a liability for the present value of the remaining lease payments, less estimated sublease income, in the fourth quarter of 2018. Additionally, we will write off the net book value of our leasehold improvements of approximately $0.8 million during the fourth quarter of 2018. No significant restructuring charges were incurred as part of this move.

With that, I will turn it back to Steve.

Thanks, Kathleen. I would like to take this opportunity to publicly thank you for stepping up and doing such an excellent job assisting us throughout the third and fourth quarter and taking ownership of the SEC filings. Kathleen will also be available to help answer questions in the Q&A portion of today's call.

As most of you have hopefully seen, Tuesday, we announced the hiring of our new CFO. I'm pleased to introduce Judd Merrill. Before I ask Judd to say a few words, I want to relay how pleased both management and our board are to have found a CFO with direct metals manufacturing experience, local proximity to our AquaRefinery and just as important, a personal fit with our corporate culture. After a thoughtful search, we found and vetted Judd right here in our own backyard.

Judd is a CPA, with his MBA from University of Reno, and has over 10 years experience directly in metals and mining in various roles, including Corporate Controller, Corporate Secretary, Director of Finance and CFO. In Judd's most recent role at Klondex Mines, he was instrumental in their successful $0.5 billion exit to Hecla.

The entire team and I look forward to working with Judd and benefiting from the experience he brings to our finance, accounting functions, cash management, modeling and reporting. And we are confident that he will help drive our dialogue with investors as our business matures.

Judd?

Thanks, Steve. I'm delighted to join Aqua Metals at this key inflection point in the company's development. With my background in metals and mining, I look forward to hitting the ground running, to drive deep modeling, reporting and decision-making capabilities into Aqua Metals' maturing business process.

I was attracted to Aqua Metals given that it's both an opportunity to, again, be part of a growing enterprise, plus, it's a chance to be part of a revolutionary new way to make advanced metal to drive growth in the burgeoning energy storage industry with sustainability at its core. Throughout my interview process, I met with all key management and the entire board and believe that I'm surrounded and supported by talented people. I'm looking forward to working alongside the entire Aqua Metals team to achieve results for our shareholders.

Thanks, Judd. Happy to have you here, and we're all looking forward to working with you.

Before I open the call to your questions, I just want to reiterate the remarkable progress we have made in a short period of time. While there will always be challenges in scaling a first-of-its-kind facility, we couldn't be prouder of the harder work and dedication of our employees to get us to where we are today.

Our AquaRefining technology today is able to process up to 50% of the lead in each battery into soft high-purity lead, now exceeding 99.996-plus percent, which is above the requirements of our partners. We also have plans to process a growing proportion of the metallic lead we recover from breaking batteries. We are in the process of commissioning the remaining 4 of our already-purchased kettles for a total of 6 as a key part of our project to enable our capability to process this material.

We also recently announced the commissioning of our ingot line and are now shipping AquaRefined lead in ingot form directly to battery manufacturing facilities. By increasing the proportion of finished lead, for which we can receive a premium over LME, we have the potential to unlock further contribution margin and improve plant economics.

Partnerships are being strengthened, and new partnership potential is growing against the backdrop of corporate and government support for green technology and a growing demand for high-purity lead to improve product performance and life cycles. We are working with prospective lead buyers in and beyond the battery industry, who are seeking ultrapure lead, for which we could receive even higher premiums.

We are executing on our capital projects that will allow us to pursue margin enhancement and further position us to scale production. And as we continue our commercialization efforts, our 12-month plan also includes the pursuit and evaluation of strategic relationships, including licensing or co-processing agreements with existing partners and the licensing of our technology and the provisioning of equipment and services to other potential strategic partners. These are expected to add higher margin fees and services to our revenue mix over time.

Regarding Johnson Controls, since June, we've been making and regularly shipping AquaRefined lead that exceeds their specifications, and we have made major progress towards formal vendor approval, which we expect to have completed very soon. We continue to work closely with their team, and as previously announced, we have extended the time line to April 2019 for conclusion of its development agreement and are moving forward with those discussions with the intention of completing this agreement on time.

On a final note, we continue to make good progress with the prosecution of our patent portfolio. And as of today, we have 13 grants and allowances in 20 different jurisdictions and have approximately 90 patent applications pending. Thank you for your continued interest in Aqua Metals. We are now ready to take questions.

(Operator Instructions) Your first question comes from Colin Rusch with Oppenheimer & Co.

Can you give us an update on where you're at in terms of procuring the equipment and installing it for the 2 phases of the electrolyte and chemical reprocessing?

Colin, thanks for the question. So yes, the procurement of the equipment is basically all on the floor for Phase I. And we've been operating and testing much of that equipment, and some of it is getting its final installation with electrical connectivity, et cetera. So we believe that we have everything in place and in-house to accomplish the project. It's now about project management and the labor side of it to get it where it needs to be.

And then on Phase 2, we have the prototype piece of equipment on the floor. And I shouldn't say prototype, it's a smaller version of the full-size version. And it's effectively allowing us to test and finalize the spec for the full-size piece of equipment that has a little bit of a lead time associated with it. We expect to finalize the specifications and finalize the bill of materials for that equipment. And that has a little bit of a long lead time, which is why it pushes out just a little bit into 2019. But we established the process, and it's just a matter now of finalizing what the equipment will be for that part of that Phase 2 implementation. Hope that answers your question.

Yes. And then the second question is really about, now that you're selling some of the AquaRefined lead, have you been able to take samples of that and send it out to incremental customers and start looking at additional customers that may hedge out some of your customer concentration risk as you ramp up?

Yes. As a matter of fact, so the samples are going out today. So we're consistently sharing samples with various players in the industry, both being battery manufacturers as well as non-battery applications. So we're ensuring that we go through a process with a multitude of players in the marketplace to see where we end up with the value and the premium that we can get for the AquaRefined lead due to its purity and attributes.

Your next question comes from Ilya Grozovsky with National Securities.

It's Ilya Grozovsky. Steve, on the recapture, you said that you expect Phase 1 to be done by the end of this year, the beginning of next quarter. Can you just kind of give us a little bit more color on the progress? Is it in a linear progress? Or is it more of a step function? And kind of where are you relative to that target?

Yes. So the recapture involves a few different pieces of equipment. There's a couple of areas that allow us to have continuous versus batch process. And that's substituting a stirred-tank reactor with a paddle mixer with continuous flow of the material, a centrifuge. And a centrifuge may sound scary, but everybody has a centrifuge in their house, it's called a washing machine. And so the centrifuge has tested well, and that adds value to what we're doing.

And then there's a special filter press that has a different kind of a membrane in it from our learnings of operating the original filter press that we had. And that's been assembled and will begin to be tested. So that will be another big, probably the biggest one of those 3 in terms of its impact on Phase 1. So those are the 3 areas of that phase that help you -- hopefully illustrate for you a little bit more of where we are with it and then the impact.

And also, just in terms of the progress, how much more do you have to do in order to get to that goal?

Yes. So for example, the filter press, as I mentioned a little earlier, there are some electrical requirement that we have to get to really have that thing running as we'd like it to. And there's concrete mounting work that's been started and is completing. So it's really a matter of just a project management plan of installation and commissioning of equipment that has known factors and known quantities.

We're not inventing anything here. We're deploying typical things like filter press, centrifuge and paddle mixer, that just allow us to recover the water and recover the electrolyte in a better fashion. So we feel confident in the schedule. Although, as I said last quarter, and it remains on schedule this quarter, it's tight to get it done by the end of the year, but we're confident that we've got the right team in place to make that happen.

Your next question comes from Bhakti Pavani with Alliance Global Partners.

I just wanted to understand, in terms of the third quarter production number, I believe 21% of the sales came from AquaRefined lead. What was kind of the utilization rate of the 4 modules throughout the third quarter?

Yes. So because we shifted to 24-hour-a-day by 7-day-a-week staffed operations and have been running the machines, we just recently announced that we were getting 20-plus hours per machine and we've also announced that we were capping the production of electrolyte until we get the positive contribution margin. That means if you're running machines, you need to run less of them because they make more lead and they consume the concentrate that gets produced for that day. So we've been running 1 to 2 modules per day, typically, in that staffed 7-by-24 function.

And for example, as I just stated in the call, we had a record run, which was quite a significant improvement of multi-days versus a matter of hours on the machines. And that is a very positive step forward for us. And we feel that, that is going to make a difference to why would that make more lead. So that's why we're running less modules, getting the learnings, making minor improvements, nothing major, but minor improvements, and realizing the benefits of those improvements while we remodel the area that does the electrolyte production itself. Does that answer...

No. That does answer. I just wanted to understand. You just reached operating these 4 modules over 4 days a week. How long do you intend to continue running these modules at over 4 days a week until you start running these modules throughout the month or throughout the quarter?

So we're running the modules 7 days a week. So we started with 24 by 4. And we've been running them 7 days a week, 24/7. So that's already happened.

Got it. And then should we anticipate -- or how long do you intend to test these modules before you bring other modules online?

Yes. So the 4 modules that we're rotating between and making minor revisions and getting improved, results in terms of production quantities and hours run and all that, has been happening with the rotating of those 4 modules. We have modules 5 through 8. I'd call it on deck to be the first group that we begin to commission. In fact, we might run module 5 even in the next week or so.

So we're preparing for -- moving forward with modules 5 to 8, but don't want to be running all of them until we get that positive contribution margin. And as we scale the modules, it is modular, so we can scale them one module at a time, but we'll probably scale in groups of 4 modules. So there's 2 trains, each train has 2 groups of 4 modules. So 25% of the plant at a time, roughly.

Got it. And just one last one with regards to the JCI agreement. You did say that the develop -- the agreement has been extended until April 2019. Just kind of wondering about that time lag. Once the agreement is complete, and let's say, JCI intends to move forward, when do you think would you guys be able to execute on your tolling arrangement and provide them those AquaRefined modules?

That's going to be dependent upon project plan and schedules. The development agreement, we're still confident we can make great progress and get -- between now and April and get the agreement done by April, but that's the agreement part. Remember, we have an agreement to agree on how that development will look.

So we've already chosen a site, and we'll be conducting site visits and working through various engineering elements of what the scope is of activities that we'll be doing in that facility. And we'll put together a project plan, and probably, when we get that agreement finalized, which we believe will be in April, we'll be able to share more information of what that schedule looks like.

(Operator Instructions) Your next question comes from Steve Kruger with Foresight Investing.

It sounds like you've made a tremendous amount of progress on the technical side and getting the process to work. The -- I guess, the big question that remains for all of us is whether or not once you've made all the process improvements and you have all the modules up and running and the electrolyte capture are all squared away, what do you think the operating margin is going to look like for the plant?

Yes. So the plant-level operating margin, we believe we will have a positive operating margin for the plant. And as I've mentioned, we're also working on improving the margin from, what we've already stated, low teens, kind of to 20, to potentially greater than that as we get better and better at processing the lead that does not go through AquaRefining.

Remember, that 50% of the lead in the batteries is metallic lead that we're selling at a discount from the London Metal Exchange price and having to pay higher transportation fees to get that material to a facility that can process it, which is a traditional battery recycling facility with a smelting process. As we improve the quantities of that material that we can process in-house, we believe we could improve those margins. But there can be no guarantee that we will have that complete as quickly as we would like. But we feel very confident as we get into Q1 of next year, we will be able to report that we are making a substantive progress on that front, and that will allow us to increase those margins further.

So looking out 2 or 3 years, if you succeed, if you achieve those goals, is it reasonable to think about operating margin being in the 15% to 20% vicinity?

Yes. And higher. And especially, remember that we also protected this plant for the ability to double the number of AquaRefining modules without having to double the amount of capital investments, things like the battery breaker and the 6 kettles that we're commissioning, and we've already purchased towards commissioning 4 of the 6 to do that, that metallic lead I was mentioning. And that will also improve the margins significantly for the plant.

There's other initiatives that will also improve the margins that should not be counted out by any means, and that is lowering the cost of our feedstock, which we have great initiatives going there. We expect we'll be able to make good progress on that element as well because the cost of feedstock does impact what your ultimate margins look like and other initiatives that we're engaged in to do margin improvement. But we're focused mostly now on getting positive contribution margin and scaling.

When do you think -- Steve, what's the schedule look like for completing the ramp of the first 16 modules? When -- if all goes well, when do you think you'll have them all up and running?

It's more condition-based than time-based. And getting through the condition of getting the positive contribution margin gives us the ability to begin scaling. As I said before, in a first-of-a-kind plant, you don't know what you don't know, and there's going to be hurdles as we scale. And we'll have some step functions in our scaling most likely, and I also said before, if I predicted the date that we'll be at 16 modules, I can assure you I'd be wrong, by either picking a date too early or picking a date too late. So I'm being very careful about the time line, but our overall goal and assumption is that we will be able to scale to the full plant capacity during 2019.

Okay. And how about supply of feedstock? Do you anticipate any difficulties? And are all the arrangements in place at this point to provide you with an assured supply of recycled batteries to allow the plant to run at full capacity?

Yes. We -- we're very confident in our feedstock surety of supply, with both Interstate Batteries and Battery Systems Inc., which is our next-door neighbor with the 200,000 square-foot battery distribution center warehouse. Our relationship with Interstate Batteries as we reported last quarter, we've revamped that and even worked with Interstate Batteries to improve the cost of our feedstock. And we're working with them as we continue to prepare for the ramp.

So we have surety of supply, but we're also working on diversity of supply and cost of supply. So we have been able to source feedstock from other sources, from various initiatives, from data center batteries to batteries with other stationary applications and telecom and even power station and railroad, use of mining, which is big around here, et cetera. And that folding into the mix of those types of batteries gives us that diversity, but also gives us some additional benefits of leveraging the cost of our feedstock down to a lower basis, and we'll continue to drive through that as we progress.

Understood. You're going through a massive learning curve right now. In my understanding, from all you've said, is that you'd like to get pretty much all the way or most of the way down the learning curve before you start ramping up with additional modules.

Is it reasonable to think that once you start ramping to modules 5, 6, 7, 8 and so forth, that you will have come down pretty much all the way or much of the -- most of the way down the learning curve so that the pace at which you're able to ramp once you start with module 5 and through 16 is going to be just pretty straightforward, pretty linear, without much more learning curve?

Yes, yes. Except you don't know what you don't know. And I do believe that, holding aside if we run into a hurdle here or there, that as we do groups of modules, we'll learn how to do the scaling better the next time. And then in each increment of the scaling, holding all other things equal, we should be faster and more efficient at the scaling of the plant as we learn how to scale the plant.

(Operator Instructions) Your next question comes from John Ziegelman with Wolverine Asset Management.

Just ironically, I joined late so I apologize for maybe asking something you've already covered, but can you tell us for the quarter, how much cash you guys burned?

Yes. I'll have Kathleen answer that.

For the quarter, we burned about $6 million in cash.

Got it. And again, I don't know if either of you can answer it or will answer it, but it's a bit of a follow-on to what the last caller asked, but differently. Given I think I saw $28 million on your balance sheet at September 30 and a $6 million burn, and then your statement that you guys will kind of get all your modules up and running in 2019, do you have enough cash? Do you have enough cushion? And whatever color you can give us on that would be helpful.

Sure. The cash burn, we believe, will continue for this quarter as we continue to do the CapEx improvements. But the quality of the burn is high because it's durable goods that we're putting in, that were going to help us achieve the positive contribution margin. And then as we begin to achieve positive contribution margin, that should help our capital position as we begin to manufacture positive contribution margin.

So the plan is that as we get into follow-on quarters, that we would be able to reduce our cash burn with that and other types of initiatives. And we've already done a lot of cost savings initiatives by relocating our Alameda facility to McCarran, Nevada, and saving about 500% on the rent and real estate costs. And a lot of other initiatives that we've done in terms of the way we procure materials, we've added a lot of specification to that to get multiple bids from multiple vendors and establish better practices on a go-forward basis as we continue to need equipment.

So we feel good about our cash position and runway route for our plans for 2019. And if you just divide the $6 million burn into the remaining cash, that gives us plenty of runway to feel comfortable with where we are.

That is all the time we have for question-and-answer today. I would now like to hand the conference back over to Mr. Scott (sic) [Steve] Cotton for closing remarks.

Well, thank you, operator. Thank you, everybody, for your time today, and we appreciate your support and patience as we move beyond demonstration and prepare to scale our operation. As I hope you can tell, we're all very excited about the opportunity for Aqua Metals. A reminder that this is a $20 plus billion market, and we do have the potential to target 50% of it today by focusing on our recycling just the lead paste in a greener manner with better economics and product performance for everybody who would use it.

A final word also that I feel is important on people and culture. The organizational capability of the company and the teamwork required to move as fast as we are does require a foundation of good people, trust and support that encourages and rewards this can-do type of approach that we've been working with. We are creating a corporate culture that values teamwork, and we've instituted performance and reward mechanisms recently and we've also promoted from within whenever possible. A company is really, only in my mind, as good as its people. And every day, I really am proud of the people that I work alongside here with Aqua Metals as we continue to grow and improve our team and our capabilities.

So thanks, everyone, for your participation, and we do look forward to updating you as we make further progress.

That concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.