Aqua Metals, Inc.
Q3 2018 Earnings Call Transcript

Published: 8 Nov 2018

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Aqua Metals Third Quarter 2018 Corporate Update Conference Call. As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask question. [Operator Instructions] I would now like to hand the conference over to Alison Ziegler, Managing Director of Darrow Associates. Please go ahead.

[Alison Ziegler:]

Thank you, operator. Welcome to the 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’d like to turn the call over to Steve Cotton, President of Aqua Metals. Steve, go ahead.

[Steve Cotton:]

Thanks, Alison. Good afternoon and welcome. In 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 four AquaRefining modules, with each module now capable of operating over 20 hours per day. We are currently rotating through the four modules we have commissioned and are running one to two 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 four days in steady state based upon recent adjustments and operating parameters. This is in line with the 100 kilogram per hour parameters we have set for the modules in 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 One testing complete, equipment installation is progressing to upgrade the pre-op refining digestion in the concentrate production equipment that feeds the modules. We anticipate this will take us to 75% towards our target for electrolyte recapture and bring us closer to positive contribution margin. We've also begun implant testing related to Phase Two, which we anticipate will recapture the remaining 25% among other benefits. Phase Two remains on target for completion by the end of second quarter of 2019. Once we are conserving enough electrolytes 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 declined 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 are 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 continued 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 four of our six 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.

[Kathleen Dotson:]

Thank you, Steve. For the three 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 three 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 $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 nine months ended September 30, 2018, the company recognized revenue of $3.4 million and had an operating loss of $24.6 million compared $1.2 million of revenue and an operating loss of $18.3 million in the prior year period. The net loss for the first nine months of 2018 was $26.7 million or negative $0.82 per diluted share compared to a net loss of $19.5 or negative $0.99 per diluted share for the first nine 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 at 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 one fifth of the cost. We are in the process of seeking a tenant for the Alameda, California facility and we'll 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 news. With that, I will turn it back to Steve.

[Steve Cotton:]

Thanks, Kathleen. I would like to take this opportunity to publicly thank you for stepping up in 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 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 found the 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 embedded judge right here in our own backyard. Judd is the 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. And Judd’s just 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 and accounting functions, cast management, modeling and reporting and we are confident that he will help to drive our dialogue with investors as our business matures. Judd?

[Judd Merrill:]

Thanks, Steve. I am 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.

[Steve Cotton:]

Thanks Jed. Happy to have you here and we're all looking forward to working with you. Before I opened the call to your questions, I just want to reiterate the remarkable progress we've made in a short period of time. While there will always be challenges in scaling a first of its kind facility, we could be proud of the harder work and dedication 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've recovered from breaking batteries. We are in the process of commissioning the remaining four of our already purchased kettles for a total of six 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 ultra-pure 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 have 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. As previously announced we have extended the timeline to April 2019 for conclusion of a 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:]

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Colin Rusch with Oppenheimer Company. Please go ahead.

[Colin Rusch:]

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

[Steve Cotton:]

Colin thanks for the question. So, yeah, the procurement of the equipment is basically all on the floor for Phase One and we've been operating and testing a bunch of that equipment and some of it is getting its final installation with electrical conductivity et cetera. So we believe that we have everything in place in and in house to accomplish the project. It's now about project management in the labor side of it to get it where it needs to be. And then on Phase Two, we have the prototype piece of equipment on the floor and I shouldn't say prototype, I would say 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 finalized the bill of materials for that equipment and that has a little bit of a long lead time, which is why it pushes out 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 Two implementation. Hope that answers your question.

[Colin Rusch:]

Yeah, 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?

[Steve Cotton:]

Yeah, as a matter of fact, a set of 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 the 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.

[Colin Rusch:]

All right, perfect. I'll hop back in the queue. Thanks.

[Operator:]

Your next question comes from Ilya Grozovsky with National Securities.

[Ilya Grozovsky:]

Thanks. It’s Ilya Grozovsky. Steve, on the recapture, you said that, you expect Phase One 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 been a linear progress? Or is it more of a step function and kind of where are you relative to that target?

[Steve Cotton:]

Yeah, so the recapture involved a few different pieces of equipment. There's a couple of areas that allow us to have the continuous versus batch process and that’s substituting a stirred tank reactor with a paddle mixer with continuous flow of the material of 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 and it from our learnings of operating the original filter press that we had. And that's been assembles and will begin to be tested. So that will be another big, probably the biggest one of those three in terms of its impact on Phase One. So those are those the three areas on that phase to help you – hopefully illustrate for you a little bit more of where we are with it and the impact.

[Ilya Grozovsky:]

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

[Steve Cotton:]

Yeah, so for example, the filter press, as I mentioned a little earlier, there is some electrical requirement that we have to get to – really you have that thing running as we, as we'd like it to And there's a 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, 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 it's – as I've said last quarter and it remains on schedule this quarter is 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.

[Ilya Grozovsky:]

Great, thank you.

[Operator:]

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

[Bhakti Pavani:]

Good afternoon guys.

[Steve Cotton:]

Hi, Bhakti.

[Bhakti Pavani:]

Just wanted to understand, you know, 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 four modules through all of the third quarter?

[Steve Cotton:]

Yeah, so because we shifted to 24 hour a day by seven day a week staffed operations and have been running the machines and we have just recently announced that we were getting 20 plus hours per machine. And we've also announced that we were tapping 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 less and they consume the concentrate that was produced for that day. So we've been running one to two modules per day typically and that staffed 7/24 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 as well, but that made more lead. So that's why we're running less modules, getting the learnings, make minor improvements, nothing major but minor improvements and realizing the benefits of those improvements while we remodeled the area that does the electrolyte production itself. Does that answers…

[Bhakti Pavani:]

Got it. No, no, that does answer. I just wanted to understand, you just reached operating, this whole modules over four days a week, how long do you intend to continue running this modules at over four days a week until you start running this modules throughout the month or throughout the quarter?

[Steve Cotton:]

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

[Bhakti Pavani:]

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

[Steve Cotton:]

Yeah, so the four modules that were rotating between and making minor revisions and getting improved results in terms production quantities now which run and all that has been happening with the rotating those four modules. We have modules five through eight. I call it on deck to be the first group that we begin to commission it back. We might run module five even in the next week or so. So we're preparing towards – moving forward with modules five to eight, but don't want to be running all of them until we get that positive contribution margin. And as we scaled the modules, it is modular so we can scale them one modular at a time, but we'll probably scale in groups of four modules. So, there's two trains, each train has two groups of four modules. So 25% of the client at the time roughly.

[Bhakti Pavani:]

Go it. And just one last one with regards to JCI agreement, you did say that the agreement has been extended until April 2019. Just kind of a wondering about the time lag, once the agreement is complete or – and let's say JCI intends to move forward. When do you think? Or would you guys be able to execute on your tolling arrangement – with AquaRefining modules?

[Steve Cotton:]

That's going to be dependent upon project plan and schedules that the development agreement we're still confident we can make great progress 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 the 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 at 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.

[Bhakti Pavani:]

Okay, perfect. That's it from my side. Thank you very much.

[Steve Cotton:]

Thanks.

[Operator:]

[Operator Instructions] Your next question comes from Steve Kruger with Foresight Investing.

[Steve Kruger:]

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

[Steve Cotton:]

Yes, so the plant level operating margin we believe we will have a positive operating margin for the plant. And as I mentioned, we're also working on improving the margin from a – 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 metallic lead that we're selling at a discount from the London Metals Exchange price and having to pay higher transportation fees to get that material to a facility they can process it, which is a traditional battery recycling facility with the 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 substantial progress on that front and that will allow us to increase those margins further.

[Steve Kruger:]

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

[Steve Cotton:]

Yes and higher.

[Steve Kruger:]

Okay, okay.

[Steve Cotton:]

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 investment, you know, things like the battery breaker in the 6 kettles that we're commissioning and we've already purchased more just commissioning four of the six 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 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 costs of feedstock does impact what your ultimate margins look like and other initiatives that we're engaged in to do margin improvement. So we're focused mostly now on getting positive contribution margin and scaling…

[Steve Kruger:]

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

[Steve Cotton:]

It's more conditioned 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, it first of 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 and our scaling most likely and as I've also said before if I predicted the date it will be at 16 modules, I can assure you I'd be wrong by either picking a date too earlier or picking a day too late. So I'm being very careful about the timeline, but our overall goal and assumption is that we will be able to scale to the full plant capacity during 2019.

[Steve Kruger:]

Okay. And how about supply of feedstock? Do you anticipate any difficulties or 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?

[Steve Cotton:]

Yeah, we're very confident in our feedstock surety of supply with both Interstate Batteries and Battery Systems Inc which is our next door neighbor was 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 with 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 a feedstock from other sources from various initiatives, from data center batteries to have batteries of other stationary application and telecom and even power stations and railroad use in mining, which is big around here, et cetera. And that folding into the mix 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 strive to do that in progress.

[Steve Kruger:]

Okay. You're going through a massive learning curve right now and 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 up to module five, six, seven, eight and so forth that you will have come down pretty much all the way or much of the – most of the ways down the learning curve, so that the pace at which we're able to ramp once you start with module five and through 16 is going to be pretty straightforward, pretty linear without a much more learning curve.

[Steve Cotton:]

Yeah, yeah, 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.

[Steve Kruger:]

Okay, thanks. That's all for me.

[Steve Cotton:]

Great. Thanks, Steve.

[Operator:]

[Operator Instructions] Your next question comes from John Ziegelman with Wolverine Asset Management.

[John Ziegelman:]

Hey, Steve.

[Steve Cotton:]

Hey, John.

[John Ziegelman:]

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?

[Steve Cotton:]

Yeah, I'll have Kathleen to answer that.

[Kathleen Dotson:]

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

[John Ziegelman:]

Got it. And again, I don't know if either of you can't 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 cushions? And whatever color you can give us on that would be helpful.

[Steve Cotton:]

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 good that we're putting in that we're going to help us to achieve the positive contribution margin. And then as we begin to achieve positive contribution margin [indiscernible] position as we begin to manufacture positive contribution margin. So the plan is that as we get in 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 sophistication of 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 for our plans for 2019. And if you just divide the $6 million burn into the remaining cash, that gives us plenty of run way to feel comfortable with where we are.

[John Ziegelman:]

Sounds great. Thank you very much. That’s it.

[Steve Cotton:]

Great. Thanks, John.

[Operator:]

That’s all the time we had for question-and-answer today. I would now like to hand the conference back over to Mr. Cotton for closing remarks.

[Steve Cotton:]

Well, thank you, operator. Thank you everybody for your time today and we appreciate your support and patience as we move beyond demonstration and prepared to scale our operation. As I hope you can tell, we're all very excited about the opportunity for Aqua Metals. And a reminder that this is a 20 plus billion dollar 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 in culture, the organizational capability of the company and the team required to move as fast as we are, it does require a foundation of good people, trust and support that encourages and rewards that 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. We do look forward to updating you as we make further progress.

[Operator:]

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