Aqua Metals, Inc. (AQMS) Q1 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Aqua Metals First Quarter 2018 Corporate Update Conference 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 of MZ North America, Aqua Metal’s 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. The release is available on the Investor 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 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 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 did 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 has not generated any significant revenue to date, thus subjecting the Company to all of the risks inherent in a pre-revenue start-up. The risk said 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 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 and 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 the 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 unanticipated 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 this call. And with that, I'll turn the call over to you, Selwyn.

Thanks, Greg. Joining me 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 over view of the history of Aqua Metals for those of you who maybe new to this 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 Clarke, 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 the planned board refreshment and CEO’s succession that was planned since late 2017. As you may know, I am the Chief Operating Officer of Aqua Metals and one of the six founders. As some of you will know the history of Aqua Metals is quite extra ordinary, starting with six guys in the 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 investment and received funding. With the initial funding, we were able to design and build a full scale 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 six inventors named on the patent. The success of our full scale unit enabled those to complete an IPO in July 2015 and to break ground in our first factory shortly after in McCarren, Nevada which is in the Tahoe Reno Industrial Center of TRIC. In 2016, we began approaching factories and today we sit on the verge of delivering the revolutionary technology that the lead recycling world is eagerly awaiting due to its economic and environmental benefits. In less than three years, we’ve gone from sketches in the plan to building the world’s first AquaRefining facility. We have applied for and being granted operating permits for that facility and have filed the numerous patent applications drawn to the AquaRefining Process that covers various aspects of methods, production intermediates and devices. Seven distinct families of patent applications have been filed totaling 90 patent applications. As of today, Aqua Metals has secured patent in seven jurisdiction 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 continue to face challenges and work 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 one electrolyzer during the remainder of December 2017. After the concept was validated, the solution was expanded to a full module of six electrolysers. The modified module was operated during the second half of January and throughout February. This included drilling 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 eroded and then the process of installing the modifications on the other modules began. So, where are we today? During April or in early May, we brought our first four modules on line and transferred them one by one from the control of the technical team into production. To do that features the modules has gone through the conditioning period supervised by the Aqua Metals technical team before moving to production. Today, we have four 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 hours operations with four 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 discovered that by initially operating four modules that 24 hours a day we would 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 outflow. This is an important point I’d like to touch on a bit more. There is no doubt that it was tempting to move directly to operating 16 modules on one shift. However, we realize 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 also what an obviously good idea it was given the numerous benefit. It maximized lead production. It’s more efficient, starting, stopping lead each take three hours a shift, therefore a single 8 hour shift only gives 5 effective production hours, running non-stop to 24 hours maximizes effective production app. For example, even if we start and stop once we still achieve 21 effective production app. Four modules running for 24 hour activity produced more than 60 modules on one shift. Mathematically, 16 modules by five hours gives 80 effective production hours and four modules b y 24 hours gives 96 hours or even 84 effective production hours if we allow for one stop, start occasionally. Furthermore, real learning comes with its operating extended hours. AquaRefining is a continuous process and 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 the 24 hour production team established, it will be easier to add additional modules into production. So, as I stated we have four modules up in running on a single shift and we are working to move those to 24 hour operation. Once we are satisfied with the operations of the first four modules and the supporting plant, we will bring additional modules online in batches of four until all 16 modules are fully operational. One of the beauties of our technology is that it has 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 upto race and supporting reliable. These processes of course include a 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 product as well as recruiting and training staff. It certainly isn’t rocket sized that everything needs to work reliably and be synchronized. We remain very confident in our ability to feed 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 four 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 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 consists of both lead recovered from grids and AquaRefined layer that alloy and 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 ton 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 now successfully sent one shipment 20 tons 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 bullied out the timing lead. Note that 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 indeed the world’s largest battery company. This relationship contemplates the thoughtful and phased rollout of AquaRefining across their lead 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 or future implementation and the basis for our technology and licensing. We continue to work with their technical team on a number of products and recently announced that we have extended the timeliness of our outlined equipment supply agreements by one year. The date to conclusion negotiation and discussion on the development program were now being 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 three 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 lower production at our current facility, product mix and production ramp up cost primarily associated with installation of retrofit piston and 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 had $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 raised. 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 the first quarter due to the added cost associated with the proxy fights. 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 increase our production in 2018, we believe that our operating results will improve as we ramp our production of our AquaRefining module. 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 director as a result of the company’s recently announced plan for CEO’s succession in process for board refreshment as well as our settlement with Kanen Wealth Management. As far as the process of implementing a plan for CEO’s succession and board refreshment, Steven 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 experience 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 the comprehensive search for successor 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 five to six directors all of which are independent. In conjunction, Aqua Metals appointed Kanen nominees, Shariq Yosufzai and Sam Kapoor to the board. Shariq Yosufzai will serve as Aqua Metals' new Non-Executive 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 appointments to office of President and Selwyn’s resignation as Interim CEO were effective immediately following today’s filing of the Company’s first quarter on 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 the Interim CFO until a replacement could be found during those transition periods. Frank brings Aqua Metals extensive, strategic and operational financial leadership with over 20 years of management and business experience in public and venture back firms. And we are very excited to have him on board. Having worked with Frank for the last three 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 proxy’s by the Kanen Group into 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’s felicitation and has withdrawn its nomination of opposition director candidates previously submitted to the company and return for the right to name new directors and with the appointment of Steve Cotton as the Company’s President. The six director nominees named in the amended proxy statement include these two 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 not all the changes can be found in the Company’s SEC filings. 8-K is [ph] April 12th was Frank Knuettel appointment, 8-K of April 19th Steve Clarke’s resignation and Eric Prouty appointment and 8-K on May 2nd 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 from development stage into full commercialization. Change can sometime seems disquieting but it 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 operation. That said, there are several milestones that we are working to deliver on as we move through 2019 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 follow; getting the first four modules running for 24 hours a day, bringing new additional modules online in batches of four into total 16 running 24 hours a day. Continued shipments of lead bullion blocks to partners such as JCI, and production of pure lead blocks and shipments to JCI. Clearly, we expect our revenues do increase as we ramp of our operation. 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 four 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.

Thank you. We will now conduct a question and answer session. [Operator Instructions] Our first question comes from Colin Rusch with Oppenheimer Company. Please go ahead.

Thanks so much, guys. Can you talk a little bit about your expectations for ramp expenses as we go through the second quarter and into the back half of the year? With the COGS running a little bit higher, just want to understand kind of where you at in terms of utilization in yield and how we should think about that trending as we 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 are utilization in yields have been. So I can't get really any more specific on that. Again as we do ramp up and the modules are producing, the AquaRefined lead that we will be able to start selling that. So the product mix up to now have been up through the first quarter has been just lead compounds and plastics. And so we have started made our first deliver shipments to JCI with lead bullion and that will continue. And so the lead products and type of lead that we will be producing and selling will increase in values as the year progresses.

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

Really, the unusual expense that we will have in the second quarter is the cost of the proxy fight that we have with Kanen and was successfully negotiated and came to – I think a good resolution for all concerns, but there were certainly cost – 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's fight. There was probably about a 150,000 of that was incurred in the first quarter.

Okay.

Yes. It was in the first quarter. So the balance will be hit in the second quarter.

Thanks a lot. Thanks so much guys.

Thank you.

Our next question comes from Ilya Grozovsky with National Securities. Please go ahead.

Thanks guys. Thanks. Just a couple of questions on the four modules; what are the gating factors to get the four modules up to 24 hours a day, and kind of what type of a timeframe do you think that happens in?

At the moment we are working through training operators, so that we can put these things to 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 day. 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? Another word is it a headcount issue right now. You need to hire more people to run the full three shift? Is it the people or is it some technical question or is it just a level of comfort?

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

Got it. And then if I look at the cash, so obviously you guys did raise. But if I look at the cash at ending Q1 here at $17 million. That is the second lowest cash position that you guys have had in the last probably three years at this point. What's the thought process there in terms of – you obviously, Tom, you said you will need additional cash, but if you can kind of layout the thought process in terms of timing; what level are you comfortable going down to? Thanks.

Yes. We're currently evaluating multiple alternatives for the future growth of the business and that includes strategic relationships and non-dilutive forms of financing if we can – if we need it. It’s a process that 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 its' something that's been evaluated by the Board and with the new members and with Steve Cotton coming on board, but it's – again its 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.

Okay, great. Thank you. I'll pass it on.

Okay.

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

Thank you. What's the timeline to get to the 16 module? Is it going to take six months or year? Where do you think you could be in terms of getting these first four modules up to 24 hours? And then from there does it accelerate, like how do these works or play out in terms of the ramp?

We want to bring the first four to 24 hours which should happen in a relatively short timeframe as we join the stuff. We didn't want to run those for 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 will then extend that out to eight and 12 and then 16. We don't – certainly don't expect to take as long as six months.

So sooner than six months?

I would expect so.

Okay, perfect. My last 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 six modules running 24 hours a day, and at the same time trying to fulfill whatever commitments we have in JCI within a one year period. How much capital do you see that you need, obviously some of this will come from cash flows 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?

All right. I'll make sure that I get back in the queue and follow-up offline.

Thank you.

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

Good afternoon, guys.

Good afternoon.

Just a quick question, while you going for bringing the 16 or the remaining modules on line and hopefully, it is done by Q2. Should we see a production of AquaRefined lead which is 40 tonnes immediately or do you think you would be able to produce some AquaRefined lead while you are bringing these modules on line?

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

We don't have – we won't receive a premium for any AquaRefined lead in the second quarter. That wouldn't start until some time in the third quarter.

Okay. One more from my end. Given that the price of lead has improved over the last years, 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 from the operational profit and you know from that point?

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

Okay. I'll take my other questions offline. Thank you.

All right. Thank you.

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.