Aqua Metals, Inc. (AQMS) Q1 2019 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Aqua Metals First Quarter 2019 Corporate Update 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 turn the conference over to Ms. Alison Ziegler, Managing Director of Darrow Associates. Please go ahead.

Thank you, operator. Welcome to Aqua Metals' First Quarter 2019 Conference Call. Last Thursday Aqua Metals released financial results for the quarter ended March 31, 2019. 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 CEO; as well as Judd Merrill, the company's Chief Financial Officer. During today's call, management will be making forward-looking statements. Please refer to the company's quarterly report on Form 10-Q filed Thursday, May 9 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, CEO of Aqua Metals. Steve, go ahead.

Thanks, Alison. Good afternoon, everyone and welcome. Before I review the significant operational progress we achieved in the first quarter and into the first half of the second quarter, I would like to comment on the financing we closed earlier today. As most of you know, we announced this financing in conjunction with our Q1 results last Thursday, so to answer the question, why we did? What we did? And when we did it? As you saw in our first quarter press release, we ended the quarter with a cash position of $15.3 million, which we have previously stated would be just enough to complete the rollout of 16 modules. The decision as to when to raise capital and at what form was a topic of constant discussion at our Board level. Debt options were going to take several months. And if we waited until later in the year when we had potentially more operational progress to report, we would also have a weaker cash position given our anticipated cash burn rate. It is also impossible to predict where the stock would be at that point and what the overall condition of the market would be. Management and the Board's desire in alignment in the way we are compensated has always been to limit shareholder dilution. However, with this offering's net proceeds of roughly $20.2 million before the effect of issue we entered the remainder of 2019 with approximately $35 million in cash. With the ability to leverage the $5 million in leasing newly authorized by Green Bank, we have approximately $40 million at our disposal on a go-forward basis. We believe the strengthening of our balance sheet achieves a few key goals. First, the runway we need to scale the plant to 16 modules to reach cash neutral at a plant level. Second, the strengthened balance sheet we need to pursue other financing options and partnerships. And third, it does remove concerns about our cash position and ability to achieve these key goals. Turning to our operations. It has been a very productive start to 2019. Aqua Metals has made substantial operational progress including safely completing installation of our Phase One capital program and more recently achieving full-scale 24-hour a day by seven-day a week production with our initial four modules. Just to reiterate some of our operational milestones during the first quarter. We completed installation of a membrane press, which should improve electrolyte recovery and throughput. We've installed a centrifuge to increase throughput and quality of concentrate sent to the AquaRefining modules. We also completed a key plant-wide electrical power upgrade. We installed and are commissioning water recovery equipment and process improvements that bring water usage at the AquaRefinery to near neutral, an additional positive impact to our contribution margin. We made shipping cost improvements for some offtake materials and we completed enhancements to our breaking and separation operations allowing us to complete commissioning of our third kettle to process the metallic lead that does not go through the AquaRefining process and to recover more material for AquaRefining. We also ordered the full-size dryer equipment, which is part of Phase Two of our capital program in the quarter, which is expected to further boost electrolyte recovery increase yield and add contribution margin later in 2019. Throughout the first quarter, we ran one or two modules 24 hours a day, four days a week to conserve cash and allow safe times for some of the key plant upgrades to be completed for our contribution margin improvement projects. Beginning in March, we expanded our production team by hiring and training key employees. And on April 15, we moved to 24x7 operations with our first four modules and are operating two to four modules at a time. This has enabled us to achieve weekly production records every week as we scale. The company is also focused on increasing the percentage of lead metal from battery feedstock and convert it into high-value AquaRefined and lead volume ingot form right at the AquaRefinery. Importantly, we have increased the amount of lead units we can process into products in ingot form throughout the plant from approximately half in January of 2019 to two-thirds conversion in April 2019. This includes the installation of a third kettle to begin to allow the processing of the other 50% of the battery which is the hard metallic lead, resulting in a significant improvement in lead unit recovery and contribution margin. The first shipment of lead bullion from this kettle was shipped at the end of the first quarter. We have projects underway to further process the hard metallic lead which could bring today's approximately 70% conversion to 80% or more by year end which could generate considerable additional plant-wide gross margin for AquaRefinery. So now moving on to our partnership with Clarios. In May of 2019, the assets and operations of Johnson Controls Battery Group Inc., including our agreements in collaboration with Johnson Controls were sold to Clarios, which is a newly organized battery and power solutions company formed by Brookfield Business Partners LP. During the first week of April, we met with Clarios at their nominated First Facility to commence discussions of the proposed development program to supply AquaRefining equipment and know-how as well as licensing and ongoing support services for that particular location or an alternate first location. As a result of these discussions, we agreed on specific performance metrics for the existing AquaRefinery as conditions precedent to shipping equipment. These include things like module performance and uptime, electrolyte usage, feed rates of AquaRefined material and emissions. In addition, Aqua Metals will provide a detailed technical proposal in June 2019. And upon completion of the general performance metrics and agreement on the technical proposal move to execute the development program agreement inclusive of a licensing agreement and an engineering package for final design of that first location. We believe we are on track to achieve target performance metrics during the remainder of 2019. And as we execute on our planned ramp of our AquaRefinery, this continued progress should lead to our first licensing revenue and the first shipment of AquaRefining equipment to Clarios as early as 2020. Note that we plan to continue to grow our revenues and expand our margins with our AquaRefinery win throughout 2019 and also during 2020 and expect the mix of revenue to include higher-margin equipment supply and licensing beginning in 2020 and beyond. I will now turn the floor over to Judd Merrill, Chief Financial Officer to review our Q1 2019 financials. Judd?

Thank you, Steve. For the quarter ended March 31, 2019, we recognized revenue of $437,000 compared to $1.7 million in the first quarter of 2018. I'd like to point out that the Q1 revenue was in line with management's expectations. As discussed last quarter and mentioned in our quarterly report, we slowed production to focus on completing Phase one of our capital program which entailed limiting AquaRefining operations to just one or two modules at a time. Although in Q1, 2018 revenue, was higher than Q1, 2019, Q1, 2018, revenue was derived from breaking the battery part and selling the pieces whereas in 2019 revenue is now being derived more and more from selling bullion and AquaRefined lead. We will see the percentage of AquaRefined lead as a percentage of revenue increase over the year. Turning to general and administrative expenses. For the first quarter 2019, included were several non-cash items including a $1 million expense related to the Veolia agreement for operations and maintenance and management services, a $0.9 million in non-cash stock-based compensation. The company also incurred $0.2 million for professional services associated with the sublease of Alameda facility. These items resulted in general and administrative expenses in the first quarter of 2019 of $4 million compared to the $1.8 million in the first quarter of 2018. The increase in interest expense for the quarter was driven by a one-time $2.6 million non-cash amortization expense, resulting from the recent payoff of the convertible note, held by the subsidiary of Interstate Battery Systems International, Inc. We paid off the Interstate note four months early, which provided the benefit of approximately $0.3 million in interest expense savings. The non-cash amortization resulted in interest expense in the first quarter of 2019 increasing that line item to $2.9 million as compared to $0.6 million a year ago. Interest expense without that one-time item was approximately $0.3 million in the first quarter 2019. For the quarter ended March 31, 2019, we had an operating loss of $8.9 million compared to an operating loss of $7 million for the first quarter of 2018. The net loss for the first quarter of 2019 was $11.7 million or a negative $0.27 per diluted share as compared to a net loss of $7.5 million or a negative $0.27 per share -- diluted share in the first quarter of 2018. Weighted average shares outstanding for the quarter increased to 43.5 million. Net loss for the first quarter of 2019 was negatively impacted by non-cash items. As I mentioned, these non-cash items included a one-time $2.6 million amortization expense recorded in conjunction with the payoff of Interstate Battery convertible note, $0.9 million of stock-based compensation, and $1 million of expense related to the Veolia agreement. As of March 31, 2019, the Company had $15.3 million in cash and cash equivalents. On May 10, 2019, the Company announced that it had priced its underwritten public offering of 11 million shares of its common stock at a public offering price of $2 per share. Aqua Metals expects the net proceeds from this offering to be $20.2 million. This does not include a $1.65 million shoe, but does include the calculation after deducting underwriting discount and other estimated offering expense. The transaction will close today. The Company also recently announced that it's reached an agreement with Green Bank, the primary lender in the USDA-backed loan, to waive certain covenants and allow the Company to enter into capital and/or operating leases in the amount of up to $5 million. The Company's current cash balance combined with the latest public offering and the ability now with the waiver from Green Bank to do up to $5 million in operating and capital leases, significantly increases the strength of the Company's balance sheet. Looking ahead at 2019, while we work to ramp up operations, management is mindful of the cash needs of the Company to meet our improvement and operations goals. During the quarter, the Company used $6.3 million of cash for operations and $1.6 million in cash for CapEx. As we scale production and generate revenues of AquaRefined lead, we expect to see our cash needs for operations go down. However, we will continue to need cash for operations until we reach full capacity at 16 modules. We also have earmarked approximately $7 million to $9 million of cash for planned capital expenditures. We anticipate that up to $5 million of this capital expenditure need will be met with capital and/or offering leases now that we have the waiver from Green Bank. We now have sufficient capital in place to complete scaling of our first AquaRefinery to 16 modules by the end of 2019 and allow us to begin to execute on the next steps of expansions, both in Nevada and with partners. With that, I'd turn it back to Steve.

Thanks, Judd. As we continue to scale concentrate production by optimizing the new filter press and centrifuge equipment in process, we expect to continue to rollout modules in 24x7 operation. We've already achieved back-to-back record weeks of AquaRefined metal production since April 15, and we expect to set regular production records moving forward. These achievements mark a major milestone for the company and set a trajectory for our continued module rollout activities. Having reached 24x7 production with our initial four modules, we've begun the process to rollout modules five through eight, which would enable the achievement of up to 50% of total plant capacity. In fact, we have already run one of those modules in a steady-state for over one week earlier in Q1 to prove out additional automation and controls initiatives that are running now on modules one through four. As more modules are brought online, plant operations will need to be further synchronized to meet the AquaRefining needs. The partnership with Veolia, a global leader in operations management has proven invaluable as we coordinate operations throughout the plant to support scaling. While there is still considerable work to be done, we believe we do remain on track to achieve our target of 16 modules in operation by the end of 2019. With the equipment and processes in place to scale production, electrolyte recovery remains critical to enhancing our contribution margin allowing us to scale further. With phase 1 complete we're now conserving up to 75% of our target for electrolyte recovery. We've completed the pilot for phase 2, which we believe will increase electrolyte recovery to 100% of our target and increase yield of the material processed through the AquaRefinery. Phase 2 equipment, which includes a full-size dryer has been ordered and anticipated to be delivered during the summer and installed in the third quarter driving further improvements to contribution margin and additional ability to further scale the plant. We are also committed to increasing the percentage of lead metal recovered from battery feedstock and convert it into high-value AquaRefined lead and lead bullion in ingot form right at the AquaRefinery. In fact, we believe that near 100% conversion could be possible. And if that were achieved, we could generate considerable additional plant-wide gross margin for AquaRefinery 1, which could then unlock new opportunities to consider deploying greenfield AquaRefineries in addition to our current capital-light plan of retrofitting existing battery recycling centers. We continue to pursue opportunities for additional partnerships given the growing demand for high-purity lead and diversify our offtake partners and increase the premiums we receive. And finally, before I open up the call to questions, I just can't say enough about the progress we've made since the start of the year. It would not have been possible without the hard work and commitment by all of our employees and partners. While there will continue to be challenges in scaling a first-of-its-kind facility we have come a long way, and I'm proud to say, we are producing some of the highest-purity lead in the world. And with production ramping and continued operational progress we are on track to have a fully operational AquaRefinery with all 16 modules by year-end. We have the right people and partners in place and now adequate capital making us more confident at this time than any point in our history that we will be able to reach the finish line. I would like to thank you for your continued support of Aqua Metals. We are now ready to take questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Ilya Grozovsky with National Securities. Please go ahead. Sorry. Our next question is from Brian Conrad [ph], a private investor.

Hey, thanks for taking my call. My first question is that we keep talking about ramping up production and putting additional modules into place and we seem to never at least hear that number five through eight are running full-time since you did run one during Q1. So what's the primary constraint that's keeping you from putting those modules in production right now?

Brian, yes, thanks for the question. Modules five through eight was actually run in one of those modules module six for over a week at one point in time. So they're getting to the point where they're ready to run, but it's the capacitization of the concentrate production that we're still working on as we complete the commissioning and online production coming from that filter press that's brand-new and the centrifuge. So those two pieces of equipment need to produce enough concentrate because the other four modules are running so well that they're using a lot of the concentrate as expected. So it's just a matter of getting that concentrate production. So it's more of a constraint on that scaling of industry-standard type of equipment and the equipment that we've invented is waiting for us to finish that.

Okay. And you expect that equipment to be sufficient to support all 16 modules when you get that running?

Yes. Yes. And in our partnership with Veolia that will also be very helpful because they have a lot of experience with centrifuges as well as filter presses. So, together we feel very confident that we'll be able to resolve the issues associated with scaling that type of equipment, which is a fairly industry standard type of scenario.

Okay. And are you going to give a time line on when you think you could be running five through eight?

Well, we've really got it more towards the end of the year, but I would view the time line from where we're at running the first four modules between two and four of them at a time to the end of the year. It's a little bit a step function because we'll take on likely four modules at a time, but it'll be fairly linear. So you should hear not too long from now that we'll be running more than four modules at a time. And then, we'll continue to make sure that everybody knows as we make those modular – module milestones.

Okay. All right. And you mentioned that, you'll be able to process I think 75% of the lead I think into AR lead and trying to get that up to 80%. It sounds like a long-term goal of 100%. Is the remaining 20% just processed in a different form? Or do you have to send that offsite for further processing?

Yeah. So the percentage of lead that we actually treat in the facility and turn into a lead metal form and then form of either an AquaRefined lead ingot or lead bullion that we take the hard lead that does not go through the AquaRefining process has grown greatly. Just this year from January, we were converting about half to just now in April we're converting over two-thirds or 70%. With the Phase 2 electrolyte management project as well as some other additional work that we have under way to recover more of the metallic lead, we believe that we'll by the end of the year get closer to the 80%-x of recovery. The percentage of the battery that's not recovered into lead units we ship as unfinished lead units that go to locations that have a furnace and a smelting capability to take that remaining material that we can't currently process and process on that end. So that does impact costs and we would rather finish the material here. We do see a path though to get to near 100% with additional initiatives so we can get by the end of the year past the 80-something percent and into the following year and beyond closer and closer towards that 100% which gets the most value and gets us the most targets.

All right. Thank you. That's all my question.

[Operator Instructions] Our next question comes from Ilya Grozovsky with National Securities. Please go ahead.

Okay. Thanks. Sorry about the probably I think I was on mute. Just wanted to get a little bit of some color on your Johnson Brookfield-Clarios agreement in terms of you assuming that you hit the milestones that they've asked you to hit over the course of 2019 at what point do you get a better sense of what the financial model looks like on the licensing side? Thanks.

Yeah, Ilya. Thanks for the question. And as we continue to work through the scaling of the facility, which by the nature of it we'll work towards those conditions precedent metrics that I spoke about earlier we're also discussing the financial relationship and how the licensing and equipment supply and related services will work with Clarios. They are all the same people. So despite the fact that they were acquired by Brookfield it's all the same people that we're working with which is we've been working with for years. And we will continue to have discussions with them around the specifics of the site and how we will provide that equipment, how we will monetize with them that relationship, so it's beneficial for all. But because the condition is precedent on the metrics to get the plant to where it needs to be that gets us all time to work out the details of that. So during the period of time that we're having these discussions and negotiations we're not really at liberty to disclose too much beyond what I've just said.

But do you anticipate that that will be in 2019 or 2020?

Well, we expect that by June of this year we will be able to provide an update on the amended agreement on a move-forward basis with where our path forward is in more details by June. We don't expect that by June we will be able to announce the economics and the pricing and things along those lines and how that will work. The conditions precedent will take us to the end of the year, so you're really looking at early 2020 before you're going to see a bunch of information around how the economics would look for that, because we're still discussing that with them. It's going to take some time.

Got it. Okay. Thank you.

Our next question comes from Alpesh Patel [ph], a Private Investor. Please go ahead.

Hi. Thank you for taking my call. One quick question I had was regarding the offering that was just recently done. Were there any insiders that bought into it or --

So with this offering that was recently done, the management and Board for the most part have participated in the prior offerings. This one, we had a little bit of a technical compliance issue when it comes to short sell -- short-swing trading and we were unable to participate unfortunately. So this particular financing round prevented us from the timing perspective to be able to do that. But I will reiterate that, as the CEO of the company, I have a lot of investment in the company, about almost 100,000 shares -- personal shares that I've purchased through various rounds and prior to net today.

Okay. And as far as Veolia, all the payments to be made to them will not be made in cash. They will be made in shares, correct?

The Veolia contract is structured in the form of shares, you are correct. So it's not cash-dilutive for our cash side of the business.

Okay. And one final question. This company that JCI sold, I guess, which is now Clarios, do you take that as a positive or a negative, or a neutral?

We think it is a positive. I think the folks at Clarios do as well. This allows them to be a little bit more nimble as a stand-alone business and be able to move forward with their plan. And if you look at Brookfield's investment thesis, you'll see that there's a lot of talk around sustainability and the future of energy storage. So there's a vision there that's common between their acquirer and the folks that are already at the company, which is why they're working with us to begin with, I think. And there's a lot of excitement about the future for -- throughout the organization. We feel it and we're really happy to see it and really happy for the folks that we've been working with.

Okay. And also, you mentioned on the call that you are negotiating -- or you are talking with other potential partners such as JCI for -- to use, I guess, Aqua Metals' technology. Is that just in the U.S. or more of a global or --

So, we're talking to various types of partners and that's inclusive of off-take for our lead. So we have already identified some places where we could place the lead and get a higher premium. And that's really good for the lead part of our business, as we continue to scale the AquaRefinery. And, of course, we're talking to other folks within the industry, both on the lead front as well as the technology and licensing front, because there is a global level of interest. But we're trying to remain focused on getting the AquaRefinery where it needs to be and working with Clarios, because they do have the first facility rights and that will keep us busy for the time being.

Okay. All right. Well, thank you for taking my call and best of luck moving forward.

Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Steve Cotton for any closing remarks.

Okay. Thank you, operator. Well, thanks everybody for your time today and we really appreciate the continued support, not only from our shareholders, but from our partners, as we work to ensure that we can scale this plant and execute on our licensing potential with Clarios as well as others. Lead metal is a growing $20-plus billion market, I'll remind everyone, and we are more confident this time than at any point in our history that AquaRefining will meaningfully penetrate this market as the best available technology. And we look forward to updating you all in the weeks and months ahead, as additional milestones are achieved. Thanks again, everybody.

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