Aqua Metals, Inc. (AQMS) Q3 2019 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Aqua Metals Third Quarter 2019 Corporate Update Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Glen Akselrod, President of Bristol Limited Capital. Please go ahead.

Thank you, operator. Welcome to the Aqua Metals Third Quarter 2019 Conference Call. Earlier today, Aqua Metals released financial results for the quarter ended September 30, 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 the Form 10-Q filed today, November 12, 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, CEO of Aqua Metals. Steve, please go ahead.

Thanks, Glen. Good morning, and welcome. Today, I'm happy to report that as we have guided throughout 2019 and for the first time in the company's history, we are just weeks away from completing our work to commission and operate all 16 modules simultaneously in their final production configuration by the end of the year and then commence operating the AquaRefinery on a 24/7 basis with all 16 modules available. This is a major inflection point for Aqua Metals, as we intend to run the AquaRefinery at ever increasing utilization throughout 2020 with all 16 modules proven and available. We plan to utilize all 16 modules going forward in 2020 with increasing efficiency as we scale the entire facility to its designed production rate of 40 tonnes of AquaRefined lead per day plus 40 tons of other lead products expected to occur midyear. We expect to prove that our innovative technology is an environmental success story and an economic success story at scale. With the tireless support of our team consisting of Aqua, Veolia, Brown and Root, our local contractors, all of our Phase 2 critical capital projects slated for completion by the end of the year also remain on schedule. Completion of commissioning of these key projects unlocks our ability to scale the full plant with projected positive contribution margins. These projects include concentrate production improvement, electrolyte chilling improvement, improvements in briquetting our spongy AquaRefined lead to prepare for melting and ingot casting, water recovery and management systems, upgrades to all the AquaRefining modules from learning to operating 4 of them 24/7 during Q3 and finally, the pace drying system to increase our yield and throughput. Four years ago, when the company first broke ground on the AquaRefinery, it seemed impossible to many that we could commercialize our 21st century technology to improve the incumbent method that have been around since the advent of the bronze age. Since then we have muscled our way through standing up the AquaRefinery, jumping over hurdle after hurdle to show that we have the ability to fundamentally transform the way one of the critical base metals used in our society is a recycled. Our innovative and environmentally clean process is one that the industry, and more importantly, the world truly needs. I believe that we are now in a very strong position, with the ongoing support of the largest battery manufacturer in the world as well as one of the largest chemical plant operators in the world to prove what is possible. Our battery manufacturing partner has already purchased commercial volume shipments of AquaRefined lead and made production runs using it. With the pursuit of our global licensing program well underway, we can report great interest from many large operators throughout the world that want to join the AquaRefining revolution. Our management team and Board of Directors have the right stuff, with a varied and yet complementary blend of background of battery system, battery recycling, mining and metals, chemical plants, oil and gas as well as capital markets. All of us, including our committed and loyal group of employees, are highly motivated to achieve success for Aqua Metals and feel they report to a higher calling of our important mission. It's more than just a job to them. With that, I will hand it over to Judd to discuss the financials. Judd?

Thank you, Steve. For the quarter ended September 30, 2019, we recognized revenue of approximately $2.4 million compared to $1.2 million in the third quarter of 2018. This represents a 102% increase for the current quarter as compared to the same quarter a year ago. It should also be noted that Q3 2019 revenue was 59% higher than Q2 2019 revenue. This is due to increased plant production with continuous operation of 4 modules, which currently resulted in higher production, Q3 revenues in line with expectations reflected operations on our initial 4 modules. Cost of products sales were $8.2 million in the quarter compared to $6.5 million in the year ago period. This represents a 28% increase. However, cost as a percentage of revenue decreased by 37%. This is a significant indicator that plant improvements are having these positive impacts on our costs. These costs were also impacted by addition of raw materials and supplies related to increased production by additional production employees in preparation for meeting the staffing requirement to enable the plant to operate its 16 modules. G&A for the third quarter 2019 was $5.1 million as compared to $2.2 million in the third quarter of 2018. Approximately 2/3 of G&A relates to noncash expense items including: $2.5 million accounted for shared payments, essentially it's debt equity shares and warrants related to the Veolia agreement for operations, maintenance and management services; and $0.8 million in noncash stock-based company compensation. Excluding the noncash items, our general and administrative expenses for the third quarter of 2019 were below expectations as a result of cost saving measures we put in place early in the year. We have identified additional savings of approximately $1 million in annual G&A cost reductions that we will begin to realize next year. We are committed to continually reviewing our costs and seek to make improvements wherever possible. Interest expense in Q3 was $142,000, that's 84% lower than the $992,000 recorded in the third quarter of 2018. This decrease is attributed to the convertible note held by Interstate Battery System International, Inc. that we paid off earlier this year. For the quarter ended September 30, 2019, we had an operating loss of $11.3 million compared to an operating loss of $8.4 million for the third quarter of 2018. The net loss for the third quarter of 2019 was $11.3 million or negative $0.20 per diluted share compared to a net loss of $9.3 million or negative $0.24 per diluted share in the third quarter of 2018. Our weighted average shares outstanding for the quarter increased to 57.1 million. As of September 30, 2019, the company had $15.5 million in cash and cash equivalents. Looking ahead, we are excited to see the progress on the final common configuration of all of our 16 modules. During the fourth quarter, we are focused on the complete installation of our Phase 2 construction project. During the third quarter, the company used $6.8 million of cash for operations and $5 million in cash for CapEx. Of course, additional capital will be needed in order to fund expected growth, continued increasing production of AquaRefined lead at the AquaRefinery, expand beyond the 16 modules, work with Clarios on equipment integration, develop our licensing business and to fund our operations until we are at positive cash flow. Management and the Board are committed to maximizing shareholder value. As a result, we are currently discussing: first, additional nondilutive options to obtain funds through various financing sources, including debt, equipment leasing, presell of our AquaRefined lead, licensing fees for our technology and/or project finances; and secondarily, options that include opportunistic sale of equity. Our strategy will be based on successfully getting the plant up and running at its full capacity, ensuring that we have the financing in place to allow for expansion and maximizing shareholder value. We have already received an approval from an equipment financing company for up to $5 million in equipment financing. The company intends to close on this CapEx funding in Q4 with the proceeds going towards funding CapEx needed to complete getting our plant up to capacity. We're also in discussions to presell our AquaRefined lead and other products for amount in equal to or greater than $5 million. With that, I'll turn it back to Steve.

Thanks, Judd. In conclusion, we are on schedule to do what we said we were going to do for the entire year: install, commission and commence operating 16 modules by the end of 2019. It's never been done before and getting this technology where it needs to be as challenging, but we're all better for it. Watch the space. We're determined to forge success for the environment, our partners and our shareholders.

[Operator Instructions] Our first question comes from Colin Rusch of Oppenheimer.

Congrats on all the progress. Could you talk a little bit about once you got all the equipment installed, the cadence of the ramp up and the balance in the system obviously, there is a lot to do. But want to get a sense of how long you think it will take?

Sure, Colin. Thanks for the question. We are, as I said, going to be running all 16 modules simultaneously before the end of the year and then the scale up begins as we get into the new year. And that is related to the commissioning -- completion of all of the equipment for the Phase 2 capital program which we expect to have all completed but one project by the end of this year with one remaining project that will go into the first week or two of January, and that's when the scaling begins. And the scaling, we believe, will happen fairly rapidly and we will get to this full utilization of the plant roughly by the middle of the year. And that will be a line that will be somewhat linear, but somewhat step function as we go through the process. And then for the remainder of the year, we will be at full capacity, as we anticipate, to the end of the year. Does that answer your question?

Yes. That's perfect. And then just for the fourth quarter, how are you thinking about revenue? Obviously, you guys don't provide a lot of specific guidance, but just sequentially with the things that you are monetizing, should we be thinking about a little bit of growth in the fourth quarter or is there enough downtime that you're not going to be growing quite so much here in the fourth quarter?

Colin, this is Judd. Our focus in the fourth quarter has been on getting these capital projects in place and up and running and that's moving along real well. And so Q4 revenues are going to look a little more like Q1 or better, but our focus has been more really on the safe completion of these capital projects. So there is some on-time and off time as we are testing things and commissioning different parts of it. So that hasn't been the big focus; the big focus is just getting the equipment up and running.

Great. And then just a final one for me. Can you give us an update on the number of customers that are testing lead product at this point, kind of how those conversations are ongoing as you guys get to a pretty important inflection point here with the technology ramp?

Yes, yes. So we have one large customer and partner of ours, Clarios, that's been taking the vast majority of lead shipment. And as I have mentioned a couple of times before, we have sent them full-size production run quantities for them to make test battery runs out of their production. So that's been the primary goal, a function of the product steps that we have had. In the meantime, we have sent samples and are continuing to send some new samples to other potential global licensing partners that were interested as well as stationary battery manufacturers that are particularly interested in the ultra pure lead that we're making. So we're not talking about how many of them, but we're working with dialogues with several to answer that question.

[Operator Instructions] Our next question comes from Alpesh Patel, a private investor.

I just wanted to thank you, Mr. Cotton, for -- first of all, I don't know if the market and most investors realize that you took your moving expenses in stock and that is almost as good as an insider buy in $100,000, which most people probably don't even realize.

That's true. I appreciate that acknowledgment. I took it in stock because I believe in the company and I also moved because I believe in the company. I'm a native of the Bay Area and I see the Tahoe/Reno area as a great marketplace and particularly a great opportunity for Aqua Metals, and just continuing to bet on the future of Aqua Metals. So appreciate that.

All right. And also, as your production ramps up into Q1, January and February of next year, do you think the company will finally decide to give us the monthly production numbers again, which I guess helps the shareholders see what the progress is looking like?

Yes. We'll continue to be transparent with our progress, and it's not as much about production right now as we finalize everything and get the 16 modules up and running altogether. And we've guided before that we're going to provide those on a quarterly basis, and -- but between the quarterly updates, we will be able to provide regular updates on progress. But we probably won't provide monthly production numbers. And we want the market to judge us on our overall progress in trend and direction, and that's really better achieved when you look at the quarterly numbers at this point.

Okay. And from listening to Judd's comments, let me just get this straight, if I have it correct. He mentioned that $5 million alone for equipment is already approved and it's going to close in Q4 of this year? And also, on top of that, you're already talking with someone else for more, for non-dilutive?

Yes. Yes. So as I mentioned kind of in the opening remarks, we do have the approval of an equipment financing company and we expect to close on that here in this fourth quarter. So that's $5 million for equipment financing. And then, in addition to that, we do have some preliminary discussions related to some pre-sell of our lead -- our 2020 lead production that we're working on. We'll have more information on that as that moves forward.

Okay. And do you think that second portion is greater than $5 million? Or can you comment on that?

Yes. It could be. We believe it will be $5 million or it could be greater.

Okay. And finally, I'm not 100% sure if this is accurate, but does Clarios have a buyout clause, like at the time of they announced the facility or based on agreement that they have an option to buy out Aqua Metals?

No. There is not a buyout option, if you're talking about that in the contractor, I think no.

Okay. But down the road, do you see Clarios or Veolia or someone stepping up and just taking out Aqua Metals if they see the opportunity?

There is always with a disruptive technology company that's transforming things opportunities out there in the market. Veolia and Clarios obviously see the opportunity with Aqua Metals. We're partners and we're delivering goods, so to speak, and we'll see how those relationships evolve. And there is the other players in the market, but our aim though is to continue to build a great company, and we see a great opportunity for Aqua Metals to continue to grow and stand on its own with its own merit.

Okay. And finally, we know Veolia is doing the day-to-day operations as far as building the modules. But is Clarios also involved in the day-to-day? Or they are just taking the back seat and watching Clarios?

Yes. I'd say, Veolia is involved hour-by-hour and Clarios is involved week-by-week. We are interacting with Clarios quite a bit on product, on the licensing discussion and planning for the anticipated rapid scale up as we commence running the 16 module, et cetera. So they're involved, they help us with some technology selections. They're involved with a lot of discussions that we have around the future of financing some of the standard processes within the AquaRefinery because that's the shared thing that they have, they have battery breakers, they have kettles, they have furnaces and things like that. So they're helping us as we work through those processes. So Veolia is our hourly partner and Clarios is someone that we talk to every week.

Our next question comes from Steve Kruger of Foresight Investing.

Couple of questions. You said that the first 4 modules were running 24/7 in the third quarter. What percentage of the time in the third quarter were they running 24/7? And what I'm really trying to get at is whether or not $2.4 million in revenue is a number we can extrapolate out to an annual revenue run rate based on going to 16 modules?

Yes. I would do less extrapolations. If you get the 16 modules and when you look at the current LME prices, revenues for the plant should be -- and LME does move around a little bit, but in the mid to high $40 million at capacity. So that's for the AquaRefined lead plus all the other products like the lead bullion and the plastics and the things that they come off of it. If you look at the Q3 run, we ran 7/24 for quite an endurant period with those 4 modules. As a percentage of the quarter, I don't know that off the top of my head and I can't answer that question off the top of my head, but it was for quite some time.

Yes. So if you take $2.4 million and multiply it by 4 and multiply it by 4 for -- going to 16 modules in four quarters, you get almost to $40 million. So if the total revenue capacity of 16 modules is going to be in mid to high 40s, you're pretty close to running it most of the quarter?

We've run modules as, I think, I've said before, for over a month at a time before. So we have a very robust level of performance with those modules, which is why we've been really comfortable in propagating that throughout the remaining 12 to get to the 16, to run all 16 with the final configuration that's ready for production.

Right. Next question, when you get all done with 32 modules, what do you expect that the total investment will have been for plant and equipment?

Well, for starters, the 32 module expansion, we're still working on the details of what the cost factors will be there from our continued learning, and we'll make that decision a little bit down the road on what the configuration, what those costs are going to be. But without getting in the specific numbers, the percentage cost that we have for the doubling of the capacity of the plant compared to the money as well as supply and equipment of the company in general is a smaller percentage than twice as much on a significant level. And that's because we've already -- some of the cost with the land, the building, the plant, the equipment, the breaker size for 32 modules, the kettle and the ingot casting line size for 32 modules. So the incremental to go from 16 to 32 is not a tremendous amount of money compared to what's already been put into the company. That's a great undervalued asset so to speak of this plant that is projected to go to those 32 modules at a reasonable cost.

Can you tell us what the investment will have been when you're done with the first 16 modules up and running with all the capital improvements?

Yes, I mean, if you look at the balance sheet, currently, our fixed assets are around $50 million or $55 million or so, net of depreciation. So if you think kind of an initial investment is probably closer to $80 million. But that's the whole plant, building the building, and all the infrastructure and then the equipment. But as Steve was mentioning, the incremental costs and to get to that additional 16 modules is a significantly smaller portion of that increase.

Right. And I think you said before that once you have all 16 modules up and running in steady state that you'd be cash flow neutral. Is that still a fair expectation?

Yes. That's still a fair expectation.

Our next question comes from Daniel [indiscernible] of Oppenheimer & Co.

I had a -- I haven't been there in a while, but the last time I was there, the actual ingot collection process seemed to be done on a piece-by-piece basis. Has that been automated?

Yes. So Daniel, the ingot casting line has been automated. We have got robotics. So the ingot is a continuous rolling line with what's called a star wheel that pours the molten lead to each ingot mold and it goes down the line with tens of yards long and cool and then they pop off at the backend and then robotics takes over and stacks -- collects and stacks those into the size of basically one forklift pallet and then manually we take the forklift and move it into the shipping area. So that's been all automated. And speaking of automation, that's one thing we've been working on greatly with Veolia, in particular, because they run a lot of chemical plants and such throughout the world and they've have really helped us automate not only that function, but many other automation control systems throughout the entire plant. And those are all critical to get predictable results and efficientize the plant, efficientize for lower labor cost, et cetera, et cetera. So that's definitely been a high area of focus.

Perfect. My other question is, I read in your report, the drying system will not be done by year-end. Is that going to affect the 16 modules that are put into use by year-end?

No, it's not. So we have enough concentrate with our tankage to easily handle that function. There is a cutover period. We can't bypass that and -- but the cutover period to get to the drying system is just a matter of a period of a week or 2. And that's what we've mentioned in our report that that will happen in the early part of the year, and then we'll able to capacitize. And what that drying system gives us is a lot of things: higher yields, because we can convert some of the insoluble materials that are soluble and our electrolytes get more as a percentage of the lead out. We've guided before that we are currently treating about 70% of the battery with the lead, and we'll get up to over 80% with this part of the process. It eliminates certain chemicals that we need to do that instead of heat. And so that's the really powerful use of -- towards a positive contribution margin. And it allows us to capacitize the way that we take that product and build our concentrate. So that's the one project that is mechanically complete and precommissioned but as we round the bend into the new year for the first couple of weeks, we'll complete that and then continue on forward with that system.

Just two final questions. One, do you expect to be using Brown and Root through the end of the year? And then, if you could give some color on how you are being received both nationally and internationally on the potential for licensing. If you can give any kind of color.

Sure. The Brown and Root will be certainly involved through the end of the year as we work on these CapEx projects and finish in construction and engineering and commission management through completion inclusive of the drying system, which will go into next year. We'll have more projects for them as we continue to move forward with the residue treatment function that will allow us to treat 100% of the battery and greatly improve our contribution margin as well as the expansion of 32 modules. So there is always going to be projects where a firm like Brown and Root will be helpful with us. So it's not just an acute relationship, but it's an intense, acute relationship during the period of time. If that answers your question. And then to your second question on the global licensing, if you guys have heard before, we hired Feng Han as our Vice President of Licensing and our Senior Director of Commercial, Dave Regan, has been working Feng closely to attend conferences on a global basis, but more importantly, meet with various parties that are quite interested about battery manufacturers as well as recyclers as well as integrated battery manufacturers/recyclers that are quite interested in the AquaRefinery technology, [indiscernible]. Follow up meetings are happening and businesses are taking place and we're engaging on a global stage towards the licensing effort because it's a funnel, it's a sales funnel and you have to build your relationships with all those players throughout the world. But in the meantime, our first mover partner, Clarios, is someone, like I mentioned before, we're talking to every week.

Well, I appreciate the color on this. I can tell you that from the last time I was there, it sounds like you've made a tremendous progress. So keep up the good work, guys, and I think the company is doing well.

Appreciate it.

[Operator Instructions] Our next question comes from [John Brecht], a private investor.

This is John Brecht. I have a question about your power supply. Looks like you're on an uninterruptible system that affected you in July. How is that going to disrupt the operation once you're on a full scale basis?

Yes. So the facility draws quite a bit of megawatts of power in order to run the entire facility, including the AquaRefining area. We are able to restart quickly once the power outage happens and then the power returns. And we're having continued discussions with NV Energy on expanding our power requirements, particularly as we move towards 32 modules, et cetera. So we don't anticipate a significant impact from various power outages. And in fact, the beauty of AquaRefining is if the power goes out, we can start back up relatively quickly. The things that impacted us more in the past wasn't really as much power as critical spares not being available when certain pieces of equipment failed which we've mitigated with a much more comprehensive spares and site kit and consultation with Veolia and Brown and Root. So netted out, I don't think we are going to see much of an impact to our -- certainly our annual numbers as well as our quarterly numbers based upon any sort of power outages.

So would this be something that you would just live with or are you planning that you may have to implement some battery storage to get you through those periods?

We do have emergency generators and some UPS backup for some critical processes. But for the most part, if you look at the cost benefit of putting megawatt hours of energy storage in place, it doesn't make sense for an industrial plant. Now personally having come from the data center space where servers -- you've got trillions of dollars going through these things on a daily or weekly basis, then it makes sense to invest in those types of processes on the IT services side. But when you're looking at industrial application, you'll find very few examples of megawatt hours of energy storage sitting there.

Is power supply one of the major factors you'd be looking at as you're citing additional plants for other commercial?

Certainly, a factor, the quality of power as well as, of course, the cost of the power in terms of cost per kilowatt hour. What we're learning in our global discussions is that we're not seeing really any obstacles in different materials as it relates to cost of power. So that's a good sign.

And I'll add -- we do believe in the longer haul that because the environmental benefits of AquaRefining, that there are opportunities for re-tariffs of power rates for this purpose because it's a win-win for the environment, the government as well as the operator.

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

Well, thanks, everybody, for the time today, and we really appreciate everybody's continued support and patience, the shareholders as well as our partners as we work and scale the plant and really execute on our partnership potential with Clarios, Veolia and our other parties that we're continuing to engage with. And we will continue to update everybody throughout the remainder of the year as we achieve those milestones. As I said before, watch the space. News to come.

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