Aqua Metals, Inc. (AQMS) Q2 2020 Earnings Report, Transcript and Summary

Welcome to the Aqua Metals, Inc. Second Quarter 2020 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Mr. Glen Akselrod, President of Bristol Capital Investor Relations. Please go ahead.

Thank you, operator. Welcome to Aqua Metals second quarter 2020 conference call. Earlier today Aqua Metals released financial results for the quarter ended June 30, 2020. The release is available on the Investor section of the company's website at www.Aqua Metals.com. Joining us for today's call from management is Steve Cotton, President and CEO, as well as Judd Merrill, company's Chief Financial Officer. During this call management will be making forward-looking statements. Please refer to the company's quarterly report on Form 10-Q filed today, August 4, for a summary of the forward-looking statements and the risk, uncertainties and other factors 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 said, I'd like to turn the call over to Steve Cotton, CEO of Aqua Metals. Steve, please go ahead.

Thanks, Glen. Good afternoon and welcome, everyone. Since our last corporate update call, I'm happy to report on behalf of our entire team key areas where we have advanced in our mission to help the $65 billion lead acid battery industry capacitize, compete, innovate and thrive in an increasingly environmentally focused world by utilizing our proven AquaRefining equipment and technologies. First and foremost, despite the challenges of COVID-19, we are pleased to announce that we are ahead of schedule on our V1.25 electrolyzer program. We are seeing better than expected results in efficiencies and throughput, enabling us to offer lower cost equipment that runs more efficiently with lower operating costs to potential licensees we continue to engage. A key goal in the initial phase of the electrolyzers three phase program, V1.25A with B and L to follow, was to automate the operation of the electrolyzer. Through regular runs over a period of weeks, we have already reached the point with the electrolyzer achieving consistent results once the on and off buttons are pushed and the control system in the electrolyzer handling the rest. This key improvement that positively impacts our value proposition would not have been achieved without all the operational experience in data that we gained from producing 35,000 commercial AquaRefining ingots in 2018 and 2019, which we sold for a significant price premium to Clarios, the world's largest battery maker. Learnings from our heritage appears to have paid off in meeting this key automation goal. I'm also pleased to announce that we are ahead of schedule on our second iteration, version 1.25B. This iteration includes several additional improvements, inclusive of a new tank design with an integrated frame that reduces complexity, fabrication cost and maintenance labor costs. Improved endurance performance of the electrolyzer is also expected to take place during this iteration. We have made substantial progress preparing for the version L as well, which will be highlighted by new tightly integrated data logging capabilities in near real time to our secure web-based portal. Our future licensees will utilize this portal. But just as important, we plan to utilize this infrastructure as well to remotely support and improve the V1.25L units and future iterations. So, the V1.25 program is ahead of schedule and we are pleased with the results thus far. Present and future planned advancements continue to be fueled not only by our team's knowledge, skills and outright passion, but our cash on hand as a result of already received and planned ongoing insurance collections. In addition, we expect to receive additional cash infusions from the expected sale of unnecessary assets as part of our go forward model. We have now collected $15 million in insurance proceeds, and we expect to continue collecting our insurance claims as we work through the layers of coverage we've already disclosed, while simultaneously selling the assets we no longer need to supplement our cash position. We have thoughtfully added organizational human capability in the quarter, including a commercial leader that we were happy to have rejoin our team. Dave Regan hit the ground running in June and is keenly focused on our licensing and partner development efforts. In addition, we have added a strong chemical engineer and other technical resources to ensure that the V1.25 program moves through its development and ultimately into the support phase. Our continuing conversations and engagements with potential licensees are improving value proposition from our V1.25 program and interesting new partnership opportunities in the areas of market development and technology improvements continue to show promise. Subject to the completion of our V1.25L development program and finalizing the costs and performance and benchmarks for improvements, which is expected by the end of the year, we believe that we will be in a position to finalize pricing, configuration and the overall value proposition to negotiate and secure the first equipment supply and licensing installation outside of our facility for our V1.25L product. I'll now hand it over to Judd to review our Q2 financials. Go ahead, Judd.

Thank you, Steve. As of June 30, 2020, cash and working capital balances were $4.8 million and $6.1 million respectively, which includes the $4.9 million insurance proceeds receivable. Actual expected insurance collections are anticipated to be higher. As of June 30, 2020, the company had received a total of $15 million in insurance payments as a result of the fire damage. $2.5 million was received in December 2019, $7.5 million was received in Q1 and an additional $5 million was received in Q2 of 2020. We have recorded an insurance receivable of $4.9 million, in line with GAAP accounting regulation, which limits the amount of insurance receivable we can recognize on our books. We are still very much involved with providing information to the insurance carriers and we expect to receive additional payments in the future as they review our claim which is over $30 million for property, plant and equipment losses. In addition, we may receive additional insurance payments for business interruption losses. Assets on our balance sheet as of June 30, 2020 that were not affected by the fire totaled approximately $38 million in book value, including the battery breaker, melting kettles, kiln, filter presses, mixing and storage tanks, water recovery storage system, and the building infrastructure, plus the land. These assets are still in good shape. Some of them are brand new and will be either used in future licensing deals or sold. As mentioned last quarter, on March 25, 2020, we entered into a memorandum of agreement with Veritex regarding our loan. We have agreed on the allocation of insurance proceeds, with proceeds allocated to Veritex to pay off the remaining balance of the loan, which is approximately $8.6 million as of the date of this report, inclusive of approximately $500,000 prepayment penalty netted against a $1 million CD collateral. As of June 30, 2020, Veritex has received $4.875 million of insurance proceeds from our insurance carriers, which has been set aside in an escrow account to be used to pay off the note. This $4.875 million is recognized as other assets on our balance sheet. On receiving approximately $10 million of additional insurance proceeds, the loan will be paid off. We anticipate that this will be completed by the end of the year. Our lead recycling facility was not in production during the second quarter due to the fire and the acceleration of our licensing strategy. As a result, the company did not generate revenue during the quarter. The plant will not be in production during 2020 except for the operation and testing of our improved electrolyzers as part of the V1.25 program. Product sales during the second quarter of 2019 were $1.5 million and consisted of high purity lead from our AquaRefining process, as well as lead bullion, lead compounds and plastics. Cost of product sales includes raw material supplies and related costs, salaries and benefits, consulting and outside services costs, depreciation and amortization costs and insurance, travel and overhead costs. Cost of product sales decreased approximately 82% for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. Cost of product sales decreased during 2020 due to the suspension of production resulting from the fire. General and administrative expenses decreased approximately 48% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The suspension of activities under our operations, maintenance and management agreement with Veolia, reduced company payroll and improvements in nearly all other expense categories drove the decrease. We expect to further decrease general and administrative expenses during the year as a result of our move to a capital light strategy. For the three months ended June 30, 2020, the company had a net loss of $3.98 million or negative $0.07 per diluted share compared to a net loss of $10.5 million or a negative $0.21 per basic and diluted share for the three months ended June 30, 2019. Net cash used in operating activities for the three months ended June 30, 2020 was approximately $4.1 million. Included in cash outflows from operations for the quarter was approximately $1.2 million for outstanding payables and for general working capital purposes. Our monthly cash burn rate during the quarter, which includes monthly planned expenses and corporate overhead, was approximately $725,000 per month as compared to approximately $830,000 per month in Q1 and approximately $2 million per month in the prior year. This decrease was the result of significant action taken after the November 2019 fire event. We may see a slight reduction in cash burn in the second half of the year. We anticipate after selling the plant and paying off our note with Veritex we that will experience other meaningful reduction in cash burn. As of June 30, 2020, we have collected a total of $15 million in insurance proceeds. Our process with insurance carriers include submitting details including invoices, quotes, assessments, drives and pictures, which represents a significant portion of our insurance claims for equipment and building damages. Recently, we have had several meetings with both virtually and in person with insurance carriers. We are currently preparing additional assessments such as a third-party assessment of damaged equipment and ongoing expert analysis. We continue to work with our public adjuster, who represents the company and our claim, and is very active with their team of experts. As I mentioned, we expect to see additional payments in the coming months and we'll update you as proceeds are received. In closing, we continue to feel confident about our financial position and runway and supporting the company's go forwards goals. Over the coming months, we intend to seek funds primarily from insurance proceeds and the sale of assets that is not required for our accelerated capital light strategy. With that, I will turn it back to Steve for closing comments.

Thanks, Judd. As I've stated before, we believe Aqua Metals has demonstrated that our technology is proven and can produce the world's purest recycled lead that will be sold at a premium by our future licensing partners. And there is opportunity for battery manufacturers to make premium products. We are working very hard on achieving our first licensing deal. I am more confident every day that our solid team's execution is a harbinger of our future success and our morale and teamwork as an organization is at an all-time high. We will probably run into a hurdle or two, but this team has proven it can clear hurdles. We look forward to continue providing incremental and meaningful updates as we continue to make progress. Please watch the Aqua Metals Twitter and YouTube channels as we continue to provide supplemental information through those venues. I'll now turn it back over to the operator to facilitate the Q&A portion of our call today.

Thank you. [Operator Instructions]. The first question comes from Steve Emerson from Emerson Investment Group.

Excellent progress. You refer to three versions of the cell. Does that mean you're working on the third version now or there are two more versions after the one completed to go in the second half of the year?

So, the first iteration, V1.25A, has been running and that's what we've been reporting on and has been running improvements over even our expectations and schedule. The B version, we anticipate to remain ahead of schedule as well. And that second electrolyzer will be deploying soon. And that has primarily, as I was mentioning, the tank/frame improvements. Now, while that unit is running, we're finalizing the work on L, and that'll be the L version. And that will include all the data logging and remote monitoring portal and some other improvements that we're making with that iteration. So, we're kind of working on all of them at the same time, but really we'll be running one at a time serially. Once we start running B, we'll run B. And then, once we start running L, we'll run L.

And are you at this point ready to comment on, with your new version, latest version, what your efficiency or any metrics that the possible licensees are looking for and one metric, perhaps, that's your goal that really becomes sort of a metric you need to achieve for these customers to license in?

So, the metrics that we're going for are to reduce the capital cost as well as the operational cost to run the machines and improve the uptime. So, the overall value proposition is improved. We do feel that the value proposition as it stands now is great and we're trying to make it even better. And so, in other words, the metrics around where we are today we believe fit the model for licensing anyway. But for the program, to allow us to improve that value proposition even further, we find it's very important to do that. And we need to finalize the actuals as we then begin the negotiation. So, as I mentioned earlier, we'll finalize those metrics and that is direct input into pricing and all the factors associated with the negotiation phase with the various licensees. So, it's kind of like you're working on a car and you don't have the final horsepower and miles per gallon yet, and that's what we're finalizing now with these electrolyzers and with this program. Hopefully, that answers your question, Steve.

And finally, after – you've now collected $15 million, you're expecting to collect or you're applying to collect $30 million more, as far as I understand it, and how much in asset sales, if you could give us a range.

Hey, Steve. This is Judd. I can probably answer that question. We collected the $15 million, as we discussed. We have over $30 million in claims that we've made on the property and the equipment and cleanup. So, we expect to collect more on that over the next few months. And we also have a business interruption claim that's above and beyond that amount, and so that is in play. So, there should be some additional dollars coming from that as well.

So, the business interruption is part of the $30 mil or would be in addition to the $30 mil replacement?

So, the $30 million is property, plant, equipment only. So, it would be in addition to that.

And how big is that possible claim?

We haven't really disclosed that. There's a lot of negotiation kind of going on with insurance carriers right now. It's a little less, like you need easy to identify. But it can be a few million to several millions of dollars.

Excellent. That gives us a ballpark. Thank you again.

[Operator Instructions]. The next question comes from Steve Kruger of Foresight Investing.

Good afternoon, guys. Thanks for taking my question. Are you far enough along in your discussions with any prospective licensees that are talking about building a greenfield facility, a new facility? And if so, can you give us any kind of color on what the design of that would look like in general terms? I know you and I have discussed the idea that the AquaRefining process is best suited to only about 50% of the lead compounds coming out of recycled battery. And just wondering if anybody's actually working on a design that would include smaller, less expensive, less polluting smelter to process 50% of the lead stream and then AquaRefining modules to process the rest.

That's a good question. So, in terms of designing AquaRefining in from a ground up greenfield type of a build, we are talking to a couple of players – in fact, in different continents even – about that kind of design-in type of a function with a new facility. So, just as if you remodel your house, you have some limitations in terms of how you would exactly put in an addition in those types of things, the benefit, obviously, when you're building a greenfield is you can kind of design in everything together. So, that keeps it interesting. But effectively, it's the same outcome in terms of process flow. So, you still have a battery breaker and separation system, taking the metallic lead and sending it off into cleanly processed through the furnaces and taking the paste and sending it through the AquaRefining process. But with a greenfield build, you do have an opportunity to think things in terms of the physical process flow and layout of the plant to make it a little bit more efficient to do so when you design it in, which is great. So, we find those opportunities just as interesting as the bolt-on and upgrade opportunities. Unfortunately, as you look across the various markets in the world, there are greenfield design opportunities, there are plenty of bolt-on opportunities as we've discussed in the past. And so, it provides us different applications to apply the AquaRefining technology.

I guess I'm still a little unclear on whether or not there are any prospective licensees that you're actually in discussions with that have a design that incorporates both smelting and AquaRefining.

We are in discussions with potential licensees, both for greenfield and for bolt-on.

Do the greenfield opportunities have a design that would include both smelting and AquaRefining?

The ones that we're talking to, do. Yes.

[Operator Instructions]. This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Steve Cotton for any closing remarks.

All right. Thank you, operator. Well, thanks everyone for your time today. And we really do appreciate the continued support from our shareholders as well as our partners as we continue our V1.25 program etc. As always, we will continue to update everybody in the coming weeks and months as we make progress on the V1.25 program and we'll continue to manage our cash position with the insurance collections and asset disposition. We'll report on continued commercial progress with our existing partners as well as potential developing partners in the future. So, thanks again, everybody, and hope everybody has a great and safe day.

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