Q3 2019 Earnings Call

As the operator, thank you for your patience the call will begin momentarily.

Thank you for standing by this is the conference operator, welcome to the Aqua metals third quarter 2019, corporate update conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions.

Who joined the question Q you May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, operator by pressing star and zero.

I would now like to turn the conference over to Glenn Axelrod, President 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 Thirtyth 2019. This release is available on all the investors section of the company's website www Dot Aqua metals Dot com.

Joining us for today's call for management is Steve Kabi, President and CEO as well as Judd Merrill The company Chief Financial Officer during today's call, Matt as you will be making forward looking statements. Please refer to the company's quarterly report on Form 10-Q filed today November 12 for a summary of the forward looking statements and the risk and so.

These and other factors could cause actual results could differ materially 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 on into.

It's a bit as events as they occur except as required by law that with Dod I'd like to turn the call over to Steve Cod Seelbach with metal Steve. Please go ahead.

Thanks, Glenn Good morning welcome.

I'm happy to report that as we had guided throughout 2019 and for the first time in the company's history. We're just weeks away from completing our work the commission and operate all 16 module simultaneously in their final production configuration by the ended the year and then commenced operating the OCC refinery on a 24 bye.

Seven basis with all 60 modules available. This is a major inflection point drop of metals as we intend to run the OCC refiner it ever increasing utilization throughout 2020, with all 60 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 design production rate of 40 tons of walk refined let per day, plus 40 tons of other led products expected to occur mid year.

We expect to proved that our innovative technologies and environmental success story and an economic success story at scale.

With the tire would support of our team consisting of Aqua Veolia round in route or local contractors all of our phase they used to critical capital projects slated for completion by the ended the year also remain on schedule.

Completion of commissioning of these key projects unlocks our ability to scale before plant with projected positive contribution margins.

These projects include concentrate production improvements electrolyte chilling improvements improvements in brick heading our spongy aquarefined lead to prepare for melting and you get casting.

Water recovery and management system upgrades to all the OCC refining modules from learnings of operating four of them.

24 by seven 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 OCC refinery it seemed impossible can many that we could commercialize our 21st century technology to improve the incumbent methods that had been around since the advent of the broad age. Since then we have muscle go away through standing up the Soc refinery jumping over hurdle after hurdle to show that we have.

The ability to fundamentally transform the way one of the critical base metals used our society is recycle our innovative environmentally clean process is one that the industry and more importantly, the world truly needs I believe that we're now in a very strong position with the ongoing supported the largest battery manufacturer in the world.

Oral as well as one of the largest chemical plant operators in the world to crude what is possible. Our battery manufacturing partner has already purchased commercial volume shipments a block refined led and made production runs using it.

With the pursuit of our global licensing program well under way, we can report great interest from many large operators throughout the world that want to join the OCC or fighting Revolution, Our management team and board of directors has the right stuff with a varied and yet complimentary blend a background battery system battery recycle.

Ling mining and metals chemical plants will in gas as well as capital markets all of us, including our committed and loyal group of employees are highly motivated to achieve success rock with metals and feel they report to the higher calling of are important mission.

More than just the job.

With that I'll hand, it over to jut to discuss the financials Jud.

Thank you Steve.

For the quarter ended September Thirtyth 2019, you recognize revenue.

2.4 million compared to 1.2 million third quarter 2008.

This represents 132% increase for the core current quarter as compared to the same quarter a year ago.

It should also be noted that Q3 2019 revenue with <unk>, 9%.

In Q2 2009.

This is due to increased plant production with continuous operation for model.

Okay and higher <unk> production.

Q3 revenue in line with Nash the expectation reflect operation of our initial core module.

Cost of product sales were 8.2 million in a quarter compared to 6.5 million in a year ago period. That's represented 28% increase however costs as a percentage of revenue decreased by 47%.

This is a significant indicated that were improvement or haven't had positive impact on a cost.

These costs were also impacted by addition, raw materials and supplies related to increase production by additional production employees in preparation for meeting the staffing requirements.

To enable the plant operating model.

DNA for the third quarter 2090 $5.1 billion.

<unk> 0.2, though in the third quarter 2018.

Approximately two thirds of DNA related non cash expense items, including $2.5 million accounted board share payment.

Essentially sweat equity shares and warrants related to that you already agreed that operation.

Management services.

And point 8 million noncash stock based company compensation.

Excluding the non cash items, our general administrative expenses third quarter 2019 with below expectation as a result of cost saving measures we put in place early year.

We have identified additional savings of approximately 1 million annual DNA cost reduction that we will begin to realize next year.

We are committed to continually reviewing our costs.

And seek to make improvements and they'd money wherever possible.

Interest expense in Q3 was 142000, that's 84% lower than that 990000 recorded third quarter 2018.

This decrease is attributed to the convertible note held by a subsidiary of Interstate battery systems internationally.

Yeah, we paid off earlier this year.

For the quarter ended September 32019, we had an operating loss of $11.3 million compared to an operating loss of 8.4 million for the bird third quarter of 2018.

The net loss for the third quarter, 2019 was $11.3 million or a negative 20 cents per diluted share compared to a net loss of 9.3 million or a negative 24 cents per diluted share third quarter 2008.

Our weighted average shares outstanding for the quarter increase the 57.1 million.

As of September Thirtyth 2019, the company had $15.5 billion in cash and cash equivalent.

Looking ahead, we are excited to see the progress on the final comedy configuration of all of our six module.

The fourth quarter, we are focused on the complete installation of our phase two construction projects.

During the third quarter, the company is $6.8 million, a cash robberies and $5 million in cash for Capex.

Of course additional capital will be needed in order to fun expected growth.

<unk> increased the production of OCC refined but at the OCC refinery.

Expand beyond the 16 module work with clarity of on equipment integration develop our licensing business and to fund our operation no yet are positive cash flow.

Management and the board are committed to maximizing shareholder value as a result, we're currently that's got to pursue additional non dilutive option to name fun through various financing sources, including debt could that leasing presell of our aka refined led lighting <unk> These where.

Our technology.

And or project financing.

And secondarily option that include opportunistic sale of equity our strategy will be based on this that slowly getting the plant up and running at full capacity, ensuring that we have the financing in place to allow for expansion and maximizing shareholder value.

We have already received approval from an equipment financing company for up to $5 million and equipment finance.

The company intends to close on this cap ex funding in Q4 with the proceeds going toward finding capex needed to complete getting our plant up to capacity.

We're also in discussion you pre sell off refined led and other products for amount equal to or greater than $5 million.

With that I will turn it back to Steve.

Thanks, Chad.

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 this space, we're determined to forge success, where the environment our partners.

And our shareholders.

We will now begin the question and answer session to join the question Q You May Press Star then one on your telephone keypad.

You'll hear a tone acknowledging your request if you're using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then to once again to join the question could you. Please press Star then one now.

Our first question comes from Colin Rusch of Oppenheimer.

Thanks, So much guys and congrats on all the progress.

Could you talk a little bit about once you've got all the equipment installed the the cadence of the ramp up and the bounce in the system. Obviously, there's theres a lot to do but want to get a sense of a about how long you think it'll take.

Sure call and thanks for the question.

We are as I said good to be running all 16 modules.

Simultaneously before the ended the year and then the scale up begins.

As we get into the new year and that is related to the commissioning a completion of all of the equipment for the phase two capital program, which we expect to have.

All completed about 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.

The year.

And that will be Oh 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'll be at full capacity as we anticipate.

To the end of year.

Does that answer your question, Yes, that's perfect and then just for the fourth quarter.

You know how you're thinking about revenue yeah. Obviously, you guys don't provide a lot of specific guidance, but I'm just a sequentially with with the things that you are monetize and should we be thinking about it a little bit growth in the fourth quarter in hours or no downtime at your you're not going to be growing quite so much here in the fourth quarter.

Yeah causes just.

Focus in the fourth quarter, then on getting your capital projects in place and up and running.

And and that's moving along real well and so Q4 revenues going to look a little more like Q1 or or better, but our focus has been mostly on the safe.

Completion of these capital projects. So there's some on time and off time, as we're testing things and and commissioning different parts of it so that hasn't been the big focus be folks just getting the equipment up and running.

Great and then just a final one from me could you give us an update on the number of customers that are testing led product at this point I'm kind of how those conversations are going as you guys get to a pretty important inflection point here with the technology around.

Yeah, Yeah, so well, we have one large customer and partner of ours Claire else. That's been taking the vast majority let shipments and as I've mentioned, a couple of <unk> before there weve set them full size production run quantities for them to make test battery runs out of their production.

The primary goal and function of the product, but that we've had in the meantime, we have sent samples and they're continuing to sense new samples to other potential global licensing partners that are interested as well as stationary battery manufacturers that are particularly interested in the ultrapure led that we're making a so we're not we're not talking to.

How many of them, but we're working with.

Dialogues with several to answer that question.

All right that's helpful. Thanks, so much gossip.

Once again, if you have a question. Please press Star then one.

Our next question comes from a passion Patel, a private investor.

Hi, Thank you for taking my call I just want to thank you Mr. Cotton for first of all Oh, I don't know Submarket and most investors realized that.

You took your moving extensive in stock and that is almost as good as an insider buying $100000, which most people probably didn't realize.

That's true a I appreciate that acknowledgement I took it in stock because I believe in the company and I also moved to 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 crop with metals and and just continuing to bet on the future of Aqua metals. So I appreciate that.

All right and also.

As a as their production ramps up into the 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.

Yeah, 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 a the 16 modules up and running altogether and we've guided before that we're going to provide those are the quarterly basis and but between the quarterly updates we will be able to.

Provide regular updates on progress that we probably won't provide monthly production numbers and we want we want the market to judge us on our our overall progress and trend and direction and that's really better achieved when you look at the quarterly numbers at this point.

Okay and from listening to a judge that comment so let me just get this.

Straight if I have it correct. He mentioned that 5 million dollar alone for equipment, there's already approved and that's going to close in Q4, that's this year.

And also for that to your all you already talking with someone else for more for non dilutive.

Yeah, Yeah, so as I mentioned kind of an opening remarks, we do have a the approval of from equipment financing company.

And we expect to close on that I'm here in the fourth quarter, let's 5 million or for financing and then in addition to that we do have some some preliminary discussions related to some degree so of our of our led our 2020 I led production that we're working on it.

More information on that you know that moves forward.

Okay, and they think that second portion as a greater than 5 million or.

Can you comment on that.

Yeah, it's a it could be a and so we you know we believe that Oh, yeah, it'd be 5 million it could be greater.

Okay and finally.

I'm not I don't know present sure. If this is accurate, but does a clarity owes a have a buyout clause like at the time of and also facility or they signed an agreement they have an option to buy out a aqua metals.

No there's not a a buyout option.

If you're talking about that in a contract or anything now.

Okay.

But down the down the road do you see a clever yos RV OEM or someone stepping up and.

Just taking out a aqua metals, if they see the opportunity.

There there there's always with a disruptive technology company that is transforming things opportunities out there in the market and you know Aeolian Clarion is obviously see the opportunity with Aqua metals were partners in we're delivering the goods so to speak and we'll see how those relationships evolve and.

Theres other players in the market. Our aim though is to continue to build a great company and we see a great opportunity for Rockwell metals to to continue to grow and stand on its own with its own merits.

Okay and finally.

We know we only is doing the day to day operations as far as though building to <unk>.

Modules, but as a clear is also involved in the day to day or.

They're just taking a bad thing just watching close.

Yes, they are veolia isn't bold hour by hour and clear else's involved week by week, we're interacting with clarity as quite a bit on product on the licensing discussions.

And planning for the for the anticipated a rapid scale up as we commence running the 16 models et cetera. So there are involved they they help us with some technology selections, they're involved with a lot of lot of discussions that we have around the future of enhancing some of.

<unk> standard processes within the OCC refinery because that's a shared.

The thing that they have they had battery breakers, they have kettles, they have furnaces and things like that they're helping us as we as we work through those processes. So the only is our hourly partner and a clear else's someone that we talked to every week.

Okay, well. Thank you for taking my call and best of luck with everything and hope to see you Essex incident.

Yeah. Thank you.

Our next question comes from Steve Cougar Foresight investing.

Good afternoon guys.

A couple of questions you said that the first for modules were running 24 seven in the third quarter.

What percentage of the time in the third quarter, where they're running 24 seven.

And what I'm really trying to get out is whether or not.

2.4 million in revenue.

There's a number we can extrapolate out to a an annual revenue run rate based come and go into 16 modules.

Yeah, I would I wouldn't due to budget calculation, if you've got the 16 modules and you look at the current LMP prices revenues for the plant should be and you know elmi does move around a little bit but in the mid mid to high 40 million.

Capacity, so that's where the offered to find led plus all the other products like the let Billy and then the plastics and things that come off of it. If you look at the Q3 run we ran seven by 24 for quite endurance period with those four modules.

As a percentage of the quarter I don't know that off the top of my head and Ah Ah I can't answer that question I'm off the top of my head, but there was for for quite some time.

Yes, if you take 2.4 and multiply it by four and multiplied by four for sick going 16 modules and four quarters.

You get almost 40 million so if the.

Total revenue capacity of 16 module is gonna be mid to high Fortys. You are you were pretty close to.

Running at most.

Most of the quarter.

We will wait so we've run yeah, 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 then we're comfortable and propagating that throughout the remaining 12 to get to this.

16 to one all 16 with the final configurations, it'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 detailed what are the cost factors will be there from our continued learnings.

And we'll make that decision a little bit down the road or on on what what the configuration. When those costs are gonna be but without getting into specific numbers. The percentage cost that we have for the doubling of the capacity of the plant compared to the money.

The plant equipment the company in general is a smaller percentage than than twice as much a a significant level.

And that's because we've already have you know something to cost and the land the building the plant equipment. The breaker size for 32 modules the cattle and get 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 under.

Valued assets so to speak of this plant and then protected to go to those 32 more reasonable cost.

Can you tell us what the investment will have been when you're done with the for 16 modules up and running.

With all the capital improvements.

Yeah, I mean, if you look at the balance sheet currently our our fixed assets around 50 million or 55 million or so net of depreciation. So if you think kinda initial investments probably closer to 80 million, but that's the whole plants you know building the building that all the infrastructure and then and then the equipment.

But you know, it's even actually the incremental costs then too. So you get to that additional 16 modules was a significant be smaller portion.

That increase.

Right.

I think I think you said before they had once you have all 16 modules up and running.

A steady state.

That you'd be cash flow neutral set still a fair Ah Ah expectation.

Yep, that's still fair expectation.

Okay, great. Thanks very much.

Our next question comes from Daniel metric of Oppenheimer <unk> co.

Thank you for taking my call.

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 and get casting line have been automated it's got robotics. So the the ingot is a continuous rolling line with a start with Golden Star wheel that pores.

The the molten led into each thing mold and then it goes down the line, but tends to be yards long and cool and then they pop off at the backend and then a robotic takes over and stacks collects the back those and two of the size of basically one for.

Slipped out and then manually we take the forklift and move it into the shipping area.

So that's been all automated and speaking of automation Ah. That's one thing we've been working a greatly with the Olivia.

In particular as they run a lot of chemical plants, such throughout the world and they really helped us automate not only that function, but many other automation control systems throughout the entire plant and those are all critical to Ah Ah to get predictable results and efficient ties the plant efficient for lower labor costs.

Better et cetera, so that's definitely but at high area 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 used by yearend.

No it's not so we have.

Concentrate with with our tankage to easily handle that.

Function there was a cut over a period, we can buy path that and Ah, but the cut over a period to get to the drawing system is a just a better a period of of a week or two and that's what we've mentioned in our report that that'll happen in the early part of the year and Ah well, then we'll be able to pass size and what that drives.

And gives US is is a lot of things higher yield because we can convert somebody insoluble materials that are soluble at our electrolyte and get more of a percentage of the let out weve guided before that were currently trading about 70% of a of the battery with the led and we'll get up to over 80% with with this part of the process. It eliminates.

Certain chemicals that we need to do that instead.

Oh of heat and so that that's a really powerful use of.

Towards a positive contribution margin and it allows us to capacitized the way that we.

Take that product and build our concentrate.

So that's the one project that is mechanically mechanically complete and pre commission, but as we round, but then into the new year for the first couple of weeks, well complete that and and that anyone forward with that that system.

Oh, just two final questions. One do you expect to be using brown and route through the end of year and then if you could give some color.

On.

How you're being received both nationally and internationally on the potential for licensing if you can give any kind of color.

Sure. So brown <unk> root will be certainly involved through the ended the year as we work on these cap capex projects and finish in construction and engineering and commission manage them through completion inclusive of the drives system, which will go into next year.

We'll have more projects for them as we.

Continue to look for what the rather than new treatment function that will allow us to treat 100% of the battery and greatly improve our contribution margins.

As well as the expansion at 32 module. So there's always going to be projects, where from like brown or we will be helpful with us.

So its not just an acute relationship but as an intense acute relationship during this period of time.

If that answers that question then to your second question on the light the global licensing as you guys. All heard before we hired for long haul and as our vice President of licensing and our senior director commercial paper you get has been working with following closely to.

Attend conferences on the global basis, but more importantly, a meat, but various parties that are quite interesting battery manufacturers as well as recyclers as well as integrated battery manufacturer slash recyclers that are quite interested in the opposite funding technology samples sent a ball.

<unk> meetings are happening and ER visits are taking place and we're engaging on a global stage or licensing efforts because yeah.

<unk> sales funnel and yet the build your relationships with all those those players throughout the world.

But in the meantime, our first mover partner Clary else is someone that like I mentioned before we're talking to every week.

Well I appreciate the the color on this Oh I can tell you that.

From the last time I was there it sounds like you've made tremendous progress progress. So keep up the good work guys and and I think.

The companys doing well thank you.

Appreciate it.

Once again if you other question. Please press Star then one.

Our next question comes from John Brac to private Investor.

Yeah.

Hi, John .

Hi, Gradings this is John correct. So.

Have a question about your power supply.

It looks like you're on uninterruptible system that affected you in July .

How is that going to disrupt the oh.

The operation.

Once you're on a.

Oh, a scale basis.

Yes, so the facility draws quite a bit of Mega watts of power in order to run the entire facility, including the OCC refining area. We are able to restart quickly was a power outage happens then our returns and.

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 significant impact from various power outages and in fact, the beauty Voc refining is a if the power goes out and you know we can we can start back up relatively quickly the things that impacted us more with a in the past of wasn't related as much power.

As a critical spares not being available when certain pieces of equipment fail, which weve mitigated with as much more comprehensive spares and site kit in consultation with Veolia Brown and route.

So you know it to netted out I don't think we're going to see much of an impact to our certainly our annual numbers below our quarterly numbers are based upon any sort of power outages.

So I would just be something that you were just live with are you planning that do you may have to implement some battery storage or to get you through those periods.

We do have emergency generators, and and ads and Ah, yes backup for some critical processes, but for the most part if you look at the cost benefit of putting megawatt hours ups of energy storage in place it doesn't make sense for industrial plant now personally having comes.

On the datacenter space, a where servers you know 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 Ah processes on the TV services side, but when you're looking at industrial application, you'll find very few examples of megawatt hours of energy storage sitting.

There.

As a power supply one of the major tractors you'd be looking at as you're citing a additional plants or for other tumors.

Certainly it by 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 and is that we're hitting really any obstacles and in a bigger material as it relates to.

Cost of power so that that's a good side.

And <unk> and <unk>, we do believe in the longer haul that because of the environmental benefits of OCC refining 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 with that operator.

Absolutely absolutely.

Well. Thank you very much for taking my questions and you guys are doing a great job out there.

Really appreciate it thank you.

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 their time today, and we really appreciate everybody's continued support in patients to shareholders as well as our partners as we work and scale the plant and really execute on a partnership potential with clarity else Veolia and our other parties that we that we are continuing to engage with and.

We will continue to update everybody throughout the remainder of the year as we achieve what milestones.

As I said before watch this space news to come.

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

Yeah.

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