Aqua Metals, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unless noted otherwise, financial amounts below are in millions of dollars. The filing was signed October 22, 2020.
Business context
Aqua Metals develops equipment and technology licensing for lead-acid battery recycling using its AquaRefining process. A November 2019 fire damaged the AquaRefining area of its Nevada facility and suspended commercial production. The company is pursuing a capital-light strategy focused on licensing and equipment supply rather than rebuilding and operating the facility. During Q3 2020, product sales came from previously produced inventory; the facility was not in commercial production.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Product sales | $0.090 | $2.361 | $0.108 | $4.281 |
| Cost of product sales | $1.635 | $8.231 | $4.395 | $20.097 |
| Loss from operations | $(3.411) | $(11.259) | $(11.242) | $(30.514) |
| Net loss | $(1.837) | $(11.316) | $(10.247) | $(33.525) |
| Basic and diluted loss per share | $(0.03) | $(0.20) | $(0.17) | $(0.66) |
Cost of product sales exceeded revenue by $1.545 million in Q3 and $4.287 million for the first nine months of 2020. Q3 and nine-month results included insurance proceeds net of related expenses of $1.722 million and $1.467 million, respectively; these amounts helped reduce reported losses.
- Revenue and expenses: Sales fell 96.2% in Q3 and 97.5% for the first nine months versus 2019. Lower operating costs reflected suspended production, reduced research and development, and lower general and administrative expenses.
- Cash flow: For the first nine months, operating cash use was $8.992 million, investing cash provided was $6.961 million (including $9.838 million of insurance proceeds), and financing cash provided was $0.091 million. Cash decreased $1.940 million to $5.635 million.
- Balance sheet at September 30: Total assets were $55.943 million; current assets $7.259 million; current liabilities $4.859 million; and working capital $2.4 million. Stockholders’ equity was $41.398 million.
- Debt and liquidity: Notes payable totaled $8.820 million, including the Veritex loan and a $0.332 million Paycheck Protection Program loan. Lease liabilities were $1.005 million, including the immaterial finance lease. The company reported $7.6 million of insurance proceeds held in escrow for the lender. Cash was $5.635 million.
- Insurance: The company had received $21.8 million in fire-related insurance proceeds by September 30; $7.6 million was held in escrow under its agreement with Veritex. A subsequent $0.7 million payment brought reported receipts to $22.6 million as of the report date.
Material changes versus the prior comparable period
- Commercial production ceased following the fire, driving the sharp fall in product sales and cost of product sales.
- Nine-month operating cash use improved from $18.591 million in 2019 to $8.992 million in 2020. Investing cash flow moved from $9.268 million used to $6.961 million provided, mainly because of insurance receipts; 2019 investing reflected facility construction.
- Net loss narrowed to $10.247 million for the first nine months from $33.525 million. The comparison includes a substantial reduction in expenses, insurance-related income, and lower interest expense; 2019 included costs associated with the repaid convertible note and Veolia agreement.
- Outstanding shares increased to 61,117,926 at quarter-end from 57,997,780 at December 31, 2019, primarily reflecting employee and other share issuances. The company reported 61,175,561 shares outstanding as of October 19, 2020.
Outlook, risks and contingencies
- Management said additional capital would be required to fund ongoing costs and the business plan over the next 12 months. Planned sources include further insurance recovery, asset sales, and potentially equity or debt financing; financing may not be available on acceptable terms, and equity issuance would dilute shareholders.
- The company intended to advance its Version 1.25L electrolyzer program and seek licensing opportunities. Management gave no quantified revenue, earnings, or production guidance and said the facility would not be in production during 2020 apart from electrolyzer operation and testing.
- The Veritex loan’s minimum debt-service-coverage covenant had been unmet for quarters from March 2017 through September 2020, with waivers received for those periods. Future waivers are not assured; absent a waiver, the lender could declare default and accelerate repayment. Insurance proceeds are allocated between the company and lender under a memorandum of agreement.
- Insurance coverage and the amount and timing of further recovery remain uncertain. The fire’s cause was associated with contractor work, and the fire suppression system reportedly did not activate; insurers accepted claims subject to reservations of rights, and the filing cautions that coverage could be disputed.
- The company had not secured a definitive licensing or development program agreement with Clarios. Its equipment supply agreement includes restrictions tied to performance conditions, which the parties had not revised; inability to agree could constrain third-party licensing or equipment sales until expiration or earlier termination.
- The Veolia operations agreement was not renewed and was scheduled to terminate March 6, 2021; a new arrangement was considered unlikely on commercially reasonable terms. Pending securities class and shareholder derivative litigation sought unspecified damages; the company disputed the claims.
- Nasdaq had notified the company of noncompliance with audit committee composition requirements after a director’s resignation. The company said it intended to regain compliance within the applicable cure period.
- Management reported disclosure controls and procedures were effective as of September 30, 2020, with no material change in internal control over financial reporting during the nine-month period.
Important facts for investors to verify
- Progress, cost, and commercial readiness of Version 1.25L and whether Aqua Metals secures binding licensing, equipment-supply, or development agreements.
- Timing and amount of additional insurance recoveries, the use of proceeds held in escrow, and the lender payoff terms under the Veritex agreement.
- Cash runway and the amount, timing, and terms of any asset sales or new financing, including potential dilution.
- Future covenant waivers and whether the company remains current on debt and lease obligations.
- Insurance coverage disputes, the status and potential exposure from pending litigation, and Nasdaq audit committee compliance.