Aqua Metals, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The unaudited results are for Aqua Metals’ lead-recycling business and its AquaRefining facility in McCarran, Nevada. Comparisons below are with Q1 2018 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Product sales | $0.44 million | $1.73 million; down 74.7% |
| Cost of product sales | $4.68 million | $5.44 million; down 13.9% |
| Gross loss, calculated as sales less cost of sales | $4.24 million | $3.71 million |
| Research and development | $0.62 million | $1.48 million; down 58.0% |
| General and administrative | $4.02 million | $1.78 million; up 126.3% |
| Operating loss | $8.88 million | $6.96 million |
| Interest expense | $2.89 million | $0.59 million |
| Net loss | $11.71 million | $7.53 million |
| Basic and diluted loss per share | $0.27 | $0.27, with a higher weighted-average share count in 2019 |
| Operating cash used | $6.30 million | $5.96 million |
| Investing cash used | $1.57 million | $1.34 million |
| Financing cash provided | $2.32 million | $2.00 million |
Sales fell as the company deliberately limited AquaRefining operations to focus on plant improvements. Cost of sales declined much less than revenue because most costs remained fixed; the company also hired production employees ahead of a planned ramp-up. G&A growth principally reflected noncash Veolia-related expense and increased stock-based compensation. Interest expense included a $2.6 million noncash charge from writing off the remaining discount on the Interstate Battery convertible note when it was repaid.
Financial position and liquidity
- Cash and cash equivalents were $15.34 million at March 31, 2019, down from $20.89 million at December 31, 2018. Working capital was $9.9 million.
- Total assets were $69.19 million; total liabilities were $18.91 million; stockholders’ equity was $50.28 million.
- The company repaid $6.7 million of principal and interest on its Interstate Battery convertible note in January. Remaining notes payable were $8.88 million, primarily the Green Bank loan; operating lease liabilities were approximately $1.75 million.
- January’s public offering of 5.175 million shares at $1.90 per share raised approximately $9.1 million net. Shares outstanding increased from 38.93 million at year-end to 44.73 million at quarter-end.
- Management believed available working capital could fund the current level of TRIC operations for the next 12 months, but said additional capital would be needed for expansion beyond the planned 16 modules and to fund ongoing losses until positive operating cash flow is achieved. It identified equity or debt financing, licensing fees, joint ventures, and project financing as possible sources; availability and terms were uncertain.
Operations, outlook, and material developments
- The company reported 16 AquaRefining modules installed. It was operating one or two modules for much of Q1 while completing improvements; after quarter-end it reported operating up to four modules continuously and beginning rollout of modules five through eight. Its goal was to operate all 16 continuously by year-end 2019, with no assurance against further delays or operational issues.
- Phase One of a two-phase capital improvement program was completed in March. Electrolyte recovery was 67% of target in Q1; management expected 75% in Q2 and 100% after Phase Two, planned for the second half of 2019. These were expectations, not reported achieved results.
- Veolia entered a two-year operations, maintenance, and management agreement in February 2019 and began onsite work in March. Veolia assumed primary responsibility for scaling the facility through 2019; the parties also planned a possible expansion to 32 modules in 2020. Consideration includes 2.35 million shares issued in quarterly installments and warrants for up to 4 million shares at stated exercise prices of $5 and $7, subject to the agreement’s terms. Financing and successful execution remain important uncertainties.
- The company continued discussions with Clarios, successor to Johnson Controls’ battery business, on a definitive technology development and licensing program. No definitive development agreement had been reached; the existing agreement could be terminated if one was not reached by the applicable deadline, which the company said it was discussing extending.
- Green Bank debt covenants require, among other things, a minimum debt-service coverage ratio. Aqua Metals was out of compliance with that ratio for quarters from March 2017 through March 2019 and had obtained waivers. An April 23, 2019 waiver also permitted up to $5.0 million of capital and/or operating leases. Failure to obtain future waivers could result in default and accelerated repayment.
- After quarter-end, Aqua Metals agreed to settle Clarios’ $2.0 million key-man penalty claim by issuing 807,436 shares. On May 9, 2019, stockholders approved and the company effected an increase in authorized common shares from 50 million to 100 million.
Risks, contingencies, and unusual items
- The AquaRefining process and facility were still in limited-scale commercialization; the company had not established commercial-scale economics or positive contribution margins. Production delays, cost overruns, feedstock supply, lead prices, customer certification, and the ability to achieve planned module output are significant risks.
- Customer and receivable concentration was high: Clarios represented 60% of Q1 revenue and 60% of quarter-end accounts receivable; P. Kay Metals represented 37% of each. The filing also identifies dependence on suppliers and strategic partners, including Veolia and Clarios.
- Pending matters include a securities class action and consolidated shareholder derivative litigation. The company denies the allegations and intends to defend itself; outcomes and potential financial effects are uncertain.
- Nevada OSHA had issued a citation concerning lead-standard compliance. The company settled the penalty amount, engaged a compliance expert, and said corrective actions would be taken based on the expert’s findings. Environmental permitting, hazardous-material handling, and potential cleanup liabilities are additional risks.
- The company recorded an asset-retirement obligation of approximately $0.76 million for facility closure and decontamination. It had contributed $0.67 million to a closure trust through March 31.
- Management stated that disclosure controls and procedures were effective as of March 31, 2019, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check subsequent filings for actual module utilization, production volumes, unit costs, electrolyte recovery, and evidence of improving contribution margins against the year-end 2019 target.
- Verify cash runway, additional financing needs and terms, and whether Green Bank covenant waivers remain in place.
- Confirm the status and economics of the Clarios development agreement and the Veolia relationship, including financing milestones, share issuances, warrants, and any expansion commitments.
- Track dilution from the Clarios settlement, Veolia consideration, outstanding options and warrants, and the increased authorized share count.
- Monitor the securities and derivative lawsuits, OSHA corrective actions, and any material environmental or closure obligations.