Aqua Metals, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Financial statement amounts below are in U.S. dollars; figures are unaudited and in millions unless otherwise noted.
Business context and operating progress
Aqua Metals is an early-stage lead recycler developing its proprietary, water-based AquaRefining technology at its McCarran, Nevada facility. In 2018 it began shipping lead bullion in April and high-purity AquaRefined lead in June, alongside lead compounds and plastics. The company reported staffing operations around the clock by August, but was rotating among four commissioned modules rather than running each continuously. Management said module operating time had improved and reported production of 100 kilograms per hour per module in an October announcement.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.169 | $0.589 | $3.378 | $1.192 |
| Cost of product sales | $6.453 | $3.140 | $16.489 | $5.671 |
| Gross loss | $(5.284) | $(2.551) | $(13.111) | $(4.479) |
| Operating loss | $(8.425) | $(5.843) | $(24.618) | $(18.325) |
| Net loss | $(9.263) | $(6.290) | $(26.722) | $(19.549) |
| Net loss per share | $(0.24) | $(0.31) | $(0.82) | $(0.99) |
Revenue increased 98.5% year over year in Q3 and 183.4% for the nine-month period. Losses widened: cost of product sales rose faster than revenue, reflecting operating costs, electrolyte losses, maintenance, and hiring and training for planned continuous operations. AquaRefined lead was 21% of Q3 revenue and 7% of nine-month revenue. Research and development expense fell, while nine-month general and administrative expense increased 60.5%, including legal costs, former CEO severance, and a warrant modification charge.
At September 30, cash and cash equivalents were $28.772, versus $22.793 at December 31, 2017. Working capital was $23.6; current assets were $31.044 and current liabilities $7.449. For the first nine months, operating cash use was $19.390, investing cash use $3.067, and financing provided $28.436. Financing included $26.6 net proceeds from a June public offering and $2.1 from the December 2017 offering’s overallotment. The company issued 10.1 million shares in the June offering; shares outstanding were 38.780 million at September 30 and 38.932 million as of November 6.
Reported balance-sheet debt carrying amounts included $8.992 of notes payable and $3.029 of current convertible note payable. The $5.0 face-value Interstate Battery convertible note bears 11% interest and is due May 24, 2019; management also described approximately $9.6 owed to Green Bank and $6.5 to Interstate Battery as of the report date. The Green Bank loan is secured and has a 21-year term. The company was not in compliance with its minimum debt-service coverage covenant for the quarters from March 2017 through September 2018, but had received waivers. It reported compliance with the loan’s other stated covenants.
Material changes, outlook, and risks
- Production economics: Management planned electrolyte-recovery improvements, with Phase One targeted for completion by year-end 2018, and intended to bring the plant to positive contribution margin before scaling beyond the initial four modules. These are targets, not assurance of profitability; the company acknowledged continuing production and performance issues.
- Operating plans and commercial prospects: The 12-month plan was to roll out all 16 installed modules if positive contribution margin is achieved. Management discussed seeking premiums for AquaRefined lead, commissioning additional refining kettles, and pursuing licensing or development arrangements, including a proposed Johnson Controls development agreement. No definitive development agreement was assured, and the filing states no licensing or joint-venture agreements were then in place.
- Funding: Management believed existing working capital could fund its current TRIC operating plan for the next 12 months, but expected to need additional capital for expansion, partnerships, and ongoing losses until positive operating cash flow. Future financing may not be available on acceptable terms. Failure to obtain a Green Bank covenant waiver could permit acceleration of that debt and potentially trigger default under the Interstate Battery loan.
- Customer and market concentration: Johnson Controls represented 94.7% of Q3 revenue and 86.4% of nine-month revenue; it also accounted for 94.8% of accounts receivable at September 30. Used-battery and lead prices are commodity-linked and volatile, though management said the short purchase-to-sale cycle reduces exposure.
- Interstate Battery arrangements: A June agreement waived key-man payments related to the former CEO and an alleged covenant breach, changed a warrant for 702,247 shares (exercise price reduced from $7.12 to $3.33 and expiry extended to June 2020), and provided for more favorable battery-supply pricing and payment terms. A further option to address key-man provisions could involve a $0.5 million fee and a potential $2.0 million payment tied to the president’s continued service.
- Contingencies and subsequent event: Securities class-action and shareholder derivative litigation remained pending; damages sought were unspecified, and the company said it would defend the claims. In October 2018, the company moved its headquarters to McCarran and ceased using its Alameda facility. It expected to record a lease-related liability and write off approximately $0.8 million of leasehold improvements in Q4.
Most important facts for investors to verify
- Whether module utilization, output, product quality, and customer certification support sustained commercial-scale production.
- Whether electrolyte-recovery and other plant improvements achieve positive contribution margin, and whether cost of sales falls relative to revenue.
- Whether the company secures covenant waivers, maintains adequate liquidity, and obtains additional financing without substantial dilution or unfavorable terms.
- Whether Johnson Controls or other customers provide durable offtake, premium pricing, and a definitive development or licensing agreement; assess the high customer concentration.
- Developments in the securities and derivative lawsuits, and any resulting financial or operational consequences.