Aqua Metals, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Financial amounts below are in millions of dollars unless otherwise noted. Aqua Metals is developing its AquaRefining lead-recycling technology and operating its first facility in McCarran, Nevada. The company reported no revenue for the quarter.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | None reported | None reported |
| Operations and development costs | $2.987 | $0.883 |
| General and administrative expense | $1.528 | $1.295 |
| Total operating expenses / operating loss | $4.515 | $2.178 |
| Interest expense | $0.388 | $0.002 |
| Net loss | $4.894 | $2.174 |
| Net loss per share, basic and diluted | $0.26 | $0.15 |
| Net cash used in operating activities | $4.150 | $1.600 |
| Net cash used in investing activities | $1.772 | $3.293 |
Gross margin is not meaningful because no revenue was reported. Cash and cash equivalents were $30.113 million at quarter-end, up from $25.458 million at year-end; restricted cash was $0.576 million. Working capital was $27.7 million. Total assets were $78.457 million and stockholders’ equity was $62.911 million.
Balance-sheet notes payable were $9.478 million, plus a convertible note with a $0.507 million carrying value. The convertible note’s contractual principal was $5.0 million, with $0.489 million accrued interest and a substantial unamortized discount. The $10 million Green Bank loan has a 21-year term and a stated rate floored at 6%; the company’s subsidiary was not in compliance with its minimum debt-service-coverage covenant at March 31, but received waivers for the March 31 and June 30, 2017 periods. It reported compliance with the other specified loan covenants.
Changes, operations and outlook
- Net loss more than doubled year over year. Operating and development costs more than tripled as the facility ramped up, headcount increased, and preparation, research, depreciation and overhead costs rose. Interest expense increased mainly due to the Interstate Battery convertible note and the Green Bank loan; related debt-discount amortization is expected to increase in later years.
- The McCarran facility began production in January 2017. Lead compounds and plastic produced during the quarter had not yet shipped; shipments began in April. Management expected production to reach 120 metric tons of recycled lead per day by year-end 2017, with a longer-term target of 160 tonnes per day.
- Management said existing working capital was sufficient for its current 12-month plan, including the 120-tonne target. Additional facilities will require further capital; the company had no formal financing agreements for them and gave no assurance that funding would be available on acceptable terms.
- Johnson Controls invested approximately $10.6 million for shares in February 2017, alongside equipment-supply and tolling/lead-purchase agreements. The company also described plans to pursue expansion, licensing and financing for additional facilities.
- After quarter-end, Aqua Metals acquired all shares of Ebonex IPR Limited, a pre-revenue advanced-battery-technology company, for $100,000 cash and 123,776 Aqua Metals shares.
Risks, contingencies and notable items
- The company remains pre-revenue and is dependent on successful production ramp-up, customer delivery arrangements and future financing. Management cautioned that financing may not be available on commercially reasonable terms, potentially limiting its business plan or ability to continue operations.
- The Green Bank loan is secured by specified subsidiary assets and a $1.0 million certificate of deposit, and is 90% guaranteed by the USDA. The company also disclosed key-person payment commitments of up to $2.0 million per occurrence to Interstate Battery and $1.0 million per occurrence to Johnson Controls, subject to stated time periods and conditions.
- A $0.670 million asset-retirement obligation was recorded for closure and decontamination of the Nevada facility, matched by a capitalized asset-retirement cost. Facility-trust contributions of $0.350 million were due in October 2017 and $0.220 million in October 2018.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting. It stated there were no material changes to the risk factors in its 2016 Form 10-K.
Important facts for investors to verify
- Whether production reaches the stated 120-tonne-per-day target and whether shipments develop into recurring revenue.
- Actual cash burn, liquidity needs and availability and terms of financing for expansion.
- Compliance with Green Bank covenants after the temporary waivers, and the loan’s future debt-service requirements.
- The effect of convertible-note interest and discount amortization, warrant exercises and other share issuance on future losses and dilution.
- Customer and partner performance under the Johnson Controls, Interstate Battery and other supply/off-take arrangements, and the costs or obligations associated with facility closure.