Aqua Metals, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial statement amounts are in thousands of dollars, except per-share data, unless noted.
Business context
Aqua Metals was developing its AquaRefining process and building its first lead-acid battery recycling facility in McCarran, Nevada. It reported no revenue for the periods presented. After quarter-end, on October 28, 2016, it began limited lead production using one module; the company said its own assay showed lead purity above 99.99%.
Financial performance and position
| Metric | Q3 2016 / Sep. 30, 2016 | Comparable period / prior balance-sheet date |
|---|---|---|
| Revenue | None reported | None reported |
| Operating expenses | $3.321 million | Q3 2015: $1.323 million |
| Operating loss | $3.321 million | Q3 2015: $1.323 million |
| Net loss | $3.517 million; $0.23 per share | Q3 2015: $2.084 million; $0.19 per share |
| Nine-month net loss | $8.622 million; $0.58 per share | Nine months 2015: $9.965 million; $1.53 per share |
| Cash and cash equivalents | $15.408 million | Dec. 31, 2015: $20.141 million |
| Restricted cash | $0.760 million | Dec. 31, 2015: $11.667 million |
| Working capital | $11.6 million | Not stated for the comparable date |
| Total assets | $55.271 million | Dec. 31, 2015: $47.276 million |
| Total liabilities | $15.050 million | Dec. 31, 2015: $13.611 million |
| Stockholders’ equity | $40.221 million | Dec. 31, 2015: $33.665 million |
Margins are not meaningful because the company had not yet reported revenue. Nine-month operating cash use was $5.802 million, investing cash use was $12.935 million, and financing cash provided was $14.004 million. Cash decreased by $4.733 million during the nine months. Capital spending primarily funded the Nevada facility; property and equipment rose to $36.056 million from $12.603 million at year-end 2015.
At September 30, notes payable totaled $9.415 million on the balance sheet, including current and non-current portions. The $10 million Green Bank construction loan carries a rate of at least 6%; its reported carrying amount is net of issuance costs. The company also issued Interstate Battery a $5 million, 11% convertible note due in 2019. After discounts and financing costs, its balance-sheet carrying value was $0.123 million; the filing reports a 184.75% effective interest rate resulting from the substantial debt discount.
Changes versus prior periods
- Q3 operating expenses increased to $3.321 million from $1.323 million, primarily reflecting higher staffing, research and development, professional services, depreciation, and other costs as activity expanded.
- Q3 net loss widened to $3.517 million from $2.084 million. For the nine-month period, net loss narrowed to $8.622 million from $9.965 million, largely because 2015 included a $5.776 million noncash increase in derivative-liability fair value.
- Nine-month operating cash use increased to $5.802 million from $2.672 million, while investing cash use increased to $12.935 million from $5.446 million, mainly due to facility construction and equipment purchases.
- Funding included approximately $9.167 million net proceeds from common-stock sales and $4.858 million net proceeds from the Interstate Battery convertible note. Shares outstanding increased to 15,578,725 from 14,137,442 at year-end 2015.
Outlook, risks and unusual items
- Management said working capital was expected to fund the current plan for the next 12 months, including a target of 120 tonnes of lead production per day early in 2017. The facility was designed for expansion to 160 tonnes per day, with that production level targeted by 2018.
- The company expected commercial-scale battery recycling to begin in Q4 2016. It also planned to pursue additional facilities and technology licensing, but reported no financing agreements for the proposed additional sites and gave no assurance that funding would be secured.
- Management identified substantial execution and financing risks: the technology had not been demonstrated at commercial scale, additional capital might be needed, and the business had a limited operating history. Other disclosed risks include lead and used-battery price volatility, feedstock access, environmental and permitting obligations, intellectual-property challenges, and dilution or market volatility.
- Interstate Battery supply terms included minimum purchase and sale requirements and limited rights of first refusal. Its note and warrants could result in substantial additional share ownership if converted or exercised. The company also agreed to potential $2 million key-man payments tied to specified CEO or COO departures during the agreement’s three-year period.
- The Green Bank loan is subject to financial covenants; the company reported compliance as of September 30, 2016. The $1 million certificate of deposit serves as collateral, and $0.760 million of restricted cash was held for facility construction-related payments.
- A one-time $175,000 stock-option modification charge was recorded in the nine-month period. The company also disclosed significant future noncash interest expense from amortizing the Interstate Battery note discount.
Investor verification points
- Verify actual commercial-scale production, throughput, recovery, product quality, operating costs, and gross margins against management’s targets; limited production began only after quarter-end.
- Monitor cash burn, unrestricted liquidity, construction and commissioning costs, and whether additional financing is required or obtained.
- Review the convertible note’s face amount, discount amortization, effective interest accounting, conversion terms, warrants, and resulting potential dilution.
- Assess progress on Interstate Battery feedstock supply, customer demand, proposed facility financing, and licensing discussions.
- Track covenant compliance, permitting and environmental obligations, and exposure to lead-price and used-battery supply fluctuations.