Aqua Metals, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 11, 2020. The filing reports full-year results and unaudited quarterly data, including Q4. Unless stated otherwise, amounts are U.S. dollars.
Business context and material developments
Aqua Metals developed AquaRefining, a water-based lead-recycling process, and operated its first recycling facility in McCarran, Nevada. In 2019, the plant operated up to four of 16 modules during parts of the second and third quarters while the company worked on upgrades to expand capacity.
A November 29, 2019 fire severely damaged all 16 AquaRefining modules and related equipment. The company suspended all commercial operations; the timing of any return to revenue-producing operations was undetermined in the filing. Management was evaluating a shift to a capital-light strategy focused on licensing its technology, rather than rebuilding the facility to its prior configuration.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Product sales | $4.874 million | $4.449 million |
| Cost of product sales | $24.799 million | $22.761 million |
| Gross loss (sales less cost of product sales) | $19.925 million | $18.312 million |
| Research and development | $1.555 million | $4.502 million |
| General and administrative expense | $19.314 million | $14.214 million |
| Operating loss | $40.794 million | $37.028 million |
| Net loss | $44.795 million | $40.254 million |
| Basic and diluted loss per share | $0.86 | $1.18 |
| Net cash used in operating activities | $25.177 million | $26.318 million |
| Net cash used in investing activities | $10.574 million | $3.929 million |
| Net cash provided by financing activities | $22.434 million | $28.346 million |
Full-year sales rose about 10%, while product costs rose about 9%; the company remained substantially loss-making. R&D fell as management shifted attention toward commercial scale-up. General and administrative expense increased, including $9.0 million of non-cash Veolia-related expense and higher stock-based compensation. Net loss included $3.477 million of interest expense and a $0.792 million net expense from fire-related insurance proceeds and costs.
Q4 2019: Product sales were $593,000, compared with $1.071 million in Q4 2018. Net loss was $11.270 million, versus $13.532 million. Q4 sales were affected by limited operations during construction and the fire.
At year-end, cash and cash equivalents were $7.575 million; working capital was $17.7 million, including a $17.446 million insurance receivable. Total assets were $69.454 million, total liabilities $19.865 million, and stockholders’ equity $49.589 million. Net property and equipment was $37.643 million after the fire-related write-off. The company reported approximately $9.2 million of Green Bank debt in its risk discussion; the balance sheet carried notes payable of $8.7 million, net of issuance costs. Contractual Green Bank principal payments totaled $9.306 million.
The company received $2.5 million of fire insurance proceeds by year-end and another $7.5 million after year-end, bringing reported proceeds received to $10 million by March 2020. Management recorded a $17.446 million year-end receivable based on its assessment that further proceeds were probable. The insurer’s ultimate payments were not assured.
Outlook, risks, and contingencies
- Management said further capital could be needed over the following 12 months. Its proposed funding sources were insurance recoveries and possible asset sales; additional equity or debt financing could be required and might be unavailable or dilutive.
- The proposed licensing strategy depended on commercializing technology that had not yet been demonstrated at significant commercial scale. The filing gives no revenue or profitability guidance and no determined restart date.
- Clarios-related commercialization faced a key obstacle: performance conditions tied to operating up to 16 modules at the damaged facility. Aqua Metals had not agreed revised standards with Clarios. If unresolved, the company said restrictions could prevent third-party sales or licensing until the equipment supply agreement expires in June 2021 or is terminated earlier.
- Insurance coverage was subject to policy exclusions and reservation of rights. The fire marshal’s preliminary investigation indicated the fire suppression system did not activate; the cause had not been determined. Green Bank was loss payee on insurance claims and controlled disbursements, creating a risk that proceeds could be applied to debt repayment or future disbursements withheld.
- The company had not met Green Bank’s minimum debt-service coverage covenant for quarters from March 2017 through December 2019, but received waivers. Future waivers were not guaranteed; default could allow acceleration of debt secured by substantially all assets.
- Veolia services and payments were suspended under a force majeure declaration after the fire. A longer-term licensing relationship remained subject to negotiation. Clarios accounted for 69% of FY2019 revenue and all reported trade receivables at year-end, underscoring customer concentration.
- Other material risks included pending securities class-action and derivative litigation, an employee complaint under investigation by Nevada OSHA, environmental and hazardous-material liabilities, and a January 2020 Nasdaq notice for falling below the $1.00 minimum bid-price requirement. The company had until July 13, 2020 to regain compliance under the notice.
Most important facts for investors to verify
- Whether insurers paid the remaining claimed proceeds, and whether the recognized receivable and total coverage ultimately matched documented losses.
- How insurance proceeds were allocated between Green Bank, operating needs, asset recovery, and the planned licensing strategy.
- Whether management adopted and funded a definitive post-fire plan, and whether AquaRefining can be commercialized by licensees at viable scale and economics.
- Whether Aqua Metals and Clarios resolved performance conditions and exclusivity restrictions, and whether a definitive development program was reached.
- Liquidity runway, debt covenant waivers or restructuring, and any need for additional financing or share issuance.
- Progress on Nasdaq bid-price compliance and the status and potential financial effect of pending litigation and the OSHA complaint.