Aqua Metals, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance sheet compared with December 31, 2017. Financial amounts are in U.S. dollars; statement amounts below are shown in millions unless noted. Aqua Metals is an early-stage lead recycler developing its proprietary, water-based AquaRefining process at its McCarran, Nevada facility.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Product sales | $1.726 million | $0 |
| Cost of product sales | $5.436 million | $0 |
| Operating loss | $6.960 million | $4.515 million |
| Net loss | $7.532 million | $4.894 million |
| Basic and diluted loss per share | $0.27 | $0.26 |
| Cash used in operating activities | $5.958 million | $4.150 million |
| Cash used in investing activities | $1.337 million | $2.320 million |
| Cash provided by financing activities | $1.999 million | $10.577 million |
| Cash and cash equivalents at period end | $17.497 million | $22.793 million at Dec. 31, 2017 |
| Working capital at period end | $16.1 million | Not stated for comparable date |
- Product sales were entirely lead compounds and plastics. Cost of product sales exceeded sales by $3.710 million, reflecting early-stage facility operating costs; the filing does not present a standalone gross-margin measure.
- Research and development expense fell to $1.475 million from $2.987 million, largely because facility costs shifted to cost of product sales after sales began. General and administrative expense rose to $1.775 million from $1.528 million, primarily due to litigation and proxy-related costs.
- Interest expense increased to $0.587 million from $0.388 million. Management noted substantial non-cash discount amortization on the Interstate Battery convertible note, with expected non-cash interest expense of $2.0 million in 2018 and $2.6 million in 2019.
- Total assets were $69.956 million and total liabilities were $16.272 million at March 31. Current assets were $20.395 million against current liabilities of $4.333 million.
- Debt includes Green Bank notes with $8.763 million non-current and $0.282 million current carrying amounts, plus a $5 million Interstate Battery convertible note due May 2019. Its reported carrying amount was $1.742 million, after discount and financing-cost deductions; accrued interest was $1.124 million. These carrying values should not be confused with principal and accrued amounts owed.
- Q1 financing included $2.107 million net proceeds from the underwriter’s exercise of the December 2017 offering overallotment option. Shares outstanding increased to 28,694,210 from 27,554,076 at year-end.
Material changes versus the prior period
- Sales began in April 2017, so Q1 2018 was the first comparable first quarter with product revenue. The company had generated $3.8 million total revenue from inception through March 31, 2018.
- Net loss increased by $2.638 million year over year, while operating cash use increased by $1.808 million. Investing cash use declined, but financing proceeds were substantially lower than in Q1 2017.
- Cash decreased by $5.296 million during Q1 2018. Property and equipment, net, increased to $46.583 million from $45.733 million, including $6.147 million of equipment under construction, primarily AquaRefining modules.
- Customer concentration was significant: Johnson Controls Battery Group accounted for 79% of Q1 revenue and 97% of accounts receivable at March 31.
Outlook, management commentary and key risks
- Operations: The 2018 plan was to complete commercial rollout of 16 installed modules and ramp AquaRefined lead production. After retrofits to address operational issues, including “sticky lead,” the company reported that the first four modules had entered commercial operation and expected to ramp production in Q2. Commercial-scale AquaRefined lead production had not yet begun; reported sales were lead compounds and plastics.
- Funding: Management believed available working capital could support commissioning and operations of 16 modules through at least May 2019, conditional on successful commercial rollout. Additional capital would be needed for expansion beyond 16 modules, strategic projects, working capital and continuing losses. Financing availability and terms were not assured; the company warned it might be unable to pursue its plan or continue operations if funding were unavailable.
- Debt covenants: AMR failed the Green Bank minimum debt-service-coverage covenant for periods through March 31, 2018 and received waivers for each. Future waivers are not assured; a default could permit acceleration and could affect the Interstate Battery loan. Interstate Battery also claimed a technical breach related to the company’s acquisition of Ebonex IPR without prior written consent. The company was negotiating a resolution and had accrued an estimated $0.6 million charge in 2017.
- CEO departure and potential payments: Stephen Clarke resigned on April 19, 2018. Unless the relevant investors approve his successor, the company may owe key-man payments of $2 million to Interstate Battery and $1 million to Johnson Controls, payable in cash or shares at the company’s option. Clarke’s separation terms also provide approximately $0.9 million of severance and benefits over two years, subject to a release, plus approximately $15,000 of option-modification expense.
- Strategic plans: The company intended to pursue a proposed development agreement with Johnson Controls for facility integration and potential licensing, but no definitive development agreement was in place. It also planned to consider 16 additional modules, subject to capital and design improvements.
- Litigation and governance: Securities class actions and shareholder derivative actions were pending; the company denied the allegations and intended to defend them. A May 2, 2018 proxy-contest settlement expanded the Board to six members, provided Kanen nomination rights subject to ownership and time conditions, and established a CEO search committee. Steve Cotton was to become president effective after the filing.
- Other risks: Commercial-scale technology and economics remain unproven; further operational delays, customer purity requirements, lead and battery-price volatility, supply access, environmental permitting and hazardous-material liabilities could affect results. The company also faces dilution risk from future financing and potential issuance of shares for key-man payments.
- Management reported disclosure controls and procedures were effective as of March 31, 2018, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Verify actual module uptime, production volumes, product mix, customer acceptance and unit economics as AquaRefined lead operations ramp.
- Track cash burn, financing needs and whether the stated runway through May 2019 remains achievable.
- Confirm Green Bank covenant waivers and resolution of Interstate Battery’s alleged covenant breach, including any acceleration or cross-default exposure.
- Determine whether Interstate Battery and Johnson Controls approve Clarke’s successor and whether up to $3 million of key-man payments are waived or paid.
- Monitor litigation developments, potential costs and outcomes, and the effect of customer concentration on receivables and revenue.
- Check progress and terms of any definitive Johnson Controls development agreement and funding for expansion beyond the initial 16 modules.