Aqua Metals, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015. The unaudited filing covers a company incorporated in June 2014 that had not begun revenue-producing operations.
Business context and outlook
Aqua Metals is developing AquaRefining, a patent-pending electrochemical process to recycle lead-acid batteries. Its plan is to build and operate recycling facilities and manufacture the process equipment. The initial facility is under construction at the Tahoe Reno Industrial Center (TRIC) in Nevada; a 125,000-square-foot manufacturing and recycling facility is also being developed in Alameda, California.
Management expected commercial operations to begin after delivery of the first AquaRefining module, with construction completion anticipated in Q2 2016. Following the subsequent Green Bank loan, management’s plan was to reach production capacity of 80 metric tons of lead per day by Q4 2016, then potentially expand to 160 tons per day over time. Management targeted that expansion by 2018, subject to earnings and with no assurance.
Key financial metrics
| Metric | Three months ended September 30, 2015 | Nine months ended September 30, 2015 |
|---|---|---|
| Revenue | None; operations were pre-revenue | None; operations were pre-revenue |
| Operating expenses | $1.323 million | $3.070 million |
| Operating loss | $1.323 million | $3.070 million |
| Net loss | $2.084 million | $9.965 million |
| Net loss per share, basic and diluted | $0.19 | $1.53 |
| Net cash used in operating activities | Not provided for the quarter | $2.672 million |
| Net cash used in investing activities | Not provided for the quarter | $5.446 million |
| Net cash provided by financing activities | Not provided for the quarter | $32.862 million |
Gross margin and operating margin are not meaningful because the company had no revenue. Nine-month other expense included $5.776 million from an increase in the fair value of derivative liabilities and $1.126 million of interest expense. The derivative-related charge was largely noncash.
At September 30, 2015, cash and cash equivalents were $29.281 million; working capital was $29.232 million; total assets were $36.575 million; and total liabilities were $0.832 million. Stockholders’ equity was $35.743 million. Convertible notes and derivative liabilities had been eliminated from the balance sheet following conversion or reclassification in connection with the IPO. The filing reports no debt outstanding at quarter-end.
Material changes versus the comparable periods
- Q3 2015 net loss of $2.084 million compared with $0.232 million for Q3 2014. Nine-month 2015 net loss was $9.965 million; the comparable 2014 figure covers only inception through September 30, 2014 and was $0.272 million.
- Q3 operating expenses rose to $1.323 million from $0.230 million in Q3 2014, reflecting increased operations and development and business development and management costs.
- Cash increased from $4.537 million at December 31, 2014 to $29.281 million at September 30, 2015, principally following the IPO. The company received $32.862 million in net IPO proceeds, including the over-allotment.
- On August 5, 2015, $6 million of convertible-note principal and $279,678 of accrued interest converted into 2,511,871 common shares at $2.50 per share. The IPO and over-allotment resulted in 7,241,930 shares sold at $5.00 per share.
- Capital spending and deposits increased as the company acquired TRIC land, began facility development, and paid a $3.053 million equipment deposit. Common shares outstanding were 14,117,442 at September 30, 2015, versus 4,363,641 at year-end 2014.
Funding, risks, contingencies, and unusual items
- On November 3, 2015, after quarter-end, a subsidiary entered into a $10 million Green Bank loan to support TRIC expansion. It carries interest at prime plus 2%, subject to a 6% floor; payments are interest-only for 12 months, then amortized over 20 years. It is secured by TRIC property, plant and fixtures and a $1 million certificate of deposit, and includes financial covenants. USDA guarantees 90% of principal; the company paid a $270,000 guarantee fee and owes an annual renewal fee.
- Management stated that cash on hand was expected to fund the current plan to reach 80 tons per day, but also warned that additional capital may be needed and may not be available on acceptable terms. Funding future facilities and the planned 160-ton-per-day expansion remains uncertain.
- A $3.053 million balance remained due upon delivery and commissioning of recycling equipment; delivery was not expected until Q2 2016. The Alameda lease has total minimum payments of $3.071 million over its term.
- The company’s technology, production schedule, facility construction, equipment installation, feedstock supply and ability to achieve expected economics are execution risks. Management described supplier discussions and market interest, but these do not establish realized supply, operating performance or customer demand.
- Potential dilution includes outstanding options and warrants. The filing also reports consulting expenses to a company owned by the CEO’s brother. Net operating loss utilization may be limited by tax ownership-change rules.
- Management reported effective disclosure controls as of September 30, 2015, no material changes in internal control during the quarter, and no off-balance-sheet financing arrangements. No litigation contingency amount is specified in the supplied filing text.
Important facts for investors to verify
- Whether construction, module delivery and commissioning meet the stated milestones, and whether the 80-ton-per-day production target is achieved.
- Actual capital needs and remaining project costs, including the equipment balance, facility expansion spending and availability of funding for any further expansion.
- Green Bank loan terms, collateral, covenant compliance, guarantee fees and the effect of the pledged $1 million certificate of deposit on liquidity.
- Whether used-battery supply, customer demand and the claimed operating and environmental advantages of AquaRefining are supported by executed agreements and operating results.
- Potential dilution from options and warrants, as well as related-party consulting arrangements and the company’s ability to use tax loss carryforwards.