Aqua Metals, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 15, 2018. The company is an early-stage lead-battery recycler developing its proprietary AquaRefining technology and operating its first facility in McCarran, Nevada.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $2.088 million | None |
| Cost of product sales | $9.541 million | None |
| Gross loss (derived) | $7.453 million | Not applicable |
| Research and development | $8.103 million | $6.348 million |
| General and administrative | $6.891 million | $6.610 million |
| Impairment charge | $2.411 million | None |
| Operating loss | $24.858 million | $12.958 million |
| Net loss | $26.580 million | $13.557 million |
| Net loss per share | $1.31 | $0.89 |
| Net cash used in operating activities | $19.002 million | $11.121 million |
| Net cash used in investing activities | $8.651 million | $19.063 million |
Revenue began in April 2017 from sales of lead compounds and plastics; the company had not begun commercial production of AquaRefined lead. The derived gross loss reflects cost of product sales substantially exceeding initial sales; the filing does not report a gross-margin percentage.
At year-end, cash and cash equivalents were $22.793 million, working capital $21.850 million, total assets $74.442 million, and stockholders’ equity $58.965 million. Total liabilities were $15.477 million. Debt disclosures include approximately $9.8 million owed to Green Bank and a $5.0 million Interstate Battery convertible note; the latter carried 11% interest and accrued interest. Most assets secure the loans. Cash declined from $25.458 million at year-end 2016. The company raised approximately $24.3 million net in 2017 from the Johnson Controls investment and public offering; the offering’s overallotment added about $2.1 million net in January 2018.
Fourth quarter: Revenue was $896,000, cost of product sales $3.870 million, operating loss $6.533 million, and net loss $7.031 million, or $0.32 per share.
Material changes and business developments
- Compared with 2016, the company moved from pre-revenue development to limited product sales, while annual net loss nearly doubled and operating cash use increased.
- It installed 16 AquaRefining modules by December 2017 but reported a “sticky lead” issue requiring retrofits. The company said it expected to complete retrofits and begin bringing the modules into commercial operation by late March or early April 2018; further delays were possible.
- A $2.4 million non-cash impairment followed the $2.5 million acquisition of Ebonex IPR. The acquired patent portfolio was valued at $112,000, and the company cited the technology’s early development stage and related uncertainties.
- Johnson Controls accounted for the vast majority of 2017 revenue. Its tolling/lead purchase agreement covers purchases and tolling of recycled lead; a separate equipment supply agreement contemplated a further development agreement, not yet finalized.
Outlook, risks, and contingencies
- For 2018, management planned to retrofit and ramp the first 16 modules, and potentially install another 16 at TRIC subject to capital availability and design improvements. Management believed available working capital could fund commissioning and operations through at least December 2018, assuming successful rollout of the 16 modules.
- Further growth, licensing work with Johnson Controls, working capital needs, and ongoing losses will require additional financing. Availability and terms are uncertain; the filing does not provide revenue, profit, or cash-flow guidance.
- The Green Bank loan’s minimum debt-service coverage covenant was not met for each 2017 quarter; waivers were obtained. Interstate Battery alleged a technical breach related to the Ebonex acquisition without its prior consent. Aqua Metals recorded a $600,000 estimated resolution charge; either lender could potentially accelerate debt if a default is declared.
- Commercial-scale performance, module reliability, product certification and purity, margins, feedstock supply and lead-price volatility remain significant uncertainties. The company also cited permitting, environmental and hazardous-material liabilities, supplier concentration, and dependence on a small number of customers and vendors.
- Three purported securities class actions were pending concerning alleged statements about recycling operations; two shareholder derivative actions were filed in February 2018. The company denied the allegations and said it intended to defend them. Damages sought were unspecified.
- The financial statements received an unqualified independent audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.
Investor verification priorities
- Confirm whether the 16 modules completed retrofit and achieved sustained commercial AquaRefined-lead production, customer certification, and acceptable unit economics.
- Track cash burn, available financing, dilution, and liquidity relative to the stated December 2018 funding horizon.
- Verify the status of Green Bank covenant waivers and resolution of Interstate Battery’s alleged covenant breach, including any changes to debt terms or collateral risk.
- Check whether Johnson Controls and Aqua Metals signed the contemplated definitive development agreement by the stated June 30, 2018 deadline, and assess the resulting commercial terms and customer concentration.
- Monitor litigation developments, environmental permits and obligations, and the effect of lead and used-battery price movements on operating margins.