Aqua Metals, Inc. — FY2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016. Aqua Metals was a pre-revenue company developing and commercializing AquaRefining, a modular, water-based lead-acid battery recycling process intended as an alternative to smelting. Its first recycling facility in McCarran, Nevada, was substantially completed and produced test lead reported as greater than 99.99% pure. Commercial-scale production began in January 2017, after the reporting period.
Financial performance and liquidity
| Metric | FY2016 / year-end | Comparable FY2015 / year-end |
|---|---|---|
| Revenue | None; the company had not generated revenue since inception | None |
| Operating expenses | $12.96 million | $5.45 million |
| Operating loss | $12.96 million | $5.45 million |
| Net loss | $13.56 million | $12.33 million |
| Basic and diluted loss per share | $0.89 | $1.47 |
| Net cash used in operations | $11.12 million | $1.48 million |
| Net cash used in investing | $19.06 million | $25.04 million |
| Net cash provided by financing | $35.50 million | $42.12 million |
| Cash and cash equivalents | $25.46 million | $20.14 million |
| Total assets | $71.53 million | $47.28 million |
| Working capital | $23.3 million | Not stated here |
Gross margin and other operating margins are not meaningful because the company had no revenue. Capital investment was substantial: property and equipment, net, rose to $41.39 million from $12.60 million, primarily reflecting construction and equipment for the Nevada facility.
At December 31, 2016, total liabilities were $14.54 million. Balance-sheet notes payable were $9.55 million, including the Green Bank facility and equipment leases; the Interstate Battery convertible note had a $5.0 million face amount but a net carrying value of $0.31 million after discounts. The Green Bank loan was originally $10.0 million, secured by facility assets and a $1.0 million certificate of deposit, and carried a floating rate with a 6% floor. The convertible note bears 11% interest and matures in 2019.
Changes versus the prior period
- Operating expenses more than doubled, driven by higher staffing, research and development, facility commissioning, professional services, and public-company costs.
- Net loss increased by about $1.23 million, although loss per share improved because weighted-average shares increased substantially.
- FY2015 included $5.78 million of noncash expense from the fair-value remeasurement of derivative liabilities; there was no comparable charge in 2016. FY2016 interest expense was $0.64 million.
- Cash used in operations increased as activity expanded. Investing outflows remained high as the first facility was built; 2016 financing included a $21.5 million net public-offering receipt and proceeds from the Interstate Battery financing.
Outlook, management commentary, and risks
- Management targeted a production rate of 120 metric tonnes per day at TRIC in the first half of 2017, with a longer-term goal of 160 tonnes per day at the site. These are targets, not reported achieved results.
- After year-end, Johnson Controls invested approximately $10.6 million gross ($10.5 million net, as described by the company) for shares and entered into tolling/lead-purchase and equipment-supply agreements. Johnson Controls agreed to buy up to 100% of automotive recycled-lead output, subject to specified notice provisions, and to provide used batteries for tolling. The planned technology deployment program remained subject to development of a definitive program blueprint.
- The company said year-end working capital, together with the Johnson Controls investment, was expected to fund its current plan for the next 12 months. Additional facilities require further funding; discussions about financing up to four additional facilities were not formal financing agreements.
- Key uncertainties include scaling the process reliably and economically, achieving target production and margins, customer qualification for primary-grade lead, securing sufficient batteries and financing, and protecting pending intellectual property. The company had no issued patents at the report date.
- Lead and used-battery prices are volatile. Environmental, health, safety, permitting, and remediation obligations could cause costs, delays, or liability. The company also cited competition from established smelters and risks associated with international expansion.
- A one-time $0.2 million charge related to modification of a former director’s stock option was included in 2016 expense. The Interstate Battery note’s large accounting discount resulted in a reported effective interest rate of 184.75%; management described significant future noncash discount amortization.
Important facts for investors to verify
- Whether commercial production reached the 120-tonne-per-day target, with what uptime, yield, operating cost, and saleable output.
- Actual revenue, cash generation, unit economics, and customer acceptance after commercial operations began.
- Availability and terms of financing for expansion, including whether the discussed non-dilutive or project financing was secured.
- Performance and enforceable obligations under the Johnson Controls and Interstate Battery supply, off-take, tolling, and technology agreements.
- Cash runway, debt service and covenants, future cash interest, convertible-note accounting, and potential dilution from warrants, options, and conversion rights.
- Permitting and environmental compliance at TRIC and any subsequent facilities, and progress and outcomes of pending patent applications.
The consolidated financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting at December 31, 2016; the auditor did not provide an internal-control attestation.