Aqua Metals, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2020, compared with Q1 2019. Aqua Metals develops lead-recycling technology using its AquaRefining process. A November 29, 2019 fire damaged all 16 AquaRefining modules and suspended plant operations. Q1 2020 sales were mainly high-purity lead sold from inventory; the plant did not produce during the quarter.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Product sales | $18,000 | $437,000; down 95.9% |
| Cost of product sales | $1.454 million | $4.681 million |
| Research and development | $242,000 | $620,000 |
| General and administrative | $2.385 million | $4.016 million |
| Operating loss | $4.063 million | $8.880 million |
| Net loss | $4.427 million | $11.708 million |
| Basic and diluted loss per share | $0.07 | $0.27 |
| Operating cash used | $4.262 million | $6.304 million |
Gross loss on product sales was approximately $1.436 million, versus $4.244 million in Q1 2019. The company reported $203,000 of insurance proceeds net of related expenses as other expense. Interest expense declined to $183,000 from $2.889 million, largely because the Interstate Battery convertible note had been repaid in January 2019.
At March 31, cash and cash equivalents were $6.386 million, versus $7.575 million at year-end 2019. Working capital was $11.5 million, including a $9.946 million insurance proceeds receivable. Total assets were $62.398 million; liabilities were $16.254 million; and stockholders’ equity was $46.144 million. Notes payable were $8.633 million net of issuance costs on the balance sheet; management described the outstanding Veritex loan as approximately $9.2 million before issuance-cost adjustments.
Investing activities provided $3.149 million, primarily reflecting $4.748 million of insurance proceeds, offset by property and equipment purchases. Financing activities used $76,000 for debt payments. Cash declined by $1.189 million during the quarter. The company said it expected to need additional capital over the next 12 months and planned to rely on insurance recoveries and possible asset sales; additional equity or debt financing might be required.
Material changes and management outlook
- Revenue fell sharply because the fire halted production. Management said the plant would not be in production during 2020, apart from limited testing of improved electrolyzers.
- Operating expenses declined, reflecting suspended production, lower research and development spending, reduced payroll and other cost reductions. Management attributed lower interest expense primarily to the prior-year convertible-note repayment.
- Management was assessing a capital-light strategy focused on licensing AquaRefining technology rather than rebuilding the damaged facility. It expected this strategy could be funded primarily through cash, insurance proceeds and asset dispositions, but gave no assurance of sufficient funding or successful licensing.
- Management estimated damaged or lost equipment and plant value could reach $37 million, excluding business-interruption recovery, against combined property, equipment and business-interruption insurance limits of $50 million. As of March 31, the company reported $10.0 million received, including $2.75 million held in escrow, and a probable additional receivable of at least $9.9 million. It expected $10–$15 million of further insurance proceeds over the following three to six months, subject to uncertainty. A subsequent-event note reports a $2.5 million payment on April 30, bringing total proceeds received to $12.5 million.
- Under the March 25 agreement with Veritex, specified portions of insurance and collateral-sale proceeds are allocated to the company and to loan repayment. Veritex is the loss payee, and the lender’s approval remains relevant to disbursements. The loan’s minimum debt-service-coverage covenant was not met for quarters from March 2017 through March 2020; waivers had been obtained, but future waivers were not assured.
Risks, contingencies and unusual items
- Insurance recovery is uncertain: carriers accepted coverage subject to reservations of rights, and the filing notes potential policy exclusions, including issues related to the fire-suppression system. Insurance proceeds are also subject to the lender allocation agreement.
- The company had no meaningful operating revenue base after the fire and stated it could be unable to continue operations if insurance, asset-sale proceeds or other financing were insufficient.
- Pending matters include a securities class action, a stayed shareholder derivative action, and a Nevada OSHA investigation concerning a former employee’s complaint. The company disputes the allegations; the employee matter’s likelihood of an unfavorable outcome could not be evaluated.
- COVID-19 restrictions could disrupt recovery work, partner and supplier activity, and license negotiations; the financial impact was not estimable.
- Nasdaq notified the company that its share price was below the $1.00 minimum bid requirement. The compliance deadline was tolled and, as described in the filing, extended to September 28, 2020.
- Commercialization depends on proving AquaRefining at scale and securing licensing arrangements. The filing identifies uncertainty around negotiations with Clarios and Veolia, technology performance, customer certification, competition, permits, environmental obligations and intellectual-property protection.
Most important facts for investors to verify
- Actual timing, amount and availability of remaining insurance proceeds, including escrow treatment and the lender’s share; reconcile the March 31 receivable with subsequent collections.
- Cash runway and funding needs under the licensing strategy, including any asset-sale proceeds or new financing and potential dilution.
- Veritex loan balance, covenant waivers, required payments and application of insurance or collateral-sale proceeds to debt retirement.
- Whether Aqua Metals can secure licensing agreements, resolve Clarios performance conditions and complete the planned Veolia negotiations.
- Progress on fire-related cleanup, electrolyzer testing and any credible timetable for future revenue-producing operations.
- Developments in the pending litigation and OSHA investigation, as well as Nasdaq bid-price compliance.