Aqua Metals, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. The company develops and operates lead-acid battery recycling facilities using its AquaRefining technology. This unaudited report covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Aqua Metals was scaling its McCarran, Nevada facility and pursuing potential licensing and strategic-partner opportunities.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Product sales | $2.36m | $1.17m | $4.28m | $3.38m |
| Cost of product sales | $8.23m | $6.45m | $20.10m | $16.49m |
| Loss from operations | $(11.26)m | $(8.43)m | $(30.51)m | $(24.62)m |
| Net loss | $(11.32)m | $(9.26)m | $(33.53)m | $(26.72)m |
| Net loss per share, basic and diluted | $(0.20) | $(0.24) | $(0.66) | $(0.82) |
Cost of product sales substantially exceeded revenue: the implied gross loss was $5.87m in Q3 and $15.82m for the nine months. The filing does not report a positive product gross margin. Revenue increased 102% year over year in Q3 and 26.7% for the nine-month period, attributed to higher production. Operating losses nevertheless widened as product costs and general and administrative expense increased.
- Expenses and unusual items: Q3 research and development expense fell to $0.28m from $0.97m; nine-month expense fell to $1.24m from $3.65m as the company shifted focus toward commercial operations. General and administrative expense increased to $5.11m in Q3 and $13.46m for nine months. It included noncash Veolia-related expense of $2.2m and $5.8m, respectively, and increased stock-based compensation.
- Interest: Nine-month interest expense rose to $3.23m from $2.23m, primarily due to a $2.6m noncash write-off of the remaining discount on the Interstate Battery convertible note when it was repaid in January. Q3 interest expense declined year over year after repayment.
- Cash flow: For nine months, operating cash use was $18.59m (versus $19.39m); investing cash use was $9.27m (versus $3.07m), mainly for facility and Phase Two equipment; financing provided $22.51m (versus $28.44m). Cash decreased $5.35m to $15.54m.
- Liquidity and debt: Current assets were $19.95m and current liabilities $9.68m, for reported working capital of $10.3m. Notes payable were $8.77m net of issuance costs; balance-sheet lease liabilities totaled approximately $1.54m. Total liabilities were $19.96m. The company repaid $6.7m of Interstate Battery principal and interest in January.
- Equity and financing: January and May 2019 public offerings generated net proceeds of approximately $9.1m and $20.3m. Shares outstanding increased from 38.9m at year-end 2018 to 57.3m at September 30, 2019.
Changes, outlook, and risks
- Management said production increased during the second and third quarters, with up to four of the initial 16 AquaRefining modules operating continuously. As of the report, the company was completing Phase Two upgrades and commissioning the remaining modules; it aimed to have all 16 commissioned by year-end 2019, while acknowledging possible further delays and operating issues.
- Phase One improvements had raised electrolyte recovery to 75% of target in Q2; management expected Phase Two to enable 100% of target and improve lead yields and contribution margin. These are expectations, not reported achieved results.
- The 12-month plan was to complete rollout of the 16 modules and ramp production, then potentially expand the site by another 16 modules, subject to available financing. Management stated that additional capital would be required to fund operations, expansion and continued losses until positive operating cash flow; availability and terms were uncertain, and equity financing could dilute shareholders. The filing provides no quantified revenue, earnings, or cash-flow guidance.
- Veolia had assumed primary responsibility for scaling and managing facility operations under a two-year agreement. The agreement includes equity and warrant compensation, and future services and expansion depend on financing and further agreements. A definitive development program with Clarios remained under discussion; no assurance was given that it would be concluded on favorable terms.
- The company was out of compliance with Green Bank’s minimum debt-service-coverage covenant for quarters from March 2017 through September 2019 and had obtained waivers. A future waiver is not assured; absent one, the lender could accelerate the debt. The loan is secured by substantially all company assets.
- Material risks include the unproven economics and commercial-scale performance of AquaRefining, commissioning delays, continued negative contribution margins, financing needs, customer and supplier concentration, volatile lead and battery prices, environmental and workplace-safety compliance, and pending securities class-action and shareholder derivative litigation. Clarios represented 80% of Q3 sales and 76% of September 30 accounts receivable. The securities case retained site-visit claims; other claims were subject to a pending motion to dismiss. Management denied the allegations and said it would defend the matters.
Important facts for investors to verify
- Whether all 16 modules were commissioned as targeted, and whether sustained production achieves positive contribution margin and the stated recovery and yield improvements.
- The company’s cash runway, financing requirements and access to funding, including any dilution or effects on operating plans.
- Green Bank covenant-waiver status and compliance with all other loan covenants.
- Progress and economic terms of long-term Veolia arrangements, Clarios development discussions, and any additional licensing or partnership agreements.
- Updates on the securities and derivative litigation, and the status of Nevada OSHA corrective actions and applicable permits.