Aqua Metals, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated financial statements; amounts below are in millions of dollars unless otherwise stated.
Business context
Aqua Metals is developing its AquaRefining technology, a water-based process for recycling lead-acid batteries. Its first facility is in McCarran, Nevada (TRIC). The company began limited production in early 2017 and began shipping lead compounds and plastics for sale in April. Through the filing date, it had not begun commercial production of AquaRefined lead.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Product sales | $0.589 | — | $1.192 | — |
| Cost of product sales | $3.140 | — | $5.671 | — |
| Gross loss on product sales | $2.551 | — | $4.479 | — |
| Operating loss | $5.843 | $3.321 | $18.325 | $8.325 |
| Net loss | $6.290 | $3.517 | $19.549 | $8.622 |
| Net loss per share, basic and diluted | $0.31 | $0.23 | $0.99 | $0.58 |
Product-sales gross margin was approximately negative 433% for Q3 and negative 376% for the nine-month period, calculated from reported sales and product costs. The company had no comparable product sales in 2016. Research and development expense was $1.367 million in Q3 and $6.538 million year to date; general and administrative expense was $1.925 million and $4.897 million, respectively. The nine-month results include a $2.411 million non-cash impairment charge related to acquired intellectual property.
| Balance-sheet and cash-flow measure | September 30, 2017 | December 31, 2016 / comparable period |
|---|---|---|
| Cash and cash equivalents | $17.523 | $25.458 |
| Working capital | Approximately $15.1 | — |
| Total assets | $68.205 | $71.529 |
| Total liabilities | $16.467 | $14.539 |
| Notes payable, current and non-current carrying amounts | $9.337 | $9.545 |
| Convertible note, carrying amount | $1.005 | $0.307 |
| Net cash used in operating activities, nine months | $13.326 | $5.802 |
| Net cash used in investing activities, nine months | $5.930 | $12.935 |
| Net cash provided by financing activities, nine months | $11.321 | $14.004 |
The $5 million Interstate Battery convertible note bears 11% annual interest and matures in 2019. Management separately described debt outstanding as approximately $9.9 million owed to Green Bank and $5.8 million owed to Interstate Battery as of the report date; these figures are not the same as balance-sheet carrying values. Q3 revenue and receivables were substantially attributable to Johnson Controls Battery Group.
Changes and notable items
- Nine-month net loss more than doubled year over year, while operating cash use increased to $13.3 million from $5.8 million. Investing cash use declined as the TRIC facility build-out progressed.
- Cash fell by $7.9 million from year-end 2016. Financing included approximately $10.5 million net proceeds from a Johnson Controls share issuance and proceeds from option and warrant exercises.
- In April 2017, the company acquired Ebonex IPR Limited for approximately $2.5 million in cash, costs, and stock. It valued the acquired patent portfolio at $112,000 and recorded a $2.411 million impairment charge.
- The company recorded a $0.6 million expense and accrued liability to resolve a claimed technical breach of a negative covenant under the Interstate Battery loan, relating to the Ebonex acquisition without prior consent.
- A $670,000 asset retirement obligation for eventual closure and decontamination of the McCarran facility was recorded in 2017. Additional facility closure-trust contributions of $350,000 were due October 31, 2017 and $220,000 due October 31, 2018.
Outlook, risks, and management commentary
- Management expected all 16 TRIC AquaRefining modules to be assembled and operational by year-end 2017, commercial AquaRefined-lead production to begin by December 31, 2017, and production to ramp during 2018. The filing cautions that prior delays and unforeseen issues could continue.
- Management believed working capital could fund commissioning and commercial operations for the first 16 modules, but said additional capital would be required within 12 months to expand production, pursue Johnson Controls integration and licensing opportunities, and fund losses until positive operating cash flow. Financing availability and terms were not assured; management warned that insufficient financing could impair execution of the plan or continued operations.
- AMR failed the Green Bank minimum debt-service coverage covenant for the March, June, and September 2017 periods and received waivers. Future waivers are uncertain; failure to obtain one could trigger acceleration of Green Bank debt and potentially the Interstate Battery loan. Interstate Battery’s claimed covenant breach was under negotiation and could also lead to default and acceleration.
- The company’s technology and commercial-scale economics remained unproven. Key risks include delays or production downtime, inability to achieve required AquaRefined-lead purity or cost targets, limited feedstock and material supply, volatile lead and battery prices, environmental and hazardous-material liabilities, and dependence on financing and strategic agreements. Discussions with Johnson Controls on a definitive development program agreement were preliminary.
- Management reported disclosure controls and procedures were effective as of September 30, 2017, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Check subsequent filings for actual completion and commissioning of all 16 modules, commercial AquaRefined-lead production, output levels, purity, customer acceptance, and unit economics.
- Verify cash runway, operating cash burn, financing raised or needed, and whether expansion plans require funding beyond the first 16 modules.
- Confirm resolution of the Interstate Battery covenant claim and continued Green Bank covenant waivers; assess any default, acceleration, or cross-default exposure.
- Track gross losses on product sales, customer concentration, and whether production costs and margins improve as operations scale.
- Review the status of the Johnson Controls development agreement, closure-trust payments, and other material commitments or contingencies.