Trying to Understand Why I (Anyone?) Would Own AQMS…

In the short span of six months, AQMS has gone from being an investment darling to the recycling bin. Well, I say short span, but the truth is it seems like its been an eternity. Starting each day thinking that things will get better but enduring nothing but a deluge of both selling pressure and negative news really can wear on someone.

The share slide has indeed been both painful and gut wrenching. It has caused me to question my investment thesis over and over, as well as answer the questions of numerous investors, each of whom is saying “WTF???”

How bad has it been? They say a picture is worth a thousand words, so see for yourself what a 75% decline in a little over half a year looks like.

So, where do things stand today? The stock is down, below IPO price. Should we be holding or adding to positions? Or, is this just another AFGE in the life of an investor and we should move on while the shares are still above $4?

Understanding the past…

How did Aqua Metals get here? As I said before, delays have plagued this Company. They are as consistent as the tides. Basically, every time AQMS has a conference call they over promise the future, while pushing back previous guidance.

This started in 2015…“We’re quickly approaching a meaningful inflection as we bring our first facility online and begin producing lead early in the fourth quarter of 2016. Most importantly, we remain on track to reach full scale capacity of 80 metric tons of lead output per day by the end of 2016.”

And continued in November of 2016…”we’ve developed some intermediate products which allow us to accelerate revenue ramp up and accelerate into positive cash flow and we expand our capacity to 120 tons a day in early 2017.”

With this additional from last November…”We said that we’ll have the other – balance of the modules onsite in early 2017. Is it all about running the breaker? The breaker is being commissioned to full operation this week and next week and that’s just a process of turning it on and running it.”

I will cut this off there as I think the gist is quite clear. Basically, everything they have said has been erroneous for various reasons.

Now, it’s quite understandable that a company would have issues bringing to scale a project the size of an AquaRefinery when they have never before existed. However, this Company has proven itself incapable of understanding the work needed to get their facility up and running and has never come close to understanding the timelines involved.

…helps to clarify the present.

At this time, Clarke is the “boy who cried wolf”, saying that things are on track for the umpteenth time, yet pushing back guidance simultaneously and giving investors zero confidence that anything he says will come to fruition.

Investors who have owned this stock for a long time are throwing in the towel. I know several people who bought this on the IPO, and continually added to their positions, who are now selling shares. They believe that they have been deceived (lied to?) by management and don’t want to stick around any longer. I expect this selling pressure to continue.

There is, and will be more, tax loss selling going on. If Trump’s proposed tax laws come into effect, one would expect investors to minimize their capital gains in 2017. Taking a loss in AQMS, which every investor now has, would be a likely way to accomplish this. I expect to see this selling pressure continuing as well.

The end result is that I foresee a couple more months of selling in shares of AQMS from disgruntled shareholders and those who are looking for a tax loss candidate (generally speaking most tax loss sellers are disgruntled with this story, so it’s just really one big group of investors dumping). This is why the stock is down and will likely not bounce soon.

The visionaries remain in the stock, but faith has to be questioned.

Who remains holding shares in AQMS? Investors who believe in the vision of the Company and the value that exists in the work done to date. Those who have been there to the facility, kicked the tires and can honestly say, “it works and I believe the issues are solvable.”

If you’re a true visionary, you believe that Aqua Metals has a solution to the environmental disaster that is smelting, that they can successfully recycle batteries on a large scale, and that they can do it cheaper than traditional methodology. If those three things are true, this stock is a steal at $4 per share. If any of them aren’t true, it’s not too late to bail on this Company.

So, looking at the issues at hand, it’s obvious that AquaRefining is a next-generation solution to smelting. If it works, it’s a no-brainer to be rolled out on a global basis. But, can it be done at scale? Well let’s examine several aspects of this.

First off, the whole AquaRefinery facility is multi-stage. And, most of these stages, breaking, ingotting, etc. are known processes that don’t need to be reinvented. It all comes down to the AquaRefining stage itself and can it be done on scale.

The AquaRefining units are modular. They are not large in size and, as we know from the Tahoe facility which has 16 of them, they are capable of infinite scaling as you simply add on new modules. They have been working and continue to be optimized to produce lead. Bottom line, I have zero doubt that AQMS can ramp production of lead without any issues beyond that of profitability.

Which leads to the most important part of the visionary’s assumption with Aqua Metals: they can do it cheaper than traditional smelting. This is the biggest assumption that anyone buying AQMS shares has to make. It is also the only assumption to which we haven’t the slightest clue.

Reading the last press release, there are two lines that bring real pause to investor’s confidence in AQMS’ ability to generate profitable lead from AquaRefining.

“Four modules are assembled, commissioned and are being used to determine the optimal operating parameters, including electrolyte pH, lead concentration, operating temperature, electrolyte flow rate and free acid levels.” 

“During module commissioning, the Company also found that under certain conditions, the operators would need to periodically assist the lead removal.”

These two lines are serious red flags. I can understand delays in building a facility. I can’t, however, understand how a facility can be built based upon a process that is still undetermined. Wouldn’t you think that the optimal operational parameters would be discovered in a lab prior to installation? And, how can you have “certain conditions” in a controlled warehouse environment? I see this and get very scared.

At this point the visionaries have to really be wondering if the process will ever be able to run profitably. I know I am. It’s clear that it works, but working and making money are different beasts altogether, aren’t they? In my opinion, it’s not the slight delay that is crushing AQMS shares, it’s those two comments.

Other potential pitfalls await…

Let’s go out on a limb here, shall we? Let’s assume that AQMS doesn’t hit their guidance of full production in Q1.

Yes, that’s facetious…based on history, we can simply assume that guidance will be missed as, if it isn’t, that would be the first time ever. So, based on that, what will happen with AQMS?

There is a financing in Aqua Metal’s future if what we assume holds true. Unless they can miraculously achieve full scale production sometime before April (per my model), they will need to raise additional working capital. Which means that investors will have the joy of dilution coming at them in the not too distant future.

On top of that, I’m concerned about the status of the JCI relationship. I know investors got a lot of confidence when it was released, in an 8-K that AQMS and JCI had taken their respective next steps forward in their relationship. However, the relationship at this time is still toothless.

In particular the companies still need to negotiate the terms of their relationship…as of now, it’s nebulous with no commitment from either side other than to negotiate said terms. If they don’t reach an agreement, either party can simply walk away.

What about JCI having chosen a facility for retrofit to AQMS’ technology? Well, per the 8-K, “Johnson Controls has reserved the right to definitively designate the initial facility upon the parties’ execution of the definitive Development Program Agreement.” In other words they have yet to do so. And, don’t ever need to.

Now, maybe I’m splitting hairs and negotiations are ongoing with JCI and everything will turn out swimmingly, right? Very possible. I could be concerned for no real reason.

But, two things make me nervous. First off, JCI has a new CEO. The old one was quite the character and it appears the new one is spending his first few months cleaning house after his predecessor. In my opinion, there is major risk to the timing of anything with JCI as a result of this.

Add to this the fact that Steve Cotton was the AQMS employee that brought JCI to the table and had the deal negotiating experience needed to land them, and now I’m really concerned that there could be an issue here.

But, the value exists if the process can be solved

So, here we are with AQMS trading at $4. The management team has never come close to guidance. The process works, but is still unproven and may never produce lead at a profit. And, the Company will likely return to the market for more money, especially since their relationship with their strategic partner is possibly not so strong.

Yet, I remain an investor. This is for two reasons.
1. I’ve seen the process work and I believe the kinks in the system are solvable.
2. At this value, you’re getting the Company at the IPO price, with a process that is close to operational.

Do I believe management has worked out all the issues? No. But, I do believe that Clarke is a smart engineer and will eventually figure things out. Or, he’ll be gone and someone else will do so. Regardless, I think AquaRefining is the future of lead acid battery recycling and I’m going to stick around to find out if I’m correct or not.

In terms of the value, AQMS is trading at around book value. The market cap of the Company is close to the amount invested so far, which give zero value added to having brought the process to the door of success. I’ll also point out that the Company just received a US patent as well, which should have some real value for the technology.

Speaking of value, the value of my position has dwindled with share price. At this point, it seems like a call option on the future of a revolutionary technology. Since I’m not selling, I guess I fall in the visionary camp.

For those of you who don’t like a management team that misses every deadline, who don’t want to own a stock in front of a financing, or who simply feel that AquaRefining doesn’t work, I don’t blame you for selling. If the stock goes to zero, you’ll be proven right and I’ll be a bigger schmuck for having stuck around.

If you have the guts to buy more and end up making a killing as a result, I’ll tip my hat to you. For me, I’m now hopeful to recoup my losses at some point next year and visions of profits are just a distant dream. I will stick around to see if that dream becomes reality…

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    • Thanks for the comment…and sorry that we both lost money here. With the recent financing, the Company has enough runway to get the product working. The upside is reduced due to dilution, but, from this level, quite large on a percentage basis.

      Interstate sold a bunch of stock, but still has a chunk. Clarke has a history of startups with mixed success. Great scientist. Obviously, poor manager of operations and cash flows.