Aqua Metals, What’s The Deal?

Today AQMS traded off 23%, hitting a new year low. This comes about a week after pre-announcing revenues for the second quarter. Which, obviously, means that something else has gone wrong, right? Well, that answer is not so obvious.

Here I’ll list 2 key things I know for sure, which would make you believe that the stock shouldn’t be hit. Then I’ll also address a list of questions which remain unanswered and, until they are answered, will likely hang over the stock. It’s these questions that are hurting the stock. But, until there is an answer, we can’t say for sure whether something has gone wrong with AQMS and the selloff is justified, or that this is a screaming buying opportunity.

At this time I have yet to sell a single share and I’m still believing in the long term upside here. Here’s why.

On Tuesday, I was part of a group that toured the facility. CEO Clarke took us around and showed us the whole place in operation, with the one exception being the ingotting line, which was in startup phase and meant to be turned on sometime very soon. That afternoon? Tomorrow? Unsure, but happening.

All of which means that we saw a plant that was working…taking batteries and turning them into recycled lead and plastic. I’m of the opinion that making ingots, something that has happened since Roman times, will be relatively easy and, thus, the whole process works. And, this is the first key takeaway. It works!!!

There have been many questions as to whether or not the aquarefining process works and will scale. Frankly, these are the two biggest questions facing the Company in my opinion. I believe the first was answered on the tours that took place, but what about the second question? Does it scale?

I believe this is a simple “yes”. Here’s my thinking. While they did need to tweak some processes (such as the battery breaker), everything they are doing besides AquaRefining is similar to industry standards. We can assume they work at scale.

The AquaRefining process itself is very simple. It’s a modular system in which each module consists of six separate units. At full production, the Reno facility will have 16 modules, or 96 AquaRefining units. These all operate independently. Thus, if one works, there is no reason to believe that they can’t scale this up as large as they would like. Since AquaRefining works at all, it will work at scale. Which means that my second key takeaway is that the AquaRefining system will scale.

Based on the fact that aquarefining works as a process and will scale, I’m in the opinion that this company is on track to revolutionize a whole industry and am going to keep my shares, if not add to the position over time. This is the big picture and AQMS still is a winner in my opinion, when looking out over any significant length of time.

That being said, there are many questions revolving around AQMS and, until they are answered, investors (shorts) will likely lean on the stock.

When are you going to announce the first JCI facility? No real answer to this and they said that the ball is really in JCI’s court. However, they claim to be on pace for shipments of modules to JCI in Q2 2018. That timeframe continues to sound more and more unreachable…can’t you provide some clarity around it?

When will you get financing for the second facility? This question was ignored on the call after being discussed on the prior two calls. I have stated often that, until they show a fully running facility that generates positive cash flow (even for just a couple months), I don’t think they can debt finance a second one. So far, it looks like I’m right on this. Wish I weren’t.

Why are revenues so low? The simple answer to this is that the Company is not focused on near term revenue. They are looking to have the facility up and running full speed by year end. And, remember, this is a first of its kind facility. Therefore, it’s a work in process as they learn how it operates, make adjustments and just get general knowledge of aquarefining. Knowledge that didn’t exist before.

Frankly, I think the fact that revenues in Q2 were weak is not important. If it mattered, the shares would have been hit on the pre-announcement. Instead, the bigger question is…

Why is Q3 guidance flat? Hmmm…this is, honestly, a head scratcher. They were running two modules in Q2 and are running 4 now. Plus, they are going to start ingotting aquarefined material, which, to date, has been stored (I believe it’s been stored, not sold…they didn’t address this directly). This is higher priced output and would suggest a ramp up in revenues in Q3, right?

Frankly, I’m not that concerned with Q3 revenues. And, I don’t think Clarke is either, so I believe that the answer was rather off the cuff. Here’s what he said, “Our expectation is quite modest for quarter three that will be largely flat in revenue.”

My take on that statement is that, since they are not running full scale, and, since the system is going to be online and offline intermittently, they don’t have a clue what Q3 revenues will be. It’s my opinion that Q3 revenues will HAVE to show an uptick, for the reasons I cited above (more modules, selling ingots), and, had Clarke thought this through, he would have likely stated something vague about “increasing revenues, but not a focus.”

Looking at the Q’s reveals more evidence that this current quarter should be much higher than the last based on the following numbers and analysis.

If they already had $123K in finished goods going into the second quarter, they only produced and shipped an additional $480K in the quarter. This quarter they have $393K in WIP plus $42K in finished goods on day 1. And, a much supply of raw materials. It makes perfect sense that we will see substantially more revenue by the end of the quarter just based on these figures.

Instead of guiding to increased revenues, however, Clarke just put out there a “flat in revenue” statement. Maybe this is correct, in which case there are some other questions raised. But, I think it was an answer that is simply wrong and not well thought out.

Which brings up a bigger question regarding credibility. This group has yet to hit any significant milestone. Clarke rightly points out that they have accomplished a lot in a little time. I agree. But, Wall Street likes companies to meet or exceed guidance and has low tolerance for inconsistencies in stories.

Pointing to zero growth is very inconsistent with other facts. It also is something that, once said, will hammer the stock. My guess is that they could easily double revenue or more if they put just a little effort into this effort. Here’s my point: if you’re going to give any guidance at all, guide to higher and hit it.

Truly, having seen the facility, and hearing the call, I believe that they could easily put up a bigger number. They should have realized the result this answer would incur in the market. Yet, they still gave the answer. This team needs to establish some credibility and that won’t be done overnight and this answer didn’t help with that at all.

Which brings up yet another question regarding their communication. The outgoing CFO insinauted, in a meeting with investors, that they would be happy with the conference call. Well, only if they are short!

Let’s be real; there were several key points that needed to be stressed on the call. 1. we are on pace for 16 modules running at year end. 2. We are fully funded. 3. We will be shipping modules to partners in Q2 next year. These are the only points that mattered. Convince investors in all three (and I think all three are likely), and your stock rallies. It’s that simple.

Instead, the call focused on many issues, including others that are great for the big picture but meaningless for today. For example, talking about five-9s purity and the transformation from 12 volt to 48 volt in the LAB industry might have great value long term. But, it’s rather just a side-show to the importance of getting your facility running ASAP.

Having watched the company make significant progress towards their goal of full production by year end, yet implode on every conference call, I would have to call their communication strategy flawed at best. Sadly, this is where they needed to focus more energy as this is the area that is easiest and best dictates the direction of your share price.

So, where are we at today and going forward?

For those of you who remember, I put out a piece after the last conference call that suggested the next three months would be volatile and that this latest call was going to be “put up or shut up time” for Clarke. Sadly, I was spot on about things, but don’t feel that this conference call proved the shorts correct, nor did it cement the bull case.

Obviously, the war is being won by the shorts, but this is a long-term stock play. If AQMS is going to revolutionize the lead recycling industry, that will take place over a multi-year time frame. Right now, nothing they have said leads me to believe they can’t do it. AquaRefining works, it scales and they are going to be running full speed by year end.

On the other hand, the Company always leaves investors with a sinking feeling in their stomach. They don’t stick a dagger in the shorts, but, instead, manage to provide them fuel for their fire with little mistakes, while still progressing the big picture forward.

Here’s what I see as a to-do list for management over the next few months. First, I would like to see pictures of ingots coming off the machine asap, along with regular updates as to the installation of modules. Next, they should have an announcement when all the modules have been installed, which is an October event, along with some details about staffing and hours/days of operation. Finally, I’d like to hear something about a delivery schedule to JCI.

In the meantime, the tug-of-war continues. I will repeat this (to myself as I go to bed at night, to calm my nerves), the system works and will be at full scale in December. And, I will try to ignore the questions that are worrying investors. I believe the concerns are simply noise. I’m looking to factor out the noise and focus on the big picture, which remains huge. Damn they make it hard to do that, though.


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