Aqua Metals: As Toxic As The Lead It Claims To Recycle

| About: Aqua Metals (AQMS)
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Summary

After blowing up battery-focused venture Applied Intellectual Capital, the same CEO has “crossed the pond” to yet again peddle tall tales about disruptive lead battery technologies.

Red flags galore: no recycling patents, failed UK venture, IPO’d by former MDB Capital bankers, ties to paid promotion website, bizarre related-party dealings, suspect auditor... the list goes on.

Even if AQMS is successful (low probability), our review of patent filings suggests there is a real chance that the company may owe significant royalty payments to a third party.

Aqua could not even get its BASIC math right in a CRITICAL permit application, leading us to seriously question the credibility of the company’s “technology" expertise.

AQMS investors should be prepared to lose it all given management’s history of failed ventures and the pattern of similar stocks collapsing.

Aqua Metals (NASDAQ:AQMS) has everything we look for in a solid short candidate. First, AQMS's management has accessed capital markets over the past two decades through highly suspect means. Second, the company's transactions and press release history are riddled with troubling fact patterns. If you are a student of stock market history, then it will take only a few minutes to recognize that this stock is as toxic as the lead it recycles.

In a nutshell, Aqua Metals claims to be in the business of designing and licensing the "technology" for lead recycling facilities that are more efficient and more environmentally friendly than the current process used to recycle lead known as smelting. However, given management's background with a little-known UK penny stock called Applied Intellectual Capital, and AQMS's capital raising ties to former principals of the infamous MDB Capital, we believe that the company is actually in the business of telling tall tales.

We will spend very little time discussing the merits of Aqua Metals' technology in this report because doing so would lend credibility to a purported "technology" that evidence would suggest has little chance of any commercial success. When a company in the "technology" business lists its lack of any patents as one of its 10-K risk factors, we scratch our heads and wonder how the company can even claim to be in the technology business.

If you take the time to research the history of all of the various characters involved in the Aqua Metals US listing, it is very hard, in our opinion, to see how the AQMS situation could possibly end well for investors. After a 250% post-IPO gain, we believe AQMS is set-up to cause max pain for investors who have fallen for a story stock that is more "hot air" than "liquid metal".

In this report we:

  • Provide details on the cast of characters tied to AQMS.
  • Show direct analogies of how this same management team ran a company into the ground in the UK using a very similar playbook.
  • Explore bizarre related-party looking transactions.
  • Debunk the "partnerships" that have gotten investors excited.
  • And finally, provide evidence showing that a) AQMS is unlikely to ever be commercially viable, but b) even if commercially viable, will have final economics that are almost certainly going to massively disappoint investors.

We see 80% downside in AQMS's shares and set a Price Target of $3.00/sh.

Red Flag #1 - The Blow-Up at Applied Intellectual Capital

We doubt that current AQMS shareholders understand the full story of what happened at Applied Intellectual Capital, a company founded and run by Aqua Metals CEO Stephen Clarke. If they did, we do not think they would be foolish enough to make the same mistake twice.

Source: Imgflip

Applied Intellectual Capital (delisted - formerly AINC:LN) was publicly traded in the United Kingdom on the AIM exchange (effectively a penny stock exchange in the UK) from 2007 to 2009. This alone should be a massive red flag for anyone researching the CEO of AQMS and his history with the capital markets. In his LinkedIn profile, Stephen Clarke indicates that he founded Applied Intellectual Capital ("AINC") in 1993 in London, but then relocated the company to the San Francisco Bay Area in 1994. Like AQMS, Applied Intellectual Capital was also focused on battery technologies (in addition to a laundry list of other mumbo jumbo technical terms that look heavy on jargon and light on substance - you can see the current website for yourself here).

After years of running the company as a private business in the San Francisco Bay Area, in 2007, Clarke decided to tap the public markets. He did NOT turn to the logical NASDAQ, but rather picked a UK penny stock exchange for public listing. If Clarke had been successful with Applied Intellectual Capital, a business based in the global technology hub of the Bay Area, why in the world did he need to list AINC on the other side of the world on a penny stock exchange?

We raise this question to provide context for the odd nature of Clarke's historical interactions with the capital markets. In a later section, we will introduce readers to Aqua Metals' history with Liquid Venture Partners, another red flag anecdote that yet again highlights the "odd" nature of Clarke's interactions with capital markets...

When assessing an entrepreneur's abilities, one of the best attributes we can look at is his track record. Investors would surely have not been bullish on Elon Musk were it not for his early involvement in PayPal (NASDAQ:PYPL). AQMS investors may therefore be surprised to know that the history of Clarke's prior public venture AINC is not pretty.

AINC Chart Over Time

Source: Bloomberg

After initially going public at around 95p per share in February 2007, AINC was off to the races, eventually hitting all-time highs of ~260p per share within months of its IPO. However, the run was short-lived, and after only two years of being a public company, AINC stock cratered, ending at 2.25p per share before getting delisted from the AIM exchange in the United Kingdom.

But the chart alone does not do justice to the AINC story and how it is highly analogous to the current setup at AQMS. There are so many similarities between AINC and AQMS that we wonder how AQMS was able to get away with not listing the history of failure at AINC as a risk factor in the AQMS 10-K.

As a reminder, AINC went public in February 2007. Only a few months later, on May 15, 2007, AINC put out the following press release:

Source: Battery Recycling Collaboration Press Release

A "partnership" with a somewhat recognizable company for battery recycling.

Hmm… wow, gee golly that sounds pretty familiar, doesn't it?

If you are wondering why the AINC post-IPO press release looks so familiar, perhaps it is because it reads almost identically to the press release issued by AQMS only months after its July 2015 IPO:

Source: MetalBulletin

We think the "playbook" for "partnerships" in "battery recycling" was put in place back at AINC. The only difference between AINC and AQMS is that AINC focused on batteries for hybrid and electric cars. Maybe that's the real mistake Clarke made with AINC. Back in 2007, the electric car market had not yet taken off (rather than being a ~$40B company, Tesla (NASDAQ:TSLA) was not even publicly listed). Clarke may have been better off announcing a JV partnership for lead batteries back in 2007, and left the electric vehicle battery press releases for Aqua Metals in present day!

Clearly the recycling "partnership" that AINC announced in May 2007 went nowhere. We think AQMS's deal with Interstate is effectively the AINC May 2007 partnership all over again.

But AQMS has gone beyond just Interstate. The real exuberance in AQMS stock emerged after the company announced an investment and collaboration with Johnson Controls (NYSE:JCI) a few months ago. After announcing this to the market, AQMS stock went parabolic, with investors jumping for joy that AQMS was able to strike a partnership with a company of JCI's clout.

To investors who are excited about the AQMS/JCI partnership, we regretfully inform you that this is not the first time that Stephen Clarke has gotten investors excited about a brand name collaboration.

See the press release from AINC back in June 2008 touting a partnership with Mitsubishi (OTCPK:MSBHY), a company that was at the time valued at north of 80 billion USD.

Source: Investegate

Just months after AINC put this press release out touting its partnership with Mitsubishi, the company was delisted from the AIM. So should investors really put much weight into the $10 million investment from Johnson Controls? We will dive into more detail on this point later in the report.

AINC's historical financials tell you everything you need to know about just how "successful" this management team was in the past. Revenues down. Expenses up.

Source: Bloomberg/Yahoo Finance

If AQMS plays out anything like AINC, expect a massive slew of dilutive capital raises to keep the dream alive.

Why do we raise these "playbook" examples?

Investors who want to make an informed decision about the likelihood of Stephen Clarke having success at AQMS should be aware that Clarke has been unsuccessfully working on "battery" technologies for over a decade.

We already noted that one of the first press releases out of AINC was related to recycling hybrid and electric car batteries, a general theme that has obviously been pulled over into the AQMS story. One of Clarke's other projects at AINC was a "bipolar design" battery for Chinese scooters. Given we found no press releases discussing this "bipolar" battery ever again (we searched hard), we are guessing it went nowhere.

AINC also had an investment in a company called Plurion, which was yet another business tied to AINC that was constantly working on battery technologies. Both current AQMS CEO Clarke and current AQMS CFO Thomas Murphy are listed as former officers of the now defunct Plurion entity. From our research, we believe Plurion was also a battery related company. According to a media report:

"Plurion Systems was set up as an R&D company by Nevada investors and…aggressively pursued the development and commercialization of large capacity electrical storage… however, during late 2002 and early 2003, management re-assessed the progress of the electrical storage development and concluded that commercial success was unlikely".

We raise all of these issues not to take a shot at an entrepreneur who will inevitably suffer some failure in the path to success. Great entrepreneurs will all inevitably fail along the way.

Rather, we raise these issues to remind investors that Clarke actually has a history of claiming that he has a disruptive solution in the battery space, only to ultimately leave investors high and dry when the rubber hits the road and commercial viability needed to be proved (i.e. the exact stage of the technology lifecycle that Aqua Metals happens to currently be in). He also has a history of using a playbook (i.e. issuing press releases and announcing partnerships) that appears to be eerily similar to the playbook currently being employed at AQMS.

But wait… there's more…

Red Flag #2 - Bizarre Related-Party Dealings

Editors' note: Aqua Metals disputes the nature of the claims presented here, as stated in an 8k filed on April 13th.

Prepare yourself for a dizzying experience as a hodgepodge of pre-revenue companies and patents will be hurled in your direction. It will be hard to keep up with all of the names and legal entities that you are about to learn about. We believe the confusing nature of the transactions is by design.

As readers of the Friendly Bear know, related-party transactions are often one of the focal points of our short research. Readers who have followed our work on Home Capital Group will be aware that we discovered a mortgage off-loading relationship between HCG and an entity tied to a HCG Board member, as well as an undisclosed relationship between HCG's founder and his daughter. The mainstream Canadian press only picked up on these stories after we published our findings. We see some similarities with Aqua Metals based on the fact pattern below.

The following press release from April 18th, 2017, caught our attention. In it, Aqua Metals announced that it acquired a pre-revenue IP-based company called Ebonex IPR Limited.

Source: Bloomberg

The transaction consideration (stock + cash) worked out to about $2.3 million at the current AQMS share price. So nothing particularly material even for a small company such as AQMS. What caught our attention is that AQMS, a company that has been unable to generate any in-house patents thus far, acquired patents not for a lead recycling technology, but for what appears to be general battery technologies.

Stay focused through this section because we promise it will get complicated.

Given the nature of the characters and backers tied to this story (see next section), we immediately recognized that something looked "off" with this transaction. Why in the world would Aqua Metals acquire a general battery technology at a time when it should be conserving all of its capital for its AquaRefining facility build-out? Naturally, we looked into the subsidiary history of Ebonex.

Source: Google

We discovered that one of the subsidiaries tied to Ebonex IPR is a company called Ebonex Technologies. We believe that the reason for confusion with multiple "Ebonex" named entities is that Ebonex IPR likely stands for "Ebonex Intellectual Property" and is the subsidiary in which the patents owned by Ebonex were held. Based on the Aqua Metals press release, the basis for its acquisition of Ebonex IPR appears to have been for intellectual property.

We wondered… is there any chance that Aqua Metals management had some pre-existing relationship with Ebonex?

That is when we stumbled upon the following biography on Bloomberg of Robert Lewis Clarke, one of the co-founders of Applied Intellectual Capital, and also father of Aqua Metals CEO Stephen Clarke:

Source: Bloomberg

From the biography above, we know that the CEO of Aqua Metals' father, Robert Lewis Clarke, was previously the Chief Technical Officer at Ebonex Technologies, one of the subsidiary sister companies to the business that Aqua Metals just acquired. But things get weirder.

We looked into the patents that Ebonex held. The two patents we found that are listed under Ebonex Technologies BOTH list Robert Lewis Clarke as one of the patent inventors. The Ebonex Technologies patents were also both dated in 1990, making us wonder how much value is really embedded in these patents.

Source: Justia

But, of course, it gets even stranger.

Right after the Ebonex acquisition, we attempted to go to the Ebonex website, but discovered that the Ebonex website had already been taken down right after the Aqua Metals announcement came out:

Source: What you now see when you go to ebonex.co.uk

Nonetheless, using the Wayback Machine, we were able to retrieve a historical version of the Ebonex website.

Source: Wayback Machine

One specific thing in the Wayback Machine pull caught our attention - "Atraverda Battery". After browsing cached versions of the Ebonex website, we discovered that at some point in the past few years, Ebonex somehow took control of the Atraverda battery per the blurb below directly from the Atraverda website:

Source: Atraverda website

From the website and the blurb above, we therefore believe that Ebonex likely owned the technology tied to Atraverda by January 2015.

We found the connection between Ebonex (whose IP was recently acquired by Aqua Metals) and Atraverda to be of particular interest given that the CEO of Aqua Metals claims to be the founder of Atraverda in a public biography we found online:

Source: Geek.ly

So we looked into Atraverda public filings. Atraverda Limited was formed in October 1991 and dissolved in March 2014 according to public records.

Using public records searches, we were able to get a shareholder list for Atraverda Limited that was filed in January 2012. Again, we found something very interesting in the shareholder list:

Source: UK Public Records

Stephen Clarke, CEO of Aqua Metals, showed up as a shareholder of Atraverda back in January 2012. Furthermore, numerous Clarke family members also showed up as shareholders of Atraverda, including the CEO's brother, Richard Clarke.

As a side note: this is also not the first time that Richard Clarke, the CEO's brother, has had business dealings with a company that Stephen Clarke is involved in. In fact, Aqua Metals has disclosed that Richard Clarke is on the payroll for Aqua Metals through a "consulting" company called Preferred Flow:

Source: AQMS 3Q15 10-Q

But now back to Atraverda and Ebonex...

According to Atraverda's website, the entity Atraverda Limited was not able to secure funds and was effectively de-registered in the United Kingdom. Atraverda was eventually redomiciled in the United States under the name Atraverda USA. This is consistent with our public records search for Atraverda Limited that shows Atraverda Limited was dissolved at some point in 2014.

Unfortunately, because the UK company was dissolved in 2014, we are not able to get the current shareholder list for Atraverda beyond 2012. Following the dissolution of the UK entity, Atraverda was incorporated in the United States under the name "Atraverda USA" and the US LLC was setup through Computer Services, thereby blocking public access to the names of individuals who set it up.

From the information available publicly through Atraverda's website, we do know that the investors that recapitalized Atraverda Limited as "Atraverda USA" were "prior investors in Atraverda Limited".

Source: Atraverda History

We also know that Atraverda USA, the reincarnated version of Atraverda Limited, was a major shareholder in Ebonex Limited as of October 2016 based on a public records search:

Source: Ebonex Limited filings

We sympathize with readers who are likely confused by the myriad of bizarre transactions and connections, so we will try to summarize what we know.

RECAP FOR PEOPLE WHO ARE CONFUSED:

Ebonex IPR Limited is likely the vehicle through which Ebonex Limited houses its intellectual property. Some of the patents held by Ebonex were created by the father of Aqua Metals' CEO back in 1990. Ebonex Limited also had some control relationship over the technology and patents created by a company called Atraverda that is in the battery technology space.

Aqua Metals' CEO claims to have founded Atraverda. Aqua Metals' CEO and his family members were listed as shareholders of Atraverda Limited back in 2012. Atraverda Limited, the company that the Clarke family was invested in, eventually became known as Atraverda USA. There is not enough public information available to confirm whether the Clarke family remained investors in Atraverda USA, although we do know that prior investors in Atraverda Limited were investors in Atraverda USA.

Atraverda USA was a shareholder of Ebonex Limited as of October 2016, suggesting Atraverda USA was most likely a shareholder of Ebonex Limited at the time of Aqua Metals' recent transaction with Ebonex on April 18, 2017.

Ebonex's "battery technologies" also sound very similar to one of Applied Intellectual Capital's 2009 projects into "bipolar batteries" for Chinese scooters:

So the CEO of Aqua Metals just acquired patents that he has had numerous touchpoints with over the past two decades for over $2 million of shareholders' money! The patents he acquired also appear to have nothing to do with AQMS's lead recycling business, but instead tie back to some of the science fair projects he was engaged in while he was running Applied Intellectual Capital.

Putting aside the unusual optics of the transaction that just took place and the numerous touchpoints between Ebonex/Atraverda/the Clarke family, this entire situation makes us wonder whether the CEO of Aqua Metals is trying to put the old Applied Intellectual Capital band back together so that he has new stories to tell down the road when his core lead recycling project business is unable to reach commercial viability.

Red Flag #3 - Introducing Liquid Ventures… From the Makers of MDB Capital

When we first read through the Aqua Metals IPO prospectus, we were immediately reminded of the IPOs brought out by a Newport Beach based investment bank called MDB Capital. As Seeking Alpha contributor New Capital noted in a report on Resonant, "MDB Capital is known for pushing overhyped empty-promise technology IPOs". AQMS in every way, shape, and form had the appearance of yet another MDB Capital "special". Copperfield Research similarly described MDB Capital IPOs as exhibiting: "Repeated failure to hit revenue milestones, meet commercial launch promises, and certification targets".

Given the nature of the AQMS story and how similar it is to other names we are very familiar with from the "MDB Universe", we were surprised to see no mention of MDB Capital in the prospectus. Instead, Aqua Metals indicates in its prospectus that a firm called "National Securities Corporation" ran the book on its IPO.

So we looked a bit deeper into National Securities Corporation and Aqua Metals' capital raising activities. That is when we came across a press release relating to Aqua Metals that provides more color on who is really behind the capital raising activities at the company:

Source: Liquid Venture Partners

Enter Liquid Venture Partners. While Aqua Metals' prospectus makes no mention of a firm called Liquid Venture Partners, we did some digging and discovered that Aqua Metals has a close investment banking relationship with a firm called Liquid Venture Partners that appears to be some form of division of "National Securities Corporation".

We then did digging into Liquid Venture Partners, and… surprise, surprise… it turns out that the founding members of Liquid Venture all hail from MDB Capital:

Source: Liquid Venture Partners

Why does this matter? We think it is rather noteworthy that Liquid Venture Partners is never mentioned once in the AQMS prospectus. We also remind readers of the story of AINC and its odd listing on the United Kingdom's AIM penny stock exchange despite its headquarters in the Bay Area.

For a company that is truly in the business of creating disruptive technologies, why would the founder need to list his business on the penny stock exchange in the UK or enlist the assistance of former MDB Capital bankers in order to raise capital? These are major red flags that investors should take into account when evaluating their position in AQMS.

Here at The Friendly Bear, we share a similar view of MDB Capital as the two aforementioned Seeking Alpha contributors that we quoted. However, due to the PG-nature of Seeking Alpha, we are unable to provide our actual unfiltered thoughts on MDB Capital.

Instead, we present the analysis below as an illustration of the risks of investing behind MDB Capital IPOs.

Generally, tombstones have a positive connotation in investment banking circles, representing deals that bankers have successfully closed. Below, we present our own take on investment banking tombstones - the graveyard of MDB Capital:

The MDB Capital Graveyard:

Source: Friendly Bear analysis using press release and Bloomberg capital raising function to determine when MDB Capital got involved

Liquid Venture Partners is admittedly not MDB Capital. However, given that its three founding partners all come from MDB Capital, we think the MDB Capital "tombstones" are highly relevant as comparable situations to AQMS. Furthermore, MDB Capital is known for being involved in "blue sky" technology plays in which the companies that it takes public sign up opaque deals with strategic partners that are light on details and disclosures. The companies that MDB Capital has taken public also tend to be light in revenues and often exhibit major and abrupt pivots in strategy. All of these are characteristics that are key pieces of the AQMS story.

So to recap, we believe that AQMS exhibits many of the same qualities as AINC, a business that was founded and run by the same management team and blew up in epic proportion. To add insult to injury, AQMS is also tied to former MDB Capital bankers, and as we have shown, this is a major red flag that should leave any reasonable investor nervous. The fact that Liquid Venture Partners is not mentioned in the AQMS prospectus may very well be by design due to the history of IPOs tied to MDB Capital.

Red Flag #4 - AQMS Can't Even Get Simple Math Right, So Should We Take Dr. Maggie Teliska's Feasibility Study Seriously?

We think one of the most powerful data points that AQMS can point to in terms of showing that it has a real and scalable technology is a purportedly independent feasibility study that was conducted by Dr. Maggie Teliska who, at the time of the study, ran a firm called RyanTel LLC. The study has never been released publicly, with Maggie Teliska claiming in a press interview that she signed an NDA precluding her from discussing the study publicly. We think it would be interesting to see the study, however, as we show below, we do not put much weight in that study and think investors deserve to understand how that study was used and why it may be a flawed piece of analysis.

First, some background.

In November 2015, Aqua Metals took out a $10 million loan from Green Bank that was guaranteed by the USDA. We're sure some of you are wondering why a lead recycling company was the beneficiary of a USDA guaranteed loan. When you think of the USDA, you normally think of an agency that makes sure your steak is Angus and Prime. However, the USDA has a program in place to encourage lending to rural areas. Aqua Metals, by building its lead recycling facility in Reno, NV, was able to tap into this program because it was able to make a case that it was going to create jobs in Reno, NV, as part of its facility build-out.

We have reviewed the underwriting guidelines on USDA-guaranteed rural loans. The primary purpose of the program is to encourage job growth in rural areas, and there is no question that Aqua Metals can present a compelling story of creating jobs in Reno, NV. So we can already see how this situation would be highly attractive for a government body that has a stated mission goal of spurring job growth in rural areas.

However, the USDA does in some instances require independent feasibility studies in order to move forward with a loan guarantee. Green Bank, as the primary underwriting bank on the deal, would have likely been required to conduct a feasibility study to convince the USDA to provide the 90% guarantee on the loan. However, the USDA's main interest would be making sure that the loan was secured and that it was not going to lose money on the loan. Given the hard collateral involved in the build-out of the Aqua Metals facility, it is easy to see how the USDA could have easily gotten comfortable extending a guarantee to Green Bank. The hardware that Aqua Metals installed in its Reno plant can serve as solid collateral and could most likely be used in a traditional lead smelting facility, providing strong capital cushion for the USDA loan even if the actual project ends up having sub-par cash flow characteristics. So, as a starting point, we do not think the feasibility study into the potential cash flow off Aqua Metals bears much weight.

However, the interview snippet below appears to have become an important piece of the Aqua Metals story and has presumably given investors comfort in the technology:

Source: Aqua Metals website

A couple of thoughts on the above. First, we find it humorous that Dr. Teliska claims to be bound by an NDA under which she can't share details on the feasibility study, but was more than willing to provide glowingly positive comments to a trade rag known as "Batteries International" that tout the apparent strength of Aqua Metals' technology. We find it curious that a consultant who is purportedly independent and governed by an NDA was somehow able to work around the terms of her NDA to provide flattering commentary about Aqua Metals to the press.

We also find a quote from Dr. Teliska rather odd. Dr. Teliska claims that she can "vouch that the costs, sales and revenue projections add up".

Be wary of empty statements like the one made above that are prominently displayed on investor relations websites. That comment from Dr. Teliska is no different than the Friendly Bear vouching to the world that 5 plus 5 plus 3 plus 2 is equal to 15.

Irrelevant and Made-Up Data Points to Illustrate The Friendly Bear's Point

Source: Friendly Bear Graphics

Dr. Teliska's report was also presumably completed by November 2015, the time at which Green Bank issued the $10 million USDA-backed loan to Aqua Metals. We think the timing of this report is very significant, as we believe evidence has since surfaced that calls into question the numbers that Dr. Teliska may have been working with when she first conducted her report.

In November 2015, around the same time that Aqua Metals secured the Green Bank loan, it also submitted a permit application for the recycling of hazardous waste (required for environmental regulatory purposes).

It is important to point out that this permit application was likely one of the single most important documents the company had ever filed in its history. This was effectively the closest thing to a business plan and environmental plan that the company had ever put out, and therefore one would imagine that tremendous care would have gone into designing this plan and dotting every "i"/crossing every "t".

In the original November 2015 permit, the company indicated that its recycling plant in the Reno area would have an estimated annual lead dust emission of 1.1 tons.

Source: Reno-Gazette Journal

For readers (including ourselves) who are not intimately familiar with the lead smelting process, the 1.1 ton lead dust emission figure likely has little meaning.

However, for a business such as Aqua Metals that pitches its primary "edge" as being an environmentally friendlier footprint, this is essentially the most important figure in the entire permit application.

The company must have therefore felt rather stupid when a journalist from the Reno-Gazette called the company months after it had filed its initial November application to inquire about the company's lead emissions disclosure in its original permit.

It turns out that a traditional lead smelter - i.e. the thing that Aqua Metals is trying to disrupt - generates around 1,000 pounds of lead emissions annually. In Aqua Metals' original permit filing, it claimed it was going to generate 1.1 tons of lead emissions annually, or 2,200 pounds (2.2x MORE lead than a traditional smelter).

Source: Reno-Gazette Journal

Only after being reached for comment by the journalist from Reno, the company revised its permit filing and indicated that it would be generating only 1 pound of lead emissions annually (i.e. a revision from 2,200 pounds to 1 pound).

Source: Friendly Bear Graphics, Reno-Gazette Journal data

Yes, you read that right. Aqua Metals' entire reason for existence is that its technology has lower emissions than a lead smelter. Yet the company's crack scientists and independent review was unable to catch a glaring mistake that suggested the company was in fact going to generate 2.2x more emissions than the thing the company is trying to improve upon…

It does not take a PhD in Physical Chemistry to recognize that 2,200 pounds of emissions would have been a staggering number that should have immediately set off red flags.

We note that Dr. Teliska's study, which by definition had to have been completed by November 2015 given the timing of the Green Bank loan, presumably relied on figures in the report that was discredited by the Reno journalist.

In other words, contrary to Dr. Teliska's assertion, in this case, it appears that all of the numbers did NOT add up for Aqua Metals.

So did Dr. Teliska do her job? How did a figure as absurd as 2,200 pounds of lead emissions not immediately stand out to her? Why did it take a journalist calling the company months after the permit application was filed for the company to recognize its "mathematical error"?

And how in the world did Aqua Metals mess up its calculations so badly? Of all figures on the paper, this was arguably one of the most important, if not THE most important. For the company to make such a big mistake and not catch it for months suggests that the company itself has a very poor grasp of the facts underlying its technology.

If the Aqua Metals management team does not understand its technology, and a purportedly expert independent review did not catch this error, do you really want to gamble on the success of Aqua Metals' technology?

Red Flag #5 - Doe Run Shows the AQMS Method Is Likely to Collapse Due to Funding Requirements

While Aqua Metals prominently touts Dr. Teliska's "independent" feasibility study, there were some more interesting pieces of information buried deeper in the Batteries International trade rag that we think are far more pertinent to Aqua Metals.

Batteries International highlights a company called Doe Run, an international lead and mining giant. In the late 2000s, Doe Run began working with an Italian firm called Engitec and looked at a similar process for lead recycling as Aqua Metals is currently exploring.

Source: Batteries International

In 2010, Doe Run publicly announced that it was going to develop this technological process, effectively providing us with the closest comparable out there to the recycling process currently being pitched by Aqua Metals.

Source: Doe Run

Source: Biz Journals

Doe Run, a company in the lead smelting business that presumably has much a far better understanding of the lead recycling value chain and technologies than Aqua Metals, already tried very hard to do almost the same thing that Aqua Metals is doing today, but years earlier. Furthermore Doe Run expected to spend $180 million in total on commercializing its plant including the $30 million it had already sunk into the project by March 2010. This compares to Aqua Metals' management that has raised less than half of that amount of capital thus far and has no experience in the lead smelting business.

And what happened to Doe Run?

Source: Batteries International

Within two years reality set in and the company decided that its capital raising efforts would be too difficult/the project would be too risky.

We got a good laugh out of this YouTube clip uploaded by Aqua Metals given that it is very obviously sped up. In conjunction with the story of Doe Run's failure, it also made us wonder about how Aqua Metals, a business that had to rely on former MDB Capital bankers in order to raise capital, will ever be able to raise the capital required to commercialize and de-risk a lead recycling plant.

We think that the Doe Run example shows the real issue with Aqua Metals' business model. The question is not whether the technology works on a small scale - it obviously does as evidenced by the sped up YouTube video above.

The question is whether Aqua Metals will ever be able to commercialize the process and how much capital it will cost along the way. Doe Run's experience shows that the capital costs of commercializing the environmentally-friendly low-heat version of lead recycling are far higher than one initially expects and involve significant risk. We also show later in this report that the economics are unlikely to be attractive enough even at commercialized scale.

In other words, we think the experience of Doe Run shows that if Aqua Metals wants to stick with the current plan, it is likely stuck in a death spiral of throwing good money after bad…

Red Flag #6 - Unpatented Process that Looks Suspiciously Similar to Previously Patented Processes

We already highlighted this earlier, but wanted to bring it up again. How can a company that presents itself as having an already functioning prototype technology have developed ZERO in-house patents? And why have NONE of the company's patent applications been granted thus far?

Source: AQMS 10-K

If all the company has is a process - and that process has no patent wrapped around it - then even in the event Aqua Metals is ultimately successful, the economics are inevitably going to be abysmal because competitors will simply step in and compete with the company. This should be one of the biggest red flags for any potential investor in the Aqua Metals story.

We were able to take our patent analysis to the next level by reviewing a couple of the publicly available Aqua Metals applications.

We reviewed two of Aqua Metals' public patent applications. In the course of doing so, we learned something very interesting about just how unique and "novel" Aqua Metals' process really is.

We encourage readers to review for themselves the two Aqua Metals patents (accessible through links below). However, our key takeaways from the patent reviews are as follows:

PATENT WO 2015077227 A1 - Devices and methods for smelterless recycling of lead acid batteries

Readers can find the patent for their own review at this link.

When we reviewed the publicly available patent information, we noted the following tables that piqued our interest:

Source: Google Patents Database

These tables were interesting because every one of the patent citations that were ultimately included in Aqua Metals' patent application were added by the patent examiner. This suggests that the patent examiner reviewed this Aqua Metals patent and determined that there were prior granted patents that were largely similar to the process put forward by the company.

We read through the other patents cited by the examiner and noted that the patent from 2013 (WO2013152260A1) and the patent from 2008 (US20080128293) appeared to be very similar to the Aqua Metals patent that was filed years later in November 2014. The research paper included in the non-patent citations section was also largely similar to the patent put forward by Aqua Metals.

PATENT WO 2016081030 A1 - Improved devices and method for smelterless recycling of lead acid batteries (link here)

Yet again, in this publicly filed patent application, we discovered that the patent examiner added numerous patent citations into the patent application, suggesting that the process described by Aqua Metals is far less "novel" than the company leads investors to believe.

Source: Google Patents Database

The one that we found most notable, however, was patent US20140131220. This patent out of the University of British Columbia by Fassbender, Dreisinger, and Wu appears to be almost the exact same as the Aqua Metals patent in question. The patent by Fassbender, Dreisinger and Wu (the "FDW Patent") does not explicitly reference lead acid batteries, but does describe a method for extracting lead from oxidized lead, which reflects the same general process described in the Aqua Metals process.

It should therefore come as no surprise to readers that under the FDW Patent, examiners cited three separate patents that effectively "rely on" ("reference by") the FDW patent - all of which happen to be patents that were submitted by Aqua metals:

Source: Google Patents Database

We clearly only evaluated two of the numerous patents that Aqua Metals has thus far submitted; however, we believe both patents effectively describe the core process that Aqua Metals claims to be employing. Based on our analysis of the patents, we therefore question just how novel and original Aqua Metals' process really is, particularly in light of the FDW Patent.

Red Flag #7 - And Friendly Bear, What about the JCI Partnership?

Readers familiar with MDB Capital IPOs are no doubt familiar with "partnerships". Partnerships are one of the key pieces of the MDB Capital playbook. They were also pivotal in the AINC playbook. As the eventual demise of AINC shows, partnerships with companies such as Mitsubishi should not be seen as some sort of vote of confidence or sign that a flimsy business could be sustainable. We will explain why in this section.

The original Interstate partnership was somewhat of a no brainer for Interstate. The company invested early, got in at a low valuation, and also found a willing buyer for its batteries. It had to pony up $10 million, but it is clear this was a very one-sided transaction in which Interstate enjoyed lopsided economics.

Interstate also recently filed a 10b5-1 trading plan to get out of a significant chunk of its AQMS holdings:

Source: PR Newswire

The deal that appears to have gotten investors most excited, however, was the recent JCI deal. JCI recently invested just under $11 million in exchange for a 5% stake in AQMS at an implied valuation of $220 million. In exchange for this investment, JCI effectively became the first licensee for AquaRefining technology. JCI also will supply Aqua Metals with batteries for recycling, and then will purchase refined metals from Aqua Metals. Notably, JCI also effectively has a form of exclusivity agreement for which Aqua Metals cannot license its technology or equipment to third parties until Aqua Metals and JCI have agreed on certain matters.

Source: AQMS 8-K Filed Feb 7

We spoke with industry sources who have studied the Aqua Metals/JCI deal. These sources indicated to us that the deal is really just a call option for JCI. It is a way for JCI to put out positive press about how the company is trying to do the right thing by the environment and also to get a cheap call option on having a backup plan for smelting if the EPA continues to put pressure on smelting operations (we view the EPA as unlikely to be as aggressive under the more lenient Scott Pruitt administration). We note that the word "clean tech" appears prominently in the JCI version of the press release, speaking to the fact that JCI views AQMS as a low-cost way to show that it is an environmentally conscious company.

We also note that a ~$10 million investment for JCI is effectively chump change. The analogy would be a gambler with a $10 million bank roll playing blackjack at the $10 limit table. For JCI, its investment in Aqua Metals is basically a cheap call option on AQMS that includes exclusivity should Aqua Metals ultimately be successful. JCI also does not really care if Aqua Metals ends up being a particularly successful or profitable company. Even if its $10 million investments gets flushed due to AQMS continuing to burn cash and erode equity value, JCI will be able to use Aqua Metals as a backup smelter which may very well be worth more than $10 million to JCI.

More importantly, JCI also has a history of taking cheap call option bets that go to zero. In June 2010, JCI invested ~$6 million into Azure Dynamics, a company tied to the development of electric and hybrid electric components and powertrain systems for commercial vehicles.

Azure Dynamics eventually filed bankruptcy around two years later:

Source: Bloomberg

In both the Interstate deal and the JCI deal, the disclosed terms look to be highly favorable for only one side of the arrangement - the external partner. The publicly disclosed terms in both agreements do not seem to be positive for Aqua Metals and appear to leave the company on weak footing.

Perhaps this is why the company has been so reticent to provide details. On the February 14, 2017, call, the CEO declined to provide color on the JCI deal. But the biggest red flag with respect to the JCI deal was the exchange below in which the CEO promised that more details on the JCI "blueprint" timing would be coming in "days":

Source: Bloomberg Transcripts

34 days have now passed without any announcement from AQMS. When we hear "a few days", we tend to think three or four days. However, for a company that thinks 2,200 pounds and 1 pound are interchangeable mathematical errors, perhaps 34 days is in fact "just a few".

So net/net, we view the partnerships as more smoke and mirrors. AINC also had "partnership deals" with companies as large as Mitsubishi that went nowhere. Partnerships are also standard elements in most MDB Capital stories. And all of the partnerships signed by AQMS thus far appear to be very one-sided in nature, to the detriment of Aqua Metals. With sparse details, small check sizes, and one-sided contracts, we do not view the partnerships as a sign of confidence in Aqua Metals, but rather a sign that Aqua Metals requires high-profile partnerships in order to keep the equity raise machine going.

Red Flag Grab Bag - Other Housekeeping Tidbits

R&D Spend

This company spends a paltry amount in R&D. In 2015, the company disclosed in its 10-K that total R&D spend was $543,031. Then, in 2016, it simply stated in its MD&A that R&D "doubled for the year ended 2016 versus 2015". So the company spent a whopping $1.5 million in R&D over the past two years. What else does any reasonable investor really need to know about the go-forward viability of AQMS's technology when it has spent only $1.5 million total in the past two fiscal years?

Missed Production Targets

The company has also already missed its production targets twice.

First, in November 2015, the company claimed it would achieve a production rate of 80 tonnes per day by 2016.

Source: Bloomberg transcripts November 2015

Then, again on May 24 of 2016, the company claimed it would achieve 80 metric tons of lead per day output by the end of 2016:

Source: Bloomberg Transcripts, May 2016

Aqua Metals ultimately delivered zero revenue in 2016.

Unknown Auditor

While accounting was not a focus of this report (given there is not even any revenue to speak of), we do think it is worth pointing out that the client list of Aqua Metals' auditor as it is a who's who of penny stock nobodies:

Source: OTC Markets.com

Ties to Websites and Firms that Take Compensation to Promote Stocks

Finally, in our research, we came across a website called "Tailwind Research" that has relentlessly promoted investing in Aqua Metals. The company has published eight bullish articles on its website since August 2016, including one treasure of an article that included some complicated math to size up the market for Aqua Metals:

Source: TailwindsResearch.com

With math skills that elite, perhaps the scientists at Aqua Metals should have hired the mathematicians at Tailwinds Research before submitting their permit application to get it right in the first place.

We raise the issue of the Tailwinds Research promotion of Aqua Metals for one simple reason. Very recently, the SEC charged 27 firms with fraudulent promotion of stocks. None of the AQMS articles posted on the Tailwinds Research website indicated that there was any payment made by AQMS for promotion of its stock on Tailwinds Research's website.

However, we found this find comment buried deep inside the Tailwinds Research "DISCLAIMER" section:

Source: TailwindsResearch.com

We obviously do not know one way or the other whether AQMS directly or indirectly provided any compensation to Tailwinds Research in exchange for positive coverage. However, given the highly promotional nature of the coverage of AQMS on Tailwinds' website, as well as the history of how AQMS came to be public (i.e. the backers involved), we believe that AQMS's apparent relationship with a website that openly admits that it takes payments for stock coverage is a clear red flag that investors should be concerned about.

We also stumbled upon this email newsletter from "Small Cap Leader" that is a bit dated (August 2015), but that also includes promotion for Aqua Metals as well as a disclosure suggesting the company (Small Cap Leader) takes compensation in exchange for "marketing and advertising" on behalf of companies:

Source: Small Cap Leader Email retrieved by The Friendly Bear from 8/14/15

We also note that in Aqua Metals' 10-K, it indicates that the company issued 20,000 shares to a firm called Insight Capital Consultants in November 2015 in exchange for "work provided for the Company". Based on our review of litigation, we believe that Insight Capital Consultants is a firm that takes payment in the form of company shares in exchange for promoting stocks ("providing financial and investor public relations"). We found no website for the company online, which is odd for a company that holds itself out as a financial and investor public relations firm. We also looked at the history of companies that have mentioned providing payment to Insight Capital Consultants in public filings and note that many of those stocks have ultimately resulted in devastating losses for investors.

There are more red flags that both prospective and current investors should be aware of.

Valuation and Target Price Math

We spoke to people in the smelting industry who said that smelter EBITDA margins are in the ~10% range. They also told us that they cannot envision how Aqua Metals, even if successfully commercialized, could generate EBITDA margins at levels that are any better than smelters. Therefore, we have a framework to analyze valuation even if we give the company credit for successfully commercializing the product (which again, we doubt ever happens at healthy economics).

In our base case scenario, we believe that the company will continue to miss revenue estimates (as it has already done) and will trade down to book value as investors recognize that this business is worth more sold for scraps than it is as an operating entity. In this case, we see the stock trading at $3/share, or ~80% downside to current levels.

In a blue sky "best case scenario", we think that at best the company will gets its margins in line with JCI or ENS (effectively two public comps that we can use in the battery space to try to gauge where margins can really go). Those two companies have EBITDA margins in the 10-18% range. We note that a consultant we spoke with - who was familiar with the Doe Run comparable recycling process - believed that 5-10% EBITDA margin was the most likely outcome for Aqua Metals even if it is successful. Nonetheless, in our "best case" scenario, we are generously assuming that Aqua Metals can get its margins to something between the JCI and ENS comparables, i.e. in line with Street estimates. We also believe that the company will need to raise at least another $50 million to achieve Street EBITDA estimates based on the Doe Run estimated comparable capital requirements.

Therefore, using Street EBITDA estimates of $33M for 2019, factoring in share dilution from another $50 million equity raise, and then using a combination of JCI/ENS multiples (~11x EBITDA), we arrive at a $17/share target, or essentially no upside remaining in the stock.

Our analysis suggests that longs are playing for no upside, but risking 80% downside. AQMS therefore appears to be setup like a recipe for disaster.

Conclusion

Given the history of this management team's failures, the involvement of Liquid Ventures (former MDB Capital bankers), the Doe Run experience in the same technology, the questions around the novelty and originality of Aqua Metals' patent, the lack of any patented technology, and management's history of over a decade of chronically over-promising and under-delivering, we believe that shareholders of AQMS are likely to get burned badly.

When the minds behind the "Big Short" were analyzing CDO securities, they certainly spent some time looking at individual securities - i.e. assessing mortgage underwriting quality. However, after a while, the teams shorting mortgage-backed securities recognized that there was a lot of garbage going into securitizations. Eventually CDOs jumped the shark, and unscrupulous bankers brought the CDO-square to the market (a CDO of a CDO). In effect, bankers created a situation where garbage was going into garbage.

This is how we view the AQMS situation. You have a management team that has already blown up a public company engaged in battery technologies, and now you have the same management team bringing a "sort of" new company public to the United States, engaging in weird related-party dealings, but this time doing it through bankers with infamous MDB Capital pedigree.

In our view, this is effectively a CDO^2 situation - garbage on top of garbage. We therefore recommend that investors stay clear of Aqua Metals.

Disclosure: I am/we are short AQMS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am/we are short AQMS. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. Additional disclosure: This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. This article reflects the author's opinion at the time of publication. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.