Aqua Metals, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Dollar amounts below are in millions unless stated otherwise. The company develops AquaRefining technology and supplies equipment and related services for lead-battery recycling. After a November 2019 fire damaged key equipment at its Nevada facility, it suspended commercial operations and shifted to a capital-light licensing and equipment-supply strategy.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Product sales | $0 | $1.483 | $0.018 | $1.920 |
| Cost of product sales | $1.306 | $7.185 | $2.760 | $11.866 |
| Research and development | $0.217 | $0.338 | $0.459 | $0.958 |
| General and administrative | $2.245 | $4.335 | $4.630 | $8.351 |
| Net loss | $3.983 | $10.501 | $8.410 | $22.209 |
| Net loss per share | $0.07 | $0.21 | $0.14 | $0.47 |
- Margins: With no Q2 sales and $1.306 million of product costs, there was no positive product contribution in the quarter. The filing does not present a meaningful conventional gross margin for the period.
- Cash flow: Six-month operating cash use was $8.323 million, versus $11.831 million in 2019. Investing activities provided $5.350 million, principally reflecting $7.625 million of insurance proceeds, less $2.239 million in property and equipment purchases. Financing provided $0.174 million, including a $0.332 million PPP loan.
- Liquidity: June 30 cash was $4.776 million, current assets $11.179 million, current liabilities $5.127 million, and working capital $6.1 million. Working capital includes a $4.946 million insurance receivable.
- Debt and obligations: Notes payable totaled $8.893 million on the balance sheet, including the PPP loan; the secured Veritex loan was approximately $9.1 million gross, or $8.6 million net of issuance costs. Lease liabilities were approximately $1.118 million. The company was out of compliance with the Veritex minimum debt-service-coverage covenant for the quarter, as it had been since 2017, but had received waivers.
- Balance sheet: Total assets were $57.625 million and stockholders’ equity was $42.715 million, down from $69.454 million and $49.589 million, respectively, at year-end 2019.
Changes versus the prior comparable period
- Q2 sales fell from $1.483 million to zero; first-half sales declined 99.1% to $18,000. The company attributed this to the fire and lack of production.
- Operating expenses declined 68.2% in Q2 and 62.9% for the first half. Management cited suspended production, reduced payroll, suspension of activity under the Veolia agreement, and a strategic shift away from facility operations.
- Net loss narrowed year over year, partly reflecting lower operating costs and lower interest expense. The six-month 2019 comparison included substantial noncash costs associated with the repaid convertible note and Veolia agreement.
- Cash fell from $7.575 million at December 31, 2019 to $4.776 million at June 30, 2020. Insurance proceeds and asset balances are subject to lender arrangements and do not equate to unrestricted cash available for operations.
Outlook, commentary, risks, and unusual items
- Strategy and outlook: Management said the plant would not produce commercially during 2020, apart from operation and testing of improved Version 1.25L electrolyzers. It is pursuing licensing and equipment-supply opportunities rather than rebuilding the facility. No revenue or earnings guidance was provided.
- Funding risk: Management said additional capital would be required over the next 12 months. It expects to rely on further insurance recoveries and possible asset sales, but said these may be insufficient; equity or debt financing could be needed, and equity issuance would dilute shareholders. The filing warns that unavailable financing could prevent execution of the plan or threaten continued operations.
- Fire and insurance: The November 2019 fire damaged all 16 AquaRefining modules and related infrastructure. The company reported $15.0 million received from insurers, including $4.875 million held in escrow, and considered at least another $4.9 million probable and receivable. Management estimated an additional $10–$15 million in insurance payments over the following three to six months, of which it expected to receive $6–$11 million. These are estimates, not assured recoveries; coverage disputes and lender allocation terms remain risks.
- Veritex agreement: Under the March 2020 memorandum of agreement, insurance and collateral-sale proceeds are shared with Veritex until the loan is retired. The loan remains secured by substantially all assets, and future covenant waivers are not assured.
- PPP loan: The company received approximately $332,000 in May and intended to apply for forgiveness. It cautioned that forgiveness was not assured.
- Commercialization and partnerships: Version 1.25L and the licensing model remain unproven at commercial scale. The company had no licensing or joint-venture agreements in place; negotiations with Clarios over revised performance criteria remained unresolved. The Clarios agreement could restrict third-party licensing until June 2021 or earlier termination. The Veolia agreement was subject to a force majeure declaration and could expire in February 2021 if the facility is not restored.
- Legal and listing matters: Securities class-action and shareholder derivative litigation remained pending; the company denied the allegations and intended to defend itself. A former employee’s Nevada OSHA matter was settled. After an audit-committee director resigned in May, the company was temporarily out of compliance with Nasdaq’s three-independent-member requirement and said it intended to appoint a replacement within the applicable cure period.
- Other items: The company reported no subsequent events through issuance of the financial statements, effective disclosure controls as of June 30, and no material changes in internal control over financial reporting during the six-month period.
Most important facts for investors to verify
- Whether and when insurers pay the estimated additional proceeds, and how much is released to the company after escrow and Veritex allocations.
- Whether cash, asset-sale proceeds, and any financing are sufficient to fund the licensing plan and ongoing costs over the next 12 months.
- Progress and performance of Version 1.25L testing, and whether the technology can be demonstrated at commercial scale.
- Resolution of Clarios performance criteria and any definitive licensing or development agreement; status of the Veolia relationship.
- Veritex covenant waivers, debt repayment status, and whether the lender continues to release insurance proceeds under the memorandum of agreement.
- Status and potential financial impact of the securities and derivative litigation, and whether the company regains Nasdaq audit-committee compliance on time.
- Potential dilution: common shares outstanding increased from 57.998 million at year-end 2019 to 60.274 million at June 30; 60.947 million were reported outstanding as of July 27. The company also had an ATM sales agreement.