Aqua Metals, Inc. quarterly report, Q2 FY2019

Aqua Metals, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2019. Financial statement amounts are in millions of dollars unless stated otherwise. Aqua Metals develops and operates lead-acid battery recycling using its AquaRefining technology; its McCarran, Nevada facility was in a limited-production and scale-up phase.

Financial performance and position

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Product sales	$1.483	$0.483	$1.920	$2.209
Cost of product sales	$7.185	$4.600	$11.866	$10.036
Operating loss	$(10.375)	$(9.233)	$(19.255)	$(16.193)
Net loss	$(10.501)	$(9.927)	$(22.209)	$(17.459)
Basic and diluted loss per share	$(0.21)	$(0.33)	$(0.47)	$(0.59)

• Margins: Cost of product sales exceeded revenue by $5.702 million in Q2 2019, versus $4.117 million in Q2 2018; the six-month shortfall was $9.946 million, versus $7.827 million. These are calculated as product sales less cost of product sales.
• Cash flow: For the first half of 2019, operating cash use was $11.831 million and investing cash use was $4.299 million; financing provided $22.550 million. Cash increased by $6.420 million to $27.312 million, with equity offerings providing most of the financing.
• Liquidity: At June 30, cash was $27.312 million, current assets $30.647 million, current liabilities $8.652 million, and working capital $22.0 million.
• Debt and leases: Balance-sheet notes payable totaled $8.821 million, principally the Green Bank loan; management described Green Bank debt as approximately $9.4 million. The $6.7 million Interstate Battery convertible note, including principal and interest, was repaid in January. Operating lease liabilities were $1.632 million.
• Equity: January and May public offerings generated approximately $29.4 million in combined net proceeds. Shares issued and outstanding rose to 56.9 million at June 30 from 38.9 million at year-end 2018.

Changes versus comparable periods

• Q2 sales increased 207% year over year as production ramped; first-half sales declined 13%, reflecting limited operations in Q1.
• Product costs rose 56% in Q2 and 18% in the first half, including costs associated with preparing for higher production and hiring approximately 25 production employees.
• Research and development costs declined 72% in Q2 and 64% in the first half as management shifted focus toward plant scale-up.
• General and administrative expense increased 11% in Q2 and 47% in the first half. First-half expense included noncash charges related to Veolia and higher stock compensation.
• First-half interest expense increased to $3.092 million from $1.306 million, primarily because repayment of the convertible note triggered recognition of $2.6 million of remaining debt discount and $20,000 of deferred financing costs. Q2 interest expense was lower year over year following repayment.

Outlook, risks and unusual items

• Management said current working capital was expected to fund the existing level of TRIC operations for the next 12 months, but additional capital would be needed for expansion beyond 16 modules and to fund continuing losses until positive operating cash flow. Financing availability and terms were not assured.
• The stated operating goal was continuous, 24/7 operation of all 16 installed modules by year-end 2019. As of the report, up to four modules were operating continuously, and rollout of eight more was underway. Management warned that delays and technical issues could prevent the year-end target.
• Management reported electrolyte recovery at 75% of its target in Q2, compared with 67% in Q1, and expected to reach 100% after Phase Two improvements in the second half of 2019. These improvements were intended to improve yields and contribution margin; positive economics had not been demonstrated at scale.
• Veolia assumed primary responsibility for plant operations and scaling under a two-year agreement. Compensation included shares and warrants; the relationship brings execution support but also potential operational dependence and financing-related termination risk.
• A June 2019 agreement with Clarios set parameters for negotiating a definitive development program. No definitive program agreement was assured. Clarios represented 59% of Q2 and first-half revenue and 71% of receivables at June 30, underscoring customer concentration.
• Aqua Metals remained out of compliance with Green Bank’s minimum debt-service-coverage covenant through June 30, 2019, but had received waivers for the periods involved. Future waivers were not guaranteed; failure to obtain one could result in default and acceleration. Green Bank approved up to $5.0 million of new capital and operating leases.
• Pending securities class-action and shareholder derivative litigation sought unspecified damages; the company denied the claims and intended to defend them. The filing also discussed Nevada OSHA citations relating to lead-safety compliance, a settlement of penalties, and an ongoing facility audit with corrective actions to follow.
• The filing describes significant risks from unproven commercial-scale technology, production delays, access to battery feedstock, lead-price volatility, permitting and environmental compliance, and the need for future financing. No quantified revenue or earnings guidance was provided.

Investor verification priorities

• Verify actual module commissioning, sustained production, lead yields, electrolyte recovery, and whether the 16-module year-end goal was achieved.
• Assess whether AquaRefining can achieve positive contribution margins and cash flow at commercial scale, rather than relying on stated targets.
• Track cash burn, available financing, equity dilution, Green Bank covenant waivers, and any financing conditions tied to Veolia or expansion plans.
• Monitor negotiations with Clarios and Veolia, including definitive agreements, performance obligations, and customer concentration.
• Review the status and potential financial impact of the securities and derivative litigation and the resolution of facility safety and compliance findings.