Aqua Metals, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Dollar amounts below are in millions unless stated otherwise. The company develops lead-acid battery recycling using its AquaRefining technology and operates its first facility in McCarran, Nevada.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $0.483 | $0.603 | $2.209 | $0.603 |
| Cost of product sales | $4.600 | $2.531 | $10.036 | $2.531 |
| Gross loss, calculated | $4.117 | $1.928 | $7.827 | $1.928 |
| Operating loss | $9.233 | $7.967 | $16.193 | $12.482 |
| Net loss | $9.927 | $8.365 | $17.459 | $13.259 |
| Basic and diluted loss per share | $0.33 | $0.42 | $0.59 | $0.69 |
Gross loss is calculated as revenue less cost of product sales; the filing does not present a gross-margin subtotal. The operating loss increased in both comparisons, and revenue remained small relative to production costs. Interest expense was $0.719 million in Q2 and $1.306 million for the six months.
- Cash and working capital: Cash was $36.759 million at June 30, 2018, versus $22.793 million at year-end 2017. Working capital was $32.4 million; total assets were $88.006 million.
- Cash flows, six months: Operating activities used $12.182 million, investing activities used $2.391 million, and financing activities provided $28.539 million. The financing inflow was primarily from equity offerings.
- Debt: Balance-sheet carrying amounts included $9.047 million of notes payable and $2.286 million of current convertible-note liability. The $5 million Interstate Battery convertible note bears 11% interest and is due May 24, 2019. Management separately described approximately $9.6 million owed to Green Bank and $6.3 million to Interstate Battery as of the report date.
- Equity issuance: A June public offering of 10.09 million shares at $2.85 per share raised approximately $26.6 million net. Shares outstanding were 38.78 million at June 30, compared with 27.55 million at December 31, 2017.
Material changes and operating developments
- Q2 revenue fell 19.9% year over year as the company shifted focus toward AquaRefining; six-month revenue increased from $0.603 million to $2.209 million as operations and shipments expanded.
- In April 2018 the company began shipping cast lead bullion, and in June it began shipping high-purity lead produced by AquaRefining. The company described production to date as limited; most historical revenue came from lead compounds and plastics.
- Cost of product sales rose substantially as the facility operated for longer periods, with electrolyte losses, maintenance, staffing and commissioning costs among the cited factors. Research and development costs declined as more facility costs were classified as product costs.
- General and administrative expense increased, reflecting legal and proxy-related costs, approximately $0.9 million of former-CEO severance, and a net $0.4 million noncash charge associated with a modified Interstate Battery warrant.
- In June, the company reduced the exercise price of Interstate Battery’s warrant for 702,247 shares from $7.12 to $3.33 and extended its expiration to June 2020. Interstate Battery also waived the alleged Ebonex-related credit-agreement breach and agreed to more favorable battery supply terms.
Outlook, risks and contingencies
- Management’s plan is to achieve continuous operation of four modules, make facility improvements, then bring the remaining modules online in stages. The company reported that technical and production issues still prevented continuous operation; it could not predict when continuous operation or full-scale production would be achieved. Production had also been reduced to conserve cash.
- Management believed available working capital could fund commissioning and commercial operations of the 16 installed modules through at least August 2019, assuming successful rollout. Additional capital may be needed for expansion beyond those modules, strategic projects, ramp-related working capital and continuing operating losses. Availability and terms of further financing are uncertain.
- AMR failed the Green Bank minimum debt-service-coverage covenant for the periods listed through June 30, 2018, but received waivers. Failure to obtain future waivers could trigger default and acceleration; the filing warns of possible cross-default consequences for the Interstate Battery loan.
- The company’s commercial-scale technology and economics remained unproven. Risks include production delays, inability to achieve target purity or competitive costs, supply and lead-price volatility, customer qualification, labor and permitting issues, and dependence on strategic relationships. A proposed Johnson Controls development agreement was not yet definitive; there was no assurance it would be completed on beneficial terms.
- Consolidated securities class-action and shareholder derivative litigation remained pending. The complaints seek unspecified damages and fees; the company denied the allegations and said it intended to defend itself. Outcomes and potential financial effects were uncertain.
- Other commitments include approximately $0.9 million of former-CEO severance paid over two years and a $0.22 million facility-closure trust contribution due October 31, 2018. Interstate Battery’s amended key-person terms include an optional $0.5 million payment and a potential $2.0 million payment tied to the current president’s continued service through May 18, 2019.
The filing provides no earnings or revenue guidance. It reports management’s operational and liquidity expectations, which depend on successful production ramp-up and financing assumptions.
Important facts for investors to verify
- Whether the first four AquaRefining modules achieve continuous operation, and whether the company can scale all 16 modules while improving product yield and unit economics.
- Whether high-purity lead meets customer specifications and can be produced and sold in commercial quantities at profitable margins.
- Cash burn and runway against management’s August 2019 estimate, including whether additional capital is required and on what terms.
- Future Green Bank covenant compliance and waivers, debt maturity and interest obligations, and any cross-default exposure.
- Progress and terms of a definitive Johnson Controls development agreement, plus customer and supplier concentration; Johnson Controls represented 90.7% of Q2 revenue and 96.2% of receivables at June 30.
- Developments in securities and derivative litigation, environmental and permitting matters, and the potential costs of associated contingencies.