Aqua Metals, Inc. — Form 10-Q Summary
Business context and period: Unaudited results for the quarter and six months ended June 30, 2017. Aqua Metals is developing and operating lead-acid battery recycling facilities using its AquaRefining technology. Production at its McCarran, Nevada facility began in January 2017; sales of lead compounds and plastics began in April. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q2 2017 | Six months 2017 | Comparable 2016 |
|---|---|---|---|
| Revenue | $0.603 | $0.603 | None reported |
| Product sales cost | $2.531 | $2.531 | None reported |
| Research and development | $2.184 | $5.171 | $1.309 Q2; $2.192 six months |
| General and administrative | $1.444 | $2.972 | $1.516 Q2; $2.811 six months |
| Impairment charge | $2.411 | $2.411 | None reported |
| Operating loss | $(7.967) | $(12.482) | $(2.825) Q2; $(5.003) six months |
| Net loss | $(8.365) | $(13.259) | $(2.931) Q2; $(5.105) six months |
| Net loss per share | $(0.42) | $(0.69) | $(0.20) Q2; $(0.35) six months |
| Operating cash flow | Not presented quarterly | $(9.004) | $(3.287) six months |
| Investing cash flow | Not presented quarterly | $(4.824) | $(8.259) six months |
| Financing cash flow | Not presented quarterly | $10.479 | $13.955 six months |
Q2 product sales cost exceeded sales by $1.928 million; the filing attributes the high costs to early-stage operations and says they are expected to exceed revenue until the facility operates closer to capacity. Cash and cash equivalents were $22.109 million at June 30, down from $25.458 million at year-end 2016. Working capital was $21.4 million; total assets were $71.933 million.
Total liabilities were $14.956 million, including $9.412 million of notes payable and $0.736 million carrying value of convertible notes. The convertible note has $5.0 million principal, 11% interest, and matures in 2019. The Green Bank loan has a 21-year term and variable rate subject to a 6% floor. Its minimum debt-service-coverage covenant was not met for the March and June 2017 periods; the company received waivers for both periods. The facility loan is also subject to other financial covenants.
Material changes and unusual items
- Revenue began in April 2017, so the company reported $0.603 million in sales in both the quarter and first half, versus no sales in the prior-year periods. Revenue and receivables were substantially attributable to Johnson Controls Battery Group.
- Operating expenses increased substantially as the company ramped up McCarran operations. R&D rose 67% in Q2 and 136% for the first half year over year; the company reported 46 facility employees at June 2017 versus nine a year earlier.
- A $2.411 million non-cash impairment followed the $2.5 million Ebonex IPR acquisition. The acquired patent portfolio was valued at $112,000; the company cited the early development stage and R&D uncertainty.
- Interest expense rose to $0.408 million in Q2 and $0.796 million for the first half, primarily reflecting the convertible note, Green Bank loan, and related financing costs. The company noted that convertible-note discount amortization is expected to increase in later years.
- Net property and equipment increased to $44.425 million from $41.392 million at year-end. Six-month capital spending was $5.558 million.
- Common shares outstanding increased from 17.879 million at year-end to 20.153 million at June 30, reflecting warrant and option exercises, the Johnson Controls investment, and stock issued for Ebonex. The Johnson Controls share sale generated approximately $10.6 million gross proceeds.
Outlook, risks, and contingencies
- Management said working capital was sufficient for the current TRIC plan over the following 12 months, including commissioning up to 16 modules by year-end 2017. As of July, four modules were commissioned and operating; management expected 12 additional modules by year-end.
- The company said it had implemented process improvements and expected capability to produce more than 120 metric tonnes of recycled lead per day by year-end, while noting that this would exceed the feedstock-processing capacity of 16 modules. It may operate below that rate to optimize product mix.
- Management identified additional funding needs within 12 months to expand AquaRefined lead production beyond the first 16 modules, develop other facilities, and support Johnson Controls equipment integration and third-party licensing. Financing was not assured; inability to obtain satisfactory funding could impede the plan or threaten continued operations.
- Lead compounds have a less established market and demand is uncertain. The company also relies on a key customer for substantially all reported revenue and receivables.
- Green Bank covenant waivers were obtained for two periods, but future waivers are not guaranteed; without a waiver, the company could be in default. The company also has facility closure and remediation obligations, with $350,000 due to its closure trust in October 2017 and $220,000 in October 2018.
- Key-man agreements provide for payments to Interstate Battery and Johnson Controls in specified circumstances involving the CEO or COO. The filing reports no material changes to risk factors from the 2016 Form 10-K and states disclosure controls were effective as of June 30, 2017.
Important facts for investors to verify
- Whether module commissioning and operating performance met management’s year-end targets, and whether production translates into revenue at commercially viable costs.
- Customer concentration, demand and pricing for lead compounds and plastics, and the timing and economics of AquaRefined lead sales.
- Availability, terms, and timing of additional financing, including any arrangements for future facilities or licensing.
- Compliance with Green Bank covenants and status of any future waivers.
- The assumptions and accounting behind the Ebonex acquisition, its $112,000 patent valuation, and the $2.411 million impairment.
- Cash runway, operating cash burn, capital requirements, debt interest costs, and potential dilution from outstanding warrants, options, and convertible securities.