Aqua Metals, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial statements are unaudited; amounts below are in millions of dollars unless noted. Aqua Metals was a pre-revenue company developing its AquaRefining lead-acid battery recycling process and building its first facility in McCarran, Nevada.
Financial results and liquidity
| Metric | Q2 2016 | Six months 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | No revenue | No revenue | No revenue |
| Operating expenses | $2.825 | $5.003 | $1.062 Q2; $1.747 six months |
| Operating loss | $(2.825) | $(5.003) | $(1.062) Q2; $(1.747) six months |
| Net loss | $(2.931) | $(5.105) | $(2.982) Q2; $(7.880) six months |
| Net loss per share, basic and diluted | $(0.20) | $(0.35) | $(0.68) Q2; $(1.81) six months |
| Cash used in operating activities | $(3.287) for six months | $(1.695) for six months | |
| Cash used in investing activities | $(8.259) for six months | $(1.211) for six months | |
| Cash provided by financing activities | $13.955 for six months | — |
- At June 30, cash and cash equivalents were $22.550; restricted cash was $3.467. Working capital was $22.799, and total assets were $57.128.
- Total liabilities were $13.668. Notes payable had carrying amounts of $9.375 in total, including $9.216 non-current. The Interstate Battery convertible note had a $5.0 face amount but a net carrying amount of $0.089 after discounts; accrued interest was $0.056.
- No revenue means operating or gross margins are not meaningful for these periods.
- Property and equipment, net, increased to $28.100 from $12.603 at year-end 2015, reflecting construction and equipment investment.
Changes versus the prior comparable period
- Operating expenses rose to $2.825 in Q2 from $1.062 and to $5.003 for six months from $1.747, driven by higher staffing, development activity, professional fees, depreciation, and general operating costs.
- Despite higher operating costs, six-month net loss narrowed to $5.105 from $7.880, mainly because 2015 included $5.499 of derivative-liability remeasurement expense. Q2 net loss was slightly lower year over year, at $2.931 versus $2.982.
- Operating cash use increased to $3.287 from $1.695 for the six-month period, while investing outflows rose with the facility build-out.
- Cash increased by $2.409 in the first half, supported by financing proceeds, including approximately $9.1 net from stock issuance and $4.85 net from the Interstate Battery note. Share count rose to 15,574,225 at June 30 from 14,137,442 at December 31, 2015.
Outlook, risks and notable items
- Management said it expected the McCarran facility to be completed in Q3 2016 and targeted commercial operations and an initial capacity of 80 tons of recycled lead per day by Q4 2016, using 16 AquaRefining modules. Expansion to 160 tons per day depended on additional funding. These were plans, not guaranteed results.
- Management believed available working capital was sufficient for facility completion and the initial 80-ton-per-day target, but cautioned additional funding could be needed. Future expansion and additional facilities would require further capital; financing might not be available on acceptable terms or at all.
- The company had not demonstrated commercial-scale operation. Risks include scaling and cost performance of the unproven process, construction or commissioning delays, permitting and environmental compliance, access to used batteries, and volatility in feedstock and lead prices.
- The $10 million Green Bank facility carries a minimum 6% rate, is secured by facility assets and a $1.0 million certificate of deposit, and is 90% USDA-guaranteed. The subsidiary reported compliance with its covenants at June 30, 2016.
- The $5 million Interstate Battery convertible note bears 11% interest, compounds monthly, and matures in 2019. Financing allocations and the beneficial conversion feature produced a $4.975 million note discount and a stated effective interest rate of 184.75%; remaining discount would be expensed upon early conversion.
- Interstate Battery also received warrants and investor rights; conversion and full exercise could result in ownership of slightly less than 20% of the company. Separately, the company agreed to pay Interstate Battery $2 million for specified key-person events involving either of two named executives during the defined three-year period.
- A one-time $0.175 million compensation charge followed modification of a director’s option. Subsequent to quarter-end, on August 8, 2016, annual salaries for four senior executives were increased.
- Management reported effective disclosure controls and procedures and no material litigation. It reported no off-balance-sheet financing arrangements.
Important facts for investors to verify
- Whether construction, commissioning, permitting, and commercial production actually met the stated Q3/Q4 2016 schedule and 80-ton-per-day target.
- Whether AquaRefining can operate reliably at commercial scale and achieve expected yields, costs, and margins; no commercial revenue or operating margin had yet been reported.
- Actual cash burn, restricted-cash availability, remaining construction commitments, and funding needs, particularly for expansion beyond the initial facility.
- The economic and dilution effects of the Interstate Battery note, warrants, financing discount, registration rights, and potential future equity issuance.
- Exposure to lead and used-battery price changes, supply access, environmental obligations, and the stated key-person payment contingencies.