Aqua Metals, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2015. Aqua Metals was formed in June 2014 to develop AquaRefining, a proprietary, patent-pending process for recycling lead-acid batteries. It had not begun revenue-producing operations and expected to start commercial operations in Q2 2016. The report states the company listed on Nasdaq after quarter-end.
Financial results and position
| Metric | Three months ended June 30, 2015 | Six months ended June 30, 2015 |
|---|---|---|
| Revenue | None | None |
| Operating expenses | $1.062 million | $1.747 million |
| Operating loss | $1.062 million | $1.747 million |
| Interest expense | $318,000 | $634,000 |
| Increase in fair value of derivative liabilities | $1.603 million | $5.499 million |
| Net loss | $2.982 million | $7.880 million |
| Basic and diluted loss per share | $0.68 | $1.81 |
| Net cash used in operating activities | $1.695 million for six months | |
| Net cash used in investing activities | $1.211 million for six months |
The Q2 2014 comparison covers only the period from inception on June 20 through June 30, 2014; the six-month statement has no comparable six-month 2014 period. Profit margins are not meaningful because there was no revenue.
At June 30, cash was $1.631 million, down from $4.537 million at December 31, 2014. Current assets were $1.935 million and current liabilities $6.029 million, producing a $4.094 million working-capital deficit. Total assets were $4.343 million, total liabilities $12.913 million, and stockholders’ deficit $8.569 million.
The company had $6.0 million of convertible-note principal outstanding, carried at $5.545 million net of unamortized discount. The notes bore 6% interest and were due December 31, 2015. Derivative liabilities were $6.884 million, up from $1.385 million at year-end. Their $5.499 million fair-value increase was a major noncash component of the six-month loss. The derivatives were Level 3 valuations based on significant unobservable inputs.
Changes, financing and outlook
- Operating expenses increased as the company advanced development and business activities; six-month operating and development costs were $635,000 and business development and management costs were $1.112 million.
- Property and equipment rose to $1.428 million from $246,000, including $1.048 million of land. Six-month capital expenditures were $1.205 million.
- After quarter-end, the IPO raised approximately $32.900 million net, including the underwriters’ partial over-allotment exercise. The $6.0 million principal and $279,678 accrued interest on the notes converted into 2,511,871 common shares at $2.50 per share; the $7.127 million derivative liability was reclassified to additional paid-in capital.
- Management said cash on hand after the IPO was expected to fund its current plan over the following 12 months, but additional capital might be required. The company allocated $22.5 million of IPO proceeds to its planned Reno facility. It believed available cash could fund construction and installation of eight AquaRefining modules; reaching the planned 80 metric tons of lead per day would require 16 modules and, if funded early, an estimated additional $6 million.
- The company purchased 11.73 acres near Reno and planned a 125,000-square-foot recycling facility. Construction began August 21, 2015; management expected building completion and initial module installation around Q2 2016. The company had discussed debt financing but had no assurance of obtaining it.
- The USDA issued a conditional commitment to guarantee up to 90% of a qualifying commercial loan of no more than $10 million. No lender agreement was in place. Proposed terms included interest at the greater of 6% or prime plus 2%, a $1 million certificate-of-deposit security requirement, and a $270,000 guarantee fee; the commitment remained subject to conditions.
Risks and other items. The business had no revenue and depended on successful technology development, facility construction, commercial-scale operation, and future financing. Management warned that unavailable financing could impede its plan or its ability to continue operations. The filing identifies the USDA loan as uncertain and describes forward-looking statements as subject to risks. It reports no off-balance-sheet financing arrangements, effective disclosure controls as of June 30, and no material quarterly change in internal control over financial reporting. A related-party consulting expense of $54,494 was recorded for the six months, payable to a company owned by the CEO’s brother.
Most important facts for investors to verify
- Whether the Reno facility and AquaRefining modules were completed on schedule, and whether the process achieved commercial-scale output and expected economics.
- Actual cash use, remaining IPO proceeds, and whether additional financing was secured to reach the 16-module, 80-metric-ton-per-day target.
- Whether the conditional USDA-guaranteed loan obtained a lender commitment and closed on acceptable terms.
- The terms and dilution effects of the IPO, note conversion, warrants, options, and subsequent share issuances.
- The assumptions supporting the Level 3 derivative valuations and the effect of their remeasurement on reported earnings.
- Whether battery supply arrangements and customer or operating partnerships progressed beyond the discussions described in the filing.