Aqua Metals(AQMS) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents Aqua Metals, Inc.'s unaudited condensed consolidated financial statements and management's discussion for the quarter ended June 30, 2019 Item 1. Financial Statements This section presents Aqua Metals, Inc.'s unaudited condensed consolidated financial statements and detailed notes for the quarter ended June 30, 2019 Condensed Consolidated Balance Sheets This section provides a snapshot of Aqua Metals' financial position, detailing assets, liabilities, and equity as of June 30, 2019 Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2019 | December 31, 2018 | | :-------------------------- | :------------ | :---------------- | | Total Assets | $83,729 | $71,371 | | Total Current Assets | $30,647 | $22,752 | | Cash and Cash Equivalents | $27,312 | $20,892 | | Total Liabilities | $19,114 | $21,281 | | Total Stockholders' Equity | $64,615 | $50,090 | Condensed Consolidated Statements of Operations This section outlines Aqua Metals' financial performance, including product sales, net loss, and loss per share for the periods ended June 30, 2019 Product Sales (in thousands) | Period | 2019 | 2018 | Change (%) | | :------------------------- | :----- | :----- | :--------- | | Three Months Ended June 30 | $1,483 | $483 | 207.0% | | Six Months Ended June 30 | $1,920 | $2,209 | (13.1)% | Net Loss (in thousands) | Period | 2019 | 2018 | | :------------------------- | :------- | :------- | | Three Months Ended June 30 | $(10,501) | $(9,927) | | Six Months Ended June 30 | $(22,209) | $(17,459) | Basic and Diluted Net Loss Per Share | Period | 2019 | 2018 | | :------------------------- | :----- | :----- | | Three Months Ended June 30 | $(0.21) | $(0.33) | | Six Months Ended June 30 | $(0.47) | $(0.59) | Condensed Consolidated Statements of Stockholders' Equity (Deficit) This section details changes in Aqua Metals' stockholders' equity, including public offerings and share issuances, for the periods ended June 30, 2019 - Total Stockholders' Equity increased from $50,090 thousand as of December 31, 2018, to $64,615 thousand as of June 30, 2019[5] - The company issued 5,175,000 common shares in a January 2019 public offering, generating $9.1 million in net proceeds, and 11,000,000 common shares in a May 2019 public offering, generating $20.3 million in net proceeds[5] - Significant share issuances during the six months ended June 30, 2019, included shares for RSU vesting, consulting services, and agreements with Veolia and Clarios[5][7][51][52] Condensed Consolidated Statements of Cash Flows This section summarizes Aqua Metals' cash inflows and outflows from operating, investing, and financing activities for the periods ended June 30, 2019 Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2019 | 2018 | | :-------------------------- | :------- | :------- | | Net cash used in operating activities | $(11,831) | $(12,182) | | Net cash used in investing activities | $(4,299) | $(2,391) | | Net cash provided by financing activities | $22,550 | $28,539 | - Cash and cash equivalents increased to $27,312 thousand at the end of June 30, 2019, from $20,892 thousand at the beginning of the period[10] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for Aqua Metals' financial statements, covering accounting policies, assets, liabilities, equity, and contingencies 1. Organization This note describes Aqua Metals, Inc.'s incorporation, its lead recycling business using AquaRefining technology, and operational milestones - Aqua Metals, Inc. was incorporated in Delaware on June 20, 2014, and is engaged in lead recycling using its patented AquaRefining™ technology[12] - The company commenced product shipments (lead compounds, plastics, cast lead bullion, high-purity lead) from its McCarran, Nevada facility between April 2017 and June 2018[12] - In early 2019, the company began scaling its AquaRefining plant, including equipment installation and commissioning of AquaRefining modules[12] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and policies used in preparing Aqua Metals' financial statements, including revenue recognition and lease accounting - The financial statements are prepared in accordance with U.S. GAAP and SEC rules, with all necessary adjustments for fair presentation[14] - The company adopted ASU 2016-02, Leases (ASC 842), on January 1, 2019, recognizing approximately $1.6 million in right-of-use assets and $1.8 million in operating lease liabilities[25] - Revenues from Clarios represented 59% of total revenue for the three and six months ended June 30, 2019, and 71% of accounts receivable as of June 30, 2019[23] 3. Revenue Recognition This note details Aqua Metals' revenue generation from recycling lead-acid batteries and selling recovered lead products and plastics - Revenue is generated from recycling lead acid batteries (LABs) and selling recovered lead products (compounds, ingoted hard lead, AquaRefined lead) and plastics[27] - 100% of revenue for the three and six months ended June 30, 2019 and 2018, was from products transferred to customers at a single point in time upon delivery[28] 4. Inventory This note provides a breakdown of Aqua Metals' inventory, including finished goods, work in process, and raw materials Inventory (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :---------------- | :------------ | :---------------- | | Finished goods | $326 | $43 | | Work in process | $604 | $164 | | Raw materials | $812 | $558 | | Total inventory | $1,742 | $765 | 5. Property and Equipment, net This note details Aqua Metals' property and equipment, including ongoing construction of AquaRefining modules and depreciation expenses - Total Property and Equipment, net, increased to $47,630 thousand as of June 30, 2019, from $45,548 thousand as of December 31, 2018[31] - Equipment under construction, primarily AquaRefining modules, increased to $8,951 thousand as of June 30, 2019, from $7,892 thousand as of December 31, 2018[31] - Depreciation expense was $0.9 million for the three months and $1.7 million for the six months ended June 30, 2019[31] 6. Asset Retirement Obligation This note explains Aqua Metals' liability for future closure costs of its McCarran facility and contributions to a trust fund - The company records a liability for asset retirement obligations (ARO) based on the discounted estimated fair value of future closure costs for the McCarran facility, estimated at $0.7 million as of March 31, 2017[32] - Accretion of the ARO for the three and six months ended June 30, 2019, was approximately $11,000 and $23,000, respectively[32] - $670,000 has been contributed to a facility closure trust fund for the benefit of the Nevada Division of Environmental Protection (NDEP)[35] 7. Convertible Note Payable This note details the repayment of Aqua Metals' convertible note payable with Interstate Battery Systems International, Inc - The convertible note payable with Interstate Battery Systems International, Inc. was fully repaid on January 24, 2019, for $6.7 million, including outstanding principal and interest[37] - Upon repayment, the remaining discount of $2.6 million and deferred financing expenses of $20,000 were amortized to interest expense[37] - As of June 30, 2019, there was no outstanding convertible note payable[36] 8. Notes Payable This note describes Aqua Metals' loan with Green Bank, including its USDA guarantee and compliance with debt covenants - Aqua Metals Reno, Inc. (AMR) has a $10 million loan with Green Bank, guaranteed by the United States Department of Agriculture Rural Development (USDA) for 90% of the principal[38][41] - AMR was not in compliance with the minimum debt service coverage ratio covenant from March 31, 2017, through June 30, 2019, but received waivers for these periods[38] Notes Payable (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :-------------------------- | :------------ | :---------------- | | Current portion | $272 | $311 | | Non-current portion | $8,549 | $8,600 | 9. Leases This note outlines Aqua Metals' finance and operating leases, including right-of-use assets and lease liabilities - The company maintains one finance lease for equipment and two operating leases for real estate, with terms of 76 and 42 months[44] - As of June 30, 2019, total right-of-use assets were approximately $1.42 million and operating lease liabilities were approximately $1.63 million[45] Lease Liabilities Maturities (in thousands) as of June 30, 2019 | Period | Amount | | :--------------------------------------- | :----- | | Due in 12-month period ended June 30, 2020 | $633 | | 2021 | $652 | | 2022 | $560 | | Less imputed interest | $(213) | | Total lease liabilities | $1,632 | 10. Stockholders' Equity This note details Aqua Metals' public offerings, share issuances, and stock-based compensation expenses - The company completed public offerings in January and May 2019, issuing 5,175,000 shares for $9.1 million net proceeds and 11,000,000 shares for $20.3 million net proceeds, respectively[49][50] - During the six months ended June 30, 2019, the company issued 597,485 shares to Veolia North America Regeneration Services, LLC and 807,436 shares to Clarios to settle a key-man penalty claim[51][52][72] Stock-based Compensation Expense (in thousands) | Period | 2019 | 2018 | | :------------------------- | :----- | :----- | | Three Months Ended June 30 | $930 | $348 | | Six Months Ended June 30 | $1,998 | $492 | 11. Commitments and Contingencies This note describes Aqua Metals' financial commitments, including key-man penalty settlements and ongoing legal proceedings - The company paid a one-time fee of $0.5 million to Interstate Battery on February 20, 2019, related to the key-man provision associated with Mr. Mould's resignation[71] - Aqua Metals settled a $2.0 million key-man penalty claim from Clarios (due to executive resignations) by issuing 807,436 shares of common stock in June 2019[72] - The company is a defendant in a consolidated securities class action lawsuit and a consolidated shareholder derivative action, both alleging false and misleading statements and breach of fiduciary duties, which the company intends to vigorously defend[74][75] 12. Subsequent Events This note confirms Aqua Metals' evaluation of events occurring after the reporting period up to the financial statement issuance date - The company evaluated subsequent events through the date the condensed consolidated financial statements were available to be issued[78] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Aqua Metals' financial condition, operational results, technology, and strategic initiatives for the quarter ended June 30, 2019 General This section introduces Aqua Metals' AquaRefining technology, operational scaling efforts, and strategic partnership with Veolia - Aqua Metals is engaged in lead recycling through its novel, proprietary, and patented AquaRefining™ technology, which is a room temperature, water and organic acid-based process designed to reduce environmental emissions and produce high-purity lead[83] - The company is operating up to four AquaRefining modules 24/7 and plans to roll out an additional 8 modules (9-16) to utilize up to 50% of current plant capacity, aiming for all 16 modules to operate 24/7 by the end of 2019[87] - Phase One of the capital improvement program was completed in March 2019, improving electrolyte recovery from 67% to 75% of target in Q2 2019, with a goal of 100% recovery upon Phase Two completion in H2 2019[88] - In February 2019, Aqua Metals signed an Operations, Maintenance and Management Agreement with Veolia North America Regeneration Services LLC to provide operational expertise and manage the McCarran facility, with Veolia assuming primary responsibility for scaling the facility[91] Plan of Operations This section outlines Aqua Metals' 12-month operational plan, including module rollout, production ramp-up, and technology licensing goals - The 12-month plan includes completing the commercial roll-out of all 16 AquaRefining modules at TRIC and ramping up production, followed by installing an additional 16 modules, subject to capital availability[96] - The company aims to improve plant economics by processing more metallic lead recovered from batteries in-house and utilizing a newly commissioned third kettle in the refining area[97] - Aqua Metals plans to license its technology and provide services for an AquaRefining facility to Clarios, and is discussing a definitive development program agreement[98] Results of Operations This section analyzes Aqua Metals' financial performance, including product sales, research and development, and general and administrative expenses Product Sales (in thousands) | Period | 2019 | 2018 | Change (%) | | :------------------------- | :----- | :----- | :--------- | | Three Months Ended June 30 | $1,483 | $483 | 207.0% | | Six Months Ended June 30 | $1,920 | $2,209 | (13.1)% | - Research and development costs decreased by 72% for the three months and 64% for the six months ended June 30, 2019, reflecting a shift from R&D to scaled production and a 25% reduction in R&D staffing[103] - General and administrative expense increased by 11% for the three months and 47% for the six months ended June 30, 2019, primarily due to non-cash expenses related to the Veolia agreement ($3.7 million) and stock-based compensation ($1.6 million increase)[104] Liquidity and Capital Resources This section discusses Aqua Metals' financial position, cash flow, and capital needs for ongoing operations and future expansion - As of June 30, 2019, the company had total assets of $83.7 million and working capital of $22.0 million[109] Cash Flow Summary (Six Months Ended June 30, in thousands) | Activity | 2019 | 2018 | | :-------------------------- | :------- | :------- | | Operating Activities | $(11,831) | $(12,182) | | Investing Activities | $(4,299) | $(2,391) | | Financing Activities | $22,550 | $28,539 | - Net cash provided by financing activities in H1 2019 included $9.1 million from the January public offering and $20.3 million from the May public offering, offset by a $6.7 million payoff of the Interstate Battery convertible note[112] - The company believes current working capital is sufficient for TRIC operations for the next twelve months but will require additional capital for production increases beyond 16 modules and to fund continued losses[115] Off-Balance Sheet Arrangements This section confirms that Aqua Metals does not have any off-balance sheet financing arrangements - The company does not have any off-balance sheet financing arrangements[117] Item 3. Quantitative and Qualitative Disclosures about Market Risk Aqua Metals' primary market risk exposure is interest expense on its Green Bank debt, which has a variable interest rate - The primary exposure to market risk is interest expense related to the variable-rate debt with Green Bank[117] - The company experiences potential market risk from the volatility of lead commodity prices, affecting both the purchase price of used LABs and the sales price of finished lead products, but the short turnaround time minimizes this risk[117] Item 4. Controls and Procedures Management concluded that Aqua Metals' disclosure controls and procedures were effective as of June 30, 2019, with no material changes in internal control Evaluation of Disclosure Controls and Procedures This section confirms management's conclusion that Aqua Metals' disclosure controls and procedures were effective as of June 30, 2019 - Management, with the participation of the chief executive officer and chief financial officer, concluded that disclosure controls and procedures were effective as of June 30, 2019[118] Changes in Internal Control Over Financial Reporting This section states that there were no material changes in Aqua Metals' internal control over financial reporting during the quarter ended June 30, 2019 - There were no changes in internal control over financial reporting during the three-month period ended June 30, 2019, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[119] PART II - OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, and a list of exhibits filed with the report Item 1. Legal Proceedings Aqua Metals is involved in securities class action and shareholder derivative lawsuits, which the company intends to vigorously defend - A consolidated securities class action lawsuit is pending against the company and former executive officers, alleging false and misleading statements concerning lead recycling operations[121] - A consolidated shareholder derivative action is pending against the company and certain current/former officers and directors, alleging breach of fiduciary duties[122] - The company denies the claims in both lawsuits and intends to vigorously defend the actions, acknowledging that litigation outcomes are uncertain and could materially affect its financial position[121][122][123] Item 1A. Risk Factors This section outlines significant risks associated with investing in Aqua Metals' common stock, covering business-related and stock ownership risks Risks Related to Our Business This section details business-specific risks, including reliance on unproven technology, need for capital, Veolia dependency, debt covenants, and environmental regulations - The company has a limited operating history and relies on novel and unproven AquaRefining technology, making it difficult for investors to evaluate its business and posing risks to commercial scale implementation and profitability[126][127][138] - Aqua Metals will require additional capital to increase production and fund continued losses, with no guarantee that such financing will be available on reasonable terms[128][129] - The business is substantially dependent on its agreement with Veolia for operations and future expansion, with risks including failure to realize expected benefits, inability to negotiate long-term agreements, or Veolia's termination of the agreement due to financing issues[130][131][132] - The company is subject to restrictive covenants on its Green Bank loan, including a minimum debt service coverage ratio for which waivers have been received but are not guaranteed in the future, risking default and accelerated payments[133][134][135] - Operations are subject to extensive environmental, health, and safety regulations, with risks of non-compliance, fines, and liabilities for mishandling hazardous materials, which could materially affect the business[160][161][166] Risks Related to Owning Our Common Stock This section outlines risks associated with Aqua Metals' common stock, including litigation, price volatility, and implications of its 'emerging growth company' status - Pending securities class action and shareholder derivative lawsuits could divert resources, incur substantial costs, and materially adversely affect the business and financial condition[168] - The common stock is thinly traded and subject to price volatility, with no assurance of maintaining a liquid market, potentially leading to difficulty selling shares and increased litigation risk[171] - As an 'emerging growth company' under the JOBS Act, the company benefits from reduced disclosure requirements, which may make its common stock less attractive to investors and hinder capital raising efforts[172][174] - The company has no plans to pay dividends in the foreseeable future, intending to reinvest all earnings into business development[175] - Provisions in the company's charter documents and Delaware law may inhibit takeovers, potentially entrenching management and depriving stockholders of a control premium[177][179] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, agreements, and certifications - The exhibits include corporate governance documents such as the First Amended and Restated Certificate of Incorporation and the Second Amended and Restated Bylaws[182][183][184][185] - Certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 are filed[186] - XBRL Instance Document and various XBRL Taxonomy Extension documents are included[186]