Quarterly / Earnings Reports | Water Treatment

Aqua-Pure Touts Permian Growth in Q2; Addresses Revenue Decline

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   |    Tuesday,August 27,2013

Aqua-Pure Ventures Inc. has reported financial results for its second quarter ended June 30, 2013.

Since the beginning of the second quarter 2013, Aqua-Pure:

• Secured its second order in the Permian basin from a large, independent oil and gas exploration company, Pioneer Natural Resources Company, to install two NOMAD units -- the Company’s NOMAD is a patented, state-of-the-art, semi-mobile, cost effective evaporation process to treat water polluted with oilfield contaminants, returning distilled fresh water that can be reused on or near-site. The two NOMADS are expected to begin processing flowback water in mid second half of 2013.
• Successfully piloted at the site of a major E&P producer in the Permian its second product, ROVER, a mobilized small footprint clarifier system technology designed for primary treatment of shale oil and gas flowback at or near the source, removing suspended solids and soluble organics from wastewater, and returning clean brine that can be blended for re-use. The self-contained system can treat up to 10,000 barrels of flowback and produced water per day, can be used across all shale formations, and can generate higher margins.
• Secured an additional US $1.5 million from the sale of Convertible Debentures to international investors. The funds will be primarily used for the construction of additional “NOMAD” and “ROVER” units to address the growing demand for oil field and shale gas wastewater recycling.
• Subsequent to quarter end, took additional steps to improve the Company’s balance sheet. Hallmark Resources Ltd. (“Hallmark”), Aqua-Pure's controlling shareholder converted an existing demand loan in the principal amount of US $700,000 to a debenture on the same terms as the last offering. Hallmark also altered the terms of its $7.02 million convertible debenture such that (i) the debenture will mature on January 15, 2017 rather than November 12, 2014 and (ii) the interest rate shall be increased from 5% to 8% effective on November 13, 2014 for the remainder of the revised term of the debenture. In addition, Hallmark converted $3,000,000 principal of its 8% promissory notes that were due on demand into a term loan bearing 8% interest and maturing on January 15, 2017. Hallmark also agreed to not be repaid on its remaining promissory notes until the Company achieves positive EBIDTA.

Aqua-Pure reported second quarter 2013 revenues of $1.3 million compared to $1.9 million for the same period of the previous year and $886,000 for the first quarter of 2013. The expected decrease in the year-over-year revenues was predominantly the result of the termination of operations by the Company in the fourth quarter 2012 with a small, independent oilfield service company located in the Eagle Ford due to lower than contracted flowback levels. The Company’s two NOMAD units that had been operating in the Eagle Ford have since been redeployed by a larger, independent oil and gas operator in the Permian basin, for which operations commenced in August 2013.

Revenues in the second quarter of the current year increased over the first quarter due to the relocation of two Nomad units to the Barnett Shale during the first quarter. These units have since been fully re-mobilized following a two week production interruption for transport and installation. Aqua-Pure anticipates a material increase in revenue during the remainder of 2013 as the four NOMAD units commence operations in the Permian Basin, and ROVER’s commercial launch proves successful. The Company reported a comprehensive loss of $(545,000) or $(0.005) per basic share for the second quarter of 2013, which included a foreign currency exchange gain of $566,000. This compares to a comprehensive loss of $(732,000) million or $(0.008) per basic share for the same period in 2012, which included a foreign currency exchange gain of $319,000, and $(1.1) million or $(0.01) per basic share for the first quarter 2013, which included foreign currency exchange gain of $316,000. During the second quarter 2013, Aqua-Pure incurred a loss from operations, before financing costs, of $(576,000) during the second quarter of 2013 versus a loss from operations of $(727,000) during the same period of the prior year and a loss from operations of $(852,000) in the first quarter 2013. The decrease in operating losses reflects the success of the Company’s diversification strategy designed to deliver improved gross margins, which increased to 37% during the second quarter 2013 from 29% during the comparable period in 2012 and 28% during the first quarter of 2013. The diversification strategy involved an expansion into the oil rich shale regions where market pricing is more advantageous and supplemental revenue from higher margined oil recovery and brine treatment exists. Aqua-Pure continues to anticipate improving gross margins as its strategy is further implemented.

Operating expenses during the second quarter of 2013 totaled $1.0 million, a decrease of approximately $220,000 or 17.5% over the second quarter of 2012, reflecting the conclusion of the prior year’s development of the ROVER effort and the modification of equipment and protocols for treating oil and liquids rich shale frac water. Operating expenses decreased $57,000 when compared to the first quarter 2013 primarily due to a $110,000 reduction in administrative expenses partially offset by a $72,000 foreign currency exchange charge.

Interest expense for the three months ended June 30, 2013 totaled $275,000 plus accretion of debentures of $148,000 compared to $211,000 in interest expense and $87,000 of accretion of debentures during the second quarter of 2012 and $257,000 in interest expense and $107,000 of accretion of debentures during the first quarter 2013. Overall financing costs (interest, debenture accretion, derivative value, cost of financing) increased over the prior year second quarter by approximately $236,000 of which $112,000 was attributed to loss on derivative value, and increased over the first quarter 2013 by $53,000 primarily due to fees associated with the $2.15 million convertible debenture issued on March 5, 2013 that bears interest of 8% paid quarterly in cash.

For the six months ended June 30, 2013, Aqua-Pure reported revenues of $2.2 million, a 41% decrease compared to the same period in 2012, largely reflecting the removal of equipment from Eagle Ford that has since been recommissioned into the Permian. The Company reported a comprehensive loss for the six months ended June 30, 2013 totaling $(1.6) million or $(0.02) per basic share compared to $(2.4) million or $(0.03) per basic share for the same period in 2012.

At June 30, 2013, the Company reported cash and cash equivalents of $407,000, accounts receivable of $442,000 and inventory of $446,000. Total assets during the second quarter were consistent with the prior first quarter 2013 and increased by $970,000 to $18.3 million from year end 2012, due primarily to the effect of foreign currency changes on translation. On June 30, 2013, the Company’s short-term and long-term debt totaled approximately $15.6 million – consistent with first quarter 2013 – of which $12.6 million is held by a company controlled by an officer and director of Aqua-Pure. Subsequent to quarter end, on August 8, 2013 Aqua-Pure issued US $2.2 million of 3-year, 8 percent senior secured convertible debentures with a US $0.30 per share conversion rate (the “Debentures”). Of the US$2.2 million raised in the sale of the Debentures, US $1.5 million was purchased by international investors and the remaining US $700,000 from the conversion of an existing demand loan held by Hallmark Resources Ltd., Aqua-Pure's controlling shareholder. In conjunction with the financing, a total of 2.2 million 2-year warrants, convertible into shares of the Company’s common stock at US $0.45 per share were issued to investors. Aqua-Pure intends to use the net proceeds from the sale of the Debentures for the construction of additional “NOMAD” and “ROVER” units, which will be used to address the growing demand for oil field and shale gas wastewater recycling.

On June 30, 2013, Aqua-Pure common stock outstanding totaled approximately 91.5 million shares, consistent with year-end 2012. The Company’s fully diluted shares totaled approximately 114.6 million inclusive of all options, warrants, and convertible debt, which upon the conversion of all options and warrants would generate approximately $3.7 million in additional working capital for the Company.

Aqua-Pure’s CEO, Jake Halldorson commented, “Since 2004, our patented, cost-efficient equipment has proven to successfully recycle contaminated flowback water. I am particularly excited by our level of opportunity in the Permian Basin as we have received contracts for our equipment from large E&P operators, both of whom have indicated interest in adding additional NOMAD and ROVER equipment in the future. As of today, all our completed NOMADS have been contracted, and we are actively completing the manufacturing of additional NOMADs and ROVERs to satisfy growing demand.”