Item 1. Financial Statements
AQUA METALS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(unaudited)
|
|
(Note 2)
|
ASSETS
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
15,336
|
|
|
$
|
20,892
|
|
Accounts receivable
|
426
|
|
|
725
|
|
Inventory
|
1,216
|
|
|
765
|
|
Prepaid expenses and other current assets
|
1,157
|
|
|
370
|
|
Total current assets
|
18,135
|
|
|
22,752
|
|
|
|
|
|
Non-current assets
|
|
|
|
Property and equipment, net
|
46,589
|
|
|
45,548
|
|
Intellectual property, net
|
1,133
|
|
|
1,271
|
|
Other assets
|
3,332
|
|
|
1,800
|
|
Total non-current assets
|
51,054
|
|
|
48,619
|
|
|
|
|
|
Total assets
|
$
|
69,189
|
|
|
$
|
71,371
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable
|
$
|
3,035
|
|
|
$
|
2,088
|
|
Accrued expenses
|
4,449
|
|
|
5,196
|
|
Lease liability, current portion
|
505
|
|
|
121
|
|
Deferred rent, current portion
|
—
|
|
|
8
|
|
Notes payable, current portion
|
274
|
|
|
311
|
|
Convertible note payable, current portion
|
—
|
|
|
4,075
|
|
Total current liabilities
|
8,263
|
|
|
11,799
|
|
|
|
|
|
Deferred rent, non-current portion
|
—
|
|
|
27
|
|
Lease liability, non-current portion
|
1,282
|
|
|
110
|
|
Asset retirement obligation
|
756
|
|
|
745
|
|
Notes payable, non-current portion
|
8,610
|
|
|
8,600
|
|
Total liabilities
|
18,911
|
|
|
21,281
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
Common stock; $0.001 par value; 50,000,000 shares authorized; 44,727,697 and 38,932,437 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
|
45
|
|
|
39
|
|
Additional paid-in capital
|
157,037
|
|
|
145,147
|
|
Accumulated deficit
|
(106,804
|
)
|
|
(95,096
|
)
|
Total stockholders’ equity
|
50,278
|
|
|
50,090
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
$
|
69,189
|
|
|
$
|
71,371
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AQUA METALS, INC.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
|
|
|
|
Product sales
|
$
|
437
|
|
|
$
|
1,726
|
|
|
|
|
|
Operating cost and expense
|
|
|
|
Cost of product sales
|
4,681
|
|
|
5,436
|
|
Research and development cost
|
620
|
|
|
1,475
|
|
General and administrative expense
|
4,016
|
|
|
1,775
|
|
Total operating expense
|
9,317
|
|
|
8,686
|
|
|
|
|
|
Loss from operations
|
(8,880
|
)
|
|
(6,960
|
)
|
|
|
|
|
Other income and expense
|
|
|
|
Interest expense
|
(2,889
|
)
|
|
(587
|
)
|
Interest and other income
|
63
|
|
|
17
|
|
|
|
|
|
Total other expense, net
|
(2,826
|
)
|
|
(570
|
)
|
|
|
|
|
Loss before income tax expense
|
(11,706
|
)
|
|
(7,530
|
)
|
|
|
|
|
Income tax expense
|
(2
|
)
|
|
(2
|
)
|
|
|
|
|
Net loss
|
$
|
(11,708
|
)
|
|
$
|
(7,532
|
)
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
43,514,225
|
|
|
27,768,008
|
|
|
|
|
|
Basic and diluted net loss per share
|
$
|
(0.27
|
)
|
|
$
|
(0.27
|
)
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AQUA METALS, INC.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Total Stockholders' Equity (Deficit)
|
|
|
Common Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2018
|
|
38,932,437
|
|
|
$
|
39
|
|
|
$
|
145,147
|
|
|
$
|
(95,096
|
)
|
|
$
|
50,090
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
1,067
|
|
|
—
|
|
|
1,067
|
|
Warrants related to Veolia agreement
|
|
—
|
|
|
—
|
|
|
578
|
|
|
—
|
|
|
578
|
|
Common stock issued upon RSU vesting
|
|
317,818
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued for consulting services
|
|
302,442
|
|
|
—
|
|
|
1,187
|
|
|
—
|
|
|
1,187
|
|
Common stock issued in January 2019 public offering, net of $739 offering costs
|
|
5,175,000
|
|
|
5
|
|
|
9,058
|
|
|
—
|
|
|
9,063
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,708
|
)
|
|
(11,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2019
|
|
44,727,697
|
|
|
$
|
45
|
|
|
$
|
157,037
|
|
|
$
|
(106,804
|
)
|
|
$
|
50,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2017
|
|
27,554,076
|
|
|
$
|
27
|
|
|
$
|
113,780
|
|
|
$
|
(54,842
|
)
|
|
$
|
58,965
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
144
|
|
|
—
|
|
|
144
|
|
Common stock issued under Officers and Directors Purchase Plan
|
|
2,034
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Common stock issued upon RSU vesting
|
|
65,600
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued in overallotment related to December 2017 Public Offering, net of $10 transaction cost
|
|
1,072,500
|
|
|
2
|
|
|
2,101
|
|
|
—
|
|
|
2,103
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,532
|
)
|
|
(7,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2018
|
|
28,694,210
|
|
|
$
|
29
|
|
|
$
|
116,029
|
|
|
$
|
(62,374
|
)
|
|
$
|
53,684
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AQUA METALS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(11,708
|
)
|
|
$
|
(7,532
|
)
|
Reconciliation of net loss to net cash used in operating activities
|
|
|
|
|
|
Depreciation
|
843
|
|
|
778
|
|
Amortization of intellectual property
|
48
|
|
|
47
|
|
Accretion of asset retirement obligation
|
11
|
|
|
11
|
|
Fair value of common stock issued for consulting services
|
1,187
|
|
|
—
|
|
Stock-based compensation
|
1,067
|
|
|
144
|
|
Warrant expense
|
578
|
|
|
—
|
|
Amortization of debt discount
|
—
|
|
|
235
|
|
Amortization of deferred financing costs
|
29
|
|
|
21
|
|
Non-cash convertible note interest expense
|
2,556
|
|
|
163
|
|
Non-cash interest expense
|
101
|
|
|
—
|
|
Loss on disposal of Ebonex asset
|
90
|
|
|
—
|
|
Loss on disposal of equipment
|
79
|
|
|
—
|
|
Inventory adjustment
|
(119
|
)
|
|
39
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
Accounts receivable
|
299
|
|
|
(444
|
)
|
Inventory
|
(332
|
)
|
|
267
|
|
Prepaid expenses and other current assets
|
(786
|
)
|
|
132
|
|
Accounts payable
|
493
|
|
|
144
|
|
Accrued expenses
|
(684
|
)
|
|
83
|
|
Deferred rent
|
(35
|
)
|
|
(46
|
)
|
Other assets and liabilities
|
(21
|
)
|
|
—
|
|
Net cash used in operating activities
|
(6,304
|
)
|
|
(5,958
|
)
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment
|
(1,612
|
)
|
|
(1,337
|
)
|
Other assets
|
38
|
|
|
—
|
|
Net cash used in investing activities
|
(1,574
|
)
|
|
(1,337
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of common stock, net of transaction costs
|
9,063
|
|
|
2,107
|
|
Payments on notes payable
|
(90
|
)
|
|
(69
|
)
|
Payments on finance leases
|
—
|
|
|
(39
|
)
|
Payments on convertible note
|
(6,651
|
)
|
|
—
|
|
Net cash provided by financing activities
|
2,322
|
|
|
1,999
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(5,556
|
)
|
|
(5,296
|
)
|
Cash and cash equivalents at beginning of period
|
20,892
|
|
|
22,793
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
$
|
15,336
|
|
|
$
|
17,497
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
Supplemental disclosure of cash flows information
|
|
|
|
Cash paid for income taxes
|
$
|
2
|
|
|
$
|
2
|
|
Cash paid for interest
|
$
|
188
|
|
|
$
|
168
|
|
|
|
|
|
Supplemental disclosure of non-cash transactions
|
|
|
|
Change in property and equipment resulting from change in accounts payable
|
$
|
455
|
|
|
$
|
504
|
|
Change in property and equipment resulting from change in accrued expenses
|
$
|
(103
|
)
|
|
$
|
(213
|
)
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
Aqua Metals, Inc. (the “Company”) was incorporated in Delaware and commenced operations on June 20, 2014 (inception). On January 27, 2015, the Company formed
two
wholly-owned subsidiaries, Aqua Metals Reno, Inc. (“AMR”) and Aqua Metals Operations, Inc. (collectively, the “Subsidiaries”), both incorporated in Delaware. The Company is engaged in the business of lead recycling through its patented and patent-pending AquaRefining
™
technology. Unlike smelting, AquaRefining is a room temperature, water-based process that emits less pollution than smelting, the traditional method of lead recycling. The Company has built its first recycling facility in Nevada’s Tahoe Regional Industrial Complex (“TRIC”) in McCarran, Nevada and intends to pursue the development of additional lead acid battery recycling facilities based on the Company’s AquaRefining technology, likely through licensing or joint development arrangements. The Company commenced the shipment of products for sale, consisting of lead compounds and plastics, in April 2017, and through March 31, 2018, substantially all revenue was derived from the sale of lead compounds and plastics. In April 2018, the Company began shipping cast lead bullion (mixture of lead purchased to prime the kettles and AquaRefined lead from our AquaRefining process) blocks in addition to lead compounds and plastics and in June 2018, the Company began shipping high purity lead from its AquaRefining process. In March 2019, the Company started the process of scaling its AquaRefining plant.
2. Summary of Significant Accounting Policies
The significant accounting policies and estimates used in preparation of the condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31,
2018
, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2018
, as filed with the Securities and Exchange Commission, or the SEC, on February 28, 2019. There have been no material changes in the Company’s significant accounting policies during the three months ended
March 31, 2019
except for the implementation of Accounting Standards Update (“ASU”) No. 2016-02, Leases, (“ASC 842”), as described below.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as found in the Accounting Standards Codification (“ASC”) and ASU of the Financial Accounting Standards Board (“FASB”) and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by such accounting principles for complete financial statements. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary to present fairly each of the condensed consolidated balance sheet as of
March 31, 2019
, the condensed consolidated statements of operations for the three months ended
March 31, 2019
and
March 31, 2018
, the condensed consolidated statements of stockholders' equity for the three months ended
March 31, 2019
and
March 31, 2018
and the condensed consolidated statements of cash flows for the three months ended
March 31, 2019
and
March 31, 2018
, as applicable, have been made. The condensed consolidated balance sheet as of
December 31, 2018
has been derived from the Company’s audited financial statements as of such date, but it does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the period ended
December 31, 2018
, which are included on Form 10-K filed with the Securities and Exchange Commission on February 28, 2019.
The results of operations for the three months ended
March 31, 2019
are not necessarily indicative of results that may be expected for the year ended
December 31, 2019
.
Principles of consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its Subsidiaries, both of which are wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of the condensed consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount and valuation of long-lived assets, the valuation of conversion features of convertible debt, valuation allowances for deferred tax assets, the determination of fair value of estimated asset retirement obligations, the determination of stock option expense and the determination of the fair value of stock warrants issued. Actual results could differ from those estimates.
Net loss per share
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method or the if-converted method, as applicable. For purposes of this calculation, stock options, restricted stock units, or RSUs, and warrants to purchase common stock are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive. The following shares underlying outstanding convertible notes, stock options, RSUs and warrants to purchase common stock were antidilutive due to a net loss in the periods presented and, therefore, were excluded from the dilutive securities computation for the three months ended
March 31,
as indicated below.
|
|
|
|
|
|
|
|
Three months ended March 31,
|
Excluded potentially dilutive securities (1):
|
2019
|
|
2018
|
|
|
|
|
Convertible note - principal
|
—
|
|
|
702,247
|
|
Options to purchase common stock
|
3,440,437
|
|
|
561,536
|
|
Unvested restricted stock units
|
244,785
|
|
|
63,600
|
|
Financing warrants to purchase common stock
|
2,444,328
|
|
|
2,340,828
|
|
Total potential dilutive securities
|
6,129,550
|
|
|
3,668,211
|
|
|
|
(1)
|
The number of shares is based on the maximum number of shares issuable on exercise or conversion of the related securities as of the period end. Such amounts have not been adjusted for the treasury stock method or weighted average outstanding calculations as required if the securities were dilutive.
|
Segment and geographic information
Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker views its operations and manages its business in
one
operating segment, and the Company operates in only
one
geographic segment.
Concentration of credit risk
Revenues from the following customers each represented at least 10% of total revenue for the three months ended
March 31, 2019
and
2018
, respectively. They also represented a significant portion of our accounts receivable as of
March 31, 2019
and
December 31, 2018
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
Accounts Receivable
|
|
Three months ended March 31,
|
|
March 31,
2019
|
|
December 31,
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Clarios (successor of Johnson Controls Battery Group, Inc.)
|
60
|
%
|
|
79
|
%
|
|
60
|
%
|
|
95
|
%
|
Ocean Partners USA, Inc.
|
—
|
%
|
|
18
|
%
|
|
—
|
%
|
|
—
|
%
|
P. Kay Metals
|
37
|
%
|
|
—
|
%
|
|
37
|
%
|
|
—
|
%
|
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recently Adopted Accounting Guidance
In February 2016, the FASB issued ASU 2016-02 -
Leases
(ASC 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 supersedes the previous leases standard, ASC 840 Leases. The standard has been adopted as of January 1, 2019. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASC Topic 842 to provide another transition method, allowing a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The Company has
two
longer term office leases and one equipment finance lease. The adoption of ASU 2016-02 on January 1, 2019 resulted in the recognition of right-of-use assets of approximately
$1.6 million
, lease liabilities for operating leases of approximately
$1.8 million
and no material impact to the Consolidated Balance Sheets and Consolidated Statements of Operations. See Note 9 for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.
Recent accounting pronouncements
There were no other recent accounting pronouncements or changes in accounting pronouncements during the
three
months ended
March 31, 2019
that are of significance or potential significance to the Company.
3. Revenue Recognition
The Company generates revenues by recycling lead acid batteries (“LABs”) and selling the recovered lead to its customers. Primary components of the recycling process include sales of recycled lead consisting of lead compounds, ingoted hard lead and ingoted AquaRefined lead as well as plastics. The Company commenced the shipment of products for sale, consisting of lead compounds and plastics, in April 2017, and through March 31, 2018, all revenue was derived from the sale of lead compounds and plastics. In April 2018, the Company began shipping lead bullion in addition to lead compounds and plastics. In June 2018, the Company began shipping high purity lead from its AquaRefining process.
Revenue from products transferred to customers at a single point in time with the delivery of the Company’s products to customers accounted for
100%
of our revenue during the three months ended
March 31, 2019
and
2018
.
4. Inventory
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
|
|
Finished goods
|
$
|
135
|
|
|
$
|
43
|
|
Work in process
|
270
|
|
|
164
|
|
Raw materials
|
811
|
|
|
558
|
|
Total inventory
|
$
|
1,216
|
|
|
$
|
765
|
|
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
5. Property and Equipment, net
Property and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Asset Class
|
|
Useful Life
(Years)
|
|
March 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
|
|
Operational equipment
|
|
3-10
|
|
$
|
18,708
|
|
|
$
|
15,926
|
|
Lab equipment
|
|
5
|
|
580
|
|
|
698
|
|
Computer equipment
|
|
3
|
|
201
|
|
|
201
|
|
Office furniture and equipment
|
|
3
|
|
336
|
|
|
336
|
|
Land
|
|
-
|
|
1,047
|
|
|
1,047
|
|
Building
|
|
39
|
|
24,842
|
|
|
24,820
|
|
Asset retirement cost
|
|
20
|
|
670
|
|
|
670
|
|
Equipment under construction
|
|
|
|
7,024
|
|
|
7,892
|
|
|
|
|
|
53,408
|
|
|
51,590
|
|
Less: accumulated depreciation
|
|
|
|
(6,819
|
)
|
|
(6,042
|
)
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
$
|
46,589
|
|
|
$
|
45,548
|
|
Depreciation expense was
$0.8
million and
$0.8
million for the three months ended
March 31, 2019
and
2018
, respectively. Equipment under construction is primarily AquaRefining modules manufactured by the Company to be used in the McCarran, Nevada recycling plant.
6. Asset Retirement Obligation
ASC Topic 410-20, “Asset Retirement and Environmental Obligations, Asset Retirement Obligations” requires the recording of a liability in the period in which an asset retirement obligation (ARO) is incurred, in an amount equal to the discounted estimated fair value of the obligation that is capitalized. In each subsequent fiscal quarter, this liability is accreted up to the final retirement cost. The determination of the ARO is based on an estimate of the future cost to remove and decontaminate the McCarran facility upon closure. The actual costs could be higher or lower than current estimates. The discounted estimated fair value of the closure costs is
$0.7 million
and the obligation was recorded as of March 31, 2017, when the obligation was deemed to have occurred. Offsetting this ARO is, as noted in Note 5 above, an asset retirement cost of the same amount that has been capitalized. The estimated fair value of the closure costs is based on vendor quotes to remove and decontaminate the McCarran facility in accordance with the Company’s closure plan as filed with the State of Nevada in its “Application for the Recycling of Hazardous Waste, by Written Determination” in 2016. Accretion of the ARO for the three months ended
March 31, 2019
and
2018
was
$11,000
and
$11,000
, respectively.
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company has entered into a facility closure trust agreement for the benefit of the Nevada Division of Environmental Protection (NDEP), an agency of the Nevada Division of Conservation and Natural Resources. Funds deposited in the trust are to be available, when and if needed, for potential decontamination and hazardous material cleanup in connection with the closure and/or post-closure care of the facility. The trustee will reimburse the Company or other persons as specified by the NDEP from the fund for closure and post-closure expenditures in such amounts as the NDEP shall direct in writing. Through
March 31, 2019
,
$670,000
has been contributed to the trust fund.
7. Convertible Note Payable
The convertible note payable at December 31, 2018 was with Interstate Battery Systems International, Inc. (Interstate Battery) and is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
|
|
Convertible note payable
|
$
|
—
|
|
|
$
|
5,000
|
|
Accrued interest
|
—
|
|
|
1,651
|
|
Deferred financing costs, net
|
—
|
|
|
(20
|
)
|
Note discount
|
—
|
|
|
(2,556
|
)
|
|
|
|
|
Less current portion
|
$
|
—
|
|
|
4,075
|
|
|
|
|
|
Convertible note payable, non-current portion
|
$
|
—
|
|
|
$
|
—
|
|
The convertible note payable bore interest at
11%
per annum and was due May 24, 2019. The original note discount was calculated as the allocated fair value of the warrants issued in connection with the transaction, which included the issuance of common stock, warrants and the convertible note, as well as the allocated fair value of the embedded conversion feature, subject to limitations on the absolute amount of discount attributable to the convertible notes and its allocated value. The discount was amortized using the effective interest method over the
three
-year term of the note, maturing on
May 24, 2019
.
On January 24, 2019, the Company repaid Interstate Battery the outstanding principal and interest on the convertible debt in the amount of
$6.7 million
. In connection with the payoff, the Company amortized the remaining discount on the note of
$2.6 million
and remaining deferred financing expenses of
$20,000
to interest expense.
8. Notes Payable
AMR entered into a
$10,000,000
loan with Green Bank on November 3, 2015. The term of the loan is
twenty-one years
. During the first twelve months, only interest was payable and thereafter monthly payments of interest and principal are due. The interest rate adjusts on the first day of each calendar quarter to the greater of six percent (
6%
) or two percent (
2%
) per annum above the minimum prime lending rate charged by large U.S. money center commercial banks as published in the Wall Street Journal. The terms of the Loan Agreement contain various affirmative and negative covenants. Among them, AMR must maintain a minimum debt service coverage ratio of
1.25
to 1.0 (beginning with the twelve-month period ending March 31, 2017), a maximum debt-to-net worth ratio of
1.0
to 1.0 and a minimum current ratio of
1.5
to 1.0. AMR was in compliance with all but the minimum debt service coverage ratio covenant as of and for each of the calendar quarters in the period March 31, 2017 through
March 31, 2019
. AMR has received a waiver for the minimum debt service coverage ratio covenant for each of the aforementioned calendar quarters.
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The net proceeds of the loan were used for the construction of the Company’s lead acid recycling operation in McCarran, Nevada. Collateral for this loan is AMR’s accounts receivable, goods, equipment, fixtures, inventory, accessions and a certificate of deposit in the amount of
$1,000,000
.
The loan is guaranteed by the United States Department of Agriculture Rural Development (“USDA”), in the amount of
90%
of the principal amount of the loan. The Company paid a guarantee fee to the USDA in the amount of
$270,000
at the time of closing and is required to pay to the USDA an annual fee in the amount of
0.50%
of the guaranteed portion of the outstanding principal balance of the loan as of December 31 of each year.
The costs associated with obtaining the Green Bank loan were recorded as a reduction to the carrying amount of the note and are being amortized as interest expense within the condensed consolidated statements of operations over the twenty-one year life of the loan.
Notes payable is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
|
|
|
Notes payable, current portion
|
|
|
|
Capital equipment leases
|
$
|
—
|
|
|
$
|
16
|
|
Green Bank, net of issuance costs
|
274
|
|
|
295
|
|
Total notes payable, current portion
|
$
|
274
|
|
|
$
|
311
|
|
|
|
|
|
Notes payable, non-current portion
|
|
|
|
Capital equipment leases
|
$
|
—
|
|
|
$
|
31
|
|
Green Bank, net of issuance costs
|
8,610
|
|
|
8,569
|
|
Total notes payable, non-current portion
|
$
|
8,610
|
|
|
$
|
8,600
|
|
Note: Capital equipment leases are now being accounted for as a finance lease liability.
9. Leases
The Company currently maintains one finance lease for equipment and two operating leases for real estate. Our finance lease is immaterial to our condensed consolidated financial statements. Our operating leases have terms of
76
and
42
months and include one or more options to extend the duration of the agreements. These operating leases are included in "Other non-current assets" on the Company's
March 31, 2019
condensed consolidated balance sheet and represent the Company's right to use the underlying assets for the term of the leases. The Company's obligation to make lease payments are included in "Lease liability, current portion" and "Lease liability, non-current portion" on the Company's
March 31, 2019
condensed consolidated balance sheet.
Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company's total right-of-use assets were approximately
$1.53 million
and operating lease liabilities were approximately
$1.75 million
.
Information related to the Company's right-of-use assets and related lease liabilities were as follows (in thousands):
|
|
|
|
|
|
Three months ended March 31, 2019
|
Cash paid for operating lease liabilities
|
$
|
154
|
|
Right-of-use assets
|
$
|
1,529
|
|
Weighted-average discount rate
|
9.66
|
%
|
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Maturities of lease liabilities as of March 31,2019 were as follows (in thousands):
|
|
|
|
|
|
Three months ended March 31, 2019
|
Due in 12 month period ended March 31,
|
|
2020
|
$
|
628
|
|
2021
|
$
|
647
|
|
2022
|
$
|
634
|
|
2023
|
$
|
91
|
|
Thereafter
|
$
|
—
|
|
|
$
|
2,000
|
|
Less imputed interest
|
$
|
(249
|
)
|
Total lease liabilities
|
$
|
1,751
|
|
|
|
Current operating lease liabilities
|
$
|
499
|
|
Non-current operating lease liabilities
|
$
|
1,252
|
|
|
$
|
1,751
|
|
Note: Excludes a finance lease with current liability of
$6
and a non-current liability of
$30
.
10. Stockholders’ Equity
Shares issued
On January 22, 2019, the Company completed a public offering of
5,175,000
shares of its common stock, at the price of
$1.90
per share, for gross proceeds of
$9.8 million
. After the payment of underwriter discounts and offering expenses, the Company received net proceeds of approximately
$9.1 million
.
During the three months ended March 31, 2019, the Company issued
189,792
shares of common stock upon vesting of Restricted Stock Units granted by the Company.
During the three months ended March 31, 2019, the Company issued
115,731
shares of common stock upon vesting of Restricted Stock Units granted to Board members.
In March 2019, the Company issued
293,750
shares of common stock valued at
$1.2 million
to Veolia North America Regeneration Services, LLC pursuant to the Operations, Maintenance and Management Agreement dated February 27, 2019 between Veolia and the Company.
During the three months ended March 31, 2019, the Company issued
20,987
shares of common stock to prior Company executives to fulfill obligations related to separation agreements and other consulting services.
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Warrant issued
In January 2019, the Company issued a warrant to purchase
103,500
shares of the Company's common stock to the underwriter of the Company's January 22, 2019 public offering, equal to 2% of the
5,175,000
shares sold. The warrant is exercisable at
$1.90
per share (100% of the price of the common stock sold in the offering), commencing the later of six months after January 22, 2019 or such time as the Company amends its charter to increase its authorized shares of common stock. The warrant will expire on
January 22, 2024
.
Pursuant to the Operations, Maintenance and Management Agreement dated February 26, 2019, the Company has agreed to issue to Veolia, on the one-year anniversary of the Agreement, warrants to purchase
2,000,000
shares of its common stock at an exercise price of
$5.00
per share and, on the second anniversary of the Agreement, warrants to purchase an additional
2,000,000
shares of its common stock at an exercise price
$7.00
per share. The warrants will have a term of ten years from the date of issuance. The warrants were valued as of the agreement date using the Black-Scholes-Merton pricing model. The value of the warrants is being amortized over the applicable period until the warrants are issued.
Stock-based compensation
The stock-based compensation expense was allocated as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
Cost of product sales
|
$
|
75
|
|
|
$
|
50
|
|
Research and development cost
|
115
|
|
|
112
|
|
General and administrative expense
|
877
|
|
|
(18
|
)
|
Total
|
$
|
1,067
|
|
|
$
|
144
|
|
The following assumptions were used in the Black-Scholes-Merton pricing model to estimate the fair value of options granted during the periods presented:
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
|
|
|
|
Expected stock volatility
|
70.5%-86.3%
|
|
|
78.4%-79.9%
|
|
Risk free interest rate
|
0.92%-3.04%
|
|
|
2.06%-2.45%
|
|
Expected years until exercise
|
3.4
|
|
|
3.5
|
|
Dividend yield
|
0
|
%
|
|
0
|
%
|
There were no stock option exercises during the three months ended
March 31, 2019
and 2018.
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stock option issuances
In January 2019, Stephen Cotton, President and CEO, was awarded options to purchase up to
232,461
shares of the Company's common stock. The options were vested immediately and are exercisable over a
five
-year period at an exercise price of
$1.88
per share. The options were issued under the Company's Amended and Restated 2014 Stock Incentive Plan, or 2014 Plan.
In January 2019, Judd Merrill, CFO, was awarded options to purchase up to
56,698
shares of the Company's common stock. The options were vested immediately and are exercisable over a
five
-year period at an exercise price of
$1.88
per share. The options were issued under the 2014 Plan.
In February 2019, Stephen Cotton, President and CEO, was awarded options to purchase up to
1.26 million
shares of the Company’s common stock. Options to purchase
420,000
common shares are exercisable over a
five
-year period at an exercise price of
$3.08
per share. Options to purchase
420,000
common shares are exercisable over a
five
-year period at an exercise price of
$3.68
per share and options to purchase
420,000
common shares are exercisable over a
five
-year period at an exercise price of
$4.18
per share. The options will vest over
three years
in
three
equal installments. The options were issued under the Company’s 2019 Stock Incentive Plan, or 2019 Plan, and the exercise of the options is subject to stockholder approval of the 2019 Plan and the amendment of the Company's charter to increase its authorized shares of common stock.
In March 2019, Judd Merrill, CFO, was awarded options to purchase up to
250,000
shares of the Company’s common stock. Options to purchase
125,000
common shares are exercisable over a
five
-year period at an exercise price of
$3.79
per share. Options to purchase
62,500
common shares are exercisable over a
five
-year period at an exercise price of
$4.39
per share and options to purchase
62,500
common shares are exercisable over a
five
-year period at an exercise price of
$4.89
per share. The options will vest over
three years
in
three
equal installments. The options were issued under the 2019 Plan and the exercise of the options is subject to stockholder approval of the 2019 Plan and the amendment of the Company's charter to increase its authorized shares of common stock.
Restricted Stock Units
In January 2019, the Company granted
261,455
restricted stock units (RSUs), all of which were subject to vesting, with a grant fair value of
$490,000
to the employees under the 2014 Plan. The shares vest in six equal semi-annual installments over a three year period.
11. Commitments and Contingencies
On April 19, 2018, Stephen Clarke resigned as president and chief executive officer and as a member of the Board. Dr. Clarke’s resignation as an officer of the Company was treated as a termination without cause under his employment agreement with the Company. Pursuant to his employment agreement, Dr. Clarke was entitled to one-time severance benefits that includes severance and benefits continuation expense of approximately
$0.9 million
paid out over a
2
-year period in consideration of his execution of a customary release and separation agreement. Additionally, Dr. Clarke was granted an extension of the exercise period of his stock options upon termination from
90 days
to
2 years
. The expense related to the modification of these stock option awards was approximately
$15,000
.
On December 3, 2018, Sewlyn Mould resigned as chief operating officer. Mr. Mould’s resignation as an officer of the Company was treated as a termination without cause under his employment agreement with the Company. Pursuant to his employment agreement, Mr. Mould was entitled to one-time severance benefits that includes severance and benefits continuation expense of approximately
$0.9 million
paid out over a
2-year
period in consideration of his execution of a customary release and separation agreement. Pursuant to a Separation Agreement and Release between the Company and Mr. Mould, Mr. Mould agreed to receive, in lieu of two years of salary, a cash severance payment of
$100,000
payable in six equal installments in accordance with the Company's regular payroll practices, plus an award of restricted stock units that entitle him to receive, for each of the
21
consecutive months commencing on March 1, 2019,
$33,333
of the Company's common shares based on volume-weighted average price over the
20
trading days preceding the first business day of the respective month. The Company has reserved the right, at its option, to pay Mr. Mould
$33,333
of cash in lieu of any of the
21
monthly share issuances. The Separation Agreement and Release includes customary indemnification, confidentiality, non-disparagement and non-solicitation covenants and agreements of the parties.
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Interstate Battery Agreement commitment
Pursuant to the 2016 Interstate Battery Investor Rights Agreement, the Company had agreed to compensate Interstate Battery should either Stephen Clarke, the Company’s then current chief executive officer, or Selwyn Mould, the Company’s then current chief operating officer, no longer hold such positions or no longer devote substantially all of their business time and attention to the Company, whether as a result of resignation, death, disability or otherwise (such an event referred to as a “key-man event”). The Company had agreed to pay Interstate Battery
$2.0 million
, per occurrence, if either officer was subject to a key-man event during the two years following May 18, 2016. The Company also agreed to pay Interstate Battery
$2.0 million
if either or both officers are subject to a key-man event during the third year following May 18, 2016. Pursuant to the Interstate Battery Investor Rights Agreement, the key-man payments are payable, at the option of the Company, in cash or shares of the Company’s common stock. Pursuant to the agreement, if Interstate Battery, in its sole and absolute discretion, agrees with the Company on mutually acceptable replacements for Messrs. Clarke and/or Mould, as the case may be, the key-man penalties shall be deemed waived by Interstate Battery.
Interstate Battery had previously raised a claim that the Company was in technical breach of a negative covenant under the Credit Agreement dated May 18, 2016 between the Company and Interstate Battery. The claimed breach related to the Company’s failure to obtain Interstate Battery’s prior written consent to its acquisition of Ebonex IPR, Ltd.
On June 24, 2018, the Company entered into a series of agreements with Interstate Battery, including an amendment to the Investor Rights Agreement. Pursuant to the amendment to the Investor Rights Agreement, Interstate Battery agreed to waive all payments under the key-man provisions of the Investor Rights Agreement with respect to the resignation of the Company’s former chief executive officer, Stephen Clarke. In addition, the parties agreed that the Company, at its option, can elect to eliminate the key-man event and all related key-man payments associated with Mr. Mould by (i) paying Interstate Battery a one-time fee of
$0.5 million
, payable in cash and (ii) agreeing to pay Interstate Battery
$2.0 million
, payable at the Company’s election in cash or shares of its common stock, should the Company’s current president, Stephen Cotton, no longer serve as president of the Company during the period ending May 18, 2019. Additionally:
|
|
●
|
With respect to a Credit Agreement dated May 18, 2016 between the Company and Interstate Battery, Interstate Battery waived the alleged breach of the Credit Agreement based on the Company’s acquisition of Ebonex IPR, Ltd.;
|
|
|
●
|
The Company adjusted the terms of a warrant to purchase
702,247
shares of its common stock issued to Interstate Battery in May 2016, pursuant to which the exercise price of the warrant was decreased from
$7.12
per share to
$3.33
per share and the expiration date of the warrant was extended to
June 23, 2020
; and
|
|
|
●
|
Interstate Battery agreed to provide the Company with more favorable pricing and payment terms under the Supply Agreement dated May 18, 2016 pursuant to which the Company buys used lead acid batteries from Interstate Battery.
|
|
|
●
|
The Company paid Interstate Battery a one time fee of $
0.5 million
on February 20, 2019 related to the key-man provision associated with Mr. Mould's resignation.
|
Clarios (successor of Johnson Controls) Agreement Commitment
Pursuant to the Clarios Investor Rights Agreement, the Company has agreed to compensate Clarios should either Stephen Clarke, the Company’s then current chief executive officer, or Selwyn Mould, the Company’s then current chief operating officer, no longer hold such positions or no longer devote substantially all of their business time and attention to the Company, whether as a result of resignation, death, disability or otherwise (such an event referred to as a “key-man event”). The Company has agreed to pay Clarios
$1.0 million
per occurrence, if either officer is subject to a key-man event during the 18 months following February 7, 2017. The Company also agreed to pay Clarios
$1.0 million
if either or both key-man events occur after
18 months
and prior to
30 months
following February 7, 2017. Pursuant to the agreement, if Clarios, in its sole and absolute discretion, agrees with the Company on mutually acceptable replacements for Dr. Clarke and/or Mr. Mould, as the case may be, the key-man penalties shall be deemed waived by Clarios. In connection with the resignations by Dr. Clarke and Mr. Mould described above, Clarios has submitted to the Company its claim for payment of the key-man penalties in the total amount of
$2.0 million
. We have agreed to settle the Clarios Key-man penalty claim through our issuance of
807,436
shares of our common stock, which we intend to issue during the week of May 13, 2019. The Company has accrued the
$2.0 million
at December 31, 2018.
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Legal proceedings
Beginning on December 15, 2017, three purported class action lawsuits were filed in the United Stated District Court for the Northern District California against the Company, Stephen Clarke, Thomas Murphy and Mark Weinswig. On March 23, 2018, the cases were consolidated under the caption In Re: Aqua Metals, Inc. Securities Litigation Case No 3:17-cv-7142. On May 23, 2018, the Court appointed lead plaintiffs and approved counsel for the lead plaintiffs. On July 20, 2018, the lead plaintiffs filed a consolidated amended complaint (“Amended Complaint”), on behalf of a class of persons who purchased the Company’s securities between May 19, 2016 and November 9, 2017, against the Company, Stephen Clarke, Thomas Murphy and Selwyn Mould. The Amended Complaint alleges the defendants made false and misleading statements concerning the Company’s lead recycling operations in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder. The Amended Complaint seeks to hold the individual defendants as control persons pursuant to Section 20(a) of the Exchange Act. The Amended Complaint also alleges a violation of Section 11 of the Securities Act of 1933 (“Securities Act”) based on alleged false and misleading statements concerning the Company’s lead recycling operations contained in, or incorporated by reference in, the Company’s Registration Statement on Form S-3 filed in connection with its November 2016 public offering. That claim is asserted on behalf of a class of persons who purchased shares pursuant to, or that are traceable to, that Registration Statement. The Amended Complaint seeks to hold the individual defendants liable as control persons pursuant to Section 15 of the Securities Act. The Amended Complaint seeks unspecified damages and plaintiffs’ attorneys’ fees and costs. On September 18, 2018, the defendants filed a motion to dismiss the Amended Complaint in its entirety and the plaintiff subsequently filed its opposition to the motion. In January 2019, the court notified the parties that it will rule on the motion to dismiss without a hearing. The Company denies that the claims in the Amended Complaint have any merit and it intends to vigorously defend the action.
Beginning on February 2, 2018,
five
purported shareholder derivative actions were filed in the United States District Court for the District of Delaware against the Company and certain of its current and former executive officers and directors, Stephen R. Clarke, Selwyn Mould, Thomas Murphy, Mark Weinswig, Vincent DiVito, Mark Slade and Mark Stevenson. On May 3, 2018, the cases were consolidated under the caption In re Aqua Metals, Inc. Stockholder Derivative Litigation, Case No. 1:18-cv-201-LPS (D. Del.). The complaints were filed by persons claiming to be stockholders of Aqua Metals and generally allege that certain of the Company’s officers and directors breached their fiduciary duties to the Company by violating the federal securities laws and exposing the Company to possible financial liability. The complaints seek unspecified damages and plaintiffs’ attorneys’ fees and costs. The parties have entered into a stipulation staying the action until 30 days after a decision on the Company’s motion to dismiss the Amended Complaint in the class action described above. The Company denies that the claims in the shareholder derivative action have any merit and it intends to vigorously defend the action.
AQUA METALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As its growth continues, the Company may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of any future matters could materially affect its future financial position, results of operations or cash flows.
12. Subsequent Events
The Company has evaluated subsequent events through the date which the condensed consolidated financial statements were available to be issued.
Equity Award
On May 3, 2019, the Company granted to its non-executive directors options to purchase an aggregate of
173,000
shares of the Company’s common stock. The options are exercisable over a five-year period at exercise price of
$2.48
per share.
Payment of Key-Man Penalty
On April 19, 2018, Stephen Clarke resigned as our president and chief executive officer and on December 3, 2018 Selwyn Mould resigned as our chief operating officer. As a result of their resignations, Clarios claimed that we became obligated to pay up to
$2 million
to Clarios, payable, at our option, in cash or shares of our common stock. On May 6, 2019, we agreed to settle the Clarios key-man penalty claim through our issuance of
807,436
shares of our common stock, which we intend to issue during the week of May 13, 2019.
Increase of Authorized Shares
At a special meeting of stockholders held on May 9, 2019, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to effect an increase in the number of authorized shares of our common stock from
50,000,000
to
100,000,000
. On May 9, 2019, we effected the increase in authorized common stock through our filing of the amendment with the Delaware Secretary of State.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other filings with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019, or our Annual Report.
In this report we make, and from time to time we otherwise make written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in our documents, reports, filings with the SEC, and news releases, and in written or oral presentations made by officers or other representatives to analysts, stockholders, investors, news organizations and others, and in discussions with management and other of our representatives.
Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties, including those risks included below in Part II, Item 1 “Risk Factors”. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.
General
Aqua Metals (NASDAQ:
AQMS
) is engaged in the business of lead recycling through its novel, proprietary and patented AquaRefining
™
technology. AquaRefining is a room temperature, water and organic acid-based process that greatly reduces environmental emissions. We believe our suite of patented and patent pending AquaRefining technologies will allow the lead-acid battery industry to simultaneously improve the environmental impact of lead recycling and scale recycling production to meet demand. Furthermore, our AquaRefining technologies result in high purity lead. We were formed as a Delaware corporation on June 20, 2014 and since our formation, we have focused our efforts on the development and testing of our AquaRefining process, the construction of our initial lead acid battery, or LAB, recycling facility at the Tahoe-Reno Industrial Center, or TRIC, located in McCarran, Nevada and commercializing the AquaRefining process.
We completed the development of our first LAB recycling facility at TRIC and commenced production of battery breaking and limited operations during the first quarter of 2017. The TRIC facility now produces varying products for commercial sale primarily consisting of ingoted AquaRefined lead, ingoted lead bullion, lead compounds, and plastics. In April 2017, we commenced the shipment of products for sale, consisting of metallic lead, lead compounds and plastics. In April 2018, we commenced the limited production of cast lead bullion, representing a mixture of lead purchased to prime our kettles and AquaRefined lead from our AquaRefining process. In June 2018, we commenced the sale of pure AquaRefined lead in the form of two tonne blocks, and in October 2018 we commenced the sale of AquaRefined lead in the form of battery manufacturing ready ingots. In November 2018, we received official vendor certification from Clarios (the successor to Johnson Controls Battery Group, Inc.) for our AquaRefined lead and in December 2018 we commenced shipments directly to Clarios owned and partner battery manufacturing facilities.
As of the date of this report, we have installed 16 AquaRefining modules at TRIC. Commencing in June 2018, we adopted an operational strategy of limiting the operation of the AquaRefining modules to one or a few at a time as we continued to adjust the AquaRefining modules to enhance their operation. Since we had been operating at a negative contribution margin, we believed this operational strategy would allow us to continue AquaRefined lead production for the Clarios certification process and control costs, while enabling the remaining components of the plant to be upgraded in support of planned increases in production at improved margins due to these upgrades. Between June 2018 and March 2019 we operated the first four of the 16 modules from time to time and made continuous improvements which have led to individual modules running in a steady state producing 100Kg/
hour for several days at a time. Between October and December 2018, we operated one or two AquaRefining Modules at a time on a 24x7 basis. During the first quarter of 2019 we ran one or two modules at a time 24-hours a day, four days a week to allow safe times for some of the key work to be completed for our contribution margin improvement projects. During the first quarter of 2019, we installed a new filter press and a new centrifuge to provide continuous production of the concentrate to the AquaRefining modules, which should also lower our cost of production.
As of the date of this report, we are operating up to four of our initial modules on a 24‑hour, seven days a week basis, and have begun the process to roll out modules five through eight to achieve up to 50% of total current plant capacity. This process will be repeated until full production is reached with all 16 modules. Our goal is to operate all 16 modules on a 24/7 continuous basis by the end of 2019. However, due to the delays and unforeseen issues in the completion of the AquaRefining production line we have experienced to date, there can be no assurance that we will not encounter additional delays and issues.
As we endeavor to bring the AquaRefining modules online, we continue our efforts to complete and commission infrastructure and operational improvements intended to improve the contribution margin for our AquaRefined lead production. These infrastructure and operational improvements are expected to allow us to recover and recycle our chemical feedstock more efficiently, which should further improve our contribution margin. In March 2019, we announced that we completed Phase One of our two-phase capital improvement program. Electrolyte recovery is critical to achieving positive contribution margin and during the first quarter of 2019 we were conserving 67% of our target for electrolyte recovery. From the capital improvements made in phase one we expect to conserve 75% of our target for electrolyte recovery starting in second quarter of 2019 and conserve 100% of our target when we complete Phase Two sometime during the second half of 2019. We have already run a successful pilot program for the Phase Two solution of our capital improvement program, which, along with conserving additional electrolyte, should generate higher lead yields for our AquaRefining process, also improving contribution margin.
In February 2017, we entered into a series of agreements with Johnson Controls Battery Group, Inc. and commenced discussions and negotiations with Johnson Controls to develop an appropriate program blueprint, and enter into a definitive development program agreement reflecting that blueprint, pursuant to which we will provide to Johnson Controls and certain strategic partners of Johnson Controls certain licensing, sale and services of our AquaRefining technologies and equipment. In May 2019, the assets and operations of Johnson Controls Battery Group, Inc., including our agreements and collaboration with Johnson Controls, were sold to a Clarios, a newly-organized battery and power solutions company formed by Brookfield Business Partners LP. In this report, we refer to Clarios, as the successor to Johnson Controls Battery Group, Inc., when referring to agreements, actions or discussions between us and Johnson Controls Battery Group, Inc., whether prior to or following the latter’s transfer of assets to Clarios.
Since January 1, 2019, we have engaged in the following non-routine transactions:
In January 2019, we completed a public offering of 5,175,000 shares of our common stock, at the price of $1.90 per share, for gross proceeds of $9.8 million. After the payment of underwriter discounts and offering expenses, we received net proceeds of approximately $9.1 million.
On February 26, 2019, after engaging in extensive diligence and engineering evaluations, we signed a contract with Veolia North America Regeneration Services LLC (Veolia) to provide operations, maintenance and management services at Aqua Metals’ AquaRefining facility in McCarran, Nevada. Pursuant to the agreement, Veolia contributes operational and technological expertise and organizational capabilities in aqueous-based process chemistries and electrolysis along with assumption of responsibility for operations, supply chain, offtake and management of the plant. Veolia employees began working onsite starting March 4, 2019 at the McCarran facility. In addition to receiving expertise and support from Veolia overall, the agreement provides for Veolia to relocate up to six full-time employees with operations, process engineering and management expertise to join the Aqua Metals team at AquaRefinery in McCarran, Nevada. Veolia has assumed the primary responsibility for scaling the facility through the remainder of 2019 to the goal of operating 16 modules on a continuous basis. The agreement also provides for Veolia and Aqua Metals to work together to plan in 2019 and complete the expansion of the TRIC facility to 32 AquaRefining modules in 2020.
In consideration of the services to be provided by Veolia under the agreement, we agreed to issue to Veolia a total of
2,350,000
shares of our common stock in eight quarterly installments of
293,750
shares. Each installment is subject to weighted average antidilution adjustments in the event of our sale of common shares for cash consideration during the preceding quarterly period at a price less than $
2.41
per share. In consideration of the antidilution adjustments, the number of shares to be issued in each installment shall be capped at the current market value of
$1.25 million
based on the volume weighted average price of our shares over the 20 trading days preceding the date for issuance of such installment. We also agreed to issue to Veolia, on the one-year anniversary of the agreement, warrants to purchase an additional
2,000,000
shares of our common stock at an exercise price
of
$5.00
per share and, on the second anniversary of the agreement, warrants to purchase an additional
2,000,000
shares of our common stock at an exercise price
$7.00
per share. The warrants will have a term of ten years from the date of issuance.
Plan of Operations
Our plan of operations for the 12-month period following the date of this report is to complete the commercial roll-out of all 16 AquaRefining modules installed at TRIC and to ramp up the production of AquaRefined lead. We also intend to install an additional 16 AquaRefining modules at TRIC, subject to the receipt of additional capital and any design improvements that are recommended based on the operation of the first 16 modules.
Additionally, we plan to further improve the plant economics by processing a growing proportion of the metallic lead we recover from breaking batteries within the AquaRefinery and by utilizing the third of our six kettles in the refining area commissioned during the first quarter of 2019. We believe the continuation of this program will improve contribution margin by enabling us to finish a growing proportion of these materials in-house. We announced in March 2019, the first full production run of lead bullion from our newly commissioned third kettle.
In parallel with our efforts to commercialize our existing AquaRefining operations, our 12-month plan of operations also includes our proposal to license our technology and to provide planning, engineering, technical assistance, equipment and other services in support of the addition of an AquaRefining facility to a battery recycling facility owned by Clarios. Licensing could take the form of either a co-processing arrangement whereby we operate our technology in conjunction with an existing smelter or our licensee operates directly utilizing our technology. We are currently discussing with Clarios an appropriate program blue print, and we intend to enter into a definitive development program agreement reflecting that blue print, pursuant to which we will provide Clarios and certain strategic partners of Clarios certain licensing, sale and services of our AquaRefining technologies and equipment. However, there can be no assurance that we will be able to conclude a definitive development agreement with Clarios on terms that benefit us, if at all. See "Risk Factors - Risks Related to Our Business."
Our 12-month plan of operations also includes the pursuit and evaluation of additional strategic relationships, in addition to our recently announced relationship with Veolia, and the licensing of our technology and the provision of equipment and services to other potential strategic partners. However, there can be no assurance that we will be able to effect any of these additional partnerships in the future on commercially reasonable terms, or at all.
Results of Operations
During the first quarter of 2018 product sales consisted of lead compounds and plastics. Product sales during the first quarter of 2019 consisted of high purity lead from our AquaRefining process as well as lead bullion, lead compounds, and plastics. The following table summarizes our results of operations with respect to the items set forth below for the three months ended
March 31, 2019
and
2018
together with the percentage change in those items (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
|
Favorable
(Unfavorable)
|
|
%
Change
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
437
|
|
|
$
|
1,726
|
|
|
$
|
(1,289
|
)
|
|
(74.7
|
)%
|
Cost of product sales
|
4,681
|
|
|
5,436
|
|
|
755
|
|
|
(13.9
|
)%
|
Research and development cost
|
620
|
|
|
1,475
|
|
|
855
|
|
|
(58.0
|
)%
|
General and administrative expense
|
4,016
|
|
|
1,775
|
|
|
(2,241
|
)
|
|
126.3
|
%
|
Total operating expense
|
$
|
9,317
|
|
|
$
|
8,686
|
|
|
$
|
(631
|
)
|
|
7.3
|
%
|
As mentioned previously, product sales consist of high purity lead from our AquaRefining process as well as lead bullion, lead compounds and plastics. Revenue for the three months ended March 31, 2019 decreased approximately 75% compared to
the three months ended March 31, 2018 as a result of our strategic decision to limit the operations of our AquaRefining in order to focus resources on the implementation of plant improvements and enhancing process efficiencies.
Cost of product sales includes raw materials, supplies and related costs, salaries and benefits, consulting and outside services costs, depreciation and amortization costs and insurance, travel and overhead costs. Cost of product sales decreased approximately 14% during the first quarter of 2019 compared to the same period in 2018, in conjunction with the planned slowdown of plant operations. The decrease in cost of sales was not directly proportionate with the decline in product sales revenue as, currently, the majority of our cost during the quarter was fixed. The decrease in cost of product sales due to the planned slowdown in production was offset by the hiring of approximately 25 new production employees in preparation for ramping-up operations.
Research and development cost included expenditures related to the improvement of the AquaRefining technology. During the three months ended March 31, 2019, research and development costs decreased approximately 58% over the comparable period in 2018. The decline in research and development expense is primarily the result of management's focus on preparing the plant for ramping-up operations and a reduced emphasis on research and development activities due to the fact that the technology has matured and we are moving out of the research and development stage. As a result, there has been a reduction in research and development staffing by 25% subsequent to the first quarter of 2018.
General and administrative expense increased approximately 126%, or $2.2 million, for the three-month period ended March 31, 2019 compared to the three months ended March 31, 2018. The most significant drivers of this increase were non-cash expense items. We had $1 million of non-cash expense related to the Veolia agreement (as previously discussed). In addition, non-cash stock based compensation increased by approximately $0.9 million compared to the first quarter of 2018. We also incurred costs of approximately $0.2 million for professional serves fees associated with the sublease of the Alameda facility.
The following table summarizes our other income and interest expense for the three months ended
March 31, 2019
and
2018
together with the percentage change in those items (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
|
Favorable
(Unfavorable)
|
|
%
Change
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
$
|
(2,889
|
)
|
|
$
|
(587
|
)
|
|
$
|
(2,302
|
)
|
|
(392.2
|
)%
|
Interest and other income
|
$
|
63
|
|
|
$
|
17
|
|
|
$
|
46
|
|
|
270.6
|
%
|
Interest expense related primarily to the $5.0 million Interstate Battery convertible note and the $10.0 million note payable to Green Bank, amortization of debt issuance costs incurred in connection with both of these notes, as well as an accrual for the USDA guarantee fee on the $10.0 million note to Green Bank. On January 24, 2019, we repaid Interstate Battery the outstanding principal and interest on the convertible debt in the amount of
$6.7 million
. As a result of this debt repayment, we amortized the remaining discount on the note of
$2.6 million
and remaining deferred financing expenses of
$20,000
to interest expense. These non-cash items were the primary cause of the increase in overall interest expense for the first quarter of 2019.
Interest income increased for the three months ended March 31, 2019 compared to the same period in 2018 due to higher cash balances during the quarter.
Liquidity and Capital Resources
As of
March 31, 2019
, we had total assets of
$69.2
million and working capital of
$9.9
million.
The following table summarizes our cash used in operating, investing and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
|
|
|
|
Net cash used in operating activities
|
$
|
(6,304
|
)
|
|
$
|
(5,958
|
)
|
Net cash used in investing activities
|
$
|
(1,574
|
)
|
|
$
|
(1,337
|
)
|
Net cash provided by financing activities
|
$
|
2,322
|
|
|
$
|
1,999
|
|
Net cash used in operating activities
Net cash used in operating activities for the
three
months ended
March 31, 2019
and
2018
was $6.3 million and $6.0 million, respectively. Net cash used in operating activities during each of these periods consisted primarily of our net loss adjusted for noncash items such as depreciation, amortization, stock-based compensation charges, and impairment charge as well as net changes in working capital.
Net cash used in investing activities
Net cash used in investing activities for the
three
months ended
March 31, 2019
and
2018
was $1.6 million and $1.3 million, respectively. Net cash used in investing activities during each of these periods consists primarily of purchases of fixed assets related to the build-out of our TRIC recycling facility in Nevada. In March of 2019, we disposed of the capital shares of our UK subsidiary, Ebonex IPR, Ltd. The sale price was a nominal cash amount and did not contribute to net cash used in investing activities.
Net cash provided by financing activities
Net cash provided by financing activities for the
three
months ended
March 31, 2019
consisted of $9.1 million net proceeds from our January 2019 public offering. This increase was offset by a $6.7 million payoff of the Interstate Battery convertible note. Net cash provided by financing activities for the
three
months ended
March 31, 2018
consisted of $2.1 million net proceeds from the January 2018 exercise of the underwriter's overallotment option related to our December 2017 public offering.
As of the date of this report, we believe that our working capital is sufficient to fund our current level of operations at TRIC over the next twelve months. However, we will require additional capital in order to increase production of AquaRefined lead at TRIC beyond the planned 16 modules, and to fund our continued losses from operations until such time as we are able to achieve positive cash flow from operations. We intend to seek additional funds through various financing sources, including the sale of our equity and debt securities, licensing fees for our technology, joint ventures with capital partners and/or project financing of our recycling facilities. However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to further pursue our business plan and we may be unable to continue operations. Additionally, we were not in compliance with the minimum debt service coverage ratio covenant on our loan from Green Bank as of the fiscal quarter ends between March 31, 2017, and
March 31, 2019
. We received a waiver for the minimum debt service coverage ratio covenant for those periods. While we expect to continue to receive waivers from Green Bank for non-compliance with such covenant, there is no guarantee that we will receive such waivers. If Green Bank determines not to grant us a waiver for non-compliance in the future, we would be in default of the loan and Green Bank would be able to accelerate the payment of all amounts under the loan.
On April 23, 2019, we reached an agreement with our primary lender, Green Bank, to waive certain covenants and allow us to enter into capital and/or operating leases. Pursuant to the waiver, we are approved to enter into capital and/or operating leases in the total amount of up to $5.0 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We do not enter into financial instruments for trading or speculative purpose. Our primary exposure to market risk is interest expense related to our debt with Green Bank. The interest rate on this loan adjusts on the first day of each calendar quarter equal to the greater of six percent (6%) or two percent (2%) per annum above the minimum prime lending rate charged by large U.S. money center commercial banks as published by the Wall Street Journal. We experience potential market risk with respect to the volatility of lead commodity prices since the purchase price of our primary raw material, used LABs and the sales price of our lead-based finished products are based on commodity pricing. However, due to the relatively short turnaround between the purchase of used LABs and the sale of our finished goods, we believe the risk is minimal.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based on that evaluation, management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective as of March 31, 2019.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three-month period ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.