Item 1B.Unresolved Staff Comments
None.
Our executive offices are presently located in 14,016 square feet of mixed office and warehouse space in McCarran, Nevada. We lease these facilities at a lease rate of approximately $10,000 per month. The lease term began in July 2018 and expires December 31, 2021.
Our executive offices were previously located in 21,697 square feet of office and industrial space in a multi-building commercial project known as “Marina Village” located in Alameda, California. The lease term is 76 months, commencing February 1, 2016 and expiring May 31, 2022. We sublet the property with the sublease commencing on February 4, 2019 and expiring May 31, 2022.
We have developed and own a 136,750 square foot LAB recycling facility on 11.73 acres of land located in TRIC, a 107,000-acre park located nine miles east of Reno, Nevada on I-80.
Item 3.
Item 3.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 us, 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-07142. 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 our securities between May 19, 2016 and November 9, 2017, against us, Stephen Clarke, Thomas Murphy and Selwyn Mould. The Amended Complaint alleges the defendants made false and misleading statements concerning our lead recycling operations in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder and 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 our lead recycling operations contained in, or incorporated by reference in, our Registration Statement on Form S-3 filed in connection with our 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 an Order dated August 14, 2019, the Court granted in part, and denied in part, the defendants’ motion to dismiss. The Court granted the motion to dismiss the Securities Act Section 11 claim and the Exchange Act Section 10(b) and Rule 10b-5 claim based on alleged false and misleading statements and gave the plaintiffs leave to amend to address the deficiencies. The Court denied the motion to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims regarding site visits. On September 20, 2019, the plaintiffs filed a Second Amended Complaint that dropped the Securities Act Section 11 claim but otherwise alleges the same claims as were alleged previously. The Second Amended Complaint seeks unspecified damages and plaintiffs’ attorneys’ fees and costs. On November 1, 2019, the defendants filed a motion to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims in the Second Amended Complaint based on alleged false and misleading statements, but not the claims regarding site visits. The motion is under consideration by the Court. We deny that the claims in the Second Amended Complaint have any merit and we intend 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 us and certain of our 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-00201-LPS (D. Del.). The complaints were filed by persons claiming to be stockholders of Aqua Metals and generally allege that certain of our officers and directors breached their fiduciary duties to us by violating the federal securities laws and exposing us 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 our motion to dismiss the Amended Complaint in the class action described above. The individual defendants deny that the claims in the shareholder derivative action have any merit and intend to vigorously defend the action.
A former employee has filed a complaint with Nevada OSHA claiming that he was wrongfully terminated for his protected activities related to safety. The matter is in the investigation stage where OSHA is gathering facts related to the employee’s claim. We are contesting the allegations by the employee. An evaluation of the likelihood of an unfavorable outcome cannot be made at this time.
We are not party to any other legal proceedings. We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we 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 our future financial position, results of operations or cash flows.
Item 4.
Item 4.Mine Safety Disclosures
Inapplicable.
PART II
Item 5.
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock has traded on the NASDAQ Capital Market under the symbol “AQMS,” since our initial public offering on July 31, 2015. Since then, our common stock has been relatively thinly traded at times and has experienced, and is expected to experience in the future, significant price and volume volatility. The following table shows the reported high and low closing prices per share for our common stock-based on information provided by the NASDAQ Capital Market for the periods indicated.
Holders of Record
As of February 24, 2020, there were eight holders of record of our common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We presently intend to retain earnings, if any, to finance the operation and expansion of our business.
Equity Compensation Plan Information
We have adopted the Aqua Metals, Inc. 2014 Stock Incentive Plan providing for the grant of non-qualified stock options and incentive stock options to purchase shares of our common stock and for the grant of restricted and unrestricted share grants. We have reserved 2,113,637 shares of our common stock under the plan. All of our officers, directors, employees and consultants are eligible to participate under the plan. The purpose of the plan is to provide eligible participants with an opportunity to acquire an ownership interest in our company.
In 2019, our board of directors adopted the Aqua Metals, Inc. 2019 Stock Incentive Plan (the “2019 Plan”). A total of 4,500,000 shares of common stock was authorized for issuance pursuant to the 2019 Plan. The 2019 Plan provides for the following types of stock-based awards: incentive stock options; non-statutory stock options; restricted stock; and performance stock. The 2019 Plan, under which equity incentives may be granted to employees and directors under incentive and non-statutory agreements, requires that the option price may not be less than the fair value of the stock at the date the option is granted. Option awards are exercisable until their expiration, which may not exceed 10 years from the grant date.
The following table sets forth the number and weighted-average exercise price of securities to be issued upon exercise of outstanding options and warrants, and the number of securities remaining available for future issuance, under our equity compensation plan at December 31, 2019.
(1) Includes 2,623,692 shares relating to outstanding options and 259,792 relating to restricted stock units under our stock-based compensation plans.
(2) Consists of warrants issued in connection with financing activities and 840,000 shares relating to outstanding options granted in reliance on Nasdaq Rule 5635(c)(4) .
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 6.
Item 6.Selected Financial Data
Inapplicable.
Item 7.
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
Aqua Metals (NASDAQ: AQMS) is engaged in the business of lead recycling through its novel, proprietary and patented AquaRefining™ technology. AquaRefining is a near 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. In April 2017, we commenced the shipment of products for sale, consisting of lead compounds as well as plastics. In April 2018, we commenced the limited production of lead bullion, including AquaRefined lead. In July 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 for our AquaRefined lead and in December 2018, we commenced shipments directly to Clarios owned and partner battery manufacturing facilities.
During the fourth quarter of 2019, the Company focused its efforts on completing the Phase 2 capital upgrades, including work done to commission the remaining 12 modules. On whole, completion of the Phase 2 capital work was expected to improve the plant's contribution margin. These projects included concentrate production improvements, electrolyte chilling improvements, improvements in briquetting our spongy AquaRefined lead to prepare for melting and ingot casting, water recovery and management systems, upgrades to all the AquaRefining modules and finally, the paste drying system to increase our yields and throughput.
On the evening of November 29, 2019, a fire occurred in the AquaRefining area of the recycling facility at TRIC. The fire and related intense heat and smoke caused significant damage to a material amount of equipment in the AquaRefinery area, including all 16 AquaRefining modules, electrical and tank infrastructure, steel superstructure, control wiring and other supporting infrastructure. The floor to ceiling firewall between the AquaRefining area and the rest of the plant isolated the worst of the damage to the AquaRefining area. The firewall also appears to have spared material damage to much of the key front-end process equipment, such as the battery breaker/separation system, concentrate production area, kettles and ingot casting, water treatment and recovery and other important areas of the plant. The administrative office area also remained intact and is now occupied by the remaining employees.
Based on preliminary estimates, as of the date of this report, we believe that the replacement value of the equipment and plant lost or damaged in the fire is approximately $37 million excluding any business interruption cost recovery. Assets on our balance sheet as of December 31, 2019 that were not affected by the fire total approximately $38 million, including the battery breaker, melting kettles, kiln, filter presses, mixing and storage tanks, water recovery system and the building infrastructure plus the land. The Company has $50 million dollars in combined property, equipment and business interruption insurance. Initial estimates for property, plant and business interruption claims may reach total limits. However, this number could change pending detailed analysis and review. As of the date of this report, we expect to receive total coverage and proceeds from our insurance carrier with the initial $15 to $20 million coming in over the next three to six months.
The Company has engaged a public adjuster in business for over 50 years who will support the Company’s legal and finance team and provide forensic accounting, construction expertise and direct interface with the insurers to assist the Company in quickly and properly documenting the loss and maximizing the Company’s insurance recovery.
As a result of the fire we have suspended all commercial operations and the date on which we can resume revenue producing operations is currently undetermined. Following the fire, an investigation of the fire was commenced by the Storey County Fire Marshal and we were denied access to the fire damaged portion of the facility until late December 2019, at which time we were given access to the fire damaged area. Since then, we have been engaged in the process of analyzing the fire damage and the clean-up and disposal of the damaged equipment. We have also engaged a public adjuster to support our legal and finance team and provide forensic accounting, construction expertise and direct interface with the insurers to assist us in quickly and properly documenting the loss and maximizing our insurance recovery. As of the date of this report, the insurance carriers paid an initial amount of $10.0 million for damages suffered as a result of the fire.
As of the date of this report, we are developing and analyzing a proposed capital light business strategy designed to optimize shareholder value by focusing on licensing opportunities, which have always been a core part of our business plans. We believe this path has the potential to maximize shareholder value in that it could be far less capital intensive than a rebuild and could be funded solely or primarily from a combination of cash on hand, insurance proceeds and asset dispositions. The capital light strategy is consistent with our long-held business strategy and objectives. The approach of this strategy is to pursue licensing opportunities within the lead battery recycling marketplace while securing our cash position by first, working on the successful collection of insurance proceeds with the assistance of our retained public adjuster and special counsel to facilitate the collection for property and business interruption losses; second, conducting the disposal of certain assets not essential to the capital light licensing strategy; and, third, restructuring the remaining balance on the USDA-backed loan with Green Bank that was initially set up for a running facility and would be impractical with a shift to capital light technology licensing.
Since January 1, 2019, we have engaged in the following financing 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 long-term contract with Veolia North America Regeneration Services LLC (Veolia), to provide operations, maintenance and management services at Aqua Metals’ AquaRefining facility in McCarran, Nevada. 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. As of the date of this report, we have issued a total of 1,184,985 shares to Veolia. As a result of the fire, however, we have declared force majeure and all further issuances to Veolia have been suspended.
In May 2019, we completed a public offering of 11,000,000 shares of our common stock, at the price of $2.00 per share, for gross proceeds of $22.0 million. After the payment of underwriter discounts and offering expenses, we received net proceeds of approximately $20.3 million.
Results of Operations for the Fiscal Year Ended December 31, 2019 Compared to the Fiscal Year Ended December 31, 2018
During the year ending December 31, 2019, product sales consisted of lead bullion, lead compounds and plastics. Product sales during the second and third 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 twelve months ended December 31, 2019 together with the percentage change in those items (in thousands).
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 twelve months ended December 31, 2019 increased approximately 10% compared to the twelve months ended December 31, 2018 as a result of increased production during 2019. During 2018, revenue was mainly derived from the sale of lead compounds and plastics. During the second quarter of 2019 and throughout the third quarter, we
began to increase production by the addition of modules and increased efficiencies. During the fourth quarter, we limited the operations of our AquaRefining in order to focus resources on the implementation of plant improvements and enhancing process efficiencies. Revenue in the fourth quarter of 2019 was impacted by limited operations due to construction and by the fire.
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 increased approximately 9% for the twelve months ended December 31, 2019, as compared to the twelve months ended December 31, 2018. Cost of product sales were lower in 2018 due to lower production rates. Cost increases in 2019 were also affected by the ramping-up operations using the AquaRefining process.
Research and development cost included expenditures related to the improvement of the AquaRefining technology. During the twelve months ended December 31, 2019, research and development costs decreased approximately 65% over the comparable period in 2018. The decline in research and development cost is primarily the result of management's focus on preparing the plant for the scaling of commercial operations and a reduced emphasis on research and development activities due to the fact that the AquaRefining for lead technology has matured and we paused the research and development stage. As a result, there has been a significant reduction in research and development staffing subsequent to the comparable periods in 2018.
General and administrative expense increased approximately 36% for the twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018. The most significant drivers of these increases were non-cash expense items. For the twelve months ended December 31, 2019, we had $9.0 million of non-cash expense related to the Veolia agreement (as previously discussed). In addition, non-cash stock-based compensation to our employees and directors increased by approximately $2.8 million compared to the twelve months ended December 31, 2018. We also incurred costs of approximately $0.2 million for professional service fees associated with the sublease of the Alameda facility. The twelve months ended December 31, 2018 included $0.9 million severance for our former chief executive officer and $0.9 million severance for our former chief operating officer, as well as a net $0.4 million noncash charge associated with a warrant modification related to Interstate Battery and $0.9 million in increased legal fees associated with proxy and solicitation fees related to efforts to address activist investors.
The following table summarizes our other income and interest expense for the years ended December 31, 2019 and December 31, 2018 together with the percentage change in those items (in thousands).
Insurance proceeds net of related expenses is a result of $17.4 million of expected insurance proceeds and $2.5 million of insurance proceeds received offset by $19.9 million of fire damaged assets and $0.8 million of other related expenses. Interest expense is 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.
Interest income increased for the twelve months ended December 31, 2019 compared to the same period in 2018 due to higher cash balances during the year.
Liquidity and Capital Resources
As of December 31, 2019, we had total assets of $69.5 million and working capital of $17.7 million, which includes $17.4 million of insurance proceeds receivable, of which we have received $7.5 million of insurance proceeds received after December 31, 2019.
The following table summarizes our cash used in operating, investing and provided by financing activities (in thousands):
Net cash used in operating activities
Net cash used in operating activities for the years ended December 31, 2019 and December 31, 2018 was $25.2 million and $26.3 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 non-cash payments to Veolia, as well as net changes in working capital. Cash used for general and administrative expenses decreased approximately $1.5 million during the year ended December 31, 2019 as compared to the same period last year.
Net cash used in investing activities
Net cash used in investing activities for the years ended December 31, 2019 and December 31, 2018 was $10.6 million and $3.9 million, respectively. Net cash used in investing activities during each of these periods consists primarily of purchases of fixed assets related to the phase two construction of our final production upgrades at our TRIC facility in Nevada and was offset by cash insurance proceeds of $2.5 million. 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 year ended December 31, 2019 consisted of $9.1 million net proceeds from our January 2019 public offering and $20.3 million net proceeds from our May 2019 public offering. This increase to cash flows was offset by a $6.7 million payoff of the Interstate Battery convertible note. Net cash provided by financing activities for the year ended December 31, 2018 consisted of $26.6 million net proceeds from our June 2018 public offering and $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 December 31, 2019, we had total cash of $7.6 million and working capital of $17.7 million, which includes $17.4 million of insurance proceeds receivable, of which we have received $7.5 million of insurance proceeds received after December 31, 2019.. As of the date of this report, we believe that we may require additional capital, depending on timing of insurance payments, in order to fund our current level of ongoing costs over the next twelve months and move forward with our capital light licensing strategy. There can be no assurance that we will be able to collect insurance proceeds or to acquire the necessary funding on commercially reasonable terms or at all. We intend to seek funds primarily from insurance proceeds and the possible sale of equipment that is not required for our capital light strategy. However, there can be no assurance that such funds will be available. If needed, we may seek funding through the sale of equity or debt financing. Funding that includes the sale of our equity may be dilutive. 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 December 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 new capital and/or operating leases. Pursuant to the waiver, we are approved to enter into new 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.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the 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 estimated asset retirement obligations, the determination of stock option expense, and the determination of the fair value of stock warrants issued. Our actual results could differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, we believe that the following accounting policies are the most critical to assist stockholders and investors reading the consolidated financial statements in fully understanding and evaluating our financial condition and results of operations.
Accounts receivable
We sell our products to large well-established companies and extend credit without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. In the event that payment of a customer’s account receivable is doubtful, we would reserve the receivable under an allowance for doubtful accounts.
Inventory
Inventory is stated at the lower of cost or net realizable value. Inventory cost is recorded on a first-in, first-out basis using the weighted average method. Net realizable value is determined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Property and equipment
Property and equipment are stated at cost net of accumulated depreciation. Depreciation on property and equipment is calculated on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the life of the asset or the remaining term of the lease.
Intangible and other long-lived assets
The intangible assets consist of a patent application contributed to us by five founding stockholders, patent applications for technology developed by us and trademark applications. The useful life of the intangible assets has been determined to be ten years and the assets are being amortized. We periodically evaluate our intangible and other long-lived assets for indications that the carrying amount of an asset may not be recoverable. In reviewing for impairment, we compare the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value. In addition to the recoverability assessment, we routinely review the remaining estimated lives of our long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the period when such determination is made, as well as in subsequent periods. We evaluate the need to record impairment during each reporting period. No impairment has been recorded. We determined that the estimated life of the intellectual property properly reflected the current remaining economic life of the asset.
Asset retirement obligations
We record the fair value of estimated asset retirement obligations associated with tangible long-lived assets in the period incurred. Retirement obligations associated with long-lived assets are those for which there is an obligation for closures and/or site remediation at the end of the assets’ useful lives. These obligations are initially estimated based on discounted cash flow estimates and are accreted to full value over time through charges to operating expense. In addition, asset retirement costs are capitalized as part of the related asset’s carrying value and are depreciated on a straight-line basis over the assets’ respective useful lives.
Revenue Recognition
The Company records revenue recognition in accordance with ASC 606, Revenue from Contracts with Customers. ASC 606 provides a single comprehensive model for the recognition of revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It requires an entity to recognize revenue when the entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) with the customer, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. ASC 606 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
Insurance Proceeds
On November 29, 2019, there was a fire in the Aqua Refining area of the plant. As of December 31, 2019, the Company has received $2.5 million in insurance payments as a result of the fire damage. Subsequent to year end the Company received an additional $7.5 million of insurance proceeds. The Company has also determined that it is probable to receive at least an additional $14.9 million in insurance proceeds. This expectation resulted in a $17.4 million insurance receivable at December 31, 2019.
Research and development
Research and development expenditures are expensed as incurred.
Income taxes
We account for income taxes in accordance with the liability method of accounting for income taxes. Under the liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The provision for income taxes is comprised of the current tax liability and the changes in deferred tax assets and liabilities. We established a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be recoverable against future taxable income.
We recognize the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Stock-based compensation
We recognize compensation expense for stock-based compensation in accordance with ASC 718 “Compensation - Stock Compensation.” For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes-Merton method for stock options; the expense is recognized over the service period for awards to vest.
The estimation of stock-based awards that will ultimately vest requires judgment and to the extent actual results or updated estimates differ from the original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience.
Recent accounting pronouncements
See recent accounting pronouncements in Note 2 of the Consolidated Financial Statements located in Item 8 in this Annual Report.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2019 and the effect such obligations are expected to have on our liquidity and cash flow in the future years (in thousands):
Note: Excludes a finance lease with current liability of $6 and a non-current liability of $25.
Operating lease obligations
We lease our Alameda, California and McCarran, Nevada spaces under non-cancelable operating leases, expiring in 2022 and 2021, respectively. On February 4, 2019, we entered into a sublease agreement effective as of February 1, 2019 for the Alameda, California facility. The term of the sublease commenced on February 4, 2019, and ends on May 31, 2022. The above obligations do not include partially offsetting sublease income of approximately $1.2 million for the remainder of the Alameda lease agreement.
Finance lease obligation
The Company currently maintains one finance lease for equipment. Our finance lease is immaterial to our consolidated financial statements.
Long-term debt
Aqua Metals Reno, Inc. entered into a $10,000,000 loan with Green Bank on November 3, 2015. The term of the loan is twenty-one years. For the first twelve months, only interest was payable; thereafter monthly payments of interest and principal are due. The interest rate 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 in the Wall Street Journal. See Note 12 in the accompanying notes to the consolidated financial statements for further description.
Item 7A.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
We do not enter into financial instruments for trading or speculative purposes. Our cash, cash equivalents and restricted cash balances as of December 31, 2019 consisted of cash and cash equivalents. 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 market risk with respect to the volatility of lead commodity prices. The purchase price of our primary raw material used lead acid batteries (used LABs), and the sales price of our lead-based finished products are based on commodity pricing. Due to the relatively short turnaround between the purchase of used LABs and the sale of our finished goods, we believe the risk is minimized.
Item 8.
Item 8.Financial Statements and Supplementary Data
Index To Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Aqua Metals, Inc. and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Aqua Metals, Inc. and Subsidiaries (collectively the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
/s/ Armanino LLP
San Ramon, CA
March 11, 2020
AQUA METALS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
AQUA METALS, INC.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
AQUA METALS, INC.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
AQUA METALS, INC.
Consolidated Statements of Cash Flows
(in thousands)
AQUA METALS, INC.
Consolidated Statements of Cash Flows
(in thousands)
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
AQUA METALS, INC.
Notes to Consolidated Financial Statements
1.Organization and Operations
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 built its first recycling facility in Nevada’s Tahoe Reno Industrial Center (“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. During the second and third quarters of 2019 we operated up to four of our initial modules (modules 1 through 4) on a 24x7 basis. Throughout these quarters, the Company made significant progress related to its goal of ramping up the plant to full production. Some of the milestones reached were related to production and revenue records while at the same time reducing general and administrative expense. During the fourth quarter of 2019, the Company focused its efforts on completing the Phase 2 capital upgrades, including work done to commission the remaining 12 modules. On whole, completion of the Phase 2 capital work would enable the plant to operate at a positive contribution margin. These projects included concentrate production improvements, electrolyte chilling improvements, improvements in briquetting our spongy AquaRefined lead to prepare for melting and ingot casting, water recovery and management systems, upgrades to all the AquaRefining modules and finally, the paste drying system to increase our yields and throughput. On the evening of November 29, 2019, a fire occurred in the AquaRefining area of the facility. The fire and related intense heat and smoke caused significant damage to a material amount of equipment in the AquaRefinery area, including all 16 AquaRefining modules, electrical and tank infrastructure, steel superstructure, control wiring and other supporting infrastructure. As of the date of this report, we are developing and analyzing a strategy of accelerating licensing activities rather than engaging in a capital intensive rebuild of the facility.
Liquidity and Management Plans
The Company generated revenues of $4.9 million and $4.4 million during the years ended December 31, 2019 and December 31, 2018, respectively. The Company had net losses of $44.8 million and $40.3 million for the years ended December 31, 2019 and December 31, 2018, respectively. As of December 31, 2019, the Company’s cash balance was $7.6 million. As of the date of this report, we believe that we may require additional capital, depending on timing of insurance payments, in order to fund our current level of ongoing costs over the next twelve months and move forward with our capital light licensing strategy.
2.Summary of Significant Accounting Policies
Basis of presentation and consolidation
The accompanying consolidated financial statements include those of Aqua Metals, Inc. and its subsidiaries, after elimination of all intercompany accounts and transactions. We have prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).
Use of estimates
The preparation of the 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 contingent assets and liabilities at the date of the 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.
Cash and cash equivalents
The Company considers all highly liquid instruments with original or remaining maturities of ninety days or less at the date of purchase to be cash equivalents. The Company maintains its cash balances in large financial institutions. Periodically, such balances may be in excess of federally insured limits.
Accounts receivable
The Company sells its products to large well-established companies and extends credit without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. In the event that payment of a customer’s account receivable is doubtful, the Company would reserve the receivable under an allowance for doubtful accounts. As of December 31, 2019, and December 31, 2018, the Company believes that all receivables have been or will be collected and, therefore, has not created any reserve for doubtful accounts.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is recorded on a first-in, first-out basis using the weighted average method. Net realizable value is determined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company records a write-down, if necessary, to reduce the carrying value of inventory to its net realizable value. The effect of these write-downs is to establish a new cost basis in the related inventory, which is not subsequently written up.
Property and equipment
Property and equipment are stated at cost net of accumulated depreciation. Depreciation on property and equipment is calculated on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the life of the asset or the remaining term of the lease.
Intangible and other long-lived assets
Intangible assets consist of a patent application contributed to the Company by five founding stockholders, patent applications for technology developed by the Company, trademark applications and a patent portfolio acquired during 2017. The useful life of this intellectual property has been determined to be ten years and the assets are being amortized straight-line over this period. The Company periodically evaluates its intangible and other long-lived assets for indications that the carrying amount of an asset may not be recoverable. In reviewing for impairment, the Company compares the carrying value of such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to the difference between the assets’ fair value and their carrying value. In addition to the recoverability assessment, the Company routinely reviews the remaining estimated lives of its long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the period when such determination is made, as well as in subsequent periods. The Company evaluates the need to record impairment during each reporting period. As of December 31, 2019, the Company determined that the estimated life of the intellectual property properly reflected the current remaining economic life of the asset.
Asset retirement obligations
The Company records the fair value of estimated asset retirement obligations associated with tangible long-lived assets in the period incurred. Retirement obligations associated with long-lived assets are those for which there is an obligation for closures and/or site remediation at the end of the assets’ useful lives. These obligations are initially estimated based on discounted cash flow estimates and are accreted to full value over time through charges to operating expense. In addition, asset retirement costs are capitalized as part of the related asset’s carrying value and are depreciated on a straight-line basis over the assets’ respective useful lives.
Revenue Recognition
The Company records revenue in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. ASC 606 provides a single comprehensive model for the recognition of revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It requires an entity to recognize revenue when the entity transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) with the customer, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. ASC 606 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
Revenue is generally recognized with the delivery of the Company’s products, primarily hard lead, lead compounds and plastics, to customers. Sales, value add, and other taxes, if any, that are collected concurrent with revenue-producing activities are excluded from revenue as they are subsequently remitted to governmental authorities. Incidental items that are immaterial in the context of the contract are recognized as expense. Freight and shipping costs related to the transfer of the Company’s products to customers are included in revenue and cost of product sales. Payment on invoices is generally due within 30 days of the invoice.
Arrangements with Multiple Performance Obligations
Contracts with customers may include multiple performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company expects that many of our contracts will have a single performance obligation as the promise to transfer the individual goods or services will not be separately identifiable from other promises in the contracts and therefore, not distinct. For contracts with multiple performance obligations, revenue will be allocated to each performance obligation based on the Company’s best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling prices is based on prices charged separately to customers or expected cost-plus margin. At present, the Company does not have any arrangements with multiple performance obligations.
Significant Judgments
The Company estimates variable consideration for arrangements where the transaction price is not fully determinable until the completion of yield testing. The Company estimates variable consideration at the most likely amount to which it expects to be entitled and includes estimated amounts in revenue to the extent it is probable that a significant reversal of revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Adjustments to revenue is recognized in the period when the uncertainty is resolved. To date, any adjustments to estimates have not been material.
Practical Expedients and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Insurance Proceeds
On November 29, 2019, there was a fire in the AquaRefining area of the TRIC facility. As of December 31, 2019, the Company has received $2.5 million in insurance payments as a result of the fire damage. Subsequent to year end the Company received an additional $7.5 million of insurance proceeds. The Company has also determined that it is probable that it will receive at least an additional $14.9 million in insurance proceeds during the 2020 fiscal year. This expectation resulted in a $17.4 million insurance receivable at December 31, 2019. This amount is included in insurance proceeds receivable in the accompanying Consolidated Balance Sheets.
Research and development
Research and development expenditures are expensed as incurred.
Income taxes
The Company accounts for income taxes in accordance with the liability method of accounting for income taxes. Under the liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The provision for income taxes is comprised of the current tax liability and the changes in deferred tax assets and liabilities. The Company establishes a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be recoverable against future taxable income.
The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Fair value measurements
The carrying amounts of cash and cash equivalents, accounts receivable, inventory, prepaid expenses and other current assets, accounts payable, accrued expenses, and deferred rent approximate fair value due to the short-term nature of these instruments. The carrying value of short and long-term debt, and lease liabilities also approximates fair value since these instruments bear market rates of interest or are calculated using market rates of interest. None of these instruments are held for trading purposes.
Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier far value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1. Quoted prices in active markets for identical assets or liabilities.
Level 2. Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level 3. Significant unobservable inputs that cannot be corroborated by market data.
The asset or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement.
There are no assets or liabilities that are measured at fair value on a recurring basis at December 31, 2019 or December 31, 2018.
Stock-based compensation
The Company recognizes compensation expense for stock-based compensation in accordance with ASC 718 “Compensation - Stock Compensation.” For employee stock-based awards, the Company calculates the fair value of the award on the date of grant using the Black-Scholes-Merton method for stock options; the expense is recognized over the service period for awards to vest.
The estimation of stock-based awards that will ultimately vest requires judgment and to the extent actual results or updated estimates differ from the original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised.
Net loss per share
Basic net loss per share is computed by dividing net loss by the weighted average number of vested shares outstanding during the period. Diluted net loss per share is computed by giving effect to all potential dilutive common securities, including convertible notes, options and warrants. Potential dilutive common shares include the dilutive effect of the common stock underlying in-the-money stock options and is calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an option and the average amount of compensation cost, if any, for future services that the Company has not yet recognized when the option is exercised, are assumed to be used to repurchase shares in the current period.
For all periods presented in this report, convertible notes, stock options, and warrants were not included in the computation of diluted net loss per share because such inclusion would have had an antidilutive effect.
(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 Company 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 years ended December 31, 2019 and December 31, 2018. Clarios represented all or a significant majority of our accounts receivable (trade) balance as of December 31, 2019 and December 31, 2018.
Substantially all of the chemicals used in our refining process are provided by one supplier and supply of used lead acid batteries has, during 2019 and 2018, been provided by two vendors as indicated below.
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 and lease liabilities for operating leases of approximately $1.8 million. See Note 13 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 year ended December 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 years ended December 31, 2019 and December 31, 2018.
Inventory consisted of the following (in thousands):
5.Property and equipment, net
Property and equipment, net, consisted of the following (in thousands):
Depreciation expense was $3.5 million and $3.2 million for the years ended December 31, 2019 and December 31, 2018, respectively. The building is a 136,750 square foot lead acid battery recycling plant built in McCarran, Nevada. Equipment under construction is comprised of various components being manufactured or installed by the Company, to be used in the McCarran, Nevada recycling plant.
The Company has financed certain equipment purchases through the use of capital leases. The lease terms are generally between 24 and 36 months with an option to purchase the asset at the end of the lease for $1. Total equipment included in the above table, subject to capital leases, is immaterial to our consolidated financial statements at December 31, 2019. Total equipment included in the above table at December 31, 2018 subject to capital leases is $0.4 million less accumulated depreciation of $0.2 million, resulting in net fixed assets under capital lease of $0.2 million. These assets are depreciated using the same useful lives as noted above and included in depreciation expense.
On November 29, 2019, there was a fire in the AquaRefining area of the plant. As a result of the fire, the company wrote off approximately $22.4 million of fixed assets that were damaged. These assets consisted of operational equipment, building and equipment under construction. The disposal of the fire damaged fixed assets included a decrease of accumulated depreciation of $2.5 million. The net write-off of fixed assets totaled $19.9 million.
6.Intellectual Property
Intellectual property, net, is comprised of the following (in thousands):
Aggregate amortization expense for the years ended December 31, 2019 and December 31, 2018 was $0.2 million.
Estimated future amortization is as follows as of December 31, 2019 (in thousands):
Other assets consist of the following (in thousands).
(1)See Footnote 13.
(2)The $1.0 million certificate of deposit is held by Green Bank as collateral for the Green Bank note payable balance. The deposit with Green Bank will be released after TRIC has three consecutive months of positive cash flow from operations.
(3)The Company has entered into a Facility Closure Trust Agreement for the benefit of the Nevada Division of Conservation and Natural Resources (NDEP). Funds deposited in the Trust are to be available when and if needed for closure and/or post-closure care of the facility related to potential decontamination and hazardous material cleanup. 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. In addition, the Trustee shall refund to the Company such amounts as the NDEP specifies in writing. $100,000 was deposited upon establishment of the Trust Fund on October 31, 2016; $350,000 was deposited on October 31, 2017; and $220,000 was deposited on October 31, 2018.
8.Accrued liabilities
Accrued liabilities consist of the following (in thousands):
9.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 Company’s facility at TRIC upon closure. 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. The actual costs could be higher or lower than current estimates. The discounted estimated fair value of the closure costs was $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 was capitalized. Accretion of the ARO for the years ended December 31, 2019 and December 31, 2018 was $46,000 and $44,000 respectively.
The Company entered into a facility closure trust agreement in October 2017 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 December 31, 2019, $670,000 has been contributed to the trust fund.
The convertible note payable with Interstate Battery Systems International, Inc. (Interstate Battery) was comprised of the following (in thousands):
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.
On August 7, 2015, the Company signed a lease for 21,697 square feet of mixed office and manufacturing space in Alameda, CA. The term of the lease is 76 months plus 6 months pre-commencement date for tenant improvement construction. The total cost of the lease is $3.0 million which was being amortized over 82 months at approximately $37,000 per month. As of December 31, 2016, the landlord had paid for $0.9 million in tenant improvements. The tenant improvements cost has been included in owned assets and deferred rent and was being amortized over the life of the lease.
In July 2018, the Company signed a lease for 14,016 square feet of mixed office and warehouse space in McCarran, Nevada. The lease term is 42 months. The total cost of the lease is $0.4 million, which is being amortized over 42 months at approximately $9,000 per month.
Amortization of deferred rent expense for the years ended December 31, 2019 and December 31, 2018 was $0.04 million and $0.1 million, respectively.
In October 2018, the Company moved its corporate headquarters to its McCarran, Nevada facility and ceased to use its Alameda, California facility. In February 2019, the Company sublet the California facility. Upon vacating the property, the Company wrote off the remaining amount of deferred rent in the amount of $0.8 million, and recorded a liability for the present value of remaining lease payments less estimated sublease income in the amount of $0.3 million recorded in the balance sheet as lease liability. Additionally, the Company wrote off the net book value of its leasehold improvements of approximately $0.8 million during the fourth quarter of 2018.
Aqua Metals Reno, Inc. (“AMR”), a subsidiary of Aqua Metals Inc., 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 December 31, 2019. AMR has received a waiver for the minimum debt service coverage ratio covenant for each of the aforementioned calendar quarters.
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 certificate of deposit is reported in "Other Assets" in the condensed consolidated balance sheet.
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):
The costs associated with obtaining the Green Bank loan of $0.8 million were recorded as a reduction to the carrying amount of the note and are being amortized as interest expense over the twenty-one year life of the loan. Amortization of the deferred financing costs was $36,000 and $35,000 for the years ended December 31, 2019 and December 31, 2018, respectively. The principal payments detailed below are excluding the effect of the reduction in the carrying amount related to the deferred financing costs.
The future principal payments related to the Green Bank note obligations are as follows as of December 31, 2019 (in thousands):
The Company currently maintains one finance lease for equipment and two operating leases for real estate. Our finance lease is immaterial to our 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 assets" on the Company's December 31, 2019 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 December 31, 2019 consolidated balance sheet. The Company recognized sublease income for the twelve months ended December 31, 2019. The Company did not recognize any sublease income during the twelve months ended December 31, 2018.
Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, as of December 31, 2019, total right-of-use assets were approximately $1.20 million and operating lease liabilities were approximately $1.38 million. The right-of-use assets are reported in "Other Assets" in the condensed consolidated balance sheet.
Information related to the Company's right-of-use assets and related lease liabilities were as follows (in thousands):
Maturities of lease liabilities as of December 31, 2019 were as follows (in thousands):
Note: Excludes a finance lease with current liability of $6 and a non-current liability of $25.
Authorized capital
The authorized capital stock of the Company consists of 100,000,000 shares of common stock, par value $0.001 per share. In the event of liquidation of the Company, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. The outstanding shares of common stock are fully paid and non-assessable.
The holders of the Company’s common stock are entitled to one vote per share. Holders of common stock are entitled to receive a ratable share of dividends, if any, as may be declared by the board of directors.
Interstate Battery Agreements
Investment Agreement
The Company entered into a Credit Agreement dated May 18, 2016 with Interstate Battery pursuant to which Interstate Battery loaned the Company $5.0 million in consideration of the Company’s issuance of a secured convertible promissory note in the original principal amount of $5.0 million. The note bore interest at the rate of eleven percent (11%) per annum, compounding monthly, and all interest was payable upon the earlier of maturity or conversion of the principal amount. The loan was to mature on May 24, 2019. The outstanding principal was convertible into shares of the Company’s common stock at a conversion price of $7.12 per share. The Company’s obligations under the note and Credit Agreement were secured by a second priority lien on the real estate, fixtures and equipment at the Company’s recycling facility at McCarran, Nevada. The Credit
Agreement included representations, warranties, and affirmative and negative covenants that are customary of institutional credit agreements. Interstate Battery had previously raised a claim that the Company was in technical breach of a negative covenant under loan. The claimed breach related to the Company’s failure to obtain Interstate Battery’s prior written consent to the Company’s acquisition of Ebonex IPR, Ltd. The Company estimated in 2017 that resolving the claim would result in a charge of $0.6 million. The Company recorded the $0.6 million in general and administrative expenses as of December 31, 2017 with the offset in accrued liabilities. The Company resolved this alleged breach in connection with a series of agreements with Interstate Battery in June 2018.
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.
Pursuant to the Credit Agreement, the Company also issued to Interstate Battery two common stock purchase warrants, including:
•a warrant to purchase 702,247 shares of the Company’s common stock, at an exercise price of $7.12 per share, that was initially exercisable upon grant and initially expired on May 24, 2018; and
•a warrant to purchase 1,605,131 shares of the Company’s common stock, at an exercise price of $9.00 per share, that is exercisable commencing November 24, 2016 and expired on May 24, 2019.
The warrants contain cashless exercise and standard anti-dilution adjustment provisions. The first warrant issued was modified in June 2018 to extend the expiration date to June 30, 2020 and reduced the exercise price to $3.33 per share. If Interstate converts its convertible note and exercises both warrants in their entirety, it will own approximately 8.3% of the Company’s common stock at an average price per share of approximately $7.22.
The Company also entered into a Stock Purchase Agreement dated May 18, 2016 with Interstate Battery pursuant to which the Company issued and sold to Interstate Battery 702,247 shares of the Company’s common stock at $7.12 per share for gross proceeds of approximately $5.0 million. The Stock Purchase Agreement includes customary representations, warranties, and covenants by Interstate Battery and us, and an indemnity from us in favor of Interstate Battery.
In connection with the investment transactions, the Company also entered into an Investors Rights Agreement dated May 18, 2016 with Interstate Battery pursuant to which the Company granted Interstate Battery customary demand and piggyback registration rights, limited board observation rights over the next three years and limited preemptive rights allowing Interstate Battery the right to purchase its proportional share of certain future equity issuances by the Company over the next three years. The Company included all of the Interstate Battery shares in its S-3 Registration Statement filed with the Securities and Exchange Commission on August 1, 2016.
The investment transactions with Interstate Battery closed on May 24, 2016. There were no sales commissions paid by the Company in connection with its sale of securities to Interstate Battery.
The Company allocated the $10.0 million proceeds from the Credit Agreement and Stock Purchase Agreement, to the various securities based on their relative fair values on the closing date of May 24, 2016.
•The fair value of the note was calculated using an average of the Merrill Lynch US High Yield CCC rate of 16.21% on May 24, 2016 and the Merrill Lynch US High Yield B effective yield of 7.44% on May 24, 2016.
•The fair value of the common stock was based on the closing market price of the Company’s common stock on the NASDAQ stock market on May 24, 2016.
The fair value of the warrants using the Black-Scholes-Merton option pricing model and the assumptions are listed in the table below (FV of warrant in thousands).
Both warrants were issued on May 24, 2016, when the closing market price of the Company’s stock was $11.39.
The table below presents the allocation of the proceeds based on the relative fair values of the stock, warrants and note (in thousands).
The difference between the face value of the convertible note and the allocated amount (which considers both the allocated fair value of the issued stock and allocated fair value of the warrants) was recorded as an initial discount to the convertible note; common stock was recorded at its allocated fair value as a credit to par value and additional paid-in capital as appropriate, based on the number of shares issued, and the allocated fair value of the warrant was credited to additional paid-in capital. After taking into consideration the amortization of the note discount, the effective interest rate on the convertible note is 184.75% per annum.
The convertible note includes an embedded BCF. The intrinsic value of the BCF was treated as an additional component of the discount attributable to the convertible note. The initial discount (attributable to the stock and warrants as noted above) and the discount attributable to the BCF exceeds the face amount of the convertible note. To avoid reducing the initial net carrying value of the convertible note to or below zero, the discount attributable to the BCF was limited such that the aggregate of all discounts does not exceed 99.5% of the face amount of the convertible note. The discount is being accreted to interest expense using the effective interest method over the three-year life of the loan. If the loan is converted prior to its maturity, any remaining discount will be expensed immediately.
Costs incurred in connection with the deal of $771,000 were allocated between additional paid-in capital and prepaid financing/ debt discount (“debt issuance costs”) in the same manner as the above allocation of proceeds. The allocated debt issuance costs of $142,000 were recorded as a reduction to the carrying amount of the convertible note and are being amortized as interest expense over the three-year life of the loan. The remaining $629,000 was recorded as a reduction to additional paid-in capital.
Clarios agreement
On February 7, 2017, the Company entered into a Stock Purchase Agreement with Clarios pursuant to which the Company issued and sold to a wholly-owned subsidiary of Johnson Controls International plc, (“Johnson Controls”), 939,005 shares of its common stock at $11.33 per share for gross proceeds of approximately $10.6 million. Costs incurred in connection with the transaction, primarily legal fees, totaled approximately $167,000. The Stock Purchase Agreement includes customary representations, warranties, and covenants by Johnson Controls and the Company, and an indemnity from the Company in favor of Johnson Controls.
In connection with the investment transactions, the Company also entered into an Investors Rights Agreement dated February 7, 2017 with Johnson Controls pursuant to which the Company granted Johnson Controls customary demand and piggyback registration rights, limited board observation rights and limited preemptive rights allowing Johnson Controls the right to purchase its proportional share of certain future equity issuances by the Company. The board observation and preemptive rights shall expire on the earlier of (i) such time as Johnson Controls no longer owns 50% of the acquired shares or (ii) the termination of both the Tolling/Lead Purchase Agreement and Equipment Supply Agreement.
There were no sales commissions paid by the Company in connection with the sale of its common shares to Johnson Controls.
Veolia Agreement
On February 26, 2019, the Company 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 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. 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.
During the year ended December 31, 2019, the Company issued 1,184,985 shares of common stock valued at $3.6 million to Veolia North America Regeneration Services, LLC pursuant to the Operations, Maintenance and Management Agreement between Veolia and the Company. As a result of the November 2019 fire at the McCarran facility, the Company has declared a force majeure event under the Agreement and suspended all further issuance of common stock.
2018 Public Offering
On June 18, 2018, the Company completed a public offering of 10,085,500 shares of its common stock, at the price of $2.85 per share, for gross proceeds of $28.7 million. After the payment of underwriter discounts and offering expenses, the Company received net proceeds of approximately $26.6 million.
2019 Public Offerings
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.
On May 14, 2019, the Company completed a public offering of 11,000,000 shares of its common stock, at the price of $2.00 per share, for gross proceeds of $22 million. After the payment of underwriter discounts and offering expenses, the Company received net proceeds of approximately $20.3 million.
Other shares issued
In January 2018, an overallotment related to a 2017 public offering was exercised resulting in 1,072,500 shares being issued and net proceeds of approximately $2.1 million.
The Company issued 65,600 shares of common stock upon vesting of Restricted Stock Units during the year ended December 31, 2018. Additionally, the Company issued 2,034 shares of common stock pursuant to the Officers and Directors Purchase Plan during the year ended December 31, 2018 for proceeds of $4,000.
The Company issued 152,727 shares of common stock in conjunction with consulting agreements during the fourth quarter of 2018 with a fair value of $0.4 million. Fair value was determined using the intrinsic value method: total number of shares issued under the consulting contract multiplied by the closing market price of the date of issuance.
During the year ended December 31, 2019, the Company issued 533,655 shares of common stock upon vesting of Restricted Stock Units granted by the Company.
During the year ended December 31, 2019, the Company issued 202,905 shares of common stock upon vesting of Restricted Stock Units granted to Board members.
During the year ended December 31, 2019, the Company issued 161,362 shares of common stock to prior Company executives to fulfill obligations related to separation agreements and other consulting services.
During the year ended December 31, 2019, the Company issued 807,436 shares of common stock valued at $1.3 million to Clarios pursuant to the Clarios Investor Rights Agreement dated February 7, 2017 between Clarios and the Company.
Warrants 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.
The following assumptions were used in the Black-Scholes-Merton pricing model to estimate the fair value of the warrants (FV of warrants in thousands).
The fair value of each of the warrants was recorded as increase to business development and management costs and increase in additional paid in-capital.
As noted in the preceding section, warrants to purchase 2,307,378 and 33,450 shares of the Company’s common stock were also issued for the Interstate Battery deal and the November 2016 Public Offering, respectively, during 2016. Please refer to the above section for specific valuation assumptions for these warrants.
Warrant modification
On June 24, 2018, the Company entered into a series of agreements with Interstate Battery, which modified the terms of a warrant to purchase 702,247 shares of our common stock by reducing the exercise price of the warrant from $7.12 per share to $3.33 per share and extended the expiration date of the warrant from June 24, 2018 to June 23, 2020. The expiration date had previously been extended from May 2018 to June 2018 as part of the overall negotiations. The incremental fair value resulting from this modification was calculated to be $1.0 million using the Black-Scholes-Merton Option Pricing Model with the assumptions as follows: $3.26 per share fair value on the date of modification; 2-year term; 80.2% volatility; 2.56% discount rate and 0% annual dividend rate.
The Company previously recorded $0.6 million in general and administrative expense during the year ended December 31, 2017 with the offset in accrued liabilities as an estimate of this liability. Upon modification, the Company recorded an additional $4 million in general and administrative expense for the three months ended June 30, 2018 and relieved $0.6 million in accrued liabilities with the $1.0 million offset to additional paid-in capital.
Warrants outstanding
Warrants outstanding to purchase shares of the Company’s common stock at a weighted average exercise price of $5.52 per share are as follows.
Stock-based compensation
In 2014, the Board of Directors adopted the Company’s stock incentive plan (the “2014 Plan”). The 2014 Plan was most recently amended and restated effective as of the Company’s 2017 Annual Stockholders’ Meeting. A total of 2,113,637 shares of common stock was authorized for issuance pursuant to the 2014 Plan at the time of its most recent amendment and restatement in 2017. The 2014 Plan provides for the following types of stock-based awards: incentive stock options; non-statutory stock options; restricted stock; and performance stock. The 2014 Plan, under which equity incentives may be granted to employees and directors under incentive and non-statutory agreements, requires that the option price may not be less than the fair value of the stock at the date the option is granted. Option awards are exercisable until their expiration, which may not exceed 10 years from the grant date.
In 2019, the Board of Directors adopted the Company’s stock incentive plan (the “2019 Plan”). A total of 4,500,000 shares of common stock was authorized for issuance pursuant to the 2019 Plan. The 2019 Plan provides for the following types of stock-based awards: incentive stock options; non-statutory stock options; restricted stock; and performance stock. The 2019 Plan, under which equity incentives may be granted to employees and directors under incentive and non-statutory agreements, requires that the option price may not be less than the fair value of the stock at the date the option is granted. Option awards are exercisable until their expiration, which may not exceed 10 years from the grant date.
Stock-based compensation expense recorded was allocated as follows (in thousands):
The following assumptions were used in the Black-Scholes-Merton option pricing model to estimate the fair value of the awards granted during the year ended December 31, 2019 and December 31, 2018.
The risk-free interest rate assumption was based on the United States Treasury’s zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The weighted-average expected life of the options was calculated using the simplified method as prescribed by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107 and No. 110 (“SAB No. 107 and 110”). This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, the estimated volatility also reflects the application of SAB No. 107 and 110, using the weighted average of the Company’s historical volatility and the historical volatility of several unrelated public companies within the recycling industry. Forfeitures are recognized as they occur.
The following table summarizes the stock-based compensation plan activity and related information through December 31, 2019.
The number of options granted during 2018 includes 840,000 options subject to the terms and conditions of the Company’s Amended and Restated 2014 Stock Incentive Plan (“2014 Plan) but were not issued under the 2014 Plan in reliance on Nasdaq Rule 5635(c)(4) and therefore does not reduce the number of shares available under the 2014 Plan.
The weighted-average grant-date fair value of options granted during the years ended December 31, 2019 and December 31, 2018 was $1.49 and $1.71 per share, respectively. There were no stock option exercises during the years ended December 31, 2019 and December 31, 2018.
Additional information related to the status of options at December 31, 2019 is as follows:
The intrinsic value of options is the fair value of the Company’s stock at December 31, 2019 less the per share exercise price of the option multiplied by the number of shares.
As of December 31, 2019, there is approximately $2.4 million of total unrecognized compensation cost related to the unvested share-based (option and RSU) compensation arrangements granted under the stock-based compensation plans. The remaining unrecognized compensation cost will be recognized over a weighted-average period of 3.5 years.
The following table summarizes information about stock options outstanding as of December 31, 2019:
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.
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.
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.
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.
In May 2019, the Company awarded options to the Directors to purchase up to 172,915 shares of the Company's common stock. The options vest equally over 12 months and are exercisable over a five-year period at an exercise price of $2.48 per share.
In July 2019, the Company awarded options to purchase up to 150,000 shares of the Company's common stock. The options vest equally over three years and are exercisable over a five-year period at an exercise price of $1.65 per share.
In July 2019, the Company awarded options to purchase up to 50,000 shares of the Company's common stock. The options vest equally over three years and are exercisable over a five-year period at an exercise price of $1.87 per share.
Restricted stock units
In January 2019, the Company granted 263,660 restricted stock units (RSUs), all of which were subject to vesting, with a grant fair value of $490,000 to the employees. The shares vest in six equal semi-annual installments over a three-year period.
In July 2019, the board of directors were granted 60,560 RSUs, all of which were subject to vesting, with a grant fair value of $97,500. The shares fully vest on September 30, 2019.
In August 2019, the Company granted 134,419 RSUs, all of which were subject to vesting, with a grant fair value of $231,000 to the employees. The shares vest in three equal installments over a twelve-month period.
In September 2019, Stephen Cotton, President and CEO, was granted 59,414 RSUs, all of which were subject to vesting, with a grant fair value of $109,000. The shares fully vest on March 20, 2020.
Total intrinsic value of RSUs vested and released during 2019 was $1.9 million. Intrinsic value of RSUs outstanding at December 31, 2019 was $0.2 million.
As of December 31, 2019, there is approximately $0.4 million of total unrecognized compensation cost related to the unvested share-based (RSU) compensation arrangements granted under the stock-based compensation plans. The remaining unrecognized compensation cost will be recognized over a weighted-average period of 3.8 years.
Reserved shares
At December 31, 2019, the Company has reserved shares of common stock for future issuance as follows:
Executive resignations
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, Selwyn Mould resigned as chief operating officer. Mr. Mould’s resignation as an officer 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 has 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 will 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 the 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.
Lease commitments
As discussed in Note 13, on August 7, 2015, the Company signed a lease for 21,697 square feet of mixed office and manufacturing space in Alameda, CA. On October 10, 2014, the Company entered into an operating lease for its current Oakland facility which expired in April 2018. The Company entered into a sublease agreement dated February 4, 2019 for the Alameda facility. The term of the sublease commenced on February 4, 2019, and ends on May 31, 2022. Total base rent payable by the sublessee through the end of the term of the sublease is approximately $1.5 million.
In July 2018, the Company signed a lease for 14,016 square feet of mixed office and warehouse space in McCarran, Nevada.
The future minimum payments related to these leases are as follows as of December 31, 2019 (in thousands):
During the years ended December 31, 2019 and December 31, 2018, the Company has incurred total rent expense of $0.6 million and $0.5 million, respectively.
Interstate Battery Agreement commitment
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.
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 had 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 agreed to settle the Clarios Key-man penalty claim through our issuance of 807,436 shares of our common stock, which we issued in June 2019.
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 us, 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-07142. 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 our securities between May 19, 2016 and November 9, 2017, against us, Stephen Clarke, Thomas Murphy and Selwyn Mould. The Amended Complaint alleges the defendants made false and misleading statements concerning our lead recycling operations in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder and 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 our lead recycling operations contained in, or incorporated by reference in, our Registration Statement on Form S-3 filed in connection with our 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 an Order dated August 14, 2019, the Court granted in part, and denied in part, the defendants’ motion to dismiss. The Court granted the motion to dismiss the Securities Act Section 11 claim and the Exchange Act Section 10(b) and Rule 10b-5 claim based on alleged false and misleading statements and gave the plaintiffs leave to amend to address the deficiencies. The Court denied the motion to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims regarding site visits. On September 20, 2019, the plaintiffs filed a Second Amended Complaint that dropped the Securities Act Section 11 claim but otherwise alleges the same claims as were alleged previously. The Second Amended Complaint seeks unspecified damages and plaintiffs’ attorneys’ fees and costs. On November 1, 2019, the defendants filed a motion to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims in the Second Amended Complaint based on alleged false and misleading statements, but not the claims regarding site visits. The motion is under consideration by the Court. We deny that the claims in the Second Amended Complaint have any merit and we intend 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 us and certain of our 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-00201-LPS (D. Del.). The complaints were filed by persons claiming to be stockholders of Aqua Metals and generally allege that certain of our officers and directors breached their fiduciary duties to us by violating the federal securities laws and exposing us 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 our motion to dismiss the Amended Complaint in the class action described above. The individual defendants deny that the claims in the shareholder derivative action have any merit and intend to vigorously defend the action.
A former employee has filed a complaint with Nevada OSHA claiming that he was wrongfully terminated for his protected activities related to safety. The matter is in the investigation stage where OSHA is gathering facts related to the employee’s claim. We are contesting the allegations by the employee. An evaluation of the likelihood of an unfavorable outcome cannot be made at this time.
We are not party to any other legal proceedings. We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we 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 our future financial position, results of operations or cash flows.
Related party transactions comprised the following for the years ended December 31, 2019 and December 31, 2018:
•A series of transactions with Interstate Battery and its affiliate, a greater than five percent owner of our common shares described at “Management’s Discussion and Analysis of Financial Condition and Results of Operations - General - Interstate Battery Partnership” in this Form 10-K.
The Company has adopted a policy that any transactions with directors, officers, beneficial owners of five percent or more of our common shares, any immediate family members of the foregoing or entities of which any of the foregoing are also officers or directors or in which they have a financial interest, will only be on terms consistent with industry standards and approved by a majority of the disinterested directors of our board.
Loss before income tax expense consists of the following (in thousands):
The components of the provision for income tax expense consist of the following (in thousands):
Reconciliation of the statutory federal income tax rates consist of the following :
The components of deferred tax assets (liabilities) included on the consolidated balance sheet are as follows (in thousands):
The Company’s effective tax rate for the year ended December 31, 2019 was lower than the statutory tax rate primarily because of the valuation allowance on its US deferred tax assets taxed at lower rates, partially offset by state taxes and tax credits. The income tax expense for the years ended December 31, 2019 and December 31, 2018 relate to state minimum income tax.
Based on the available objective evidence at this time, management believes that it is more likely than not that the net deferred tax assets of the Company will not be fully realized. Accordingly, management has applied a full valuation allowance against net deferred tax assets at both December 31, 2019 and December 31, 2018. The net valuation allowance increased by approximately $8.41 million during the year ended December 31, 2019. The increase in net valuation allowance primarily relates to net operating losses generated during 2019.
The Company has Federal and California net operating loss carry-forwards of approximately $94.1 million and $4.1 million, respectively, available to reduce future taxable income which will begin to expire in December 31, 2034 for Federal and California purposes.
At December 31, 2019, the Company had research and development credits carryforward of approximately $0.1 million and $0.5 million for Federal and California income tax purposes, respectively. If not utilized, the Federal research and development credits carryforward will begin to expire in December 31, 2034. The California credits can be carried forward indefinitely.
Utilization of the Company’s net operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of net operating loss carryforwards prior to utilization.
The Company’s policy is to account for interest and penalties as income tax expense. As of December 31, 2019, the Company had no interest related to unrecognized tax benefits. No amounts of penalties related to unrecognized tax benefits were recognized in the provision for income taxes.
The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgement and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income tax expense. At December 31, 2019, the Company’s total amount of unrecognized tax benefit was approximately $0.2 million, none of which will affect the effective tax rate, if recognized. The Company does not expect its unrecognized benefits to change materially over the next twelve months.
The Company files income tax returns with the United States federal government and the State of California. The Company’s tax returns for all prior years from the Company's inception in 2014 remain open to audit for Federal and California purposes.
The Company maintains a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who meet defined minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pretax basis. The Plan does not currently provide for matching contributions.
Quarterly Results of Operations (Unaudited)
The following table presents the unaudited statements of operations data for each of the eight quarters in the period ended December 31, 2019. The information has been presented on the same basis as the audited financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly the unaudited quarterly results when read in conjunction with the audited financial statements and related notes. The operating results for any quarter should not be relied upon as necessarily indicative of results for any future period.
Unaudited Quarterly Results of Operations
(in thousands, except share and per share amounts)
The Company has evaluated subsequent events through the date which the consolidated financial statements were available to be issued.
Equity Awards
In January 2019, the Company granted 1,548,253 RSUs to employees and directors primarily in connection with the Company's 2019 short-term incentive programs.
Insurance Proceeds
On January 30, 2020, the company announced that it had received a payment of $2.5 million related to the fire that occurred at the plant on November 29, 2019. This payment brought total insurance proceeds received to $5 million.
On March 11,2020, the company announced that it had received a payment of $5 million related to the fire that occurred at the plant on November 29, 2019. This payment brought total insurance proceeds received to $10 million.
Item 9.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our management, including our chief executive officer and chief financial officer, concluded that for the reasons described below our disclosure controls and procedures were effective as of December 31, 2019 in ensuring all material information required to be filed has been made known in a timely manner.
(b) Changes in internal control over financial reporting.
There were no changes to our internal control over financial reporting, as defined in Rules 13a-15(f) under the Exchange Act that occurred during the fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c)Management’s report on internal controls over financial reporting.
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined under Rule 15a-15(f) under the Exchange Act. Our management has assessed the effectiveness of our internal controls over financial reporting as of December 31, 2019 based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. An internal control material weakness is a significant deficiency, or aggregation of deficiencies, that does not reduce to a relatively low level the risk that material misstatements in financial statements will be prevented or detected on a timely basis by employees in the normal course of their work. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, and based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.
This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Item 9B.
Item 9B.Other Information
None.
PART III
The information required by Part III is omitted from this report because we will file a definitive proxy statement within 120 days after the end of our 2019 fiscal year pursuant to Regulation 14A for our 2020 Annual Meeting of Stockholders, or the 2020 Proxy Statement, and the information to be included in the 2020 Proxy Statement is incorporated herein by reference.
Item 10.
Item 10.Directors, Executive Officers and Corporate Governance
The information required by this item will be contained in the 2020 Proxy Statement and is hereby incorporated by reference.
The information required by this item will be contained in the 2020 Proxy Statement and is hereby incorporated by reference.
Item 12.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be contained in the 2020 Proxy Statement and is hereby incorporated by reference.
Item 13.
Item 13.Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be contained in the 2020 Proxy Statement and is hereby incorporated by reference.
Item 14.
Item 14.Principal Accountant Fees and Services
The information required by this item will be contained in the 2020 Proxy Statement and is hereby incorporated by reference.
PART IV
Item 15.
Item 15.Exhibits and Financial Statement Schedules
(a)Financial statements
Reference is made to the Index and Financial Statements under Item 8 in Part II hereof where these documents are listed.
(b)Financial statement schedules
Financial statement schedules are either not required or the required information is included in the consolidated financial statements or notes thereto filed under Item 8 in Part II hereof.
(c)Exhibits
The exhibits to this Annual Report on Form 10-K are set forth below. The exhibit index indicates each management contract or compensatory plan or arrangement required to be filed as an exhibit.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document Filed electronically herewith
* Indicates management compensatory plan, contract or arrangement.
+ Certain portions of the exhibit have been omitted pursuant to Registrant’s confidential treatment request filed with the Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. The omitted text has been filed separately with the Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.