FORM 10-Q 

 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the Quarterly Period Ended March 31, 2017

  

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  

For the transition period from             to             .

  

Commission file number: 001-37515

  

Aqua Metals, Inc.

(Exact name of registrant as specified in its charter)

  

Delaware   47-1169572

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification no.)

  

1010 Atlantic Avenue 

Alameda, California 94501 

(Address of principal executive offices, including zip code)

 

(510) 479-7635 

(Registrant’s telephone number, including area code)

 

Not Applicable 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No 

  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):

  

Large accelerated filer ¨   Accelerated filer x
     
Non-accelerated filer ¨   Smaller reporting company ¨
(Do not check if a smaller reporting company)    
    Emerging growth company x

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x

  

As of May 8, 2017, there were 20,141,636 outstanding shares of the common stock of Aqua Metals, Inc.

 

 

 

  

    Page
     
  PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Condensed Consolidated Balance Sheets 1
     
  Condensed Consolidated Statements of Operations 2
     
  Condensed Consolidated Statement of Stockholders’ Equity 3
     
  Condensed Consolidated Statements of Cash Flows 4
     
  Notes to Condensed Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
     
Item 4. Controls and Procedures 17
     
  PART II - OTHER INFORMATION  
     
Item 1A Risk Factors 18
     
Item 6. Exhibits 19

 

 

 

 

PART I - FINANCIAL INFORMATION

 

Item1.          Financial Statements

AQUA METALS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

   March 31, 2017   December 31, 2016 
   (unaudited)   (Note 2) 
ASSETS          
Current assets          
Cash and cash equivalents  $30,113   $25,458 
Restricted cash   576    1,124 
Inventory   297    59 
Prepaid expenses and other current assets   1,030    729 
Total current assets   32,016    27,370 
           
Non-current assets          
Property and equipment, net   43,622    41,392 
Intellectual property, net   1,144    1,137 
Other assets   1,675    1,630 
Total non-current assets   46,441    44,159 
           
Total assets  $78,457   $71,529 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities          
Accounts payable  $2,640   $1,572 
Accrued expenses   1,154    1,975 
Deferred rent, current portion   180    177 
Notes payable, current portion   314    307 
Total current liabilities   4,288    4,031 
           
Deferred rent, non-current portion   917    963 
Asset retirement obligation   670    - 
Notes payable, non-current portion   9,164    9,238 
Convertible note payable, non-current portion   507    307 
Total liabilities   15,546    14,539 
           
Commitments and contingencies   -    - 
           
Stockholders' equity          
Common stock; $0.001 par value; 50,000,000 shares authorized; 19,960,356 and 17,878,725 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively   20    18 
Additional paid-in capital   96,047    85,234 
Accumulated deficit   (33,156)   (28,262)
Total stockholders' equity   62,911    56,990 
           
Total liabilities and stockholders' equity  $78,457   $71,529 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 1 

 

 

AQUA METALS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)

 

 

   Three months ended March 31, 
   2017   2016 
         
Operating Expense          
Operations and development costs  $2,987   $883 
General and administrative expense   1,528    1,295 
Total operating expenses   4,515    2,178 
           
Loss from operations   (4,515)   (2,178)
           
Other income and expenses          
Interest expense   (388)   (2)
Interest and other income   11    7 
           
Total other income (expense), net   (377)   5 
           
Loss before income tax expense   (4,892)   (2,173)
           
Income tax expense   (2)   (1)
           
Net loss  $(4,894)  $(2,174)
           
Weighted average shares outstanding, basic and diluted   18,792,850    14,137,442 
           
Basic and diluted net loss per share  $(0.26)  $(0.15)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 2 

 

 

AQUA METALS, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands, except share amounts)

(Unaudited)

 

           Additional       Total 
   Common Stock   Paid-in   Accumulated   Stockholders' 
   Shares   Amount   Capital   Deficit   Equity 
                     
Balances, December 31, 2016   17,878,725   $18   $85,234   $(28,262)  $56,990 
                          
Stock based compensation - stock options   -    -    161    -    161 
Cashless exercise of warrants   1,121,353    1    (1)   -    - 
Exercise of warrants to purchase common stock   2,500    -    15    -    15 
Exercise of options to purchase common stock   18,773    -    67    -    67 
Common stock issued for cash in February 2017 from Johnson Controls, net of $67 transaction cost   939,005    1    10,571    -    10,572 
Net loss   -    -    -    (4,894)   (4,894)
                          
Balances, March 31, 2017   19,960,356   $20   $96,047   $(33,156)  $62,911 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 3 

 

  

AQUA METALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   Three months ended March 31, 
   2017   2016 
Cash flows from operating activities:          
Net loss  $(4,894)  $(2,174)
Reconciliation of net loss to net cash used in operating activities          
Depreciation   665    78 
Amortization of intellectual property   36    31 
Fair value of warrants issued for consulting services   -    15 
Stock option compensation   161    208 
Amortization of debt discount   42    - 
Amortization of deferred financing costs   22    9 
Non-cash convertible note interest expense   146    - 
Changes in operating assets and liabilities          
Inventory   (238)   - 
Prepaid expenses and other current assets   (301)   (18)
Accounts payable   307    89 
Accrued expenses   (53)   84 
Deferred rent   (43)   78 
Net cash used in operating activities   (4,150)   (1,600)
           
Cash flows from investing activities:          
Decrease in restricted cash   548    1,131 
Purchases of property and equipment   (2,232)   (4,396)
Other assets   (45)   - 
Intellectual property related expenditures   (43)   (28)
Net cash used in investing activities   (1,772)   (3,293)
           
Cash flows from financing activities:          
Proceeds from issuance of common stock, net of transaction costs   10,654    - 
Payments on notes payable   (44)   - 
Payments on capital leases   (33)   (4)
Net cash provided by (used in) financing activities   10,577    (4)
           
Net increase (decrease) in cash and cash equivalents   4,655    (4,897)
Cash and cash equivalents at beginning of period   25,458    20,141 
           
Cash and cash equivalents at end of period  $30,113   $15,244 

 

   Three months ended March 31, 
   2017   2016 
Non-cash investing activities          
Tenant improvement allowances  $-   $78 
           
Non-cash financing activities          
Capital lease  $-   $101 
           
Supplemental disclosure of non-cash transactions          
Increase in property and equipment resulting from increase in accounts payable  $761   $3,066 
Change in property and equipment resulting from change in accrued expenses  $(768)  $1,046 
Decrease in restricted cash resulting from a decrease in accounts payable  $-   $2,644 
Asset retirement obligation offset with asset retirement cost (property and equipment)  $670   $- 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 4 

 

 

AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.Organization

 

Aqua Metals, Inc. (the “Company”) was incorporated in Delaware and commenced operations on June 20, 2014 (inception). On January 27, 2015, the Company formed two wholly-owned subsidiaries, Aqua Metals Reno, Inc. (“AMR”), and Aqua Metals Operations, Inc. (collectively, the “Subsidiaries”), both incorporated in Delaware. The Company is reinventing lead recycling with its patent-pending AquaRefiningTM technology. Unlike smelting, AquaRefining is a room temperature, water-based process that is fundamentally non-polluting. These modular systems allow the lead-acid battery industry to simultaneously improve environmental impact and scale recycling production to meet demand. The Company intends to manufacture the equipment it has developed, and will also operate lead acid battery recycling facilities.

 

2.Summary of Significant Accounting Policies

 

The significant accounting policies and estimates used in preparation of the condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission, or the SEC, on March 2, 2017. There have been no material changes in the Company’s significant accounting policies during the three months ended March 31, 2017 except for the addition of Asset Retirement Obligations, as described below.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”) and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by such accounting principles for complete financial statements. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary to present fairly each of the condensed consolidated balance sheet as of March 31, 2017, the condensed consolidated statements of operations for the three months ended March 31, 2017 and March 31, 2016, the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2017 and the statements of cash flows for the three months ended March 31, 2017 and March 31, 2016, as applicable have been made. The condensed consolidated balance sheet as of December 31, 2016 has been derived from our audited financial statements as of such date, but does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the period ended December 31, 2016, which are included on Form 10-K filed with the Securities and Exchange Commission on March 2, 2017.

 

The results of operations for the three months ended March 31, 2017 are not necessarily indicative of results that may be expected for the year ended December 31, 2017.

 

Principles of consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its Subsidiaries, both of which are wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation.

 

Use of estimates

 

The preparation of the condensed consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount and valuation of long-lived assets, the valuation of conversion features of convertible debt, valuation allowances for deferred tax assets, the determination of stock option expense and the determination of the fair value of stock warrants issued. Actual results could differ from those estimates.

 

 5 

 

  

AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Asset retirement obligations

 

The Company records the fair value of estimated asset retirement obligations (ARO) 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 interest 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.

 

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. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience.

  

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 as 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.

 

   Three months ended 
   March 31, 
   2017   2016 
Excluded potentially dilutive securities (1):          
           
Convertible note - principal   702,247    - 
Consulting warrants to purchase common stock   12,500    491,364 
Options to purchase common stock   892,129    767,074 
Financing and IPO warrants to purchase common stock   2,384,464    975,380 
Total potential dilutive securities   3,991,340    2,233,818 

 

(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.

 

 6 

 

 

AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Recent accounting pronouncements

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The amendment to the standard is effective for the Company beginning on June 1, 2018. While the Company is currently assessing the impact of the new standard, it does not expect this new guidance to have a material impact on its consolidated financial statements.

 

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 is effective on January 1, 2019, with early adoption permitted. The Company is in the process of evaluating the impact of this new guidance.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which simplifies certain elements of cash flow classification. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of the ASU will have on its consolidated financial statements.

 

There were no other recent accounting pronouncements or changes in accounting pronouncements during the year ended March 31, 2017 that are of significance or potential significance to the Company.

 

3.Inventory

 

Inventory consisted of the following (in thousands):

 

   March 31,   December 31, 
   2017   2016 
         
Finished goods  $123   $- 
Work in process   96    - 
Raw materials   78    59 
    297    59 

 

 7 

 

 

AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

4.Property and equipment, net

 

Property and equipment, net, consisted of the following (in thousands):

 

   Useful Life   March 31,   December 31, 
Asset Class  (Years)   2017   2016 
             
Operational equipment   3-10   $15,742   $15,132 
Lab equipment   5    551    547 
Computer equipment   3    156    140 
Office furniture and equipment   5    300    298 
Leasehold improvements   5-7    1,408    1,408 
Land   -    1,048    1,047 
Building   39    23,447    21,962 
Asset Retirement Cost   20    670    - 
Equipment under construction   10    1,742    1,635 
         45,064    42,169 
Less:  accumulated depreciation        (1,442)   (777)
                
        $43,622   $41,392 

 

Depreciation expense was $665,000 and $78,000 for the three months ended March 31, 2017 and March 31, 2016, respectively. The building is a 136,750 square foot lead acid battery recycling plant being built in McCarran, Nevada. Equipment under construction is primarily AquaRefining modules manufactured by the Company to be used in the McCarran, Nevada recycling plant.

 

Certain costs necessary to make the recycling facility ready for its intended use have been capitalized, including interest expense on notes payable. Capitalized interest totaled $152,000 for the three months ended March 31, 2016. Capitalization of interest ceased upon completion of the building in early November 2016.

  

5.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 is incurred, in an amount equal to the discounted estimated fair value of the obligation that is capitalized. In each subsequent fiscal quarter, this liability is accreted up to the final retirement cost. The determination of the ARO is based on an estimate of the future cost to remove and decontaminate the McCarran facility upon closure. The actual costs could be higher or lower than current estimates. The discounted estimated fair value of the closure costs is $670,000 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 4 above, an asset retirement cost of the same amount that has been capitalized. The estimated fair value of the closure costs is based on vendor quotes to remove and decontaminate the McCarran facility in accordance with the Company’s closure plan as filed with the State of Nevada in its “Application for the Recycling of Hazardous Waste, by Written Determination” in 2016. The Company has entered into a facility closure trust agreement for the benefit of the Nevada Division of Environmental Protection (NDEP), an agency of the Nevada Division of Conservation and Natural Resources. Funds deposited in the Trust are to be available when and if needed, for potential decontamination and hazardous material cleanup in connection with the closure and/or post-closure care of the facility. The trustee will reimburse the Company or other persons as specified by the NDEP from the fund for closure and post-closure expenditures in such amounts as the NDEP shall direct in writing. $100,000 was contributed to the Trust Fund on October 31, 2016 and is included in Other Assets on the condensed consolidated balance sheet; $350,000 will be due and payable on October 31, 2017, and $220,000 will be due on October 31, 2018.

 

 8 

 

 

AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

6.Convertible Notes

 

Convertible note payable is comprised of the following (in thousands):

 

   March 31,   December 31, 
   2017   2016 
         
Convertible note payable  $5,000   $5,000 
Accrued interest   489    343 
Deferred financing costs, net   (103)   (115)
Note discount   (4,879)   (4,921)
           
Convertible note payable, non-current portion  $507   $307 

 

 

7Notes Payable

 

AMR entered into a $10,000,000 loan with Green Bank on November 3, 2015. The term of the loan is twenty-one years. During the first twelve months, only interest was payable and thereafter monthly payments of interest and principal are due. The interest rate will adjust 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 the three months ended March 31, 2017. The Company has received a waiver for the minimum debt service coverage ratio covenant for the periods ending March 31, 2017 and June 30, 2017.

 

The net proceeds of the loan were deposited into an escrow account at Green Bank. The funds are being released as payment for the building being constructed in McCarran, NV to house AMR’s lead acid recycling operation. Collateral for this loan is AMR’s accounts receivable, goods, equipment, fixtures, inventory, accessions and a certificate of deposit in the amount of $1,000,000.

 

The loan is guaranteed by the United States Department of Agriculture Rural Development (“USDA”), in the amount of 90% of the principal amount of the loan. The Company paid a guarantee fee to the USDA in the amount of $270,000 at the time of closing and will be 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.

 

Notes payable is comprised of the following (in thousands):

 

   March 31,   December 31, 
   2017   2016 
         
Notes payable, current portion          
Thermo Fisher Financial Service  $141   $137 
Green Bank, net of issuance costs   173    170 
   $314   $307 
           
Notes payable, non-current portion          
Thermo Fisher Financial Service  $101   $138 
Green Bank, net of issuance costs   9,063    9,100 
   $9,164   $9,238 

 

The Thermo Fisher Financial Service obligations relate to capital leases. 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.

 

 9 

 

 

AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

8.Stockholders’ Equity

 

Investment Agreement

 

On February 7, 2017, the Company entered into a Stock Purchase Agreement with Johnson Controls 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 the gross proceeds of approximately $10.6 million. The Stock Purchase Agreement includes customary representations, warranties, and covenants by Johnson Controls and us, 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 our common shares to Johnson Controls.

 

Warrants exercised

 

During the three months ended March 31, 2017, 1,123,853 shares were issued pursuant to cash and cashless warrant exercises as detailed below. Generally, the warrants specify using the preceding five-day average of closing prices for the Company’s common stock in the calculation of common stock to be issued pursuant to a cashless exercise.

 

   Average Closing       Warrant   Common 
   Market Price   Exercise Price   Shares   Shares 
Date  Per Share   Per Share   Exercised   Issued 
                 
2/10/2017  $11.016   $0.0034375    392,728    392,605 
2/13/2017  $13.062   $3.00    25,119    19,349 
2/13/2017  $13.062   $6.00    72,420    39,154 
2/15/2017  $16.768   $6.00    65,177    41,856 
2/16/2017  $16.768   $6.00    35,000    22,470 
3/17/2017  $20.262   $6.00    2,500    2,500 
3/20/2017  $20.304   $3.00    226,068    192,666 
3/20/2017  $20.304   $6.00    586,596    413,253 
                     
              1,405,608    1,123,853 

 

 10 

 

 

AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Warrants outstanding

 

Warrants to purchase shares of the Company’s common stock at a weighted average exercise price of $8.28 are as follows.

 

Exercise Price   Expiration  Shares Subject to purchase 
per Share   Date  at March 31, 2017 
           
$0.0034375   9/8/2017   43,636 
$6.00   7/31/2018   12,500 
$7.12   5/18/2018   702,247 
$9.00   5/18/2019   1,605,131 
$10.00   11/21/2019   33,450 
           
         2,396,964 

 

Subsequent to March 31, 2017, 51,943 shares were issued pursuant to cashless warrant exercises of 56,136 warrants (the first two lines above).

 

Stock based compensation

 

The stock-based compensation expense attributable to option grants granted was allocated as follows:

 

   Three months ended March 31, 
   2017   2016 
Operations and development costs  $87   $51 
General and administrative expense   74    157 
Total  $161   $208 

 

 

The following assumptions were used in the Black-Scholes-Merton pricing model to estimate the fair value of the options.

 

   Three months ended March 31, 
   2017   2016 
         
Expected stock volatility   70.92% - 72.18%   80%
Risk free interest rate   1.53% - 1.79%   1.11% - 1.77%
Expected years until exercise   3.50    3.50 
Dividend yield   0%   0%

  

The Company issued 18,773 shares of common stock for the three months ended March 31, 2017 upon stock option exercises.

 

9.Commitments and Contingencies

 

Interstate Battery Agreement commitment

 

Pursuant to the Interstate Battery Investor Rights Agreement, the Company has agreed to compensate Interstate Battery should either Stephen Clarke, the Company’s current chief executive officer, or Selwyn Mould, the Company’s 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 Interstate Battery $2.0 million, per occurrence, if either officer is subject to a key-man event during the two years following May 18, 2016. The Company also agreed to pay Interstate Battery $2.0 million if either or both officers are subject to a key-man event during the third year following May18, 2016.

 

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Johnson Controls Agreement Commitment

 

Pursuant to the Johnson Controls Investor Rights Agreement, the Company has agreed to compensate Johnson Controls should either Stephen Clarke, the Company’s current chief executive officer, or Selwyn Mould, the Company’s 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 Johnson Controls $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 Johnson Controls $1.0 million if either or both key-man events occur after 18 months and prior to 30 months following February 7, 2017.

 

10.Subsequent Events

 

The Company has evaluated subsequent events through the date which the condensed consolidated financial statements were available to be issued.

 

On April 13, 2017, when the closing market price of our stock was $17.36, we entered into an agreement to purchase all of the capital shares of Ebonex IPR Limited, a company registered in England and Wales. Ebonex IPR Limited is a pre-revenue IP-based company that has developed patented technology in the field of advanced materials and manufacturing methods for advanced lead acid batteries. In consideration of our acquisition of all of the capital shares of Ebonex IPR Limited, we paid $100,000 in cash and issued 123,776 shares of our common stock. The agreement contains customary representations, warranties and indemnities.

 

 12 

 

  

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement

 

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other filings with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 2, 2017, or our Annual Report.

 

In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the SEC, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives.

 

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties, including those risks included in the section “Risk Factors” set forth in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 2, 2017. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

 

General

 

Aqua Metals (NASDAQ: AQMS) is reinventing lead recycling with its patent-pending AquaRefining technology. Unlike smelting, AquaRefining is a room temperature, water-based process that is fundamentally non-polluting. These modular systems allow the lead-acid battery industry to simultaneously improve environmental impact and scale recycling production to meet demand. Aqua Metals is based in Alameda, California, and has built its first recycling facility in Nevada's Tahoe Reno Industrial Complex. 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 development of our business plan, the raise of our present working capital and the development of our initial lead acid battery, or LAB, recycling facility in the Tahoe Regional Industrial Center, McCarran, Nevada (“TRIC”).

 

We have completed the development of our initial LAB recycling facility at TRIC and commenced production during January 2017. Lead compounds and plastic produced in the quarter were not shipped as details were still being worked out for delivery to customers. Shipments began in April 2017. We expect TRIC to achieve a production rate of 120 metric tons of recycled lead per day by the end of 2017.

 

Since our organization in 2014, we have engaged in the following financing transactions:

 

Convertible Note Placement. Prior to our initial public offering, we capitalized our operations with equity contributions and advances from our founders, our receipt of a $0.5 million investment from Wirtz Manufacturing Co. Inc. and our receipt of $5.5 million of capital from our private placement sale of senior secured convertible promissory notes, which we refer to as our “convertible notes”, in October 2014. Pursuant to the terms of our investment agreement with Wirtz Manufacturing Co. Inc., Wirtz exchanged its investment in our company for a convertible note sold in the October 2014 private placement. As a result, we had issued and outstanding convertible notes in the aggregate principal amount of $6.0 million, with accrued and unpaid interest as of August 5, 2015 in the amount of $0.3 million. All principal and accrued interest under the convertible notes converted into shares of our common stock at the close of our initial public offering on August 5, 2015.

 

Initial Public Offering. On July 31, 2015, we conducted an initial public offering of 6.6 million shares of our common stock, at the public offering price of $5.00 per share. After the payment of underwriter discounts and offering expenses, and after giving effect to the underwriters’ exercise of its overallotment option on August 13, 2015 to purchase an additional 641,930 shares of our common stock at the offering price of $5.00 per share, we received net proceeds of approximately $32.9 million.

 

 13 

 

 

Pursuant to the terms of the above convertible notes, all principal and interest under the convertible notes automatically converted into shares of our common stock upon the completion of the initial public offering at the conversion price of $2.50 per share. As of the close of our initial public offering, all principal and interest, including $6.0 million of principal and $0.3 million of accrued interest, under the convertible notes automatically converted into 2,511,871 shares of our common stock.

 

Green Bank Loan.   On November 3, 2015, Aqua Metals Reno, Inc., our wholly-owned subsidiary, entered into a Loan Agreement with Green Bank, N.A. pursuant to which Green Bank provided us with a loan in the amount of $10.0 million.  The loan proceeds were applied towards the development of our TRIC facility.  The loan accrues interest at an annual rate of the Wall Street Journal Prime Rate Index plus a margin of 2.00% per year, adjusted quarterly, with a floor rate of 6.00% per year.  Interest-only payments were due monthly for the first twelve months.  Thereafter, principal and interest are due monthly and are fully amortized over 20 years.  The loan is collateralized by the real estate, plant and fixtures at the TRIC facility and a certificate of deposit of $1.0 million at Green Bank.  Additionally, the terms of the Loan Agreement contain various affirmative and negative covenants.  Among them, Aqua Metals Reno, Inc. must maintain a minimum debt service coverage ratio of 1.25 to 1.0, a maximum debt-to-net worth ratio of 1.0 to 1.0 and a minimum current ratio of 1.5 to 1.0.

 

The loan is guaranteed by the United States Department of Agriculture Rural Development, or USDA, in the amount of 90% of the principal amount of the loan.  We paid a guarantee fee to USDA in the amount of $270,000 at the time of closing of the Loan Agreement and we will be required to pay to USDA an annual renewal 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.

 

Interstate Battery Investment. On May 18, 2016, we entered into definitive agreements with Interstate Battery System International, Inc. (“Interstate Battery”) and other investors for the sale of approximately $15.1 million of our equity and debt securities, including a $10.0 million investment by Interstate Battery, the largest independent battery distributor in North America. At the same time, we also entered into a supply agreement with Interstate Battery pursuant to which Interstate Battery will supply us with used LABs as feedstock for our AquaRefineries. The investment transactions closed on May 24, 2016.

 

Pursuant to the investment agreements with Interstate Battery, Interstate Battery:

·Purchased 702,247 shares of our common stock at $7.12 per share for the gross proceeds of approximately $5.0 million; and
·Loaned us $5.0 million pursuant to a secured convertible promissory in the original principal amount of $5.0 million. The note will bear interest at the rate of eleven percent (11%) per annum, compounding monthly, and all interest shall be payable upon the earlier of maturity or conversion of the principal amount. The outstanding principal is convertible into our common shares at a conversion price of $7.12 per share. Our obligations under the loan are secured by a second priority lien interest on our assets, other than our intellectual property. The loan will mature on May 18, 2019.

 

In connection with the agreements, we granted Interstate Battery warrants to purchase our common stock, including:

·a fully vested warrant to purchase 702,247 shares of our common stock, at an exercise price of $7.12 per share, expiring on May 24, 2018; and
·a warrant to purchase 1,605,131 shares of our common stock, at an exercise price of $9.00 per share, vesting on November 16, 2016 and expiring on May 24, 2019.

 

We granted Interstate Battery customary demand and piggyback registration rights, limited board observation rights over the next three years and limited preemptive rights allowing it to purchase its proportional share of certain future equity issuances by us over the next three years. We included all of the Interstate Battery shares in our Form S-3 Registration Statement filed with the Securities and Exchange Commission on August 1, 2016.

 

If Interstate Battery were to convert its convertible note and exercise both warrants in their entirety as of the date of this report, it would own approximately 16.6% of the common stock of Aqua Metals at an average price per share of approximately $7.93.

 

We also entered into a definitive agreement with certain accredited investors to sell approximately $5.1 million of our common stock through National Securities Corporation as placement agent. Pursuant to this agreement, we sold 719,333 of shares of our common stock, at the price of $7.12 per share, for gross proceeds of approximately $5.1 million.

 

Public Offering. On November 21, 2016, we completed a public offering of 2.3 million shares of our common stock, at the public offering price of $10.00 per share, for gross proceeds of $23.0 million. The completed offering includes shares issued by the exercise in full of the underwriter’s overallotment option. After the payment of underwriter discounts and offering expenses we received net proceeds of approximately $21.5 million. In connection with the underwritering agreement, we issued a warrant for 33,450 shares of our common stock, at an exercise price of $10.00 per share, exercisable commencing on May 20, 2017 and expiring on November 21, 2019.

 

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Johnson Controls Investment. In connection with our entry into the equipment supply agreement and tolling/lead purchase agreement with Johnson Controls, on February 7, 2017, we entered into a stock purchase agreement with Johnson Controls pursuant to which we sold to Johnson Controls 939,005 shares of our common stock at $11.33 per share for the gross proceeds of approximately $10.6 million. We granted Johnson Controls customary demand and piggyback registration rights, limited board observation rights and limited preemptive rights allowing it to purchase its proportional share of certain future equity issuances by us. We included all of the Johnson Controls shares in our Form S-3 Registration Statement filed with the Securities and Exchange Commission on February 27, 2017.

 

Plan of Operations

 

We have completed the development of our initial LAB recycling facility at TRIC and commenced production during January 2017. Our plan of operations for the 12-month period following the date of this report is to expand operations at our first recycling facility at TRIC to 120 tonnes of lead production per day by the end of 2017. In the longer term, our goal is to increase our production of lead at our TRIC facility to 160 tonnes per day. Our 12-month plan of operations also includes our collaboration with Johnson Controls for the development of a program for the installation of new greenfield builds and conversion of Johnson Controls and certain strategic partners of Johnson Controls’ existing lead smelters throughout North America, China and Europe to a lead recycling process utilizing our proprietary and patent-pending AquaRefining technology and equipment, know-how and services. Finally, our 12-month plan of operations includes our continued pursuit of the expansion of our business with additional recycling facilities and licensing of our recycling technology and equipment to third parties.

 

Separately, we continue to pursue providers of non-dilutive capital to finance up to an additional four facilities, each of which would have a production capacity of approximately 160 tonnes per day. Through the supply and off-take relationships that we have established with Battery Systems Inc., Interstate Battery and Johnson Controls, we believe we are better positioned to acquire the necessary funding, including potential forms of non-diluting financing, in order to finance our next facilities. However, as of the date of this report, we have no formal agreements with regard to the financing and there can be no assurance that we will be able to consummate an agreement on terms acceptable to us, or at all.

 

Results of Operations

 

To date, our operations have consisted of the development and limited testing of our AquaRefining process, the development of our business plan, the raise of our present working capital and the development of our initial lead acid battery, or LAB, recycling facility near Reno, Nevada. The following table summarizes results of operations with respect to the items set forth below for the three months ended March 31, 2017 and 2016 together with the percentage change in those items (in thousands).

 

   Three months ended March 31, 
           Favorable   % 
   2017   2016   (Unfavorable)   Change 
                 
Operations and development costs  $2,987   $883   $(2,104)   -238.28%
General and administrative expense   1,528    1,295    (233)   -17.99%

 

 

Operations and development costs have more than tripled over the comparative period. The increase is due to the increased level of operations following the ramp up of operations at our plant in TRIC. Salary related expenses have tripled for the three-month period in 2017 compared to 2016. Average head-count has increased four-fold from the previous period, however the more recent hires are more junior-level employees, somewhat reducing the per person cost of labor. Our research and development expenses have doubled for the three-month period ended March 31, 2017 compared to the previous period and includes costs incurred to prepare our TRIC plant for operations. Other increases include professional services, depreciation, insurance, travel and general overhead costs due to our increased activities.

 

General and administrative expense has increased to $1.5 million from $1.3 million, or 18%, during the three-month period ended March 31, 2017 compared to the prior year period. Average headcount has increased by 12.5% between periods; additional increases are due to professional services, including third-party consulting, and smaller increases in depreciation, travel, insurance and general overhead costs.

 

 15 

 

 

   Three months ended September 30, 
       Favorable   % 
   2017   2016   (Unfavorable)   Change 
Other (expense) income                    
                     
Interest expense   (388)   (2)   386    19300.00%
Interest income   11    7    (4)   57.14%

 

Interest during the three months ended March 31, 2017 relates primarily to the $5.0 million Interstate Battery convertible note and the $10.0 million notes payable, 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. Interest relating to the $10.0 million notes payable during the three-month period ended March 31, 2016 was capitalized as part of the building cost of the TRIC facility in the amount of $152,000. Interest capitalization ceased upon completion of the building in November 2016.

 

The note discount associated with the Interstate Battery convertible note is being amortized using the effective interest method over the three-year term of the note, maturing on May 24, 2019. Using the effective interest method results in higher expense in later periods. Thus, non-cash interest expense associated with the note discount amortization will be $360,000 in 2017, $2.0 million in 2018 and $2.6 million in 2019.

 

Liquidity and Capital Resources

 

As of March 31, 2017, we had total assets of $78.5 million and working capital of $27.7 million.

 

The following table summarizes our cash used in operating, investing and financing activities (in thousands):

 

   Three months ended March 31, 
   2017   2016 
         
Net cash used in operating activities   (4,150)   (1,600)
Net cash used in investing activities   (1,772)   (3,293)
Net cash provided by (used in) financing activities   10,577    (4)

 

Net cash used in operating activities

 

Net cash used in operating activities for the three months ended March 31, 2017 and 2016 was $4.2 million and $1.6 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, as well as net changes in working capital.

 

Net cash used in investing activities

 

Net cash used in investing activities for the three months ended March 31, 2017 and 2016 was $1.8 million and $3.3 million, respectively. Net cash used in investing activities during each of these periods consists primarily of purchases of fixed assets related to the build out of our TRIC recycling facility in Nevada and, to a lesser extent, our corporate headquarters.

 

Net cash provided by (used in) financing activities

 

Net cash provided by financing activities for the three months ended March 31, 2017 primarily consists of $10.6 million net proceeds from the issuance of common stock to Johnson Controls partially offset by lease and debt payments. Net cash used by financing activities for the three months ended March 31, 2016 consisted of lease payments on capital leases.

 

As of the date of this report, we believe that our working capital is sufficient to fund our current business plan over the next 12 months, including the attainment of production at the rate of 120 tonnes of recycled lead per day by the end of 2017. However, we will require additional capital in order to fund our proposed development of additional AquaRefining recycling facilities. We intend to seek additional funds through various financing sources, including the sale of our equity and debt securities, licensing fees for our technology, joint ventures with capital partners and/or project financing of our recycling facilities. However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to further pursue our business plan and we may be unable to continue operations.

 

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Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet financing arrangements.

 

Item 3.Quantitative and Qualitative Disclosures about Market Risks

 

Not applicable.

 

Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of March 31, 2017.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the three-month period ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1A.Risk Factors

 

There have been no material changes from the risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 3, 2017.

 

 18 

 

 

Item 6.Exhibits

 

Exhibit

No.

  Description   Method of Filing
         
3.1   First Amended and Restated Certificate of Incorporation of the Registrant   Incorporated by reference from the Registrant’s Registration Statement on Form S-1 filed on July 22, 2015.
         
3.2   Amended and Restated Bylaws of the Registrant   Incorporated by reference from the Registrant’s Registration Statement on Form S-1 filed on June 9, 2015.
         
3.3   Certificate of Amendment to First Amended and Restated Certificate of Incorporation of the Registrant   Incorporated by reference from the Registrant’s Registration Statement on Form S-1 filed on June 9, 2015.
         
10.1*   Tolling/Lead Purchase Agreement dated February 7, 2017 between the Registrant and Johnson Controls Battery Group, Inc.   Filed electronically herewith
         
10.2*   Equipment Supply Agreement dated February 7, 2017 between the Registrant and Johnson Controls Battery Group, Inc.   Filed electronically herewith
         
10.3   Stock Purchase Agreement dated February 7, 2017 between the Registrant and Tyco International Finance S.A.   Filed electronically herewith
         
10.4   Investor Rights Agreement dated February 7, 2017 between the Registrant and Tyco International Finance S.A.   Incorporated by reference from the Registrant’s Registration Statement on Form S-3 filed on February 27, 2017
         
31.1   Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed electronically herewith
         
31.2   Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed electronically herewith
         
32.1   Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).   Filed electronically herewith
         
101.INS   XBRL Instance Document   Filed electronically herewith  
         
101.SCH   XBRL Taxonomy Extension Schema Document   Filed electronically herewith
         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   Filed electronically herewith
         
101.LAB   XBRL Taxonomy Extension Label Linkbase Document   Filed electronically herewith
         
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document     Filed electronically herewith
         
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document     Filed electronically herewith
         

 

*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.

 

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SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    AQUA METALS, INC.
     
Date: May 10, 2017 By: /s/ Stephen R. Clarke
      Stephen R. Clarke,
      President and Chief Executive Officer
       
       
Date: May 10, 2017 By: /s/ Thomas Murphy
      Thomas Murphy,
      Chief Financial Officer