Annual report pursuant to Section 13 and 15(d)

Stockholders' Equity

Stockholders' Equity

12 Months Ended

Dec. 31, 2019


14.			Stockholders’ Equity

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).


	Warrant #1			Warrant #2
Warrant shares issued	702,247			1,605,131
Market price	$	11.39		$	11.39
Exercise price	$	7.12		$	9.00
Term (years)	2 years			3 years
Risk-free interest rate	0.91		%	1.05		%
Volatility	65.70		%	67.80		%
Dividend rate	—		%	—		%
Per share FV of warrant	$	5.89		$	5.89
FV of warrant	$	4,136		$	9,450

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).


	Fair value		Allocated value

Allocation of Proceeds
Convertible note	$	4,879	$	1,844
Warrants	13,586		5,134
Common stock	7,998		3,022

	$	26,463	$	10,000

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).


	Veolia Warrant #1			Veolia Warrant #2			Jan. 2019 Offering Underwriter
Warrant shares issued	2,000,000			2,000,000			103,500
Market price	$	3.02		$	3.02		$	2.16
Exercise price	$	5.00		$	7.00		$	1.90
Term (years)	10			10			5
Risk-free interest rate	2.64		%	2.64		%	2.57		%
Volatility	81.50		%	81.50		%	81.00		%
Dividend rate	—		%	—		%	—		%
Per share FV of warrant	$	2.35		$	2.24		$	1.47
FV of warrant	$	4,699		$	4,474		$	152

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.


Exercise Price per Share		Expiration Date	Shares Subject to Purchase at December 31, 2019

$	3.33	2020-06-23	702,247
$	1.90	2024-01-22	103,500
$	5.00	2030-02-28	2,000,000
$	7.00	2031-02-28	2,000,000
			4,805,747

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):


	Year ended December 31,
	2019		2018
Cost of product sales	$	357	$	154
Research and development cost	200		215
General and administrative expense	3,649		832
Total	$	4,206	$	1,201

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.


	Year ended December 31,
	2019		2018

Expected stock volatility	82.2% - 87.5%		76.9% - 86.3%
Risk free interest rate	1.7% - 2.6%		2.1% - 3.0%
Expected years until exercise	1.0-4.0		2.5-3.5
Dividend yield	—	%	—	%

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.


		Options Outstanding				RSUs Outstanding
	Number of Shares Available for Grant	Number of Shares	Weighted- Average Exercise Price Per Share		Number of RSUs	Weighted- Average Grant Date Fair Value Per Share
Balance at December 31, 2017	1,065,003	578,813	$	6.51	180,951	$	7.40
Granted	(640,275)	1,269,925	3.99		207,623	2.42
Exercised/ Released	—	—	—		(65,600)	5.78
Forfeited	381,021	(154,670)	7.00		(226,351)	4.74
Balance at December 31, 2018	805,749	1,694,068	$	4.57	96,623	$	4.01
Authorized	4,500,000
Granted	(3,468,296)	2,197,074	3.19		1,271,222	1.52
Exercised/ Released	—	—	—		(970,630)	1.63
Forfeited	564,873	(427,450)	4.46		(137,423)	1.85
Balance at December 31, 2019	2,402,326	3,463,692	$	3.71	259,792	$	1.83

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:


	Shares	Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding	3,463,692	$	3.71	3.44	$	—
Vested and exercisable	1,096,071	$	3.74	2.28	$	—

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:


	Options Outstanding			Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted- Average Remaining Contractual Life (Years)	Number of Shares	Weighted- Average Remaining Contractual Life (Years)

$1.60 -$2.93	732,627	3.00	440,330	2.08
$2.94 - $3.00	849,998	3.67	146,832	3.33
$3.01 - $3.95	685,152	3.50	138,819	1.00
$3.96 - $6.92	578,720	4.00	95,553	3.30
$6.93 - $19.20	617,195	3.00	274,537	2.30

	3,463,692	3.44	1,096,071	2.28

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:


			Number of Shares
Equity Plan
Subject to outstanding options and restricted shares			3,723,484
Available for future grants			2,402,326

Officer and Director Purchase Plan			245,562
Warrants			4,805,747
			11,177,119