Annual report pursuant to Section 13 and 15(d)

Stockholders' Equity

Stockholders' Equity

12 Months Ended

Dec. 31, 2018



13.	Stockholders’ Equity

Authorized capital

The authorized capital stock of the Company consists of 50,000,000 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 bears interest at the rate of eleven percent (11%) per annum, compounding monthly, and all interest is payable upon the earlier of maturity or conversion of the principal amount. The loan matures on May 24, 2019. The outstanding principal is 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 are 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 includes 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 as further described below and in Note 14.

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 is exercisable upon grant and expires 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 expires on May 24, 2019.

The warrants contain cashless exercise and standard anti-dilution adjustment provisions. The first warrant issued above was modified in June 2018 to extend the expiration date to June 30, 2020 and reduce the exercise price to $3.33 peer share. See Note 14 for further details of this modification. 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.

National Securities Placement

On May 18, 2016, the Company entered into a Stock Purchase Agreement and a Registration Rights Agreement with certain accredited investors pursuant to which the Company issued and sold to the investors 719,333 shares of its common stock at a price of $7.12 per share for the gross proceeds of approximately $5.1 million. The Stock Purchase Agreement includes customary representations, warranties, and covenants by the investors and the Company, and an indemnity from the Company in favor of the investors. The private placement closed on May 24, 2016. The Company included all of these shares in its S-3 Registration Statement filed with the Securities and Exchange Commission on August 1, 2016.

National Securities Corporation acted as placement agent for the private placement and received sales commission in the amount of six percent (6%) of the gross proceeds, or a total of $307,000 in commissions from us. In addition, we reimbursed National Securities for its out-of-pocket expenses and legal fees in the aggregate amount of $38,000. The total costs of $345,000 have been recorded as a reduction to additional paid-in capital.

2016 Public Offering

On November 21, 2016, the Company completed a public offering of 2.3 million shares of its common stock at a public offering price of $10.00 per share. Net proceeds to the Company from the public offering were approximately $21.5 million after deducting underwriting discounts, commissions and offering expenses. In connection with the public offering, the underwriter received a fee of $1.4 million and a warrant to purchase 33,450 shares of the Company’s common stock at $10.00 per share that is exercisable commencing May 20, 2017 and expires on November 21, 2019. The fair value of the warrant, $229,000, was recorded as an increase to offering expenses and an increase to additional paid-in capital. The Company calculated the fair value of the warrant using a BlackScholes Merton model with the assumptions as follows: $12.66 closing market value on the date of grant; 3-year term; 72% volatility; 1.36% discount rate and 0% annual dividend rate.

Johnson Controls 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. 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.

2017 Public Offering

On December 12, 2017, the Company completed a public offering of 7,150,000 shares of its common stock at a public offering price of $2.10 per share. Net proceeds to the Company from the public offering were approximately $13.8 million after deducting underwriting discounts, commissions and offering expenses. In January 2018, the underwriter exercised their overallotment option resulting in an additional 1,072,500 shares being issued and net proceeds of approximately $2.1 million.

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.

Other shares issued

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.

Warrants issued

Warrants to purchase 12,500 of the Company’s common stock were issued on January 31, 2016, April 30, 2016 and July 31, 2016, all with an exercise price of $6.00 per share. The warrants were fully vested upon issuance and expire, if not exercised, on July 31, 2018. All of these warrants were exercised during 2017.

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).



	1/31/2016			4/30/2016			7/31/2016
Warrant shares issued	12,500			12,500			12,500
Market price	4.63			8.37			9.31
Exercise price	$	6.00		$	6.00		$	6.00
Term (years)	1.25			2.25			2
Risk-free interest rate	0.97		%	0.77		%	0.72		%
Volatility	80.00		%	80.00		%	80.00		%
Dividend rate	—		%	—		%	—		%
Per share FV of warrant	1.24			4.58			5.19
FV of warrant	$	16		$	57		$	65

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.

Warrants exercised

On June 7, 2016, when the five-day average of closing prices for the Company’s common stock was $12.16 per share, 15,203 shares of the Company’s common stock were issued pursuant to a cashless exercise of a warrant for 30,000 shares of the Company’s common stock with an exercise price of $6.00 per share.

During the year ended December 31, 2017, 1,175,796 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.



Date of Warrant Exercise	Average Closing Market Price Per Share		Exercise Price Per Share		Warrant Shares Exercised	Common Shares 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
4/3/2017	$	19.148	0.0034375		43,636	43,628
4/11/2017	$	17.920	$	6.00	12,500	8,315

					1,461,744	1,175,796

Warrant modification

On June 24, 2018, the Company entered into a series of agreements (see Note 14 for details) 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 $0.4 million in general and administrative expense for the three months ended June 30, 2018, 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 $7.31 per share are as follows.



Exercise Price per Share		Expiration Date	Shares Subject to purchase at December 31, 2018

$	3.33	6/23/2020	702,247
$	9.00	5/18/2019	1,605,131
$	10.00	11/21/2019	33,450

			2,340,828

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.

Stock-based compensation expense recorded was allocated as follows (in thousands):



	Year ended December 31,
	2018		2017		2016
Cost of product sales	$	154	$	143	—
Research and development cost	215		456		256
General and administrative expense	832		482		804
Total	$	1,201	$	1,081	$	1,060

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, 2018, 2017 and 2016.



	Year ended December 31,
	2018		2017		2016

Expected stock volatility	76.9% - 86.3		70.5% - 73.2		71%-80
Risk free interest rate	2.1% - 3.0		1.4% - 2.0		0.9%-1.8
Expected years until exercise	2.5-3.5		2.5-3.5		2.5-4.0
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 2014 Plan activity and related information through December 31, 2018.



			Options Outstanding				RSU’s outstanding
	Number of Shares Available for Grant		Number of Shares		Weighted- Average Exercise Price Per Share		Number of RSU’s		Weighted- Average Grant Date Fair Value Per Share
Balance at December 31, 2016	443,565		915,572		$	4.96	—		$	—
Authorized	750,000
Granted	(330,884	)	134,933		11.19		195,951		7.28
Exercised	—		(284,370	)	3.77		—		—
Forfeited	202,322		(187,322	)	6.44		(15,000	)	5.78
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	—		—		—		(65,600	)	5.78
Forfeited	381,021		(154,670	)	7		(226,351	)	4.74
Balance at December 31, 2018	805,749		1,694,068		$	4.57	96,623		$	4.01

The number of options granted during 2018 include 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 do not reduce the number of shares available under the 2014 Plan.

The weighted-average grant-date fair value of options granted during the year ended December 31, 2018, 2017 and 2016 was $1.71, $5.55 and $4.47 per share, respectively. The intrinsic value of options exercised during the year ended December 31, 2017 and 2016 was $1.5 million and $22,000, respectively. There were no stock option exercises during the year ended December 31, 2018. The amount of cash received from exercise of stock options during the year ended December 31, 2017 was $1.1 million.

Additional information related to the status of options at December 31, 2018 is as follows:



	Shares	Weighted- Average Exercise Price Per Share	Weighted- Average Remaining Contractural Life (Years)	Aggregate Intrinsic Value (in thousands)
Outstanding	1,694,068	4.57	3.77	6
Vested and exercisable	678,264	5.21	2.86	—

The intrinsic value of options is the fair value of the Company’s stock at December 31, 2018 less the per share exercise price of the option multiplied by the number of shares.

As of December 31, 2018, there is approximately $1.7 million of total unrecognized compensation cost related to the unvested share-based (option and RSU) compensation arrangements granted under the 2014 Plan. The remaining unrecognized compensation cost will be recognized over a weighted-average period of 2.1 years.

The following table summarizes information about stock options outstanding as of December 31, 2018:



	Options Outstanding		Options Exercisable
Range of Exercise Prices	Quantity	Weighted- Average Remaining Contractural Life (Years)	Quantity	Weighted- Average Remaining Contractural Life (Years)

$1.60 -$2.93	212,750	4.77	—	0.00
$2.94 - $3.00	422,500	4.33	82,500	4.33
$3.01 - $3.95	395,220	2.98	305,458	2.58
$3.96 - $6.92	310,267	3.44	134,494	2.30
$6.93 - $19.20	353,331	3.70	155,812	3.13

	1,694,068	3.78	678,264	2.86

Stock option issuances

In connection with his appointment as President of the Company in May 2018, Stephen Cotton was awarded options to purchase up to 840,000 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 $3.00 per share. Options to purchase 210,000 common shares are exercisable over a five-year period at an exercise price of $5.00 per share and options to purchase 210,000 common shares are exercisable over a five-year period at an exercise price of $7.00 per share. The options vest in 1/36^th increments during each of the first twelve months following the date of grant and thereafter the options vest in one-third increments on the second and third anniversary of the date of grant. The options issued are subject to the terms and conditions of the 2014 Plan but were not issued under the 2014 Plan in reliance on with Nasdaq Rule 5635(c)(4) and therefore do not reduce the number of shares available under the 2014 Plan.

Option modification

In connection with his termination, the stock options of the Company’s former CEO were modified to extend the exercise period upon termination from 90 days to 2 years. The expense related to the modification of these stock option awards was approximately $15,000 and was recorded during the second quarter of 2018.

During the three months ended June 30, 2016, the Compensation Committee of the Board of Directors approved the modification of the terms of a stock option previously granted to a member of its Board of Directors to accelerate vesting and the waiver of the early termination of the option based upon the director’s end of service to the Company. The modification resulted in additional compensation expense of $175,000.

Restricted Stock Units

In April 2018, the Company granted 150,000 restricted stock units (RSUs), all of which were subject to vesting, with a grant fair value of $339,000 to its then-Chief Financial Officer, Francis Knuettel II, as part of his employment agreement. Mr. Knuettel resigned in August 2018 and all of the RSUs expired by their terms prior to vesting.

In July 2017, the Company granted 49,751 restricted stock units (RSUs) with a grant date fair value per share of $11.68 to its then Chief Financial Officer, Mr. Weinswig, as part of his employment agreement. Mr. Weinswig resigned in March 2018 and all of the RSUs expired by their terms prior to vesting.

Total intrinsic value of RSUs vested and released during 2018 was $0.1 million. Intrinsic value of RSUs outstanding at December 31, 2018 was $0.2 million.

As of December 31, 2018, there is approximately $11,000 of total unrecognized compensation cost related to the unvested share-based (RSU) compensation arrangements granted under the 2014 Plan. The remaining unrecognized compensation cost will be recognized over a weighted-average period of 11 days.

Reserved shares

At December 31, 2018, 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	1,790,691
Available for future grants	805,749
Convertible note-principal	702,247
Officer and Director Purchase Plan	245,562
Warrants	2,340,828
	5,885,077