Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1.
Organization
Aqua
Metals, Inc. (the “Company”) was incorporated in Delaware and commenced operations on June 20, 2014 (inception). On
January 27, 2015, the Company formed two wholly-owned subsidiaries, Aqua Metals Reno, Inc. (“AMR”) and Aqua Metals
Operations, Inc. (collectively, the “Subsidiaries”), both incorporated in Delaware. The Company is engaged in the
business of lead recycling through its patented and patent-pending AquaRefining
TM
technology. Unlike smelting, AquaRefining
is a room temperature, water-based process that emits less pollution than smelting, the traditional method of lead recycling.
The Company has built its first recycling facility in Nevada’s Tahoe Regional Industrial Complex (“TRIC”) in
McCarran, Nevada and intends to pursue the development of additional lead acid battery recycling facilities based on the Company’s
AquaRefining technology, likely through licensing or joint development arrangements. The Company commenced the shipment of products
for sale, consisting of lead compounds and plastics, in April 2017, and through March 31, 2018, substantially all revenue was
derived from the sale of lead compounds and plastics. In April 2018, the Company began shipping cast lead bullion (mixture of
lead purchased to prime the kettles and AquaRefined lead from our AquaRefining process) blocks in addition to lead compounds and
plastics and in June 2018, the Company began shipping high purity lead from its AquaRefining process.
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, 2017, and the notes
thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with
the Securities and Exchange Commission, or the SEC, on March 15, 2018. There have been no material changes in the Company’s
significant accounting policies during the three and nine months ended September 30, 2018 except for the implementation of Accounting
Standards Update (“ASU”) No. 2016-18, Restricted Cash, (“ASU 2016-18”), as described below.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) as found in the Accounting Standards Codification
(“ASC”) and ASU of the Financial Accounting Standards Board (“FASB”) and pursuant to the rules and regulations
of the SEC. Accordingly, they do not include all the information and footnotes required by such accounting principles for complete
financial statements. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary
to present fairly each of the condensed consolidated balance sheet as of September 30, 2018, the condensed consolidated statements
of operations for the three and nine months ended September 30, 2018 and September 30, 2017, and the condensed consolidated statements
of cash flows for the nine months ended September 30, 2018 and September 30, 2017, as applicable, have been made. The condensed
consolidated balance sheet as of December 31, 2017 has been derived from the Company’s audited financial statements as of
such date, but it does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with our audited consolidated financial statements for the period ended December 31,
2017, which are included on Form 10-K filed with the Securities and Exchange Commission on March 15, 2018.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of results that may
be expected for the year ended December 31, 2018.
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 fair value of estimated
asset retirement obligations, the determination of stock option expense and the determination of the fair value of stock warrants
issued. Actual results could differ from those estimates.
Restricted
cash
Restricted
cash was comprised of funds held in escrow at Green Bank for the purpose of paying for the construction of the lead recycling
plant building in McCarran, Nevada. During 2017, the building was completed, and the funds held in escrow were dispersed.
In
November 2016, the Financial Accounting Standards Board, FASB issued ASU No. 2016-18. The amendments in ASU 2016-18 require an
entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statements
of cash flows rather than reconciling and explaining the period-over-period change in total cash and cash equivalents (excluding
restricted cash). The Company adopted this new ASU beginning January 1, 2018 using the required full retrospective approach. The
adoption of this standard resulted in an increase in net cash used in investing activities of $1.1 million in the condensed consolidated
statements of cash flows for the nine months ended September 30, 2017. As there is no restricted cash at September 30, 2018 or
December 31, 2017, there is no effect on the nine-month period ending September 30, 2018. There was no restricted cash at September
30, 2017.
Net
loss per share
Basic
net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.
Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding
for the period determined using the treasury-stock method or the if-converted method, as applicable. For purposes of this calculation,
stock options, restricted stock units, or RSUs, and warrants to purchase common stock are considered to be common stock equivalents
and are only included in the calculation of diluted net loss per share when their effect is dilutive.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
following outstanding shares subject to convertible notes, stock options, RSUs and warrants to purchase common stock were antidilutive
due to a net loss in the periods presented and, therefore, were excluded from the dilutive securities computation for the nine
months ended September 30, as indicated below.
|
|
September
30,
|
|
Excluded potentially dilutive securities
(1):
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Convertible note - principal
|
|
|
702,247
|
|
|
|
702,247
|
|
Options to purchase common stock
|
|
|
1,632,483
|
|
|
|
624,329
|
|
Unvested restricted stock units
|
|
|
107,723
|
|
|
|
-
|
|
Financing warrants
to purchase common stock
|
|
|
2,340,828
|
|
|
|
2,340,828
|
|
Total potential
dilutive securities
|
|
|
4,783,281
|
|
|
|
3,667,404
|
|
|
(1)
|
The
number of shares is based on the maximum number of shares issuable on exercise or conversion of the related securities as
of the period end. Such amounts have not been adjusted for the treasury stock method or weighted average outstanding calculations
as required if the securities were dilutive.
|
|
Segment
and geographic information
Operating
segments are defined as components of an enterprise engaging in business activities for which discrete financial information is
available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing
performance. The chief operating decision maker views its operations and manages its business in one operating segment, and the
Company operates in only one geographic segment.
Concentration
of credit risk
Revenues
from the following customers each represented at least 10% of total revenue for the three and nine months ended September 30,
2018 and 2017, respectively. They also represented a significant portion of our accounts receivable as of September 30, 2018 and
December 31, 2017, respectively.
|
|
Revenue
|
|
|
Revenue
|
|
|
Accounts
Receivable
|
|
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Johnson Controls Battery
Group, Inc.
|
|
|
94.7
|
%
|
|
|
96.1
|
%
|
|
|
86.4
|
%
|
|
|
95.2
|
%
|
|
|
94.8
|
%
|
|
|
95.4
|
%
|
Ocean Partners USA, Inc.
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
10.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Recent
accounting pronouncements
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 new standard requires a modified retrospective transition approach for all leases existing at, or entered
into after, the date of initial application, with an option to use certain transition relief. In July 2018, the FASB issued ASU
No. 2018-11, Leases (Topic 842): Targeted Improvements, which amends ASC Topic 842 to provide another transition method, allowing
a cumulative effect adjustment to the opening balance of retained earnings during the period of adoption. The Company has two
longer term office leases and a few small equipment leases. At January 1, 2019, the Company will record a lease liability equal
to the present value of future lease payments not yet paid on each of these leases and an asset for its right to use the underlying
assets.
In
June 2018, the FASB issued ASU 2018-07 –
Compensation – Stock Compensation (ASC 718) Improvements to Nonemployee
Share-Based Payment Accounting
. This update expands the scope of Topic 718 to include share-based payment transactions for
acquiring goods and services from nonemployees. The standard is effective on January 1, 2019 with early adoption permitted. The
Company has elected to adopt ASU 2018-07 immediately. There is no impact to the Company’s financial statements upon adoption
as there are currently no share-based payments to nonemployees. However, this standard will simplify the accounting for future
share-based payments to nonemployees, as applicable.
There
were no other recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September
30, 2018 that are of significance or potential significance to the Company.
3.
Revenue recognition
Revenues
are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration the
Company expects to be entitled to in exchange for those goods. Generally, this occurs with the delivery of the Company’s
products, primarily hard lead, lead compounds and plastics, to customers. Sales, value add, and other taxes, if any, that are
collected concurrent with revenue-producing activities are excluded from revenue as they are subsequently remitted to governmental
authorities. Incidental items that are immaterial in the context of the contract are recognized as expense. Freight and shipping
costs related to the transfer of the Company’s products to customers are included in revenue and cost of product sales,
to the extent that the Company bears these costs. Payment on invoices is generally due within 30 days of the invoice.
The
Company generates revenues by recycling lead acid batteries (“LABs”) and selling the recovered lead to its customers.
Primary components of the recycling process include sales of recycled lead consisting of lead compounds, cast hard lead and cast
AquaRefined lead as well as plastics. The Company commenced the shipment of products for sale, consisting of lead compounds and
plastics, in April 2017, and through March 31, 2018, all revenue was derived from the sale of lead compounds and plastics. In
April 2018, the Company began shipping lead bullion in addition to lead compounds and plastics. In June 2018, the Company began
shipping high purity lead from its AquaRefining process.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Arrangements
with Multiple Performance Obligations
Contracts
with customers may include multiple performance obligations. A performance obligation is a promise in a contract to transfer a
distinct good or service to the customer and is the unit of account in ASC 606. A contract’s transaction price is allocated
to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company
expects that many of its contracts will continue to have a single performance obligation as the promise to transfer individual
goods will not be separately identifiable from other promises in the contracts and therefore, not distinct. For contracts with
multiple performance obligations, revenue will be allocated to each performance obligation based on the Company’s best estimate
of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone
selling prices is based on prices charged separately to customers or expected cost-plus margin.
Revenue
from products transferred to customers at a single point in time, as noted above with the delivery of the Company’s products
to customers, accounted for 100% of our revenue during the three and nine months ended September 30, 2018 and 2017.
Practical
Expedients and Exemptions
The
Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length
of one year or less and (ii) contracts for which it recognizes revenue at the amount to which it has the right to invoice for
services performed.
4.
Inventory
Inventory
consisted of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
90
|
|
|
$
|
512
|
|
Work in process
|
|
|
297
|
|
|
|
182
|
|
Raw materials
|
|
|
702
|
|
|
|
545
|
|
Total inventory
|
|
$
|
1,089
|
|
|
$
|
1,239
|
|
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
5.
Property and equipment, net
Property
and equipment, net, consisted of the following (in thousands):
|
|
Useful Life
|
|
|
September 30,
|
|
|
December 31,
|
|
Asset
Class
|
|
(Years)
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Operational equipment
|
|
|
3-10
|
|
|
$
|
15,923
|
|
|
$
|
15,457
|
|
Lab equipment
|
|
|
5
|
|
|
|
687
|
|
|
|
685
|
|
Computer equipment
|
|
|
3
|
|
|
|
195
|
|
|
|
174
|
|
Office furniture and equipment
|
|
|
3
|
|
|
|
330
|
|
|
|
326
|
|
Leasehold improvements
|
|
|
5-7
|
|
|
|
1,388
|
|
|
|
1,408
|
|
Land
|
|
|
-
|
|
|
|
1,047
|
|
|
|
1,047
|
|
Building
|
|
|
39
|
|
|
|
24,859
|
|
|
|
24,847
|
|
Asset retirement cost
|
|
|
20
|
|
|
|
670
|
|
|
|
670
|
|
Equipment under
construction
|
|
|
|
|
|
|
7,073
|
|
|
|
4,552
|
|
|
|
|
|
|
|
|
52,172
|
|
|
|
49,166
|
|
Less: accumulated
depreciation
|
|
|
|
|
|
|
(5,761
|
)
|
|
|
(3,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property
and equipment, net
|
|
|
|
|
|
$
|
46,411
|
|
|
$
|
45,733
|
|
Depreciation
expense was $0.8 million and $2.4 million for the three and nine months ended September 30, 2018, respectively, and $0.8 million
and $2.1 million for the three and nine months ended September 30, 2017, respectively. Equipment under construction is primarily
AquaRefining modules manufactured by the Company to be used in the McCarran, Nevada recycling plant.
6.
Asset Retirement Obligation
ASC
Topic 410-20, “Asset Retirement and Environmental Obligations, Asset Retirement Obligations” requires the recording
of a liability in the period in which an asset retirement obligation (ARO) is incurred, in an amount equal to the discounted estimated
fair value of the obligation that is capitalized. In each subsequent fiscal quarter, this liability is accreted up to the final
retirement cost. The determination of the ARO is based on an estimate of the future cost to remove and decontaminate the McCarran
facility upon closure. The actual costs could be higher or lower than current estimates. The discounted estimated fair value of
the closure costs is $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 5 above, an asset retirement cost of the same amount that has been capitalized. The estimated
fair value of the closure costs is based on vendor quotes to remove and decontaminate the McCarran facility in accordance with
the Company’s closure plan as filed with the State of Nevada in its “Application for the Recycling of Hazardous Waste,
by Written Determination” in 2016. Accretion of the ARO for the three and nine months ended September 30, 2018 was $11,000
and $32,000, respectively. Accretion of the ARO for the three and nine months ended September 30, 2017 was $11,000 and $21,000,
respectively.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company has entered into a facility closure trust agreement for the benefit of the Nevada Division of Environmental Protection
(NDEP), an agency of the Nevada Division of Conservation and Natural Resources. Funds deposited in the trust are to be available,
when and if needed, for potential decontamination and hazardous material cleanup in connection with the closure and/or post-closure
care of the facility. The trustee will reimburse the Company or other persons as specified by the NDEP from the fund for closure
and post-closure expenditures in such amounts as the NDEP shall direct in writing. Through December 31, 2017, $450,000 has been
contributed to the trust fund; $220,000 will be due on October 31, 2018.
7.
Convertible Note Payable
The
convertible note payable is with Interstate Battery Systems International, Inc. (Interstate Battery) and is comprised of the following
(in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Convertible note payable
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
Accrued interest
|
|
|
1,470
|
|
|
|
961
|
|
Deferred financing costs, net
|
|
|
(31
|
)
|
|
|
(67
|
)
|
Note discount
|
|
|
(3,410
|
)
|
|
|
(4,562
|
)
|
|
|
|
|
|
|
|
|
|
Less current
portion
|
|
$
|
3,029
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible note
payable, non-current portion
|
|
$
|
-
|
|
|
$
|
1,332
|
|
The
convertible note payable bears interest at 11% per annum and is due May 24, 2019. The original note discount was calculated as
the allocated fair value of the warrants issued in connection with the transaction, which included the issuance of common stock,
warrants and the convertible note, as well as the allocated fair value of the embedded conversion feature, subject to limitations
on the absolute amount of discount attributable to the convertible notes and its allocated value. The discount is being amortized
using the effective interest method over the three-year term of the note, maturing on May 24, 2019.
8.
Notes Payable
AMR
entered into a $10,000,000 loan with Green Bank on November 3, 2015. The term of the loan is twenty-one years. During the first
twelve months, only interest was payable and thereafter monthly payments of interest and principal are due. The interest rate
adjusts on the first day of each calendar quarter to the greater of six percent (6%) or two percent (2%) per annum above the minimum
prime lending rate charged by large U.S. money center commercial banks as published in the Wall Street Journal. The terms of the
Loan Agreement contain various affirmative and negative covenants. Among them, AMR must maintain a minimum debt service coverage
ratio of 1.25 to 1.0 (beginning with the twelve-month period ending March 31, 2017), a maximum debt-to-net worth ratio of 1.0
to 1.0 and a minimum current ratio of 1.5 to 1.0. AMR was in compliance with all but the minimum debt service coverage ratio covenant
as of and for each of the calendar quarters in the period March 31, 2017 through September 30, 2018. AMR has received a waiver
for the minimum debt service coverage ratio covenant for each of the aforementioned calendar quarters.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
net proceeds of the loan were used for the construction of the Company’s lead acid recycling operation McCarran, Nevada.
Collateral for this loan is AMR’s accounts receivable, goods, equipment, fixtures, inventory, accessions and a certificate
of deposit in the amount of $1,000,000.
The
loan is guaranteed by the United States Department of Agriculture Rural Development (“USDA”), in the amount of 90%
of the principal amount of the loan. The Company paid a guarantee fee to the USDA in the amount of $270,000 at the time of closing
and 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):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Notes payable, current portion
|
|
|
|
|
|
|
|
|
Capital
equipment leases
|
|
$
|
32
|
|
|
$
|
128
|
|
Green
Bank, net of issuance costs
|
|
|
291
|
|
|
|
277
|
|
Total notes payable,
current portion
|
|
$
|
323
|
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
|
Notes payable, non-current portion
|
|
|
|
|
|
|
|
|
Capital equipment
leases
|
|
$
|
33
|
|
|
$
|
11
|
|
Green
Bank, net of issuance costs
|
|
|
8,636
|
|
|
|
8,828
|
|
Total notes payable,
non-current portion
|
|
$
|
8,669
|
|
|
$
|
8,839
|
|
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.
Stockholders’ Equity
Shares
issued
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.
1,072,500
shares of common stock were issued during January 2018 upon exercise of the overallotment option related to the December 2017
public offering, netting proceeds to the Company of $2.1 million.
The
Company issued 65,600 shares of common stock upon vesting of Restricted Stock Units during the nine months ended September 30,
2018. Additionally, the Company issued 2,034 shares of common stock pursuant to the Officers and Directors Purchase Plan during
the nine months ended September 30, 2018 for proceeds of $4,000.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Warrant
modification
On
June 24, 2018, the Company entered into a series of agreements (see Note 10 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.
Stock-based
compensation
The
stock-based compensation expense attributable to option grants was allocated as follows:
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of product sales
|
|
$
|
35
|
|
|
$
|
17
|
|
|
$
|
132
|
|
|
$
|
41
|
|
Research and development cost
|
|
|
26
|
|
|
|
62
|
|
|
|
215
|
|
|
|
222
|
|
General and administrative
expense
|
|
|
300
|
|
|
|
46
|
|
|
|
506
|
|
|
|
329
|
|
Total
|
|
$
|
361
|
|
|
$
|
125
|
|
|
$
|
853
|
|
|
$
|
592
|
|
The
following assumptions were used in the Black-Scholes-Merton pricing model to estimate the fair value of options granted during
the periods presented.
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected stock volatility
|
|
|
78.0%-79.3
|
%
|
|
|
70.7%-71.4
|
%
|
|
|
78.0%-86.3
|
%
|
|
|
70.7%-72.7
|
%
|
Risk free interest rate
|
|
|
2.6%-2.9
|
%
|
|
|
1.5%-1.7
|
%
|
|
|
2.1%-2.9
|
%
|
|
|
1.4%-1.8
|
%
|
Expected years until exercise
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
|
|
2.5
- 3.5
|
%
|
|
|
2.5
- 3.5
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
There
were no stock option exercises during the three and nine months ended September 30, 2018.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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 Company’s Amended and Restated 2014 Stock
Incentive Plan (“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.
Stock
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.
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.
10.
Commitments and Contingencies
On
April 19, 2018, Stephen Clarke resigned as president and chief executive officer and as a member of the Board. Dr. Clarke’s
resignation as an officer the Company was treated as a termination without cause under his employment agreement with the Company.
Pursuant to his employment agreement, Dr. Clarke was entitled to one-time severance benefits that includes severance and benefits
continuation expense of approximately $0.9 million paid out over a 2-year period in consideration of his execution of a customary
release and separation agreement. Additionally, as noted above, Dr. Clarke was granted an extension of the exercise period of
his stock options upon termination from 90 days to 2 years. The expense related to the modification of these stock option awards
was approximately $15,000.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Interstate
Battery Agreement commitment
Pursuant
to the 2016 Interstate Battery Investor Rights Agreement, the Company had agreed to compensate Interstate Battery should either
Stephen Clarke, the Company’s former 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 had 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 May 18, 2016. Pursuant to the Interstate Battery Investor
Rights Agreement, the key-man payments are payable, at the option of the Company, in cash or shares of the Company’s common
stock. Pursuant to the agreement, if Interstate Battery, in its sole and absolute discretion, agrees with the Company on mutually
acceptable replacements. for Messrs. Clarke and/or Mould, as the case may be, the key man penalties shall be deemed waived by
Interstate Battery.
Interstate
Battery had previously raised a claim that the Company was in technical breach of a negative covenant under the Credit Agreement
dated May 18, 2016 between the Company and Interstate Battery. The claimed breach related to the Company’s failure to obtain
Interstate Battery’s prior written consent to its acquisition of Ebonex IPR, Ltd.
On
June 24, 2018, the Company entered into a series of agreements with Interstate Battery, including an amendment to the Investor
Rights Agreement. Pursuant to the amendment to the Investor Rights Agreement, Interstate Battery agreed to waive all payments
under the key-man provisions of the Investor Rights Agreement with respect to the resignation of the Company’s former chief
executive officer, Stephen Clarke. In addition, the parties agreed that the Company, at its option, can elect to eliminate the
key-man event and all related key-man payments associated with Mr. Mould by (i) paying Interstate Battery a one-time fee of $0.5
million, payable in cash and (ii) agreeing to pay Interstate Battery $2.0 million, payable at the Company’s election in
cash or shares of its common stock, should the Company’s current president, Stephen Cotton no longer serve as president
of the Company during the period ending May 18, 2019. Additionally:
|
●
|
With
respect to a Credit Agreement dated May 18, 2016 between the Company and Interstate Battery,
Interstate Battery waived the alleged breach of the Credit Agreement based on the Company’s
acquisition of Ebonex IPR, Ltd.;
|
|
●
|
The
Company adjusted the terms of a warrant to purchase 702,247 shares of its common stock
issued to Interstate Battery in May 2016, pursuant to which the exercise price of the
warrant was decreased from $7.12 per share to $3.33 per share and the expiration date
of the warrant was extended to June 23, 2020; and
|
|
●
|
Interstate
Battery agreed to provide the Company with more favorable pricing and payment terms under
the Supply Agreement dated May 18, 2016 pursuant to which the Company buys used lead
acid batteries from Interstate Battery.
|
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 former 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. Pursuant to the Johnson Controls Investor Rights Agreement,
the key-man payments are payable, at the option of the Company, in cash or shares of the Company’s common stock. Pursuant
to the agreement, if Johnson Controls, in its sole and absolute discretion, agrees with the Company on mutually acceptable replacements.
for Messrs. Clarke and/or Mould, as the case may be, the key man penalties shall be deemed waived by Johnson Controls.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Legal
proceedings
Beginning
on December 15, 2017, three purported class action lawsuits were filed in the United Stated District Court for the Northern District
California against the Company, Stephen Clarke, Thomas Murphy and Mark Weinswig. On March 23, 2018, the cases were consolidated
under the caption In Re: Aqua Metals, Inc. Securities Litigation Case No 3:17-cv-07142. On May 23, 2018, the Court appointed lead
plaintiffs and approved counsel for the lead plaintiffs. On July 20, 2018, the lead plaintiffs filed a consolidated amended complaint
(“Amended Complaint”), on behalf of a class of persons who purchased the Company’s securities between May 19,
2016 and November 9, 2017, against the Company, Stephen Clarke, Thomas Murphy and Selwyn Mould. The Amended Complaint alleges
the defendants made false and misleading statements concerning the Company’s lead recycling operations in violation of Section
10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder. The Amended Complaint
seeks to hold the individual defendants as control persons pursuant to Section 20(a) of the Exchange Act. The Amended Complaint
also alleges a violation of Section 11 of the Securities Act of 1933 (“Securities Act”) based on alleged false and
misleading statements concerning the Company’s lead recycling operations contained in, or incorporated by reference in,
the Company’s Registration Statement on Form S-3 filed in connection with its November 2016 public offering. That claim
is asserted on behalf of a class of persons who purchased shares pursuant to, or that are traceable to, that Registration Statement.
The Amended Complaint seeks to hold the individual defendants liable as control persons pursuant to Section 15 of the Securities
Act. The Amended Complaint seeks unspecified damages and plaintiffs’ attorneys’ fees and costs. On September 18, 2018,
the defendants filed a motion to dismiss the Amended Complaint in its entirety. The plaintiff has not yet filed its opposition
to the motion. The Company denies that the claims in the Amended Complaint have any merit and it intends to vigorously defend
the action.
Beginning
on February 2, 2018, five purported shareholder derivative actions were filed in the United States District Court for the District
of Delaware against the Company and certain of its current and former executive officers and directors, Stephen R. Clarke, Selwyn
Mould, Thomas Murphy, Mark Weinswig, Vincent DiVito, Mark Slade and Mark Stevenson. On May 3, 2018, the cases were consolidated
under the caption In re Aqua Metals, Inc. Stockholder Derivative Litigation, Case No. 1:18-cv-00201-LPS (D. Del.). The complaints
were filed by persons claiming to be stockholders of Aqua Metals and generally allege that certain of the Company’s officers
and directors breached their fiduciary duties to the Company by violating the federal securities laws and exposing the Company
to possible financial liability. The complaints seek unspecified damages and plaintiffs’ attorneys’ fees and costs.
The parties have entered into a stipulation staying the action until 30 days after a decision on the Company’s motion to
dismiss the Amended Complaint in the class action described above. The Company denies that the claims in the shareholder derivative
action have any merit and it intends to vigorously defend the action.
AQUA
METALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company is not party to any other legal proceedings. The Company may, from time to time, be party to litigation and subject to
claims incident to the ordinary course of business. As its growth continues, the Company may become party to an increasing number
of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution
of any future matters could materially affect its future financial position, results of operations or cash flows.
11.
Subsequent Events
The
Company has evaluated subsequent events through the date which the condensed consolidated financial statements were available
to be issued.
In
October 2018, the Company moved its corporate headquarters to its McCarran, Nevada facility and ceased to use its Alameda, California
facility. The Company is in the process of seeking a tenant for this property and will record a liability for the present value
of remaining lease payments less estimated sublease income in the fourth quarter of 2018. Additionally, the Company will write-off
the net book value of its leasehold improvements of approximately $0.8 million during the fourth quarter of 2018. The restructuring
charge incurred by the Company related to the relocation was not material.