Aqua Metals(AQMS) - 2018 Q4 - Annual Report

Part I Business Aqua Metals commercializes its proprietary AquaRefining technology for lead recycling, operating its TRIC facility and licensing the process - The company's core technology is AquaRefining, a patented, room-temperature, water-based process for recycling lead-acid batteries (LABs), positioned as an environmentally superior alternative to traditional smelting[7][13] - The first recycling facility at the Tahoe Regional Industrial Center (TRIC) in McCarran, Nevada, commenced limited operations in Q1 2017 and began selling pure AquaRefined lead ingots in October 2018[8] - In February 2019, Aqua Metals entered into a significant agreement with Veolia North America to provide operations, maintenance, and management services for the TRIC facility, aiming to scale the plant to its full 16-module capacity[9][10] - The business model is twofold: 1) expanding its own recycling operations at the TRIC plant, and 2) supplying AquaRefining equipment and services to third parties, such as Johnson Controls, on a licensing basis[16][32] - The company holds a significant intellectual property portfolio, including 1 US patent, 13 international patents, and 90 pending patent applications related to the AquaRefining process[55] - Key strategic agreements underpin the business, including a supply and offtake agreement with Johnson Controls (which accounted for 88% of 2018 revenue) and a used battery supply agreement with Interstate Battery[45][49][53] Risk Factors The company faces substantial risks from its limited operating history, unproven AquaRefining technology, reliance on third parties, and need for additional financing - The business is dependent on the successful implementation of its novel and unproven AquaRefining technology on a commercial scale, which has already faced unforeseen complications and delays[71] - The company requires additional financing to execute its business plan and fund continued operating losses, with no assurance such funding will be available on reasonable terms[72] - A significant operational risk is the dependency on Veolia North America for the management and operation of the TRIC facility, with failure to negotiate a long-term agreement potentially disrupting operations[73][74] - Competition from established smelter operators, who may restrict access to the supply of used lead-acid batteries, poses a significant threat to the company's operations[80] - The company is a defendant in a putative consolidated class action lawsuit and a shareholder derivative lawsuit, which could result in substantial costs and divert management resources[106] - The company is subject to restrictive covenants under its credit agreement with Green Bank, where a breach could lead to default and acceleration of approximately $9.5 million in debt[75] Unresolved Staff Comments This section is not applicable as the company reports no unresolved staff comments - There are no unresolved staff comments[119] Properties The company owns a 136,750 square foot recycling facility in McCarran, Nevada, and leases executive office space in the same location - The company owns its primary operational asset: a 136,750 square foot LAB recycling facility on 11.73 acres in McCarran, Nevada (TRIC)[122] - Executive offices are located in a leased 14,016 square foot space in McCarran, Nevada, with the lease expiring in December 2021[120] - The former 21,697 square foot office in Alameda, California, has been sublet as of February 2019[121] Legal Proceedings The company is defending against a consolidated class action lawsuit and a shareholder derivative action alleging securities law violations and breach of fiduciary duties - The company is a defendant in a consolidated class action lawsuit (In Re: Aqua Metals, Inc. Securities Litigation) alleging violations of Sections 10(b) and 11 of the Securities Acts[124] - The company and certain current and former officers and directors are defendants in a consolidated shareholder derivative action (In re Aqua Metals, Inc. Stockholder Derivative Litigation) alleging breach of fiduciary duties[125] Mine Safety Disclosures This item is inapplicable to the company's operations - This section is inapplicable[127] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities The company's common stock trades on NASDAQ under "AQMS", has experienced volatility, and the company has no plans to pay cash dividends - Common stock trades on the NASDAQ Capital Market under the symbol "AQMS"[130] Quarterly Common Stock Price Range (2018) | Quarter | High ($) | Low ($) | | :--- | :--- | :--- | | First | 3.00 | 1.59 | | Second | 4.14 | 2.26 | | Third | 3.11 | 2.24 | | Fourth | 2.92 | 1.55 | - The company has never declared or paid cash dividends and intends to retain any future earnings to finance operations[133] Equity Compensation Plan Information (as of Dec 31, 2018) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price ($) | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by stockholders | 950,691 | 4.18 | 805,749 | | Not approved by stockholders | 3,180,828 | 6.57 | — | Selected Financial Data This section summarizes five years of consolidated financial data, reflecting the company's early, pre-profitable stage with increasing revenues but also substantial net losses Selected Consolidated Statements of Operations Data (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Product sales | $4,449 | $2,088 | $0 | | Loss from operations | $(37,028) | $(24,858) | $(12,958) | | Net loss | $(40,254) | $(26,580) | $(13,557) | | Basic and diluted net loss per share | $(1.18) | $(1.31) | $(0.89) | Selected Consolidated Balance Sheet Data (in thousands) | | As of Dec 31, 2018 | As of Dec 31, 2017 | | :--- | :--- | :--- | | Cash, cash equivalents | $20,892 | $22,793 | | Total assets | $71,371 | $74,442 | | Working capital | $10,953 | $21,850 | | Total stockholders' equity | $50,090 | $58,965 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses AquaRefining commercialization, noting increased revenues and operating losses, and outlines funding strategies including recent public offerings and the Veolia agreement - The company's goal is to operate all 16 installed AquaRefining modules on a 24/7 basis by the end of 2019, but it has experienced delays and unforeseen issues in ramping up production[145] - In June 2018, the company completed a public offering raising approximately $26.6 million in net proceeds, followed by another public offering in January 2019 raising approximately $9.1 million net[149][150] - The 12-month plan of operations focuses on the commercial roll-out of the 16 AquaRefining modules at TRIC, managed by Veolia, and pursuing licensing opportunities, particularly with Johnson Controls[151][153][156] Comparison of Operations (FY 2018 vs. FY 2017, in thousands) | Item | 2018 | 2017 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product sales | $4,449 | $2,088 | $2,361 | 113% | | Cost of product sales | $22,761 | $9,541 | $(13,220) | (139)% | | General & administrative expense | $14,214 | $6,891 | $(7,323) | (106)% | | Total operating expense | $41,477 | $26,946 | $(14,531) | (54)% | - The increase in G&A expense in 2018 was primarily due to a $2.5 million accrual for key man penalties, $1.5 million in legal and proxy fees related to lawsuits and activist investors, and $1.8 million in severance accruals for former executives[163] Summary of Cash Flows (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(26,318) | $(19,002) | $(11,121) | | Net cash used in investing activities | $(3,929) | $(9,775) | $(29,606) | | Net cash provided by financing activities | $28,346 | $24,988 | $35,501 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk from variable-rate debt and significant commodity price risk affecting both raw materials and finished lead products - The company is exposed to interest rate risk from its variable-rate loan with Green Bank[204] - The company experiences market risk from the volatility of lead commodity prices, which affects both the purchase price of used LABs and the sales price of its finished products[204] Financial Statements and Supplementary Data This section presents audited consolidated financial statements, highlighting the company's developmental stage, financial performance, balance sheet, and key notes on revenue concentration and subsequent events Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $20,892 | $22,793 | | Total current assets | $22,752 | $25,684 | | Property and equipment, net | $45,548 | $45,733 | | Total assets | $71,371 | $74,442 | | Liabilities & Equity | | | | Total current liabilities | $11,799 | $3,834 | | Total liabilities | $21,281 | $15,477 | | Total stockholders' equity | $50,090 | $58,965 | Consolidated Statements of Operations (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Product sales | $4,449 | $2,088 | $— | | Cost of product sales | $22,761 | $9,541 | $— | | Loss from operations | $(37,028) | $(24,858) | $(12,958) | | Net loss | $(40,254) | $(26,580) | $(13,557) | | Basic and diluted net loss per share | $(1.18) | $(1.31) | $(0.89) | - Johnson Controls Battery Group, Inc. represented 88% of total revenue in 2018 and 96% in 2017, indicating a high concentration of credit risk[257] - The company accrued $2.0 million for key-man penalties claimed by Johnson Controls following the resignations of the CEO and COO, and agreed to pay Interstate Battery a $0.5 million fee related to a similar provision[280][357][359] - Subsequent to year-end, the company completed a public offering for $9.1 million in net proceeds (Jan 2019), repaid its $6.7 million convertible debt to Interstate Battery (Jan 2019), and entered into a major Operations, Management and Maintenance contract with Veolia (Feb 2019)[389][390][393] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section is not applicable as the company reports no changes in or disagreements with its accountants - There were no changes in or disagreements with accountants on accounting and financial disclosure[398] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[400] - Management concluded that internal control over financial reporting was effective as of December 31, 2018[402] Other Information This section details significant post-fiscal year-end events, including a two-year operations agreement with Veolia involving stock and warrant issuance, and amended executive employment agreements - On February 28, 2019, the company entered into a significant agreement with Veolia to provide operational, maintenance, and managerial services for the TRIC facility[404] - As consideration for the Veolia agreement, Aqua Metals will issue 2,350,000 common shares in installments and warrants to purchase 4,000,000 shares at exercise prices of $5.00 and $7.00[410] - The employment agreement for CEO Stephen Cotton was amended to increase his salary to $450,000 and grant him options to purchase 1,260,000 shares of common stock[411] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the 10-K, including material contracts and corporate governance documents - This section contains the index of all exhibits filed with the 10-K, including material contracts such as agreements with Johnson Controls, Interstate Battery, and Veolia, as well as employment agreements and corporate governance documents[417][419][432]