Aqua Metals(AQMS) - 2019 Q4 - Annual Report

Part I Business Aqua Metals, Inc. pivots to a capital-light licensing model for its AquaRefining™ technology following a 2019 fire that suspended operations - A fire on November 29, 2019, caused significant damage to the AquaRefining area of the TRIC facility, leading to the suspension of all commercial operations[10] - The company has shifted its strategy to a capital-light model focused on licensing its AquaRefining technology, funded by insurance proceeds, cash on hand, and potential asset sales[14][35] - AquaRefining is a proprietary, room-temperature, water-based electrochemical process that produces lead with a purity of 99.996+%, which is cleaner and more modular than traditional smelting[18][30] - The company has strategic agreements with Clarios for equipment supply and lead purchase, and with Veolia for plant operations, with negotiations underway to revise them post-fire[38][56] Intellectual Property Portfolio | Type | Status | Jurisdictions | | :--- | :--- | :--- | | Patents | 3 US patents, 24 international patents, 2 allowances | US, EU, Eurasia, Honduras, India, Indonesia, South Korea, Japan, China, Australia, Canada, Africa, Mexico, South Africa, Vietnam, Ukraine | | Patent Applications | 86 pending | US and 20 additional jurisdictions | Risk Factors Significant risks include fire-related insurance uncertainty, operational suspension, unproven licensing model, debt covenants, and Nasdaq delisting - A fire on November 29, 2019, destroyed or impaired substantially all AquaRefining equipment, valued at approximately $37 million, with no assurance of full collection of the $50 million insurance coverage[72] - The company has shifted to a capital-light licensing business model, which is less capital-intensive but unproven and its success is not guaranteed[76] - The company is indebted to Green Bank for approximately $9.2 million, secured by all assets, including insurance proceeds, and has required waivers for non-compliance with restrictive covenants[83][84] - Agreements with key partners Clarios and Veolia are at risk due to unmet performance conditions and a declared force majeure, jeopardizing partnerships[82][100] - The company is facing a putative class action and shareholder derivative lawsuit, which could result in substantial costs and divert management resources[114] - On January 15, 2020, the company received a delisting notice from Nasdaq for its stock price falling below the $1.00 minimum bid requirement, with a deadline of July 13, 2020, to regain compliance[117] Unresolved Staff Comments The company reports no unresolved staff comments - None[128] Properties Aqua Metals owns a 136,750 sq. ft. recycling facility in Nevada and leases executive office space, while subletting its former California office - The company owns a 136,750 sq. ft. LAB recycling facility on 11.73 acres in TRIC, McCarran, Nevada[131] - Executive offices are leased in a 14,016 sq. ft. space in McCarran, Nevada, with the lease expiring in December 2021[129] - The former executive office in Alameda, California (21,697 sq. ft.) has been sublet, with the sublease expiring in May 2022[130] Legal Proceedings Aqua Metals is defending against a consolidated class action lawsuit, a shareholder derivative action, and a wrongful termination claim - A consolidated class action lawsuit alleges false and misleading statements between May 19, 2016, and November 9, 2017, with a Second Amended Complaint filed after a partial motion to dismiss[133] - A consolidated shareholder derivative action alleges breach of fiduciary duties by current and former officers and directors, currently stayed pending a decision in the class action lawsuit[134] - A former employee has filed a wrongful termination claim with Nevada OSHA, which is currently under investigation[135] Mine Safety Disclosures This item is not applicable to the company - Inapplicable[137] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, has experienced significant volatility, and has never paid cash dividends - The company's common stock (AQMS) has traded on the NASDAQ Capital Market since July 31, 2015, and has experienced significant price volatility[139] Common Stock Price Range per Share (2018-2019) | Quarter | 2019 High | 2019 Low | 2018 High | 2018 Low | | :--- | :--- | :--- | :--- | :--- | | First | $4.18 | $1.80 | $3.00 | $1.59 | | Second | $3.10 | $1.51 | $4.14 | $2.26 | | Third | $2.06 | $1.54 | $3.11 | $2.24 | | Fourth | $1.91 | $0.42 | $2.92 | $1.55 | - The company has never declared or paid cash dividends and plans to retain any earnings to finance its business operations[142] - The company has two equity compensation plans: the 2014 Stock Incentive Plan (2,113,637 shares reserved) and the 2019 Stock Incentive Plan (4,500,000 shares authorized)[143][144] Selected Financial Data This item is not applicable to the company - Inapplicable[146] Management's Discussion and Analysis of Financial Condition and Results of Operations The 2019 fire halted operations, prompting a strategic shift; revenues rose 10% to $4.9 million, net loss widened to $44.8 million, liquidity depends on insurance - The November 29, 2019 fire caused an estimated $37 million in equipment and plant damage, leading to a suspension of operations and a strategic pivot to a capital-light licensing model[151][152][155] Results of Operations (in thousands) | Metric | 2019 | 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product sales | $4,874 | $4,449 | $425 | 10% | | Cost of product sales | $24,799 | $22,761 | $(2,038) | (9)% | | Research and development | $1,555 | $4,502 | $2,947 | 65% | | General and administrative | $19,314 | $14,214 | $(5,100) | (36)% | | Loss from operations | $(40,794) | $(37,028) | - | - | | Net loss | $(44,795) | $(40,254) | - | - | - General and administrative expenses increased by 36% in 2019, primarily due to $9.0 million in non-cash expense related to the Veolia agreement and a $2.8 million increase in stock-based compensation[164] Cash Flow Summary (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(25,177) | $(26,318) | | Net cash used in investing activities | $(10,574) | $(3,929) | | Net cash provided by financing activities | $22,434 | $28,346 | - As of December 31, 2019, the company had $7.6 million in cash and $17.7 million in working capital, which includes a $17.4 million insurance proceeds receivable, and management believes additional capital will be required[167][172] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks relate to interest rate fluctuations on its variable-rate debt and the price volatility of lead - The company is exposed to interest rate risk from its debt with Green Bank, which has a variable rate tied to the prime lending rate[195] - The company faces market risk from the volatility of lead commodity prices, which affects the cost of raw materials and the sales price of finished products[195] Financial Statements and Supplementary Data This section presents audited financial statements for 2019 and 2018, reflecting a $44.8 million net loss and the impact of the 2019 fire - The independent auditor, Armanino LLP, issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2019 and 2018[200] Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $7,575 | $20,892 | | Insurance proceeds receivable | $17,446 | $0 | | Total current assets | $27,503 | $22,752 | | Property and equipment, net | $37,643 | $45,548 | | Total assets | $69,454 | $71,371 | | Total current liabilities | $9,810 | $11,799 | | Total liabilities | $19,865 | $21,281 | | Total stockholders' equity | $49,589 | $50,090 | - The November 29, 2019 fire resulted in a write-off of approximately $22.4 million in fixed assets, with a net write-off of $19.9 million after accounting for accumulated depreciation[257] - The company repaid its $5.0 million convertible note to Interstate Battery in January 2019 for a total of $6.7 million, including principal and interest[270] - The company has a $10 million loan with Green Bank, with a balance of $9.3 million as of December 31, 2019, and has received waivers for non-compliance with the minimum debt service coverage ratio covenant[274][278] Unaudited Quarterly Revenue 2019 (in thousands) | Quarter | Product Sales | | :--- | :--- | | Q1 2019 | $437 | | Q2 2019 | $1,483 | | Q3 2019 | $2,361 | | Q4 2019 | $593 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure - None[374] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management concluded that disclosure controls and procedures were effective as of December 31, 2019[376] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on the COSO framework[378] Other Information The company reported no other information - None[379] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for these items is incorporated by reference from the company's definitive proxy statement for its 2020 Annual Meeting of Stockholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's 2020 definitive proxy statement[381][382][383] Part IV Exhibits and Financial Statement Schedules This section lists financial statements and an index of exhibits, including key agreements and Sarbanes-Oxley Act certifications - The financial statements are referenced under Item 8, and no separate financial statement schedules are filed[386] - The exhibit list includes key agreements such as the Underwriting Agreements, the Amended and Restated Certificate of Incorporation, the Tolling/Lead Purchase and Equipment Supply Agreements with Clarios (formerly Johnson Controls), and the Operations, Maintenance and Management Agreement with Veolia[385][390][395] - Certifications from the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act are filed as exhibits[397][398]