The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Notes to Consolidated Financial Statements
1. Organization
and Operations
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 reinventing lead recycling with its patent-pending AquaRefining
TM
technology.
Unlike smelting, AquaRefining is a room temperature, water-based process that is fundamentally non-polluting. These modular systems
allow the lead-acid battery industry to simultaneously improve environmental impact and scale production to meet rapidly growing
demand.
The Company intends to manufacture the equipment it has
developed, and will also operate lead acid battery recycling facilities. Construction of the first recycling facility is substantially
complete in McCarran, Nevada, with equipment within the facility being commissioned on an on-going basis.
Liquidity and Management
Plans
As of December 31, 2016, the
Company has completed the development of our initial LAB recycling facility at the Tahoe Reno Industrial Center, (“TRIC”)
and commenced the commercial scale production of recycled lead during January 2017. We expect TRIC to achieve a production rate
of 120 metric tons of recycled lead per day in the first half of 2017.
The Company has not generated
revenues since its inception and had net losses of $13.6 million and $12.3 million for the years ended December 31, 2016 and December
31, 2015, respectively. As of December 31, 2016, the Company’s cash balance was $25.5 million. After giving effect to the
receipt of an additional $10.5 million of net proceeds from the sale of our common shares to Johnson Controls, Inc., as more fully
descripted in Note 16 - Subsequent Events, the Company believes that its working capital will be sufficient to fund the Company’s
operations into positive cash flow from the first recycling plant in McCarran, NV.
2. Summary
of Significant Accounting Policies
Basis of presentation and consolidation
The
accompanying consolidated financial statements include those of Aqua Metals, Inc. and its subsidiaries, after elimination of all
intercompany accounts and transactions. We have prepared the accompanying consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations
of the United States Securities and Exchange Commission (the “SEC”).
Certain reclassifications have been made
to the December 31, 2015 balance sheet to conform to current period presentation. Specifically, equipment deposits at December
31, 2015 of $3.8 million have been reclassified to property and equipment with the remaining balance reclassified to other assets.
Use of estimates
The preparation of the 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 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 stock option expense, and the determination of the fair value of stock
warrants issued. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly
liquid instruments with original or remaining maturities of ninety days or less at the date of purchase to be cash equivalents.
The Company maintains its cash balances in large financial institutions. Periodically, such balances may be in excess of federally
insured limits.
Restricted cash
Restricted cash is 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,
NV. As of December 31, 2016, the building is substantially complete. At December 31, 2016, $0.6 million of the outstanding accounts
payable balance and $0.4 million of the outstanding accrual liability balance is to be paid out of the escrowed funds.
Inventory
Inventory is stated as the lower of cost or market.
Cost is determined using the weighted average method. Market value is determined as the lower of replacement cost or net realizable
value. At December 31, 2016, inventory consisted of raw materials, primarily chemicals, to be used in the lead recycling process.
Property and equipment
Property and equipment are stated
at cost net of accumulated depreciation. Depreciation on property and equipment is calculated on the straight-line basis over the
estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the life of the asset or the remaining
term of the lease.
Intangible and other long-lived assets
The intangible assets consist
of a patent application contributed to the Company by five founding stockholders, patent applications for technology developed
by the Company and trademark applications. The useful life of the intangible assets has been determined to be ten years and the
assets are being amortized. The Company periodically evaluates its intangible and other long-lived assets for indications that
the carrying amount of an asset may not be recoverable. In reviewing for impairment, the Company compares the carrying value of
such assets to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition.
When the estimated undiscounted future cash flows are less than their carrying amount, an impairment loss is recognized equal to
the difference between the assets’ fair value and their carrying value. In addition to the recoverability assessment, the
Company routinely reviews the remaining estimated lives of its long-lived assets. Any reduction in the useful life assumption will
result in increased depreciation and amortization expense in the period when such determination is made, as well as in subsequent
periods. The Company evaluates the need to record impairment during each reporting period. No impairment has been recorded. The
Company determined that the estimated life of the intellectual property properly reflected the current remaining economic life
of the asset.
Research and development
Research and development expenditures are expensed
as incurred.
Income taxes
The Company accounts for income
taxes in accordance with the liability method of accounting for income taxes. Under the liability method, deferred assets and liabilities
are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases. The provision for income taxes is comprised of the current tax
liability and the changes in deferred tax assets and liabilities. The Company establishes a valuation allowance to the extent that
it is more likely than not that deferred tax assets will not be recoverable against future taxable income.
The Company recognizes the effect
of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions
are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs.
Fair value measurements
The carrying amounts of cash
and cash equivalents, inventory, prepaid expenses and other current assets, accounts payable, accrued expenses and deferred rent
approximate fair value due to the short-term nature of these instruments. The carrying value of short and long term debt also approximates
fair value since these instruments bear market rates of interest. None of these instruments are held for trading purposes.
Fair value is defined as an
exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly
transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that
market participants would use in pricing an asset or liability. A three-tier far value hierarchy is used to prioritize the inputs
in measuring fair value as follows:
Level 1. Quoted prices in active markets for identical
assets or liabilities.
Level 2. Quoted prices for similar
assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not
active, or other inputs that are observable, either directly or indirectly.
Level 3. Significant unobservable
inputs that cannot be corroborated by market data.
The asset or liability's fair
value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value
measurement.
There are no assets or liabilities that are measured
at fair value on a recurring basis at December 31, 2016 or December 31, 2015.
Stock-based compensation
The Company recognizes compensation expense for stock-based
compensation in accordance with ASC 718 “Compensation – Stock Compensation.” For employee stock-based awards,
the Company calculates the fair value of the award on the date of grant using the Black-Scholes-Merton method for stock options;
the expense is recognized over the service period for awards to vest.
The estimation of stock-based awards that will ultimately
vest requires judgment and to the extent actual results or updated estimates differ from the original estimates, such amounts are
recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected
forfeitures, including types of awards, employee class and historical experience.
Net loss per share
Basic net loss per share is computed by dividing
net loss by the weighted average number of vested shares outstanding during the period. Diluted net loss per share is computed
by giving effect to all potential dilutive common securities, including convertible notes, options and warrants. Potential dilutive
common shares include the dilutive effect of the common stock underlying in-the-money stock options as is calculated based on the
average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an
option and the average amount of compensation cost, if any, for future services that the Company has not yet recognized when the
option is exercised, are assumed to be used to repurchase shares in the current period.
For all periods presented in this report, convertible
notes, stock options, and warrants were not included in the computation of diluted net loss per share because such inclusion would
have had an antidilutive effect.
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Excluded potentially dilutive securities (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note - principal
|
|
|
702,247
|
|
|
|
-
|
|
Consulting warrants to purchase common stock
|
|
|
486,364
|
|
|
|
478,864
|
|
Options to purchase common stock
|
|
|
915,572
|
|
|
|
752,324
|
|
Financing and IPO warrants to purchase common stock
|
|
|
3,316,208
|
|
|
|
975,380
|
|
Total potential dilutive securities
|
|
|
5,420,391
|
|
|
|
2,206,568
|
|
|
(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 Company views its operations
and manages its business in one operating segment, and the Company operates in only one geographic segment.
Recent accounting pronouncements
In January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance
enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement,
presentation and disclosure. The amendment to the standard is effective for the Company beginning on June 1, 2018. While the Company
is currently assessing the impact of the new standard, it does not expect this new guidance to have a material impact on its consolidated
financial statements.
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
Company is in the process of evaluating the impact of this new guidance.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended
to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the
accounting for share-based payments, the amendments can significantly impact net income, EPS, and the statement of cash flows.
For public companies, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted. The Company is in the process of evaluating the impact of this
ASU on its financial statements but does not believe the impact will be material.
There were no other recent accounting pronouncements
or changes in accounting pronouncements during the year ended December 31, 2016 that are of significance or potential significance
to the Company.
3. Property
and equipment, net
Property and equipment, net, consisted of the following
for the dates indicated (in thousands):
|
|
Useful Life
|
|
|
December 31,
|
|
Asset Class
|
|
(Years)
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Operational equipment
|
|
|
3-10
|
|
|
$
|
15,132
|
|
|
$
|
356
|
|
Lab equipment
|
|
|
5
|
|
|
|
547
|
|
|
|
52
|
|
Computer equipment
|
|
|
3
|
|
|
|
140
|
|
|
|
72
|
|
Office furniture and equipment
|
|
|
5
|
|
|
|
298
|
|
|
|
9
|
|
Leasehold improvements
|
|
|
5-7
|
|
|
|
1,408
|
|
|
|
1,086
|
|
Land
|
|
|
-
|
|
|
|
1,047
|
|
|
|
1,047
|
|
Building
|
|
|
39
|
|
|
|
21,962
|
|
|
|
5,681
|
|
Equipment under construction
|
|
|
10
|
|
|
|
1,635
|
|
|
|
4,390
|
|
|
|
|
|
|
|
|
42,169
|
|
|
|
12,693
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(777
|
)
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,392
|
|
|
$
|
12,603
|
|
Depreciation expense was $687,000
and $89,000 for the years ended December 31, 2016 and 2015, respectively. The Building is a 136,750 square foot lead acid battery
recycling plant being built in McCarran, NV. Equipment under construction at December 31, 2016 is primarily AquaRefining modules
manufactured by the Company to be used in the McCarran, NV recycling plant.
Certain costs necessary to make
the recycling facility ready for its intended use have been capitalized, including interest expense on notes payable. Capitalized
interest totaled $508,000 and $98,000 for the years ended December 31, 2016 and 2015, respectively. Capitalization of interest
ceased upon completion of the building in early November 2016.
The Company has financed certain of its lab equipment
purchases through the use of capital leases. The lease terms are generally between 24 and 36 months with an option to purchase
the asset at the end of the lease for $1. Total lab equipment included in the above table at December 31, 2016 subject to capital
leases is $392,000 less accumulated depreciation of $36,000 resulting in net fixed assets under capital lease of $356,000. These
assets are depreciated using the same useful lives as noted above and included in depreciation expense. See Note 9 – Notes
Payable for minimum future payments related to these equipment leases.
4. Intellectual
Property
On July 3, 2014, five of the
founding stockholders contributed the rights to certain intellectual property to the Company in exchange for the issuance of 4,101,822
shares with a fair value of approximately $1.1 million. This contribution was recorded as an intangible asset with an offset to
additional paid in capital for $0.6 million and deferred taxes for $0.4 million. The fair market value of the intellectual property
was determined by management with the assistance of an independent valuation specialist using an equal weighting of the incremental
cash flow and relief from royalty methodologies.
Both methodologies used a discount
rate of 50%. The discounted cash flow approach used a 10-year forecast and a 20% probability of achieving commercial success. The
forecast assumed 85% of revenue is generated from sales of lead processed in Company owned and operated recycling plants and 15%
of revenue is generated from license fees. The relief from royalty method used revenues equal to 50% of management’s discounted
cash flow forecast and a license rate of 1.5% of revenue.
The increase of $200,000 and
$146,400 in 2016 and 2015 was due to fees associated with additional patent and trademark filings. The intellectual property balance
is being amortized straight-line over a 10-year period.
Intellectual property, net, is comprised of the following
for the dates indicated (in thousands):
|
|
2016
|
|
|
2015
|
|
Intellectual property
|
|
$
|
1,419
|
|
|
$
|
1,219
|
|
Accumulated amortization
|
|
|
(282
|
)
|
|
|
(154
|
)
|
Intellectual property, net
|
|
$
|
1,137
|
|
|
$
|
1,065
|
|
Aggregate amortization expense
for the year ended December 31, 2016 and 2015 was $128,000 and $110,000, respectively.
5. Other
Assets
Other assets consist of the following (in thousands).
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Alameda security deposit (1)
|
|
$
|
597
|
|
|
$
|
593
|
|
CD for Green Bank collateral security (2)
|
|
|
1,012
|
|
|
|
1,000
|
|
Nevada sales and use tax deposit
|
|
|
49
|
|
|
|
-
|
|
Facility Closure Trust deposit (3)
|
|
|
100
|
|
|
|
-
|
|
Various other assets
|
|
|
147
|
|
|
|
60
|
|
|
|
|
1,905
|
|
|
|
1,653
|
|
Less: current portion (1)
|
|
|
(275
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other assets, non-current
|
|
$
|
1,630
|
|
|
$
|
1,653
|
|
|
(1)
|
The lease deposit related to the Alameda headquarters will be released in three installments: $275,000 at June 17, 2017, followed
by $275,000 in June 2018; and the remainder will be released at the end of the lease term. The current portion is included in Prepaid
expenses and other current assets in the consolidated balance sheet.
|
|
(2)
|
The $1.0 million certificate of deposit is held by Green Bank as collateral for the TRIC construction note payable balance.
The deposit with Green Bank will be released after TRIC has three consecutive months of positive cash flow from operations.
|
|
(3)
|
The Company has entered into a Facility Closure Trust Agreement for the benefit of the Nevada Division of Conservation and
Natural Resources (NDEP). Funds deposited in the Trust are to be available when and if needed, for closure and/or post-closure
care of the facility related to potential decontamination and hazardous material cleanup. 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. In addition, the Trustee shall refund to the Company such amounts as the NDEP specifies in writing. $100,000
was due upon establishment of the Trust Fund, on October 31, 2016; $350,000 will be due and payable on October 31, 2017, and $220,000
will be due on October 31, 2018.
|
6. Accrued
liabilities
Accrued liabilities consist of the following (in
thousands).
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Fixed asset related
|
|
$
|
1,330
|
|
|
$
|
-
|
|
Payroll related
|
|
|
359
|
|
|
|
81
|
|
Use tax accrual
|
|
|
156
|
|
|
|
-
|
|
Other
|
|
|
130
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,975
|
|
|
$
|
81
|
|
7. Convertible
Notes
As described more completely under the caption “Interstate
Battery Agreements” below in Note 10, the Company issued to Interstate Battery System International, Inc. and its wholly-owned
subsidiary (collectively “Interstate Battery”) a convertible note with a face amount of $5.0 million and interest of
11% per annum due May 25, 2019. The note is convertible at $7.12 per share of common stock. The Company allocated the proceeds
from the Interstate Battery agreements to the convertible note, common stock and warrants comprising the financing agreements based
on the relative fair value of the individual securities on the May 24, 2016 closing date of the agreements. Additionally, the convertible
notes contained an embedded conversion feature having intrinsic value at the issuance date, which value the Company treated as
an additional discount attributed to the convertible note, subject to limitations on the absolute amount of discount attributable
to the convertible notes and its allocated value. The Company recorded a corresponding credit to additional paid-in capital attributable
to the beneficial conversion feature (“BCF”). The discounts attributable to the convertible note, an aggregate of $4,975,000,
are being amortized using the effective interest method over the three-year term of the note, maturing on May 24, 2019. Because
the discount on the convertible note exceeds 99% of its initial face value, and because the discount is amortized over the period
from issuance to maturity, the calculated effective interest rate is 184.75% per annum.
Interest cost on the note for the year ended December
31, 2016 totaled $343,000. Amortization of the note discount for the year ended December 31, 2016 totaled $54,000. Amortization
of the deferred financing costs, more fully described in Note 9, totaled $27,000 for the year ended December 31, 2016.
The December 31, 2016 convertible
note payable is comprised of the following (in thousands):
|
|
December 31, 2016
|
|
|
|
|
|
Convertible note payable
|
|
$
|
5,000
|
|
Accrued interest
|
|
|
343
|
|
Deferred financing costs, net
|
|
|
(115
|
)
|
Note discount
|
|
|
(4,921
|
)
|
|
|
|
|
|
Convertible note payable, non-current portion
|
|
$
|
307
|
|
As of December 31, 2016, the
Interstate Battery convertible note’s “if-converted value” exceeded its principal amount by $4.2 million.
Private Placement
Convertible notes
On October 31, 2014, the Company entered into a securities
purchase agreement (the “Securities Purchase Agreement”) with accredited investors (the “Investors”), pursuant
to which the Company issued an aggregate of $6.0 million principal amount of senior secured convertible notes (the “Private
Placement Convertible Notes”). In connection with the sale of the Private Placement Convertible Notes (the “Bridge
Financing”), the Company entered into a registration rights agreement (the “Registration Rights Agreement”) and
a security agreement (the “Security Agreement”) with the Investors. The closing of the Bridge Financing was completed
October 31, 2014. Upon issuance, the Private Placement Convertible Notes bore simple interest at 6% per annum and upon the occurrence
of any specified event of default, the Private Placement Convertible Notes would bear interest at 12% per annum and were scheduled
to mature on December 31, 2015.
The principal, $6.0 million, and interest, $0.3 million,
of the Private Placement Convertible Notes were converted into 2,511,871 shares of the Company’s common stock at a conversion
price of $2.50 per share on August 5, 2015 as part of the Company’s Initial Public Offering (“IPO”).
Pursuant to the terms of the
Private Placement Convertible Notes, the conversion price was subject to adjustments in the event of an IPO, other financing and
upon certain other events. The embedded conversion feature was not clearly and closely related to the host instrument and was bifurcated
from the host Convertible Notes as a derivative, principally because the instrument's variable exercise price terms would not qualify
as being indexed to the Company's own common stock. Accordingly, this conversion feature instrument was classified as a derivative
liability in the consolidated balance sheet at December 31, 2014. Derivative liabilities were initially recorded at fair value
and were then re-valued at each reporting date, with changes in fair value recognized in earnings during the reporting period.
The Company determined that
the initial fair value of the embedded conversion option was $0.2 million. From the aggregate principal amount of the Private Placement
Convertible Notes of $6.0 million, the Company deducted in full the fair value of the embedded conversion feature, and offering
costs of $0.8 million as a debt discount. The debt discount was amortized under the effective interest method over the term of
the Convertible Notes. Upon completion of the IPO, all remaining unamortized debt discount and BCF were immediately expensed. The
amount of issuance cost amortized as interest expense on the statements of operations was $0.9 million for the year ended December
31, 2015.
The balance of Private Placement
Convertible Notes as of December 31, 2014 was as follows (in thousands):
Face value of the Private Placement Convertible Notes
|
|
$
|
6,000
|
|
Debt discount and value of embedded option, net of amortization
|
|
|
(909
|
)
|
Private Placement Convertible Notes, net
|
|
$
|
5,091
|
|
The Company calculated the fair
value of the embedded conversion feature of the Private Placement Convertible Notes using the Monte Carlo simulation, with the
observable assumptions as provided in the table below. The significant unobservable inputs used in the fair value measurement of
the reporting entity's embedded conversion feature were expected stock prices, levels of trading and liquidity of the Company's
stock. Significant increases in the expected stock prices and expected liquidity would result in a significantly higher fair value
measurement. Significant increases in either the probability or severity of default of the host instrument would result in a significantly
lower fair value measurement (Aggregate fair value in thousands).
|
|
As of
|
|
|
As of
|
|
|
|
October 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2014
|
|
Fair value of stock price on valuation date
|
|
$
|
1.77
|
|
|
$
|
2.18
|
|
High collar
|
|
$
|
2.50
|
|
|
$
|
2.50
|
|
Low collar
|
|
$
|
1.67
|
|
|
$
|
1.67
|
|
Term (years)
|
|
|
0.75
|
|
|
|
0.58
|
|
Expected volatility
|
|
|
80
|
%
|
|
|
80
|
%
|
Weighted average risk-free interest rate
|
|
|
0.11
|
%
|
|
|
0.14
|
%
|
Trials
|
|
|
50,000
|
|
|
|
50,000
|
|
Aggregate fair value
|
|
$
|
212
|
|
|
$
|
1,109
|
|
The fair value of the embedded
conversion feature at the time of the IPO and note conversion into common shares of the Company was $6.3 million. The increase
of $5.2 million in fair value of the embedded conversion feature during 2015 until the IPO was recorded as a change in the fair
value of derivative liabilities within the statements of operations.
On September 8, 2014, the Company
entered into an agreement (the "Placement Agent Agreement") with National Securities Corporation ("NSC") pursuant
to which the Company appointed NSC to act as the Company's placement agent in connection with the sale of the Company's securities
("Offering or Offerings"). Specifically, NSC was the placement agent in connection with the sale of its Private Placement
Convertible Notes. The Placement Agent Agreement had an initial term of 180 days after which it will continue in effect until it's
terminated by either party with 60 days written notice to the other party.
In connection with the sale
of the Private Placement Convertible Notes, the Company paid NSC a cash fee of $0.6 million and issued on October 31, 2014 to NSC
warrants ("Financing Warrants") to purchase shares of the Company's common stock. NSC subsequently transferred a portion
of the Financing Warrants to associated persons. The Financing Warrants were fully vested upon issuance, have a term of five years,
and are immediately exercisable. The Financing Warrants were exercisable into 251,187 shares of the Company’s common stock
assuming an exercise price of $3.00 per share (calculated as 120% of the Private Placement Convertible Notes conversion price of
$2.50 per share).
The warrant holders have certain
registration rights with respect to the common stock issued upon exercise of the Financing Warrants.
The Company calculated the fair
value of the Financing Warrants using a Black Scholes Merton model with the assumptions provided in the table below. The fair market
value of the stock used prior to the IPO was from 409A valuations prepared by an outside consultant.
Provided below are the principal
assumptions used in the initial and subsequent measurement of the fair values of the Financing Warrants (Warrants fair value in
thousands):
|
|
10/31/14
|
|
|
12/31/14
|
|
|
8/5/15
|
|
Fair market value of shares
|
|
$
|
1.77
|
|
|
$
|
2.18
|
|
|
$
|
5.00
|
|
Assumed exercise price
|
|
$
|
3.00
|
|
|
$
|
3.00
|
|
|
$
|
3.00
|
|
Term in years
|
|
|
5
|
|
|
|
4.84
|
|
|
|
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
80
|
%
|
|
|
80
|
%
|
|
|
80
|
%
|
Annual rate of dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Discount rate
|
|
|
1.62
|
%
|
|
|
1.65
|
%
|
|
|
1.55
|
%
|
Call option value
|
|
$
|
0.88
|
|
|
$
|
1.14
|
|
|
$
|
3.51
|
|
Warrant shares issuable
|
|
|
220,268
|
|
|
|
220,268
|
|
|
|
251,187
|
|
Warrants fair value
|
|
$
|
212
|
|
|
$
|
276
|
|
|
$
|
881
|
|
The initial fair value of the
Financing Warrants was accounted for as a derivative issuance cost and along with the other private placement costs was amortized
over the life of the Private Placement Convertible Notes. During the year ended December 31, 2015, the Company recorded an increase
of $0.6 million in the fair value of the Financing Warrant as a change in the fair value of derivative liabilities within the statements
of operations. On August 5, 2015, after the conclusion of the IPO, the financing warrants fair value was fixed and the derivative
liability of $0.9 million was reclassified to additional paid-in capital.
As described in Note 16 –
Subsequent Events, warrants totaling an aggregate of 25,119 shares were exercised on February 13, 2017 via a cashless exercise
resulting in the issuance of 19,349 shares of the Company’s common stock.
8. Deferred
Rent
On August 7, 2015, the Company signed a lease for
21,697 square feet of mixed office and manufacturing space in Alameda, CA. The term of the lease is 76 months plus 6 months pre-commencement
date for tenant improvement construction. The total cost of the lease is $3.0 million which is being amortized over 82 months at
approximately $37,000 per month. As of December 31, 2016, the landlord had paid for $0.9 million in tenant improvements. The tenant
improvements cost has been included in owned assets and deferred rent and is being amortized over the life of the lease. Net deferred
rent expense for the periods ended December 31, 2016 and 2015 was $29,000 and $163,000, respectively. The December 31, 2016 short
term deferred rent balance of $177,000 is included in current liabilities whereas the December 31, 2015 balance of negative $38,000
was included in prepaid expenses and other current assets. The remaining liability of $963,000 and $1,071,000 at December 31, 2016
and 2015, respectively, is classified as long term deferred rent.
9. 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. For the first twelve months only interest was
payable; thereafter monthly payments of interest and principal are due. The interest rate adjusts on the first day of each calendar
quarter equal 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 covenants as of and for the years ending December 31, 2016 and 2015.
The net proceeds of the loan
was deposited into an escrow account at Green Bank. The funds are being released as payment for the building being constructed
in McCarran, NV to house AMR’s lead acid recycling operation. 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 as of
the dates indicated (in thousands):
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Notes payable, current portion
|
|
|
|
|
|
|
|
|
Thermo Fisher Financial Service
|
|
$
|
137
|
|
|
$
|
16
|
|
Green Bank, net of issuance costs
|
|
|
170
|
|
|
|
29
|
|
|
|
$
|
307
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
Notes payable, non-current portion
|
|
|
|
|
|
|
|
|
Thermo Fisher Financial Service
|
|
$
|
138
|
|
|
$
|
1
|
|
Green Bank, net of issuance costs
|
|
|
9,100
|
|
|
|
9,221
|
|
|
|
$
|
9,238
|
|
|
$
|
9,222
|
|
The Thermo Fisher Financial Service obligations relate
to capital leases further discussed in Note 4 – Property and Equipment, net. The costs associated with obtaining the Green
Bank loan of $756,000 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. Amortization of the deferred
financing costs totaled $35,000 and $9,000 for the years ended December 31, 2016 and 2015, respectively.
The future principal payments related to the Green
Bank and Thermo Fisher Financial Service notes are as follows as of December 31, 2016 (in thousands):
2017
|
|
$
|
307
|
|
2018
|
|
|
308
|
|
2019
|
|
|
202
|
|
2020
|
|
|
203
|
|
2021
|
|
|
217
|
|
Thereafter
|
|
|
9,020
|
|
Total loan payments
|
|
$
|
10,257
|
|
10. Stockholders’
Equity
Authorized capital
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.
On June 24, 2015, the Company
had a reverse stock split whereby each share of issued common stock was converted into 0.91 shares of common stock of the Company.
All share and per share amounts in the period preceding the stock split have been adjusted to reflect the split retroactively.
On June 9, 2015, the Company
filed a registration statement on form S-1 with the Securities and Exchange Commission. The registration was for the sale of 6,600,000
shares of common stock to raise proceeds of $33,000,000 at an issue price of $5.00 per share. On July 31, 2015, the common shares
of the Company began trading on the NASDAQ capital markets. On July 31, 2015, the Company sold 6,600,000 shares of common stock
for $33,000,000 less commissions of $2,525,000 and expenses of $577,000 for net proceeds of $29,898,000. The form S-1 included
an over-allotment option of 990,000 common shares. On August 13, 2015, the Company sold 641,930 shares of the over-allotment option
for $3,210,000 less commissions of $246,000 for net proceeds of $2,964,000.
On November 2, 2015, the Company
issued 20,000 shares of common stock to Insight Capital Consultants Corporation for work performed for the Company.
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 $5,000,000 in consideration
of the Company’s issuance of a secured convertible promissory note in the original principal amount of $5,000,000. 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.
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. If Interstate converts its convertible note and exercises both warrants in their entirety, it will own slightly
less than 20% of the Company’s common stock at an average price per share of approximately $7.93.
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 $5,000,000. 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
|
|
|
|
3
|
|
Risk-free interest rate
|
|
|
0.91
|
%
|
|
|
1.05
|
%
|
Volatility
|
|
|
65.70
|
%
|
|
|
67.80
|
%
|
Dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
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 our 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%.
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 within the condensed consolidated statements
of operations 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
$5,122,000. 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.
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.
Warrants issued
On September 8, 2014, the Company
entered into a consulting agreement with Liquid Patent Consulting, LLC ("LPC"), pursuant to which LPC agreed to provide
management, strategic and intellectual property advisory services. The Consulting Agreement had an initial term of 180 days after
which it will continue in effect until it is terminated by either party with 30 days written notice to the other party.
As consideration for services provided
under the Consulting Agreement the Company issued warrants ("Consulting Warrants") to LPC for the purchase of an aggregate
of 436,364 shares of the Company's common stock. LPC subsequently transferred a portion of the Consulting Warrants to a third party.
The Consulting Warrants vested upon issue, have a term of three years, an exercise price of $0.0034375 per share and are immediately
exercisable, provided that upon the Company's consummation of an IPO, the Consulting Warrants may not be exercised until 90 days
after the consummation of the IPO. The Consulting Warrants may be exercised on a cashless basis. As described in Note 16 –
Subsequent Events, warrants totaling an aggregate of 392,728 shares were exercised on February 10, 2017 via a cashless exercise
resulting in the issuance of 392,605 shares of the Company’s common stock.
In connection with underwriting
the IPO, the Company issued on August 5, 2015 to NSC warrants (“IPO Warrants”) to purchase 660,000 shares of the Company’s
common stock at an exercise price of $6.00 per share. The IPO Warrants were fully vested upon issuance, are not exercisable until
July 30, 2016 and have a term of five years. The registration statement with the Securities and Exchange Commission included an
over-allotment of shares available for sale in addition to the IPO. On August 13, 2015, the Company issued warrants to NSC (“O-A
Warrants”) to purchase 64,193 shares of the Company’s common stock at an exercise price of $6.00 per share for underwriting
the over-allotment sale of shares. The O-A Warrants were fully vested upon issuance, are not exercisable until July 30, 2016 and
have a term of five years. The fair values were recorded as an increase to IPO costs and or increase to additional paid in capital.
As described in Note 16 – Subsequent Events, warrants totaling an aggregate of 72,420 shares were exercised on February 13,
2017 via a cashless exercise resulting in the issuance of 39,154 shares of the Company’s common stock. An additional 65,177
of these warrants were exercised on February 15, 2017 via a cashless exercise resulting in the issuance of 41,856 shares of the
Company’s common stock.
On October 31, 2015, the Company
issued warrants to a consultant to purchase 12,500 shares of the Company’s common stock at an exercise price of $6.00 per
share. The warrants were fully vested on issuance and expire on July 30, 2018. The fair value of the warrants, calculated by the
Black-Scholes-Merton method, $28,000 was recorded to business development and management costs and additional paid in capital in
2015. As described in Note 16 – Subsequent Events, warrants totaling an aggregate of 12,500 shares were exercised on February
16, 2017 via a cashless exercise resulting in the issuance of 8,025 shares of the Company’s common stock.
On November 2, 2015, the Company
issued warrants to a consultant to purchase 30,000 shares of the Company’s common stock at an exercise price of $6.00. The
warrants were fully vested upon issuance and have a term of one year. The fair value of the warrants, calculated by the Black-Scholes-Merton
method, $36,000 was recorded to business development and management costs and additional paid in capital in 2015. As noted below
in the “warrants exercised” section, all of these warrants were exercised in June 2017.
Provided below are the principal
assumptions used in the measurement of the fair values of the warrants issued during 2015 (Warrants fair value in thousands).
|
|
Consulting
|
|
|
IPO
|
|
|
O-A
|
|
|
Consulting
|
|
|
Consulting
|
|
|
|
09/08/14
|
|
|
08/05/15
|
|
|
08/13/15
|
|
|
10/31/15
|
|
|
11/02/15
|
|
Fair market value of shares
|
|
$
|
1.64
|
|
|
$
|
5.00
|
|
|
$
|
5.36
|
|
|
$
|
5.00
|
|
|
$
|
4.89
|
|
Assumed exercise price
|
|
$
|
0.0034375
|
|
|
$
|
6.00
|
|
|
$
|
6.00
|
|
|
$
|
3.00
|
|
|
$
|
6.00
|
|
Term in years
|
|
|
3
|
|
|
|
5
|
|
|
|
5
|
|
|
|
2.75
|
|
|
|
1
|
|
Volatility
|
|
|
80
|
%
|
|
|
80
|
%
|
|
|
80
|
%
|
|
|
80
|
%
|
|
|
80
|
%
|
Annual rate of dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Discount rate
|
|
|
1.02
|
%
|
|
|
1.64
|
%
|
|
|
1.57
|
%
|
|
|
1.26
|
%
|
|
|
1.26
|
%
|
Call option value
|
|
$
|
1.49
|
|
|
$
|
3.05
|
|
|
$
|
3.34
|
|
|
$
|
2.28
|
|
|
$
|
1.21
|
|
Warrant shares issued
|
|
|
436,364
|
|
|
|
660,000
|
|
|
|
64,193
|
|
|
|
12,500
|
|
|
|
30,000
|
|
Warrants fair value
|
|
$
|
714
|
|
|
$
|
2,014
|
|
|
$
|
214
|
|
|
$
|
28
|
|
|
$
|
36
|
|
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. As described in Note 16 – Subsequent Events,
warrants totaling an aggregate of 22,500 shares were exercised on February 16, 2017 via a cashless exercise resulting in the issuance
of 14,445 shares of the Company’s common stock.
The following assumptions were used
in the Black-Scholes-Merton pricing model to estimate the fair value of the warrant (FV of warrant 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
|
|
|
|
2.00
|
|
Risk-free interest rate
|
|
|
0.97
|
%
|
|
|
0.77
|
%
|
|
|
0.72
|
%
|
Volatility
|
|
|
80.00
|
%
|
|
|
80.00
|
%
|
|
|
80.00
|
%
|
Dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
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 2,305,378 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.
Stock based compensation
In 2014, the Board of Directors
adopted the Company's stock incentive plan (the "2014 Plan") under which a maximum of 1,363,637 shares of common stock
were authorized for issuance. 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.
The stock-based compensation expense
recorded was allocated as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Operations and development costs
|
|
$
|
256
|
|
|
$
|
119
|
|
General and administrative expense
|
|
|
804
|
|
|
|
182
|
|
Total
|
|
$
|
1,060
|
|
|
$
|
301
|
|
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, 2016 and 2015.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected stock volatility
|
|
|
71.2% - 80.0%
|
|
|
|
80
|
%
|
Risk free interest rate
|
|
|
0.92% - 1.77%
|
|
|
|
1.32% - 1.75%
|
|
Expected years until exercise
|
|
|
2.5 - 4.0
|
|
|
|
3.42 - 3.5
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
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.
The following table summarizes the
stock option activity and related information through December 31, 2016.
|
|
|
|
|
Options Outstanding
|
|
|
|
Number of
Shares
Available for
Grant
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
Per Share ($)
|
|
Balance at December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Options authorized
|
|
|
1,363,637
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(777,779
|
)
|
|
|
777,779
|
|
|
$
|
3.94
|
|
Options forfeited
|
|
|
25,455
|
|
|
|
(25,455
|
)
|
|
|
3.56
|
|
Balance at December 31, 2015
|
|
|
611,313
|
|
|
|
752,324
|
|
|
|
3.95
|
|
Options granted
|
|
|
(229,497
|
)
|
|
|
229,497
|
|
|
|
8.56
|
|
Options exercised
|
|
|
-
|
|
|
|
(4,500
|
)
|
|
|
4.18
|
|
Options forfeited
|
|
|
61,749
|
|
|
|
(61,749
|
)
|
|
|
6.14
|
|
Balance at December 31, 2016
|
|
|
443,565
|
|
|
|
915,572
|
|
|
$
|
4.96
|
|
The weighted-average grant-date
fair value of options granted during the year ended December 31, 2016 was $4.47 per share. The intrinsic value of options exercised
during the year ended December 31, 2016 was $22,000. There were no stock option exercises during the year ended December 31, 2015.
The amount of cash received from exercise of stock options during the year ended December 31, 2016 was $19,000.
Additional information related to
the status of options at December 31, 2016 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractural
Life (Years)
|
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
Outstanding
|
|
|
915,572
|
|
|
$
|
4.96
|
|
|
|
3.73
|
|
|
$
|
7,465
|
|
Vested and exercisable
|
|
|
338,099
|
|
|
$
|
4.46
|
|
|
|
3.83
|
|
|
$
|
2,925
|
|
The intrinsic value of options is
the fair value of the Company’s stock at December 31, 2016 less the per share exercise price of the option multiplied by
the number of shares.
As of December 31, 2016, there is
approximately $1.1 million of total unrecognized compensation cost related to the unvested share-based compensation arrangements
granted under the 2014 Plan. The remaining unrecognized compensation cost will be recognized over a weighted-average period of
2.0 years.
The following table summarizes information
about stock options outstanding as of December 31, 2016:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Quantity
|
|
|
Weighted-
Average
Remaining
Contractural
Life
(Years)
|
|
|
Quantity
|
|
|
Weighted-
Average
Remaining
Contractural
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.56
|
|
|
559,047
|
|
|
|
3.42
|
|
|
|
197,670
|
|
|
|
3.71
|
|
$3.92 - $5.07
|
|
|
112,662
|
|
|
|
3.87
|
|
|
|
95,996
|
|
|
|
3.94
|
|
$5.08 - $8.04
|
|
|
84,335
|
|
|
|
3.96
|
|
|
|
17,001
|
|
|
|
3.74
|
|
$8.05 - $8.82
|
|
|
79,236
|
|
|
|
4.41
|
|
|
|
27,432
|
|
|
|
4.33
|
|
$8.83 - $12.72
|
|
|
80,292
|
|
|
|
4.77
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
915,572
|
|
|
|
3.73
|
|
|
|
338,099
|
|
|
|
3.83
|
|
Option modification
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.
11. Commitments and Contingencies
Lease commitments
As discussed in Note 8, On August
7, 2015, the Company signed a lease for 21,697 square feet of mixed office and manufacturing space in Alameda, CA. On October 10,
2014, the Company entered into an operating lease for its current Oakland facility through April 2018. The future minimum payments
related to these leases are as follows as of December 31, 2016 (in thousands):
2017
|
|
$
|
515
|
|
2018
|
|
|
504
|
|
2019
|
|
|
506
|
|
2020
|
|
|
522
|
|
2021
|
|
|
538
|
|
Thereafter
|
|
|
227
|
|
Total minimum lease payments
|
|
$
|
2,812
|
|
During the years ended December
31, 2016 and 2015, the Company has incurred total rent expense of $340,000 and $232,000, respectively.
See Note 9 for lease commitments associated with
capital leases for fixed assets.
Legal proceedings
The Company is not subject to any legal proceedings as
of December 31, 2016.
12. Related Party Transactions
Related party transactions comprised
the following for the years ended December 31, 2016 and 2015:
|
·
|
a series of transactions with Interstate Battery and its affiliate, a greater than five percent
owner of our common shares described at “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – General - Interstate Battery Partnership” in this Form 10-K; and
|
|
·
|
the payment of $156,000 of salary, bonus and consulting fees during the year ended December 31,
2016 and $98,000 of consulting fees during the year ended December 31, 2015 to an employee who is the brother of the Company’s
chief executive officer.
|
The Company has adopted a policy
that any transactions with directors, officers, beneficial owners of five percent or more of our common shares, any immediate family
members of the foregoing or entities of which any of the foregoing are also officers or directors or in which they have a financial
interest, will only be on terms consistent with industry standards and approved by a majority of the disinterested directors of
our board.
13. Income Taxes
Net loss before tax provision consists
of the following (in thousands):
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
US
|
|
$
|
(13,556
|
)
|
|
$
|
(12,329
|
)
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
(13,556
|
)
|
|
$
|
(12,329
|
)
|
The components of the provision
for income tax expense consist of the following for the periods indicated (in thousands):
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
1
|
|
|
$
|
3
|
|
Reconciliation of the statutory
federal income tax rates consist of the following for the periods indicated:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Tax at federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State tax, net of federal benefit
|
|
|
-0.01
|
%
|
|
|
5.83
|
%
|
Change in derivative liability
|
|
|
0
|
%
|
|
|
-18.66
|
%
|
Change in rate
|
|
|
-1.30
|
%
|
|
|
0
|
%
|
Valuation allowance
|
|
|
-30.70
|
%
|
|
|
-20.53
|
%
|
Other
|
|
|
-2.00
|
%
|
|
|
-0.65
|
%
|
Provision for taxes
|
|
|
-0.01
|
%
|
|
|
-0.01
|
%
|
The components of deferred tax assets (liabilities) included
on the consolidated balance sheet are as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Capitalized start-up costs
|
|
$
|
4,640
|
|
|
$
|
1,840
|
|
Credits
|
|
|
127
|
|
|
|
58
|
|
Net operationg losses
|
|
|
1,730
|
|
|
|
771
|
|
Warrants
|
|
|
299
|
|
|
|
284
|
|
Others
|
|
|
666
|
|
|
|
111
|
|
Total gross deferred tax assets
|
|
|
7,462
|
|
|
|
3,064
|
|
Valuation allowance
|
|
|
(6,175
|
)
|
|
|
(2,682
|
)
|
Total gross deferred tax assets (net of valuation allowance)
|
|
$
|
1,287
|
|
|
$
|
382
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Patents
|
|
|
(350
|
)
|
|
|
(382
|
)
|
Fixed assets
|
|
|
(325
|
)
|
|
|
-
|
|
Beneficial conversion feature - debt discount
|
|
|
(612
|
)
|
|
|
-
|
|
Total gross deferred tax liabilities
|
|
|
(1,287
|
)
|
|
|
(382
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Based on the available objective
evidence at this time, management believes that it is more likely than not that the deferred tax assets of the Company will not
be fully realized. Accordingly, management has applied a full valuation allowance against net deferred tax assets at both December
31, 2016 and December 31, 2015.
The Company has Federal and California
net operating loss carry-forwards of approximately $4.9 million and $1.8 million, respectively, available to reduce future taxable
income which will begin to expire in December 31, 2034 for Federal and California purposes.
At December 31, 2015, the Company
had research and development credits carryforward of approximately $59,000 and $186,000 for Federal and California income tax purposes,
respectively. If not utilized, the Federal research and development credits carryforward will begin to expire in December 31, 2034.
The California credits can be carried forward indefinitely.
Utilization of the Company's net
operating loss may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of net operating loss carryforwards
prior to utilization.
The Company’s policy is to
account for interest and penalties as income tax expense. As of December 31, 2016, the Company had no interest related to unrecognized
tax benefits. No amounts of penalties related to unrecognized tax benefits were recognized in the provision for income taxes.
The Company maintains liabilities
for uncertain tax positions. These liabilities involve considerable judgement and estimation and are continuously monitored by
management based on the best information available, including changes in tax regulations, the outcome of relevant court cases,
and other information. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as
income tax expense. At December 31, 2016, the Company’s total amount of unrecognized tax benefit was approximately $73,000,
none of which will affect the effective tax rate, if recognized. The Company does not expect its unrecognized benefits to change
materially over the next twelve months.
The Company files income tax returns
with the United States federal government and the State of California. The Company’s tax returns for the prior years remain
open to audit for Federal and California purposes.
The Company is making the election
to early adopt ASU 2015-17 to classify all deferred tax assets and liabilities, along with any related valuation allowance, as
noncurrent on the balance sheet.
14. 401(k) Savings Plan
The Company maintains a defined-contribution savings
plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). The 401(k) Plan covers all employees who
meet defined minimum age and service requirements, and allows participants to defer a portion of their annual compensation on a
pretax basis. The Plan does not currently provide for matching contributions.
15. Supplemental Financial
Information