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 demand. The Company
intends to manufacture the equipment it has developed and pursue the development of lead acid battery recycling facilities, both
directly and 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 to the date of this report all revenue has been derived from the sale of lead
compounds and plastics.
Liquidity and Management
Plans
The Company completed the development
of our first LAB recycling facility at the Tahoe Reno Industrial Center (“TRIC”) and commenced production during the
first quarter of 2017. The TRIC facility will produce recycled lead, consisting of lead compounds, ingoted hard lead and ingoted
AquaRefined lead as well as plastic.
The Company generated revenues
of $2.1 million during 2017 and had net losses of $26.6 million, $13.6 million and $12.3 million for the years ended December 31,
2017, 2016 and 2015, respectively. As of December 31, 2017, the Company’s cash balance was $22.8 million. The Company believes
that its working capital is sufficient to fund the commissioning and commencement of commercial operations of 16 AquaRefining modules
and its commercial operations at TRIC through, at least, December 2018, assuming the successful commercial rollouts of the 16 AquaRefining
modules.
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”).
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 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.
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 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. As of December 31, 2017, the building was complete and the funds had been dispersed.
Accounts receivable
The Company sells its products to large well-established
companies and extends credit without requiring collateral, based on an ongoing evaluation of the customer’s business prospects
and financial condition. In the event that payment of a customer’s account receivable is doubtful, the Company would reserve
the receivable under an allowance for doubtful accounts. As of December 31, 2017, the Company believes that all receivables will
be collected and, therefore, has not created any reserve for doubtful accounts.
Inventory
Inventory is stated as the lower of cost or net realizable
value. Cost is recorded on a first-in, first-out basis using the weighted average method. Net realizable value is determined as
the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. The Company records a write-down, if necessary, to reduce the carrying value of inventory to its net realizable
value. The effect of these write-downs is to establish a new cost basis in the related inventory, which is not subsequently written
up.
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
Intangible assets consist of
a patent application contributed to the Company by five founding stockholders, patent applications for technology developed by
the Company, trademark applications and a patent portfolio acquired during 2017. The useful life of the intangible assets has been
determined to be ten years and the assets are being amortized straight-line over this period. 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. As further described in Note 6, the Company recorded an impairment of $2.4 million on the acquisition of the
2017 acquired patent portfolio. The Company determined that the estimated life of the intellectual property properly reflected
the current remaining economic life of the asset.
Asset retirement obligations
The Company records the fair value of estimated asset
retirement obligations associated with tangible long-lived assets in the period incurred. Retirement obligations associated with
long-lived assets are those for which there is an obligation for closures and/or site remediation at the end of the assets’
useful lives. These obligations are initially estimated based on discounted cash flow estimates and are accreted to full value
over time through charges to operating expense. In addition, asset retirement costs are capitalized as part of the related asset’s
carrying value and are depreciated on a straight-line basis over the assets’ respective useful lives.
Revenue Recognition
The Company records revenue recognition in accordance
with ASC 606,
Revenue from Contracts with Customers
.
ASC 606 provides
a single comprehensive model for the recognition of revenue arising from contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. It requires an entity to recognize revenue when the entity transfers
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. ASC 606 creates a five-step model that requires entities to exercise judgment when considering
the terms of contract(s), which includes (1) identifying the contract(s) with the customer, (2) identifying the separate performance
obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance
obligations, and (5) recognizing revenue as each performance obligation is satisfied. ASC 606 requires additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including qualitative and
quantitative information about contracts with customers, significant judgments and changes in judgments and assets recognized from
costs incurred to obtain or fulfill a contract.
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, accounts receivable, 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, 2017 or 2016.
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.
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 and 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,
|
|
Excluded potentially dilutive securities (1):
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note - principal
|
|
|
702,247
|
|
|
|
702,247
|
|
|
|
—
|
|
Consulting warrants to purchase common stock
|
|
|
—
|
|
|
|
486,364
|
|
|
|
478,864
|
|
Options to purchase common stock
|
|
|
578,813
|
|
|
|
915,572
|
|
|
|
752,324
|
|
Unvested restricted stock
|
|
|
180,951
|
|
|
|
—
|
|
|
|
—
|
|
Financing warrants to purchase common stock
|
|
|
2,340,828
|
|
|
|
3,316,208
|
|
|
|
975,380
|
|
Total potential dilutive securities
|
|
|
3,802,839
|
|
|
|
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.
Concentration of Credit Risk
Substantially all of our revenue and accounts receivable
as of and for the year ended December 31, 2017 is attributable to Johnson Controls Battery Group, Inc. Substantially all of the
chemicals used in our refining process are provided by one supplier and supply of used lead acid batteries has, during 2017, been
provided by two vendors supplying 56% and 44%, respectively.
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
Company is in the process of evaluating the impact of this new guidance.
In November 2016, the FASB issued ASU No. 2016-18,
Restricted Cash, or ASU 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. ASU 2016-18 is effective for fiscal
years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply
the amendments in ASU 2016-18 using a full retrospective approach. The Company is currently evaluating the impact the adoption
of the ASU will have on its consolidated financial statements.
There were no other recent accounting pronouncements
or changes in accounting pronouncements during the year ended December 31, 2017 that are of significance or potential significance
to the Company.
3. Revenue recognition
Revenues are recognized when control of the promised
goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled
to in exchange for those goods or services. 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. 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, ingoted hard lead and ingoted 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 to the date
of this report all revenue has been derived from the sale of lead compounds and plastics.
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 our contracts will have a single
performance obligation as the promise to transfer the individual goods or services 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 year ended December 31, 2017.
Significant Judgments
The Company estimates variable consideration for
arrangements where the transaction price is not fully determinable until the completion of yield testing. The Company estimates
variable consideration at the most likely amount to which it expects to be entitled and includes estimated amounts in revenue to
the extent it is probable that a significant reversal of revenue recognized will not occur when the uncertainty associated with
the variable consideration is resolved. Adjustments to revenue is recognized in the period when the uncertainty is resolved. To
date, any adjustments to estimates have not been material.
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 we
recognize revenue at the amount to which we have the right to invoice for services performed.
4. Inventory, net
Inventory consisted of the following for the dates
indicated (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
512
|
|
|
$
|
—
|
|
Work in process
|
|
|
182
|
|
|
|
—
|
|
Raw materials
|
|
|
545
|
|
|
|
59
|
|
|
|
$
|
1,239
|
|
|
$
|
59
|
|
5. 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)
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational equipment
|
|
|
3-10
|
|
|
$
|
15,457
|
|
|
$
|
15,132
|
|
Lab equipment
|
|
|
5
|
|
|
|
685
|
|
|
|
547
|
|
Computer equipment
|
|
|
3
|
|
|
|
174
|
|
|
|
140
|
|
Office furniture and equipment
|
|
|
3
|
|
|
|
326
|
|
|
|
298
|
|
Leasehold improvements
|
|
|
5-7
|
|
|
|
1,408
|
|
|
|
1,408
|
|
Land
|
|
|
—
|
|
|
|
1,047
|
|
|
|
1,047
|
|
Building
|
|
|
39
|
|
|
|
24,847
|
|
|
|
21,962
|
|
Asset Retirement Cost
|
|
|
20
|
|
|
|
670
|
|
|
|
—
|
|
Equipment under construction
|
|
|
|
|
|
|
4,552
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
49,166
|
|
|
|
42,169
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(3,433
|
)
|
|
|
(777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,733
|
|
|
$
|
41,392
|
|
Depreciation expense was $2.9
million, $0.7 million and $0.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. The Building is a 136,750
square foot lead acid battery recycling plant being built in McCarran, Nevada. Equipment under construction at December 31, 2017
is primarily AquaRefining modules manufactured by the Company to be used in the McCarran, Nevada 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 $0.5 million and $0.1 million 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, 2017 subject to capital
leases is $0.4 million less accumulated depreciation of $0.1 million resulting in net fixed assets under capital lease of $0.3
million. Total lab equipment included in the above table at December 31, 2016 subject to capital leases was $0.4 million less accumulated
depreciation of $36,000 resulted in net fixed assets under capital lease of $0.4 million. These assets are depreciated using the
same useful lives as noted above and included in depreciation expense. See Note 12 – Notes Payable for minimum future payments
related to these equipment leases.
6. Intellectual
Property
On April 13, 2017, the Company entered into an agreement
to purchase all the capital shares of Ebonex IPR Limited, a company registered in England and Wales. Ebonex IPR Limited is a pre-revenue
IP-based company that has developed patented technology in the field of advanced materials and manufacturing methods for advanced
lead acid batteries. Total consideration was $2.5 million, consisting of cash, transaction costs and 123,776 shares of the Company’s
common stock, which at the time had a closing market price of $17.36 per share. In accordance with ASC Topic 805-50, “Business
Combinations – Related Issues”, the Company accounted for the transaction as an asset acquisition and allocated the
consideration to the relative fair value of the assets acquired. The Company determined that the transaction was an asset acquisition
rather than a business combination following the guidance in the above-mentioned standard. In order to be treated as a business
combination, the acquired assets and assumed liabilities must constitute a business. A business requires a set of inputs and processes
applied to those inputs that have the ability to contribute to the creation of outputs. Ebonex IPR Limited has no processes such
as strategic management processes, operational processes, or employees. Further, Ebonex IPR Limited provides no goods or services
to customers, nor has it any investment or other revenues. Therefore, the Company concluded that the acquired assets and assumed
liabilities do not constitute a business and are instead treated as an asset acquisition. Assets acquired consisted of a patent
portfolio. The fair value of the patent portfolio, of $112,000, was determined by management with the assistance of an independent
valuation specialist using an income approach. Included in the purchase were certain fixed assets that have been determined by
management to have no immediate value and were not considered in the valuation of Ebonex IPR.
The Company initially recorded the transaction as an
increase of $2.5 million to intellectual property, net on the balance sheet. Subsequently, due to the fair value of the patent
portfolio being significantly less than total consideration, the early development stage of the technology acquired and the uncertainties
inherent in research and development, the Company recorded a non-cash impairment charge of $2.4 million during the three-month
period ended June 30, 2017.
The remaining $0.1 million is
being amortized straight-line over a 10-year period.
The increase of $0.5 million
(excluding the Ebonex transaction detailed above), $0.2 million and $0.1 million in 2017, 2016 and 2015, respectively, 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):
|
|
2017
|
|
|
2016
|
|
Intellectual property
|
|
$
|
1,906
|
|
|
$
|
1,419
|
|
Accumulated amortization
|
|
|
(445
|
)
|
|
|
(282
|
)
|
Intellectual property, net
|
|
$
|
1,461
|
|
|
$
|
1,137
|
|
Aggregate amortization expense
for the year ended December 31, 2017, 2016 and 2015 was $0.2 million, $0.1 million and $0.1 million, respectively.
Estimated future amortization is as follows as of
December 31, 2017 (in thousands).:
2018
|
|
|
|
191
|
|
2019
|
|
|
|
191
|
|
2020
|
|
|
|
191
|
|
2021
|
|
|
|
191
|
|
2022
|
|
|
|
191
|
|
Thereafter
|
|
|
|
506
|
|
Total
estimated future amortization
|
|
|
$
|
1,461
|
|
7. Other
Assets
Other assets consist of the following (in thousands).
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Alameda security deposit (1)
|
|
$
|
321
|
|
|
$
|
597
|
|
CD for Green Bank collateral security (2)
|
|
|
1,019
|
|
|
|
1,012
|
|
Nevada sales and use tax deposit
|
|
|
49
|
|
|
|
49
|
|
Facility Closure Trust deposit (3)
|
|
|
450
|
|
|
|
100
|
|
Various other assets
|
|
|
—
|
|
|
|
147
|
|
|
|
|
1,839
|
|
|
|
1,905
|
|
Less: current portion (1)
|
|
|
(275
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
Other assets, non-current
|
|
$
|
1,564
|
|
|
$
|
1,630
|
|
|
(1)
|
The lease deposit related to the Alameda headquarters is being released over time: $275,000 was released in June 2017 and $275,000
will be released in June 2018; 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 Green Bank 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 deposited upon establishment of the Trust Fund, on October 31, 2016; $350,000 was deposited on October 31, 2017; and $220,000
will be due on October 31, 2018.
|
8. Accrued
liabilities
Accrued liabilities consist of the following (in
thousands).
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Fixed asset related
|
|
$
|
232
|
|
|
$
|
1,330
|
|
Payroll related
|
|
|
470
|
|
|
|
359
|
|
Use tax accrual
|
|
|
75
|
|
|
|
156
|
|
Professional services
|
|
|
88
|
|
|
|
29
|
|
Estimated Interstate Battery settlement
|
|
|
600
|
|
|
|
—
|
|
Other
|
|
|
336
|
|
|
|
101
|
|
|
|
$
|
1,801
|
|
|
$
|
1,975
|
|
9. 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 Company’s facility at TRIC upon closure. 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. 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 was capitalized.
Accretion of the ARO for the year ended December 31, 2017 was $31,000.
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.
10. Convertible Notes
As described more completely under the caption “Interstate
Battery Agreements” below in Note 13, 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 years ended December
31, 2017 and 2016 totaled $ 0.6 million and $0.3 million, respectively. Amortization of the note discount for the years ended December
31, 2017 and 2016 totaled $0.4 million and $0.1 million, respectively. Amortization of the deferred financing costs, more fully
described in Note 13, totaled $48,000 and $27,000 for the year ended December 31, 2017 and 2016, respectively.
The convertible note payable
is comprised of the following (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Convertible note payable
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
Accrued interest
|
|
|
961
|
|
|
|
343
|
|
Deferred financing costs, net
|
|
|
(67
|
)
|
|
|
(115
|
)
|
Note discount
|
|
|
(4,562
|
)
|
|
|
(4,921
|
)
|
|
|
|
|
|
|
|
|
|
Convertible note payable, non-current portion
|
|
$
|
1,332
|
|
|
$
|
307
|
|
As of December 31, 2017, the
Interstate Battery convertible note’s “if-converted value” did not exceed its principal amount.
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.
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.
All of these warrants were exercised
via cashless exercises during 2017.
11. 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. Amortization
of deferred rent expense for the year ended December 31, 2017 was $177,000. Net deferred rent expense for the years ended December
31, 2016 and 2015 was $29,000 and $163,000, respectively.
12. 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. AMR was in compliance
with all but the minimum debt service coverage ratio covenant as of and for each of the three-month periods ended March 31, June
30, September 30 and December 31, 2017. AMR has received a waiver for the minimum debt service coverage ratio covenant for each
of the three-month periods ended March 31, June 30, September 30 and December 31, 2017.
The net proceeds of the loan
was deposited into an escrow account at Green Bank. The funds were released as payment for the building constructed in McCarran,
Nevada 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,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Notes payable, current portion
|
|
|
|
|
|
|
|
|
Thermo Fisher Financial Service
|
|
$
|
128
|
|
|
$
|
137
|
|
Green Bank, net of issuance costs
|
|
|
277
|
|
|
|
170
|
|
|
|
$
|
405
|
|
|
$
|
307
|
|
|
|
|
|
|
|
|
|
|
Notes payable, non-current portion
|
|
|
|
|
|
|
|
|
Thermo Fisher Financial Service
|
|
$
|
11
|
|
|
$
|
138
|
|
Green Bank, net of issuance costs
|
|
|
8,828
|
|
|
|
9,100
|
|
|
|
$
|
8,839
|
|
|
$
|
9,238
|
|
The Thermo Fisher Financial Service obligations relate
to capital leases further discussed in Note 5 – 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, $35,000 and $9,000 for the years ended December 31, 2017, 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, 2017 (in thousands):
2018
|
|
|
|
405
|
|
2019
|
|
|
|
305
|
|
2020
|
|
|
|
313
|
|
2021
|
|
|
|
335
|
|
2022
|
|
|
|
357
|
|
Thereafter
|
|
|
|
8,206
|
|
Total loan payments
|
|
|
$
|
9,921
|
|
13. Stockholders’ Equity
Authorized capital
The authorized capital stock
of the Company consists of 50,000,000 shares of common stock, par value $0.001 per share. In the event of liquidation of the company,
dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities.
The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. The outstanding shares of common stock are fully paid and non-assessable.
The holders of the Company’s
common stock are entitled to one vote per share. Holders of common stock are entitled to receive a ratable share of dividends,
if any, as may be declared by the board of directors.
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. As of the date of this report, Interstate Battery has raised a
claim that the Company is in technical breach of a negative covenant under loan. The claimed breach relates to the Company’s
failure to obtain Interstate Battery’s prior written consent to the Company’s acquisition of Ebonex IPR, Ltd. In the
event the Company is unable to resolve this matter, Interstate Battery may declare a default under the loan and attempt to accelerate
the payment of all amounts thereunder. There can be no assurance the Company will be able to resolve this matter or that Interstate
Battery will not declare a default under the loan and attempt to accelerate the payment of all amounts thereunder. The Company
estimates that resolving the claim will result in a charge of $0.6 million. The Company has recorded the $0.6 million in general
and administrative expenses as of December 31, 2017 with the offset in accrued liabilities.
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 approximately 11.4% 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 the Company’s stock was $11.39.
The table below presents the allocation of the proceeds
based on the relative fair values of the stock, warrants and note (in thousands).
|
|
Fair value
|
|
|
Allocated value
|
|
|
|
|
|
|
|
|
Allocation of Proceeds
|
|
|
|
|
|
|
|
|
Convertible note
|
|
$
|
4,879
|
|
|
$
|
1,844
|
|
Warrants
|
|
|
13,586
|
|
|
|
5,134
|
|
Common stock
|
|
|
7,998
|
|
|
|
3,022
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,463
|
|
|
$
|
10,000
|
|
The difference between the face value of the convertible
note and the allocated amount (which considers both the allocated fair value of the issued stock and allocated fair value of the
warrants) was recorded as an initial discount to the convertible note; common stock was recorded at its allocated fair value as
a credit to par value and additional paid-in capital as appropriate, based on the number of shares issued, and the allocated fair
value of the warrant was credited to additional paid-in capital. After taking into consideration the amortization of the note discount,
the effective interest rate on the convertible note is 184.75%.
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.
2016 Public Offering
On November 21, 2016, the Company
completed a public offering of 2.3 million shares of its common stock at a public offering price of $10.00 per share. Net proceeds
to the Company from the public offering were approximately $21.5 million after deducting underwriting discounts, commissions and
offering expenses. In connection with the public offering, the underwriter received a fee of $1.4 million and a warrant to purchase
33,450 shares of the Company’s common stock at $10.00 per share that is exercisable commencing May 20, 2017 and expires on
November 21, 2019. The fair value of the warrant, $229,000, was recorded as an increase to offering expenses and an increase to
additional paid-in capital. The Company calculated the fair value of the warrant using a BlackScholes Merton model with the assumptions
as follows: $12.66 closing market value on the date of grant; 3-year term; 72% volatility; 1.36 discount rate and 0% annual dividend
rate.
Johnson Controls Agreement
On February 7, 2017, the Company entered into a Stock
Purchase Agreement with Johnson Controls pursuant to which the Company issued and sold to a wholly-owned subsidiary of Johnson
Controls International plc, (“Johnson Controls”), 939,005 shares of its common stock at $11.33 per share for the gross
proceeds of approximately $10.6 million. Costs incurred in connection with the transaction, primarily legal fees, totaled approximately
$167,000. The Stock Purchase Agreement includes customary representations, warranties, and covenants by Johnson Controls and the
Company, and an indemnity from the Company in favor of Johnson Controls.
In connection with the investment transactions,
the Company also entered into an Investors Rights Agreement dated February 7, 2017 with Johnson Controls pursuant to which the
Company granted Johnson Controls customary demand and piggyback registration rights, limited board observation rights and limited
preemptive rights allowing Johnson Controls the right to purchase its proportional share of certain future equity issuances by
the Company. The board observation and preemptive rights shall expire on the earlier of (i) such time as Johnson Controls no longer
owns 50% of the acquired shares or (ii) the termination of both the Tolling/Lead Purchase Agreement and Equipment Supply Agreement.
There were no sales commissions paid by the Company
in connection with the sale of its common shares to Johnson Controls.
2017 Public Offering
On December 12, 2017, the Company completed a public
offering of 7,150,000 shares of its common stock at a public offering price of $2.10 per share. Net proceeds to the Company from
the public offering were approximately $13.8 million after deducting underwriting discounts, commissions and offering expenses.
In January 2018, the underwriter exercised their overallotment option resulting in an additional 1,072,500 shares being issued
and net proceeds of approximately $2.1 million.
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. All of these warrants
were exercised during 2017.
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 an increase to additional paid in capital.
All of these warrants were exercised during 2017.
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. All of these warrants were exercised during 2017.
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. All of these
warrants were exercised during 2016.
Provided
below are the principal assumptions used in the measurement of the fair values of the warrants issued during 2014 and 2015 (Warrants
fair value in thousands).
|
|
Consulting
09/08/14
|
|
|
IPO
08/05/15
|
|
|
O-A
08/13/15
|
|
|
Consulting
10/31/15
|
|
|
Consulting
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
|
|
|
$
|
6.00
|
|
|
$
|
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. All of these warrants were exercised during 2017.
The
following assumptions were used in the Black-Scholes-Merton pricing model to estimate the fair value of the warrants (FV of warrants
in thousands).
|
|
1/31/2016
|
|
|
4/30/2016
|
|
|
7/31/2016
|
|
Warrant shares issued
|
|
|
12,500
|
|
|
|
12,500
|
|
|
|
12,500
|
|
Market price
|
|
$
|
4.63
|
|
|
$
|
8.37
|
|
|
$
|
9.31
|
|
Exercise price
|
|
$
|
6.00
|
|
|
$
|
6.00
|
|
|
$
|
6.00
|
|
Term (years)
|
|
|
1.25
|
|
|
|
2.25
|
|
|
|
2.00
|
|
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.
During
the year ended December 31, 2017, 1,175,796 shares were issued pursuant to cash and cashless warrant exercises as detailed below.
Generally, the warrants specify using the preceding five-day average of closing prices for the Company’s common stock in
the calculation of common stock to be issued pursuant to a cashless exercise.
Date
of
|
|
|
Average
Closing
|
|
|
|
|
|
Warrant
|
|
|
Common
|
|
Warrant
|
|
|
Market
Price
|
|
|
Exercise
Price
|
|
|
Shares
|
|
|
Shares
|
|
Exercise
|
|
|
Per
Share
|
|
|
Per
Share
|
|
|
Exercised
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/10/2017
|
|
|
$
|
11.016
|
|
|
$
|
0.0034375
|
|
|
|
392,728
|
|
|
|
392,605
|
|
|
2/13/2017
|
|
|
$
|
13.062
|
|
|
$
|
3.00
|
|
|
|
25,119
|
|
|
|
19,349
|
|
|
2/13/2017
|
|
|
$
|
13.062
|
|
|
$
|
6.00
|
|
|
|
72,420
|
|
|
|
39,154
|
|
|
2/15/2017
|
|
|
$
|
16.768
|
|
|
$
|
6.00
|
|
|
|
65,177
|
|
|
|
41,856
|
|
|
2/16/2017
|
|
|
$
|
16.768
|
|
|
$
|
6.00
|
|
|
|
35,000
|
|
|
|
22,470
|
|
|
3/17/2017
|
|
|
$
|
20.262
|
|
|
$
|
6.00
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
3/20/2017
|
|
|
$
|
20.304
|
|
|
$
|
3.00
|
|
|
|
226,068
|
|
|
|
192,666
|
|
|
3/20/2017
|
|
|
$
|
20.304
|
|
|
$
|
6.00
|
|
|
|
586,596
|
|
|
|
413,253
|
|
|
4/3/2017
|
|
|
$
|
19.148
|
|
|
$
|
0.0034375
|
|
|
|
43,636
|
|
|
|
43,628
|
|
|
4/11/2017
|
|
|
$
|
17.920
|
|
|
$
|
6.00
|
|
|
|
12,500
|
|
|
|
8,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,461,744
|
|
|
|
1,175,796
|
|
Warrants
outstanding
Warrants
to purchase shares of the Company’s common stock at a weighted average exercise price of $8.45 per share are as follows.
Exercise
Price
|
|
|
Expiration
|
|
|
Shares
Subject to purchase
|
|
per
Share
|
|
|
Date
|
|
|
at
September 30, 2017
|
|
|
|
|
|
|
|
|
|
$
|
7.12
|
|
|
|
5/18/2018
|
|
|
|
702,247
|
|
$
|
9.00
|
|
|
|
5/18/2019
|
|
|
|
1,605,131
|
|
$
|
10.00
|
|
|
|
11/21/2019
|
|
|
|
33,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,340,828
|
|
Stock
based compensation
In
2014, the Board of Directors adopted the Company’s stock incentive plan (the “2014 Plan”). The 2014 Plan was
most recently amended and restated effective as of the Company’s 2017 Annual Stockholders’ Meeting. A total of
2,113,637 shares of common stock was authorized for issuance pursuant to the 2014 Plan at the time of its most recent amendment
and restatement in 2017. The 2014 Plan provides for the following types of stock-based awards: incentive stock options; non-statutory
stock options; restricted stock; and performance stock. The 2014 Plan, under which equity incentives may be granted to employees
and directors under incentive and non-statutory agreements, requires that the option price may not be less than the fair value
of the stock at the date the option is granted. Option awards are exercisable until their expiration, which may not exceed 10
years from the grant date.
The
stock-based compensation expense recorded was allocated as follows (in thousands):
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cost of
product sales
|
|
$
|
143
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Research and development
cost
|
|
|
456
|
|
|
|
256
|
|
|
|
119
|
|
General
and administrative expense
|
|
|
482
|
|
|
|
804
|
|
|
|
182
|
|
Total
|
|
$
|
1,081
|
|
|
$
|
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, 2017, 2016 and 2015.
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Expected
stock volatility
|
|
|
70.5%
- 73.2
|
%
|
|
|
71%-80
|
%
|
|
|
80
|
%
|
Risk free interest
rate
|
|
|
1.38%
- 2.03
|
%
|
|
|
0.92%-1.77
|
%
|
|
|
1.32%-1.75
|
%
|
Expected years until
exercise
|
|
|
2.5-3.5
|
|
|
|
2.5-4.0
|
|
|
|
3.4-3.5
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
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. Forfeitures are recognized as they
occur.
The
following table summarizes the 2014 Plan activity and related information through December 31, 2017.
|
|
|
|
|
|
Options
Outstanding
|
|
|
RSU’s
outstanding
|
|
|
|
|
Number
of
Shares
Available for
Grant
|
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share ($)
|
|
|
Number
of
RSU’s
|
|
|
Weighted-
Average
Grant Date
Fair Value
Per Share
($)
|
|
Balance
at December 31, 2015
|
|
|
|
611,313
|
|
|
|
752,324
|
|
|
$
|
3.95
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
|
(229,497
|
)
|
|
|
229,497
|
|
|
|
8.56
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
|
—
|
|
|
|
(4,500
|
)
|
|
|
4.18
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
|
61,749
|
|
|
|
(61,749
|
)
|
|
|
6.14
|
|
|
|
—
|
|
|
|
—
|
|
Balance
at December 31, 2016
|
|
|
|
443,565
|
|
|
|
915,572
|
|
|
|
4.96
|
|
|
|
—
|
|
|
|
—
|
|
Authorized
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
(330,884
|
)
|
|
|
134,933
|
|
|
|
11.19
|
|
|
|
195,951
|
|
|
|
7.28
|
|
Exercised
|
|
|
|
—
|
|
|
|
(284,370
|
)
|
|
|
3.77
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
|
202,322
|
|
|
|
(187,322
|
)
|
|
|
6.44
|
|
|
|
(15,000
|
)
|
|
|
5.78
|
|
Balance
at December 31, 2017
|
|
|
|
1,065,003
|
|
|
|
578,813
|
|
|
$
|
6.51
|
|
|
|
180,951
|
|
|
$
|
7.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average grant-date fair value of options granted during the year ended December 31, 2017, 2016 and 2015 was $5.55, $4.47
and $2.20 per share, respectively. The intrinsic value of options exercised during the year ended December 31, 2017 and 2016 was
$1.5 million and $22,000, respectively. There were no stock option exercises during the year ended December 31, 2015. The amount
of cash received from exercise of stock options during the year ended December 31, 2017 was $1.1 million.
Additional
information related to the status of options at December 31, 2017 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractural
Life (Years)
|
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
Outstanding
|
|
|
578,813
|
|
|
$
|
6.51
|
|
|
|
3.27
|
|
|
$
|
—
|
|
Vested and exercisable
|
|
|
376,039
|
|
|
$
|
5.58
|
|
|
|
3.00
|
|
|
$
|
—
|
|
The
intrinsic value of options is the fair value of the Company’s stock at December 31, 2017 less the per share exercise price
of the option multiplied by the number of shares.
As
of December 31, 2017, there is approximately $0.7 million of total unrecognized compensation cost related to the unvested share-based
(option) compensation arrangements granted under the 2014 Plan. The remaining unrecognized compensation cost will be recognized
over a weighted-average period of 1.9 years.
The
following table summarizes information about stock options outstanding as of December 31, 2017:
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
|
Quantity
|
|
|
Weighted-
Average
Remaining
Contractural
Life
(Years)
|
|
|
Quantity
|
|
|
Weighted-
Average
Remaining
Contractural
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.03 -$3.57
|
|
|
|
211,045
|
|
|
|
2.78
|
|
|
|
178,091
|
|
|
|
2.77
|
|
$3.58 -
$5.24
|
|
|
|
92,796
|
|
|
|
3.00
|
|
|
|
83,752
|
|
|
|
2.90
|
|
$5.25 -
$8.04
|
|
|
|
94,370
|
|
|
|
3.54
|
|
|
|
36,552
|
|
|
|
2.83
|
|
$8.05 -
$9.41
|
|
|
|
93,241
|
|
|
|
3.59
|
|
|
|
48,330
|
|
|
|
3.46
|
|
$9.42 -
$19.20
|
|
|
|
87,361
|
|
|
|
4.14
|
|
|
|
29,314
|
|
|
|
4.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578,813
|
|
|
|
3.28
|
|
|
|
376,039
|
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Restricted
Stock Units
In
July 2017, the Company granted 49,751 restricted stock units (RSUs) with a grant date fair value per share of $11.68 to its
then Chief Financial Officer, Mr. Weinswig, as part of his employment agreement. 16,584 RSUs will vest on each July 31, 2018
and July 31, 2019 and the remaining 16,583 RSU’s will vest on July 31, 2020. In October 2017, the Company granted
146,200 restricted stock units with a grant date fair value per share of $5.78 to certain non-executive employees. These restricted
stock units were granted with 50% vesting on January 15, 2018 and the remaining 50% vesting on January 15, 2019. As of
December 31, 2017, no restricted stock units had vested.
As
of December 31, 2017, there is approximately $0.9 million of total unrecognized compensation cost related to the unvested share-based
(RSU) compensation arrangements granted under the 2014 Plan. The remaining unrecognized compensation cost will be recognized over
a weighted-average period of 1.9 years.
Reserved
shares
At
December 31, 2017, the Company has reserved shares of common stock for future issuance as follows:
|
|
Number
of
|
|
|
|
Shares
|
|
Equity Plan
|
|
|
|
|
Subject
to outstanding options and restricted shares
|
|
|
759,764
|
|
Available
for future grants
|
|
|
1,065,003
|
|
Convertible note-principal
|
|
|
702,247
|
|
Officer and Director
Purchase Plan
|
|
|
247,596
|
|
Warrants
|
|
|
2,340,828
|
|
December
2017 public financing overallotment
|
|
|
1,072,500
|
|
|
|
|
6,187,938
|
|
14. Commitments
and Contingencies
Lease
commitments
As
discussed in Note 11, 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, 2017 (in thousands):
2018
|
|
|
|
504
|
|
2019
|
|
|
|
506
|
|
2020
|
|
|
|
522
|
|
2021
|
|
|
|
538
|
|
2022
|
|
|
|
227
|
|
Total minimum
lease payments
|
|
|
$
|
2,297
|
|
|
|
|
|
|
|
|
During
the years ended December 31, 2017, 2016 and 2015, the Company has incurred total rent expense of $0.5 million, $0.3 million and
$0.2 million, respectively.
See
Note 12 for lease commitments associated with capital leases for fixed assets.
Interstate
Battery Agreement commitment
Pursuant
to the Interstate Battery Investor Rights Agreement, the Company has agreed to compensate Interstate Battery should either Stephen
Clarke, the Company’s current 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 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 May18, 2016.
As
of the date of this report, Interstate Battery has raised a claim that the Company is in technical breach of a negative covenant
under the Interstate Battery convertible loan. The claimed breach relates to the Company’s failure to obtain Interstate
Battery’s prior written consent to its acquisition of Ebonex IPR, Ltd. The Company is in negotiations with Interstate Battery
to resolve the claim and the Company believes it will be able to resolve that matter. However, in the event the Company is unable
to resolve the claim, Interstate Battery may declare a default under the loan and attempt to accelerate the payment of all amounts
thereunder. There can be no assurance we will be able to resolve this matter or that Interstate Battery will not declare a default
under the loan and attempt to accelerate the payment of all amounts thereunder. The Company estimates that resolving the claim
of breach will result in a charge of $0.6 million. The Company has recorded $0.6 million in general and administrative expense
for the year ended December 31, 2017 with the offset in accrued liabilities.
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 current 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.
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 R. Clarke, Thomas Murphy and Mark Weinswig:
Arlis Hampton vs. Aqua
Metals, Inc. et al.
, Case No 3:17-cv-07142;
Grant Heath vs. Aqua Metals, Inc. et al
., Case No 3:17-cv-07196-JST;
Lotfy
Arbab vs. Aqua Metals, Inc. et al
., Case No 3:17-cv-07270WHA. Each of the complaints was filed by persons claiming to be
stockholders of the Company and generally allege violations of the anti-fraud provisions of the federal securities laws based
on the alleged issuance of false and misleading statements of material fact, and the alleged omission to state material facts
necessary to make other statements made not misleading, between May 19, 2016 and November 9, 2017 with respect to the
Company’s lead recycling operations. The complaints seek unspecified damages and plaintiffs’ attorneys’
fees and costs. As of the date of this report, multiple plaintiffs have filed motions seeking appointment as lead plaintiff.
Briefing on those competing motions was completed in early March, and a hearing is set for May 17, 2018. The Company has not
filed a responsive pleading in any of the above actions and does not expect to do so until a lead plaintiff has been
appointed by the Court.
Beginning
on February 2, 2018, two purported shareholder derivative actions were filed in the United States District Court for the District
of Delaware against the Company and its current executive officers and directors, Stephen R. Clarke, Selwyn Mould, Mark Weinswig,
Vincent DiVito, Mark Slade and Mark Stevenson, and one former officer and director, Thomas Murphy:
Al Lutzker, Derivatively
and on Behalf of Aqua Metals, Inc. v. Stephen R. Clarke, Thomas Murphy, Mark Weinswig, Selwyn Mould, Vincent L. Divito, Mark Slade
and Mark Stevenson and Aqua Metals, Inc., Case No. 1:99-mc-09999; and Chau Nguyen, Derivatively and on Behalf of Aqua Metals,
Inc. v. Stephen R. Clarke, Thomas Murphy, Mark Weinswig, Selwyn Mould, Vincent L. Divito, Mark Slade and Mark Stevenson and Aqua
Metals, Inc., Case No. 1:18-cv-00327
. The complaints were filed by persons claiming to be stockholders of the Company and
generally alleges that certain of its officers and directors breached their fiduciary duties to us by violating the federal securities
laws and exposing us to possible financial liability. The complaints seek unspecified damages and plaintiffs’ attorneys’
fees and costs. As of the date of this report, the Company has not filed a responsive pleading in either action.
15. Related
Party Transactions
Related
party transactions comprised the following for the years ended December 31, 2017, 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 $116,000 of salary during the year ended December 31, 2017; $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 a former 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.
16. Income
Taxes
Net
loss before tax provision consists of the following (in thousands):
|
|
|
Year
ended December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
US
|
|
|
$
|
(26,578
|
)
|
|
$
|
(13,556
|
)
|
|
$
|
(12,329
|
)
|
Foreign
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
$
|
(26,578
|
)
|
|
$
|
(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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
provision for income taxes
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
3
|
|
Reconciliation
of the statutory federal income tax rates consist of the following for the periods indicated:
|
|
Year
ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Tax at
federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State tax, net of federal
benefit
|
|
|
0.00
|
%
|
|
|
-0.01
|
%
|
|
|
5.83
|
%
|
Change in derivative
liability
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
-18.66
|
%
|
Change in rate
|
|
|
-22.13
|
%
|
|
|
-1.30
|
%
|
|
|
0
|
%
|
Valuation allowance
|
|
|
-15.78
|
%
|
|
|
-30.70
|
%
|
|
|
-20.53
|
%
|
Impairment charge of
acquired IP
|
|
|
6.86
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Excess benefits from
equity compensation
|
|
|
-3.08
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Other
|
|
|
0.14
|
%
|
|
|
-2.00
|
%
|
|
|
-0.65
|
%
|
Provision
for taxes
|
|
|
0.01
|
%
|
|
|
-0.01
|
%
|
|
|
-0.01
|
%
|
The
components of deferred tax assets (liabilities) included on the consolidated balance sheet are as follows (in thousands):
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Capitalized
start-up costs
|
|
$
|
4,312
|
|
|
$
|
4,640
|
|
Credits
|
|
|
484
|
|
|
|
127
|
|
Net operationg losses
|
|
|
5,350
|
|
|
|
1,730
|
|
Warrants
|
|
|
—
|
|
|
|
299
|
|
Others
|
|
|
818
|
|
|
|
666
|
|
Total gross deferred
tax assets
|
|
|
10,964
|
|
|
|
7,462
|
|
Valuation
allowance
|
|
|
(10,370
|
)
|
|
|
(6,175
|
)
|
Total
gross deferred tax assets (net of valuation allowance)
|
|
$
|
594
|
|
|
$
|
1,287
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Patents
|
|
|
(239
|
)
|
|
|
(350
|
)
|
Fixed assets
|
|
|
—
|
|
|
|
(325
|
)
|
Beneficial
conversion feature - debt discount
|
|
|
(355
|
)
|
|
|
(612
|
)
|
Total
gross deferred tax liabilities
|
|
|
(594
|
)
|
|
|
(1,287
|
)
|
Net
deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company’s effective tax rate for the period ended December 31, 2017 was lower than the statutory tax rate primarily because
of the valuation allowance on its US deferred tax assets taxed at lower rates, partially offset by state taxes and tax credits.
The income tax expense for the year ended December 31, 2017, 2016 and 2015 relate to state minimum income tax.
On
December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “Act”) into law. The new legislation decreases
the U.S. corporate federal income tax rate from 35% to 21% effective January 1, 2018. There was no impact on recorded deferred
tax balances as the remeasurement of net deferred tax assets was offset by a change in valuation allowance. The Act also includes
a number of other provisions including the elimination of loss carrybacks and limitations on the use of future losses, repeal
of the Alternative Minimum Tax regime, and the introduction of a base erosion and anti-abuse tax. These provisions are not expected
to have immediate effects on the Company.
Based
on the available objective evidence at this time, management believes that it is more likely than not that the net 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, 2017 and December 31, 2016. The net valuation allowance increased by approximately $4.2 million
during the year ended December 31, 2017. The increase in net valuation allowance primarily relates to net operating losses generated
during 2017 partially offset by a decrease related to the lower U.S. corporate federal income tax rate effective January 1, 2018.
The
Company has Federal and California net operating loss carry-forwards of approximately $24.6 million and $2.7 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, 2017, the Company had research and development credits carryforward of approximately $0.3 million and $0.5 million
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, 2017, the Company’s total amount of unrecognized tax benefit was approximately
$0.2 million, 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.
Prior
to January 1, 2017, the Company recognized the excess tax benefits of stock-based compensation expense as additional paid-in capital
(“APIC”), and tax deficiencies of stock-based compensation expense in the income tax provision or as APIC to the extent
that there were sufficient recognized excess tax benefits previously recognized. As a result of the prior requirement that excess
tax benefits reduce taxes payable prior to be recognized as an increase in paid in capital, the Company had not recognized certain
deferred tax assets (all tax attributes such as loss or credit carryforwards) that could be attributed to tax deductions related
to equity compensation in excess of compensation recognized for financial reporting.
Effective
as of January 1, 2017, the Company adopted a change in accounting policy in accordance with ASU 2016-09 to account for excess
tax benefits and tax deficiencies as income tax expense or benefit, and to recognize previously unrecognized deferred tax assets
that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation
recognized for financial reporting. The change was applied on a modified retrospective basis; no prior periods were restated
as a result of this change in accounting policy.
ASU
2016-09 also eliminates the requirement that excess tax benefits be realized as a reduction in current taxes payable before the
associated tax benefit can be recognized as an increase in paid in capital. Approximately $0.2 million of capitalized start-up
costs (none of which were included in the deferred tax assets recognized in the statement of financial position as of December
31, 2016) have been attributed to tax deduction for stock-based compensation in excess of the related book expense. Under ASU
2016-09, these previously unrecognized deferred tax assets were recognized on a modified retrospective basis as of January 1,
2017, the start of the year in which the Company adopted ASU 2016-09. The capitalized start-up costs recognized as of January
1, 2017, as described above, have been offset by a valuation allowance. As a result, there was no tax-related cumulative-effect
to retained earnings for US tax purpose.
The
Company made the election to early adopt ASU 2015-17 at December 31, 2016 to classify all deferred tax assets and liabilities,
along with any related valuation allowance, as noncurrent on the balance sheet.
17.
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.
18.
Supplemental Financial Information