Cautionary Statement
The following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements and the related notes
thereto contained elsewhere in this report. The information contained in this
quarterly report on Form 10-Q is not a complete description of our business or
the risks associated with an investment in our common stock. We urge you to
carefully review and consider the various disclosures made by us in this report
and in our other filings with the Securities and Exchange Commission, or SEC,
including our Annual Report on Form 10-K for the year ended December 31, 2019
filed with the SEC on March 11, 2020, or our Annual Report.
In this report we make, and from time to time we otherwise make written and oral
statements regarding our business and prospects, such as projections of future
performance, statements of management's plans and objectives, forecasts of
market trends, and other matters that are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements containing the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimates," "projects," "believes," "expects," "anticipates," "intends,"
"target," "goal," "plans," "objective," "should" or similar expressions identify
forward-looking statements, which may appear in our documents, reports, filings
with the SEC, and news releases, and in written or oral presentations made by
officers or other representatives to analysts, stockholders, investors, news
organizations and others, and in discussions with management and other of our
representatives.
Our future results, including results related to forward-looking statements,
involve a number of risks and uncertainties, including those risks included
below in Part II, Item 1 "Risk Factors". No assurance can be given that the
results reflected in any forward-looking statements will be achieved. Any
forward-looking statement speaks only as of the date on which such statement is
made. Our forward-looking statements are based upon assumptions that are
sometimes based upon estimates, data, communications and other information from
suppliers, government agencies and other sources that may be subject to
revision. Except as required by law, we do not undertake any obligation to
update or keep current either (i) any forward-looking statement to reflect
events or circumstances arising after the date of such statement or (ii) the
important factors that could cause our future results to differ materially from
historical results or trends, results anticipated or planned by us, or which are
reflected from time to time in any forward-looking statement.

General

Aqua Metals (NASDAQ: AQMS) is engaged in the business of equipment supply,
technology licensing and related services for recycling lead through a novel,
proprietary and patented process we developed and named AquaRefining™.
AquaRefining is a room temperature, water and organic acid-based process that
greatly reduces environmental emissions. Lead is a globally traded commodity
with a worldwide market value in excess of $20 billion. We believe our suite of
patented and patent pending AquaRefining technologies will allow the lead-acid
battery industry to simultaneously improve the environmental impact of lead
recycling and scale recycling production to meet demand. Furthermore, our
AquaRefining technologies result in high purity lead. We were formed as a
Delaware corporation on June 20, 2014 and since our formation, we have focused
our efforts on the development and testing of our AquaRefining process, the
construction of our initial lead acid battery, or LAB, recycling facility at the
Tahoe Reno Industrial Center, or TRIC, located in McCarran, Nevada and
commercializing the AquaRefining process.

We completed the development of our first LAB recycling facility at Nevada's
Tahoe Reno Industrial Center, or TRIC, in McCarran, Nevada and commenced
production of battery breaking and limited operations during the first quarter
of 2017. In April 2017, we commenced the shipment of products for sale,
consisting of lead compounds as well as plastics. In April 2018, we commenced
the limited production of lead bullion, including AquaRefined lead. In July
2018, we commenced the sale of pure AquaRefined lead in the form of two tonne
blocks and in October 2018, we commenced the sale of AquaRefined lead in the
form of battery manufacturing ready ingots. In November 2018, we received
official vendor certification from Clarios for our AquaRefined lead and in
December 2018, we commenced shipments directly to Clarios owned and partner
battery manufacturing facilities. In 2019, we operated our demonstration
AquaRefinery at commercial quantity production levels and produced over 35,000
AquaRefined ingots by operating the AquaRefinery 24 hours a day and 7 days a
week for sustained periods of time. The AquaRefining electrolyzers produced at
or above the target 100 Kg/Hr of production throughput per module of six
electrolyzers or ~ 16-17 Kg/Hr per electrolyzer and ran sustained endurance runs
for over one month several times.

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In order to expand the demonstration AquaRefinery to its full capacity, we chose
to idle the AquaRefinery beginning in September 2019 to facilitate contracting
work required to step the plant up to the next level of capacity planned for
late 2019 or early 2020. On the evening of November 29, 2019, a fire occurred in
the AquaRefining area of the recycling facility at TRIC. The cause of the fire
was not due to the technology or process of AquaRefining but rather to
contracting activities. The fire and related intense heat and smoke caused
significant damage to a material amount of equipment in the AquaRefinery area,
including all 16 AquaRefining modules, electrical and tank infrastructure, steel
superstructure, control wiring and other supporting infrastructure. The floor to
ceiling firewall between the AquaRefining area and the rest of the plant
isolated the worst of the damage to the AquaRefining area. The firewall also
appears to have spared material damage to much of the key front-end process
equipment, such as the battery breaker/separation system, concentrate production
area, kettles and ingot casting, water treatment and recovery and other
important areas of the plant. The administrative office area also remained
intact.

Based on preliminary estimates, as of the date of this report, we believe that
the replacement value of the equipment and plant lost or damaged in the fire
could be over $30 million excluding any business interruption cost recovery.
Assets on our balance sheet as of June 30, 2020 that were not affected by the
fire total approximately $38 million in book value, including the battery
breaker, melting kettles, kiln, filter presses, mixing and storage tanks, water
recovery system and the building infrastructure plus the land. We have $50
million dollars in combined property, equipment and business interruption
insurance. Initial estimates for property, plant and business interruption
claims may reach total limits. However, this number could change pending
detailed analysis and review.

Pursuant to the loan agreement with Veritex Community Bank, or Veritex, the
successor in interest to Green Bank, N.A., for approximately $9.1 million ($8.6
million net of issuance costs), Veritex is the loss payee on our insured claims
and all funds are paid directly to Veritex, which in turn disburses the proceeds
to us subject to their approval. In March 2020, we entered into a memorandum of
agreement with Veritex pursuant to which the parties agreed on the allocation of
funds from collected insurance payments. Pursuant to the memorandum of
agreement, 90% of the initial $5 million and 55% of the next $7.5 million of
insurance proceeds were allocated to us and the balance was allocated towards
the retirement of the Veritex loan. Thereafter, 60% of the next $12.5 million of
insurance proceeds will be allocated to us, and the balance towards the
repayment of the Veritex loan, until such time as the Veritex loan has been paid
in full, after which 100% of all future insurance payouts will be disbursed
directly to us.

As of the date of this report, of the $15.0 million of insurance proceeds
received from our insurance carriers, Veritex has put into escrow $4.875 million
and we have received $10.125 million. We expect the insurance carriers to pay an
additional $10.0 to $15.0 million in insurance proceeds over the next three to
six months, of which we should receive $6.0 to $11.0 million. This estimate is
based upon the cadence of receipts to date. We intend to vigorously pursue
receipt of insurance proceeds to satisfy in full all of our property, casualty
and business interruption losses, subject to the coverage limits.

We have engaged a public adjuster to support our legal and finance team and provide forensic accounting, construction expertise and direct interface with the insurers to assist us in quickly and properly documenting the loss and maximizing our insurance recovery amounts on the best possible timeline.



As a result of the fire we have suspended all commercial operations and the date
on which we can resume revenue producing operations is currently undetermined.
Following the fire, an investigation of the fire was commenced by the Storey
County Fire Marshal and we were denied access to the fire damaged portion of the
facility until late December 2019, at which time we were given access to the
fire damaged area. Since then, we have been engaged in the process of analyzing
the fire damage and the clean-up and disposal of the damaged equipment, and the
development of our capital light strategy.

Plan of Operations



Following the November 2019 fire, we have been engaged in the pursuit of a
capital light strategy that is based on the pursuit of licensing opportunities
within the lead battery recycling marketplace without maintaining and operating
a capital-intensive lead recycling facility. We plan to continue securing our
cash position by working on the successful collection of additional insurance
proceeds with the assistance of our retained public adjuster and special counsel
to facilitate the collection for property and business interruption losses. We
intend to dispose certain assets that are not essential to the capital light
licensing strategy. We believe our capital light business strategy will require
less space and less equipment and focus on the needs of our future licensees. As
of the date of this report, we have accelerated our capital light business
strategy, designed to optimize shareholder value by focusing on equipment supply
and licensing opportunities, which have always been a core part of our business
plans. We believe this path has the potential to maximize shareholder value in
that it could be far less capital intensive than a rebuild and could be funded
solely or primarily from a combination of cash on hand, insurance proceeds and
asset dispositions.

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Our capital light strategy is consistent with our long-held business strategy
and objectives. When we designed and developed TRIC in 2016, we did so at a time
when our business model assumed that TRIC would be the first of many LAB
recycling facilities owned and operated by us. Commencing in 2017, we began to
shift our focus away from the development of additional Company-owned LAB
recycling facilities and towards the licensing of our AquaRefining technology to
partners engaged in LAB recycling. We continued to develop TRIC as a LAB
recycling facility for purposes of further demonstrating AquaRefining on a
commercial scale. However, as a result of the fire and our high costs of capital
we believe that the cost of restoring TRIC to its pre-fire state would not be
the best use of our available and projected cash and that we may be able to
achieve the benefits of operating our facility at TRIC in its pre-fire state,
namely the development and demonstration of the licensing ready iteration of our
AquaRefining technologies, which we call Version 1.25L, through a less costly
commercialization program. Further, we believe that our results of operations to
date can demonstrate to potential licensees the value proposition of our
AquaRefining technologies. We believe that our AquaRefining technology would be
a commercially attractive valuable proposition in the hands of battery
recyclers, who typically have access to lower cost feedstock and ability to
process all materials on site through a furnace.
Results of Operations

Our lead recycling facility was not in production during the second quarter due
to the fire and the acceleration of our licensing strategy. Product sales during
the second quarter of 2019 consisted of high purity lead from our AquaRefining
process as well as lead bullion, lead compounds, and plastics. The following
table summarizes our results of operations with respect to the items set forth
below for the three and six months ended June 30, 2020 and 2019 together with
the percentage change in those items (in thousands).

                                                               Three months ended June 30,                                                                                          Six months ended June 30,
                                                                               Favorable                 %                                                    Favorable                %
                                            2020             2019            (Unfavorable)            Change               2020             2019            (Unfavorable)            Change

Product sales                            $     -          $  1,483          $      (1,483)             (100.0) %        $    18          $  1,920          $      (1,902)             (99.1) %
Cost of product sales                      1,306             7,185                  5,879               (81.8) %          2,760            11,866                  9,106              (76.7) %
Research and development cost                217               338                    121               (35.8) %            459               958                    499              (52.1) %
General and administrative expense         2,245             4,335                  2,090               (48.2) %          4,630             8,351                  3,721              (44.6) %

Total operating expense                  $ 3,768          $ 11,858          $       8,090               (68.2) %        $ 7,849          $ 21,175          $      13,326              (62.9) %


As mentioned previously, product sales consist of high-purity lead from our
AquaRefining process as well as lead bullion, lead compounds and plastics.
Except for nominal sales of inventory in the first quarter of 2020, we did not
generate revenue for the three and six months ended June 30, 2020 as there has
been no production subsequent to the fire that occurred during the fourth
quarter of 2019. The plant will not be in production during 2020 except for the
operation and testing of our improved electrolyzers as part of the V1.25
program.
Cost of product sales includes raw materials, supplies and related costs,
salaries and benefits, consulting and outside services costs, depreciation and
amortization costs and insurance, travel and overhead costs. Cost of product
sales decreased approximately 82% and 77% for the three and six months ended
June 30, 2020, respectively, as compared to the three and six months ended June
30, 2019. Cost of product sales decreased during 2020 due to the suspension of
production, resulting from the fire.
Research and development cost included expenditures related to the improvement
of the AquaRefining technology. During the three and six months ended June 30,
2020, research and development costs decreased 36% and 52%, respectively, over
the comparable periods in 2019. The decline in research and development cost is
primarily the result of management's focus on transitioning to a capital light
business strategy.
General and administrative expense decreased approximately 48% and 45% for the
three and six months ended June 30, 2020, respectively, compared to the three
and six months ended June 30, 2019. The suspension of activities under our
Operations, Maintenance and Management Agreement with Veolia, reduced Company
payroll and improvements in nearly all other expense categories drove the
decrease. We expect to further decrease general and administrative expenses
during the year as a result of our move to a more capital light strategy. For
the six months ended June 30, 2019 we had $3.7 million of non-cash expense
related to the Veolia agreement. We also incurred costs of approximately $0.2
million for professional serves fees associated with the sublease of the Alameda
facility.
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The following table summarizes our other income and interest expense for the
three and six months ended June 30, 2020 and 2019 together with the percentage
change in those items (in thousands).
                                                          Three months ended June 30,                                                                                         Six months ended June 30,
                                                                              Favorable               %                                                  Favorable               %
                                      2020                   2019           (Unfavorable)           Change            2020             2019            (Unfavorable)           Change

Other income and (expense)



Interest expense                  $    (164)               $ (203)         $         39               19.2  %       $ (347)         $ (3,092)         $      2,745               88.8  %
Interest and other income         $       3                $   77          $        (74)             (96.1) %       $   25          $    140          $       (115)             (82.1) %


Interest expense has related primarily to the $5.0 million Interstate Battery
convertible note (until January of 2019) and the $10.0 million note payable to
Veritex, the successor in interest to Green Bank, amortization of debt issuance
costs incurred in connection with both of these notes, as well as an accrual for
the USDA guarantee fee on the $10.0 million note to Veritex. On January 24,
2019, we repaid Interstate Battery the outstanding principal and interest on the
convertible debt in the amount of $6.7 million. As a result of this debt
repayment, we amortized the remaining discount on the note of $2.6 million and
remaining deferred financing expenses of $20,000 to interest expense. Interest
expense decreased for the three months ended June 30, 2020 as compared to the
same period in 2019 as the result of the principle debt reduction through
scheduled payments on the Veritex loan, along with decreases in the variable
interest rate for that note.
Interest income decreased for the three months ended June 30, 2020 compared to
the same period in 2019 due to lower cash balances during the period.

Liquidity and Capital Resources
As of June 30, 2020, we had total assets of $57.6 million and working capital of
$6.1 million.
The following table summarizes our cash provided by (used in) operating,
investing and financing activities (in thousands):
                                                                               Six months ended June 30,
                                                                              2020                      2019

Net cash used in operating activities                                   $     (8,323)               $ (11,831)
Net cash provided by (used in) investing activities                     $      5,350                $  (4,299)
Net cash provided by financing activities                               $        174                $  22,550


Net cash used in operating activities
Net cash used in operating activities for the six months ended June 30, 2020 and
2019 was $8.3 million and $11.8 million, respectively. Net cash used in
operating activities during each of these periods consisted primarily of our net
loss adjusted for noncash items such as depreciation, amortization, stock-based
compensation charges, and impairment charge as well as net changes in working
capital.
Net cash provided by and used in investing activities
Net cash provided by investing activities for the six months ended June 30, 2020
was $5.4 million and consisted mainly of $7.6 million of insurance proceeds
offset by $2.2 million related to purchases of property and equipment. Net cash
used by investing activities for the six months ended June 30, 2019 was $4.3
million and consisted primarily of purchases of fixed assets related to the
build-out of our TRIC recycling facility in Nevada. In March of 2019, we
disposed of the capital shares of our UK subsidiary, Ebonex IPR, Ltd. The sale
price was a nominal cash amount and did not contribute to net cash used in
investing activities.
Net cash provided by financing activities
Net cash provided by financing activities for the six months ended June 30, 2020
was approximately $0.2 million and consisted of Payroll Protection Program loan
proceeds of $0.3 million, partially offset by payments on debt. Net cash
provided by financing activities for the six months ended June 30, 2019
consisted of $9.1 million net proceeds from our January 2019
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public offering and $20.3 million net proceeds from our May 2019 public
offering. This increase was offset by a $6.7 million payoff of the Interstate
Battery convertible note.
As of June 30, 2020, we had total cash of $4.8 million and working capital of
$6.1 million which includes a $4.9 million insurance proceeds receivable. As of
the date of this report, we believe that we will require additional capital in
order to fund our current level of ongoing costs and our proposed business plan
over the next 12 months as we move forward with our capital light licensing
strategy. We intend to acquire the necessary capital though the recovery of
insurance proceeds on our fire related claims and the possible sale of certain
equipment and assets at TRIC. However, there can be no assurance that we will be
able to collect insurance proceeds or acquire proceeds from the sale of TRIC in
amounts sufficient to fund the capital requirements or, if we are successful,
that we will not require additional capital. If needed, we may seek funding
through the sale of equity or debt securities. Funding that includes the sale of
our equity may be dilutive. If such financing is not available on satisfactory
terms, we may be unable to further pursue our business plan and we may be unable
to continue operations. Additionally, we were not in compliance with the minimum
debt service coverage ratio covenant on our loan from Veritex as of the fiscal
quarter ends between March 31, 2017 and June 30, 2020. We received a waiver for
the minimum debt service coverage ratio covenant for those periods. While we
expect to continue to receive waivers from Veritex for non-compliance with such
covenant, there is no guarantee that we will receive such waivers. If Veritex
determines not to grant us a waiver for non-compliance in the future, we would
be in default of the loan and Veritex would be able to accelerate the payment of
all amounts under the loan.

On March 25, 2020, we entered into a Memorandum of Agreement ("MOA") with Veritex regarding our loan from Veritex.



Pursuant to the MOA, we have agreed to the allocation of proceeds from insurance
policies and sales of collateral secured by the loan. We have agreed on the
allocation of all insurance proceeds, with the proceeds allocated to Veritex to
be used to pay off all amounts outstanding under the loan, approximately $8.6
million as of the date of this report (inclusive of an approximate $500,000
prepayment penalty, netted against a $1,000,000 CD collateral).
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We do not enter into financial instruments for trading or speculative purpose.
Our primary exposure to market risk is interest expense related to our debt with
Veritex Bank. The interest rate on this loan 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 by the Wall Street Journal.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based on that evaluation, management, including our chief
executive officer and chief financial officer, concluded that our disclosure
controls and procedures were effective as of June 30, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that
occurred during the six month period ended June 30, 2020 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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