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 theSecurities and Exchange Commission , orSEC , including our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onFebruary 25, 2021 , 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 theSEC , 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. GeneralAqua 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 aDelaware corporation onJune 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 inMcCarran, Nevada and commercializing the AquaRefining process. We completed the development of our first LAB recycling facility atNevada's Tahoe Reno Industrial Center, or TRIC, inMcCarran, Nevada and commenced production of battery breaking and limited operations during the first quarter of 2017. InApril 2017 , we commenced the shipment of products for sale, consisting of lead compounds as well as plastics. InApril 2018 , we commenced the limited production of lead bullion, including AquaRefined lead. InJuly 2018 , we commenced the sale of pure AquaRefined lead in the form of two tonne blocks and, inOctober 2018 , we commenced the sale of AquaRefined lead in the form of battery manufacturing ready ingots. InNovember 2018 , we received official vendor certification from Clarios for our AquaRefined lead and inDecember 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 Aqualyzers produced at or above the target 100 Kg/Hr of production throughput per module of six Aqualyzers or ~16-17 Kg/Hr per Aqualyzer and ran sustained endurance runs for over one month several times. 14
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In order to expand the demonstration AquaRefinery to its full capacity, we chose to idle the AquaRefinery beginning inSeptember 2019 to facilitate contracting work required to increase the plant capacity planned for late 2019 or early 2020. On the evening ofNovember 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 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. As ofJune 30, 2021 , we have received approximately$25.0 million of insurance proceeds from our insurance carriers related to theNovember 2019 fire event. Subsequent to quarter end, the Company and the insurance carriers agreed on a payment of an additional$5.25 million . This payment represents the final expected payment from insurance bringing the total collected from insurance to approximately$30.25 million . During the first half of 2020, we successfully performed test runs on the first and second iterations of our Aqualyzer as part of our V1.25L program. The program consists of three iterations that are classified as V1.25a, V1.25b and the final iteration, V1.25L, the latter of which will be used to create the AquaRefining Aqualyzer package for our equipment supply and licensing offerings. During the fourth quarter of 2020, we completed our V1.25L Aqualyzer program on time and under budget, achieving lead production that is 100% greater compared to the V1.0 Aqualyzer deployed at the AquaRefinery during commercial production in 2018 and 2019. The Company previously guided a 20% increase of throughput, yet the V.125L Aqualyzer surpassed that guidance by 500%. The V1.25L program concluded with a multi-day 24/7 endurance run that ended onDecember 24, 2020 . These results should positively impact capital and operating expenses for our future equipment supply and licensee customers. The doubling of throughput results in a 50% reduction in the number of Aqualyzers needed for equivalent lead production. V1.25L also has a lower build cost and reduced assembly time compared to the V1.0 Aqualyzer, which correlates to a 50% decrease in capital expenditures forAqua Metals equipment installations. In addition, Aqualyzer operating expenses have been reduced by greater than 60% compared to the V1.0 Aqualyzer, with the combined impact of improvements in automation and increased throughput. The current design has a single button start and stop functionality with no manual interaction required during operation, along with automated maintenance capability. The 60% reduction in operating expenses and 50% reduction in capital expenditures greatly exceeds the targets that were set in early 2020.
Our business model focus is on global licensing opportunities to incorporate AquaRefining in the recycling industry.
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. Our capital light business strategy is designed to optimize shareholder value by focusing on equipment supply and licensing opportunities, which have always been a core part of our business plans. OnJuly 1, 2021 , the Company signed a Letter of Intent (LOI) withACME Metal Enterprise Co., Ltd. (ACME) to deploy and license AquaRefining equipment at its facility in Keelung,Taiwan . The Company believes the path of licensing our technology 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.
During the three months ended
Plan of Operations 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 believe our capital light business strategy will require less space and less equipment and focus on the needs of our future licensees. 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 as we focus on the shift to an equipment plus services supplier and licensor of our technology. 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. During 2020, we completed the V1.25L Aqualyzer program and achieved a 100% improvement in lead production throughput, in addition to improved equipment and operating costs. We believe that our results of operations and improvements to our Aqualyzers, 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. Our capital light strategy also includes an expansion into lithium-ion battery recycling by investing inLINICO Corporation ("LiNiCo"). The Company and LiNiCo reached a lease-to-buy agreement for theAqua Metals' AquaRefining facility.Aqua Metals has committed a$1.5 million investment, paid inAqua Metals shares and$232,000 in cash, for an ownership share in LiNiCo of approximately 9%, as part of our strategy to strengthen growth by potentially applying AquaRefining intellectual property to lithium-ion battery recycling while meeting its lead recycling commercial guidance. We believe that expanding our patented AquaRefining hydrometallurgical approach to recycling the high-value metals of lithium-ion batteries is a smart, long-term strategy forAqua Metals and the creation of shareholder value. 15
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Table of Contents Results of Operations We have not engaged in commercial operations since the 2019 fire at our TRIC facility other than the sale of inventory, and since that time our operations have been devoted to improvements to our AquaRefining processes and equipment in furtherance of our capital light strategy. We did not incur revenue during the three and six months endedJune 30, 2021 and 2020, other than nominal revenue generated during the first quarter of 2020 from the sale of inventory. The following table summarizes our results of operations with respect to the items set forth below for the three and six months endedJune 30, 2021 and 2020 together with the dollar and percentage changes in those items (in thousands). Three Months Ended June 30, Six Months Ended June 30, Favorable % Favorable % 2021 2020 (Unfavorable) Change 2021 2020 (Unfavorable) Change Product sales $ - $ - $ - n/a $ -$ 18 $ (18 ) (100.0 )% Cost of product sales 2,138 1,306 (832 ) 63.7 % 3,749 2,760 (989 ) 35.8 %
Research and development cost 176 217 41 (18.9 )% 465 459 (6 ) 1.3 % General and administrative expense 2,129 2,245 116 (5.2 )% 4,428 4,630 202 (4.4 )%
Total operating expense
As mentioned previously, historical product sales prior to the reported periods have consisted of high-purity lead from our AquaRefining process as well as lead bullion, lead compounds and plastics. Other than sales from inventory, we do not expect to generate revenue from operations until such time as we enter into a commercial license for our AquaRefining technology and equipment. Cost of product sales includes raw materials, supplies and related costs, salaries and benefits, consulting and outside services costs, inventory adjustments, depreciation and amortization costs and insurance, travel and overhead costs. Cost of product sales increased approximately 64% and 36% for the three and six months endedJune 30, 2021 , respectively, as compared to the three and six months endedJune 30, 2020 . The increase in cost of product sales was a result of plant clean-up costs, in preparation for the lease and eventual sale of the facility. Research and development cost included expenditures related to the improvement of the AquaRefining technology related to our lead recycling process and initial development of our lithium recycling process. During the three months endedJune 30, 2021 , research and development cost decreased$41,000 or 19% over the comparable period in 2020. This modest decrease was driven by the Company's efforts to control costs while continuing to maintain and advance our proprietary AquaRefining technology. For the six months endedJune 30, 2021 , research and developments costs remained essentially even with a 1% increase compared to the six months endedJune 30, 2020 .
General and administrative expense was fairly consistent with a decrease of
approximately 5% and 4% for the three and six months ended
The following table summarizes our other income and interest expense for the three and six months endedJune 30, 2021 and 2020 together with the dollar and percentage changes in those items (in thousands). Three Months Ended June 30, Six Months Ended June 30, Favorable % Favorable % 2021 2020 (Unfavorable) Change 2021 2020 (Unfavorable) Change Other income and (expense) Insurance proceeds net of related expenses$ 460 $ (52 ) $ 512 (984.6 )%$ 448 $ (255 ) $ 703 (275.7 )% PPP loan forgiveness 201 - 201 n/a 332 - 332 n/a Loss on disposal of property and equipment (4,254 ) - (4,254 ) n/a (4,254 ) - (4,254 ) n/a Interest expense (4 ) (164 ) 160 (97.6 )% (9 ) (347 ) 338 (97.4 )% Interest and other income 24 3 21 700.0 % 25 25 - 0.0 % Total other income (expense), net$ (3,573 ) $ (213 ) $ 3,360
(1,577 )%
Insurance proceeds net of related expenses resulted from collection and payment activity that began in 2020 following theNovember 2019 fire. The change from period to period is due to the timing of insurance payments and associated fire clean-up expenses. Both of the Company's two PPP loans totaling$332,000 received in May of 2020 have been forgiven. One of the PPP loans for$131,000 was forgiven in January of 2021 and the second PPP loan for$201,000 was forgiven in May of 2021.Aqua Metals recognized a loss on the sale of assets held for sale of approximately$4.3 million during the three months endedJune 30, 2021 . This amount was comprised of a$3.5 million loss recognized in conjunction with the accounting for the lease to purchase arrangement for the Company'sMcCarran, Nevada facility. The loss on sale of assets held for sale also included$0.7 million resulting from the sale of a battery breaker and related equipment.Aqua Metals recognized interest expense of$4,000 and$9,000 for the three and six months endedJune 30, 2021 , respectively. The decrease in interest expense from the comparable prior year periods is due to the Company retiring the Veritex loan during the fourth quarter of 2020 and being essentially debt free since that time.Aqua Metals recognized approximately$24,000 and$25,000 in interest and other income during the three and six months endedJune 30, 2021 , respectively. This compares to interest and other income of$3,000 and$25,000 for the three and six months endedJune 30, 2020 , respectively. The increase in interest and other income for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 is primarily due to the payments received for the lease of theMcCarran, Nevada plant pursuant to the lease to purchase agreement that commenced onApril 1, 2021 . 16
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Liquidity and Capital Resources
As of
The following table summarizes our cash provided by (used in) operating, investing and financing activities (in thousands):
Six Months Ended June 30, 2021 2020 Net cash used in operating activities$ (4,940 ) $ (8,323 ) Net cash (used in) provided by investing activities$ (1,131 ) $ 5,350 Net cash provided by financing activities$ 10,242 $ 174
Net cash used in operating activities
Net cash used in operating activities for the six months endedJune 30, 2021 and 2020 was$4.9 million and$8.3 million , respectively. Net cash used in operating activities during each of these periods consisted primarily of our net loss adjusted for non-cash items such as depreciation, amortization and stock-based compensation charges, loss on the sale of property and equipment, as well as net changes in working capital. Net cash used in operating activities for the six months endedJune 30, 2021 reflected a non-cash adjustment of$4.3 million for the disposal of property and equipment. No loss on disposal of property and equipment adjustment was recognized during the six months endedJune 30, 2020 .
Net cash used in and provided by investing activities
Net cash used in investing activities for the six months endedJune 30, 2021 was$1.1 million and consisted mainly of$1.2 million for the purchase of property and equipment and$0.2 million utilized toward the investment in LiNiCo. Net cash provided by investing activities for the six months endedJune 30, 2020 was$5.4 million and consisted primarily of$7.6 million in insurance proceeds partially offset by$2.2 million for purchases of property and equipment accrued in the prior quarter.
Net cash provided by and used in financing activities
Net cash provided by financing activities of$10.2 million for the six months endedJune 30, 2021 consisted of$9.3 million in net proceeds from the sale ofAqua Metals shares pursuant to the ATM and$0.7 million of proceeds from stock options exercises. Net cash provided by financing activities for the six months endedJune 30, 2020 was approximately$0.2 million , consisting of$0.3 million from PPP loan proceeds partially offset by$0.2 million for payments on debt. As ofJune 30, 2021 , we had total cash of$10.7 million and working capital of$10.7 million . As of the date of this report, we believe that we may 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 execute on our capital light licensing strategy. We intend to acquire the necessary capital though the recovery of remaining insurance proceeds on our fire related claims, the possible sale of certain equipment and assets at TRIC, and the collection of funds from the lease and sale of our plant. However, there can be no assurance that such funds will be available. If needed, we may seek funding through the sale of equity or debt financing, including the sale of our common shares through our current at-the-market offering. 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. 17
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements.
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