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OFFON

AQUA METALS, INC.

(AQMS)
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AQUA METALS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/29/2021 | 04:11pm EDT

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, 2020
filed with the SEC on February 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 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 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.



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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 increase the plant 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 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 of June 30, 2021, we have received approximately $25.0 million of insurance
proceeds from our insurance carriers related to the November 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 on December 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 for Aqua 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. On July 1, 2021, the
Company signed a Letter of Intent (LOI) with ACME 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 June 30, 2021, we issued 549,745 shares of common stock pursuant to an At the Market Issuance Sales Agreement ("ATM") for net proceeds of $1.8 million.



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 in LINICO Corporation ("LiNiCo"). The Company and LiNiCo
reached a lease-to-buy agreement for the Aqua Metals' AquaRefining facility.
Aqua Metals has committed a $1.5 million investment, paid in Aqua 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 for Aqua Metals
and the creation of shareholder value.



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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 ended June 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 ended June 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 $ 4,443 $ 3,768 $ (675 ) 17.9 % $ 8,642 $ 7,849 $ (793 ) 10.1 %





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 ended June 30, 2021, respectively, as compared to the
three and six months ended June 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 ended June
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 ended June 30, 2021,
research and developments costs remained essentially even with a 1% increase
compared to the six months ended June 30, 2020.



General and administrative expense was fairly consistent with a decrease of approximately 5% and 4% for the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020.




The following table summarizes our other income and interest expense for the
three and six months ended June 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 )% $ (3,458 ) $ (577 ) $ 2,881 (499.3 )%





Insurance proceeds net of related expenses resulted from collection and payment
activity that began in 2020 following the November 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 ended June
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's McCarran, 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 ended June 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
ended June 30, 2021, respectively. This compares to interest and other income of
$3,000 and $25,000 for the three and six months ended June 30, 2020,
respectively. The increase in interest and other income for the three months
ended June 30, 2021 compared to the three months ended June 30, 2020 is
primarily due to the payments received for the lease of the McCarran, Nevada
plant pursuant to the lease to purchase agreement that commenced on April 1,
2021.







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Liquidity and Capital Resources

As of June 30, 2021, we had total assets of $38.1 million and working capital of $10.7 million.

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 ended June 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 ended June 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 ended June 30, 2020.



Net cash used in and provided by investing activities




Net cash used in investing activities for the six months ended June 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 ended June 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
ended June 30, 2021 consisted of $9.3 million in net proceeds from the sale of
Aqua 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
ended June 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 of June 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.



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Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.

© Edgar Online, source Glimpses

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