aqms20220930

aqms20220930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 001-37515

Aqua Metals, Inc.

(Exact name of registrant as specified in its charter)

Delaware	47-1169572
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification no.)

5370 Kietzke Lane, Suite 201

Reno, Nevada 89511

(Address of principal executive offices, including zip code)

(775) 446-4418

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class of stock:	Trading symbol	Name of each exchange on which registered:
Common Stock	AQMS	The Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company (as defined in Rule 12b-2 of the Act):

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 28, 2022, there were 78,386,746 outstanding shares of the common stock of Aqua Metals, Inc.

Table of Contents

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Stockholders' Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	16
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	24

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AQUA METALS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	*September 30, 2022*			*December 31, 2021*
	*(unaudited)*			*(Note 2)*
ASSETS
Current assets
Cash and cash equivalents	$	9,293		$	8,137
Accounts receivable		94			269
Lease receivable, current portion		15,811			920
Inventory		28			123
Assets held for sale		1,100			2,633
Prepaid expenses and other current assets		375			356
Total current assets		26,701			12,438

Non-current assets
Property and equipment, net		4,629			2,367
Intellectual property, net		505			640
Investment in LINICO		2,000			1,500
Lease receivable, non-current portion		—			15,528
Other assets		1,126			796
Total non-current assets		8,260			20,831

Total assets	$	34,961		$	33,269

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable	$	867		$	685
Accrued expenses		2,863			3,005
Lease liability, current portion		302			388
Building purchase deposit, current portion		1,250			—
Notes payable		5,886			—
Total current liabilities		11,168			4,078

Non-current liabilities
Building purchase deposit, non-current portion		—			1,328
Lease liability, non-current portion		350			330
Total liabilities		11,518			5,736

Commitments and contingencies (see Note 13)

Stockholders’ equity
Common stock; $0.001 par value; 200,000,000 shares authorized; 78,065,455 and 70,416,552 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		78			70
Additional paid-in capital		218,672			211,309
Accumulated deficit		(195,307	)		(183,846	)
Total stockholders’ equity		23,443			27,533

Total liabilities and stockholders’ equity	$	34,961		$	33,269

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AQUA METALS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2022*			*2021*			*2022*			*2021*

Product sales	$	—		$	—		$	4		$	—

Operating cost and expense
Cost of product sales		833			1,670			3,026			5,417
Research and development cost		490			273			1,561			738
General and administrative expense		2,611			2,681			7,615			7,109
Total operating expense		3,934			4,624			12,202			13,264

Loss from operations		(3,934	)		(4,624	)		(12,198	)		(13,264	)

Other income and (expense)
Insurance proceeds net of related expenses		—			4,344			—			4,792
PPP loan forgiveness		—			—			—			332
Gain (loss) on disposal of property and equipment		5			(1,411	)		595			(5,665	)
Interest expense		(9	)		(5	)		(22	)		(15	)
Interest and other income		53			310			166			334

Total other income (expense), net		49			3,238			739			(222	)

Loss before income tax expense		(3,885	)		(1,386	)		(11,459	)		(13,486	)

Income tax expense		—			—			(2	)		(2	)

Net loss	$	(3,885	)	$	(1,386	)	$	(11,461	)	$	(13,488	)

Weighted average shares outstanding, basic and diluted		77,402,763			69,609,070			74,871,423			68,223,115

Basic and diluted net loss per share	$	(0.05	)	$	(0.02	)	$	(0.15	)	$	(0.20	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AQUA METALS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

					Additional					Total
	Common Stock				Paid-in		Accumulated			Stockholders'
	Shares		Amount		Capital		Deficit			Equity (Deficit)

Balances, June 30, 2022		75,772,815	$	76	$	217,030	$	(191,422	)	$	25,684

Stock-based compensation		—		—		597		—			597
RSUs issued for consulting services		13,389		—		12		—			12
Common stock issued to employees and directors, includes RSUs vesting		1,089,471		1		—		—			1
Common stock issued for ATM share sales, net of $33 transaction costs		1,189,780		1		1,033		—			1,034
Net loss		—		—		—		(3,885	)		(3,885	)

Balances, September 30, 2022		78,065,455	$	78	$	218,672	$	(195,307	)	$	23,443

Balances, December 31, 2021		70,416,552	$	70	$	211,309	$	(183,846	)	$	27,533

Stock-based compensation		—		—		1,735		—			1,735
RSUs issued for consulting services		13,389		—		12		—			12
Common stock issued to employees and directors, includes RSUs vesting		2,228,600		2		—		—			2
Common stock issued for ATM share sales, net of $176 transaction costs		5,406,914		6		5,616		—			5,622
Net loss		—		—		—		(11,461	)		(11,461	)

Balances, September 30, 2022		78,065,455	$	78	$	218,672	$	(195,307	)	$	23,443

Balances, June 30, 2021		68,607,326	$	69	$	209,382	$	(177,755	)	$	31,696

Stock-based compensation		—		—		399		—			399
RSUs issued for consulting services		—		—		79		—			79
Common stock issued to employees and directors, includes RSUs vesting		1,216,338		1		—		—			1
Net loss		—		—		—		(1,386	)		(1,386	)

Balances, September 30, 2021		69,823,664	$	70	$	209,860	$	(179,141	)	$	30,789

Balances, December 31, 2020		64,461,065	$	64	$	196,728	$	(165,653	)	$	31,139

Stock-based compensation		—		—		1,696		—			1,696
RSUs issued for consulting services		—		—		114		—			114
Common stock issued to employees and directors, includes RSUs vesting		2,100,749		2		—		—			2
Common stock issued upon exercise of employee stock options		347,901		—		727		—			727
Common stock issued upon warrant exercise		65,590		—		—		—			—
Common stock issued for ATM share sales, net of $311 transaction costs		2,473,359		3		9,328		—			9,331
Common stock issued related to LINICO investment		375,000		1		1,267		—			1,268
Net loss		—		—		—		(13,488	)		(13,488	)

Balances, September 30, 2021		69,823,664	$	70	$	209,860	$	(179,141	)	$	30,789

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AQUA METALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	*Nine Months Ended September 30,*
	*2022*			*2021*
Cash flows from operating activities:
Net loss	$	(11,461	)	$	(13,488	)
Reconciliation of net loss to net cash used in operating activities
Depreciation		736			926
Amortization of intellectual property		135			135
Fair value of RSUs issued for consulting services		12			114
Stock-based compensation		1,737			1,698
Inventory NRV adjustment		—			146
Loss (gain) on disposal of property and equipment		(595	)		5,665
Forgiveness of PPP Loan		—			(332	)
Changes in operating assets and liabilities
Accounts receivable		131			(218	)
Inventory		95			612
Prepaid expenses and other current assets		(19	)		392
Accounts payable		(35	)		304
Accrued expenses		383			750
Other assets and liabilities		(427	)		(457	)
Net cash used in operating activities		(9,308	)		(3,753	)

Cash flows from investing activities:
Purchases of property and equipment		(2,290	)		(1,672	)
Proceeds from sale of equipment		1,432			275
Equipment deposits and other assets		(322	)		123
Investment in LINICO		(500	)		(232	)
Net cash used in investing activities		(1,680	)		(1,506	)

Cash flows from financing activities:
Proceeds from notes payable		5,886			—
Proceeds from leasing of building		636			368
Proceeds from exercise of stock options		—			727
Proceeds from ATM, net		5,622			9,331
Net cash provided by financing activities		12,144			10,426

Net increase (decrease) in cash and cash equivalents		1,156			5,167
Cash and cash equivalents at beginning of period		8,137			6,533
Cash and cash equivalents at end of period	$	9,293		$	11,700

	*Nine Months Ended September 30,*
	*2022*			*2021*
Supplemental disclosure of cash flows information
Cash paid for income taxes	$	2		$	2
Cash paid for interest	$	7		$	—

Supplemental disclosure of non-cash transactions
Change in property and equipment resulting from change in accounts payable	$	(218	)	$	793
Change in property and equipment resulting from change in accrued expenses	$	(136	)	$	—
Change in investing activity resulting from issuance of equity	$	—		$	(1,268	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization

Aqua Metals (NASDAQ: AQMS) is engaged in the business of applying its commercialized clean, water-based recycling technology principles to develop the clean and cost-efficient recycling solutions for both lead and lithium-ion batteries, or "Li". We offer technology licensing and related services to recyclers across the globe for lead recycling and expect to provide recycling services for Li batteries. Our recycling process is a patented hydrometallurgical technology that is 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. The modular Aqualyzers cleanly generate ultra-pure metal one atom at a time, closing the sustainability loop for the rapidly growing energy storage economy. Our process was originally designed for lead recycling. 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 are also applying our commercialized clean, water-based recycling technology principles with the goal of developing the cleanest and most cost-efficient recycling solution for lithium-ion batteries. We believe our process has the potential to produce higher quality products at a lower operating cost without the damaging effects of furnaces and greenhouse emissions. Aqua Metals estimates its total addressable market for lithium-ion battery recycling will be approximately $9 billion by 2025 and grow to exceed lead battery recycling by the end of the decade. Unlike the mature lead recycling market, the deployed lithium-ion battery recycling infrastructure to serve market growth does not exist today.

We were formed as a Delaware corporation on June 20, 2014 for the purpose of engaging in the business of recycling metals through our patent-pending process that we developed and named “AquaRefining”. Since 2015, Aqua Metals has developed breakthrough metal recycling technologies that utilize a clean, closed-loop process that can produce ultra-high purity metal. Our innovative approach, AquaRefining, delivers raw materials back into the manufacturing supply chain while reducing emissions and toxic byproducts and creating a safer work environment. The patented AquaRefining modular systems have already demonstrated how they can reduce environmental impact and scale lead-acid battery recycling capacity.

We completed the development of our first LAB recycling facility at the Tahoe Reno Industrial Center in McCarran, Nevada (“TRIC”) and commenced production of battery breaking. During 2020 and 2021, we successfully iterated our lead AquaRefining Aqualyzer through a 1.25 and a 1.5 version which now has triple the throughput of the 2019 iteration that produced over 35,000 industry standard ingots in commercial production. During the second half of 2022, we are deploying and operating a Phase 1 deployment of lead AquaRefining with our partner ACME Metal in Taiwan. This showcase installation will inform management of the interest in ACME to move forward with larger deployments by the first quarter of 2023 as well as other potential licensees and partners in the same timeframe.

In February 2021, we announced a strategic investment in LINICO Corporation of up to $2 million to be paid in Aqua Metals shares and cash for an approximate 12% ownership in LINICO as part of our strategy to strengthen growth by potentially applying AquaRefining intellectual property to lithium-ion battery recycling while meeting our lead recycling commercial guidance. In November 2021, Aqua Metals and LINICO signed a collaboration agreement which sets the parameters for future research and development cooperation, as both companies expand into lithium-ion battery recycling and advance our technologies designed to recycle lithium-ion batteries cost-effectively and sustainably. Aqua Metals and LINICO plan to source the necessary lithium-ion feedstock from battery manufacturing scrap and end-of-life cells from various sources, including electric vehicle battery suppliers interested in participating in the eco-network the two companies announced in 2021. LINICO intends to process the feedstock into high-quality black mass utilizing its proprietary process. The resulting black mass will be used as input feedstock for Aqua Metals’ AquaRefining pilot cells intended to create high purity metals such as nickel, cobalt, and copper as well as other compounds.

In August 2021, we announced that we had established an Innovation Center focused on applying our proven technology to lithium-ion battery recycling research and development and prototype system activities. During the first half of 2022, we announced our ability to recover copper, lithium hydroxide, nickel, and cobalt from lithium-ion battery black mass at the Company's Innovation Center. Our strategic decision to apply our proven clean, closed-loop hydrometallurgical and electro-chemical recycling experience to lithium-ion battery recycling is designed to meet the growing demand for critical metals driven by the global transition to electric vehicles, growth in Internet data centers, and alternative energy applications including solar, wind, and grid-scale storage. In July 2022, we signed a letter of intent with Dragonfly Energy Corporation, a leader in lithium-ion deep cycle batteries, pursuant to which Dragonfly would purchase commercial quantities of lithium hydroxide for ongoing development of solid-state lithium-ion battery technologies and future manufacturing activities. The Company is on schedule to have the Innovation Center’s lithium-ion recycling pilot plant to be fully operational in the fourth quarter of 2022.

2. Summary of Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission, or the SEC, on February 24, 2022. There have been no material changes in the Company’s significant accounting policies during the three and nine months ended September 30, 2022.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates ("ASU") of the Financial Accounting Standards Board (“FASB”) and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by such accounting principles for complete financial statements. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary to present fairly each of the condensed consolidated balance sheet as of September 30, 2022, the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and September 30, 2021, the condensed consolidated statements of stockholders' equity for the three and nine months ended September 30, 2022 and September 30, 2021 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and September 30, 2021, as applicable, have been made. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the Company’s audited financial statements as of such date, but it does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the period ended December 31, 2021, which are included on Form 10-K filed with the Securities and Exchange Commission on February 24, 2022.

The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022.

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Principles of consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its Subsidiaries, both of which are wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates

The preparation of the condensed 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 condensed 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, valuation allowances for deferred tax assets, the determination of stock option expense and the determination of the fair value of stock warrants issued. Actual results could differ from those estimates.

Net loss per share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method or the if-converted method, as applicable. For purposes of this calculation, stock options, restricted stock units (RSUs) and warrants to purchase common stock are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive. The following shares underlying outstanding convertible notes, stock options, RSUs and warrants to purchase common stock were anti-dilutive due to a net loss in the periods presented and, therefore, were excluded from the dilutive weighted average securities computation for the three and nine months ended September 30, as indicated below:

	Three Months Ended September 30,				Nine Months Ended September 30,
Excluded potentially dilutive weighted average securities (1):	2022		2021		2022		2021

Options to purchase common stock		1,009,230		1,038,439		1,018,900		1,115,380
Unvested restricted stock units		3,221,803		3,772,069		3,921,702		4,543,145
Financing warrants to purchase common stock		6,372		6,372		6,372		6,372
Total potential dilutive weighted average securities		4,237,405		4,816,880		4,946,974		5,664,897

(1)	Securities are presented on a weighted average outstanding calculation as required if the securities were dilutive

Segment and geographic information

Our chief operating decision maker (“CODM”) is the Chief Executive Officer. 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 CODM in deciding how to allocate resources and in assessing performance. The CODM views its operations and manages its business in one operating segment, and the Company operates in only one geographic segment.

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Concentration of credit risk

The Company did not generate revenue other than nominal revenue from the sale of inventory during the three and nine months ended September 30, 2022 or the three and nine months ended September 30, 2021. The accounts receivable balance on the Company's condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021 consisted of amounts due from the return or sale of inventory and proceeds from assets held for sale.

Recent accounting pronouncements

There were no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2022 that are of significance or potential significance to the Company.

Insurance Proceeds

On November 29, 2019, there was a fire in the AquaRefining area of the TRIC facility. As of December 31, 2021, the Company had received a total of $30.25 million in insurance payments as a result of the fire damage. The Company does not expect any additional insurance payments related to this matter.

3. Revenue Recognition

The Company has historically generated 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 through March 31, 2018, all revenue was derived from the sale of lead compounds and plastics. In April 2018, the Company began shipping lead bullion in addition to lead compounds and plastics. In June 2018, the Company began shipping high purity lead from its AquaRefining process.

The Company was not in commercial production during the three and nine months ended September 30, 2022 or during the three and nine months ended September 30, 2021. Historically, Company products transferred to customers at a single point in time accounted for 100% of its revenue.

4. Lease Receivable

The Company has entered into an Industrial Lease Agreement with LINICO Corporation, a Nevada corporation, or ("LINICO"), dated February 15, 2021 pursuant to which the Company has leased to LINICO its 136,750 square foot recycling facility at TRIC. The lease commenced April 1, 2021 and expires on March 31, 2023. During the lease term, LINICO has the option to purchase the land and facilities at a purchase price of $14.25 million if the option is exercised and the sale is completed by October 1, 2022 and $15.25 million if the option is exercised and the sale is completed after October 1, 2022 and prior to March 31, 2023. The purchase option is subject to LINICO’s payment of a nonrefundable deposit of $1.25 million, which was paid on October 15, 2021, and a second nonrefundable deposit of $2.0 million by November 1, 2022, both of which will be applied towards the purchase price. LINICO did not exercise the option to purchase the land and facilities at a purchase price of $14.25 million on October 1, 2022. The lease agreement is a triple-net lease pursuant to which LINICO is responsible for all fixed costs, including maintenance, utilities, insurance, and property taxes. The lease agreement provides for LINICO’s monthly lease payments starting at $68,000 per month and increasing to $100,640 in the last six months of the lease.

With respect to the portion of the facility that was damaged in the November 2019 fire, consisting of approximately 30,000 square feet, the Company was obligated to complete the clean-up of the damaged area, at the Company's expense and repair all damage to the damaged area, at the Company's expense. Both the clean-up and the repair of the building has been completed. With regard to the equipment on-site at TRIC, the Company has granted LINICO the right of first offer to purchase any equipment the Company offers for sale. The lease agreement contains customary representations, warranties and indemnities on the part of both parties.

The Company accounted for the Industrial Lease and Option to Purchase Agreement as a sales-type lease. As a component of the accounting for the agreement, the Company recognized the estimated fair market value of the land and plant of $17.0 million as a lease receivable, which is reflected on the Company's condensed consolidated balance sheets. The implied interest rate of 0.5% was utilized for the amortization of the scheduled building lease/purchase payments outlined in the agreement. The Company applies the monthly payments received as a reduction to lease receivable and interest income. The interest income recognized from the agreement is included in "Interest and other income" on the Company's condensed consolidated statements of operations. For the nine months ended September 30, 2022, the Company recognized a reduction in the lease receivable balance of approximately $636,000 and recorded $57,000 of interest income related to this agreement.

5. Inventory

Inventory consisted of the following (in thousands):

	September 30, 2022		December 31, 2021

Finished goods	$	28	$	28
Work in process		—		9
Raw materials		—		86
Total inventory	$	28	$	123

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

6. Assets Held for Sale

Assets are classified as held for sale when, among other factors, they are identified and marketed for sale in their present condition, management is committed to their disposal, and the sale of the asset is probable within one year. Management believes these lead recycling assets are no longer necessary for the Company's future operating plans. As of September 30, 2022, Aqua Metals had assets with a book value of $1.1 million classified as assets held for sale.

7. Property and Equipment, net

Property and equipment, net, consisted of the following (in thousands):

	Useful Life
Asset Class	(Years)		September 30, 2022			December 31, 2021

Operational equipment		3 - 10	$	1,446		$	1,539
Lab equipment		5		730			530
Computer equipment		3		6			8
Office furniture and equipment		3		90			91
Building		39		80			—
Equipment under construction				3,683			1,328
				6,035			3,496
Less: accumulated depreciation				(1,406	)		(1,129	)

Total property and equipment, net			$	4,629		$	2,367

Property and equipment depreciation expense was $0.2 million and $0.4 million for the three and nine months ended September 30, 2022 and $58.6 thousand and $0.5 million for the three and nine months ended September 30, 2021, respectively. Equipment under construction is comprised of various components being manufactured or installed by the Company.

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

8. Investments

On February 15, 2021, the Company entered into a Series A Preferred Stock Purchase Agreement with LINICO Corporation, a Nevada Corporation, or ("LINICO"), that provided for the Company's issuance of 375,000 shares (“Aqua Shares”) of the Company's common stock in consideration of LINICO’s issuance of 1,500 shares of its Series A Preferred Stock, at a stated aggregate value of $1.5 million, along with a three-year warrant (“Series A Warrant”) to purchase an additional 500 shares of LINICO Series A Preferred Stock at an exercise price of $1,000 per share. During the three months ended March 31, 2022, the Company exercised the warrant for all 500 LINICO Series A Preferred shares. Following the exercise, the Company held a total of 2,000 shares of the Series A Preferred Stock representing approximately 12% of LINICO common stock on a fully diluted basis.

The Company accounted for the LINICO investment under ASC 321, Investments-Equity Securities, using the measurement alternative of recording at cost as the investment in LINICO doesn’t have a readily determinable fair value.

The LINICO Series A Preferred Stock is senior to all other capital stock of LINICO with regard to dividends and distributions upon liquidation, dissolution and sale of the company. Each share of LINICO Series A Preferred Stock is entitled to one vote per share and votes with the common stock on all matters, subject to certain protective provisions that require the approval of the holders of the Series A Preferred Stock voting as a class. The Series A Preferred Stock accrues a cumulative dividend of 8% per annum on the original stated value of $1,000 per share, and all accrued and unpaid dividends on the Series A Preferred Stock must be paid in full prior to the payment of any dividends on any other shares of LINICO capital stock. In the event of any liquidation or dissolution of LINICO, which would include a sale of LINICO, the holders of the Series A Preferred Stock shall receive the return of their stated value of $1,000 per share plus all accrued and unpaid dividends prior to any distribution to the holders of any other capital stock of LINICO, following which the holders of the Series A Preferred Stock shall participate in the distribution of any remaining assets with the holders of the junior stock on an as-converted basis. The Series A Preferred Stock is convertible into shares of LINICO common stock at the Company's option and is automatically converted into LINICO common stock upon the election of the holders of a majority of the LINICO Series A Preferred Stock or upon a qualifying IPO of LINICO common stock. The Series A Preferred Stockholders are also provided with preemptive rights allowing them the right to purchase their proportional share of certain future LINICO equity issuances.

The Series A Preferred Stock Purchase Agreement includes customary representations, warranties, and covenants by LINICO and the Company.

As LINICO’s sale of the 375,000 of Aqua Shares resulted in net proceeds to LINICO that were less than $1,500,000, the Company was required to pay LINICO the difference of $232,000 in cash.

In connection with the investment transactions, the Company also entered into an Investors Rights Agreement and a Voting Agreement, each dated February 15, 2021, pursuant to which LINICO granted the Company customary demand and piggyback registration rights, information rights and the right to nominate one person to the LINICO board of directors as long as the Company is the owner of at least 10% of the LINICO common stock on a fully-diluted basis.

Comstock Inc., a Nevada corporation (NYSE-MKT: LODE), is the beneficial owner of approximately 88% of the common shares of LINICO. The Company's Chief Financial Officer, Judd Merrill, is a member of the board of directors of Comstock Inc.

9. Accrued Expenses

Accrued expenses consist of the following (in thousands):

	*September 30, 2022*		*December 31, 2021*

Property and equipment related	$	789	$	2,242
Class action settlement		500		500
Payroll related		1,116		180
Professional		109		56
Other		349		27
	$	2,863	$	3,005

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

10. Leases

As of September 30, 2022, the Company maintained two finance leases for equipment and two operating leases for real estate. The operating leases have current terms of 36 and 37 months and include one or more options to extend the duration of the agreements. These operating leases are included in "Other assets" on the Company's condensed consolidated balance sheets and represent the Company's right to use the underlying assets for the term of the leases. The Company's obligation to make lease payments are included in "Lease liability, current portion" and "Lease liability, non-current portion" on the Company's condensed consolidated balance sheets. The Company recognized sublease income of approximately $0 and $85,000 for the three and nine months ended September 30, 2022, respectively. The sublease agreement ended during the first quarter of 2022. The Company recognized sublease income of approximately $127,000 and $382,000 for the three and nine months ended September 30, 2021, respectively.

Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, as of September 30, 2022, total right-of-use assets were approximately $0.52 million and operating lease liabilities were approximately $0.53 million. As of September 30, 2021, the Company's total right-of-use assets were approximately $0.68 million and operating lease liabilities were approximately $0.75 million.

The Company currently maintains two finance leases for equipment. In November 2021, the Company entered into a finance lease for a modular laboratory which expires in October of 2024. The second finance lease is for warehouse equipment that expires in September of 2023.

Information related to the Company's right-of-use assets and related lease liabilities were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Cash paid for operating lease liabilities	$	65	$	167	$	279	$	494
Operating lease cost	$	65	$	155	$	272	$	444

Cash paid for finance lease liabilities	$	15	$	2	$	46	$	5
Interest expense	$	2	$	—	$	7	$	1

	September 30, 2022
Weighted-average remaining lease term (Years) - operating leases		2.1
Weighted-average discount rate - operating leases		6.16	%

Weighted-average remaining lease term (Years) - finance leases		1.5
Weighted-average discount rate - finance leases		7.51	%

Future maturities of lease liabilities as of September 30, 2022 are as follows (in thousands):

Due in 12-month period ended September 30,
	Operating Leases			Finance Leases
2022	$	264		$	70
2023	$	270		$	54
2024	$	34		$	4
Less imputed interest	$	(35	)	$	(9	)
Total lease liabilities	$	533		$	119

Current lease liabilities	$	239		$	63
Non-current lease liabilities	$	294		$	56
	$	533		$	119

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

11. Notes Payable

On September 30, 2022, Aqua Metals Reno, Inc., our wholly-owned subsidiary, entered into a Loan Agreement with Summit Investment Services, LLC, a Nevada limited liability company as to an undivided 90.8334% interest, Darren McBride, Trustee of the Arduino 1 Trust, U/A dated April 25, 2022, as to an undivided 8.3333% interest and Jason Yelowitz, Trustee of the Jason Yelowitz 2006 Trust, Dated March 31, 2006 as to an undivided .8333% interest (collectively, the “Lenders”), pursuant to which the Lenders provided us with a loan in the amount of $6 million. The loan accrues interest at a fixed annual rate of 8.50%. Interest-only payments are due monthly for the first twenty-four months and the principal and all unpaid accrued interest is due on September 29, 2024. We have the right to prepay the loan at any time, provided that we must pay guaranteed minimum interest of $255,000 (6-months of interest). The Loan Agreement includes representations, warranties, and affirmative and negative covenants that are customary of institutional loan agreements. The loan is collateralized by a first priority lien interest on our land and recycling facility at TRIC that is expected to sell before March 31, 2023 to LINICO as disclosed in Note 4 of the financial statements. Upon the completion of the sale, the commitments and obligations per our loan agreement with the Lenders will terminate, and all amounts then outstanding will become payable. The costs associated with obtaining the loan were recorded as a reduction to the carrying amount of the note and are being amortized over the life of the loan.

Notes payable is comprised of the following (in thousands):

	September 30, 2022		December 31, 2021

Notes payable, current portion
The Lenders, net of issuance costs	$	5,886	$	—
Total notes payable, current portion	$	5,886	$	—

12. Stockholders’ Equity

Shares issued

During the nine months ended September 30, 2022, the Company issued 2,148,909 shares of common stock upon vesting of Restricted Stock Units ("RSUs") granted by the Company to management and employees.

During the nine months ended September 30, 2022, the Company issued 79,691 shares of common stock upon vesting of RSUs granted to Board members.

During the nine months ended September 30, 2022, the Company issued 5,406,914 shares of common stock pursuant to the At The Market Issuance Sales Agreement for net proceeds of $5.6 million.

During the nine months ended September 30, 2022, the Company issued 13,389 shares of common stock to a former Board member to fulfill obligations related to consulting services.

Stock-based compensation

The stock-based compensation expense was allocated as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of product sales	$	27	$	14	$	75	$	61
Research and development cost		—		11		36		64
General and administrative expense		571		375		1,626		1,573
Total	$	598	$	400	$	1,737	$	1,698

There were no options issued during the three and nine months ended September 30, 2022 or the three and nine months ended September 30, 2021.

Restricted stock units

In January 2022, the Company granted 44,780 RSUs, all of which were subject to vesting, with a grant fair value of $50,000 to employees. The shares vest in three equal installments over a three-year period.

In February 2022, the Company granted 47,933 RSUs, all of which were subject to vesting, with a grant fair value of $50,000 to employees. The shares vest in three equal installments over a three-year period.

In April 2022, the Company granted 9,615 RSUs, all of which were subject to vesting, with a grant fair value of $10,000 to employees. The shares vest in three equal installments over a three-year period.

In May 2022, the Company granted 182,293 RSUs, all of which were subject to vesting, with a grant fair value of $175,000 to Board Members. The shares vest in four equal installments over a twelve-month period.

In June 2022, the Company granted 12,121 RSUs, all of which were subject to vesting, with a grant fair value of $10,000 to employees. The shares vest in three equal installments over a three-year period.

In July 2022, the Company granted 143,708 RSUs, all of which were subject to vesting, with a grant fair value of $120,000 to employees. The shares vest in three equal installments over a three-year period.

In August 2022, the Company granted 10,537 RSUs, all of which were subject to vesting, with a grant fair value of $10,000 to employees. The shares vest in three equal installments over a three-year period.

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

13. Commitments and Contingencies

Legal proceedings

See Item 1. Legal Proceedings

14. Subsequent Events

On October 25, 2022, the Company received the second nonrefundable deposit of $2.0 million from LINICO. The sale of the land and facilities at a sale price of $15.25 million is expected to close prior to March 31, 2023. Both nonrefundable deposits in the total of $3.25 million will be applied towards the sale price.

The Company has evaluated subsequent events through the date which the condensed consolidated financial statements were available to be issued. Based upon this review, the Company did not identify any other subsequent events that would have required adjustment or disclosure.

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AQUA METALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, inclu

SEC Form 10-Q filed by Aqua Metals Inc.