Aqua Metals, Inc. current report, 07 February 2017

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Business Context and Reporting Period

Company: Aqua Metals, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: February 7, 2017
Event: Entry into material definitive agreements and unregistered sale of equity securities with Johnson Controls International plc (Johnson Controls).

Key Financial Metrics and Transaction Details

  • Capital Raised: Approximately $10,638,926 in gross proceeds from the sale of 939,005 shares of common stock at $11.33 per share.
  • Revenue Commitments:
    • Tolling/Lead Purchase Agreement: Johnson Controls agreed to purchase up to 100% of Aqua Metals' recycled lead for automotive applications on a monthly basis (merchanting basis).
    • Tolling Services: Johnson Controls will deliver used lead acid batteries (LABs) for recycling, representing a significant allocation of the McCarran, Nevada facility's production capacity.
    • Licensing Fees: Future revenue anticipated from ongoing licensing fees based on operational capacity of AquaRefining equipment supplied to Johnson Controls.
  • Contingent Liabilities:
    • Key-Man Event Payments: Aqua Metals agreed to pay Johnson Controls $1,000,000 per occurrence if CEO Stephen Clarke or COO Selwyn Mould cease their roles within 18 months of the agreement date. A total of $1,000,000 is payable if such events occur between 18 and 30 months.
    • Liquidated Damages: Payments required if the company fails to file a registration statement within 20 days of closing or if Rule 144 becomes unavailable for resale.

Note: The filing does not provide historical revenue, profit, cash flow, or debt figures for Aqua Metals, Inc.

Material Changes and Strategic Agreements

The filing details three primary agreements entered into on February 7, 2017, marking a significant strategic shift:

  1. Equipment Supply Agreement: Collaboration to develop a program for installing new greenfield builds and converting existing smelters to AquaRefining technology in North America, Europe, and China. Aqua Metals agreed not to license this technology to third parties in these regions until initial conversion matters are resolved.
  2. Tolling/Lead Purchase Agreement: A minimum five-year term (auto-extending) securing a major off-take partner for automotive recycled lead and establishing tolling services for used batteries.
  3. Investment Agreement: Johnson Controls acquired a significant equity stake, granting them demand and piggyback registration rights, limited board observation rights, and limited preemptive rights.

Outlook, Risks, and Contingencies

  • Operational Outlook: The agreements are designed to accelerate the deployment of AquaRefining technology and secure a primary customer for recycled lead output.
  • Termination Risks:
    • The Equipment Supply Agreement may be terminated by either party with 60 days' notice if a definitive blueprint agreement is not reached by a mutually agreed date.
    • The Tolling/Lead Purchase Agreement allows termination for any reason after the second anniversary (effective on the third anniversary of notice).
  • Key Personnel Risk: The financial stability of the partnership is partially contingent on the continued employment of the CEO and COO, with specific monetary penalties for their departure.
  • Regulatory Risk: The investment was made under Section 4(a)(2) and Rule 506(b) exemptions; failure to file a registration statement promptly triggers liquidated damages.

Investor Verification Checklist

  • Verify the operational status and capacity of the McCarran, Nevada recycling facility to ensure it can meet the "significant allocation" of tolling services promised to Johnson Controls.
  • Confirm the timeline for the "definitive development program agreement" (blueprint) to assess the risk of early termination of the Equipment Supply Agreement.
  • Review the company's cash position post-transaction to determine runway for facility construction and retrofitting.
  • Monitor the employment status of Stephen Clarke (CEO) and Selwyn Mould (COO) regarding the $1,000,000 key-man event liabilities.
  • Check for the timely filing of the registration statement for the 939,005 shares issued to Johnson Controls to avoid liquidated damages.