PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AQUA METALS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

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

AQUA METALS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(Unaudited)

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

AQUA METALS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)

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

AQUA METALS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

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

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(“Li”) batteries. Our recycling process is a patented hydrometallurgicalhydro and electrometallurgical technology that is a novel, proprietary and patented process we developed and named "AquaRefining".AquaRefining. AquaRefining is a room temperature, waterlow-emissions, closed-loop recycling technology that replaces polluting furnaces and organic acid-based process that greatly reduces environmental emissions.hazardous chemicals with electricity-powered electroplating to recover valuable metals and materials from spent batteries with higher purity, lower emissions, and with minimal waste. The modular Aqualyzers“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 engagingare in the businessprocess of recycling metals through our patent-pending processdemonstrating that we developedLi AquaRefining, which is fundamentally non-polluting, can create the highest quality 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 emissionshighest yields of recovered minerals from lithium-ion batteries with lower waste streams and toxic byproducts and creating a safer work environment. The patented AquaRefining modular systemslower costs than existing alternatives. We have already demonstrated how they can reduce environmental impact and scale lead-acid battery recycling capacity.

We completed the development ofat our first LAB recyclingpilot facility at the Tahoe Reno Industrial Centerour ability to recover key valuable minerals 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-effectivelysuch as lithium hydroxide, copper, nickel, cobalt, 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 interestedother compounds in participating in the eco-network the two2022. companies announced in 2021. LINICO intendsOur goal is 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 ascommercial quantities of nickel, cobalt, and copper as well as other compounds. 

In August 2021, we announcedin a pure metal form that we had established an Innovation Center focused on applying our proven technologycan be sold to lithium-ionthe general metals and superalloy markets and can be made into battery recycling researchprecursor compound materials with known processes already used in the mining industry. We have installed, commissioned, and development and prototype system activities. Duringbegan to operate 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 recyclingLi AquaRefining pilot plant, to be fully operational in thescaling towards a commercial demonstration operation through fourth quarter of 2022.2023.

Our focus for the lead market is providing equipment and licensing of our lead acid battery recycling technologies in an enabler model which allows us to work with anyone in the industry globally and address the entire marketplace. Our focus for the lithium market includes operating our first-of-a-kind lithium battery recycling facility, utilizing electricity to recycle instead of intensive chemical processes, fossil fuels, or high-temperature furnaces.

2. Summary of Significant Accounting Policiessignificant 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, 20212022, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022, as filed with the Securities and Exchange Commission, or the SEC, on February 24, 2022.March 09,2023.There have been no material changes in the Company’s significant accounting policies during the three and ninemonths ended September 30, 2022March 31, 2023.

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, 2022March 31, 2023, the condensed consolidated statements of operations for the three and ninemonths ended September 30, 2022March 31, 2023 and September 30, 2021March 31, 2022, the condensed consolidated statements of stockholders' equity for the three and ninemonths ended September 30, 2022March 31, 2023 and September 30, 2021March 31, 2022 and the condensed consolidated statements of cash flows for the ninethree months ended September 30, 2022March 31, 2023 and September 30, 2021March 31, 2022, as applicable, have been made. The condensed consolidated balance sheet as of December 31, 20212022 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, 20212022, which are included on Form 10-K filed with the Securities and Exchange Commission on FebruaryMarch 24,09, 2022.2023.

The results of operations for the three and ninemonths ended September 30, 2022March 31, 2023 are not necessarily indicative of results that may be expected for the year ending December 31, 20222023.

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 optionstock-based compensation expense and the determination of the fair value of stock warrants issued. Actual results could differ from those estimates.

Cash and cash equivalents

The Company considers all highly liquid instruments with original or remaining maturities of ninety days or less at the date of purchase to be cash equivalents. The Company maintains its cash balances in large financial institutions. Periodically, such balances may be in excess of federally insured limits.

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost is recorded on a first-in, first-out basis using the weighted average method. Net realizable value is determined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company records a write-down, if necessary, to reduce the carrying value of inventory to its net realizable value. The effect of these write-downs is to establish a new cost basis in the related inventory, which is not subsequently written up.

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 ninemonths ended September 30March 31, as indicated below:

Property, plant and equipment, net

Property, plant and equipment are stated at cost net of accumulated depreciation. Depreciation on property, plant and equipment is calculated on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are depreciated over the shorter of the life of the asset or the remaining term of the lease. We periodically evaluate our property, plant and equipment assets for indications that the carrying amount of an asset may not be recoverable.

Intellectual property, net

Intellectual property consists of patent applications contributed to the Company by the founding stockholders and patent applications for technology developed by the Company. The useful life of this intellectual property has been determined to be ten years and the assets are being amortized straight-line over this period. The Company periodically evaluates its intangible and other long-lived assets for indications that the carrying amount of an asset may not be recoverable and the remaining estimated lives of its long-lived assets. The Company evaluates the need to record impairment during each reporting period.

Investment in LINICO

Investments, which may be made from time to time for strategic reasons (and not to engage in the business of investments) are included in non-current assets in the condensed consolidated balance sheets. Investments are recorded at cost and the Company analyzes the value of investments on a quarterly basis.

Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets (“ROU assets”) and short-term and long-term lease liabilities are included in the condensed consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For lease agreements with terms less than 12 months, the Company has elected the short-term lease measurement and recognition exemption, and the Company recognizes such lease payments on a straight-line basis over the lease term.

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.

Concentration of credit risk

The Company did not generate revenue other than nominal revenueduring the three months ended March 31, 2023 or for the three months ended March 31, 2022. The Company has no accounts receivable as of March 31, 2023. As of December 31, 2022, accounts receivable consisted of proceeds from the sale of inventory during the threeequipment.

Research and nine months ended September 30, 2022 or the threedevelopment

Research and nine months ended September 30, 2021. The accounts receivable balance on the Company's condensed consolidated balance sheetsdevelopment expenditures are expensed 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. incurred.

Recent accounting pronouncements

There were no recent accounting pronouncements or changes in accounting pronouncements during the ninethree months ended September 30, 2022March 31, 2023 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 Recognitionrecognition

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 ninemonths ended September 30, 2022March 31, 2023 or during the three and ninemonths ended September 30, 2021March 31, 2022. Historically, Company products transferred to customers at a single point in time accounted for 100% of its revenue. 

4. Lease Receivablereceivable

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 expiresexpired on March 31, 2023. During the lease term, LINICO has(or it's parent, Comstock Inc.) had 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 andor $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, bywhich was paid on November 1, 2022,October 25, 2022. both of whichBoth deposits 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 respectOn March 31, 2023, Aqua Metals, Inc. received a notice of Comstock Inc.’s exercise of the option to purchase to the portionland and building located at 2500 Peru Dr., McCarran, Nevada. Per the Industrial Lease dated February 15, 2021, Comstock has the right to exercise the purchase option in lieu of LINICO, and the transaction will follow the same terms of the facility that was damaged inoriginal agreement. Per the agreement, Comstock Inc. has November 2019 nofire, consisting of approximately 30,000 square feet, more than 30 days, or until April 30, 2023, to close on the Company was obligated to complete the clean-uppurchase of the damaged area, at the Company's expenseland 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.building.

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 ninethree months ended September 30, 2022March 31, 2023, the Company recognized a reduction in the lease receivable balance of approximately $636,000$283,000 and recorded $57,000$18,000 of interest income related to this agreement.

On April 26,2023, the Company sold the land and building located at 2500 Peru Dr., McCarran, Nevada to Comstock Inc. and after paying the note payable as noted in Note 14, the Company received the net proceeds of approximately $5.7 million.

5. Inventory

Inventory consisted of the following (in thousands):

6. Assets Heldheld for Salesale

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, 2022March 31, 2023, Aqua Metals had assets with a book value of $1.1 million classified asall assets held for sale.sale were sold.

7. Property, plant and Equipment,equipment, net

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

Property, plant and equipment depreciation expense was $0.2$0.1 million and $0.4$0.1 million for the three months ended March 31, 2023and ninethree months ended September 30,March 31, 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.

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, iswas a member of the board of directors of Comstock Inc.

until April 5, 2023.

9. Accrued Expensesexpenses

Accrued expenses consist of the following (in thousands):

10. Leases

As of September 30, 2022March 31, 2023, 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, 2022March 31, 2023, total right-of-use assets were approximately $0.52$0.40 million and operating lease liabilities were approximately $0.53$0.42 million. As of September 30, 2021March 31, 2022, the Company's total right-of-use assets were approximately $0.68$0.63 million and operating lease liabilities were approximately $0.75$0.65 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):

Future maturities of lease liabilities as of September 30, 2022March 31, 2023 are as follows (in thousands):

11. Notes Payablepayable

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. 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. 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 expectedTRIC. On April 26, 2023, the property was sold and the proceeds from the sale were used to sell before March 31, 2023 to LINICO as disclosed in Note 4 ofpay off the financial statements.loan. Upon the completion of the sale, the commitments and obligations per our loan agreement with the Lenders will terminate,were terminated. All amounts outstanding on April 26, 2023 were paid.

On February 1, 2023, Aqua Metals Reno, Inc., our wholly-owned subsidiary, entered into a Loan Agreement with Summit Investment Services, LLC, a Nevada limited liability company (the “Lender”), pursuant to which the Lender provided us with a loan in the amount of $3 million. The loan proceeds were used to purchase a building located at 2999 Waltham Way McCarran, NV 89434 (the “Building”). The loan accrues interest at a fixed annual rate of 9.50%. Interest-only payments are due monthly for the firsttwenty-four months and the principal and all amounts then outstanding will become payable. The costs associated with obtainingunpaid interest is due on March 1, 2025. We have the right to prepay the loan were recorded asat any time, provided that we must pay guaranteed minimum interest of $213,750 (9-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 reduction tofirst priority lien on the carrying amount of the notebuilding and are being amortized over the life of the loan.site improvements, and is guaranteed by Aqua Metals, Inc.

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

12. Stockholders’ Equityequity

Shares issued

During the ninethree months ended September 30, 2022March 31, 2023, the Company issued 2,148,9091,287,170 shares of common stock upon vesting of Restricted Stock Units ("RSUs") granted by the Company to management and employees. We withheld 510,632 shares to satisfy approximately $577,000 of employees’ tax obligations during the three months ended March 31, 2023. We treat shares of common stock withheld for tax purposes on behalf of our employees in connection with the vesting of RSUs in a similar manner as common stock repurchases and reported as treasury stock.

During the ninethree months ended September 30, 2022March 31, 2023, the Company issued 79,69145,573 shares of common stock upon vesting of RSUs granted to Board members.

During the ninethree months ended September 30, 2022March 31, 2023, the Company issued 5,406,9141,662,953 shares of common stock pursuant to the At The Market Issuance Sales Agreement for net proceeds of $5.6$2.0 million.

During the ninethree months ended September 30, 2022March 31, 2023, the Company issued 13,38915,781 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:

There were no options issued duringDuring the three andmonths ended nineMarch 31, 2023, the Company issued 25,500 shares of common stock to a Board member related to director fees.

During the three months ended September 30, 2022March 31, 2023 or, the Company issued 469,366 shares of common stock upon the settlement of the securities class action lawsuit.

During the three and ninemonths ended September 30, 2021March 31, 2023.

Restricted stock units

In January 2022,, the Company granted 44,780 RSUs, allissued 192,707 shares of which were subjectcommon stock pursuant 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.

employee stock purchase plan.

Stock-based compensation

The stock-based compensation expense was allocated as follows:

There were no options issued during the three months ended March 31, 2023 or the three months ended March 31, 2022.

Restricted stock units

In January 2023, the Company granted 21,726 RSUs, all of which were subject to vesting, with a grant fair value of $25,000 to employees. The shares vest in three equal installments over a three-year period.

In February 2023, the Company granted 17,423 RSUs, all of which were subject to vesting, with a grant fair value of $20,000 to employees. The shares vest in three equal installments over a three-year period.

In March 2023, the Company granted 25,000 RSUs, all of which were subject to vesting, with a grant fair value of $25,000 to employees. The shares vest in three equal installments over a three-year period.

13. Commitments and Contingenciescontingencies

Legal proceedings

See Item 1. Legal Proceedings

14. Subsequent Eventsevents

On OctoberApril 25,26, 2022,2023, the Company sold the land and building located at 2500 Peru Dr., McCarran, Nevada to Comstock Inc. and after paying the note payable, the Company received the second nonrefundable depositnet proceeds 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.approximately $5.7 million.

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.

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, including our Annual Report on Form 10-K for the year ended December 31, 20212022 filed with the SEC on February 24, 2022,March 09, 2023, 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 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(“Li”) batteries. Our recycling process is a patented hydrometallurgicalhydro and electrometallurgical technology that is a novel, proprietary and patented process we developed and named AquaRefining. AquaRefining is a room temperature, waterlow-emissions, closed-loop recycling technology that has the potential to replace polluting furnaces and organic acid-based process that greatly reduces environmental emissions.hazardous chemicals with electricity-powered electroplating to recover valuable metals and materials from spent batteries with higher purity, lower emissions, and with minimal waste. The modular Aqualyzers“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 the 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 a novel, proprietary and 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 third and fourth quarters 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 our entry into the Lilithium-ion battery (LiB) recycling market through a key provisional patent we filed and a strategic investment in LINICO Corporation of $2 million paid in Aqua Metals shares and cash for an approximate 10% ownership in LINICO as part of our strategy to strengthen growth.

that applies the same innovative AquaRefining approach. In August 2021, we announced that we had established our Innovation Center in Tahoe-Reno Industrial CenterTRIC focused on applying our proven technology to lithium-ion batteryLiB recycling research and development and prototype system activities. prototyping. Our strategic decision to apply our proven clean, closed-loop hydrometallurgical and electrochemical 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.

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 applyDuring 2022, we built our proven clean, closed-loop hydrometallurgical and electro-chemical recycling experience to lithium-ion battery recyclingfully-integrated pilot system, located within the Company’s Innovation Center, which is designed to meetallow Aqua Metals to be the growing demand for criticalfirst company in North America to recycle battery minerals from black mass and sell them in the U.S. and position the Company as the first LiB recycler in North America to align with the U.S. government’s goal of retaining strategic battery minerals within the domestic supply chain.

During 2022, we conducted environmental comparisons based on Argonne National Lab’s modeling of lithium battery supply chains – called EverBatt. The initial results indicate that AquaRefining is a cleaner approach to LiB recycling, producing far less CO2 waste streams than the two evaluated primary processes currently on the market which include smelting and chemically driven hydrometallurgical process. In December of 2022, we completed equipment installation and began to operate our first-of-a-kind LiB recycling facility, utilizing electricity to recycle instead of intensive chemical processes, fossil fuels, or high-temperature furnaces. In January of 2023, Aqua Metals recovered its first metals drivenfrom recycling lithium batteries using the patent-pending Li AquaRefining process and is currently scaling operations at the Company’s pilot facility.

In February 2023, we acquired a five-acre recycling campus at TRIC. The facility is designed, when fully developed, to process up to 10,000 tonnes of lithium-ion battery material each year using our proprietary AquaRefining technology. Subject to our receipt of development financing on a timely basis, we expect to complete development of Phase One, including all equipment installation, by the global transition to electric vehicles, growth in Internet data centers, and alternative energy applications including solar, wind, and grid-scale storage. 

Planend of Operations

Our business strategy is based on the pursuit of licensing opportunities within the lead acid battery recycling marketplace2023 and to meetcommence operations at the growing demand for critical metals driven by innovations in automobile batteries, growth in Internet data centers, and alternative energy applications, including solar, wind, and grid-scale storage, by applying AquaRefining methodologies to the lithium-ion battery market. 

We arenew campus in the processfirst quarter of demonstrating that2024. Our initial plans call for upgrading the current building to install a commercial-scale Li AquaRefining whichsystem capable of recycling 3,000 tonnes of lithium battery ‘black mass’ each year. We expect to complete redevelopment of the current space and finalize equipment installation this year, and to commence operations at the new campus in the first quarter of 2024. The purchase of the new property was funded with a non-dilutive loan. At first, we intend to finance the development of Phase One through a conventional non-dilutive loan. The Company is fundamentally non-polluting, can createcurrently in discussions with a provider of debt financing. This lender has provided the highest quality and highest yields of recovered minerals from Lithium-ion batteriesCompany with debt financing in the lower waste streams and lower costs than existing alternatives. We have already demonstrated our ability to recover key valuable minerals in Lithium-ion batteries, such as lithium hydroxide, copper, nickel, cobalt, and other compounds in 2022. Our goal is to process results with nickel, cobalt, and copper inpast. At the same time, we are looking into raising capital through a pure metal form thatpotential government backed debt offering. However, there can be sold to the general metals and superalloy markets and canno assurance that such funds will be made into battery precursor compound materials with known processes already used in the mining industry. We are installing and intends to commission and operate the first Li AquaRefining pilot plant producing initial quantities by year end 2022, scaling towards a commercial demonstration quantity of up to 80 tonnes per month by year end 2023. The location for the demonstration quantity is currently the Innovation Center but we are also considering alternative locations in the Tahoe-Reno area to expand from demonstration commercial quantities to ~10,000 tonnes / year or more of production starting in 2024.  available.

Our focus for the lead market is providing equipment and licensing of our lead acid battery recycling technologies in an enabler model which allows us to work with anyone in the industry globally and address the entire marketplace. Our focus for the lithium market includes operating our first-of-a-kind lithium battery recycling facility, utilizing electricity to recycle instead of intensive chemical processes, fossil fuels, or high-temperature furnaces. We are also exploringpursuing potential partnership and/or joint ventures and potentially operating a recycling facility again in the future,agreements, particularly as our Li AquaRefining matures through 20222023 and into 2023. This flexibility in our business model allows us to preserve cash in the shorter term and maximize profit potential in the longer term.2024. We believe that Aqua Metals is in a position to become one of the few critical minerals recovery players for which our environmental and economic value proposition should generate both great commercial wins and potentially government grants to accelerate our credibility and progress.

Plan of Operations

Our business strategy is based on the pursuit of building and operating Li AquaRefining recycling capacity to meet the growing demand for critical metals in lithium-ion batteries driven by innovations in automobile batteries, growth in internet data centers, and alternative energy applications, including solar, wind, and grid-scale storage. We are also continuing to pursue equipment supply and licensing opportunities within the lead acid battery recycling marketplace.

We are in the process of demonstrating that Li AquaRefining, which is fundamentally non-polluting, can create the highest quality and highest yields of recovered minerals from lithium-ion batteries with lower waste streams and lower costs than existing alternatives. We have already demonstrated at our pilot facility our ability to recover key valuable minerals in lithium-ion batteries, such as lithium hydroxide, copper, nickel, cobalt, and other compounds in 2022. Our goal is to process commercial quantities of nickel, cobalt, and copper in a pure metal form that can be sold to the general metals and superalloy markets and can be made into battery precursor compound materials with known processes already used in the mining industry. We have installed, commissioned, and began to operate the first Li AquaRefining pilot plant at the end of 2022, scaling towards a commercial demonstration plant operation with capacity of processing approximately 3,000 tonnes of black mass per year. The location for the pilot demonstration is currently the Innovation Center with expansion to happen at our new 5-acre recycling campus starting with processing ~3,000 tonnes of black mass/ year in 2024 and growing to commercial quantities of ~10,000 tonnes / year or more of production starting in 2025 and 2026, which would be enough material to build ~100,000 average EVs or ~400,000 average home energy storage systems. At today’s metals prices, this capacity could also generate $200,000,000 plus of revenues for the company.

Results of Operations

We have not engaged in commercial operations since 2019, other than the sale of inventory, and since that time our operations have been devoted to improvements to our AquaRefining processes and developing our Li AquaRefining battery recycling technology. We currently have budgeted to spendDuring 2022, we spent approximately $3$3.1 million on research and development, for 2022, which includes the plan to build out of the initial Li battery recycling pilot at the Innovation Center. We have spent $1.6 million ofDuring the research and development budget during the ninethree months ended September 30, 2022.March 31, 2023, Aqua Metals is focused on quickly advancing from the planning and validation phases to execution and operation of our pilot facility and the build out of our commercial facility. We did not incurearn any revenue during the three and nine months ended September 30, 2022March 31, 2023 and 2021 other than nominal revenue generated during the second quarter of 2022 from the sale of inventory.2022. The following table summarizes our results of operations with respect to the items set forth below for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 together with the dollar and percentage changes in those items (in thousands).

Historical product sales prior to the reported periods have consisted of high-purity lead from our AquaRefining process. Other than sales from inventory, we do not expect to generate revenue fromPlant operations until such time as we enter into a commercial license for our lead acid AquaRefining technology or revenue from Li battery recycling.

Cost of product salesand clean up 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 decreasedPlant operations and clean up increased approximately 50% and 44%7% for the three and nine months ended September 30, 2022, respectively,March 31, 2023 as compared to the three and nine months ended September 30, 2021.March 31, 2022. The decreaseincrease in cost of product salesplant operations and clean up was primarily due to the decreaseincrease in plant clean-upoperations costs, in preparation foras we began to operate the lease of thepilot facility that occurred in 2021. Such expenditures were reduced during the nine months ended September 30, 2022.and to process black mass.

Research and development cost includes expenditures related to the improvement of the AquaRefining technology related to our lead recycling process and initialthe development of our lithium-ion battery recycling process. DuringFor the three months ended September 30, 2022, research and development cost increased $217,000, or approximately 80%, over the comparable period in 2021. For the nine months ended September 30, 2022,March 31, 2023, research and developments costs increased $823,000,decreased $106,000, or approximately 112%19% compared to the ninethree months ended September 30, 2021. These increases wereMarch 31, 2022. The decrease was driven by effortsour focus to advanceoperate our proprietary AquaRefining technology and the Li battery recycling pilot at the Innovation Center.

General and administrative expense decreasedincreased approximately 3%9% for the three months ended September 30, 2022, but increased approximately 7% for the nine months ended September 30, 2022,March 31, 2023 compared to the three and nine months ended September 30, 2021.March 31, 2022. The increase in general and administrative expenses includes changes in payroll and payroll related expenses in addition to an increase in professional fees.as we ramp up and support the growth of our lithium-ion recycling business model.  

The following table summarizes our other income and interest expense for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 together with the dollar and percentage changes in those items (in thousands).