Item
1A.
Risk Factors
There
are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually
occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading
price of our common stock could decline and investors could lose all or part of their investment.
Risks
Relating to Our Business
Since
we have a limited operating history and have only recently commenced revenue producing operations, it is difficult for potential
investors to evaluate our business
.
We formed our corporation in June 2014 and only commenced revenue producing
operations in the first quarter of 2017. From inception through March 31, 2018, we generated a total of $3.8 million of revenue,
all of which was derived from the sale of lead compounds and plastics. To date, our operations have consisted of the development
and testing of our AquaRefining process, the construction of our initial LAB recycling facility in Tahoe Regional Industrial Center,
McCarran, Nevada (“TRIC”), the continuing development of our LAB recycling operations at TRIC and limited revenue
producing operations as we bring those LAB recycling operations online. Our limited operating history makes it difficult for potential
investors to evaluate our technology or prospective operations. As an early stage company, we are subject to all the risks inherent
in the initial organization, financing, expenditures, complications and delays in a new business, including, without limitation:
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the
timing and success of our plan of commercialization and the fact that we continue to
experience delays in completing our LAB recycling operations at TRIC;
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our
ability to bring modules online and ramp up production on a commercial scale;
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our
ability to profitably operate our AquaRefining process on a commercial scale;
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our
ability to realize the expected benefits of our strategic partnership with Johnson Controls;
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our
ability to procure LABs in sufficient quantities at competitive prices; and
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our
ability to receive proper certification from and meet the requirements of our customers
regarding the purity of our AquaRefined lead.
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Investors
should evaluate an investment in us in light of the uncertainties encountered by developing companies in a competitive environment.
There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.
Our
business is dependent upon on our successful implementation of novel and unproven technologies and processes and there can be
no assurance that we will be able to implement such technologies and processes in a manner that supports the successful commercial
roll-out of our business model.
While much of the technology and processes involved in our lead recycling operations are
widely used and proven, the AquaRefining component of our lead recycling operations is largely novel and unproven. While we have
shown that our proprietary technology can produce AquaRefined lead on a small scale, we have only recently completed, and have
not put into operation, the processes that we believe will support the production of AquaRefined lead on a commercial scale. Further,
as we complete our AquaRefining production line, we continue to encounter unforeseen complications that have delayed the installation
and commissioning of our AquaRefining modules and the integration of our AquaRefining process with the traditional lead recycling
operations. For example, we most recently had to develop special processes and equipment to deal with an unexpected development
in the form of “sticky lead,” whereby the AquaRefined lead produced by our electrolyzers stuck to the AquaRefining
modules’ exit chute and failed to exit without manual intervention. As of the date of this report,
we have substantially completed the retrofit of all 16 modules for this particular issue and have began to bring the modules
into commercial operation. There can be no assurance that
we will not encounter additional unforeseen complications that will cause further delays in our planned commercial operation of
our AquaRefining modules or prevent us from commencing commercial production of AquaRefined lead at all.
We
will need additional financing to execute our business plan and fund operations, which additional financing may not be available
on reasonable terms or at all
.
As of March 31, 2018, we had total cash of $17.5 million and working capital of
$16.1 million. As of the date of this report, we believe that we have working capital sufficient to fund the commissioning and
commercial operation of 16 AquaRefining modules at TRIC over the 12 months from the date of this report. However, we will require
additional capital in order to increase production of AquaRefined lead at TRIC beyond that planned for 16 modules, to work with
Johnson Controls on equipment integration and licensing to third parties, to fund working capital needs related to the ramp-up
of our operations and to fund our continued losses from operations until such time as we are able to achieve positive cash flow
from operations. There can be no assurance that we will be able to acquire the necessary funding on commercially reasonable terms
or at all. There can also be no assurance we will be able to conclude the proposed development agreement with Johnson Controls.
We intend to seek additional funds through various financing sources, including the sale of our equity and debt securities, licensing
fees for our technology, joint ventures with capital partners and/or project financing of our recycling facilities. However, there
can be no assurance that such funds will be available on commercially reasonable terms, if at all. If such funding is not available
on satisfactory terms, we may be unable to further pursue our business plan and we may be unable to continue operations, in which
case you may lose your entire investment.
We
are subject to restrictive debt covenants that may limit our ability to run our business, finance our capital needs and
pursue business opportunities and activities
.
As of the date of this Quarterly Report, we are indebted to Green Bank
for approximately $9.7 million and Interstate Battery for approximately $6.1 million, all of which is secured by liens on
substantially all of our assets. The credit agreements governing such indebtedness contain covenants that limit our ability
to take certain actions. These covenants could limit our ability to finance our future operations and capital needs and our
ability to pursue business opportunities and activities that may be in our interest. If we breach any of these covenants, the
debt holder could declare a default under the credit agreement, in which case all of the indebtedness may then become
immediately due and payable. In addition, any default under one credit agreement could lead to an acceleration of debt under
the other credit agreement pursuant to cross-acceleration or cross-default provisions. If the debt under either credit
agreement is accelerated, we may not have, or be able to obtain, sufficient funds to make these accelerated payments. In
addition, since all of the indebtedness to Green Bank and Interstate Battery is secured by substantially all of our assets, a
default under either credit facility could enable the debtholder to foreclose on its security interest and attempt to seize
our assets. The affirmative and negative debt covenants could materially adversely impact our ability to operate and finance
our business. In addition, our default under any of these covenants could subject us to accelerated debt payments or
foreclosure proceedings that could threaten our ability to continue as a going concern.
Interstate
Battery currently claims that we are in breach of a negative covenant with Interstate Battery and we have not been able to comply
with our debt service covenant with Green Bank
. As of the date of this report, Interstate Battery has raised a claim that
we are in technical breach of a negative covenant under our loan with Interstate Battery. The claimed breach relates to our failure
to obtain Interstate Battery’s prior written consent to our acquisition of Ebonex IPR, Ltd. We believe we will be able to
resolve the matter. However, in the event we are unable to resolve the matter, Interstate Battery may declare a default under
the loan and attempt to accelerate the payment of all amounts thereunder. There can be no assurance we will be able to resolve
the claimed breach or that Interstate Battery will not declare a default under the loan and attempt to accelerate the payment
of all amounts thereunder. In addition, our credit agreement with Green Bank requires, among other affirmative and negative covenants,
that we maintain a minimum debt service coverage ratio of 1.25 to 1.0 beginning with the twelve-month period ending March 31,
2017. We failed to meet the minimum debt service coverage ratio covenant as of March 31, June 30, September 30, December 31, 2017
and March 31, 2018, and we were required to obtain a waiver of the minimum debt service coverage ratio covenant from Green Bank
for such periods. There can be no assurance that Green Bank will provide waivers of this covenant, or any other covenant that
we may fail to satisfy, going forward. Our default under either the Interstate Battery or Green Bank loan covenants could subject
us to accelerated debt payments or foreclosure proceedings that could threaten our ability to continue as a going concern.
In
the event of the acceleration of either the Interstate Battery or Green Bank loans, we will need additional financing to satisfy
our obligations under the loans, which additional financing may not be available on reasonable terms or at all
.
As noted above, as of the date of this report, we are indebted to Green Bank for approximately $9.7 million and Interstate Battery
for approximately $6.1 million. The credit agreements governing such indebtedness contain various affirmative and negative covenants
and if we breach any of these covenants, the debt holder could declare a default under the credit agreement, in which case all
of the indebtedness may then become immediately due and payable. In addition, any default under one credit agreement could lead
to an acceleration of debt under the other credit agreement pursuant to cross-acceleration or cross-default provisions. If the
debt under either credit agreement is accelerated, we may not have sufficient funds to make the accelerated payments, in which
case we would be required to seek additional funds through various financing sources, most likely through the sale of our equity
or debt securities. However, there can be no assurance that such funds will be available on commercially reasonable terms, if
at all. Further, any sale of our equity or equity-linked securities will result in additional dilution to our stockholders.
Our
outstanding debt may make it difficult for us obtain additional financing using our future operating cash flow.
We currently
have a substantial amount of indebtedness, including approximately $9.7 million owed to Green Bank and approximately $6.1 million
owed to Interstate Battery as of the date of this report. Such indebtedness could limit our ability to borrow additional funds
to fund operations or expansion or increase the cost of any such borrowing, or both. Our inability to conduct additional debt
financing could:
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limit
our flexibility in developing our business operations and planning for, or reacting to,
changes in our business;
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increase
our vulnerability to, and reduce our flexibility to respond to, general adverse economic
and industry conditions; and
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place
us at a competitive disadvantage as compared to our competitors that are not as highly
leveraged.
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Any
of these or other consequences or events could have a material adverse effect on our ability to finance our business and our operations.
We
may be required to pay up to $3 million of key-man payments as the result of the resignation of our chief executive officer.
On April 19, 2018, Stephen Clarke resigned as our president and chief executive officer and as a member of our Board. As a result
of Mr. Clarke’s resignation, we will be obligated to make key-man payments of $2 million and $1 million to Interstate Battery
and Johnson Controls, respectively, payable, at our option, in cash or shares of our common stock, unless Interstate Battery and/or
Johnson Controls, as the case may be, approves the successor to Dr. Clarke. See Note 10 to our unaudited condensed consolidated
financial statements. We have commenced the process of discussing Dr. Clarke’s successor with Interstate Battery and Johnson
Controls and are hopeful we will be successful in obtaining their approval of Dr. Clarke’s successor, however to there can
be no assurance will be able to do so. If we are unable to obtain the approval of either or both of Interstate Battery and Johnson
Controls to waive the key man payments, we will be obligated to pay them up to $3 million in cash or our common shares.
Our
business model is new and has not been proven by us or anyone else
.
We are engaged in the business of producing
recycled lead through a novel and unproven technology. While the production of recycled lead is an established business, to date
all recycled lead has been produced by way of traditional smelting processes. To our knowledge, no one has successfully produced
recycled lead in commercial quantities other than by way of smelting. In addition, our lead recycling production line at TRIC
is the first-of-its-kind and neither we nor anyone else has ever successfully built a production line that commercially recycles
LABs without smelting. While we have commenced limited lead recycling operations at our TRIC facility, to date all revenues have
been derived from the sale of lead compounds and plastics and we have not commenced the commercial production of AquaRefined lead.
In addition to the general risks associated with a novel and unproven technology, our business model is subject to a number of
related risks, including:
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our
ability to acquire sufficient quantities of used LABs at competitive prices;
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our
ability to produce AquaRefined lead on a commercial scale and at an adequate gross profit;
and
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our
ability to sell our AquaRefined lead at prices and in quantities that provide an adequate
net profit from operations.
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Further,
there can be no assurance that we will be able to produce AquaRefined lead in commercial quantities at a cost of production that
will provide us with an adequate profit margin. The uniqueness of our AquaRefining process and our production line at TRIC presents
potential risks associated with the development of a business model that is untried and unproven.
Certain
industry participants may have the ability to restrict our access to used LABs and otherwise focus significant competitive pressure
on us
. We believe that our primary competition will come from operators of existing smelters and other parties invested
in the existing supply chain for smelting, both of which may resist the change presented by our AquaRefining process. Competition
from such incumbents may come in the form of restricted access to used LABs. We believe that LAB manufacturers who also maintain
their own smelting operations control a significant part of the market for used LABs. We will require access to used LABs at market
prices in order to carry out our business plan. If those LAB manufacturers and others involved in the reverse supply chain for
used LABs attempt to restrict our access to used LABs, that may adversely affect our prospects and future growth. There can be
no assurance that we will be able to effectively withstand the pressures applied by our competition.
Even
if we are successful in recycling lead using our processes, there can be no assurance that the AquaRefined lead will meet the
certification and purity requirements of our potential customers.
A key component of our business plan is to produce recycled
lead through our AquaRefining process of the highest purity (at least 99.99% pure lead), which we refer to as AquaRefined lead.
We believe that our AquaRefined lead will provide us with the highest gross profit margin and, more importantly, our ability to
produce AquaRefined lead will be vital to confirming the efficacy and relevancy of our proprietary technology. Our customers will
require that our AquaRefined lead meet certain minimum purity standards and, in all likelihood, require independent assays to
confirm the lead’s purity. As of the date of this report, we have produced limited quantities of AquaRefined lead. However,
we have not produced AquaRefined lead in commercial quantities and there can be no assurance that we will be able to do so or,
if we are able to produce AquaRefined lead in commercial quantities, that such lead will meet the required purity standards of
our customers. If we are unable to commercially produce AquaRefined lead that meets the purity standards established by our customers,
our entire business plan may be invalidated and you may suffer the loss of your entire investment.
While
we have been successful in producing AquaRefined lead in small volumes, there can be no assurance that we will be able to replicate
the process, along with all of the expected economic advantages, on a large commercial scale
.
As of the date of
this report, our commercial operations have involved the production of lead compounds and plastics from recycled LABs and we have
not commenced the commercial production of AquaRefined lead. While we believe that our development, testing and limited production
to date has validated the concept of our AquaRefining process, the limited nature of our operations to date are not sufficient
to confirm the economic returns on our production of recycled lead. There can be no assurance that the commencement of commercial
production of AquaRefined lead at our TRIC facility will not incur unexpected costs or setbacks that might restrict the desired
scale of our intended operations or that we will be to produce AquaRefined lead in commercial quantities at a cost of production
that will provide us with an adequate profit margin.
We
have completed the construction of our initial LAB recycling facility at TRIC, however we have been delayed in the
completion of our lead recycling operations at TRIC and we may encounter further delays.
We completed the
construction of our initial LAB recycling facility at TRIC in August 2016 and commenced the limited production of recycled
lead in the first quarter of 2017. However, as of the date of this report, our commercial operations have involved the
production of lead compounds and plastics from recycled LABs and we have not commenced the commercial production of
AquaRefined lead. As of December 2017, we have installed 16 AquaRefining modules. However, we encountered an issue which
required the retrofitting of all 16 modules. As of the date of this report, we have substantially completed the retrofit of
all 16 modules for this particular issue and have begun to bring all 16 modules into commercial operation. As we bring the
modules into commercial operation, we expect to continue to adjust the modules to enhance operations. We intend to bring the
modules on line in batches of four. As of the date of this report, we have brought the first four modules into commercial
operation and expect to ramp up production during the second quarter. However, due to the delays and unforeseen issues in the
completion of the AquaRefining production line we have experienced to date, there can be no assurance that we will not
encounter additional delays and issues. In addition, since our lead recycling production line at TRIC is the
first-of-its-kind, neither we nor anyone else has ever built a facility of this nature and there can be no assurance that we
will not experience continuing operational delays and issues, including significant downtime from time to time, as we
progress into the commercial production of AquaRefined lead. There can be no assurance that the commencement of commercial
AquaRefining operations at our TRIC facility will not incur unexpected costs or hurdles that might restrict the desired scale
of our intended operations or negatively impact our projected gross profit margin.
Our
intellectual property rights may not be adequate to protect our business
.
As of the date of this report, we have
secured one US patent (US 9837689) and international patents in Korea (Korea Patent No. 10-1739414), Japan (Japan Patent No. 6173595)
Australia (Australia Patent No. AU2014353227), Canada (CA 2930945), African Intellectual Property Organization (OA 17808), and
South Africa (ZA 2016.04083). We also have further patent applications pending in the United States and numerous corresponding
patent applications pending in 20 additional jurisdictions relating to certain elements of the technology underlying our AquaRefining
process and related apparatus and chemical formulations. However, no assurances can be given that any patent issued, or any patents
issued on our current and any future patent applications, will be sufficiently broad to adequately protect our technology. In
addition, we cannot assure you that any patents issued now or in the future will not be challenged, invalidated, or circumvented.
Even
patents issued to us may not stop a competitor from illegally using our patented processes and materials. In such event, we would
incur substantial costs and expenses, including lost time of management in addressing and litigating, if necessary, such matters.
Additionally, we rely upon a combination of trade secret laws and nondisclosure agreements with third parties and employees having
access to confidential information or receiving unpatented proprietary know-how, trade secrets and technology to protect our proprietary
rights and technology. These laws and agreements provide only limited protection. We can give no assurance that these measures
will adequately protect us from misappropriation of proprietary information.
Our
processes may infringe on the intellectual property rights of others, which could lead to costly disputes or disruptions
.
The applied science industry is characterized by frequent allegations of intellectual property infringement. Though we do
not expect to be subject to any of these allegations, any allegation of infringement could be time consuming and expensive to
defend or resolve, result in substantial diversion of management resources, cause suspension of operations or force us to enter
into royalty, license, or other agreements rather than dispute the merits of such allegation. If patent holders or other holders
of intellectual property initiate legal proceedings, we may be forced into protracted and costly litigation. We may not be successful
in defending such litigation and may not be able to procure any required royalty or license agreements on acceptable terms or
at all.
Our
business strategy includes licensing arrangements and entering into joint ventures and strategic alliances, however as of the
date of this report we have no such agreements in place and there can be no assurance we will be able to do so. Failure to successfully
integrate such licensing arrangements, joint ventures, or strategic alliances into our operations could adversely affect our business
.
We propose to commercially exploit our AquaRefining process, in part, by licensing our technology to third parties and entering
into joint ventures and strategic relationships with parties involved in the manufacture and recycling of LABs, including Johnson
Controls, among others. However, as of the date of this report, we have not entered into any such licensing, joint venture or
strategic alliance agreements, apart from our equipment supply agreement with Johnson Controls, and there can be no assurance
that we will be able to do so on terms that benefit us, if at all. In addition, licensing programs, joint ventures and strategic
alliances may involve significant other risks and uncertainties, including distraction of management’s attention away from
normal business operations, insufficient revenue generation to offset liabilities assumed and expenses associated with the transaction,
and unidentified issues not discovered in our due diligence process, such as product quality, technology issues and legal contingencies.
In addition, we may be unable to effectively integrate any such programs and ventures into our operations. Our operating results
could be adversely affected by any problems arising during or from any licenses, joint ventures or strategic alliances.
There
can be no assurance that we will be able to negotiate our key agreement with Johnson Controls on commercially reasonable terms,
or at all
. In February 2017, we entered into a series of agreements with Johnson Controls, including an equipment supply
agreement pursuant to which, among other things, we agreed to work with Johnson Controls on the development of a program for the
conversion of Johnson Controls and certain strategic partners of Johnson Controls’ existing lead smelters throughout North
America, China and Europe to a lead recycling process utilizing our AquaRefining technology and equipment, know-how and services.
The equipment supply agreement discusses the development of the conversion program in general terms and contemplates that the
parties will enter into a definitive development program agreement that is based on the general terms set forth in the equipment
supply agreement and provides more detailed terms and conditions, including the economic obligations and rights of each party.
We have agreed not to license our AquaRefining technology and equipment to third parties in the aforementioned regions until such
time as we and Johnson Controls have agreed on certain matters relating to the initial conversion of a Johnson Controls facility.
Johnson Controls and we have agreed to use good faith, commercial best-efforts to conclude the discussion and negotiation of the
development program agreement no later than April 30, 2019, and to enter into a definitive development program agreement no later
than June 30, 2019. The equipment supply agreement may be terminated by either party upon 60 days’ prior written notice
if the parties have not entered into the development program agreement by June 30, 2019. There can be no assurance that we will
be able to negotiate and conclude a definitive development program agreement with Johnson Controls on commercially reasonable
terms, or at all.
We
are dependent on a limited number of suppliers of certain materials used in our AquaRefining process and our inability to obtain
these materials as and when needed could cause a material disruption in our operations
.
Our AquaRefining process
involves a significant number of elements, chemicals, solvents and other materials, in addition to used LABs. There are a limited
number of suppliers of certain materials used in our AquaRefining process and we have no agreements in place for our supply of
such materials. Our ability to conduct our AquaRefining process on a commercial scale will depend significantly on obtaining timely
and adequate supply of these materials on competitive terms. Our inability to source these materials on a timely and cost-efficient
manner could interrupt our operations, significantly limit our revenue sales and increase our costs. This factor could also impair
our ability to meet our commitments to supply our customers. Our inability to obtain these materials as and when needed could
cause a material disruption in our operations.
If
we are unable to manage future expansion effectively, our business, operations and financial condition may suffer significantly,
resulting in decreased productivity
.
If our AquaRefining process proves to be commercially viable, growth and expansion
activities could place a significant strain on our managerial, administrative, technical, operational and financial resources.
Our organization, procedures and management may not be adequate to fully support the expansion of our operations or the efficient
execution of our business strategy. If we are unable to manage future expansion effectively, our business, operations and financial
condition may suffer significantly, resulting in decreased productivity.
We
may experience significant fluctuations in raw material prices and the price of our principal product, either of which could have
a material adverse effect on our liquidity, growth prospects and results of operations
.
Used LABs are our primary
raw material and we believe that in recent years the cost of used LABs has been volatile at times. In addition, we believe that
the cost of used LABs can be seasonal, with prices trending lower in the winter months (as automobile owners increase their purchase
of new LABs, thereby putting a greater number of used LABs on the market) and trend higher in the spring (as the purchase of new
LABs, and supply of used LABs, decreases). Our principal product, recycled lead, has also experienced price volatility from time
to time as well. For example, the market price of lead on the London Metal Exchange, or LME, during 2017 ranged from approximately
$2,000 to $2,600 per tonne. While we intend to pursue supply and tolling arrangements as appropriate to offset any price volatility,
the volatile nature of prices for used LABs and recycled lead could have an adverse impact on our liquidity, growth prospects
and results of operations.
Global
economic conditions could negatively affect our prospects for growth and operating results
.
Our prospects for growth
and operating results will be directly affected by the general global economic conditions of the industries in which our suppliers,
partners and customer groups operate. We believe that the market price of our principal product, recycled lead, is relatively
volatile and reacts to general global economic conditions. Lead prices decreased from $2,139 per tonne on May 5, 2015 to a low
of $1,554 per tonne on November 23, 2015 because of fluctuations in the market. A month later, the price per tonne increased back
up to $1,801 per tonne; the price per tonne was $2,411 on March 31, 2018. Our business will be highly dependent on the economic
and market conditions in each of the geographic areas in which we operate. These conditions affect our business by reducing the
demand for LABs and decreasing the price of lead in times of economic down turn and increasing the price of used LABs in times
of increasing demand of LABs and recycled lead. There can be no assurance that global economic conditions will not negatively
impact our liquidity, growth prospects and results of operations.
We
are subject to the risks of conducting business outside the United States
.
A part of our strategy involves our
pursuit of growth opportunities in certain international market locations. We intend to pursue licensing or joint venture arrangements
with local partners who will be primarily responsible for the day-to-day operations. Any expansion outside of the US will require
significant management attention and financial resources to successfully develop and operate any such facilities, including the
sales, supply and support channels, and we cannot assure you that we will be successful or that our expenditures in this effort
will not exceed the amount of any resulting revenues. Our international operations expose us to risks and challenges that we would
otherwise not face if we conducted our business only in the United States, such as:
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increased
cost of enforcing our intellectual property rights;
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heightened
price sensitivities from customers in emerging markets;
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our
ability to establish or contract for local manufacturing, support and service functions;
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localization
of our LABs and components, including translation into foreign languages and the associated
expenses;
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compliance
with multiple, conflicting and changing governmental laws and regulations;
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foreign
currency fluctuations;
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laws
favoring local competitors;
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weaker
legal protections of contract terms, enforcement on collection of receivables and intellectual
property rights and mechanisms for enforcing those rights;
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market
disruptions created by public health crises in regions outside the United States;
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difficulties
in staffing and managing foreign operations, including challenges presented by relationships
with workers’ councils and labor unions;
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issues
related to differences in cultures and practices; and
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changing
regional economic, political and regulatory conditions.
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U.S.
Government regulation and environmental, health and safety concerns may adversely affect our business
.
Our operations
in the United States will be subject to the Federal, State and local environmental, health and safety laws applicable to the reclamation
of lead acid batteries. Our facilities will have to obtain environmental permits or approvals to operate, including those associated
with air emissions, water discharges, and waste management and storage. We may face opposition from local residents or public
interest groups to the installation and operation of our facilities. In addition to permitting requirements, our operations are
subject to environmental health, safety and transportation laws and regulations that govern the management of and exposure to
hazardous materials such as the lead and acids involved in battery reclamation. These include hazard communication and other occupational
safety requirements for employees, which may mandate industrial hygiene monitoring of employees for potential exposure to lead.
Failure to comply with these requirements could subject our business to significant penalties (civil or criminal) and other sanctions
that could adversely affect our business.
In
the event we are unable to present and operate our AquaRefining process and operations as safe and environmentally responsible,
we may face opposition from local governments, residents or public interest groups to the installation and operation of our facilities.
The
development of new AquaRefining facilities by us or our partners or licensees, and the expansion of our operations at TRIC, will
depend on our ability to acquire necessary permits and approvals, of which there can be no assurance.
As noted above,
our AquaRefining facilities will have to obtain environmental permits or approvals to operate, including those associated with
air emissions, water discharges, and waste management and storage. In addition, we expect that our planned expansion of AquaRefining
operations at TRIC will require additional permitting and approvals. Failure to secure (or significant delays in securing) the
necessary permits and approvals could prevent us and our partners and licensees from pursuing additional AquaRefining facilities
or expanding operations at TRIC, and otherwise adversely affect our business, financial results and growth prospects. Further,
the loss of any necessary permit or approval could result in the closure of an AquaRefining facility and the loss of our investment
associated with such facility.
Our
business involves the handling of hazardous materials and we may become subject to significant fines and other liabilities in
the event we mishandle those materials
. The nature of our operations involves risks, including the potential for exposure
to hazardous materials such as lead, that could result in personal injury and property damage claims from third parties, including
employees and neighbors, which claims could result in significant costs or other environmental liability. Our operations also
pose a risk of releases of hazardous substances, such as lead or acids, into the environment, which can result in liabilities
for the removal or remediation of such hazardous substances from the properties at which they have been released, liabilities
which can be imposed regardless of fault, and our business could be held liable for the entire cost of cleanup even if we were
only partially responsible. We are also subject to the possibility that we may receive notices of potential liability in connection
with materials that were sent to third-party recycling, treatment, and/or disposal facilities under the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), and comparable state statutes,
which impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct
that contributed to the contamination, and for damages to natural resources. Liability under CERCLA is retroactive, and, under
certain circumstances, liability for the entire cost of a cleanup can be imposed on any responsible party. Any such liability
could result in judgments or settlements that restrict our operations in a manner that materially adversely effects our operations
and could result in fines, penalties or awards that could materially impair our financial condition and even threaten our continued
operation as a going concern.
We
will be subject to foreign government regulation and environmental, health and safety concerns that may adversely affect our business
.
As our business expands outside of the United States, our operations will be subject to the environmental, health and safety laws
of the countries where we do business, including permitting and compliance requirements that address the similar risks as do the
laws in the United States, as well as international legal requirements such as those applicable to the transportation of hazardous
materials. Depending on the country or region, these laws could be as stringent as those in the US, or they could be less stringent
or not as strictly enforced. In some countries in which we are interested in expanding our business, such as Mexico and China,
the relevant environmental regulatory and enforcement frameworks are in flux and subject to change. Compliance with these requirements
will cause our business to incur costs, and failure to comply with these requirements could adversely affect our business.
In
the event we are unable to present and operate our AquaRefining process and operations as safe and environmentally responsible,
we may face opposition from local governments, residents or public interest groups to the installation and operation of our facilities.
Risks
Related to Owning Our Common Stock
Securities
class action lawsuits and shareholder derivative lawsuit are pending against us and could have a material adverse effect on our
business, results of operations and financial condition.
Eight putative class action lawsuits and shareholder derivative
lawsuit are pending against us and certain of our directors and officers. These lawsuits may divert financial and management resources
that would otherwise be used to benefit our operations. Although we deny the material allegations in the lawsuits and intend to
defend ourselves vigorously, defending the lawsuits could result in substantial costs. No assurances can be given that the results
of these matters will be favorable to us. An adverse resolution of any of these lawsuits could have a material adverse effect
on our results of operations and financial condition. In addition, we may be the target of securities-related litigation in the
future, both related and unrelated to the existing class action and shareholder derivative lawsuits. Such litigation could divert
our management’s attention and resources, result in substantial costs, and have an adverse effect on our business, results
of operations and financial condition.
We
maintain director and officer insurance that we regard as reasonably adequate to protect us from potential claims; however, we
cannot assure you that it will. Further, as a result of the pending litigation the costs of insurance may increase and the availability
of coverage may decrease. As a result, we may not be able to maintain our current levels of insurance at a reasonable cost, or
at all, which might make it more difficult to attract qualified candidates to serve as executive officers or directors.
Our
common stock is thinly traded and our share price has been volatile.
Our common stock has traded on the Nasdaq Capital
Market, under the symbol “AQMS”, since July 31, 2015. Since that date, our common stock has at times been relatively
thinly traded and subject to price volatility. There can be no assurance that we will be able to successfully maintain a liquid
market for our common shares. The stock market in general, and early stage public companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies.
If we are unable to develop and maintain a liquid market for our common shares, you may not be able to sell your common shares
at prices you consider to be fair or at times that are convenient for you, or at all. In addition, following periods of volatility
in the market price of a company’s securities, litigation has often been brought against that company and we may become
the target of litigation as a result of price volatility. Litigation could result in substantial costs and divert our management’s
attention and resources from our business. This could have a material adverse effect on our business, results of operations and
financial condition.
We
are an “emerging growth company” under the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements
applicable to emerging growth companies will make our common stock less attractive to investors
.
We are an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), and we may take
advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not
“emerging growth companies” including, but not limited to:
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not
being required to comply with the auditor attestation requirements of Section 404 of
the Sarbanes-Oxley Act;
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reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy
statements;
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exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation
and stockholder approval of any golden parachute payments; and
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extended
transition periods available for complying with new or revised accounting standards.
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We
have chosen to “opt out” of the extended transition periods available for complying with new or revised accounting
standards, but we intend to take advantage of all of the other benefits available under the JOBS Act, including the exemptions
discussed above. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
If some investors find our common stock less attractive as a result, there may be a less active trading market for our common
stock and our stock price may be more volatile.
We
will remain an “emerging growth company until 2020, although we will lose that status sooner if our revenues exceed $1 billion,
if we issue more than $1 billion in non-convertible debt in a three-year period, or if the market value of our common stock that
is held by non-affiliates exceeds $700 million as of any June 30.
Our
status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when
we need it
.
Because of the exemptions from various reporting requirements provided to us as an “emerging
growth company,” we may be less attractive to investors and it may be difficult for us to raise additional capital as and
when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our
reporting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we
need it, our financial condition and results of operations may be materially and adversely affected.
We
have not paid dividends in the past and have no plans to pay dividends
.
We plan to reinvest all of our earnings,
to the extent we have earnings, in order to develop our recycling centers and cover operating costs and to otherwise become and
remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot
assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders
of our common stock as a dividend. Therefore, you should not expect to receive cash dividends on our common stock.
Shares
eligible for future sale may adversely affect the market for our common stock
.
Of the 28,694,210 shares of our
common stock outstanding as of the date of this report, approximately 25,699,794 shares are held by “non-affiliates”
and are freely tradable without restriction pursuant to Rule 144. In addition, in August 2016, we filed with the SEC a Registration
Statement on Form S-3 for purposes of registering the resale of 3,711,872 shares of restricted common stock sold to Interstate
Battery in May 2016, including 3,009,625 shares of common stock issuable to Interstate Battery upon exercise of its warrants and
conversion of its convertible note, and in February 2017, we filed with the SEC a Registration Statement on Form S-3 for purposes
of registering the resale of the 939,005 shares of restricted common stock we sold to Johnson Controls in February 2017. Both
registration statements were declared effective by the SEC and the shares registered thereunder are eligible for sale without
restriction. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material
adverse effect on the market price of our common stock.
Our
charter documents and Delaware law may inhibit a takeover that stockholders consider favorable
.
Provisions of our
certificate of incorporation and bylaws and applicable provisions of Delaware law may delay or discourage transactions involving
an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise
receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests.
The provisions in our certificate of incorporation and bylaws:
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limit
who may call stockholder meetings;
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do
not permit stockholders to act by written consent;
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do
not provide for cumulative voting rights; and
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provide
that all vacancies may be filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum.
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In
addition, Section 203 of the Delaware General Corporation Law may limit our ability to engage in any business combination with
a person who beneficially owns 15% or more of our outstanding voting stock unless certain conditions are satisfied. This restriction
lasts for a period of three years following the share acquisition. These provisions may have the effect of entrenching our management
team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This
potential inability to obtain a control premium could reduce the price of our common stock.
Our
bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain litigation that may
be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes
with the Company
.
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum,
the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding
brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or
other employees to us or our stockholders, (iii) any action asserting a claim against us or any our directors, officers or other
employees arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws,
or (iv) any action asserting a claim against us or any our directors, officers or other employees governed by the internal affairs
doctrine. This forum selection provision in our bylaws may limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or any our directors, officers or other employees.