This Quarterly Report on Form 10-Q, or Quarterly Report, contains
“forward-looking statements” that involve substantial risks and uncertainties. Forward-looking statements relate to
future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors
that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or
implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “intend,” “may,”
“plan,” “potential,” “should,” “will” and “would” or the negatives
of these terms or other comparable terminology.
You should not place undue reliance on forward-looking statements.
The cautionary statements set forth in this Quarterly Report, including in “Risk Factors” and elsewhere, identify important
factors which you should consider in evaluating our forward-looking statements. These factors include, among other things:
You should read this Quarterly Report and the documents that we
reference elsewhere in this Quarterly Report completely and with the understanding that our actual results may differ materially
from what we expect as expressed or implied by our forward-looking statements. In light of the significant risks and uncertainties
to which our forward-looking statements are subject, you should not place undue reliance on or regard these statements as a representation
or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. We discuss
many of these risks and uncertainties in greater detail in this Quarterly Report, particularly in Part II. Item 1A. “Risk
Factors.” These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly
Report regardless of the time of delivery of this Quarterly Report. Except as required by law, we undertake no obligation to update
or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the
date of this Quarterly Report.
Unless expressly indicated or the context requires otherwise, references
in this Quarterly Report on Form 10-Q to “ADOMANI,” “Company,” “we,” “our,” and
“us” refer to ADOMANI, Inc. and our subsidiaries, unless the context indicates otherwise.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of our financial condition and the results
of operations should be read in conjunction with the “Unaudited Consolidated Financial Statements” and notes thereto
included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report. This discussion contains forward-looking statements
that are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially
from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among
others, those identified under the “Cautionary Statement Regarding Forward-Looking Statements” above, and elsewhere
in this Quarterly Report, particularly in Part II. Item 1A. “Risk Factors,” below.
Overview of ADOMANI
We are a provider of advanced zero-emission electric and hybrid
vehicles and replacement drivetrains that is focused on reducing the total cost of vehicle ownership. Our drivetrain systems are
designed to help fleet operators unlock the benefits of green technology and address the challenges of traditional fuel price cost
instability and local, state and federal environmental regulatory compliance.
We design advanced zero-emission electric and hybrid drivetrain
systems for integration in new school buses and medium to heavy-duty commercial fleet vehicles. We also design patented conversion
kits to replace conventional drivetrain systems for combustion powered vehicles with zero-emission electric or hybrid drivetrain
systems. The hybrid drivetrain systems are available in both an assistive hybrid format and a full-traction format for use in private
and commercial fleet vehicles of all sizes. We seek to expand our product offerings to include the sale of zero-emission systems
in vehicles manufactured by outside original equipment manufacturer, or OEM, partners, but to be marketed, sold, warrantied and
serviced through our developing distribution and service network.
Our drivetrain systems can be built with options for remote monitoring,
electric power-export and various levels of grid-connectivity. Our zero-emission systems may also grow to include automated charging
infrastructure and “intelligent” stationary energy storage that enables fast vehicle charging, emergency back-up facility
power, and access to the developing, grid-connected opportunities for the aggregate power available from groups of large battery
packs.
We generated virtually no revenue from inception through September
30, 2017. For the years ended December 31, 2016 and 2015, our net losses were $10.7 million and $6.0 million, respectively. For
the nine months ended September 30, 2017 and 2016, our net losses were $21.6 million and $9.2 million, respectively; and for the
three months ended September 30, 2017 and 2016, our net losses were $12.0 million and $6.3 million, respectively.
Factors Affecting Our Performance
We believe that the growth and future success of our business depend
on various opportunities, challenges and other factors, including the following:
New Customers.
We are competing with other companies
and technologies to help fleet managers and their districts/companies more efficiently and cost-effectively manage their fleet
operations. Once these fleet managers have decided they want to buy from us, we still face challenges helping them obtain financing
options to reduce the cost barriers to purchasing. We may also encounter customers with inadequate electrical services at their
facilities that may delay their ability to purchase from us.
Investment in Growth
.
We plan to continue to invest
for long-term growth. We anticipate that our operating expenses will increase in the foreseeable future as we invest in research
and development to enhance our zero-emission systems; design, develop and manufacture our drivetrains and their components; increase
our sales and marketing to acquire new customers; and increase our general and administrative functions to support our growing
operations. We believe that these investments will contribute to our long-term growth, although they will adversely affect our
results of operations in the near term. In addition, the timing of these investments can result in fluctuations in our annual and
quarterly operating results.
Zero-emission
electric and hybrid drivetrain experience.
Our dealer and service network is not currently established, although we do
have certain agreements in place. One issue they may have, and we may encounter, is finding appropriately trained technicians with
zero-emission electric and hybrid drivetrain experience. Our performance will depend on having a robust dealer and service network,
which will require appropriately trained technicians to be successful. Because our vehicles are based on a different technology
platform than traditional internal combustion engines, individuals with sufficient training in zero-emission electric and hybrid
vehicles may not be available to hire, and we may need to expend significant time and expense training the employees we do hire.
If we are not able to attract, assimilate, train or retain additional highly qualified personnel in the future, or do so cost-effectively,
our performance would be significantly and adversely affected.
Market
Growth.
We believe the market for all-electric and hybrid solutions for alternative fuel technology, specifically all-electric
and hybrid vehicles will continue to grow as more purchases of new zero emission vehicles and as more conversions of existing fleet
vehicles to zero-emission vehicles are made. However, unless the costs to produce such vehicles decrease dramatically, purchases
of our products will continue to depend in large part on financing subsidies from government agencies. We cannot be assured of
the continued availability or the amounts of such assistance to our customers.
Revenue
Growth from Additional Products
. We seek to add to our product offerings additional zero-emission vehicles of all sizes
manufactured by outside OEM partners, to be marketed, sold, warrantied and serviced through our developing distribution and service
network, as well as add other ancillary products discussed elsewhere in this report.
Revenue
Growth from Additional Geographic Markets.
We believe that growth opportunities for our products exist internationally
in addition to domestically, and through our wholly-owned subsidiary Adomani (Nantong) Automotive Technology Co. Ltd., or ADOMANI
China, we will be pursuing international growth as well. Our future performance will depend in part upon the growth of these additional
markets. Accordingly, our business and operating results will be significantly affected by our ability to timely enter and effectively
address these emerging markets and the speed with which and extent to which demand for our products in these markets grows.
Components of Our Results of Operations
Revenue
Revenue is recognized from the sales of advanced zero-emission electric
and hybrid drivetrain systems for fleet vehicles and from the sale of new, purpose-built zero-emission electric or hybrid vehicles.
Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii)
the price is fixed or determinable and (iv) collectability is reasonably assured.
Cost of Sales
Cost of sales includes those costs related to the development, manufacture,
and distribution of our products. Specifically, we include in cost of sales each of the following: material costs (including commodity
costs); freight costs; labor and other costs related to the development and manufacture of our products; and other associated costs.
Selling, General and Administrative Expenses
Selling, general and administrative costs include all corporate
and administrative functions that support our company. These costs also include stock-based compensation expense; warranty, including
product recall and customer satisfaction program costs; consulting costs; and other costs that cannot be included in cost of sales.
Consulting and Research and Development Costs
These costs are substantially related to our research and development
activity.
Other Income/Expenses, Net
Other income/expenses include non-operating income and expenses,
including interest expense.
Provision for Income Taxes
We account for income taxes in accordance with FASB ASC 740 “Income
Taxes,” which requires the recognition of deferred income tax assets and liabilities for the future tax consequences attributable
to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided
for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations. Because
we have incurred only losses to this point, no provision for income taxes has been made.
Results of Operations
The following table compares operating data for the three and nine
months ended September 30, 2017 and 2016:
ADOMANI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except per share data)
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
68
|
|
Cost of sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative [1]
|
|
|
11,716
|
|
|
|
5,872
|
|
|
|
18,363
|
|
|
|
8,107
|
|
Consulting
|
|
|
49
|
|
|
|
-
|
|
|
|
2,213
|
|
|
|
95
|
|
Research and development
|
|
|
38
|
|
|
|
112
|
|
|
|
557
|
|
|
|
128
|
|
Total operating expenses, net
|
|
|
11,803
|
|
|
|
5,984
|
|
|
|
21,133
|
|
|
|
8,330
|
|
Loss from operations
|
|
|
(11,803
|
)
|
|
|
(5,984
|
)
|
|
|
(21,133
|
)
|
|
|
(8,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(47
|
)
|
|
|
(274
|
)
|
|
|
(362
|
)
|
|
|
(833
|
)
|
Other income (expense)
|
|
|
(116
|
)
|
|
|
(11
|
)
|
|
|
(113
|
)
|
|
|
(9
|
)
|
Total other income (expense)
|
|
|
(163
|
)
|
|
|
(285
|
)
|
|
|
(475
|
)
|
|
|
(842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(11,966
|
)
|
|
|
(6,269
|
)
|
|
|
(21,608
|
)
|
|
|
(9,154
|
)
|
Income tax expense
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
Net loss
|
|
$
|
(11,967
|
)
|
|
$
|
(6,269
|
)
|
|
$
|
(21,611
|
)
|
|
$
|
(9,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares used in the computation of net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
68,070,930
|
|
|
|
57,163,882
|
|
|
|
66,020,773
|
|
|
|
69,286,226
|
|
[1] Includes stock-based compensation expense as follows:
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
General and administrative expenses
|
|
|
10,609
|
|
|
|
5,645
|
|
|
|
15,653
|
|
|
|
6,920
|
|
Total stock-based compensation expense
|
|
|
10,609
|
|
|
|
5,645
|
|
|
|
15,653
|
|
|
|
6,920
|
|
Revenue
Revenue for each of the three and nine months ended
September 30, 2017 was $0, as compared to revenue of $0 and $68,000 for the three and nine months ended September 30, 2016, respectively.
We expect to begin generating revenues in the fourth quarter of 2017.
General and Administrative Expenses
General and administrative expenses consist primarily
of the following:
•
personnel-related expenses, including stock-based compensation costs;
•
costs related to investor relations activities;
•
sales and marketing-related expenses; and
•
other expenses relating to the operations of the Company.
General and administrative expenses increased by
$5.8 million and $10.3 million for the three and nine months ended September 30, 2017, respectively, as compared to the prior-year
periods. The increases are primarily due to increases in stock-based compensation expense of $5.0 million and $8.7 million for
the three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods, due to the additional
options granted in March 2017 (see “Options to Purchase Common Stock” below and Note 7 to the unaudited consolidated
financial statements included in this report) and also to the requirement to remeasure non-employee stock options, as required
by ASC 718 and ASC 505. We anticipate stock-based compensation expense to continue to increase as we expand our infrastructure
in order to begin generating revenue.
Other increases in the current-year periods over
the prior-year periods include payroll, rent, sales and marketing, travel, investor relations expenses, and other general and administrative
expenses, which increased by $920,305 and $1.6 million, offset by a decrease in legal and professional fees of $183,124 and $122,906
for the three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods, due to the Company’s
need to expand its sales and marketing infrastructure, as well as the incurrence of certain costs associated with its status as
a public company.
Consulting Expenses
Consulting expenses increased by $49,153 and $2.1
million for the three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods.
The increase for the three months ended September
30, 2017 as compared to the prior period is due to required payments to various consultants for this period.
The increase for the nine months ended September
30, 2017 as compared to the prior period is primarily due to the issuance of a warrant to purchase 350,000 shares of Common Stock
as part of a settlement agreement, which was valued at $1.2 million, and a payment of $800,000 required under the same agreement.
Additionally, $75,000 previously paid to the party involved in the settlement agreement, and originally classified as deferred
offering costs, was reclassified as consulting expense. See Note 5 of the unaudited consolidated financial statements contained
in this report.
Research and Development Expenses
Research and development expenses decreased by $74,213
and increased by $428,516 for the three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods.
The decrease for the three months ended September
30, 2017 as compared to the prior period is due to lower expenditures for research and development activity.
The increase for the nine months ended September
30, 2017 as compared to the prior period is primarily due to $420,000 incurred in the second quarter of 2017 to build and install
our drivetrain system on a chassis of a Type D school bus, on a promotional basis, for a potential customer. The project also enabled
us to evaluate a third party firm that performed the work.
Liquidity and Capital Resources
From our incorporation in 2012 until the completion
of our offering of Common Stock under Regulation A in June 2017, we financed our operations and capital expenditures through issuing
equity capital, convertible notes and notes payable. A significant portion of this funding has been provided by affiliated stockholders,
although significant equity capital was also raised in late 2015, and the majority of the convertible notes outstanding was also
raised in 2015 from non-affiliated third parties, as discussed below and in Note 4 to the unaudited consolidated financial statements.
As of September 30, 2017, we had cash
and cash equivalents of $4.5 million. We believe that our existing cash and cash equivalents will be sufficient to fund our operations
at least through the end of calendar year 2018. However, there can be no assurance that we will successfully execute our business
plan, and if we do not, we may need additional capital to continue our operations. While we
have not generated any material
revenues
to date and do not expect to be able to satisfy our cash requirements solely through product
sales in the near future, we have received several purchase orders for zero-emission electric school buses in the second half of
2017 and we expect to begin generating revenue in the fourth quarter of 2017. The sale of additional equity securities in the future
could result in additional dilution to our stockholders and those securities may have rights senior to those of our Common Stock.
The incurrence of additional indebtedness in the future would result in increased debt service obligations and could result in
operating and financing covenants that would restrict our operations. Such capital, if required, may not be available on terms
that are favorable to us or at all. We are currently incurring operating deficits that are expected to continue for the foreseeable
future, and as we begin to execute our marketing plan, we expect our operating deficit will continue to grow until we begin to
generate a sufficient level of revenue from our sales and marketing efforts.
Debt
As of December 31, 2016, the Company
had borrowed $645,000 from Acaccia Family Trust, formerly a related party, and other parties by issuing notes convertible into
Common Stock at prices ranging from $0.10 per share to $0.50 per share. On January 30, 2017, the notes plus accrued interest, a
total of $725,584, converted into 6,868,578 shares of Common Stock. As of December 31, 2016, we also had outstanding a total of
$4,255,325 of secured promissory notes, net of $884,700 principal amount of these secured notes that were exchanged for 884,700
shares of Common Stock on September 1, 2016. In November 2016, we borrowed $500,000 from an unaffiliated stockholder for working
capital needs and, in March 2017, borrowed an additional $500,000 from the same stockholder for additional working capital required
due to delays in completing our offering under Regulation A. In December 2016, we borrowed $500,000 from a third party pursuant
to a secured promissory note, and immediately made a $500,000 loan to another third party who operates in the zero-emissions drivetrain
technology industry. All notes referenced in this paragraph were scheduled to mature in 2017. In connection with the initial closing
of our offering under Regulation A, on May 12, 2017, we repaid the $1,500,000 outstanding under the three unsecured notes payable.
See Note 4 to the unaudited consolidated financial statements contained in this report.
Equity Financings
In a series of closings during the fiscal
years ended 2012, 2013, 2014, 2015 and 2016, the Company sold an aggregate of 58,542,350 shares of Common Stock to certain of
its officers, directors and other related parties for an aggregate purchase price of $5,270,860.
Regulation
A Offering
On June 9, 2017, we completed an offering of Common
Stock under Regulation A. We sold 2,852,275 shares of Common Stock for gross proceeds of $14,261,375, of which $1,711,365 was paid
to the selling stockholders for 342,273 shares they sold in the offering.
Options
to Purchase Common Stock
As
of September 30, 2017, we had granted options to purchase 30,375,000 shares of Common Stock.
22,567,619
shares of Common Stock are issuable upon the exercise of options vested as of September 30, 2017, at an exercise price of $0.10
per share, and 670,073 shares of Common Stock are issuable upon the exercise of options vested as of September 30, 2017, at an
exercise price of $10.49 per share. If all vested options to purchase Common Stock were exercised, we would receive proceeds of
$9,285,828 and we would be required to issue 23,237,692 shares of Common Stock.
There can be no assurance,
however, that any such options will be exercised.
In
March 2017, a co-founder of the Company (including family members and trusts) relinquished voting and investment power over all
securities of the Company they owned. The co-founder surrendered his options to purchase 7,000,000 shares of Common Stock for forfeiture
and cancellation, and sold the shares owned by his IRA.
2015 Note Financing and Warrants to Purchase
Common Stock
During 2015, the Company issued two-year
secured promissory notes to third party lenders in an aggregate principal amount of $5,147,525, or the Note Financing.
As
of September 30, 2017, the Company had repaid $1,060,000 of principal outstanding under such notes.
The
secured promissory notes are due on various dates between January 31 and November 30, 2017. Prior to the maturity dates of the
notes, the Company exercised its option to extend the maturity dates six months pursuant to the provisions of such notes.
Any
subsequent extension requires the consent of the noteholders.
The notes bear interest at an annual rate of 9%, payable monthly
in arrears. The note obligations are secured by a lien on all assets of the Company. On September 1, 2016, holders of $884,700
of principal amount of the notes exchanged their notes for 884,700 shares of Common Stock, thereby reducing the principal amount
outstanding under the notes to $3,195,325.
In connection with the Note Financing, in 2015,
the Company agreed to issue a warrant to a third party to purchase 1,250,000 shares of Common Stock at $4.00 per share, exercisable
through September 1, 2021. On September 1, 2016, the Company issued the warrant.
Credit
Facilities
We
do not have any credit facilities or other access to bank credit. If, however, we elect to repay the secured promissory notes at
maturity, or believe that making an acquisition is appropriate, or see that sales of product are more rapidly using working capital
than anticipated, we may seek to obtain a credit facility to address these issues.
Capital
Expenditures
We
do not have any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment necessary
to conduct our operations on an as needed basis.
Going
Concern
As of September 30, 2017, we had working
capital of $2.6 million and stockholders’ equity of approximately $3.2 million. During the nine months ended September 30,
2017, we incurred a net loss attributable to holders of our Common Stock of approximately $21.6 million. Of the $21.6 million loss
incurred for the nine months ended September 30, 2017, approximately $15.7 million is attributable to non-cash stock-based compensation
expense, and another $1.2 million is related to non-cash consulting expense discussed above. The foregoing non-cash expenses had
no impact on our cash flows during the nine months ended September 30, 2017. Stock-based compensation expense represents the amortization
of the fair market value of stock options granted over their respective vesting period. The fair market value for both items is
determined using the Black-Scholes model. Because some of these stock options were granted to non-employees, ASC 505 also require
that we remeasure the fair market value of each of these options for each interim vesting period based on the market value of our
stock on the interim vesting date. Therefore, the expense associated with these options is sensitive to changes in our stock price.
We have not generated any material revenues
and have incurred net losses since inception. Our recurring operating losses and our need for additional sources of capital to
fund our ongoing operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent
registered public accounting firm included an explanatory paragraph in its report on our audited consolidated financial statements
as of December 31, 2016 and 2015 and for the years then ended with respect to this uncertainty. However, on June 9, 2017, we completed
our
offering under Regulation A
. We sold 2,852,275 shares of Common Stock for gross
proceeds of $14,261,375, of which $1,711,365 was paid to the selling stockholders for 342,273 shares they sold in the offering.
Based on our management’s plans and the significant capital raised, that substantial doubt has been alleviated.
Cash Flows
The following table summarizes our cash flows from operating, investing,
and financing activities for the nine months ended September 30, 2017 and 2016.
|
|
Nine
Months Ended September 30,
|
|
|
2017
|
|
2016
|
Consolidated Statements of Cash Flow Data:
|
|
|
|
|
|
|
|
|
Cash flows used in operating activities
|
|
$
|
(4,656
|
)
|
|
$
|
(2,107
|
)
|
Cash flows used in investing activities
|
|
|
(474
|
)
|
|
|
(369
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
8,787
|
|
|
|
(324
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
3,657
|
|
|
$
|
(2,800
|
)
|
Operating Activities
Cash used in operating activities is primarily the
result of our operating losses, reduced by the impact of the non-cash stock-based compensation and warrant amounts. These numbers
are further impacted by adjustments for non-cash interest expense.
Net cash used in operating activities during the
nine months ended September 30, 2017 was $4.7 million, as a result of a net loss of $21.6 million, stock-based compensation of
$15.7 million, other non-cash charges of $1.4 million, and changes in operating assets and liabilities that used $152,241 in cash.
Inventory increased by $390,000, accrued liabilities increased by $226,225, accounts payable increased by $75,716, other current
assets increased by $59,202, and other non-current assets increased by $4,980.
Net cash used in operating activities during the
nine months ended September 30, 2016 was $2.1 million, as a result of a net loss of $9.2 million, stock-based compensation of $6.9
million, other non-cash charges of $463,248, and changes in operating assets and liabilities that used $336,797 in cash.
We expect cash used in operating activities to fluctuate
significantly in future periods as a result of a number of factors, some of which are outside of our control, including, among
others: the success we achieve in generating revenue; the success we have in helping our customers obtain financing to subsidize
their purchases of our products; our ability to efficiently develop our dealer and service network; the costs of batteries and
other materials utilized to make our products; the extent to which we need to invest additional funds in research and development;
and the amount of expense we incur to satisfy future warranty claims.
Investing Activities
Net
cash used in investing activities during the nine months ended September 30, 2017 was $593,573. This was due to the acquisition
of property and equipment relating to the lease of our new office facility, and issuing a note to a third party. See Notes 4 and
8 to the unaudited consolidated financial statements contained in this report.
Net cash used in investing activities during the
nine months ended September 30, 2016 was $368,939. This was primarily due to the acquisition of $358,939 of property and equipment
and a $10,000 investment in Silicon Turbine Solutions.
Financing Activities
Net cash provided by financing activities during
the nine months ended September 30, 2017 was $8.8 million. This is due to net proceeds of $12.6 million received from the closing
of our
offering under Regulation A
, a $2.6 million repayment of notes payable principal
and related accrued and unpaid interest, and net notes payable proceeds of $500,000. This is reduced by payments for costs related
to our
offering under Regulation A
of $1.7 million.
See
Note 5 to the unaudited consolidated financial statements contained in this report.
Net cash used by financing activities during the
nine months ended September 30, 2016 was $324,219. This is due to net proceeds of $187,827 from sales of capital stock, $54,000
paid for a stock rescission, notes payable proceeds of $42,160, and to a $7,500 repayment of notes payable principal, reduced by
payments for costs related to our
offering under Regulation A
of $492,706.
Contractual Obligations
Except as set forth below, during the nine months ended September
30, 2017, there were no material changes in our contractual obligations and commitments.
During the three months ended September 30, 2017, we entered into
a lease for our corporate office space in Corona, California, to serve as our corporate headquarters. The lease is for a period
of 65 months, terminating February 28, 2023. The base rent for the term of the lease is $568,912. The total amount due monthly
is $7,600 at commencement and will escalate to $10,560 by its conclusion. Additionally, the lease includes five months in which
no rent payment is due.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently
have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
Jumpstart Our Business Startups Act of 2012 (JOBS Act)
We are an “emerging growth company,” or an EGC, as defined
in the JOBS Act. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for EGCs. We
have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will
be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We
have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions
set forth in the JOBS Act, as an EGC we are not required to, among other things, (i) being permitted to provide only two years
of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure, (ii) not
being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting,
(iii) not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and
the financial statements, (iv) reduced disclosure obligations regarding executive compensation or (v) exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously
approved.
We will retain our EGC status until the first to occur of: (i) the
end of the fiscal year in which the fifth anniversary of the completion of our initial public offering occurs, (ii) the end of
the fiscal year in which our annual revenues exceed $1 billion, (iii) the date on which we issue more than $1 billion in non-convertible
debt during any three-year period or (iv) the date on which we qualify as a “large accelerated filer.”
Critical
Accounting Policies Judgments and Estimates
Our consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based
on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results
could differ from these estimates.
We believe that the assumptions
and estimates associated with the preparation of the financial statement information presented in this Quarterly Report are not
significant because we have not generated any appreciable revenue. Therefore, we have not had to make assumptions or estimates
related to a reserve for bad debt expense, or for future warranty costs to be incurred, two items that will have the greatest potential
impact on our consolidated financial statements in the future. We also have no significant current litigation on which we have
to provide reserves or estimate accruals and our investment to date in property, plant and equipment has not been significant.
We therefore have not had to rely on estimates related to impairment. We have not generated any taxable income to date, so have
not had to make any decisions about future profitability that would impact recording income tax expense. Assuming we are able to
generate future profits by executing our business plan, these areas, among others, will most likely be our critical accounting
policies and estimates. For further information on all of our significant accounting policies, see Note 2 to our unaudited consolidated
financial statements.
There have been no material
changes to the critical accounting policies disclosed in the Company’s Form 1-A, which was declared qualified by the Securities
and Exchange Commission, or SEC, on April 25, 2017.
Recent Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock
Compensation (Topic 718): “Scope of Modification Accounting.” The amendments provide guidance on determining which
changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic
718. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15,
2017. Early adoption is permitted, including any interim period, for reporting periods for which financial statements have not
been issued. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s
financial statements and disclosures.