Attached files
file | filename |
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EX-10.2 - EX-10.2 - T3M INC. | a56153exv10w2.htm |
EX-31.1 - EX-31.1 - T3M INC. | a56153exv31w1.htm |
EX-10.1 - EX-10.1 - T3M INC. | a56153exv10w1.htm |
EX-31.2 - EX-31.2 - T3M INC. | a56153exv31w2.htm |
EX-32.2 - EX-32.2 - T3M INC. | a56153exv32w2.htm |
EX-32.1 - EX-32.1 - T3M INC. | a56153exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From To
Commission File Number 333-150888
T3 MOTION, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-4987549 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
2990 Airway Avenue, Suite A | 92626 | |
Costa Mesa, California | (Zip Code) | |
(Address of principal executive offices) |
(714) 619-3600
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
As
of May 17, 2010, the number of shares outstanding of the Registrants Common Stock, par
value $0.001 per share was 48,538,462.
T3 MOTION, INC.
INDEX TO FORM 10-Q
March 31, 2010
INDEX TO FORM 10-Q
March 31, 2010
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
T3 MOTION, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 937,888 | $ | 2,580,798 | ||||
Accounts receivable, net of reserves of $37,000 and $37,000, respectively |
937,140 | 747,661 | ||||||
Related party receivable |
35,790 | 35,658 | ||||||
Inventories |
1,288,957 | 1,169,216 | ||||||
Prepaid expenses and other current assets |
553,486 | 161,997 | ||||||
Total current assets |
3,753,261 | 4,695,330 | ||||||
Property and equipment, net |
803,148 | 868,343 | ||||||
Deposits |
495,596 | 495,648 | ||||||
Total assets |
$ | 5,052,005 | $ | 6,059,321 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 877,747 | $ | 872,783 | ||||
Accrued expenses |
840,308 | 1,064,707 | ||||||
Related party payables |
| 104,931 | ||||||
Derivative liabilities |
11,584,128 | 11,824,476 | ||||||
Related party notes payable, net of debt discounts |
2,157,704 | 1,836,837 | ||||||
Total liabilities |
15,459,887 | 15,703,734 | ||||||
Commitments and contingencies |
||||||||
Stockholders deficit: |
||||||||
Series A convertible preferred stock, $0.001 par value; 20,000,000 shares
authorized; 11,502,563 and 12,347,563 shares issued and
outstanding, respectively |
11,503 | 12,348 | ||||||
Common stock, $0.001 par value; 150,000,000 shares authorized;
48,538,462 and 44,663,462 shares issued and outstanding, respectively |
48,538 | 44,664 | ||||||
Additional paid-in capital |
25,944,642 | 23,356,724 | ||||||
Accumulated deficit |
(36,416,795 | ) | (33,062,174 | ) | ||||
Accumulated other comprehensive income |
4,230 | 4,025 | ||||||
Total stockholders deficit |
(10,407,882 | ) | (9,644,413 | ) | ||||
Total liabilities and stockholders deficit |
$ | 5,052,005 | $ | 6,059,321 | ||||
See accompanying notes to condensed consolidated financial statements
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Table of Contents
T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (UNAUDITED)
COMPREHENSIVE LOSS (UNAUDITED)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net revenues |
$ | 1,149,426 | $ | 1,205,037 | ||||
Cost of revenues |
1,127,449 | 1,466,267 | ||||||
Gross profit (loss) |
21,977 | (261,230 | ) | |||||
Operating Expenses: |
||||||||
Sales and marketing |
427,654 | 546,404 | ||||||
Research and development |
320,506 | 301,448 | ||||||
General and administrative |
1,029,413 | 1,241,520 | ||||||
Total operating expenses |
1,777,573 | 2,089,372 | ||||||
Loss from operations |
(1,755,596 | ) | (2,350,602 | ) | ||||
Other income (expense): |
||||||||
Interest income |
903 | 1,615 | ||||||
Other income, net |
755,555 | 165,809 | ||||||
Interest expense |
(681,801 | ) | (512,612 | ) | ||||
Total other income (expense), net |
74,657 | (345,188 | ) | |||||
Loss before provision for income taxes |
(1,680,939 | ) | (2,695,790 | ) | ||||
Provision for income taxes |
800 | 800 | ||||||
Net loss |
(1,681,739 | ) | (2,696,590 | ) | ||||
Deemed dividend to preferred stockholders |
(1,672,882 | ) | | |||||
Net loss attributable to common stockholders |
$ | (3,354,621 | ) | $ | (2,696,590 | ) | ||
Other comprehensive loss: |
||||||||
Foreign currency translation income (loss) |
205 | (19,941 | ) | |||||
Comprehensive loss |
$ | (1,681,534 | ) | $ | (2,716,531 | ) | ||
Net loss per share: |
||||||||
Basic |
$ | (0.07 | ) | $ | (0.06 | ) | ||
Diluted |
$ | (0.07 | ) | $ | (0.06 | ) | ||
Weighted average number of common shares outstanding: |
||||||||
Basic |
45,050,960 | 44,022,097 | ||||||
Diluted |
45,050,960 | 44,022,097 | ||||||
See accompanying notes to condensed consolidated financial statements
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T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (1,681,739 | ) | $ | (2,696,590 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
91,841 | 91,205 | ||||||
Warranty expense |
13,229 | 39,423 | ||||||
Share-based compensation expense |
292,461 | 409,743 | ||||||
Change in fair value of derivative liabilities |
(753,727 | ) | (165,797 | ) | ||||
Investor relations expense |
| 80,000 | ||||||
Amortization of debt discounts |
554,851 | 390,218 | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts and other receivables |
(189,477 | ) | 400,320 | |||||
Inventories |
(119,741 | ) | (253,322 | ) | ||||
Prepaid expenses and other current assets |
(391,490 | ) | 244,436 | |||||
Security deposits |
51 | (3,784 | ) | |||||
Accounts payable and accrued expenses |
(232,665 | ) | (29,368 | ) | ||||
Related party payable |
(104,931 | ) | 12,463 | |||||
Net cash used in operating activities |
(2,521,337 | ) | (1,481,053 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Loans/advances to related parties |
(1,607 | ) | | |||||
Purchases of property and equipment |
(26,646 | ) | (1,578 | ) | ||||
Repayment of loans/advances to related parties |
1,475 | 4,346 | ||||||
Net cash (used in) provided by investing activities |
(26,778 | ) | 2,768 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Rescission of common stock |
(250,000 | ) | | |||||
Proceeds from the sale of preferred stock |
1,155,000 | | ||||||
Net cash provided by financing activities |
905,000 | | ||||||
Effect of exchange rate on cash |
205 | (19,941 | ) | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(1,642,910 | ) | (1,498,226 | ) | ||||
CASH AND CASH EQUIVALENTS beginning of period |
2,580,798 | 1,682,741 | ||||||
CASH AND CASH EQUIVALENTS end of period |
$ | 937,888 | $ | 184,515 | ||||
See accompanying notes to condensed consolidated financial statements
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T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Continued
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Continued
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 6,494 | $ | | ||||
Income taxes |
$ | 800 | $ | | ||||
Supplemental disclosure of non cash activities: |
||||||||
Issuance of common stock for related party payables |
$ | | $ | 1,536,206 | ||||
Conversion of related party payable to related party notes payable |
$ | | $ | 498,528 | ||||
Cumulative effect to retained earnings due to adoption of accounting standard |
$ | | $ | 1,981,338 | ||||
Cumulative effect to additional paid-in capital due to adoption of accounting standard |
$ | | $ | 4,013,085 | ||||
Cumulative effect to debt discount due to adoption of accounting standard |
$ | | $ | 859,955 | ||||
Conversion option of preferred stock and warrants issued with preferred stock
recorded as derivative liabilities |
$ | 1,401,360 | $ | | ||||
Reclassification of derivative liability to equity due to conversion of preferred stock
to common stock |
$ | 1,121,965 | $ | | ||||
Debt discount and warrant liability recorded upon issuance of warrants |
$ | 233,984 | $ | 245,592 | ||||
Amortization of preferred stock discount related to conversion feature and warrants |
$ | 1,672,882 | $ | | ||||
Conversion of preferred stock to common |
$ | 4,000 | $ | | ||||
See accompanying notes to condensed consolidated financial statements
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T3 MOTION, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 DESCRIPTION OF BUSINESS
T3 Motion, Inc. (the Company) was organized on March 16, 2006, under the laws of the state
of Delaware. The Company develops and manufactures T3 Series vehicles, which are electric
three-wheel stand-up vehicles that are directly targeted to the public safety and private security
markets. T3 Series have been designed to tackle a host of daily professional functions, from
community policing to patrolling of airports, military bases, campuses, malls, public event venues
and other high-density areas. In September 2009, we introduced the CT Micro Car, the
(L.S.V./N.E.V.) four-wheeled electric car.
Interim Unaudited Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with SEC regulations for interim financial information. The principles for condensed
interim financial information do not require the inclusion of all of the information and footnotes
required by accounting principles generally accepted in the United States (GAAP) for complete
financial statements. Therefore, these financial statements should be read in conjunction with the
Companys Annual Report on Form 10-K for the year ended December 31, 2009. The condensed
consolidated financial statements included herein are unaudited; however, in the opinion of
management, they contain all normal recurring adjustments necessary for a fair presentation of the
consolidated results for the interim periods. The results of operations for the three months ended
March 31, 2010 are not necessarily indicative of the results that may be expected for the entire
fiscal year.
The Company has evaluated subsequent events through the filing date of this quarterly report on
Form 10-Q, and determined that no subsequent events have occurred that would require recognition in
the condensed consolidated financial statements or disclosure in the notes thereto other than as
disclosed in the accompanying notes.
Going Concern
The Companys condensed consolidated financial statements are prepared using the accrual
method of accounting in accordance with GAAP and have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the normal course of
business. The Company has sustained operating losses since its inception (March 16, 2006) and has
used substantial amounts of working capital in its operations. Management has been and is
continuing to implement its cost reduction strategy for material, production and service costs.
Until management achieves its cost reduction strategy over the next year and sufficiently increases
cash flow from operations, the Company will require additional capital to meet its working capital
requirements, debt service, research and development, capital requirements and compliance
requirements. Further, at March 31, 2010, the Company has an accumulated deficit of $36,416,795 and
a working capital deficit of $11,706,626. These factors raise substantial doubt about the Companys
ability to continue as a going concern for a reasonable period of time.
Management believes that its current sources of funds and current liquid assets will allow the
Company to continue as a going concern through at least June 30, 2010. During 2010, the Company has
obtained equity financing from third parties of approximately $1,155,000 and refinanced the
outstanding balance of $1.0 million related to the note to Immersive Media Corporation
(Immersive). The Company plans to raise additional debt and/or equity capital to finance future
activities. In light of these plans, management is confident in the Companys
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ability to continue as a going concern. These condensed consolidated financial statements do
not include any adjustments that might result from the outcome of this uncertainty.
Reclassification
Certain
amounts in the 2009 financial statements have been reclassified to conform with the current year presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period.
Significant estimates include, but are not limited to; collectibility of receivables,
recoverability of long-lived assets, realizability of inventories, warranty accruals, valuation of
stock-based transactions, valuation of derivative liabilities and realizability of deferred tax
assets. The Company bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments with original maturities of
three months or less. Included in the cash equivalents balance at March 31, 2010 is $105,000
related to proceeds from the sale of preferred stock that is held in an escrow account.
Concentrations of Credit Risk
As of March 31, 2010 and December 31, 2009, one customer accounted for 13% of total accounts
receivable and two customers accounted for more than 10% of total accounts receivable,
respectively. One customer accounted for 12% of net revenues for the three months ended March 31,
2010. For the three months ended March 31, 2009, two customers accounted for approximately 22% of
total revenues.
As of March 31, 2010 and December 31, 2009, one vendor accounted for approximately 12% of
total accounts payable and one vendor accounted for more than 10% of total accounts payable,
respectively. Two vendors accounted for approximately 22% and 57% of purchases for the three months ended March
31, 2010 and 2009, respectively.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash and cash equivalents, accounts receivable,
related party receivables, accounts payable, accrued expenses, related party payables and related
party notes payable. The carrying value for all such instruments except related party notes payable
approximates fair value due to the short-term nature of the instruments. The Company cannot
determine the fair value of its related party notes payable due to the related party nature and
instruments similar to the notes payable could not be found.
Revenue Recognition
The Company recognizes revenues when there is persuasive evidence of an arrangement, product
delivery and acceptance have occurred, the sales price is fixed or determinable and collectibility
of the resulting receivable is reasonably assured.
For all sales, the Company uses a binding purchase order as evidence of an arrangement.
Delivery occurs when goods are shipped for customers. The Company ships with either FOB Shipping
Point or Destination terms. Shipping documents are used to verify delivery and customer acceptance.
For FOB Destination, the Company records revenue when proof of delivery is confirmed by the
shipping company. The Company assesses whether the sales price is fixed or determinable based on
the payment terms associated with the transaction and whether the sales price is subject to refund.
The Company offers a standard product warranty to its customers for defects in materials
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and workmanship for a period of one year or 2,500 miles, whichever comes first (see Note 8),
and has no other post-shipment obligations. The Company assesses collectibility based on the
creditworthiness of the customer as determined by evaluations and the customers payment history.
All amounts billed to customers related to shipping and handling are classified as net
revenues, while all costs incurred by the Company for shipping and handling are classified as cost
of revenues.
The Company does not enter into contracts that require fixed pricing beyond the term of the
purchase order. All sales via distributor agreements are accompanied by a purchase order. Further,
the Company does not allow returns of unsold items.
The Company has executed various distribution agreements whereby the distributors agreed to
purchase T3 Series packages (one T3 Series, two power modules, and one charger per package). The
terms of the agreements require minimum re-order amounts for the vehicles to be sold through the
distributors in specified geographic regions. Under the terms of the agreements, the distributor
takes ownership of the vehicles and the Company deems the items sold at delivery to the
distributor.
Share Based Compensation
The Company maintains a stock option plan (see Note 7) and records expenses
attributable to the stock option plan. The Company elected to amortize stock-based compensation for
awards granted on or after March 16, 2006 (date of inception) on a straight-line basis over the
requisite service (vesting) period for the entire award.
The Company accounts for equity instruments issued to consultants and vendors in
exchange for goods and services in accordance with the accounting standards. The measurement date
for the fair value of the equity instruments issued is determined at the earlier of (i) the date at
which a commitment for performance by the consultant or vendor is reached or (ii) the date at which
the consultant or vendors performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the term of the consulting
agreement.
In accordance with the accounting standards, an asset acquired in exchange for the
issuance of fully vested, non-forfeitable equity instruments should not be presented or classified
as an offset to equity on the grantors balance sheet once the equity instrument is granted for
accounting purposes. Accordingly, the Company records the fair value of the fully vested,
non-forfeitable common stock issued for future consulting services as prepaid expense in its
consolidated balance sheet.
Beneficial Conversion Features and Debt Discounts
The convertible features of convertible notes provides for a rate of conversion that is
below market value. Such feature is normally characterized as a beneficial conversion feature
(BCF). The relative fair values of the BCF have been recorded as discounts from the face amount
of the respective debt instrument. The Company is amortizing the discount using the effective
interest method through maturity of such instruments. The Company will record the corresponding
unamortized debt discount related to the BCF as interest expense when the related instrument is
converted into the Companys common stock.
Loss Per Share
Basic loss per share is computed by dividing loss applicable to common stockholders by the
weighted average number of common shares assumed to be outstanding during the period of
computation.
Diluted loss per share is computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been outstanding if the
potential shares had been issued and if the additional common shares were dilutive. Options,
warrants and shares associated with the conversion of debt and preferred
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stock to purchase approximately 49.4 million and 14.4 million shares of common stock were
outstanding at March 31, 2010 and 2009, respectively, but were excluded from the computation of
diluted earnings per share due to the net losses for the periods.
Net loss per basic share is computed as follows:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Net loss |
$ | (1,681,739 | ) | $ | (2,696,590 | ) | ||
Deemed preferred stock dividend |
(1,672,882 | ) | | |||||
Net loss applicable to common stockholders |
$ | (3,354,621 | ) | $ | (2,696,590 | ) | ||
Weighted average number of common shares outstanding: |
||||||||
Basic and diluted |
45,050,960 | 44,022,097 | ||||||
Net loss per share: |
||||||||
Basic and diluted |
$ | (0.07 | ) | $ | (0.06 | ) | ||
Business Segments
The Company currently only has one reportable business segment due to the fact that the
Company derives its revenue primarily from one product. The CT Micro Car is not included in a
separate business segment due to nominal net revenues during the three months ended March 31, 2010.
The revenue from domestic and international sales are shown below:
For the Three Months | ||||||||
Ended March 31, | ||||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Net revenues: |
||||||||
T3 Domestic |
$ | 1,066,579 | $ | 675,029 | ||||
T3 International |
61,697 | 530,008 | ||||||
CT Domestic |
21,150 | | ||||||
Total net revenues |
$ | 1,149,426 | $ | 1,205,037 | ||||
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NOTE 2 INVENTORIES
Inventories consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Raw materials |
$ | 930,350 | $ | 959,909 | ||||
Work-in-process |
218,505 | 91,013 | ||||||
Finished goods |
140,102 | 118,294 | ||||||
$ | 1,288,957 | $ | 1,169,216 | |||||
NOTE 3 PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Prepaid inventory |
$ | 15,364 | $ | 64,744 | ||||
Vendor Deposits |
424,109 | 47,946 | ||||||
Prepaid expenses and other current assets |
114,013 | 49,307 | ||||||
$ | 553,486 | $ | 161,997 | |||||
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NOTE 4 RELATED PARTY NOTES PAYABLE
Related party notes payable, net of discounts consisted of the following:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Note payable to Immersive Media Corp., 12%
interest rate, net of discount of $218,709
and $41,265, respectively |
$ | 781,291 | $ | 958,735 | ||||
Note payable to Vision Opportunity Master
Fund, Ltd., 10% interest rate, net of
discount of $2,123,587 and $2,621,898,
respectively |
1,376,413 | 878,102 | ||||||
$ | 2,157,704 | $ | 1,836,837 | |||||
Immersive Note
On December 31, 2007, the Company issued a 12% secured promissory note in the principal amount
of $2,000,000 to Immersive, one of the Companys shareholders. On March 31, 2008, the Company
repaid $1,000,000 of the principal amount. The note was due December 31, 2008 and is secured by all
of the Companys assets.
In connection with the issuance of the promissory note, the Company issued a warrant to
Immersive for the purchase of 697,639 shares of the Companys common stock at an exercise price of
$1.08 per share. The warrants are immediately exercisable. The Company recorded a debt discount of
$485,897 related to the fair value of the warrants, which was calculated using the Black-Scholes
Merton option pricing model. The debt discount was amortized to interest expense over the original
term of the promissory note.
On December 19, 2008, the Company amended the terms of the promissory note with Immersive to,
among other things, extend the maturity date of the outstanding balance of $1,000,000 from December
31, 2008 to March 31, 2010. In the event the Company issues common stock or common stock
equivalents for cash consideration in a subsequent financing at an effective price per share less
than the original conversion price, the conversion price will reset.
In December 2009, the Company issued 2,000,000 shares of its Series A Convertible Preferred
Stock in connection with an equity offering (see Note 6). As a result of the December 2009 equity
offering, the Company recorded the estimated fair value of the conversion feature of $1,802 as a
debt discount and amortized such amount to interest expense through the maturity of the note on
March 31, 2010. The Company recorded the corresponding amount as a derivative liability and any
change in fair value of the conversion feature was recorded through earnings.
As of March 31, 2010, the debt discount related to the fair value of the warrants issued and
the derivative liability related to the conversion feature were fully amortized.
As consideration for extending the terms of the promissory note in December 2008, the Company
agreed to issue warrants to Immersive for the purchase of up to 250,000 shares of the Companys
common stock exercisable at $2.00, subject to adjustment. During the three months ended March 31,
2010, the Company issued 50,000 warrants under the agreement. The Company recorded a debt discount
of $15,274 during the three months ended March 31, 2010 and a total debt discount of $155,938 based
on the estimated fair value of the warrants issued, and amortized approximately $56,540 and $9,950
of the discount to interest expense during the three months ended March 31,
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2010 and 2009, respectively. As a result of the December 2009 equity offering, the exercise price
of the warrants was adjusted to $0.50 per share (see Note 5 for a discussion on derivative
liabilities).
On March 31, 2010, Immersive agreed to extend the note to April 30, 2010. As consideration
for extending the note, the Company agreed to exchange Immersives Class A warrants to purchase up
to 697,639 shares of the Companys common stock at an exercise price of $1.08 per share and its
Class D warrants to purchase up to 250,000 shares of the Companys common stock at an exercise
price of $2.00 per share, for Class G Warrants to purchase up to 697,639 and 250,000 shares of the
Companys common stock, respectively, each with an exercise price of $0.70 per share. The Company
recorded a debt discount and derivative liability of $1,898 based on
the incremental increase in the estimated fair value
of the re-pricing of the 250,000
warrants.
The Company recorded an additional debt discount and derivative liability in the amount of $216,811 based on the
estimated fair value of the 697,639 warrants issued.
No amounts were amortized during the three months ended
March 31, 2010. The debt discount was amortized in April 2010.
The note and accrued interest were not repaid in full by April 30, 2010. Per the agreement, the maturity date was
extended to March 31, 2011 and the Company will issue Class G Warrants to purchase up to 1,040,000
shares of the Companys common stock at an exercise price of $0.70 per share. The interest rate
compounded annually was amended to 15%. The terms of the Class G Warrants are substantially
similar to prior Class G warrants issued by the Company.
Vision Opportunity Master Fund, Ltd. Bridge Financing
On December 30, 2009, the Company sold $3,500,000 in debentures and warrants to Vision
Opportunity Master Fund, Ltd. (Vision) through a private placement pursuant to a Securities
Purchase Agreement (the Purchase Agreement). The Company issued to Vision, 10% Secured
Convertible Debentures (Debentures), with an aggregate principal value of $3,500,000.
The Debentures accrue interest on the unpaid principal balance at a rate equal to 10% per
annum. The maturity date is December 30, 2010. At any time after the 240th calendar day
following the issue date, the Debentures are convertible into units of Company securities at a
conversion price of $1.00 per unit, subject to adjustment. Each unit consists of one share of the
Companys Series A Convertible Preferred Stock and a warrant to purchase one share of the common
stock. The Company may redeem the Debentures in whole or part at any time after June 30, 2010 for
cash in an amount equal to 120% of the principal amount plus accrued and unpaid interest and
certain other amounts due in respect of the Debenture. Interest on the Debentures is payable in
cash on the maturity date or, if sooner, upon conversion or redemption of the Debentures. In the
event of default under the terms of the Debentures, the interest rate increases to 15% per annum.
The Purchase Agreement provides that during the 18 months following December 30, 2009, if the
Company or its wholly owned subsidiary, T3 Motion, Ltd., a company incorporated under the laws of
the United Kingdom (the Subsidiary), issue common stock, common stock equivalents for cash
consideration, indebtedness, or a combination of such securities in a subsequent financing (the
Subsequent Financing), Vision may participate in such Subsequent Financing in up to an amount
equal to Visions then percentage ownership of its common stock.
The Purchase Agreement also provides that from December 30, 2009 to the date that the
Debentures are no longer outstanding, if the Company effects a Subsequent Financing, Vision may
elect, in its sole discretion, to exchange some or all of the Debentures then held by Vision for
any securities issued in a Subsequent Financing on a $1.00 for $1.00 basis (the Exchange);
provided, however, that the securities issued in a Subsequent Financing will be irrevocably
convertible, exercisable, exchangeable, or resettable (or any other similar feature) based on the
price equal to the lesser of (i) the conversion price, exercise price, exchange price, or reset
price (or such similar price) in such Subsequent Financing and (ii) $1.00 per share of common
stock. Vision is obligated to elect the Exchange on a $0.90 per $1.00 basis (not a $1.00 for $1.00
basis) if certain conditions regarding the Subsequent Financing and other matters are met.
Also pursuant to the Purchase Agreement, Vision received Series G Common Stock Purchase
Warrants (the Warrants). Pursuant to the terms of Warrants, Vision is entitled to purchase up to
an aggregate of 3,500,000 shares
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of our common stock at an exercise price of $0.70 per share, subject to adjustment. The
Warrants have a term of five years after the issue date of December 30, 2009.
The Subsidiary entered into a Subsidiary Guarantee (Subsidiary Guarantee) for its benefit to
guarantee to Vision the obligations due under the Debentures. The Company and the Subsidiary also
entered into a Security Agreement (Security Agreement) with Vision, under which it and the
Subsidiary granted to Vision a security interest in certain of our and the Subsidiarys property to
secure the prompt payment, performance, and discharge in full of all obligations under the
Debentures and the Subsidiary Guarantee.
The debt discount was allocated between the warrants and the effective beneficial conversion
feature, of $1,077,651 and $1,549,482, respectively, for the year ended December 31, 2009. The
discount is being amortized over the term of the Debentures. The Company amortized $498,311 and $0
for the three months ended March 31, 2010 and 2009, respectively. The remaining unamortized warrant
and beneficial conversion feature values are recorded as a discount on the Debentures in the
accompanying condensed consolidated balance sheets.
During the three months ended March 31, 2009, the Company amortized $366,621 of interest
expense related to a debt discount on a different note to Vision that was ultimately exchanged for
shares of the Companys Preferred Stock.
Lock-Up Agreement
In connection with the Vision financing, Ki Nam, the Chief Executive Officer and Chairman of
the Board of Directors of the Company agreed not to transfer, sell, assign, pledge, hypothecate,
give, create a security interest in or lien on, place in trust (voting trust or otherwise), or in
any other way encumber or dispose of, directly or indirectly and whether or not voluntarily,
without express prior written consent of Vision, any of our common stock equivalents of the Company
until August 27, 2010; provided, however, that commencing on August 27, 2010, he may sell up to
1/24th of the shares of common stock of the Company in each calendar month through February 28,
2011.
NOTE 5 DERIVATIVE LIABILITIES
During the three months ended March 31, 2010, the Company issued 2,310,000 of warrants related
to the issuance of preferred stock (see Note 6). The Company estimated the fair value of the
warrants of $716,236 at the dates of issuance and recorded a reduction in additional paid-in
capital and a derivative liability. The change in fair value of the derivative will be recorded
through earnings at each reporting date.
During 2010, the Company recorded a discount on the issuance of preferred stock and derivative
liability of $685,124 related to the anti-dilution provision of the conversion feature of the
preferred stock issued. The discount will be recorded as a deemed dividend with a reduction to
retained earnings during the 24-month period that the anti-dilution provision is outstanding. The
change in fair value of the derivative is recorded through earnings at each reporting date.
During the three months March 31, 2010, the Company recorded
additional debt discount and derivative liability in the amount of
$218,709 related to the Immersive transaction (see Note 4).
For the three months ended March 31, 2010, the amortization of the discount related to the
preferred stock anti-dilution provision was $573,140, which was recorded as a deemed dividend.
On March 22, 2010, one of the Companys preferred shareholders exercised their option to
convert their 2,000,000 preferred shares into 4,000,000 shares of common stock (see Note 6). As a
result of the conversion, the Company reclassified the balance of the derivative liability of
$1,121,965 to additional paid-in capital and the balance of the discount of $1,099,742, as a deemed
dividend.
The common stock purchase warrants were not issued with the intent of effectively hedging any
future cash flow, fair value of any asset, liability or any net investment in a foreign operation.
The warrants do not qualify for hedge
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accounting, and as such, all future changes in the fair value of these warrants will be
recognized currently in earnings until such time as the warrants are exercised or expire. These
common stock purchase warrants do not trade in an active securities market, and as such, the
Company estimates the fair value of these warrants and embedded conversion features using the
Black-Scholes-Merton option pricing model using the following assumptions:
March 31, | ||||
2010 | ||||
(unaudited) | ||||
Annual dividend yield |
| |||
Expected life (years) |
0.75-5 | |||
Risk-free interest rate |
0.41%-2.55 | % | ||
Expected volatility |
85%-117 | % |
During the three months ended March 31, 2010 and 2009, the Company recorded other income of
$753,727 and $165,797, respectively, related to the change in fair value of the warrants and
embedded conversion options and is included in other income in the accompanying condensed
consolidated statements of operations.
The Company determines the fair value of its financial instruments based on a three-level
hierarchy for fair value measurements under which these assets and liabilities must be grouped,
based on significant levels of observable or unobservable inputs. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. This hierarchy requires the use of observable market data when available. These two
types of inputs have created the following fair-value hierarchy:
Level 1 Valuations based on unadjusted quoted market prices in active markets for
identical securities. Currently the Company does not have any items classified as Level 1.
Level 2 Valuations based on observable inputs (other than Level 1 prices), such as quoted
prices for similar assets at the measurement date; quoted prices in markets that are not active;
or other inputs that are observable, either directly or indirectly. Currently the Company does
not have any items classified as Level 2.
Level 3 Valuations based on inputs that are unobservable and significant to the overall
fair value measurement, and involve management judgment. The Company used the
Black-Scholes-Merton option pricing model to determine the fair value of the instruments.
If the inputs used to measure fair value fall in different levels of the fair value hierarchy,
a financial securitys hierarchy level is based upon the lowest level of input that is significant
to the fair value measurement.
The following table presents the Companys warrants and embedded conversion options measured
at fair value on a recurring basis.
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Level 3 | Level 3 | |||||||
Carrying Value | Carrying Value | |||||||
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Embedded conversion options |
$ | 7,655,913 | $ | 8,853,893 | ||||
Warrants |
3,928,215 | 2,970,583 | ||||||
$ | 11,584,128 | $ | 11,824,476 | |||||
Decrease in fair value |
$ | 753,727 | ||||||
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The following table provides a reconciliation of the beginning and ending balances for the
Companys liabilities measured at fair value using Level 3 inputs (unaudited):
Balance at January 1, 2010 |
$ | 11,824,476 | ||
Issuance of warrants and conversion option |
1,635,344 | |||
Reclassification to equity due to conversion of preferred stock |
(1,121,965 | ) | ||
Change in fair value |
(753,727 | ) | ||
Balance at March 31, 2010 |
$ | 11,584,128 | ||
NOTE 6 EQUITY
Series A Convertible Preferred Stock
The Companys Board of Directors has authorized 20,000,000 shares of preferred stock. Except
as otherwise provided in the Series A Certificate or by law, each holder of shares of Series A
Preferred shall have no voting rights. As long as any shares of Series A Preferred are outstanding,
however, the Company shall not, without the affirmative vote of the holders of a majority of the
then outstanding shares of the Series A Preferred, (a) alter or change adversely the powers,
preferences, or rights given to the Series A Preferred or alter or amend the Series A Certificate,
(b) authorize or create any class of stock ranking as to dividends, redemption or distribution of
assets upon a liquidation senior to or otherwise pari passu with the Series A Preferred, (c) amend
its certificate of incorporation or other charter documents in any manner that adversely affects
any rights of the holders of Series A Preferred, (d) increase the number of authorized shares of
Series A Preferred, or (e) enter into any agreement with respect to any of the foregoing.
Each share of Series A Preferred is convertible at any time and from time to time after the
issue date at the holders option into two shares of the Companys common stock (subject to
beneficial ownership limitations determined by dividing the Stated Value of such share of Series A
Preferred by the Conversion Price (each as defined below).
Holders of our Series A Preferred are restricted from converting their shares of Series A
Preferred to Common Stock if the number of shares of Common Stock to be issued pursuant to such
conversion would cause the number of shares of Common Stock beneficially owned by such holder,
together with its affiliates, at such time to exceed 4.99% of the then issued and outstanding
shares of Common Stock; provided, however, that such holder may waive this limitation upon 61 days
notice to the Company. The Company has not received any such notice. There are no redemption
rights.
The Conversion Price shall be proportionately reduced for a stock dividend, stock split,
subdivision, combination or similar arrangements. The Conversion Price will also be reduced for any
sale of common stock (or options, warrants or convertible debt or other derivative securities) at a
purchase price per share less than the Conversion Price, subject to certain excepted issuances. The
Conversion Price will be reduced to such purchase price if such issuance occurs within the first 12
months of the original issuance date. The Conversion Price will be reduced to a price derived using
a weighted-average formula if the issuance occurs after the first 12 months but before the 24 month
anniversary of the original issuance date.
If, at any time while the Series A Preferred is outstanding, (A) the Company effects any
merger or consolidation of the Company with or into another person, (B) the Company effects any
sale of all or substantially all of its assets in one transaction or a series of related
transactions, (C) any tender offer or exchange offer (whether by the Company or another person) is
completed pursuant to which holders of common stock are permitted to tender or exchange their
shares for other securities, cash or property, or (D) the Company effects any reclassification of
the common stock or any compulsory share exchange pursuant to which the common stock is effectively
converted into or exchanged for other securities, cash or property (in any such case, a
Fundamental Transaction), then, upon any subsequent conversion of Series A Preferred, the holders
shall have the right to receive, for each Conversion Share (as defined in Section 1 of the Series A
Certificate) that would have been issuable upon such conversion immediately prior to the occurrence
of such Fundamental Transaction, the same kind and amount of securities, cash
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or property as it would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one
share of common stock.
On March 22, 2010, one of the Companys preferred shareholders exercised their option to
convert their 2,000,000 preferred shares into 4,000,000 shares of common stock.
During the three months ended March 31, 2010, under the terms of the Offering, the Company
issued and sold 1,155,000 shares of preferred stock through an equity financing transaction. In
connection with the financing, the Company granted warrants to purchase 2,310,000 shares of common
stock, exercisable at $0.70 per share. The warrants are exercisable for five years (See Note 5 for
additional discussion).
Common Stock
In September 2008, the Company sold to Piedmont Select Equity Fund (Piedmont) 125,000 shares of
its common stock at $2.00 per share for an aggregate price of $250,000. In December 2008, the
Company entered into a rescission agreement with Piedmont in which it agreed to rescind the
Piedmonts stock purchase so long as affiliates of Piedmont were to purchase at least $250,000 of
Company equity securities. In March 2010, two investors affiliated with Piedmont purchased an
aggregate of 250,000 shares of the Companys Series A Preferred Stock at $1.00 per share and
warrants to purchase 500,000 shares of Company common stock for an aggregate purchase price of
$250,000. Each Series A Preferred Stock may be converted into two shares of Company common stock.
Concurrent with the closing of such offering, the Company rescinded the purchase of the 125,000
shares of common stock. Piedmont delivered the stock certificate for 125,000 shares to the Company
and the Company returned the original purchase price of $250,000 to Piedmont.
NOTE 7 STOCK OPTIONS AND WARRANTS
Common Stock Options
The following table sets forth the share-based compensation expense (unaudited):
The Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Stock compensation expense cost of revenue |
$ | 25,310 | 32,963 | |||||
Stock compensation expense sales and marketing |
45,833 | 86,456 | ||||||
Stock compensation expense research and development |
45,831 | 51,242 | ||||||
Stock compensation expense general and administrative |
175,487 | 239,082 | ||||||
Total stock compensation expense |
$ | 292,461 | $ | 409,743 | ||||
A summary of common stock option activity under the Plan for the three months ended March 31,
2010 is presented below (unaudited):
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Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Shares | Price | Life | Value | |||||||||||||
Options outstanding January 1, 2010 |
6,033,188 | 0.77 | ||||||||||||||
Options granted |
| | ||||||||||||||
Options exercised |
| | ||||||||||||||
Options forfeited |
(349,060 | ) | 0.88 | |||||||||||||
Options cancelled |
| | ||||||||||||||
Total options outstanding March 31, 2010 |
5,684,128 | $ | 0.76 | 7.85 | $ | | ||||||||||
Options exercisable March 31, 2010 |
4,944,502 | $ | 0.71 | 7.79 | $ | | ||||||||||
Options vested and expected to vest March 31, 2010 |
5,664,727 | $ | 0.76 | 7.85 | $ | | ||||||||||
Options available for grant under the Plan at March 31, 2010 |
1,765,872 | |||||||||||||||
The following table summarizes information about stock options outstanding and exercisable at
March 31, 2010 (unaudited):
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted Average | Weighted | |||||||||||||||||||
Remaining | Average | |||||||||||||||||||
Contractual | Exercise | Weighted Average | ||||||||||||||||||
Exercise Prices | Number of Shares | Life | Price | Number of Shares | Exercise Price | |||||||||||||||
(In years) | ||||||||||||||||||||
$0.60 |
3,770,335 | 7.71 | $ | 0.60 | 3,490,249 | $ | 0.60 | |||||||||||||
$0.77 |
1,000,000 | 7.70 | $ | 0.77 | 1,000,000 | $ | 0.77 | |||||||||||||
$1.40 |
854,418 | 8.61 | $ | 1.40 | 426,128 | $ | 1.40 | |||||||||||||
$1.70 |
59,375 | 8.43 | $ | 1.70 | 28,125 | $ | 1.70 | |||||||||||||
5,684,128 | 7.85 | $ | 0.76 | 4,944,502 | $ | 0.71 | ||||||||||||||
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At March 31, 2010, the amount of unearned stock-based compensation currently estimated to be
expensed from fiscal 2010 through 2012 related to unvested common stock options is approximately
$1.3 million. The weighted-average period over which the unearned stock-based compensation is expected
to be recognized is approximately 1.5 years. If there are any modifications or cancellations of the
underlying unvested common stock options, the Company may be required to accelerate, increase or
cancel any remaining unearned stock-based compensation expense. Future stock-based compensation
expense and unearned stock-based compensation will increase to the extent that the Company grants
additional common stock options or other equity awards.
Warrants
From time to time, the Company issues warrants to purchase shares of the Companys common
stock to investors, note holders and to non-employees for services rendered or to be rendered in
the future (See Notes 4 and 6). Such warrants are issued outside of the Plan. A summary of the
warrant activity for the three months ended March 31, 2010 is presented below (unaudited):
Weighted- | Weighted-Average | |||||||||||||||
Exercise | Contractual | Aggregate Intrinsic | ||||||||||||||
Number of Shares | Price | Life | Value | |||||||||||||
(In years) | ||||||||||||||||
Warrants outstanding January 1, 2010 |
10,746,143 | $ | 0.87 | 4.89 | ||||||||||||
Warrants granted (See Notes 4 and 6) |
3,307,639 | $ | 0.70 | |||||||||||||
Warrants exercised |
| | ||||||||||||||
Warrants cancelled |
(947,639 | ) | $ | 0.93 | ||||||||||||
Warrants outstanding and exercisable-March
31, 2010 |
13,106,143 | $ | 0.80 | 4.54 | $ | | ||||||||||
NOTE 8 COMMITMENTS AND CONTINGENCIES
Warranties
The Companys warranty policy generally provides coverage for components of the vehicle, power
modules, and charger system that the Company produces. Typically, the coverage period is the
shorter of one calendar year or 2,500 miles, from the date of sale. Provisions for estimated
expenses related to product warranties are made at the time products are sold. These estimates are
established using estimated information on the nature, frequency, and average cost of claims.
Revision to the reserves for estimated product warranties is made when necessary, based on changes
in these factors. Management actively studies trends of claims and takes action to improve vehicle
quality and minimize claims.
The T3 Series vehicle is a front wheel drive all electric vehicle and as such the front fork
assembly is the main vehicle drive system. In late 2007, the Company made significant improvements
to this drive system by implementing into production a new belt drive system. The system offers
greater efficiency and minimizes the need for routine maintenance while improving the overall
quality of the vehicle. The belt drive system is standard on new 2008 models and is reverse
compatible with all older year models. The Company has agreed to retro-fit existing vehicles that
are in service with the new system.
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On June 25, 2008, the Company elected to upgrade or replace approximately 500 external
chargers (revision D or older) that were produced due to a chance that the chargers could fail over
time. A failed charger could result in degrading the life of the batteries or cause the batteries
to be permanently inoperable, or in extreme conditions result in thermal runaway of the batteries.
The charges were placed in service between January 2007 and April 2008. The Company is notifying
customers informing them of the need for an upgrade and will begin sending out new and/or upgraded
chargers (revision E) to replace all existing revision D or older chargers that are in the field.
After all the upgrades are complete, any remaining returned chargers will be upgraded to revision E
and resold as refurbished units. The Company did not include any potential revenue from re-sales in
the estimate. The total costs of upgrading or replacing these chargers are estimated to be
approximately $78,000. The Company anticipates that all of the chargers will be upgraded or
replaced by December 2010.
The following table presents the changes in the product warranty accrual for the three months
ended March 31 (unaudited):
2010 | 2009 | |||||||
Beginning balance, January 1, |
$ | 235,898 | $ | 362,469 | ||||
Charged to cost of revenues |
13,229 | 39,423 | ||||||
Usage |
(33,978 | ) | (116,447 | ) | ||||
Ending balance, March 31 |
$ | 215,149 | $ | 285,445 | ||||
Legal Contingency
Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim (Orange County Superior
Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (Plaintiff)
filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki
Nam, the Companys CEO, and Jason Kim, the Companys former COO, (Defendants) for breach of
contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed
between Plaintiff and T3 Motion, Inc. On August 24, 2009, Defendants filed a Demurrer to the
Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against
Defendants for breach of contract, fraud and common counts, seeking compensatory damages of
$470,598, attorneys fees, punitive damages, interest and costs. Defendants have disputed
Plaintiffs claims and intend to vigorously defend against them. Indeed, on October 27, 2009,
Defendants filed a Demurrer, challenging various causes of action in the First Amended Complaint.
The Court overruled the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an
answer to the First Amended Complaint. The trial in this matter is set for July 30, 2010.
In the ordinary course of business, the Company may face various claims brought by third
parties in addition to the claim described above and may from time to time, make claims or take
legal actions to assert the Companys rights, including intellectual property rights as well as
claims relating to employment and the safety or efficacy of the Companys products. Any of these
claims could subject us to costly litigation and, while the Company generally believes that it has
adequate insurance to cover many different types of liabilities, the insurance carriers may deny
coverage or the policy limits may be inadequate to fully satisfy any damage awards or settlements.
If this were to happen, the payment of such awards could have a material adverse effect on the
consolidated operations, cash flows and financial position. Additionally, any such claims, whether
or not successful, could damage the Companys reputation and business. Management believes the
outcome of currently pending claims and lawsuits will not likely have a material effect on the
consolidated operations or financial position.
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Indemnities and Guarantees
During the normal course of business, the Company has made certain indemnities and guarantees
under which it may be required to make payments in relation to certain transactions. These
indemnities include certain agreements with the Companys officers under which the Company may be
required to indemnify such person for liabilities arising out of their employment relationship. In
connection with its facility leases, the Company has indemnified its lessors for certain claims
arising from the use of the facilities. The duration of these indemnities and guarantees varies,
and in certain cases, is indefinite. The majority of these indemnities and guarantees do not
provide for any limitation of the maximum potential future payments the Company would be obligated
to make. Historically, the Company has not been obligated to make significant payments for these
obligations and no liability has been recorded for these indemnities and guarantees in the
accompanying consolidated balance sheets.
NOTE 9 RELATED PARTY TRANSACTIONS
The following reflects the activity of the related party transactions as of the respective
periods.
Accounts Receivable
The Company advanced $28,902 to Graphion Technology USA LLC (Graphion) to be used for their
operating requirements. Graphion was established by the Companys Chief Executive Officer and is
under common ownership. The advance is non-interest bearing and due upon demand.
As of March 31, 2010 and December 31, 2009, there were outstanding related party receivables
of $6,888 and $6,756, respectively, which primarily related to receivables due from Mr. Nam for
rent at the facility.
Related Party Payables
The Company purchases batteries and research and development parts from Graphion. During the
three months ended March 31, 2010 and 2009, the Company purchased $0 and $513,179, respectively, of
parts and had an outstanding accounts payable balance of $0 and $104,931 at March 31, 2010 and
December 31, 2009, respectively.
Notes Payable see Note 4
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Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
This quarterly report on Form 10-Q contains certain statements that may be deemed to be
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other
than statements of historical facts, included in this report are forward-looking statements. When
used in this report, the words may, will, should, would, anticipate, estimate,
expect, plan, project, continuing, ongoing, could, believe, predict, potential,
intend, and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to risks and uncertainties that could cause actual results
to differ materially from those projected. These risks and uncertainties include, but are not
limited to, changes in sales or industry trends, competition, retention of senior management and
other key personnel, availability of materials or components, ability to make continued product
innovations, casualty or work stoppages at the Companys facilities, adverse results of lawsuits
against the Company and currency exchange rates. Forward-looking statements are based on
assumptions and assessments made by the Companys management in light of their experience and their
perception of historical trends, current conditions, expected future developments and other factors
they believe to be appropriate. Readers of this report are cautioned not to place undue reliance on
these forward-looking statements, as there can be no assurance that these forward-looking
statements will prove to be accurate. Management undertakes no obligation to update any
forward-looking statements. This cautionary statement is applicable to all forward-looking
statements contained in this report. Readers should carefully review the risks described in other
documents we file from time to time with the Securities and Exchange Commission (SEC), including
the recently filed Annual Report on Form 10-K for the year ended December 31, 2009.
Overview
T3 Motion, Inc. (the Company, we or us) was organized on March 16, 2006, under the laws
of the state of Delaware. We develop and manufacture the T3 Series which are electric three-wheel
stand-up vehicles that are directly targeted to the public safety and private security markets. T3
Series have been designed to tackle a host of daily professional functions, from community policing
to patrolling of airports, military bases, campuses, malls, public event venues and other
high-density areas. In September 2009, we launched our second product, the CT Micro Car. The Micro
Car is another product line to sell to our potential and existing customers.
Critical Accounting Policies and Estimates
Our managements discussion and analysis of our financial condition and results of operations
are based on unaudited condensed consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements as well as the reported
net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates
and assumptions. We base our estimates on historical experience and on various other factors that
we believe are reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or
conditions.
A
summary of these policies can be found in the Managements Discussion and Analysis
section of the Companys Annual Report on Form 10-K for the year ended December 31, 2009. The following is an update to the critical accounting policies and estimates.
Going Concern
The Companys condensed consolidated financial statements are prepared using the accrual
method of accounting in accordance with GAAP and have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the normal course of
business. The Company has sustained operating losses since its inception (March 16, 2006) and has
used substantial amounts of working capital in its operations. Management has been and is
continuing to implement its cost reduction strategy for material, production and service costs.
Until management achieves its cost reduction strategy over the next year and sufficiently increases
cash flow from operations, the Company will require additional capital to meet its working capital
requirements, debt service, research and development, capital requirements and compliance
requirements. Further, at March 31, 2010, the Company has an accumulated deficit of $36,416,795 and
a working capital deficit of $11,706,626. These factors raise substantial doubt about the Companys
ability to continue as a going concern for a reasonable period of time.
Management believes that its current sources of funds and current liquid assets will allow the
Company to continue as a going concern through at least June 30, 2010. During 2010, the Company has
obtained equity financing from third parties of approximately $1,155,000 and refinanced the
outstanding balance of $1.0 million related to the note to Immersive Media Corporation
(Immersive). The Company plans to raise additional debt and/or equity capital to finance future
activities. In light of these plans, management is confident in the Companys
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ability to continue as a going concern. These condensed consolidated financial statements do
not include any adjustments that might result from the outcome of this uncertainty.
Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments with original maturities of
three months or less. Included in the cash equivalents balance at March 31, 2010 is $105,000
related to proceeds from the sale of preferred stock that is held in an escrow account.
Concentrations of Credit Risk
As of March 31, 2010 and December 31, 2009, one customer accounted for 13% of total accounts
receivable and two customers accounted for more than 10% of total accounts receivable,
respectively. One customer accounted for more than 12% of net revenues for the three months ended
March 31, 2010. For the three months ended March 31, 2009, two customers accounted for
approximately 22% of total revenues.
As of March 31, 2010 and December 31, 2009, one vendor accounted for approximately 12% of
total accounts payable and one vendor accounted for more than 10% of total accounts payable,
respectively. Two vendors accounted for approximately 22% and 57% of purchases for the three months ended March
31, 2010 and 2009, respectively.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash, accounts receivable, related party
receivables, accounts payable, accrued expenses, related party payables and related party notes
payable. The carrying value for all such instruments except related notes payable approximates fair
value due to the short-term nature of the instruments. The Company cannot determine the fair value
of its related party notes payable due to the related party nature and instruments similar to the
notes payable could not be found.
Revenue Recognition
The Company recognizes revenues when there is persuasive evidence of an arrangement, product
delivery and acceptance have occurred, the sales price is fixed or determinable and collectibility
of the resulting receivable is reasonably assured.
For all sales, the Company uses a binding purchase order as evidence of an arrangement.
Delivery occurs when goods are shipped for customers. The Company ships with either FOB Shipping
Point or Destination terms.
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Shipping documents are used to verify delivery and customer acceptance. For FOB Destination,
the Company records revenue when proof of delivery is confirmed by the shipping company. The
Company assesses whether the sales price is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is subject to refund. The Company
offers a standard product warranty to its customers for defects in materials and workmanship for a
period of one year or 2,500 miles, whichever comes first, and has no other post-shipment
obligations. The Company assesses collectibility based on the creditworthiness of the customer as
determined by evaluations and the customers payment history.
All amounts billed to customers related to shipping and handling are classified as net
revenues, while all costs incurred by the Company for shipping and handling are classified as cost
of revenues.
The Company does not enter into contracts that require fixed pricing beyond the term of the
purchase order. All sales via distributor agreements are accompanied by a purchase order. Further,
the Company does not allow returns of unsold items.
The Company has executed various distribution agreements whereby the distributors agreed to
purchase T3 Series packages (one T3 Series, two power modules, and one charger per package). The
terms of the agreements require minimum re-order amounts for the vehicles to be sold through the
distributors in specified geographic regions. Under the terms of the agreements, the distributor
takes ownership of the vehicles and the Company deems the items sold at delivery to the
distributor.
Business Segments
The Company currently only has one reportable business segment due to the fact that the
Company derives its revenue primarily from one product. The CT Micro Car is not included in a
separate business segment due to nominal net revenues during the three months ended March 31, 2010.
The revenue from domestic and international sales are shown below:
For the Three Months | ||||||||
Ended March 31, | ||||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Net revenues: |
||||||||
T3 Domestic |
$ | 1,066,579 | $ | 675,029 | ||||
T3 International |
61,697 | 530,008 | ||||||
CT Domestic |
21,150 | | ||||||
Total net revenues |
$ | 1,149,426 | $ | 1,205,037 | ||||
Derivative Liability
During the three months ended March 31, 2010, the Company issued 2,310,000 of warrants related
to the issuance of preferred stock (see Note 6). The Company estimated the fair value of the
warrants of $716,236 at the dates of issuance and recorded a derivative liability. The change in
fair value of the derivative will be recorded through earnings at each reporting date.
During 2010, the Company recorded a discount on the issuance of preferred stock and derivative
liability of $685,124 related to the anti-dilution provision of the preferred stock issued. The
discount will be recorded as a deemed dividend with a reduction to retained earnings during the
24-month period that the anti-dilution provision is outstanding. The change in fair value of the
derivative is recorded through earnings at each reporting date.
During the three months
ended March 31, 2010, the Company recorded additional debt discount and derivative liability in the amount of
$218,709 related to the Immersive transaction (see Note 4.)
For the three months ended March 31, 2010, the amortization of the discount related to the
preferred stock anti-dilution provision was $573,140, which was recorded as a deemed dividend.
On March 22, 2010, one of the Companys preferred shareholders exercised their option to
convert their 2,000,000 preferred shares into 4,000,000 shares of common stock (see Note 6). As a
result of the conversion, the Company reclassified the balance of the derivative liability of
$1,121,965 to additional paid in capital and the balance of the discount of $1,099,742, as a deemed
dividend.
The common stock purchase warrants were not issued with the intent of effectively hedging any
future cash flow, fair value of any asset, liability or any net investment in a foreign operation.
The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value
of these warrants will be recognized currently in earnings until such time as the warrants are
exercised or expire. These common stock purchase warrants do not trade in an active securities
market, and as such, the Company estimates the fair value of these warrants and embedded conversion
features using the Black-Scholes-Merton option pricing model.
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Loss Per Share
Basic loss per share is computed by dividing loss applicable to common stockholders by the weighted
average number of common shares assumed to be outstanding during the period of computation. Diluted
loss per share is computed similar to basic loss per share except that the denominator is increased
to include the number of additional common shares that would have been outstanding if the potential
shares had been issued and if the additional common shares were dilutive. Options, warrants and
shares associated with the conversion of debt and preferred stock to
purchase approximately 49.4
million and 14.4 million shares of common stock were outstanding at March 31, 2010 and 2009,
respectively, but were excluded from the computation of diluted earnings per share due to the net
losses for the periods.
Net loss per basic share is computed as follows:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Net loss |
$ | (1,681,739 | ) | $ | (2,696,590 | ) | ||
Deemed preferred stock dividend |
(1,672,882 | ) | | |||||
Net loss applicable to common stockholders |
$ | (3,354,621 | ) | $ | (2,696,590 | ) | ||
Weighted average number of common shares outstanding: |
||||||||
Basic and diluted |
45,050,960 | 44,022,097 | ||||||
Net loss per share: |
||||||||
Basic and diluted |
$ | (0.07 | ) | $ | (0.06 | ) | ||
Commitments and Contingencies
On June 25, 2008, we elected to upgrade or replace approximately 500 external chargers
(revision D or older) that were produced due to a chance that the chargers could fail over time. A
failed charger could result in degrading the life of the batteries or cause the batteries to be
permanently inoperable, or in extreme conditions result in thermal runaway of the batteries. The
chargers were placed in service between January 2007 and 2008. We notified customers informing them
of the need for an upgrade and began sending out new and/or upgraded chargers (revision E) in July
of 2008 to replace all existing revision D or older chargers that are in the field. After all the
upgrades are complete, any remaining returned chargers will be upgraded to revision E and resold as
refurbished units. We did not include any potential revenue from re-sales in the estimate. The
total costs of upgrading or replacing these chargers are estimated to be approximately $78,000. We
anticipate that all of the chargers will be upgraded or replaced by December 2010.
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Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim (Orange County Superior
Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (Plaintiff)
filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki
Nam, the Companys CEO, and Jason Kim, the Companys former COO, (Defendants) for breach of
contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed
between Plaintiff and T3 Motion, Inc. On August 24, 2009, Defendants filed a Demurrer to the
Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against
Defendants for breach of contract, fraud and common counts, seeking compensatory damages of
$470,598, attorneys fees, punitive damages, interest and costs. Defendants have disputed
Plaintiffs claims and intend to vigorously defend against them. Indeed, on October 27, 2009,
Defendants filed a Demurrer, challenging various causes of action in the First Amended Complaint.
The Court overruled the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an
Answer to the First Amended Complaint. The trial in this matter is set for July 30, 2010.
In the ordinary course of business, the Company may face various claims brought by third
parties in addition to the claim described above and may from time to time, make claims or take
legal actions to assert the Companys rights, including intellectual property rights as well as
claims relating to employment and the safety or efficacy of the Companys products. Any of these
claims could subject us to costly litigation and, while the Company generally believes that it has
adequate insurance to cover many different types of liabilities, the insurance carriers may deny
coverage or the policy limits may be inadequate to fully satisfy any damage awards or settlements.
If this were to happen, the payment of such awards could have a material adverse effect on the
consolidated operations, cash flows and financial position. Additionally, any such claims, whether
or not successful, could damage the Companys reputation and business. Management believes the
outcome of currently pending claims and lawsuits will not likely have a material effect on the
consolidated operations or financial position.
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Result of Operations
The
following table sets forth the results of our operations for the three months ended March 31, 2010 and 2009
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Net revenues |
$ | 1,149,426 | $ | 1,205,037 | ||||
Cost of revenues |
1,127,449 | 1,466,267 | ||||||
Gross profit (loss) |
21,977 | (261,230 | ) | |||||
Operating Expenses: |
||||||||
Sales and marketing |
427,654 | 546,404 | ||||||
Research and development |
320,506 | 301,448 | ||||||
General and administrative |
1,029,413 | 1,241,520 | ||||||
Total operating expenses |
1,777,573 | 2,089,372 | ||||||
Loss from operations |
(1,755,596 | ) | (2,350,602 | ) | ||||
Other income (expense): |
||||||||
Interest income |
903 | 1,615 | ||||||
Other income, net |
755,555 | 165,809 | ||||||
Interest expense |
(681,801 | ) | (512,612 | ) | ||||
Total other income (expense), net |
74,657 | (345,188 | ) | |||||
Loss before provision for income taxes |
(1,680,939 | ) | (2,695,790 | ) | ||||
Provision for income taxes |
800 | 800 | ||||||
Net loss |
(1,681,739 | ) | (2,696,590 | ) | ||||
Deemed dividend to preferred stockholders |
(1,672,882 | ) | | |||||
Net loss attributable to common stockholders |
$ | (3,354,621 | ) | $ | (2,696,590 | ) | ||
Other comprehensive loss: |
||||||||
Foreign currency translation income (loss) |
205 | (19,941 | ) | |||||
Comprehensive loss |
$ | 1,681,534 | $ | (2,716,531 | ) | |||
Net loss per share: |
||||||||
Basic |
$ | (0.07 | ) | $ | (0.06 | ) | ||
Diluted |
$ | (0.07 | ) | $ | (0.06 | ) | ||
Weighted average number of common shares outstanding: |
||||||||
Basic |
45,050,960 | 44,022,097 | ||||||
Diluted |
45,050,960 | 44,022,097 | ||||||
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Net revenues. Revenues are primarily from sales of the T3 Series, CT Micro Car, power
modules, chargers and related accessories. Revenues decreased $55,611, or 4.6%, to $1,149,426 for
the three months ended March 31, 2010, compared to the same period of the prior year. The decrease
is primarily due to adverse conditions in the global economy and disruption in the financial
markets. Due to the current economic conditions, our customers have deferred purchasing decisions,
thereby lengthening our sales cycles, offset in part by increased service revenue and the
introduction of the CT Micro Car.
Cost of revenues. Cost of revenues consisted of materials, labor to produce vehicles and
accessories, warranty and service costs and applicable overhead allocations. Cost of revenues
decreased $338,818, or 23.1%, to $1,127,449 for the three months ended March 31, 2010, compared to
the same period of the prior year. This decrease in cost of revenues is primarily attributable to
managements cost reduction strategy.
Gross income (loss). During 2010, management has continued to source lower product costs,
increase production efficiencies, and achieving lower warranty experience rates resulting in gross
profit of $21,977 for the three months ended March 31, 2010, compared to a gross loss of ($261,230)
for the same period of the prior year. Management has and will continue to evaluate the processes
and materials to reduce the costs of revenues over the next year. Gross income (loss) margin was
1.9% and (21.7%), respectively, for the three months ended March 31, 2010 and 2009.
Sales and marketing. Sales and marketing decreased by $118,750 or 21.7%, to $427,654 for the
three months ended March 31, 2010, compared to the same period of the prior year. The decrease in
sales and marketing expense is attributable to reduction in salaries and commissions and decreases
in trade show and travel expenses.
Research and development. Research and development costs includes development expenses such
as salaries, consultant fees, cost of supplies and materials for samples, as well as outside
services costs. Research and development expense increased by $19,058 or 6.3%, to $320,506 for the
three months ended March 31, 2010, compared to the same period of the prior year.
General and administrative. General and administrative expenses decreased $212,107, or 17.1%,
to $1,029,413, for the three months ended March 31, 2010 compared to the same period of the prior
year. The decrease was primarily due to decreases in salaries, legal, and accounting compliance
costs.
Other income (expense). Other income increased $589,746, or 355.7% to $755,555 for the three
months ended March 31, 2010 primarily due to the change in the fair value of the derivative
liabilities due to the adoption of the accounting standard in 2009 when compared to the same period
of the prior year.
Interest expense. Interest expense increased $169,189, or 33.0% to $681,801 for the three
months ended March 31, 2010 due to increased interest expense from the related party loans and the
debt discount associated with the loans compared to the same period of the prior year.
Net loss. Net loss for the three months ended March 31, 2010, was $1,681,739 or $(0.07) per
basic and diluted share compared to $2,696,590, or $(0.06) per basic and diluted share, for the
same period of the prior year.
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LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund working capital requirements, invest in
research and development and capital equipment, to make debt service payments and the continued
costs of public company filing requirements. We will continue to raise equity and/or secure
additional debt to meet our working capital requirements. For the year ended December 31, 2009, our
independent registered public accounting firm noted in its report that we have incurred losses from
operations and have an accumulated deficit and working capital deficit of approximately $33.0
million and $11.0 million, respectively, as of December 31, 2009, which raises substantial doubt
about our ability to continue as a going concern. Management believes that our current and
potential sources of funds and current liquid assets will allow us to continue as a going concern
through at least June 30, 2010. During 2010, the Company has obtained equity financing from third
parties of approximately $1,155,000 and refinanced the outstanding balance of $1.0 million related
to the note to Immersive Media Corporation (Immersive). The Company plans to raise additional
debt and/or equity capital to finance future activities. In light of these plans, management is
confident in the Companys ability to continue as a going concern. These condensed consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Until Management achieves our cost reduction strategy over the next year and sufficiently
increases cash flow from operations, we will require additional capital to meet our working capital
requirements, research and development and capital requirements. We will continue to raise
additional equity and/or financing to meet our working capital requirements.
Our principal sources of liquidity are cash and receivables. As of March 31, 2010, cash and
cash equivalents were $937,888, or 18.6% of total assets compared to $2,580,798, or 42.6% of total
assets as of December 31, 2009. The decrease in cash and cash equivalents was primarily
attributable to net cash used in operating activities.
Cash Flows
For the three months ended March 31, 2010 and 2009
Net cash flows used in operating activities for the three months ended March 31, 2010 and
2009, were $2,521,337 and $1,481,053, respectively. For the three months ended March 31, 2010, cash
flows used in operating activities related primarily to the net loss of $1,681,739, offset by net
non-cash reconciling items of $198,655. Net cash flows
used were due in part by increases in accounts receivables, inventories, and other current
assets of $189,477, $119,741 and $391,490, respectively, and decreases in accounts payable and related party payables of $232,665 and $104,931, respectively.
For the three months ended March 31, 2009, cash flows used in operating activities related
primarily to the net loss of $2,696,590, offset by net non-cash reconciling items of $844,792.
Further contributing to the decrease were increases in inventories and security deposits of
$253,322 and $3,784, respectively, and decreases in accounts payable of $29,368. Net cash flows
used were offset in part by decreases in accounts receivables and other current assets of $400,320
and $244,436, respectively and increases in related party payables of $12,463.
Net cash used in investing activities of $26,778 for the three months ended March 31, 2010
related primarily to purchases of property and equipment of $26,646 and loans to related parties of
$1,607, offset by repayment of loans to related parties of $1,475.
Net cash provided by investing activities of $2,768 for the three months ended March 31, 2009
related to repayment of loans from related parties of $4,346, offset by purchases of property and
equipment of $1,578.
Net cash provided by financing activities was $905,000 and $0 for the three months ended March
31, 2010 and 2009, respectively. For the three months ended March 31, 2010, cash flows provided by
financing activities related to proceeds from the sale of preferred stock of $1,155,000, offset by
a common stock rescission of $250,000.
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For the three months ended March 31, 2009, there were no cash flows provided by financing
activities.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee
the payment obligations of any third parties. We have not entered into any derivative contracts
that are indexed to our shares and classified as stockholders equity that are not reflected in our
financial statements. Furthermore, we do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to
such entity. We do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing, hedging or
research and development services with us.
Warrants
From time to time, we issue warrants to purchase shares of the Companys common stock to
investor, note holders and to non-employees for services rendered or to be rendered in the future.
Warrants issued in conjunction with equity, are recorded to equity as exercised.
As of March 31, 2010, there were outstanding warrants to purchase 697,639 shares of our
common stock at an exercise price of $0.70 per share. The warrants are immediately exercisable. The
warrants expire on December 31, 2012. There were 120,000 warrants exercisable at the exercise price
of $1.54 per warrant. These warrants expire on March 31, 2013. There were 274,774 warrants
exercisable at the exercise price of $2.00 per warrant that expire on March 31, 2014. There were
5,703,730 warrants exercisable at the exercise price of $0.70 per warrant that expire on December
30, 2014. There were 4,000,000 warrants exercisable at the exercise
price of $0.70 per warrant that
expire on December 30, 2014. There were 1,600,000 warrants exercisable at the exercise price of
$0.70 per warrant that expire on February 2, 2015. There were 710,000 warrants exercisable at the
exercise price of $0.70 per warrant that expire on March 22, 2015.
The exercise price and the number of shares issuable upon exercise of the warrants will
be adjusted upon the occurrence of certain events, including reclassifications, reorganizations or
combinations of the common stock. At all times that the warrants are outstanding, we will authorize
and reserve at least that number of shares of common stock equal to the number of shares of common
stock issuable upon exercise of all outstanding warrants.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
Item 4T.
Controls and Procedures.
Regulations under the Securities Exchange Act of 1934 require public companies to maintain
disclosure controls and procedures, which are defined to mean a companys controls and other
procedures that are designed to ensure that information required to be disclosed in the reports
that it files or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Commissions rules and forms.
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended, or the Exchange Act, as of March 31, 2010, to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities Exchange
Commissions rules and forms, including to ensure that information required to be disclosed by us
in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to
our management, including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required
disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that as of March 31, 2010, our disclosure controls and procedures were not effective at
the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other
procedures to ensure our financial statements were prepared in accordance with generally accepted
accounting principles. Accordingly, we believe that the financial statements included in this
report fairly present, in all material respects, our financial condition, results of operations and
cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public Company Accounting
Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. Management has identified the following
four material weaknesses which have caused management to conclude that, as of March 31, 2010, our
disclosure controls and procedures were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures.
Written documentation of key internal controls over financial reporting is a requirement of Section
404 of the Sarbanes-Oxley Act and will be applicable to us for the year ending December 31, 2010.
Management evaluated the impact of our failure to have written documentation of our internal
controls and procedures on our assessment of our disclosure controls and procedures and has
concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a
basic internal control. Due to our size and nature, segregation of all conflicting duties may not
always be possible and may not be economically feasible. However, to the extent possible, the
initiation of transactions, the custody of assets and the recording of transactions should be
performed by separate individuals. Management evaluated the impact of our
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failure to have
segregation of duties on our assessment of our disclosure controls and procedures and has concluded
that the control deficiency that resulted represented a material weakness.
3. We did not maintain sufficient accounting resources with adequate training in the
application of generally accepted accounting principles (GAAP) commensurate with our financial
reporting requirements and the complexity of our operations and transactions.
4. We do not have sufficient policies and procedures to approve changes to shipping terms of
sales agreements to ensure appropriate revenue recognition of sales transactions.
5. We have had, and continue to have, a significant number of audit adjustments. Audit
adjustments are the result of a failure of the internal controls to prevent or detect misstatements
of accounting information. The failure could be due to inadequate design of the internal controls
or to a misapplication or override of controls. Management evaluated the impact of our significant
number of audit adjustments and has concluded that the control deficiency that resulted represented
a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures
to ensure that the financial statements included herein fairly present, in all material respects,
our financial position, results of operations and cash flows for the periods presented.
Remediation of Material Weaknesses
We are attempting to remediate the material weaknesses in our disclosure controls and procedures
identified above by refining our internal procedures (see below).
Changes in Internal Control over Financial Reporting
The following change in our internal control over financial reporting was completed during the
quarter ended March 31, 2010, and has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting:
| We have hired additional professional accounting resources to assist with the review of accounting policies and procedures and financial reporting with knowledge, experience and training in the application of GAAP. |
We have also initiated the following corrective actions, which management believes are reasonably
likely to materially affect our controls and procedures as they are designed to remediate the
material weaknesses as described above:
| We are in the process of further enhancing, the supervisory procedures that will include additional levels of analysis and quality control reviews within the accounting and financial reporting functions. | ||
| We are in the process of strengthening our internal policies and enhancing our processes for ensuring consistent treatment and recording of reserve estimates and that validation of our conclusions regarding significant accounting policies and their application to our business transactions are carried out by personnel with an appropriate level of accounting knowledge, experience and training. |
We do not expect to have fully remediated these significant deficiencies until management has
tested those internal controls and found them to have been remediated. We expect to complete this
process during our annual testing for fiscal 2010.
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PART II OTHER INFORMATION
Item 1.
Legal Proceedings.
Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim (Orange County Superior
Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (Plaintiff)
filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki
Nam, the Companys CEO, and Jason Kim, the Companys former COO, (Defendants) for breach of
contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed
between Plaintiff and T3 Motion, Inc. On August 24, 2009, Defendants filed a Demurrer to the
Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against
Defendants for breach of contract, fraud and common counts, seeking compensatory damages of
$470,598, attorneys fees, punitive damages, interest and costs. Defendants have disputed
Plaintiffs claims and intend to vigorously defend against them. Indeed, on October 27, 2009,
Defendants filed a Demurrer, challenging various causes of action in the First Amended Complaint.
The Court overruled the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an
Answer to the First Amended Complaint. The trial in this matter is set for July 30, 2010.
Other than the description above, there have been no material developments during the three
months ended March 31, 2010 in any material pending legal proceedings to which the Company is a
party or of which any of our property is the subject.
Item 1A. Risk Factors
Risks Related to Our Company and Our Industry
There were no material changes from the risk factors previously disclosed in our 2009 Annual Report
on Form 10-K, as filed with the Unites States Securities and Exchange Commission, or the SEC, on
March 31, 2010.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
In September 2008, the Company sold Piedmont Select Equity Fund (Piedmont) 125,000 shares of
its common stock at $2.00 per share for an aggregate price of $250,000.
In December 2008, the Company entered into a rescission agreement with Piedmont in which it
agreed to rescind the Piedmonts stock purchase so long as affiliates of Piedmont were to purchase
at least $250,000 of Company equity securities.
In March 2010, two investors affiliated with Piedmont purchased an aggregate of 250,000
shares of the Companys Series A Preferred Stock at $1.00 per share and warrants to purchase
500,000 shares of Company common stock for an aggregate purchase price of $250,000. Each Series A
Preferred Stock may be converted into two shares of Company common stock. Concurrent with the
closing of such offering, the Company rescinded the purchase of the 125,000 shares of common stock.
Piedmont delivered the stock certificate for 125,000 shares to the Company and the Company
returned the original purchase price of $250,000 to Piedmont.
During the three months ended March 31, 2010, under the terms of the Offering, the Company
raised $905,000 through an equity financing transaction. The Company issued and sold 905,000 shares
of preferred stock. In connection with the financing, the Company granted warrants to purchase
1,810,000 shares of common stock, exercisable at $0.70 per share. The warrants are exercisable for
five years.
On March 31, 2010, Immersive agreed to extend the note to April 30, 2010. As consideration for extending
the note, the Company agreed to exchange Immersives Class A warrants to purchase up to 697,639 shares
of the Companys common stock at an exercise price of $1.08 per share and its Class D warrants to
purchase up to 250,000 shares of the Companys common stock at an exercise price of $2.00 per share, for
Class G Warrants to purchase up to 697,639 and 250,000 shares of the Companys common stock,
respectively, each with an exercise price of $0.70 per share.
The note and accrued interest were not repaid in full by April 30, 2010. Per the agreement, the maturity
date was extended to March 31, 2011 and the Company will issue Class G Warrants to purchase up to
1,040,000 shares of the Companys common stock at an exercise price of $0.70 per share. The interest rate
compounded annually was amended to 15%. The terms of the Class G Warrants are substantially similar to
prior Class G warrants issued by the Company.
Item 3.
Defaults Upon Senior Securities.
None
Item 5.
Other Information.
As described under Item 2, on March 31, 2010, the Company agreed to exchange Immersives Class A
warrants to purchase up to 697,639 shares of the Companys common stock at an exercise price of $1.08
per share and its Class D warrants to purchase up to 250,000 shares of the Companys common stock at an
exercise price of $2.00 per share, at an exercise price of $2.00 per share, for Class G Warrants to purchase
up to 697,639 and 250,000 shares of the Companys common stock, respectively, each with an exercise
price of $0.70 per share. On April 30, 2010, the Company issued additional Class G Warrants to purchase
up to 1,040,000 shares of the Companys common stock at an exercise price of $0.70 per share, to Immersive.
33
Table of Contents
Employment Agreement
The Company entered into a written employment agreement with Ms. Kelly Anderson (Executive) on
April 17, 2010 in which it agree to employ Executive during the term hereof as its Chief Financial
Officer. Executives term of employment shall continue until December 30, 2011. The Agreement
shall automatically renew, annually, upon the terms and conditions set forth herein unless
terminated by either party by written notice 60 days prior to the expiration of the then term.
For the period of one year commencing on April 30 2010, the Company shall pay Executive a base
salary of $190,000 per annum. During the her employment and any renewal or extension period
thereafter, the Executive shall be entitled to receive, on March 15 of each calendar year, an
annual bonus based upon an approved budget by the Companys Board of Directors and/or its
Compensation Committee.
If Board determines that the Company does not have sufficient cash available to make the above
described cash obligations, the Board shall have the right to make such payments in stock, but at
no time shall the cash payment due under the cash obligation fall below one third of the payment
obligation.
Executive shall be eligible to participate in any Compensation Plan or Program (401(k) Plan and
Stock Option Plan) maintained by the Company in which other Executives or employees of the Company
participate, on similar terms. The Company shall provide to the Executive and her family, during
the employment with coverage under all employee medical, dental and vision benefit programs, plans
or practices adopted by the Company and made available to all employees of the Company. The
Executive shall be entitled to four (4) weeks paid vacation in each calendar year (but no more than
ten 10 consecutive business days at any given time).
The Company may terminate Executives employment at any time for any reason. If Executives
employment is terminated by the Company other than for Cause (as defined in such agreement),
Executive shall receive a severance payment equal to six (6) months Base Salary and six (6)
months benefits, and any earned and/or accrued Bonus, as in effect immediately prior to such
termination, payable in accordance with the ordinary payroll practices of the Company, but not less
frequently than semi-monthly following such termination of employment.
In the event that Executives employment is terminated (i) by the Company for Cause; (ii) by the
Executive on a voluntary basis; (iii) as a result of the Executives Permanent Disability; or (iv)
by the Executives death, then Executive or her Estate shall only be entitled to receive Base
Salary and Bonuses already earned and accrued through the Termination Date.
In the event of termination by the Executives death or Permanent Disability, all such benefits
identified herein shall be maintained and in effect for six (6) additional months by the Company.
Any and all such unvested benefits (i.e. 401(k), restricted stock or stock options) shall
immediately vest.
If Executives employment with the Company is terminated by the Company (other than upon the
expiration of the Employment terms, for Cause, or by reason of Disability, or upon Executives
death) at any time within ninety (90) days before, or within twelve (12) months after, a Change in
Control, or if the Executives employment with the Company is terminated by the Executive for Good
Reason (as defined in the Employment Agreement) within six (6) months after a change in control, or
if the Executives employment with the Company is terminated by the Executive for any reason,
including without Good Reason, during the period commencing six (6) months after a Change in
Control and ending twelve (12) months after a Change in Control, then the Company shall pay to the
Executive: (i) any accrued, unpaid base salary payable as in effect on the Date of Termination,
(ii) any unreimbursed business expenses and (iii) a severance benefit, in a lump sum cash payment,
in an amount equal to: (A) the Executives annual
rate of base salary, as in effect as of the Date of Termination, plus the Executives Target Bonus
for the fiscal year of the Company in which the Date of Termination occurs.
In the event the Executive is entitled to the severance benefits, each stock option exercisable for
shares of Company Common Stock granted under the Companys stock incentive plan that is held by the
Executive, if then outstanding, shall become immediately vested and exercisable with respect to all
of the shares of Company Common Stock subject thereto on the Date of Termination and shall be
exercisable in accordance with the provisions of the Companys stock incentive plan and option
agreement pursuant to which such option was granted. In addition, in the event the Executive is
entitled to severance benefits, a restricted stock award and restricted shares of the Company
Common Stock granted under the Companys stock incentive plan that is held by the Executive that is
subject to a forfeiture, reacquisition or repurchase option held by the Company shall become fully
vested, nonforfeitable and no longer subject to reacquisition or repurchase by the Company or other
restrictions on the Date of Termination.
The Executive shall not, without the prior written consent of the Company, use or make accessible
to any other Person, any Confidential Information pertaining to the business or affairs of the
Company, except (i) while employed by the Company, in the business of and for the benefit of the
Company, or (ii) when required to do so by applicable law.
The Executive hereby covenants that, during the period commencing on the date hereof and ending on
the two (2) year anniversary of the Termination Date (the Restricted Period), the Executive and
her affiliates shall not directly or indirectly, through any other Person, (i) employ, solicit or
induce any individual who is, or was at any time during the one (1) year period prior to the
Termination Date, an employee or consultant of the Company, (ii) cause such individual to terminate
or refrain from renewing or extending her or her employment by or consulting relationship with the
Company, or (iii) cause such individual to become employed by or enter into a consulting
relationship with the Company and its affiliates or any other individual, Person or entity.
The Executive and her affiliates shall not solicit, persuade or induce any customer to terminate,
reduce or refrain from renewing or extending its contractual or other relationship with the Company
in regard to the purchase of products or services, performed, manufactured, marketed or sold by the
Company or any other Person. The Executive and her affiliates shall not solicit, persuade or
induce any supplier to terminate, reduce or refrain from renewing or extending her, her or its
contractual or other relationship with the Company. During the term of her employment, the
Executive shall not engage or assist others to engage in a competing business.
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Table of Contents
Item 6.
Exhibits.
INDEX TO EXHIBITS
Exhibit | ||
Number | Description | |
3.1
|
Amended and Restated Certificate of Incorporation, as currently in effect(1) | |
3.2
|
Bylaws(1) | |
3.3
|
Amendment to Bylaws, dated January 16, 2009(2) | |
3.4
|
Amendment to Certificate of Incorporation(3) | |
3.5
|
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock(3) | |
10.1
|
Amendment No. 2 to Immersive Media Promissory Note* | |
10.2
|
Employment agreement with Kelly Anderson May 17, 2010 (Portions of the exhibit has been omitted pursuant to the request for confidential treatment)* | |
31.1
|
Section 302 Certificate of Chief Executive Officer* | |
31.2
|
Section 302 Certificate of Chief Financial Officer* | |
32.1
|
Section 906 Certificate of Chief Executive Officer* | |
32.2
|
Section 906 Certificate of Chief Financial Officer* |
* | Filed herewith. | |
(1) | Filed with the Companys Registration Statement on Form S-1 filed on May 13, 2008. | |
(2) | Filed with the Companys Current Report on Form 8-K filed on January 20, 2009. | |
(3) | Filed with the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and filed on November 16, 2009. |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 17, 2010 | T3 MOTION, INC. (Registrant) |
|||
By: | /s/ Ki Nam | |||
Ki Nam | ||||
Chairman of the Board and Chief Executive Officer |
||||
Date: May 17, 2010 | T3 MOTION, INC. (Registrant) |
|||
By: | /s/ Kelly Anderson | |||
Kelly Anderson | ||||
Executive Vice President and Chief Financial Officer |
||||
35