Attached files
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EX-31.2 - EX-31.2 - T3M INC. | a59545exv31w2.htm |
EX-31.1 - EX-31.1 - T3M INC. | a59545exv31w1.htm |
EX-32.2 - EX-32.2 - T3M INC. | a59545exv32w2.htm |
EX-32.1 - EX-32.1 - T3M INC. | a59545exv32w1.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, 2011
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 | ||
Costa Mesa, California | 92626 | |
(Address of principal executive offices) | (Zip Code) |
(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 | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
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 20, 2011 the number of shares outstanding of the Registrants Common Stock, par
value $0.001 per share, was 8,237,276
T3 MOTION, INC.
INDEX TO FORM 10-Q
March 31, 2011
INDEX TO FORM 10-Q
March 31, 2011
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PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
T3 MOTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 144,070 | $ | 123,861 | ||||
Restricted cash |
10,000 | 10,000 | ||||||
Accounts receivable, net of reserves of $47,626 and $50,000, respectively |
568,602 | 595,261 | ||||||
Related party receivables |
37,571 | 35,722 | ||||||
Inventories |
896,157 | 1,064,546 | ||||||
Prepaid expenses and other current assets |
631,463 | 251,467 | ||||||
Total current assets |
2,287,863 | 2,080,857 | ||||||
Property and equipment, net |
482,951 | 564,700 | ||||||
Deposits |
934,893 | 934,359 | ||||||
Total assets |
$ | 3,705,707 | $ | 3,579,916 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,647,227 | $ | 1,335,761 | ||||
Accrued expenses |
1,776,066 | 1,483,220 | ||||||
Related party payables |
51,973 | 51,973 | ||||||
Note payable |
93,468 | 243,468 | ||||||
Derivative liabilities |
8,643,368 | 9,633,105 | ||||||
Related party notes payable, net of debt discounts |
6,621,000 | 4,391,121 | ||||||
Total current liabilities |
18,833,102 | 17,138,648 | ||||||
Long term liabilities |
||||||||
Related party notes payable |
1,000,000 | 2,121,000 | ||||||
Total liabilities |
19,833,102 | $ | 19,259,648 | |||||
Commitments and contingencies |
||||||||
Stockholders deficit: |
||||||||
Series A convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; 11,502,563 shares issued and outstanding |
11,503 | 11,503 | ||||||
Common stock, $0.001 par value; 150,000,000 shares authorized; 5,065,847 shares issued and outstanding |
5,066 | 5,066 | ||||||
Additional paid-in capital |
30,477,262 | 29,419,540 | ||||||
Accumulated deficit |
(46,625,595 | ) | (45,120,210 | ) | ||||
Accumulated other comprehensive income |
4,369 | 4,369 | ||||||
Total stockholders deficit |
(16,127,395 | ) | (15,679,732 | ) | ||||
Total liabilities and stockholders deficit |
$ | 3,705,707 | $ | 3,579,916 | ||||
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)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net revenues |
$ | 996,562 | $ | 1,149,426 | ||||
Cost of net revenues |
956,932 | 1,127,449 | ||||||
Gross profit |
39,630 | 21,977 | ||||||
Operating Expenses: |
||||||||
Sales and marketing |
311,750 | 427,654 | ||||||
Research and development |
233,912 | 320,506 | ||||||
General and administrative |
821,545 | 1,029,413 | ||||||
Total operating expenses |
1,367,207 | 1,777,573 | ||||||
Loss from operations |
(1,327,577 | ) | (1,755,596 | ) | ||||
Other income (expense), net: |
||||||||
Interest income |
43 | 903 | ||||||
Other income, net |
991,694 | 755,555 | ||||||
Interest expense |
(303,945 | ) | (681,801 | ) | ||||
Total other income (expense), net |
687,792 | 74,657 | ||||||
Loss before provision for income tax |
(639,785 | ) | (1,680,939 | ) | ||||
Provision for income tax |
800 | 800 | ||||||
Net loss |
(640,585 | ) | (1,681,739 | ) | ||||
Deemed dividend to preferred stockholders |
(864,800 | ) | (1,672,882 | ) | ||||
Net loss attributable to common stockholders |
$ | (1,505,385 | ) | $ | (3,354,621 | ) | ||
Other comprehensive income (loss): |
||||||||
Foreign currency translation income |
| 205 | ||||||
Comprehensive loss |
$ | (640,585 | ) | $ | (1,681,534 | ) | ||
Net loss per share: Basic and diluted |
$ | (0.30 | ) | $ | (0.74 | ) | ||
Weighted average number of common shares outstanding: |
||||||||
Basic and diluted |
5,065,847 | 4,505,096 | ||||||
See accompanying notes to condensed consolidated financial statements
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T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT (UNAUDITED)
Accumulated | ||||||||||||||||||||||||||||||||
Preferred | Common | Additional | Other | Total | ||||||||||||||||||||||||||||
Preferred | Stock | Common | Stock | Paid-in | Accumulated | Comprehensive | Stockholders | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Income | Deficit | |||||||||||||||||||||||||
BALANCE December 31, 2010 |
11,502,563 | $ | 11,503 | 5,065,847 | $ | 5,066 | $ | 29,419,540 | $ | (45,120,210 | ) | $ | 4,369 | $ | (15,679,732 | ) | ||||||||||||||||
Preferred stock dividend (unaudited) |
864,800 | (864,800 | ) | | ||||||||||||||||||||||||||||
Share-based compensation expense (unaudited) |
192,922 | 192,922 | ||||||||||||||||||||||||||||||
Net loss (unaudited) |
(640,585 | ) | (640,585 | ) | ||||||||||||||||||||||||||||
BALANCE March 31, 2011 (unaudited) |
11,502,563 | $ | 11,503 | 5,065,847 | $ | 5,066 | $ | 30,477,262 | $ | (46,625,595 | ) | $ | 4,369 | $ | (16,127,395 | ) | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements
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Table of Contents
T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (640,585 | ) | $ | (1,681,739 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
81,749 | 91,841 | ||||||
Warranty expense |
30,794 | 13,229 | ||||||
Share-based compensation expense |
192,922 | 292,461 | ||||||
Change in fair value of derivative liabilities |
(989,737 | ) | (753,727 | ) | ||||
Amortization of debt discounts |
108,879 | 554,851 | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts and other receivables |
26,659 | (189,477 | ) | |||||
Inventories |
168,389 | (119,741 | ) | |||||
Prepaid expenses and other current assets |
(148,677 | ) | (391,490 | ) | ||||
Deposits |
(534 | ) | 51 | |||||
Accounts payable and accrued expenses |
367,005 | (232,665 | ) | |||||
Related party payables |
| (104,931 | ) | |||||
Net cash used in operating activities |
(803,136 | ) | (2,521,337 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Loans/advances to related parties |
(1,849 | ) | (1,607 | ) | ||||
Purchases of property and equipment |
| (26,646 | ) | |||||
Repayment of loans/advances to related parties |
| 1,475 | ||||||
Net cash used in investing activities |
(1,849 | ) | (26,778 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from related party notes payable |
1,000,000 | | ||||||
Recission of common stock |
| (250,000 | ) | |||||
Deferred offering costs |
(24,806 | ) | ||||||
Proceeds from the sale of preferred stock, net of issuance costs |
| 1,155,000 | ||||||
Repayment of note payable |
(150,000 | ) | | |||||
Net cash provided by financing activities |
825,194 | 905,000 | ||||||
Effect of exchange rate on cash |
| 205 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
20,209 | (1,642,910 | ) | |||||
CASH AND CASH EQUIVALENTS beginning of period |
123,861 | 2,580,798 | ||||||
CASH AND CASH EQUIVALENTS end of period |
$ | 144,070 | $ | 937,888 | ||||
See accompanying notes to condensed consolidated financial statements
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Table of Contents
T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Continued
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Continued
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | | $ | 6,494 | ||||
Income taxes |
$ | | $ | 800 | ||||
Supplemental disclosure of non-cash activities: |
||||||||
Conversion option of preferred stock and warrants issued with preferred stock recorded
as derivative liabilities |
$ | | $ | 1,401,360 | ||||
Deferred offering costs in connection with equity financing recorded in accounts payable |
$ | 206,513 | $ | | ||||
Reclassification of derivative liability to equity |
$ | | $ | 1,121,965 | ||||
Debt discount and warrant liabiltiy recorded upon issuance of warrants |
$ | | $ | 233,984 | ||||
Amortization of preferred stock discount related to conversion feature and warrants |
$ | 864,800 | $ | 1,672,882 | ||||
Conversion of preferred stock to common stock |
$ | | $ | 4,000 | ||||
See accompanying notes to condensed consolidated financial statements
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Table of Contents
T3 MOTION, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
T3 Motion, Inc. was incorporated on March 16, 2006, under the laws of the state of Delaware.
T3 Motion and its wholly-owned subsidiary, T3 Motion, Ltd. (collectively, the Company), develop
and manufacture personal mobility vehicles powered by electric motors. The Companys initial
product, the T3 Series, is an electric, three-wheel stand-up vehicle (ESV) that is directly
targeted to the law enforcement and private security markets. Substantially all of the Companys
revenues to date have been derived from sales of the T3 Series ESVs and related accessories.
The Company has entered into a distribution agreement with CT&T pursuant to which the Company
has the exclusive right to market and sell the CT Series Micro Car, which is a low speed,
four-wheel electric car, in the U.S. to the government, law enforcement and security markets. The
Company is also currently developing the Electric/Hybrid Vehicle, which is a plug-in hybrid vehicle
that features a single, wide-stance wheel with two high-performance tires sharing one rear wheel.
The Company anticipates introducing the Electric/Hybrid Vehicle in late 2011.
Interim Unaudited Condensed Consolidated Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the Securities and Exchange Commission (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 of America (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, 2010. 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, 2011 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 have been 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 incurred significant operating losses and has used substantial amounts of
working capital in its operations since its inception (March 16, 2006). Further, at March 31, 2011,
the Company had an accumulated deficit of $(46,625,595), a working capital deficit of $(16,545,239)
and cash and cash equivalents (including restricted cash) of $154,070. Additionally, the Company
used cash in operations of $(803,136) for the three months ended March 31, 2011. These factors
raise substantial doubt about the Companys ability to continue as a going concern for a reasonable
period of time. These condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
On May 19, 2011, the Company completed a public offering of its securities generating $11.1
million in gross proceeds (see below). In addition to this financing, management has been
implementing cost reduction strategies for material, production and service costs and believes that
its cash from operations, together with the net proceeds of the offering, will be sufficient to
allow the Company to continue as a going concern through at least December 31, 2011.
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The Company anticipates that it will pursue raising additional debt or equity financing to
fund its new product development and expansion plans. The Company cannot make any assurances that
managements cost reduction strategies will be effective or that any additional financing will be
completed on a timely basis, on acceptable terms or at all. Managements inability to successfully
implement its cost reduction strategies or to complete any other financing will adversely impact
the Companys ability to continue as a going concern.
Public Offering of the Companys Equity Securities
On May 16, 2011, the Company announced that it had raised $11.1 million in a public offering
of its securities. The offering closed on May 19, 2011, and the Company received net proceeds of
$9,678,903 after deducting commissions and offering expenses.
The transaction resulted in the issuance of 3,171,429 units of the Companys securities. Each
unit consists of one share of the Companys common stock, one Class H warrant and one Class I
warrant. Each warrant grants the holder the right to purchase one share of the Companys common
stock. In connection with the offering, the Company effected a one-for-10 reverse stock split of
its common stock, which allowed it to meet the minimum share price requirement of the NYSE Amex,
LLC, (the AMEX). The Company has offered contractual rights to investors that either
purchase $500,000 or more of our units in the offering or are converting at least $500,000 of
existing securities into substantially identical units. We entered into agreements with such
investors that grant them approval rights to certain change of control transactions. Such
agreements also granted them approval rights, subject to certain exceptions, to financings at a
per share purchase price below the exercise price of their warrants.
Debt and Preferred Stock Conversion into Common Stock and Common Stock Equivalent
Securities.
In connection with the AMEX listing and the May public offering, Vision Opportunity Master Fund,
Ltd. and Vision Capital Advantage Fund (collectively Vision); and Ki Nam, our Chief Executive
Officer, will convert their $3.5 million and $2.1 million debentures plus accrued interest,
respectively, into 1,138,885 and 632,243 unregistered units. As with the publicly offered units,
each unregistered unit consisted of one share of common stock, one Class H warrant and one Class
I warrant. Because the units, shares, warrants and warrant shares underlying these units are not
registered, we intend to file a registration statement registering such securities within seven
days of the closing of the May public offering.
In connection with the AMEX listing, the Companys preferred stockholders have agreed to
convert all outstanding Series A Convertible Preferred Stock into 2,872,574 shares of the Companys
common stock. Included in the conversion of the Series A Convertible Preferred Stock are shares
held by Vision and Mr. Nam of 9,370,698 and 976,865, respectively, which are convertible into
2,340,176 and 243,956 shares of common stock, respectively. These shares of common stock will also
be registered.
1-for-10 Reverse Stock Split
The Company effected a one-for-10 reverse stock split of its common stock after the
effectiveness of the registration statement and prior to the closing of the May public offering.
All information included in this quarterly filing has been adjusted to reflect the effect of the
reverse stock split.
Lock Up Agreement
Upon closing of the offering, Vision and Ki Nam have entered into lock-up agreements pursuant
to which such parties have agreed not to sell any shares of our common stock for 12 months, subject
to exceptions.
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Table of Contents
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of T3
Motion, Inc. and its wholly owned subsidiary, T3 Motion Ltd. (UK) (the subsidiary). All
significant inter-company accounts and transactions are eliminated in consolidation.
Reclassifications
Certain amounts in the 2010 financial statements have been reclassified to conform with the
current period 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 share-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.
Concentrations of Credit Risk
Cash and Cash Equivalents
The Company maintains its non-interest bearing transactional cash accounts at financial
institutions for which the Federal Deposit Insurance Corporation (FDIC) provides unlimited
insurance coverage through December 31, 2012. For interest bearing cash accounts, from time to
time, balances exceed the amount insured by the FDIC. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk related to these
deposits. At March 31, 2011, the Company did not have cash deposits in excess of the FDIC limit.
The Company considers cash equivalents to be all short-term investments that have an initial
maturity of 90 days or less and are not restricted. The Company invests its cash in short-term
money market accounts.
Restricted Cash
Under a credit card processing agreement with a financial institution, the Company is required
to maintain a security deposit as collateral. The amount of the deposit is at the discretion of the
financial institution and as of March 31, 2011 was $10,000.
Accounts Receivable
The Company performs periodic evaluations of its customers and maintains allowances for
potential credit losses as deemed necessary. The Company generally does not require collateral to
secure accounts receivable. The Company estimates credit losses based on managements evaluation of
historical bad debts, customer concentrations, customer credit-worthiness, current economic trends
and changes in customer payment patterns when evaluating the adequacy of its allowance for doubtful
accounts. At March 31, 2011 and December 31, 2010, the Company had an allowance for doubtful
accounts of $47,626 and $50,000, respectively. Although the Company expects to collect amounts due,
actual collections may differ from the estimated amounts.
As of March 31, 2011 and December 31, 2010, one and two customers accounted for approximately
39% and 51% of total accounts receivable, respectively. Two customers accounted for approximately
29% and one customer accounted for approximately 12% of net revenues for the three months ended
March 31, 2011 and 2010, respectively.
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Accounts Payable
As of March 31, 2011 and December 31, 2010, three and one vendors accounted for approximately
31% and 10% of total accounts payable, respectively. Two vendors accounted for approximately 51%
and 22% of purchases for the three months ended March 31, 2011 and 2010, respectively.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash and cash equivalents, restricted cash,
accounts receivable, related party receivables, accounts payable, accrued expenses, related party
payables, note payable, related party notes payable and derivative liabilities. The carrying value
for all such instruments except related party notes payable and derivative liabilities 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. The Companys derivative liabilities are recorded at fair
value (see Note 6).
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.
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 collectability
of the resulting receivable is reasonably assured.
For all sales, the Company uses a binding purchase order as evidence of an arrangement. 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 and workmanship for a period of one year or 2,500 miles,
whichever comes first (see Note 9), 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 net 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.
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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 8) and records expenses attributable to
the stock option plan. The Company amortizes stock-based compensation from the date of grant on a
straight-line basis over the requisite service (vesting) period for the entire award using the
Black-Scholes-Merton option pricing model.
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
sheets.
Upon the exercise of common stock options, the Company issues new shares from its authorized
shares.
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 potential shares underlying derivative securities such as options, warrants and
convertible notes 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 5.8 million and 4.9 million shares of common stock were outstanding at March 31, 2011
and 2010, respectively, but were excluded from the computation of diluted earnings per share due to
the net losses for the periods.
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Net loss |
$ | (640,585 | ) | $ | (1,681,739 | ) | ||
Deemed dividend to preferred stockholders |
(864,800 | ) | (1,672,882 | ) | ||||
Net loss attributable to common stockholders |
$ | (1,505,385 | ) | $ | (3,354,621 | ) | ||
Weighted average number of common shares outstanding: |
||||||||
Basic and diluted |
5,065,847 | 4,505,096 | ||||||
Net loss per share: |
||||||||
Basic and diluted |
$ | (0.30 | ) | $ | (0.74 | ) | ||
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
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nominal net revenues during the three months ended March 31, 2011. The revenue from domestic
sales and international sales are shown below:
For the Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Net revenues: |
||||||||
T3 Series domestic |
$ | 723,383 | $ | 1,066,579 | ||||
T3 Series international |
273,179 | 61,697 | ||||||
CT Series domestic |
| 21,150 | ||||||
Total net revenues |
$ | 996,562 | $ | 1,149,426 | ||||
NOTE 2 INVENTORIES
Inventories consist of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Raw materials |
$ | 774,440 | $ | 788,496 | ||||
Work-in-process |
65,962 | 212,723 | ||||||
Finished goods |
55,755 | 63,327 | ||||||
$ | 896,157 | $ | 1,064,546 | |||||
NOTE 3 PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Prepaid inventory |
$ | 125,021 | $ | 148,410 | ||||
Deferred offering costs |
231,319 | | ||||||
Prepaid expenses and other current assets |
275,123 | 103,057 | ||||||
$ | 631,463 | $ | 251,467 | |||||
NOTE 4 NOTE PAYABLE
Note payable consisted of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Note payable to Preproduction
Plastics, Inc., interest payable monthly at
6% per annum, monthly payments of $50,000
plus interest, due May 2011 |
$ | 93,468 | $ | 243,468 | ||||
In accordance with a settlement agreement (see Note 9), the Company agreed to pay
compensatory damages, attorneys fees and costs totaling $493,468, to Preproduction Plastics, Inc.,
which is payable in monthly payments of $50,000 each, plus interest accruing at 6% per annum from
the date of the settlement. Commencing January 1, 2011, the Company has failed to make the
scheduled payments required by the July 29, 2010 settlement agreement and stipulation for entry of
judgment. As a result, the Plaintiff filed a motion for entry of judgment pursuant to the terms of the July
29, 2010 settlement agreement and stipulation for entry of judgment, which if granted, would cause
the acceleration of all amounts owed under the settlement agreement. While the motion has been
pending, the Company has made principal payments totaling $150,000. This motion is now scheduled
to be heard on June 16, 2011. During the three months ended March 31, 2011, the Company recorded
$4,855 of interest expense and had accrued interest of $8,040 at March 31, 2011.
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NOTE 5 RELATED PARTY NOTES PAYABLE
Related party notes payable, net of discounts consisted of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Note payable to Immersive Media Corp., 19% interest rate, net of
discount of $0 and $108,879, respectively, due May 20, 2011 |
$ | 1,000,000 | $ | 891,121 | ||||
Note payable to Vision Opportunity Master Fund, Ltd., 10% interest
rate, due June 30, 2011 |
3,500,000 | 3,500,000 | ||||||
Note payable to Ki Nam, 10% interest rate per annum, due March 31, 2012 |
2,121,000 | 1,121,000 | ||||||
Note payable to Alfonso and Mercy Cordero, 10% interest rate per
annum, due October 1, 2013 |
1,000,000 | 1,000,000 | ||||||
7,621,000 | 6,512,121 | |||||||
Less: current portion |
(6,621,000 | ) | (4,391,121 | ) | ||||
$ | 1,000,000 | $ | 2,121,000 | |||||
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 originally due December 31, 2008 and is
secured by all of the Companys assets (see subsequent amendments to the note below).
In connection with the issuance of the promissory note, the Company issued a warrant to
Immersive for the purchase of 69,764 shares of the Companys common stock at an exercise price of
$10.80 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.
First Amendment to Immersive 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 and give Immersive the option to convert the promissory note during the
pendency and prior to the closing of an equity offering into units of the Companys securities at
an original conversion price of $16.50 per unit. Each unit consists of one share of the Companys
common stock and a warrant to purchase a share of the Companys common stock at $20.00 per share.
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. The amended terms of the note resulted in terms that were
substantially different from the terms of the original note. As a result, the modification was
treated as an extinguishment of debt during the year ended December 31, 2008. There was no gain or
loss recognized in connection with the extinguishment. At the date of the amendment, the Company
did not record the value of the conversion feature as the conversion option was contingent on a
future event.
In December 2009, the Company issued 2,000,000 shares of its Series A Convertible Preferred
Stock (Preferred Stock) in connection with an equity offering. 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.
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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 25,000 shares of the Companys
common stock at an exercise price
of $20.00 per share, subject to adjustment. For every three months that the promissory note is
outstanding, the Company issued Immersive a warrant to purchase 5,000 shares of the Companys
common stock. During the year ended December 31, 2009, the Company issued warrants to Immersive to
purchase 20,000 shares of the Companys common stock. The Company recorded a debt discount of
$139,778 based on the estimated fair value of the warrants issued during the year ended December
31, 2009. As a result of the December 2009 equity offering, the exercise price of the warrants was
adjusted to $5.00 per share (see Note 6 for a discussion on derivative liabilities). During the
year ended December 31, 2010, the Company issued the remaining 5,000 warrants under the note. The
Company recorded an additional debt discount of $15,274 based on the estimated fair value of the
5,000 warrants issued during the year ended December 31, 2010.
During the three months ended March 31, 2010, the Company amortized $56,539 of the debt
discounts to interest expense. As of March 31, 2010, prior to the second amendment to the
Immersive note (see below), the debt discounts were fully amortized to interest expense.
Second Amendment to Immersive Note
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
69,764 shares of the Companys common stock at an exercise price of $10.80 per share and its Class
D warrants to purchase up to 25,000 shares of the Companys common stock at an adjusted exercise
price of $7.00 per share, for Class G warrants to purchase up to 69,764 shares and 25,000 shares of
the Companys common stock, respectively, each with an exercise price of $7.00 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 25,000 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 69,764 warrants issued. The total debt discount was amortized in April
2010. The amended terms did not result in terms that were substantially different from the terms of
the original note. Therefore, there was no extinguishment of debt as a result of the second
amendment.
The note and accrued interest were not repaid in full by April 30, 2010. As a result, per the
agreement, the maturity date was extended to March 31, 2011 and the Company issued Class G warrants
to purchase up to 104,,000 shares of the Companys common stock at an exercise price of $7.00 per
share. The interest rate, which compounds annually, was also amended to 15.0%. The Company recorded
interest expense of $37,500 and $30,000, related to the stated rate of interest during the three
months ended March 31, 2011 and 2010, respectively, and had accrued interest of $147,500 and
$110,000 at March 31, 2011 and December 31, 2010, respectively. The terms of the Class G warrants
issued to Immersive are substantially similar to prior Class G warrants issued by the Company. The
Company recorded a debt discount of $329,120 related to the fair value of the warrants issued.
Amortization of this debt discount was $108,879 and $0 for the three months ended March 31, 2011
and 2010, respectively, resulting in an unamortized debt discount balance of $0 at March 31, 2011.
Third Amendment to Immersive Note
On March 30, 2011, Immersive agreed to extend the note to April 30, 2011. As
consideration for extending the note, the Company agreed to increase the interest rate to 19% per
annum compounded annually commencing on April 1, 2011. The amended terms of the note did not result
in terms that were substantially different from the terms of the original note, therefore there was
no extinguishment of debt.
Fourth Amendment to Immersive Note
On April 30, 2011, Immersive agreed to extend the note to May 20, 2011. All terms of the
note remained the same (see Note 11).
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Repayment of Immersive Note
On
May 20, 2011, the Company paid Immersive the balance of
$1,121,861, including all accrued
interest due under the note.
Vision Opportunity Master Fund, Ltd. Bridge Financing
December 30, 2009 10% Convertible Debenture
On December 30, 2009, the Company sold $3,500,000 in debentures and warrants to 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 of the Debentures was December 30, 2010 (see below). 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 Preferred Stock and a warrant to
purchase one share of our common stock.
As a result of the 240th day passing, the Company recorded an additional debt discount and
corresponding derivative liability in the amount of $275,676 during the year ended December 31,
2010 (see Note 6). 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 Company recorded interest expense of $87,500 and $88,232, related to the
stated rate of interest, for the three months ended March 31, 2011 and 2010, respectively, and had
accrued interest of $439,444 and $350,959 as of March 31, 2011 and December 31, 2010, respectively.
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 the Companys 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 Class G common stock purchase
warrants (the Class G Warrants). Pursuant to the terms of the Class G Warrants, Vision is
entitled to purchase up to an aggregate of 350,000 shares of the Companys common stock at an
exercise price of $7.00 per share, subject to adjustment. The Class G 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 Visions
benefit to guarantee to Vision T3 Motions obligations due under the Debentures. T3 Motion 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.
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Amendment to December 30, 2009 10% Convertible Debenture
On December 31, 2010, the Company and Vision amended the Debenture to extend the maturity date
from December 31, 2010 to March 31, 2011. All other provisions of the Debenture remained unchanged.
The amended terms of the Debenture did not result in terms that were substantially different from
the terms of the original Debenture, therefore there was no extinguishment of debt.
Second Amendment to December 30, 2009 10% Convertible Debenture
On March 31, 2011, the Company and Vision amended the Debenture to extend the maturity
date from March 31, 2011 to June 30, 2011. All other provisions of the Debenture remained
unchanged. The amended terms of the Debenture did not result in terms that were substantially
different from the terms of the original Debenture, therefore there was no extinguishment of debt.
Conversion of 10% Convertible Debenture Upon Closing of May Public Offering
The
Vision Debentures of $3.5 million plus accrued interest of
$486,098 will convert into
1,138,885 units of the Companys securities upon completion of the offering which was completed on
May 19, 2011. Each unit consisted of one share of common stock, one Class H warrant and one
Class I warrant.
Debt Discounts and Amortization
The debt discount recorded on the December 30, 2009 Debentures was allocated between the
warrants and conversion feature in the amount of $1,077,652 and $1,549,481, respectively. In
addition, the Company recorded an additional debt discount during the year ended December 31, 2010
of $275,676 (see above). The debt discounts were amortized through the original maturity of the
Debentures of December 30, 2010. During the three months ended March 31, 2011 and 2010, the Company
amortized $0 and $498,311, respectively, of the debt discounts to interest expense.
Ki Nam Note
2010 Note
On February 24, 2011, the Company entered into a loan agreement with Ki Nam, its Chairman and
Chief Executive Officer, for previous advances to the Company. The agreement allows Mr. Nam to
advance up to $2.5 million for operating requirements. The note bears interest at 10% per annum.
The note is due on March 31, 2012 and allows for an automatic one year extension. During the year
ended December 31, 2010, Mr. Nam advanced $1,511,000 to the Company to be used for operating
requirements. During October 2010, the Company repaid $390,000 of the advances, leaving a balance
of $1,121,000 outstanding as of December 31, 2010. During the three months ended March 31, 2011,
Mr. Nam advanced $1,000,000 to the Company to be used for operating requirements. The Company
recorded interest expense of $35,566 for the three months ended March 31, 2011. The Company had
accrued interest of $59,322 as of March 31, 2011 and $23,756 as of December 31, 2010.
Conversion of 2010 Note Upon Closing of May Public Offering
The
2010 Note of $2.121 million in principal plus accrued interest
of $91,851 will convert
into 632,243 units of the Companys securities upon completion of the offering which was completed
on May 19, 2011.
Each unit consisted of one share of common stock, one Class H warrant,
and one Class I warrant.
2011 Note
In April 2011, Mr. Nam, advanced $300,000 to the Company in exchange for debt securities to be
negotiated with the Company (2011 Note). The Company proposed to Mr. Nam the 2011 Note would
accrue interest at 12% per annum and would mature in one year. Interest payments would be due
monthly and will commence on June 1, 2011. The Company also proposed
granting 30,000 five-year warrants to purchase common stock at $3.50 (see Note 11).
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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.
Alfonso Cordero and Mercy Cordero Note
On January 14, 2011, the Company delivered a 10% unsecured promissory note (the Note) in the
principal amount of $1,000,000 that matures on October 1, 2013 to Alfonso G. Cordero and Mercy B.
Cordero, Trustees of the Cordero Charitable Remainder Trust (Noteholder) for amounts previously
loaned to the Company in October 2010. The Note was dated as of September 30, 2010. Interest
payments of $8,333 are due on the first day of each calendar month commencing November 1, 2010 and
continuing each month thereafter. The Company recorded interest expense of $25,000 for the three
months ended March 31, 2011 and accrued interest of $49,277 as of March 31, 2011 and $24,277 as of
December 31, 2010.
The Company may prepay the Note, but must prepay in full only. The Company will be in default
under the Note upon: (1) failure to timely make payments due under the note; and (2) failure to
perform other agreements under the Note within 10 days of request from the Noteholder. Upon such
event of default, the Noteholder may declare the Note immediately due and payable. The applicable
interest rate will be upon default will be increased to 15% or the maximum rate allowed by law. The
Noteholder has waived any and all defaults under the Note at December 31, 2010 and through April
15, 2011. On May 19, 2011, the Company paid the outstanding
accrued interest balance of $59,290, bringing
the note current per the terms of the note.
NOTE 6 DERIVATIVE LIABILITIES
The Company recognizes the accounting standard that provides guidance for determining whether
an equity-linked financial instrument, or embedded feature, is indexed to an entitys own stock.
The standard applies to any freestanding financial instruments or embedded features that have the
characteristics of a derivative, and to any freestanding financial instruments that are potentially
settled in an entitys own common stock.
During 2010, the Company issued 104,000 warrants, respectively, related to convertible debt
(see Note 5). During 2010, the Company exchanged 69,764 of Class A warrants and 25,000 of Class B
warrants for 94,764 Class G warrants (see Note 5). The Company also recorded an additional
derivative liability of $275,676 related to the Vision Debentures during the year ended December
31, 2010 (see Note 5). The Company estimated the fair value of the warrants and conversion options
at the dates of issuance and recorded a debt discount and corresponding derivative liability of
$838,779 during 2010. The debt discount was amortized over the remaining life of the related debt.
The change in fair value of the derivative liability is recorded through earnings at each reporting
date.
During 2010, the Company issued additional warrants of 231,000, related to Preferred Stock
(see Note 7). The Company estimated the fair value of the warrants of $716,236 at the date of
issuance and recorded a discount on the issuance of the equity and a corresponding derivative
liability. The discount is recorded as a deemed dividend with a reduction to retained earnings. The
change in fair value of the derivative is recorded through earnings at each reporting date.
During 2010, the Company recorded a discount on the issuance of Preferred Stock and a
corresponding derivative liability of $685,124, related to the anti-dilution provision of the
Preferred Stock issued. The discount is 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 liabilities is recorded through earnings at each reporting date.
During the three months ended March 31, 2011 and 2010, the amortization of the discounts
related to the Preferred Stock anti-dilution provision and warrants issued was $864,800 and
$1,672,882, respectively, which was recorded as a deemed dividend.
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On March 22, 2010, one of the Companys preferred shareholders exercised their option to
convert their 2,000,000 preferred shares into 400,000 shares of common stock (see Note 7). 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.
As of March 31, 2011 and December 31, 2010, the unamortized discount related to the conversion
feature of the Preferred Stock was $3,398,268 and $4,263,068, respectively.
During the three months ended March 31, 2010, the Company recorded additional debt discount
and derivative liabilities of $15,274, related to related party notes payable (see Note 5).
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 using the following assumptions:
March 31, | ||||
2011 | ||||
(unaudited) | ||||
Annual dividend yield |
| |||
Expected life (years) |
0.25-4.08 | |||
Risk-free interest rate |
0.30%-2.24 | % | ||
Expected volatility |
155%-156 | % |
Expected volatility is based primarily on historical volatility of the Company, using weekly
pricing observations, and the Companys peer group, using daily pricing observations. Historical
volatility was computed for recent periods that correspond to the expected term. The Company
believes this method produces an estimate that is representative of its expectations of future
volatility over the expected term of these warrants.
The Company currently has no reason to believe future volatility over the expected remaining
life of these warrants is likely to differ materially from historical volatility. The expected life
is based on the remaining term of the warrants. The risk-free interest rate is based on one-year to
five-year U.S. Treasury securities consistent with the remaining term of the instrument.
During the three months ended March 31, 2011 and 2010, the Company recorded other income of
$989,737 and $753,727, respectively, related to the change in fair value of the warrants and
embedded conversion options and is included in other income, net in the accompanying condensed
consolidated statements of operations.
The following table presents the Companys warrants and embedded conversion options measured
at fair value on a recurring basis.
Level 3 | Level 3 | |||||||
Carrying Value | Carrying Value | |||||||
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Embedded conversion options |
$ | 5,117,813 | $ | 5,991,957 | ||||
Warrants |
3,525,555 | 3,641,148 | ||||||
$ | 8,643,368 | $ | 9,633,105 | |||||
Decrease in fair value |
$ | 989,737 | ||||||
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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):
2011 | 2010 | |||||||
Beginning balance, January 1, |
$ | 9,633,105 | $ | 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 |
(989,737 | ) | (753,727 | ) | ||||
Ending balance, March 31 |
$ | 8,643,368 | $ | 11,584,128 | ||||
NOTE 7 EQUITY
Series A Convertible Preferred Stock
The Companys Board of Directors has authorized 20,000,000 shares of Series A preferred stock
(Preferred). Except as otherwise provided in the Series A Certificate or by law, each holder of
shares of Preferred shall have no voting rights. As long as any shares of 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 Preferred, (a) alter or change adversely the powers,
preferences, or rights given to the 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 Preferred, (c) amend its
certificate of incorporation or other charter documents in any manner that adversely affects any
rights of the holders of Preferred, (d) increase the number of authorized shares of the Preferred,
or (e) enter into any agreement with respect to any of the foregoing.
Each share of 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 (each as defined below)).
Holders of our Preferred are restricted from converting their shares of 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 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 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 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.
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On March 22, 2010, one of the Companys preferred shareholders exercised their option to
convert their 2,000,000 preferred shares into 400,000 shares of common stock.
During the three months ended March 31, 2010, the Company issued and sold 1,155,000 shares of
preferred stock through an equity financing transaction. In connection with the financing, the
Company issued warrants to purchase 231,000 shares of common stock, exercisable at $7.00 per share.
The warrants are exercisable for five years (See Note 6 for additional discussion).
Per
the terms of the May public offering, all shares of Series A
convertible
preferred stock will be converted into 2,872,574
shares of our common stock.
Common Stock
In September 2008, the Company sold to Piedmont Select Equity Fund (Piedmont) 12,500 shares
of its common stock at $20.00 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 50,000 shares of Company common stock for a purchase price of $250,000.
Concurrent with the closing of such offering, the Company rescinded the purchase of the 12,500
shares of common stock. Piedmont delivered the stock certificate for 12,500 shares to the Company
and the Company returned the original purchase price of $250,000 to Piedmont.
NOTE 8 STOCK OPTIONS AND WARRANTS
Stock Option/Stock Issuance Plan
On August 15, 2007 the Company adopted the 2007 Stock Option/Stock Issuance Plan (the 2007
Plan), under which stock awards or options to acquire shares of the Companys common stock may be
granted to employees, nonemployee members of the Companys board of directors, consultants or other
independent advisors who provide services to the Company. The 2007 Plan is administered by the
board of directors. The 2007 Plan permits the issuance of up to 745,000 shares of the Companys
common stock. Options granted under the 2007 Plan generally vest 25% per year over four years and
expire 10 years from the date of grant. The 2007 Plan was terminated with respect to the issuance
of new options or awards upon the adoption of the 2010 Stock Option/Stock Issuance Plan (the 2010
Plan); no further options or awards may be granted under the 2007 Plan.
During 2010, the Company adopted the 2010 Plan, under which stock awards or options to acquire
shares of the Companys common stock may be granted to employees, nonemployee members of the
Companys board of directors, consultants or other independent advisors who provide services to the
Company. The 2010 Plan is administered by the Companys board of directors. The 2010 Plan permits
the issuance of up to 650,000 shares of the Companys common stock. Options granted under the 2010
Plan generally vest 25% per year over four years and expire 10 years from the date of grant.
The following table sets forth the share-based compensation expense(unaudited):
The Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Stock compensation expense cost of net revenues |
$ | 12,143 | $ | 25,310 | ||||
Stock compensation expense sales and marketing |
25,224 | 45,833 | ||||||
Stock compensation expense research and development |
23,155 | 45,831 | ||||||
Stock compensation expense general and administrative |
132,400 | 175,487 | ||||||
Total stock compensation expense |
$ | 192,922 | $ | 292,461 | ||||
A summary of common stock option activity under the 2007 Plan and the 2010 Plan for the three
months ended March 31, 2011 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, 2011 |
649,090 | $ | 5.72 | |||||||||||||
Options granted |
330,000 | 5.00 | ||||||||||||||
Options exercised |
| | ||||||||||||||
Options forfeited |
(9,823 | ) | 5.10 | |||||||||||||
Options cancelled |
| | ||||||||||||||
Total options outstanding March 31, 2011 |
969,267 | $ | 5.48 | 8.62 | $ | | ||||||||||
Options exercisable March 31, 2011 |
329,869 | $ | 6.37 | 6.86 | $ | | ||||||||||
Options vested and expected to vest March 31, 2011 |
621,664 | $ | 5.02 | 9.53 | $ | | ||||||||||
Options available for grant under the 2010 Plan at March 31, 2011 |
42,050 | |||||||||||||||
The weighted average fair value per share of options granted during the three months ended March
31, 2011 was $3.90.
The following table summarizes information about stock options outstanding and exercisable at
March 31, 2011 (unaudited):
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted- | ||||||||||||||||||||
Average | Weighted- | |||||||||||||||||||
Remaining | Weighted | Average | ||||||||||||||||||
Exercise | Number of | Contractual | Average of | Number of | Exercise | |||||||||||||||
Prices | Shares | Life | Exercise Price | Shares | Price | |||||||||||||||
$5.00 |
675,767 | 9.43 | $ | 5.00 | 47,338 | $ | 5.00 | |||||||||||||
$6.00 |
193,500 | 6.78 | $ | 6.00 | 182,531 | $ | 6.00 | |||||||||||||
$7.70 |
100,000 | 6.70 | $ | 7.70 | 100,000 | $ | 7.70 | |||||||||||||
969,267 | 8.62 | $ | 5.48 | 329,869 | $ | 6.37 | ||||||||||||||
Summary of Assumptions and Activity
The fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option pricing model for service and performance based awards, and a binomial
model for market based awards. The Company has only granted service based awards. In estimating
fair value, expected volatilities used by the Company were based on the historical volatility of
the underlying common stock of its peer group, and other factors such as implied volatility of
traded options of a comparable peer group. The expected life assumptions for all periods were
derived from a review of annual historical employee exercise behavior of option grants with similar
vesting periods of a comparable peer group. The risk-free rate used to calculate the fair value is
based on the expected term of the option. In all cases, the risk-free rate is based on the U.S.
Treasury yield bond curve in effect at the time of grant.
The assumptions used to calculate the fair value of options granted are evaluated and revised,
as necessary, to reflect market conditions and experience. The following table presents details of
the assumptions used to calculate the weighted-average grant date fair value of common stock
options granted by the Company, along with certain other pertinent information:
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March 31, | ||||
2011 | ||||
(unaudited) | ||||
Expected term ( in years) |
6.02 | |||
Expected volatility |
205 | % | ||
Risk-free interest rate |
2.6 | % | ||
Expected dividends |
| |||
Forefeiture rate |
2.8 | % |
Upon the exercise of common stock options, the Company issues new shares from its authorized
shares.
At March 31, 2011, the amount of unearned stock-based compensation currently estimated to be
expensed from fiscal 2011 through 2015 related to unvested common stock options is approximately
$2.4 million. The weighted-average period over which the unearned stock-based compensation is
expected to be recognized is approximately 3.3 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 5 and 7). Such warrants are issued outside of the Plan. A summary of the
warrant activity for the three months ended March 31, 2011 is presented below (unaudited):
Weighted- | Weighted-Average | |||||||||||||||
Exercise | Contractual | Aggregate Intrinsic | ||||||||||||||
Number of Shares | Price | Life (in years) | Value | |||||||||||||
Warrants outstanding January 1, 2011 |
1,069,615 | $ | 7.30 | |||||||||||||
Warrants granted |
| | ||||||||||||||
Warrants exercised |
| | ||||||||||||||
Warrants cancelled |
| | ||||||||||||||
Warrants outstanding and exercisable- March 31, 2011 |
1,069,615 | $ | 7.30 | 3.87 | $ | | ||||||||||
Amendment to Certain Class G Warrants
During May 2011, the Company entered into agreements with certain Class G warrant
holders to waive the price-based, anti-dilution protection provisions and fix the
exercise price per share of the Common Stock under the Warrant to $5.00.
NOTE 9 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 following table presents the changes in the product warranty accrual for the three months
ended March 31 (unaudited):
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2011 | 2010 | |||||||
Beginning balance, January 1, |
$ | 165,641 | $ | 235,898 | ||||
Charged to cost of revenues |
30,794 | 13,229 | ||||||
Usage |
(31,898 | ) | (33,978 | ) | ||||
Ending balance, March 31 |
$ | 164,537 | $ | 215,149 | ||||
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 (collectively the Defendants) for
breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly
executed between Plaintiff and the Company. 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
$470,599, attorneys fees, punitive damages, interest and costs. On October 27, 2009, Defendants
filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court
denied the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the
First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case
was settled in its entirety. The Company agreed to pay compensatory damages, attorneys fees and
costs totaling $493,468, through monthly payments of $50,000, with 6% interest accruing from the
date of the settlement. Periodic payments are expected to be made through May 2011. The first
payment of $50,000 was made on August 3, 2010 and subsequent principal payments totaling $200,000
were made by the Company through December 31, 2010. Company recorded the entire settlement amount
of $493,468 as a note payable, $470,599 as a deposit on fixed assets and the remaining $22,869 as a
charge to legal expense. At December 31, 2010, the remaining
settlement amount of $243,468 was
recorded as a note payable in the accompanying condensed consolidated balance sheet. The Company
has recorded accrued interest of $8,040 and $4,126 at March 31, 2011 and December 31, 2010,
respectively.
Commencing January 1, 2011, the Company has failed to make the scheduled payments required by
the July 29, 2010 settlement agreement and stipulation for entry
of judgment. As a result, the Plaintiff
filed a motion for entry of judgment pursuant to the terms of the July 29, 2010 settlement
agreement and stipulation for entry of judgment, which if granted, would cause the acceleration of
all amounts owed under the settlement agreement. While the motion has been pending, the Company has
made principal payments totaling $150,000. This motion is now scheduled to be heard on June 16,
2011.
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.
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 condensed consolidated balance sheets.
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NOTE 10 RELATED PARTY TRANSACTIONS
The following reflects the activity of the related party transactions for the respective
periods.
Controlling Ownership
Mr. Nam, the Companys CEO and Chairman of the Board of Directors, together with his children,
owns 57.2% of the outstanding shares of the Companys common stock.
Accounts Receivable
As of March 31, 2011 and December 31, 2010, the Company has receivables of $37,571 and
$35,722, respectively, due from Graphion Technology USA LLC (Graphion) related to consulting
services rendered and/or fixed assets sold to Graphion. During 2010, the Company sold fixed assets
to Graphion for a purchase price of $6,820, and there was no gain or loss recorded on the sale of
the fixed assets. Graphion is wholly owned by Mr. Nam, the Companys Chief Executive Officer . The
amounts due are non-interest bearing and are due upon demand.
As of March 31, 2011 and December 31, 2010, there were outstanding related party receivables
of $1,849 and $0, respectively, which relate to receivables due from Mr. Nam, which represents the
rental obligation of Mr. Nam for his month-to-month lease of excess warehouse space at the
Companys facility in Costa Mesa, CA.
Related Party Payables
The Company purchases batteries and research and development parts and services from Graphion.
During the three months ended March 31, 2011 and 2010, the Company purchased no parts and services
and had an outstanding accounts payable balance of $51,973 at March 31, 2011 and December 31, 2010.
Accrued Salary
As of March 31, 2011 and December 31, 2010, the Company owed Mr. Nam $50,431 and $40,000,
respectively, of salary pursuant to his employment agreement which is included in accrued expenses.
Mr. Nam has elected to defer payment of this amount until the next round of funding is received by
the Company.
Notes Payable see Note 5
NOTE 11 SUBSEQUENT EVENTS
Ki Nam Advances
In April 2011, Mr. Nam advanced $300,000 to the Company in exchange for debt securities to be
negotiated with the Company. The Company proposed to Mr. Nam the 2011 Note would accrue interest at
12% per annum and would mature in one year. Interest payments would be due monthly but would not
commence until June 1, 2011. The Company also proposed granting 30,000 five-year warrants to
purchase common stock at $3.50 per share. Mr. Nam is considering these proposals currently.
In May 2011, Mr. Nam advanced the Company $100,000 for general operating purposes.
Fourth Amendment to Immersive Note
On April 30, 2011, Immersive agreed to extend the note to May 20, 2011. All other terms
of the note remain the same.
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Public Offering of the Companys Equity Securities
On May 16, 2011, the Company announced that it had raised $11.1 million in a public offering
of its securities. The offering closed on May 19, 2011, and the Company received net proceeds of
$9,678,903 after deducting commissions and offering expenses.
The transaction resulted in the issuance of 3,171,429 units of the Companys securities. Each
unit consists of one share of the Companys common stock, one Class H warrant and one Class I
warrant. Each warrant grants the holder the right to purchase one share of the Companys common
stock. In connection with the offering, the Company effected a one-for-10 reverse stock split of
its common stock, which allowed it to meet the minimum share price requirement of the NYSE Amex,
LLC, (the AMEX). The Company has offered contractual rights to investors that either
purchase $500,000 or more of our units in the offering or are converting at least $500,000 of
existing securities into substantially identical units. We entered into agreements with such
investors that grant them approval rights to certain change of control transactions. Such
agreements also granted them approval rights, subject to certain exceptions, to financings at a
per share purchase price below the exercise price of their warrants.
Debt and Preferred Stock Conversion into Common Stock and Common Stock Equivalent
Securities.
In
connection with the AMEX listing and the May public offering, Vision Opportunity Master Fund,
Ltd. and Vision Capital Advantage Fund (collectively Vision); and Ki Nam, our Chief Executive
Officer, will convert their $3.5 million and $2.1 million debentures plus accrued interest,
respectively, into 1,138,885 and 632,243 unregistered units. As with the publicly offered units,
each unregistered unit consisted of one share of common stock, one Class H warrant and one Class
I warrant. Because the units, shares, warrants and warrant shares underlying these units are not
registered, we intend to file a registration statement registering such securities within seven
days of the closing of the May public offering.
In connection with the AMEX listing, the Companys preferred stockholders have agreed to
convert all outstanding Series A Convertible Preferred Stock into 2,872,574 shares of the Companys
common stock. Included in the conversion of the Series A Convertible Preferred Stock are shares
held by Vision and Mr. Nam of 9,370,698 and 976,865, respectively, which are convertible into
2,340,176 and 243,956 shares of common stock, respectively. These shares of common stock will also
be registered.
1-for-10 Reverse Stock Split
The Company effected a one-for-10 reverse stock split of its common stock after the
effectiveness of the registration statement and prior to the closing of the May public offering.
All information included in this quarterly filing has been adjusted to reflect the effect of the
reverse stock split.
Lock Up Agreement
Upon closing of the offering, Vision and Ki Nam have entered into lock-up agreements pursuant
to which such parties have agreed not to sell any shares of our common stock for 12 months, subject
to exceptions.
Immersive Note Repayment
On
May 20, 2011, the Company paid Immersive the balance of
$1,121,861, including all accrued
interest due under the note.
Amendment to Certain Class G Warrants
During May 2011, the Company entered into agreements with certain Class G warrant
holders to waive the price-based, anti-dilution protection provisions and fix the
exercise price per share of the Common Stock under the Warrant to $5.00.
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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, 2010.
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. We continue to design and introduce products based on modularity of the sub
systems we have created. 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. In June 2010, we
introduced the GT3, a plug-in hybrid consumer vehicle.
Going Concern
The Companys condensed consolidated financial statements have been 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 incurred significant operating losses and has used substantial amounts of
working capital in its operations since its inception (March 16, 2006). Further, at March 31, 2011,
the Company had an accumulated deficit of $(46,625,595), a working capital deficit of $(16,545,239)
and cash and cash equivalents (including restricted cash) of $154,070. Additionally, the Company
used cash in operations of $(803,136) for the three months ended March 31, 2011. These factors
raise substantial doubt about the Companys ability to continue as a going concern for a reasonable
period of time.
On May 19, 2011, the Company completed a public offering of its securities generating $11.1
million in gross proceeds (see below). In addition to this financing, management has been
implementing cost reduction strategies for material, production and service costs and believes that
its cash from operations, together with the net proceeds of the offering, will be sufficient to
allow the Company to continue as a going concern through at least December 31, 2011.
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Public Offering of the Companys Equity Securities
On May 16, 2011, the Company announced that it had raised $11.1 million in a public offering
of its securities. The offering closed on May 19, 2011, and the Company received net proceeds of
$9,678,903 after deducting commissions and offering expenses.
The transaction resulted in the issuance of 3,171,429 units of the Companys securities. Each
unit consists of one share of the Companys common stock, one Class H warrant and one Class I
warrant. Each warrant grants the holder the right to purchase one share of the Companys common
stock. In connection with the offering, the Company effected a one-for-10 reverse stock split of
its common stock, which allowed it to meet the minimum share price requirement of the NYSE Amex,
LLC, (the AMEX). The Company has offered contractual rights to investors that either
purchase $500,000 or more of our units in the offering or are converting at least $500,000 of
existing securities into substantially identical units. We entered into agreements with such
investors that grant them approval rights to certain change of control transactions. Such
agreements also granted them approval rights, subject to certain exceptions, to financings at a
per share purchase price below the exercise price of their warrants.
Debt and Preferred Stock Conversion into Common Stock and Common Stock Equivalent
Securities.
In connection with the AMEX listing and the public offering, Vision Opportunity Master Fund,
Ltd. and Vision Capital Advantage Fund (collectively Vision); and Ki Nam, our Chief Executive
Officer, will convert their $3.5 million and $2.1 million debentures plus accrued interest,
respectively, into 1,138,885 and 632,243 unregistered units. As with the publicly offered units,
each unregistered unit consisted of one share of common stock, one Class H warrant and one Class
I warrant. Because the units, shares, warrants and warrant shares underlying these units are not
registered, we intend to file a registration statement registering such securities within seven
days of the closing of the May public offering.
In connection with the AMEX listing, the Companys preferred stockholders have agreed to
convert all outstanding Series A Convertible Preferred Stock into 2,872,574 shares of the Companys
common stock. Included in the conversion of the Series A Convertible Preferred Stock are shares
held by Vision and Mr. Nam of 9,370,698 and 976,865, respectively, which are convertible into
2,340,176 and 243,956 shares of common stock, respectively. These shares of common stock will also
be registered.
1-for-10 Reverse Stock Split
The Company effected a one-for-10 reverse stock split of its common stock after the
effectiveness of the registration statement and prior to the closing of the May public offering.
All information included in this quarterly filing has been adjusted to reflect the effect of the
reverse stock split.
Lock Up Agreement
Upon closing of the offering, Vision and Ki Nam have entered into lock-up agreements pursuant
to which such parties have agreed not to sell any shares of our common stock for 12 months, subject
to exceptions.
Critical Accounting Policies and Estimates
Our managements discussion and analysis of our financial condition and results of operations
are based on our unaudited condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America (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.
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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, 2010. The following is an
update to the critical accounting policies and estimates.
Concentrations of Credit Risk
Cash and Cash Equivalents
The Company maintains its non-interest bearing transactional cash accounts at financial
institutions for which the Federal Deposit Insurance Corporation (FDIC) provides unlimited
insurance coverage through December 31, 2012. For interest bearing cash accounts, from time to
time, balances exceed the amount insured by the FDIC. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk related to these
deposits. At March 31, 2011, the Company did not have cash deposits in excess of the FDIC limit.
The Company considers cash equivalents to be all short-term investments that have an initial
maturity of 90 days or less and are not restricted. The Company invests its cash in short-term
money market accounts.
Restricted Cash
Under a credit card processing agreement with a financial institution, the Company is required
to maintain a security deposit as collateral. The amount of the deposit is at the discretion of the
financial institution and as of March 31, 2011 was $10,000.
Accounts Receivable
The Company performs periodic evaluations of its customers and maintains allowances for
potential credit losses as deemed necessary. The Company generally does not require collateral to
secure accounts receivable. The Company estimates credit losses based on managements evaluation of
historical bad debts, customer concentrations, customer credit-worthiness, current economic trends
and changes in customer payment patterns when evaluating the adequacy of its allowance for doubtful
accounts. At March 31, 2011 and December 31, 2010, the Company had an allowance for doubtful
accounts of $47,626 and $50,000, respectively. Although the Company expects to collect amounts due,
actual collections may differ from the estimated amounts.
As of March 31, 2011 and December 31, 2010, one and two customers accounted for approximately
39% and 51% of total accounts receivable, respectively. Two customers accounted for approximately
29% and one customer accounted for approximately 12% of net revenues for the three months ended
March 31, 2011 and 2010, respectively.
Accounts Payable
As of March 31, 2011 and December 31, 2010, three and one vendors accounted for approximately
31% and 10% of total accounts payable, respectively. Two vendors accounted for approximately 51%
and 22% of purchases for the three months ended March 31, 2011 and 2010, respectively.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash and cash equivalents, restricted cash,
accounts receivable,
related party receivables, accounts payable, accrued expenses, related party payables, note
payable, related party notes payable and derivative liabilities. The carrying value for all such
instruments except related party notes payable and derivative liabilities 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 because instruments similar to the
notes payable could not be found. The Companys derivative liabilities are recorded at fair value.
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
29
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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 financial 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.
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 to 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 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, 2011.
The revenue from domestic sales and, international sales are shown below:
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For the Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Net revenues: |
||||||||
T3 Series domestic |
$ | 723,383 | $ | 1,066,579 | ||||
T3 Series international |
273,179 | 61,697 | ||||||
CT Series domestic |
| 21,150 | ||||||
Total net revenues |
$ | 996,562 | $ | 1,149,426 | ||||
Derivative Liabilities
The Company recognizes the accounting standard that provides guidance for determining whether
an equity-linked financial instrument, or embedded feature, is indexed to an entitys own stock.
The standard applies to any freestanding financial instruments or embedded features that have the
characteristics of a derivative, and to any freestanding financial instruments that are potentially
settled in an entitys own common stock.
During the three months ended March 31, 2011 and 2010, the Company recorded additional debt
discount and derivative liabilities of $0 and $15,274, respectively, related to related party notes
payable.
During 2010, the Company issued 231,000 warrants related to the issuance of preferred stock.
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 is 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 is 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. For the three months ended March 31, 2011 and
2010, the amortization of the discounts related to the Preferred Stock anti-dilution provision and
warrants issued was $864,800 and $1,672,882, respectively, 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 400,000 shares of common stock. 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.
As of March 31, 2011 and December 31, 2010, the unamortized discount related to the conversion
feature of the Preferred Stock was $3,398,268 and $4,263,068, respectively.
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 5.8 million and 4.9 million shares of common stock were outstanding at
March 31, 2011 and 2010, respectively, but were excluded from the computation of diluted earnings
per share due to the net losses for the periods.
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Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Net loss |
$ | (640,585 | ) | $ | (1,681,739 | ) | ||
Deemed dividend to preferred stockholders |
(864,800 | ) | (1,672,882 | ) | ||||
Net loss attributable to common stockholders |
$ | (1,505,385 | ) | $ | (3,354,621 | ) | ||
Weighted average number of common shares outstanding: |
||||||||
Basic and diluted |
5,065,847 | 4,505,096 | ||||||
Net loss per share: |
||||||||
Basic and diluted |
$ | (0.30 | ) | $ | (0.74 | ) | ||
Commitments and Contingencies
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 (collectively the Defendants) for
breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly
executed between Plaintiff and the Company. 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
$470,599, attorneys fees, punitive damages, interest and costs. On October 27, 2009, Defendants
filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court
denied the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the
First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case
was settled in its entirety. The Company agreed to pay compensatory damages, attorneys fees and
costs totaling $493,468, through monthly payments of $50,000, with 6% interest accruing from the
date of the settlement. Periodic payments are expected to be made through May 2011. The first
payment of $50,000 was made on August 3, 2010 and subsequent principal payments totaling $200,000
were made by the Company through December 31, 2010. Company recorded the entire settlement amount
of $493,468 as a note payable, $470,599 as a deposit on fixed assets and the remaining $22,869 as a
charge to legal expense. At December 31, 2010, the remaining settlement amount of $243,468 is
recorded as a note payable in the accompanying condensed consolidated balance sheet. The Company
has recorded accrued interest of $8,040 and $4,126 at March 31, 2011 and December 31, 2010,
respectively.
Commencing January 1, 2011, the Company has failed to make the scheduled payments required by
the July 29, 2010 settlement agreement and stipulation for entry of judgment. The Plaintiff then
filed a motion for entry of judgment pursuant to the terms of the July 29, 2010 settlement
agreement and stipulation for entry of judgment, which if granted, would cause the acceleration of
all amounts owed under the settlement agreement. While the motion has been pending, the Company has
made principal payments totaling $150,000. This motion is now scheduled to be heard on June 16,
2011.
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
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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.
Recent Events
Ki Nam Advances
In April 2011, Mr. Nam advanced $300,000 to the Company in exchange for debt securities to be
negotiated with the Company . The Company proposed to Mr. Nam the 2011 Note would accrue interest
at 12% per annum and would mature in one year. Interest payments would be due monthly but would not
commence until June 1, 2011. The Company also proposed granting 30,000 five-year warrants to
purchase common stock at $3.50 per share. Mr. Nam is considering these proposals currently.
In May 2011, Mr. Nam advanced the Company $100,000 for general operating purposes.
Fourth Amendment to Immersive Note; Repayment
On April 30, 2011, Immersive agreed to extend the note to May 20, 2011. All other terms
of the note remained the same. On May 20, 2011, the Company paid Immersive the balance of
$1,121,861, including all accrued interest due under the note.
Public Offering of the Companys Equity Securities
On May 16, 2011, the Company announced that it had raised $11.1 million in a public offering
of its securities. The offering closed on May 19, 2011, and the Company received net proceeds of
$9,678,903 after deducting commissions and offering expenses.
The transaction resulted in the issuance of 3,171,429 units of the Companys securities.
Each unit consists of one share of the Companys common stock, one Class H warrant and one Class I
warrant. Each warrant grants the holder the right to purchase one share of the Companys common
stock. In connection with the offering, the Company effected a one-for-10 reverse stock split of
its common stock, which allowed it to meet the minimum share price requirement of the NYSE Amex,
LLC, (the AMEX). The Company has offered contractual rights to investors that either
purchase $500,000 or more of our units in the offering or are converting at least $500,000 of
existing securities into substantially identical units. We entered into agreements with such
investors that grant them approval rights to certain change of control transactions. Such
agreements also granted them approval rights, subject to certain exceptions, to financings at a
per share purchase price below the exercise price of their warrants.
Debt and Preferred Stock Conversion into Common Stock and Common Stock Equivalent
Securities.
In connection with the AMEX listing and the public offering, Vision Opportunity Master Fund,
Ltd. and Vision Capital Advantage Fund (collectively Vision); and Ki Nam, our Chief Executive
Officer, will convert their $3.5 million and $2.1 million debentures plus accrued interest,
respectively, into 1,138,885 and 632,243 unregistered units. As with the publicly offered units,
each unregistered unit consisted of one share of common stock, one Class H warrant and one Class
I warrant. Because the units, shares, warrants and warrant shares underlying these units are not
registered, we intend to file a registration statement registering such securities within seven
days of the closing of the May public offering.
In connection with the AMEX listing, the Companys preferred stockholders have agreed to
convert all outstanding Series A Convertible Preferred Stock into 2,872,574 shares of the Companys
common stock. Included in the conversion of the Series A Convertible Preferred Stock are shares
held by Vision and Mr. Nam of 9,370,698 and 976,865, respectively, which are convertible into
2,340,176 and 243,956 shares of common stock, respectively. These shares of common stock will also
be registered.
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1-for-10 Reverse Stock Split
The Company effected a one-for-10 reverse stock split of its common stock after the
effectiveness of the registration statement and prior to the closing of the May Public Offering.
All information included in this quarterly filing has been adjusted to reflect the effect of the
reverse stock split.
Lock Up Agreement
Upon closing of the offering, Vision and Ki Nam have entered into lock-up agreements pursuant
to which such parties have agreed not to sell any shares of our common stock for 12 months, subject
to exceptions.
Amendment to Certain Class G Warrants
During May 2011, the Company entered into agreements with certain Class G warrant
holders to waive the price-based, anti-dilution protection provisions and fix the
exercise price per share of the Common Stock under the Warrant to $5.00.
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Results of Operations
The following table sets forth the results of our operations for the three months ended March
31, 2011 and 2010 (unaudited):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net revenues |
$ | 996,562 | $ | 1,149,426 | ||||
Cost of net revenues |
956,932 | 1,127,449 | ||||||
Gross profit |
39,630 | 21,977 | ||||||
Operating Expenses: |
||||||||
Sales and marketing |
311,750 | 427,654 | ||||||
Research and development |
233,912 | 320,506 | ||||||
General and administrative |
821,545 | 1,029,413 | ||||||
Total operating expenses |
1,367,207 | 1,777,573 | ||||||
Loss from operations |
(1,327,577 | ) | (1,755,596 | ) | ||||
Other income (expense), net: |
||||||||
Interest income |
43 | 903 | ||||||
Other income, net |
991,694 | 755,555 | ||||||
Interest expense |
(303,945 | ) | (681,801 | ) | ||||
Total other income (expense), net |
687,792 | 74,657 | ||||||
Loss before provision for income tax |
(639,785 | ) | (1,680,939 | ) | ||||
Provision for income tax |
800 | 800 | ||||||
Net loss |
(640,585 | ) | (1,681,739 | ) | ||||
Deemed dividend to preferred stockholders |
(864,800 | ) | (1,672,882 | ) | ||||
Net loss attributable to common stockholders |
$ | (1,505,385 | ) | $ | (3,354,621 | ) | ||
Other comprehensive income (loss): |
||||||||
Foreign currency translation income |
| 205 | ||||||
Comprehensive loss |
$ | (640,585 | ) | $ | (1,681,534 | ) | ||
Net loss per share: Basic and diluted |
$ | (0.30 | ) | $ | (0.74 | ) | ||
Weighted average number of common shares outstanding: |
||||||||
Basic and diluted |
5,065,847 | 4,505,096 | ||||||
Net revenues. Net revenues are primarily from sales of the T3 Series, T3i Series, power modules,
chargers, related accessories and service. Net revenues decreased ($152,864), or (13.3%), to
$996,562 for the three months ended March 31, 2011 compared to the same period of the prior year.
The decrease was primarily due to certain of our customers deferring purchasing decisions, thereby
lengthening our sales cycles, as well as vendor supply issues resulting in orders placed by
customers not being shipped during the quarter coupled with our short supply of cash to adequately
purchase parts in a timely and cost-effective manner to meet our orders. The delays in our parts
due to our increased vendor lead times along with our inadequate cash position, has resulted in an
increased backlog. To date, we have not received any cancelled orders. The decreases were offset
in part by expansion into new markets, increase in orders placed due to the slight economic
recovery, achieving a higher average selling price per unit and
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an increase in service and parts
revenue. We anticipate that the net proceeds from our offering will reduce our delays
and also allow us to place orders with our vendors in accordance with their current lead times.
This should return our lead times back to our standard of approximately 4-6 weeks. Our backlog at
March 31, 2011 was approximately $2.9 million.
Cost of net revenues. Cost of net revenues consisted of materials, labor to produce vehicles and
accessories, warranty and service costs and applicable overhead allocations. Cost of net revenues
decreased ($170,517), or (15.1%), to $956,932 for the three months ended March 31, 2011 compared to
the same period of the prior year. This decrease in cost of net revenues is primarily attributable
to managements cost reduction strategy. The decrease was offset in part by increased shipping
costs due to our cash position and the inability to purchase product at the appropriate lead times
to prevent overnight or air freight charges, thereby increasing our costs.
Gross profit. Management has continued to source lower product costs, increase production
efficiencies and experienced lower warranty costs, offset in part by cash constraints resulting in
increased shipping costs, and vendor supply issues, resulting in gross profit of $39,630 for the
three months ended March 31, 2011, compared to a gross profit of $21,977 for the same period of the
prior year and. Management has and will continue to evaluate the processes and materials to reduce
the costs of net revenues over the next periods. Gross profit margin was 4.0% and 1.9% for the
three months ended March 31, 2011 and 2010, respectively.
Sales and marketing. Sales and marketing decreased by ($115,904), or (27.1%), to $311,750 for
the three months ended March 31, 2011, compared to the same period of the prior year. The decrease
in sales and marketing expense was attributable to a reduction in salaries and commissions due to
restructuring of commission plans and decreases in trade show and travel expenses.
Research and development. Research and development costs include development expenses such as
salaries, consultant fees, cost of supplies and materials for samples and prototypes, as well as
outside services costs. Research and development expense decreased by ($86,594), or (27.0%), to
$233,912 for the three months ended March 31, 2011 compared to the same period of the prior year.
The decrease was largely in part due to a reduction in salaries and employee costs as well as a
reduction in material costs due to the completion of the electric/hybrid vehicle prototype during
2011.
General and administrative. General and administrative expenses decreased by ($207,868), or
(20.2%), to $821,545, for the three months ended March 31, 2011 compared to the same period of the
prior year. The decrease was due to a decrease in stock compensation expenses and a decrease in
compliance expenses.
Other income (expense), net. Other income, net increased by $613,135, or 821.3%, to $687,792
for the three months ended March 31, 2011 compared to the prior year. The increase was primarily
due to the change in the fair value of the derivative liabilities and a decrease in amortization of
debt discounts when compared to the same period of the prior year.
Deemed dividend. Deemed dividend decreased by ($808,082), or (48.3%), to $864,800 for the
three months ended March 31, 2011 compared to the same period of the prior year. The deemed
dividend is the result of the amortization of the discount on the Series A convertible preferred
stock. The decrease was primarily attributable to the conversion of 2,000,000 preferred shares
into 400,000 shares of common stock resulting in additional deemed dividend of $1,099,742 during
the three months ended March 31, 2010.
Net loss attributable to common stockholders. Net loss attributable to common stockholders for
the three months ended March 31, 2011, was ($1,505,385), or ($0.30) per basic and diluted share
compared to a loss of ($3,354,621), or ($0.74) per basic and diluted share, for the same period of
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund our 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 have historically funded our operations through
debt and equity financings, raising $1,000,000 and $1,155,000 for the three months ended March 31,
2011 and 2010, respectively. We will continue to
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raise equity and/or secure additional debt to meet
our working capital requirements. For the year ended December
31, 2010, 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 $(45.1) million and $(15.1) million, respectively, as of December 31, 2010, which
raises substantial doubt about our ability to continue as a going concern.
Management believes that cash from operations, together with the net proceeds of the recent
public offering of approximately $9.6 million, should be sufficient to allow the Company to
continue as a going concern through at least December 31, 2011; however, the Company cannot assure
you of this and may require additional debt or equity financing in the future to maintain
operations. The Company also anticipates that it will pursue raising additional debt or equity
financing to fund its new product development and expansion plans. We cannot assure you that such
financing will be available on a timely basis, or acceptable terms or at all.
During 2011, the Company has received proceeds from related-party loans of approximately $1.0
million, repaid the outstanding balance of the $1.0 million related to the note to Immersive Media
Corp. (Immersive) and converted the outstanding balance of the $3.5 million related to the note
with Vision into equity securities. 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 and is able to generate sales to realize
the benefits of the strategy and sufficiently increases cash flow from operations, we will require
additional capital to meet our working capital requirements, debt service, research and
development, capital requirements and compliance 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, 2011, cash and
cash equivalents were $154,070 or 4.2% of total assets compared to $133,861, or 3.7% of total
assets as of December 31, 2010.
Cash Flows
For the three months ended March 31, 2011 and 2010
Net cash used in operating activities for the three months ended March 31, 2011 and 2010 were
$803,136 and $2,521,337, respectively. Net cash flows used were primarily due to a net loss of
$640,585, net non-cash reconciling items of $575,393 and an increase in prepaid expenses of
$148,677. Net cash flows used were offset in part by decreases in accounts receivable and
inventories of $26,659 and $168,389, respectively, and increases in accounts payable and accrued
expenses of $367,005.
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 receivable, 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.
Net cash used in investing activities of $1,849 for the three months ended March 31, 2011
related to loans to related parties of $1,849.
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 financing activities was $825,194 for the three months ended March 31,
2011. For the three months ended March 31, 2011, cash flows provided by financing activities
related to proceeds from the related party notes payable of $1,000,000, offset by repayments of the
note payable due to PPI for $150,000 and payment of deferred offering costs of $24,806.
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For the three months ended March 31, 2010, net 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.
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.
The following table is the warrants issued and outstanding as of March 31, 2011:
Warrants Exercisable | Exercise Price | Expiration | ||||||
12,000 |
$ | 15.40 | 3/31/2013 | |||||
27,478 |
$ | 16.50 | 12/29/2014 | |||||
195,373 |
$ | 7.00 | * | 12/29/2014 | ||||
400,000 |
$ | 7.00 | * | 12/30/2014 | ||||
160,000 |
$ | 7.00 | * | 2/2/2015 | ||||
71,000 |
$ | 7.00 | * | 3/22/2015 | ||||
94,764 |
$ | 7.00 | * | 3/31/2015 | ||||
104,000 |
$ | 7.00 | 4/30/2015 | |||||
5,000 |
$ | 7.00 | 8/25/2015 |
* Amendment to Certain Class G Warrants
During May 2011, the Company entered into agreements with certain Class G warrant
holders to waive the price-based, anti-dilution protection provisions and fix the
exercise price per share of the Common Stock under the Warrant to $5.00.
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.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Not Applicable
Item 4. | Controls and Procedures. |
Disclosure 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.
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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, 2011, 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, 2011, 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, 2011, 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.
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 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 GAAP commensurate with our financial reporting requirements and the complexity of
our operations and transactions, specifically related to the accounting and reporting of debt
and equity transactions, including derivative instruments.
4. 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.
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Management has reviewed the financial statements and underlying information included herein in
detail and believes the procedures performed are adequate to fairly present our financial position,
results of operations and cash flows for the periods presented in all material respects.
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
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 our internal finance and accounting organizational structure, which includes hiring additional resources. |
| We are in the process of further enhancing the supervisory procedures to 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 material weaknesses 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 2011.
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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 (collectively the Defendants) for
breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly
executed between Plaintiff and the Company. 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
$470,599, attorneys fees, punitive damages, interest and costs. On October 27, 2009, Defendants
filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court
denied the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the
First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case
was settled in its entirety. The Company agreed to pay compensatory damages, attorneys fees and
costs totaling $493,468, through monthly payments of $50,000, with 6% interest accruing from the
date of the settlement. Periodic payments are expected to be made through May 2011. The first
payment of $50,000 was made on August 3, 2010 and subsequent principal payments totaling $200,000
were made by the Company through December 31, 2010. Company recorded the entire settlement amount
of $493,468 as a note payable, $470,599 as a deposit on fixed assets and the remaining $22,869 as a
charge to legal expense. At December 31, 2010, the remaining
settlement amount of $243,468 was
recorded as a note payable in the accompanying condensed consolidated balance sheet. The Company has recorded
accrued interest of $8,040 and $4,126 at March 31, 2011 and December 31, 2010, respectively.
Commencing January 1, 2011, the Company has failed to make the scheduled payments required by
the July 29, 2010 settlement agreement and stipulation for entry
of judgment. As a result, the Plaintiff
filed a motion for entry of judgment pursuant to the terms of the July 29, 2010 settlement
agreement and stipulation for entry of judgment, which if granted, would cause the acceleration of
all amounts owed under the settlement agreement. While the motion has been pending, the Company has
made principal payments totaling $150,000. This motion is now scheduled to be heard on June 16,
2011.
Other than the description above, there have been no material developments during the three
months ended March 31, 2011 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
There were no material changes from the risk factors previously disclosed in our 2011 Annual
Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the
SEC, on March 31, 2010 except for the following risk factors:
Risks Related to Our Company and Our Industry
We have a history of losses and we expect to continue to have additional net losses in the near
future, which
could cause the value of our securities to decline and may even cause our business to fail.
We have generated net losses since our inception (March 16, 2006). Our net losses for the three
months ended March 31, 2011 was approximately $(641,000). Our net losses for the years ended
December 31, 2010, 2009, 2008 and 2007 were approximately $(8.3 million), $(6.7 million), $(12.3
million) and $(8.6 million), respectively. A large portion of our expenses are fixed, and
accordingly, we will need to significantly increase our sales in order to achieve profitability. We
anticipate that we will continue to generate losses in the near future, and the rate at which we
will incur losses could continue or even increase in future periods from current levels
as a result of any of the following:
| We may be unable to increase sales sufficiently to recognize economies of scale; | ||
| We may be unable to successfully expand into other private security markets or achieve broad brand recognition for our products; | ||
| We may be unable to reduce our costs or experience unanticipated costs or expenses in connection with our current development, marketing and manufacturing plans; | ||
| We may encounter technological challenges in connection with the development, introduction or manufacturing of enhancements to our existing vehicles or in the addition of new products; and | ||
| We may be unable to obtain sufficient components or materials used in our products due to capital constraints, which could adversely effect our sales, our reputation and credibility. |
To date, we have financed our operations primarily through equity and debt financing. Because we
anticipate additional net losses in the near future, we believe we will likely require additional
financings subsequent to the May public offering. Our ability to arrange future financing from third parties
will depend upon our perceived performance and market conditions as well as the ability to obtain
the consent from at least our 67% in interest of certain major investors that acquired our Class H
and Class I warrants in connection with our recent public offering. Our inability to raise additional
working capital on a timely basis, on acceptable terms or at all would negatively impact our
business and operations, which could cause the price of our common stock to decline. It could also
lead to the reduction or suspension of our operations and ultimately force us to go out of
business.
If we are unable to continue as a going concern, our securities will have little or no value.
The report of our independent registered public accounting firm that accompanies our audited
consolidated
financial statements for the years ended December 31, 2010 and 2009 contains a going concern
qualification in which such firm expressed substantial doubt about our ability to continue as a
going concern. In addition to our
history of losses, our accumulated deficit as of March 31, 2011, December 31, 2010 and 2009 was
approximately $(46.6 million), $(45.1 million) and $ (33.1 million), respectively. At March 31,
2011 and December 31, 2010, we had a working capital deficit of $(16.5 million) and $(15.1
million), respectively and cash and cash equivalents (including restricted cash) of $144,070 and
$123,861, respectively.
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While management plans to continue to implement a cost reduction strategy and is seeking to
increase our cash flow from operations, we cannot assure you that we will be successful in this regard. Since
inception, we have used cash in excess of operating revenues. Until management achieves its cost
reduction strategy and is able to generate significantly higher sales to realize the benefits of
the strategy, and significantly increase our cash flow from operations, we may require additional
capital to meet our working capital requirements, achieve our expansion plans and fund our research
and development. We plan to continue to raise additional equity or debt financing to meet our
working capital requirements, including the use of $9.6 million in net proceeds generated from our
recently closed public offering. If we fail as a going concern, our shares of common stock will
hold little or no value.
Adverse conditions in the global economy and disruption in financial markets could impair our
revenues.
As widely reported, financial markets in the United States, Europe, the Middle East, Latin America
and Asia
have been experiencing extreme disruption in recent months, including, among other things, extreme
volatility in
security prices, severely diminished liquidity and credit availability, rating downgrades of
certain investments and
declining valuations of others. These conditions have already impaired our ability to access credit
markets and
finance operations. There can be no assurance that there will not be a further deterioration in
financial markets and
confidence in major economies. We have been, and may continue to be, impacted by these economic
developments,
both domestically and globally. We believe that the current tightening of credit in financial
markets has adversely
affected the ability of our customers and suppliers to obtain financing for significant purchases
and operations, and
could result in a decrease in orders for our products and services. Similarly, the downturn has
resulted in budgetary
constraints and delays in government funding, which we believe has also adversely affected the
ability of certain law
enforcement agencies and police departments to fund additional capital equipment purchases. These
economic
conditions may negatively impact us as some of our customers defer purchasing decisions, thereby
lengthening our
sales cycles. Our customers ability to pay for our products and services may also be impaired,
which may lead to an
increase in our allowance for doubtful accounts and write-offs of accounts receivable. Our revenues
for the three months in March 31, 2011 decreased approximately $153,000 from the comparable period
in 2010. Our revenues in fiscal year 2010 were relatively flat as compared to 2009. Net revenues
in 2009 decreased $2.9 million from 2008 due in part to many of the foregoing factors, which
factors may continue to affect our revenues and operating results in future periods.
We are dependent on a few single sourced third party manufacturers. Any interruption in our
relationships with
these parties may adversely affect our business.
Most components used in our products are purchased from outside sources. Certain components are
purchased
from single sourced suppliers. These single source suppliers provide components used on our
products and include
domestic suppliers such as American Made, Performance Composites, Imperial Electric and Santa Fe
Mold. These
suppliers provide the frame, fiberglass body, electric motor, and various small plastic parts,
respectively. The failure
of any such supplier to meet its commitment on schedule could have a material adverse effect on our
business,
operating results, financial condition or prospects. If a sole-source supplier were to go out of
business or otherwise
become unable to meet its supply commitments, the process of locating and qualifying alternate
sources could
require up to several months, during which time our production could be delayed. Such delays could
have a material
adverse effect on our business, operating results, financial condition or prospects. For instance,
our revenues for the
six months ended December 31, 2010 and three months ended March 31, 2011 were adversely affected by
vendor
supply issues, which we believe was due to reduced vendor staffing and their inability to respond
to our orders
coupled with our inadequate cash flow which resulted in certain vendors requiring terms to be cash
in advance.
Our officers and directors own a substantial portion of our outstanding common stock, which will
enable them
to influence many significant corporate actions and in certain circumstances may prevent a change
in control
that would otherwise be beneficial to our shareholders.
Our directors and executive officers controlled at least 60.2% of our outstanding shares of common
stock (after giving effect to the recent public offering and concurrent debt and preferred stock
conversions) that are entitled to vote on all corporate actions as of May 20, 2011. In particular,
our controlling stockholder, Chairman and Chief Executive Officer, Ki Nam, together with his
children, owns 28.6% of the outstanding shares of common stock (after giving effect to the recent
public offering and concurrent debt and preferred stock conversions) and the Vision Parties own
31.7% (after giving effect to the recent public offering and concurrent debt and preferred stock
conversions). The Vision Parties and Mr. Nam are among the $500,000 Investors being granted certain
contractual
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rights regarding dilutive financings and certain change of control transactions, and together with
their common stock holdings, could have a substantial impact on matters requiring the vote of the
shareholders, including the election of our directors and most of our corporate actions. This
control could delay, defer, or prevent others from initiating a potential merger, takeover, or
other change in our control, even if these actions would benefit our shareholders and us. This
control could adversely affect the voting and other rights of our other shareholders and could
depress the market price of our common stock.
Risks Relating Ownership of Our Securities
Substantial future sales of our common stock in the public market may depress our stock price.
As of May 20, 2011, 8,237,276 shares of common stock, 11,502,563 shares of preferred stock (which
will be converted into 2,872,574 shares of common stock within the next few days), warrants for the
purchase of 3,171,429, 3,171,429, 921,137, 109,000, 12,000 and 27,478 shares of common stock at an
exercise price of $3.00, $3.50, $5.00, $7.00, $15.40 and $16.50 per share, respectively, are outstanding.
In addition, we intend to file a registration statement on Form S-8 under the Securities Act of
1933, as amended,
to register approximately 1,011,317 shares of our common stock underlying options granted or to be
granted to our
officers, directors, employees and consultants. These shares, if issued in accordance with these
plans, will be eligible
for immediate sale in the public market, subject to volume limitations. As of April 30, 2011, there
were 966,350
options outstanding, of which 328,839 were vested.
We also have entered into a registration rights agreement with the Vision Entities and Ki Nam and
register all
shares of our common stock underlying the Vision Entities and Mr. Nams convertible debt and
warrants and certain other shareholders. We intend to register (i) approximately 1,138,885 shares
of common stock that will be issued to the Vision Entities and approximately 632,243 shares of
common stock which will be issued to Mr. Nam as part of their conversion of their respective debt
at the closing of the May public offering, (ii) approximately 3.5 million shares of common stock underlying
warrants issued to the Vision Entities and Mr. Nam, and (iii) up to 2.9 million shares of common stock
underlying Series A preferred stock.
If our stockholders sell substantial amounts of common stock in the public market, or the market
perceives that
such sales may occur, the market price of our common stock could fall. The sale of a large number
of shares could
impair our ability to raise needed capital by depressing the price at which we could sell our
common stock.
We may raise additional capital through a securities offering that could dilute your ownership
interest and
voting rights.
Our certificate of incorporation currently authorizes our board of directors to issue up to
150,000,000 shares of
common stock and 20,000,000 shares of preferred stock. After the conversion of all of our Series A
convertible
preferred stock our board of directors will be entitled to issue up to 20,000,000 additional shares
of preferred stock
with rights, preferences and privileges that are senior to our common stock. The power of the board
of directors to
issue additional securities is generally not subject to stockholder approval.
We require substantial working capital to fund our business. If we raise additional funds through
the issuance of
equity, equity-related or convertible debt securities, these securities may have rights,
preferences or privileges senior
to those of the holders of our common stock. The issuance of additional common stock or securities
convertible into
common stock by our board of directors will also have the effect of diluting the proportionate
equity interest and
voting power of holders of our common stock.
Furthermore, these financings may require the consent of a supermajority in interest of certain
major purchasers of our recent Class H and Class I warrants. If we are unable to obtain such consent, we
may be unable to obtain such financing and our ability to operate our business will be adversely
affected.
Our incorporation documents and Delaware law may inhibit a takeover that stockholders consider
favorable
and could also limit the market price of your stock, which may inhibit an attempt by our
stockholders to change
our direction or management.
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Our certificate of incorporation and bylaws contain provisions that could delay or prevent a change
in control of
our company. Some of these provisions:
| authorize our board of directors to determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the preferred stock and to fix the number of shares constituting any series and the designation of such series without further action by our stockholders; | ||
| prohibit stockholders holding less than 25% of the outstanding voting shares from calling special meetings; and | ||
| establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting. |
In addition, we are governed by the provisions of Section 203 of Delaware General Corporate Law.
These
provisions may prohibit large stockholders, in particular those owning 15% or more of our
outstanding voting stock,
from merging or combining with us, which may prevent or frustrate any attempt by our stockholders
to change our
management or the direction in which we are heading. These and other provisions in our amended and
restated
certificate of incorporation and bylaws and under Delaware law could reduce the price that
investors might be willing to pay for shares of our common stock in the future and result in the
market price being lower than it would be without these provisions.
Furthermore, certain mergers where stockholders may receive cash or non-publicly traded securities
require the consent of a supermajority in interest of certain major purchasers of our recent Class
H and Class I warrants. If we are unable to obtain such consent, we may be unable to obtain consummate
mergers or sales of our company that may be favorable to stockholders. Such provisions could also
deter potential buyers from initiating an offer.
Our shares of common stock may be thinly traded, so you may be unable to sell at or near ask prices
or at all if you need to sell your shares to raise money or otherwise desire to liquidate your
shares.
We cannot predict the extent to which an active public market for our common stock will develop or
be
sustained. Our common stock is listed on the AMEX, but, we cannot assure that you will obtain
sufficient liquidity in your holdings of our common stock.
This situation may be attributable to a number of factors, including the fact that we are a small
company which
is relatively unknown to stock analysts, stock brokers, institutional investors and others in the
investment community that generate or influence sales volume, and that even if we came to the
attention of such persons, they
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tend to be risk averse and would be reluctant to follow an unproven company such as ours or
purchase or recommend the purchase of our shares until such time as we became more seasoned and
viable. As a consequence, there may be periods of several days, weeks or months when trading
activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a
large and steady volume of trading activity that will generally support continuous sales without an
adverse effect on share price. We cannot give you any assurance that a broader or more active
public trading market for our common stock will develop or be sustained, or that current trading
levels will be sustained or not diminish.
There is no guarantee that our securities will remain listed on AMEX.
Our common stock is listed on AMEX. Such listing, however, is not guaranteed. If we do not meet
AMEX continued listing requirements, our common stock could be delisted. Therefore, it may be
difficult to sell your shares of common stock if you desire to need to sell them. Our underwriters
from the recent public offering of our securities are not obligated to make a market in our
securities, and even after making a market, can discontinue market making at any time without
notice. Neither we nor the underwriters can provide any assurance that an active or liquid trading
market in our securities will develop or, if developed, that the market will continue.
Our liquidity of our common stock and market capitalization could be adversely affected by the
recent reverse stock split.
We recently consummated a 1-for-10 reverse stock split on May 16, 2011. The reverse stock split
may be viewed negatively by the market and, consequently, can lead to a decrease in our price per
share and overall market capitalization. If the per share market price does not increase
proportionately as a result of the reverse stock split, then our value as measured by our market
capitalization will be reduced, perhaps significantly.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None
Item 3. | Defaults Upon Senior Securities. |
None
Item 4. | (Removed and Reserved) |
Item 5. | Other Information. |
On March 30, 2011, Immersive agreed to extend the note to April 30, 2011. As consideration for
extending the note, the Company agreed to increase the interest rate to 19% per annum compounded
annually commencing on April 1, 2011.
On April 30, 2011, Immersive agreed to extend the note to May 20, 2011. All terms of the
note remained the same.
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On March 31, 2011, the Company and Vision amended the Debenture to extend the maturity
date from March 31, 2011 to June 30, 2011. All other provisions of the Debenture remained
unchanged. The amended terms of the Debenture did not result in terms that were substantially
different from the terms of the original Debenture, therefore there was no extinguishment of debt.
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) |
|||
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. |
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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 23, 2011 | T3 MOTION, INC. | |||||
(Registrant) | ||||||
By: | /s/ Ki Nam | |||||
Chairman of the Board and Chief Executive Officer | ||||||
Date: May 23, 2011 | T3 MOTION, INC. | |||||
(Registrant) | ||||||
By: | /s/ Kelly Anderson | |||||
Executive Vice President and Chief Financial Officer |
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