Attached files
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EX-31.2 - SECTION 302 CERTIFICATE OF CHIEF FINANCIAL OFFICER - T3M INC. | d253964dex312.htm |
EX-32.2 - SECTION 906 CERTIFICATE OF CHIEF FINANCIAL OFFICER - T3M INC. | d253964dex322.htm |
EX-31.1 - SECTION 302 CERTIFICATE OF CHIEF EXECUTIVE OFFICER - T3M INC. | d253964dex311.htm |
EXCEL - IDEA: XBRL DOCUMENT - T3M INC. | Financial_Report.xls |
EX-32.1 - SECTION 906 CERTIFICATE OF CHIEF EXECUTIVE OFFICER - T3M INC. | d253964dex321.htm |
Table of Contents
UNITED STATES
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 September 30, 2011
OR
¨ | 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 001-35133
T3 MOTION, INC.
(Exact name of registrant as specified in its charter)
Delaware | 20-4987549 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
2990 Airway Avenue, Bldg A Costa Mesa, California |
92626 | |
(Address of principal executive offices) | (Zip Code) |
(714) 619-3600
(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 ¨
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 þ NO ¨
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 | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ
As of November 14, 2011, the number of shares outstanding of the Registrants Common Stock, par value $0.001 per share was 12,881,027.
Table of Contents
T3 MOTION, INC.
September 30, 2011
2
Table of Contents
T3 MOTION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,754,316 | $ | 123,861 | ||||
Restricted cash |
10,000 | 10,000 | ||||||
Accounts receivable, net of allowance of $47,626 and $50,000, respectively |
1,096,137 | 595,261 | ||||||
Related party receivables |
41,269 | 35,722 | ||||||
Inventories |
1,523,187 | 1,064,546 | ||||||
Prepaid expenses and other current assets |
398,221 | 251,467 | ||||||
|
|
|
|
|||||
Total current assets |
6,823,130 | 2,080,857 | ||||||
Property and equipment, net |
346,277 | 564,700 | ||||||
Deposits |
934,369 | 934,359 | ||||||
|
|
|
|
|||||
Total assets |
$ | 8,103,776 | $ | 3,579,916 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 872,843 | $ | 1,335,761 | ||||
Accrued expenses |
860,321 | 1,483,220 | ||||||
Related party payables |
| 51,973 | ||||||
Note payable |
| 243,468 | ||||||
Derivative liabilities |
130,078 | 9,633,105 | ||||||
Related party notes payable, net of debt discounts |
225,322 | 4,391,121 | ||||||
|
|
|
|
|||||
Total current liabilities |
2,088,564 | 17,138,648 | ||||||
Long-term liabilities: |
||||||||
Related party notes payable |
1,000,000 | 2,121,000 | ||||||
|
|
|
|
|||||
Total liabilities |
3,088,564 | 19,259,648 | ||||||
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|
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|
|||||
Commitments and contingencies |
||||||||
Stockholders equity (deficit): |
||||||||
Series A convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; none and 11,502,563 shares issued and outstanding, respectively |
| 11,503 | ||||||
Common stock, $0.001 par value; 150,000,000 shares authorized; 12,881,027 and 5,065,896 shares issued and outstanding, respectively |
12,881 | 5,066 | ||||||
Additional paid-in capital |
56,897,601 | 29,419,540 | ||||||
Accumulated deficit |
(51,899,639 | ) | (45,120,210 | ) | ||||
Accumulated other comprehensive income |
4,369 | 4,369 | ||||||
|
|
|
|
|||||
Total stockholders equity (deficit) |
5,015,212 | (15,679,732 | ) | |||||
|
|
|
|
|||||
Total liabilities and stockholders equity (deficit) |
$ | 8,103,776 | $ | 3,579,916 | ||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements
3
Table of Contents
T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenues |
$ | 1,884,321 | $ | 1,047,573 | $ | 4,211,849 | $ | 3,625,531 | ||||||||
Cost of net revenues |
1,498,810 | 915,922 | 3,634,606 | 3,265,195 | ||||||||||||
|
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|
|
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|
|
|
|||||||||
Gross profit |
385,511 | 131,651 | 577,243 | 360,336 | ||||||||||||
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|||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
527,689 | 435,562 | 1,171,698 | 1,305,819 | ||||||||||||
Research and development |
350,332 | 316,759 | 810,891 | 1,069,226 | ||||||||||||
General and administrative |
1,071,832 | 813,786 | 2,818,712 | 2,730,770 | ||||||||||||
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|
|
|||||||||
Total operating expenses |
1,949,853 | 1,566,107 | 4,801,301 | 5,105,815 | ||||||||||||
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|
|
|
|||||||||
Loss from operations |
(1,564,342 | ) | (1,434,456 | ) | (4,224,058 | ) | (4,745,479 | ) | ||||||||
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|
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|
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|||||||||
Other income (expense): |
||||||||||||||||
Interest income |
2,737 | 54 | 4,558 | 1,281 | ||||||||||||
Other income, net |
402,656 | 1,238,138 | 2,225,837 | 3,113,919 | ||||||||||||
Interest expense |
(47,695 | ) | (1,066,047 | ) | (521,147 | ) | (2,759,158 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other income, net |
357,698 | 172,145 | 1,709,248 | 356,042 | ||||||||||||
|
|
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|
|||||||||
Loss before provision for income tax |
(1,206,644 | ) | (1,262,311 | ) | (2,514,810 | ) | (4,389,437 | ) | ||||||||
Provision for income tax |
750 | | 1,550 | 800 | ||||||||||||
|
|
|
|
|
|
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|
|||||||||
Net loss |
(1,207,394 | ) | (1,262,311 | ) | (2,516,360 | ) | (4,390,237 | ) | ||||||||
Deemed dividend to preferred stockholders |
| (689,109 | ) | (4,263,069 | ) | (2,962,300 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss attributable to common stockholders |
$ | (1,207,394 | ) | $ | (1,951,420 | ) | $ | (6,779,429 | ) | $ | (7,352,537 | ) | ||||
|
|
|
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Other comprehensive income: |
||||||||||||||||
Foreign currency translation income (loss) |
| (206 | ) | | 318 | |||||||||||
|
|
|
|
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|
|
|||||||||
Comprehensive loss |
$ | (1,207,394 | ) | $ | (1,262,517 | ) | $ | (2,516,360 | ) | $ | (4,389,919 | ) | ||||
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Net loss attributable to common stockholders per share: basic and diluted |
$ | (0.09 | ) | $ | (0.40 | ) | $ | (0.76 | ) | $ | (1.55 | ) | ||||
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Weighted average number of common shares outstanding: |
||||||||||||||||
Basic and diluted |
12,881,027 | 4,855,390 | 8,901,895 | 4,739,394 | ||||||||||||
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See accompanying notes to condensed consolidated financial statements
4
Table of Contents
T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT) FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2011 (UNAUDITED)
Preferred Shares |
Preferred Stock Amount |
Common Shares |
Common Stock Amount |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
Total Stockholders Equity (Deficit) |
|||||||||||||||||||||||||
BALANCE December 31, 2010 |
11,502,563 | $ | 11,503 | 5,065,896 | $ | 5,066 | $ | 29,419,540 | $ | (45,120,210 | ) | $ | 4,369 | $ | (15,679,732 | ) | ||||||||||||||||
Conversion of preferred stock to common stock |
(11,502,563 | ) | (11,503 | ) | 2,872,574 | 2,873 | 8,630 | | | | ||||||||||||||||||||||
Conversion of notes payable and accrued interest to common stock units |
| | 1,771,128 | 1,771 | 6,197,178 | | | 6,198,949 | ||||||||||||||||||||||||
Issuance of common stock units, net of offering costs of $ 2,100,659 |
| | 3,171,429 | 3,171 | 8,996,171 | | | 8,999,342 | ||||||||||||||||||||||||
Reclassification of derivative liability to equity due to conversion of preferred stock to common stock |
| | | | 4,182,992 | | | 4,182,992 | ||||||||||||||||||||||||
Reclassification of conversion feature derivative liability to equity due to conversion of related party notes payable |
| | | | 702,605 | | | 702,605 | ||||||||||||||||||||||||
Preferred stock deemed dividend |
| | | | 4,263,069 | (4,263,069 | ) | | | |||||||||||||||||||||||
Reclassification of derivative liability to equity due to price adjustments on warrants |
| | | | 2,388,503 | | | 2,388,503 | ||||||||||||||||||||||||
Share-based compensation expense |
| | | | 625,341 | | | 625,341 | ||||||||||||||||||||||||
Relative fair value of warrants issued with related party notes payable |
| | | | 113,572 | | | 113,572 | ||||||||||||||||||||||||
Net loss |
| | | | | (2,516,360 | ) | | (2,516,360 | ) | ||||||||||||||||||||||
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BALANCE September 30, 2011 (unaudited) |
| $ | | 12,881,027 | $ | 12,881 | $ | 56,897,601 | $ | (51,899,639 | ) | $ | 4,369 | $ |
5,015,212 |
| ||||||||||||||||
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See accompanying notes to condensed consolidated financial statements
5
Table of Contents
T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (2,516,360 | ) | $ | (4,390,237 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
235,376 | 273,524 | ||||||
Loss (gain) on sale of fixed asset |
1,104 | (7,500 | ) | |||||
Warranty expense |
92,572 | 77,144 | ||||||
Share-based compensation expense |
625,341 | 647,098 | ||||||
Change in fair value of derivative liabilities |
(2,228,927 | ) | (3,095,754 | ) | ||||
Investor relations expense |
| 10,000 | ||||||
Amortization of debt discounts |
147,773 | 2,352,658 | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts and other receivables |
(500,876 | ) | 268,355 | |||||
Inventories |
(458,641 | ) | (172,954 | ) | ||||
Prepaid expenses and other current assets |
(146,754 | ) | (148,326 | ) | ||||
Deposits |
(10 | ) | 31,873 | |||||
Purchase of certificate of deposit |
| (10,000 | ) | |||||
Accounts payable and accrued expenses |
(600,440 | ) | 368,278 | |||||
Related party payables |
(51,973 | ) | (104,931 | ) | ||||
|
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|
|||||
Net cash used in operating activities |
(5,401,815 | ) | (3,900,772 | ) | ||||
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|
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CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Loans/advances to related parties |
(5,547 | ) | (28,795 | ) | ||||
Purchases of property and equipment |
(20,147 | ) | (43,645 | ) | ||||
Proceeds from sale of fixed assets |
2,090 | | ||||||
Repayment of loans/advances to related parties |
| 18,062 | ||||||
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|
|||||
Net cash used in investing activities |
(23,604 | ) | (54,378 | ) | ||||
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|
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CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Loans/advances from related parties |
| 610,000 | ||||||
Proceeds from related party notes payable |
1,300,000 | | ||||||
Proceeds from sale of common stock units, net of offering costs |
8,999,342 | | ||||||
Recission of common stock |
| (250,000 | ) | |||||
Proceeds from the sale of preferred stock, net of issuance costs |
| 1,155,000 | ||||||
Repayment of note payable |
(243,468 | ) | (100,000 | ) | ||||
Repayment of related party notes payable |
(1,000,000 | ) | | |||||
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|
|
|
|||||
Net cash provided by financing activities |
9,055,874 | 1,415,000 | ||||||
|
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|
|
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Effect of exchange rate on cash |
| 318 | ||||||
|
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|
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
3,630,455 | (2,539,832 | ) | |||||
CASH AND CASH EQUIVALENTS beginning of period |
123,861 | 2,580,798 | ||||||
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CASH AND CASH EQUIVALENTS end of period |
$ | 3,754,316 | $ | 40,966 | ||||
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|
See accompanying notes to condensed consolidated financial statements
6
Table of Contents
T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Continued
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 304,331 | $ | 41,335 | ||||
|
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|
|
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Income taxes |
$ | 1,550 | $ | 800 | ||||
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Supplemental disclosure of non cash activities: |
||||||||
Conversion of notes payable and accrued interest to common stock units |
$ | 6,198,949 | $ | | ||||
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|
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Reclassification of conversion feature derivative liability to equity due to conversion of related party notes payable to common stock units |
$ | 702,605 | $ | | ||||
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Reclassification of derivative liability to equity due to price adjustments on warrants |
$ | 2,388,503 | $ | | ||||
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Conversion option of preferred stock and warrants issued with preferred stock recorded as derivative liabilities |
$ | | $ | 1,401,360 | ||||
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Reclassification of derivative liability to equity due to conversion of preferred stock to common stock |
$ | 4,182,992 | $ | 1,121,965 | ||||
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Debt discount and warrant liability recorded upon issuance of warrants |
$ | | $ | 838,779 | ||||
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Amortization of preferred stock discount related to conversion feature and warrants |
$ | 4,263,069 | $ | 2,962,300 | ||||
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Debt discount based on relative fair value of warrant issued in connection with related party notes payable |
$ | 113,572 | $ | | ||||
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|
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Conversion of prefered stock to common stock |
$ | 11,503 | $ | 4,000 | ||||
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Deposits for equipment |
$ | | $ | 470,599 | ||||
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|||||
Receivable for sale of equipment |
$ | | $ | 7,500 | ||||
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See accompanying notes to condensed consolidated financial statements
7
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. (U.K.) and (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 Co., Ltd. (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 currently developing the R3 Series, an 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 has entered into a Letter of Intent with Panoz Automotive to provide engineering services and limited production for the launch of the R3 Series. The Company anticipates introducing the R3 Series in 2012.
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 nine months ended September 30, 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.
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). The Company has an accumulated deficit of $(51.9) million as of September 30, 2011, and has a net loss of $(2.5) million and used cash in operations of $(5.4) million for the nine months ended September 30, 2011. These factors raise substantial doubt about the Companys ability to continue as a going concern.
The Company expects to continue to incur substantial additional operating losses from costs related to the continuation of product and technology development and administrative activities. The Company believes that its working capital at September 30, 2011 of $4.7 million, together with the revenues from the sale of its products, the implementation of its cost reduction strategy for material, production and service costs and the recent $11.1 million underwritten public offering of its securities (the Public Offering), is sufficient to sustain its planned operations into the second quarter of 2012; however, the Company cannot assure you of this and may require additional debt or equity financing in the future to maintain operations.
8
Table of Contents
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. If the Company is unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it may be required to reduce, defer or discontinue one or more of its product development programs. 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 Securities
On May 19, 2011, the Company consummated the $11.1 million Public Offering and received net proceeds of $8,999,342, after deducting commissions and offering costs. In connection with the Public Offering, the Company sold to the underwriters for a purchase price of $100, a share purchase warrant to purchase up to an additional 142,857 shares of common stock at an exercise price of $4.38 per share.
The transaction resulted in the issuance of 3,171,429 units, at $3.50 per unit, 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 Public 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 entered into agreements offering contractual rights to investors that purchased $500,000 or more of our units in the offering or converted at least $500,000 of existing securities into substantially identical units. The agreements with such investors grant them approval rights to certain change of control transactions. Such agreements will also grant them approval rights, subject to certain exceptions, to financings at a per share purchase price below the exercise price of their warrants.
As discussed above, 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 Public Offering, which allowed it to meet the minimum share price requirement to list on AMEX. All information included in this quarterly filing has been adjusted to reflect the effect of the reverse stock split.
In connection with the Public Offering and AMEX listing, Vision Opportunity Master Fund, Ltd. and Vision Capital Advantage Fund (collectively Vision) and Ki Nam, our Chief Executive Officer, converted their $3.5 million and $2.1 million debentures plus accrued interest, respectively, into 1,138,885 and 632,243 units substantially identical to the units sold in the Public Offering. The registration statement registering such securities for resale was declared effective by the SEC on June 30, 2011.
In connection with the Public Offering and AMEX listing, the Companys preferred stockholders converted all outstanding Series A Convertible Preferred Stock (Series A Preferred) into 2,872,574 shares of the Companys common stock. Included in this conversion were 9,370,698 and 976,865, shares of Series A Preferred held by Vision and Mr. Nam, respectively, which converted into 2,340,176 and 243,956 shares of common stock, respectively. The registration statement registering such securities for resale was declared effective by the SEC on June 30, 2011.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of T3 Motion, Inc. and its wholly owned subsidiary, T3 Motion, Ltd. (U.K.). All significant inter-company accounts and transactions are eliminated in consolidation.
9
Table of Contents
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 September 30, 2011, the Company had approximately $3.4 million in 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 September 30, 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 September 30, 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 September 30, 2011 and December 31, 2010, two customers accounted for approximately 21% and 51% of total accounts receivable, respectively. No single customer accounted for more than 10% and two customers accounted for approximately 23% of net revenues for the three months ended September 30, 2011 and 2010, respectively, and no single customer accounted for more than 10% of net revenues for the nine months ended September 30, 2011 and 2010.
Accounts Payable
As of September 30, 2011, one vendor accounted for approximately 12% of total accounts payable, and as of December 31, 2010, no single vendor accounted for more than 10% of total accounts payable. No single vendor accounted for more than 10% and one vendor accounted for approximately 23% of purchases for the three months ended September 30, 2011 and 2010, respectively. Three vendors accounted for approximately 41% of purchases and no single vendor accounted for more than 10% of purchases for the nine months ended September 30, 2011 and 2010, respectively.
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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, 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.
If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial securitys hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.
The Companys cash equivalents consist of short-term investments in money market funds which are carried at fair value, and are classified as Level 1 assets.
The Companys derivative liabilities consist of embedded conversion features on debt and price protection features on warrants which are carried at fair value, and are classified as Level 3 liabilities. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of these instruments (see Note 6).
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.
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The Company does not enter into contracts that require fixed pricing beyond the term of the purchase order. All sales via reseller agreements are accompanied by a purchase order. Further, the Company does not allow returns of unsold items.
The Company has executed various distribution agreements whereby the distributors agreed to purchase T3 Series packages (one T3 Series, two power modules, and one charger per package). The terms of the agreements require minimum re-order amounts for the vehicles to be sold through the distributors in specified geographic regions. Under the terms of the agreements, the distributor takes ownership of the vehicles and the Company deems the items sold at delivery to the distributor.
Share-Based Compensation
The Company maintains a stock option plan (see Note 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 net loss attributable 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 12.1 million and 5.1 million shares of common stock were outstanding at September 30, 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Net loss |
$ | (1,207,394 | ) | $ | (1,262,311 | ) | $ | (2,516,360 | ) | $ | (4,390,237 | ) | ||||
Deemed dividend to preferred stockholders |
| (689,109 | ) | (4,263,069 | ) | (2,962,300 | ) | |||||||||
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Net loss attributable to common stockholders |
$ | (1,207,394 | ) | $ | (1,951,420 | ) | $ | (6,779,429 | ) | $ | (7,352,537 | ) | ||||
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Weighted average number of common shares outstanding: |
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Basic and diluted |
12,881,027 | 4,855,390 | 8,901,895 | 4,739,394 | ||||||||||||
Net loss per share: |
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Basic and diluted |
$ | (0.09 | ) | $ | (0.40 | ) | $ | (0.76 | ) | $ | (1.55 | ) | ||||
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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 revenue from domestic sales and international sales are shown below:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Product |
Net revenues | Net revenues | Net revenues | Net revenues | ||||||||||||
T3 Series domestic |
$ | 1,345,915 | $ | 677,918 | $ | 3,078,456 | $ | 3,078,658 | ||||||||
T3 Series International |
538,406 | 369,655 | 1,133,393 | 546,873 | ||||||||||||
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$ | 1,884,321 | $ | 1,047,573 | $ | 4,211,849 | $ | 3,625,531 | |||||||||
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NOTE 2 INVENTORIES
Inventories consist of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Raw materials |
$ | 1,368,143 | $ | 788,496 | ||||
Work-in-process |
84,038 | 212,723 | ||||||
Finished goods |
71,006 | 63,327 | ||||||
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$ | 1,523,187 | $ | 1,064,546 | |||||
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NOTE 3 PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Prepaid inventory |
$ | 235,369 | $ | 148,410 | ||||
Prepaid expenses and other current assets |
162,852 | 103,057 | ||||||
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$ | 398,221 | $ | 251,467 | |||||
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NOTE 4 NOTE PAYABLE
Note payable consisted of the following:
September 30, | 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, paid in full in May 2011 |
$ | | $ | 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 was payable in monthly payments of $50,000 each, plus interest accruing at 6% per annum from the date of the settlement. In May 2011, the Company repaid the outstanding note balance and related accrued interest. During the three and nine months ended September 30, 2011, the Company recorded $0 and $4,014 of interest expense, respectively, related to this note.
NOTE 5 RELATED PARTY NOTES PAYABLE
Related party notes payable, net of discounts, consisted of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Note payable to Immersive Media Corp.(Immersive), 19% interest rate, net of discount of $0 and $108,879, respectively. |
$ | | $ | 891,121 | ||||
Note payable to Vision Opportunity Master Fund, Ltd., 10% interest rate. |
| 3,500,000 | ||||||
Note payable to Ki Nam, 12% interest rate, due April 25, 2012, net of discount of $74,678 and $0, respectively. |
225,322 | 1,121,000 | ||||||
Note payable to Alfonso and Mercy Cordero, 10% interest, due October 1, 2013. |
1,000,000 | 1,000,000 | ||||||
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1,225,322 | 6,512,121 | |||||||
Less: current portion |
(225,322 | ) | (4,391,121 | ) | ||||
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$ | 1,000,000 | $ | 2,121,000 | |||||
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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 stockholders. On March 31, 2008, the Company repaid $1,000,000 of the principal amount. The note was originally due December 31, 2008 and was secured by all of the Companys assets (see amendments below).
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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 were 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.
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 was 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.
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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 compounded annually, was also amended to 15.0%. The Company recorded interest expense of $0 and $37,500, $63,361 and $102,500, related to the stated rate of interest during the three and nine months ended September 30, 2011 and 2010, respectively, and had accrued interest of $0 and $110,000 at September 30, 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 $0 and $80,013, $108,879 and $126,904 for the three and nine months ended September 30, 2011 and 2010, respectively.
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.
Repayment of Immersive Note
On May 20, 2011, the Company repaid Immersive the principal and accrued interest of $1,127,861 due under the note.
Revaluation of Immersive Derivative Liabilities
As a result of the Public Offering, the exercise price of the outstanding Series G common stock purchase warrants held by Immersive were adjusted (see Note 6).
Vision Opportunity Master Fund, Ltd. Bridge Financing
December 30, 2009 10% Convertible Debenture
On December 30, 2009, the Company sold $3,500,000 principal amount of 10% secured convertible debentures (the Debentures) and warrants to Vision in a private placement pursuant to a Securities Purchase Agreement (the Purchase Agreement).
The Debentures accrued 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 were convertible into units of Company securities at a conversion price of $1.00 per unit, subject to adjustment. Each unit consisted of one share of the Companys Preferred Stock and a warrant to purchase one share of the 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 was 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 $0, $87,000, and $135,139 and $265,000 related to the stated rate of interest, for the three and nine months ended September 30, 2011 and 2010, respectively, and had accrued interest of $0 and $350,959 as of September 30, 2011 and December 31, 2010, respectively.
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The Purchase Agreement provided 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 provided that from December 30, 2009 to the date that the Debentures are no longer outstanding, if the Company effected 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 was 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 were 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 expire on December 30, 2014.
In connection with the sale of the Debentures, the subsidiary entered into a subsidiary guarantee (Subsidiary Guarantee) for Visions benefit with respect to the Companys obligations due under the Debentures. In addition, the Company and the Subsidiary also entered into a security agreement (Security Agreement) granting Vision a security interest in certain of the Companys property to secure the prompt payment, performance, and discharge in full of all obligations under the Debentures and the Subsidiary Guarantee.
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
In connection with the Public Offering and the Amex Listing, the $3.5 million principal amount of the Debentures plus accrued interest of $486,098 was converted into 1,138,885 units of the Companys securities on May 19, 2011.
Debt Discounts and Amortization
The debt discount recorded on the 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 and nine months ended September 30, 2011 and 2010, the Company amortized $0, $842,122, $0 and $1,950,506, respectively, of the debt discounts to interest expense.
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Ki Nam Note
2009 Derivative Warrants
As a result of the Public Offering, the exercise price of the outstanding 27,478 Class E purchase warrants of Ki Nam, our Chairman and Chief Executive Officer, were adjusted to $7.87 per share.
2010 Note
On February 24, 2011, the Company entered into a loan agreement with Mr. Nam (the 2010 Note) for previous advances to the Company. The agreement allowed Mr. Nam to advance up to $2.5 million for operating requirements. The 2010 Note bore interest at 10% per annum and was due on March 31, 2012, subject to 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 nine months ended September 30, 2011, Mr. Nam advanced $1,000,000 to the Company to be used for operating requirements. The Company recorded interest expense of $0 and $68,095 for the three and nine months ended September 30, 2011. The Company had accrued interest of $0 as of September 30, 2011 and $23,756 as of December 31, 2010, respectively.
Conversion of 2010 Note Upon Closing of May Public Offering
The outstanding balance of the 2010 Note of $2,121,000 plus accrued interest of $91,851 was converted into 632,243 units of the Companys securities upon completion of the Public Offering on May 19, 2011.
2011 Note
On June 30, 2011, the Company entered into a loan agreement with Mr. Nam for previous advances of $300,000 (the 2011 Note). The 2011 Note bears interest at 12% per annum and matures on April 25, 2012; subject to an automatic one year extension. Interest payments are due monthly commencing on July 1, 2011.The Company recorded interest expense of $6,000 and $15,500 for the three and nine months ended September 30, 2011, respectively, and had accrued interest of $6,000 as of September 30, 2011. In connection with the 2011 Note, the Company granted Mr. Nam Class J warrants to purchase 50,000 shares of common stock. The exercise price per share of the common stock under these warrants is $3.50 and the warrants expire on April 25, 2016. The Company recorded a debt discount of $113,572 upon the issuance in connection with the 2011 Note. The debt discount of $113,572 represents the relative fair value of the warrants which was calculated based on the Black-Scholes-option pricing model using the assumptions of five years expected life, 2.1% risk-free rate, and 148% expected volatility. The Company recorded interest expense of $10,200 and $38,894 for the three and nine months ended September 30, 2011, respectively. The unamortized discount as of September 30, 2011 is $74,678.
Lock Up Agreements
On May 16, 2011, Mr. Nam and Vision entered into lock-up agreements pursuant to which they have agreed not to sell any shares of our common stock and Class I warrants for 12 months, subject to certain exceptions.
Alfonso Cordero and Mercy Cordero Note
On January 14, 2011, the Company issued a 10% unsecured promissory note (the Note) dated September 30, 2010 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 (the 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 and $75,000 for the three and nine months ended September 30, 2011 and had accrued interest of $0 and $24,277 as of September 30, 2011 and December 31, 2010, respectively.
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The Company may prepay the Note in full, but not in part. 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 upon default will be increased to 15% or the maximum rate allowed by law. At September 30, 2011 the Company is in compliance with all terms of the Note.
NOTE 6 DERIVATIVE LIABILITIES
The Company applies 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 Class G warrants 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.
As a result of the Public Offering in May 2011, the exercise price of the above noted purchase warrants has been reduced due to the price protection clause. Accordingly, the fair value of the related derivative liabilities has been adjusted.
During 2010, the Company issued Class G 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 and nine months ended September 30, 2011 and 2010, the amortization of the discounts related to the Preferred Stock anti-dilution provision and warrants issued was $0, $689,109, $4,263,069 and $1,862,558, respectively, which was recorded as a deemed dividend.
On March 22, 2010, one of the Companys preferred stockholders 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.
In connection with the Public Offering and AMEX listing on May 19, 2011, the Companys preferred stockholders converted 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 converted into 2,340,176 and 243,956 shares of common stock, respectively. These shares of common stock were registered on June 30, 2011. As a result of the conversion of the Series A Convertible Preferred Stock, the Company reclassified the balance of the derivative liabilities at the date of conversion of $4,182,992 to additional paid-in capital and recorded the remaining balance of the preferred stock discount at the date of conversion as a deemed dividend.
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As of September 30, 2011 and December 31, 2010, the unamortized discount related to the conversion feature of the Preferred Stock was $0 and $4,263,069, respectively.
On May 19, 2011, the Company entered into agreements with certain holders of Class G warrants to amend their Class G warrants such that the price-based anti-dilution provisions would be removed. In exchange, the exercise price of the warrants was fixed at $5.00 per share. As a result of the agreements, the Company reclassified the fair value of the derivative liabilities related to these warrants on the date of the agreements of $2,388,503 to additional paid-in capital.
On May 19, 2011, Vision converted the Debentures into units of the Companys securities. As a result of the conversion, the Company reclassified the remaining derivative balance related to the conversion feature of $702,605 to additional paid-in capital.
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:
September 30, 2011 |
||||
(unaudited) | ||||
Annual dividend yield |
| |||
Expected life (years) |
0.11-4.08 | |||
Risk-free interest rate |
0.19%-2.24% | |||
Expected volatility |
136%-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 and nine months ended September 30, 2011 and 2010, the Company recorded other income of $404,139, $1,228,577, $2,228,927 and $3,095,754, 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 Carrying Value September 30, 2011 |
Level 3 Carrying Value December 31, 2010 |
|||||||
(unaudited) | ||||||||
Embedded conversion options |
$ | | $ | 5,991,957 | ||||
Warrants |
130,078 | 3,641,148 | ||||||
|
|
|
|
|||||
$ | 130,078 | $ | 9,633,105 | |||||
|
|
|
|
|||||
Decrease in fair value |
$ | 2,228,927 | ||||||
|
|
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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 |
| 2,240,140 | ||||||
Reclassification of equity due to conversion of related party notes payable to common stock units |
(702,605 | ) | | |||||
Reclassification to equity due to conversion of preferred stock to common stock |
(4,182,992 | ) | (1,121,965 | ) | ||||
Reclassification of equity due to exercise price adjustments on warrants |
(2,388,503 | ) | | |||||
Change in fair value |
(2,228,927 | ) | (3,095,754 | ) | ||||
|
|
|
|
|||||
Ending balance, September 30, |
$ | 130,078 | $ | 9,846,897 | ||||
|
|
|
|
NOTE 7 EQUITY
Series A Convertible Preferred Stock
The Companys Board of Directors has authorized 20,000,000 shares of Series A Preferred. Except as otherwise provided in the Certificate of Designation of the Series A Preferred (the Designation) or the Companys by-laws, each holder of shares of Series A Preferred shall have no voting rights. As long as any shares of Series A Preferred are outstanding, however, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series A Preferred, (a) alter or change adversely the powers, preferences, or rights given to the Series A Preferred or alter or amend the Designation, (b) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to or otherwise paripassu with the Series A Preferred, (c) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Series A Preferred, (d) increase the number of authorized shares of the Series A Preferred, or (e) enter into any agreement with respect to any of the foregoing.
Each share of Series A Preferred is convertible at any time and from time to time after the issue date at the holders option into two shares of the Companys common stock (subject to beneficial ownership limitations).
Holders of Series A Preferred are restricted from converting their shares into 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 Conversion Limitation). There are no redemption rights.
The conversion price of the Series A Preferred (the Conversion Price) shall be proportionately reduced for a stock dividend, stock split, subdivision, combination or similar arrangements. The Conversion Price will also be reduced for any sale of common stock (or options, warrants or convertible debt or other derivative securities) at a purchase price per share less than the Conversion Price, subject to certain excepted issuances. The Conversion Price will be reduced to such purchase price if such issuance occurs within the first 12 months of the original issuance date. The Conversion Price will be reduced to a price derived using a weighted-average formula if the issuance occurs after the first 12 months but before the 24 month anniversary of the original issuance date.
If, at any time while the Series A Preferred is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another person, (B) the Company effects any sale of all or substantially all of its assets in one transaction or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another person) is completed pursuant to which holders of common stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the common stock or any compulsory share exchange pursuant to which the common stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a Fundamental Transaction), then, upon any subsequent conversion of Series A Preferred, the holders shall have the right to receive, for each Conversion Share (as defined in Section 1 of the Series A Certificate) that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the same kind and amount of securities, cash 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 stockholders exercised its option to convert its 2,000,000 Series A preferred shares into 400,000 shares of common stock.
During 2010, under the terms of the offering, the Company issued and sold 1,155,000 shares of Series A preferred in a private placement. In connection with the financing, the Company issued Class G five-year warrants to purchase 231,000 shares of common stock, exercisable at $7.00 per share. The warrants expire in 2015 (See Note 6 for additional discussion).
In connection with the Public Offering and AMEX listing on May 19, 2011, the Designation was amended to remove the Conversion Limitation and the Companys Series A preferred stockholders converted 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 were shares held by Vision and Mr. Nam of 9,370,698 and 976,865, respectively, which converted into 2,340,176 and 243,956 shares of the Companys common stock, respectively. The shares of common stock were registered on June 30, 2011.
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.
On May 16, 2011, the Company raised gross proceeds of $11.1 million in a public offering of its securities. The offering closed on May 19, 2011, and the Company received net proceeds of $8,999,342 after deducting commissions and offering costs. In connection with the offering, the underwriters exercised their share purchase warrant options of $100 for the purchase of 142,857 shares with an exercise price of $4.38 per share.
The Public Offering 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 AMEX. The Company has entered into agreements offering contractual rights to investors that purchased $500,000 or more of our units in the offering or converted at least $500,000 of existing securities into substantially identical units. The agreements with such investors grant them approval rights to certain change of control transactions. Such agreements will also grant them approval rights, subject to certain exceptions, to financings at a per share purchase price below the exercise price of the Class H and Class I warrants.
On June 30, 2011, the Company registered the resale by certain selling stockholders of (i) 1,771,128 shares of common stock, 1,771,128 Class H warrants and 1,771,128 Class I warrants comprising units issued upon conversion of certain debt; (ii) 3,542,256 shares of common stock underlying such Class H and Class I warrants; and (iii) 3,942,193 additional shares of common stock, including shares underlying other outstanding warrants. Each Class H warrant entitles the holder to purchase one share of the Companys common stock at an exercise price of $3.00 at any time between August 19, 2011 and May 13, 2013. Each Class I warrant entitles the holder to purchase one share of the Companys common stock at an exercise price of $3.50 at any time between August 19, 2011 and May 13, 2016.
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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):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Stock compensation expense cost of net revenues |
$ | 10,882 | $ | 6,796 | $ | 34,215 | $ | 43,968 | ||||||||
Stock compensation expense sales and marketing |
35,715 | 47,721 | 85,395 | 127,229 | ||||||||||||
Stock compensation expense research and development |
24,946 | 38,078 | 73,816 | 99,336 | ||||||||||||
Stock compensation expense general and administrative |
137,213 | 138,231 | 431,915 | 376,565 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total stock compensation expense |
$ | 208,756 | $ | 230,826 | $ | 625,341 | $ | 647,098 | ||||||||
|
|
|
|
|
|
|
|
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A summary of common stock option activity under the 2007 Plan and the 2010 Plan for the nine months ended September 30, 2011 is presented below (unaudited):
Number of Shares |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Life |
Aggregate Intrinsic Value |
|||||||||||||
Options outstandingJanuary1, 2011 |
649,090 | $ | 5.72 | |||||||||||||
Options granted |
330,000 | 5.00 | ||||||||||||||
Options exercised |
| | ||||||||||||||
Options forfeited |
(31,739 | ) | 5.03 | |||||||||||||
Options cancelled |
| | ||||||||||||||
|
|
|
|
|||||||||||||
Total options outstandingSeptember 30,2011 |
947,351 | $ | 5.49 | 8.11 | $ | | ||||||||||
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|
|
|
|
|
|
|
|||||||||
Options exercisableSeptember 30, 2011 |
439,599 | $ | 6.04 | 6.93 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options vested and expected to vestSeptember 30, 2011 |
933,392 | $ | 5.50 | 8.09 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options available for grant under the 2010 Plan at September 30, 2011 |
61,049 | |||||||||||||||
|
|
The weighted average fair value per share of options granted during the nine months ended September 30, 2011 was $3.95.
The following table summarizes information about stock options outstanding and exercisable at September 30, 2011 (unaudited):
Options Outstanding | Options Exercisable | |||||||||||||||||||
Exercise Prices | Number of Shares |
Weighted- Average Remaining Contractual Life |
Weighted Average Exercise Price |
Number of Shares |
Weighted- Average Exercise Price |
|||||||||||||||
$5.00 |
653,851 | 8.95 | $ | 5.00 | 152,047 | $ | 5.00 | |||||||||||||
$6.00 |
193,500 | 6.28 | $ | 6.00 | 187,552 | $ | 6.00 | |||||||||||||
$7.70 |
100,000 | 6.20 | $ | 7.70 | 100,000 | $ | 7.70 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
947,351 | 8.11 | $ | 5.49 | 439,599 | $ | 6.04 | ||||||||||||||
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|
|
|
|
|
|
|
|
|
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.
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Table of Contents
The assumptions used to calculate the fair value of options and warrants 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 and warrants granted by the Company, along with certain other pertinent information:
September 30, 2011 |
||||
(unaudited) | ||||
Expected term (in years) |
6.02 | |||
Expected volatility |
205 | % | ||
Risk-free interest rate |
2.6 | % | ||
Expected dividends |
| |||
Forfeiture rate |
2.8 | % |
At September 30, 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 $1.9 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 3.1 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 stock option plans. A summary of the warrant activity for the nine months ended September 30, 2011 is presented below (unaudited):
Number of Shares | Weighted- Exercise Price |
Weighted- Average Contractual Life (in years) |
Aggregate
Intrinsic Value |
|||||||||||||
Warrants outstanding January 1, 2011 |
1,069,615 | $ | 5.14 | |||||||||||||
Warrants granted |
10,077,971 | 3.27 | ||||||||||||||
Warrants exercised |
| | ||||||||||||||
Warrants cancelled |
| | ||||||||||||||
|
|
|
|
|||||||||||||
Warrants outstanding and exercisable-September 30, 2011 |
11,147,586 | $ | 3.45 | 3.21 | $ | | ||||||||||
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|
|
|
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|
|
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.
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The following table presents the changes in the product warranty accrual for the nine months ended September 30 (unaudited):
2011 | 2010 | |||||||
Beginning balance, January 1, |
$ | 165,641 | $ | 235,898 | ||||
Charged to cost of revenues |
92,572 | 77,144 | ||||||
Usage |
(82,543 | ) | (161,864 | ) | ||||
|
|
|
|
|||||
Ending balance, September 30, |
$ | 175,670 | $ | 151,178 | ||||
|
|
|
|
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 were 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. The 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 $0 and $4,126 at September 30, 2011 and December 31, 2010, respectively.
In May 2011, the Company repaid the outstanding note balance and related accrued interest. The case was dismissed on June 22, 2011. During the three and nine months ended September 30, 2011, the Company recorded $0 and $4,014 of interest expense, respectively.
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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Table of Contents
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 Chief Executive Officer and Chairman of the Board of Directors, together with his children, owns 29.4% of the outstanding shares of the Companys common stock.
Accounts Receivable
As of September 30, 2011 and December 31, 2010, the Company has receivables of $35,722, due from Graphion Technology USA LLC (Graphion) related to consulting services rendered and/or fixed assets sold to Graphion. Graphion is wholly owned by Mr. Nam. The amounts due are non-interest bearing and are due upon demand.
As of September 30, 2011 and December 31, 2010, there were outstanding related party receivables of $5,547 and $0, respectively, 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
From time to time, the Company purchases batteries and research and development parts and services from Graphion. During the nine months ended September 30, 2011, the Company purchased no parts and services and had an outstanding accounts payable balance of $0 and $51,973 at September 30, 2011 and December 31, 2010, respectively. During the nine months ended September 30, 2010, the Company purchased $100,000 of parts and services from Graphion.
Accrued Salary
As of September 30, 2011 and December 31, 2010, the Company owed Mr. Nam $0 and $40,000, respectively, of salary pursuant to his employment agreement which is included in accrued expenses.
Notes Payable see Note 5
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Table of Contents
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 our Annual Report on Form 10-K for the year ended December 31, 2010.
Overview
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 (U.K.). (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 currently developing the R3 Series, an 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 has entered into a Letter of Intent with Panoz Automotive to provide engineering services and limited production for the launch of the R3 Series. The Company anticipates introducing the R3 Series in 2012.
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 expects to continue to incur substantial additional operating losses from costs related to the continuation of product and technology development and administrative activities. The Company believes that its working capital at September 30, 2011 of $4.7 million, together with the revenues from the sale of its products, the implementation of its cost reduction strategy for material, production and service costs and the recent $11.1 million underwritten public offering of its securities (the Public Offering), is sufficient to sustain its planned operations into the second quarter of 2012, however, the Company cannot assure you of this and may require additional debt or equity financing in the future to maintain operations.
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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. If the Company is unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it may be required to reduce, defer or discontinue one or more of its product development programs. 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 Securities
On May 19, 2011, the Company consummated a $11.1 million Public Offering and received net proceeds of $8,999,342, after deducting commissions and offering costs. In connection with the Public Offering, the Company sold to the under writers for a purchase price of $100, a share purchase warrant to purchase up to an additional 142,857 shares of common stock at an exercise price of $4.38 per share.
The transaction resulted in the issuance of 3,171,429 units, at $3.50 per unit, 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 Public 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 entered into agreements offering contractual rights to investors that purchased $500,000 or more of our units in the offering or converted at least $500,000 of existing securities into substantially identical units. The agreements with such investors grant them approval rights to certain change of control transactions. Such agreements will also grant them approval rights, subject to certain exceptions, to financings at a per share purchase price below the exercise price of their warrants.
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 Public Offering, which allowed it to meet the minimum share price requirement to list on AMEX. All information included in this quarterly filing has been adjusted to reflect the effect of the reverse stock split.
In connection with the Public Offering and AMEX listing, Vision Opportunity Master Fund, Ltd. and Vision Capital Advantage Fund (collectively Vision), and Ki Nam, our Chief Executive Officer, converted their $3.5 million and $2.1 million debentures plus accrued interest, respectively, into 1,138,885 and 632,243 units substantially identical to the units sold in the Public Offering. The registration statement registering such securities for resale was declared effective by the SEC on June 30, 2011.
In connection with the Public Offering and AMEX listing, the Companys preferred stockholders converted all outstanding Series A Convertible Preferred Stock (Series A Preferred) into 2,872,574 shares of the Companys common stock. Included in this conversion were 9,370,698 and 976,865 shares of Series A Preferred held by Vision and Mr. Nam, respectively which converted into 2,340,176 and 243,956 shares of common stock, respectively. The registration statement registering such securities for resale was declared effective by the SEC on June 30, 2011.
Lock Up Agreement
On May 16, 2011, Vision and Ki Nam 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 September 30, 2011, the Company had approximately $3.4 million in 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 September 30, 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 September 30, 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 September 30, 2011 and December 31, 2010, two customers accounted for approximately 21% and 51% of total accounts receivable, respectively. No single customer accounted for more than 10% and two customers accounted for approximately 23% of net revenues for the three months ended September 30, 2011 and 2010, respectively, and no single customer accounted for more than 10% of net revenues for the nine months ended September 30, 2011 and 2010.
Accounts Payable
As of September 30, 2011, one vendor accounted for approximately 12% of total accounts payable, and as of December 31, 2010, no single vendor accounted for more than 10% of total accounts payable. No single vendor accounted for more than 10% and one vendor accounted for approximately 23% of purchases for the three months ended September 30, 2011 and 2010, respectively, and three vendors accounted for approximately 41% of purchases and no single vendor accounted for more than 10% of purchases for the nine months ended September 30, 2011 and 2010, respectively.
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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 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.
If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial securitys hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.
The Companys cash equivalents consist of short-term investments in money market funds which are carried at fair value, and are classified as Level 1 assets.
The Companys derivative liabilities consist of embedded conversion features on debt and price protection features on warrants which are carried at fair value, and are classified as Level 3 liabilities. The Company uses the Black-Scholes-Merton option pricing model to determine the fair value of these instruments.
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. 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.
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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.
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 revenue from domestic sales and international sales are shown below:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Product |
Net revenues | Net revenues | Net revenues | Net revenues | ||||||||||||
T3 Series domestic |
$ | 1,345,915 | $ | 677,918 | $ | 3,078,456 | $ | 3,078,658 | ||||||||
T3 Series International |
538,406 | 369,655 | 1,133,393 | 546,873 | ||||||||||||
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$ | 1,884,321 | $ | 1,047,573 | $ | 4,211,849 | $ | 3,625,531 | |||||||||
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Derivative Liabilities
The Company applies 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 related to convertible debt. During 2010, the Company exchanged 69,764 of Class A warrants and 25,000 of Class B warrants for 94,764 Class G warrants. The Company also recorded an additional derivative liability of $275,676 related to the Vision Debentures during the year ended December 31, 2010. 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.
As a result of the Public Offering in May 2011, the exercise price of the above noted purchase warrants has been reduced due to the price protection clause. Accordingly, the fair value of the related derivative liabilities has been adjusted.
During 2010, the Company issued additional warrants of 231,000, related to Preferred Stock. 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 and nine months ended September 30, 2011 and 2010, the amortization of the discounts related to the Preferred Stock anti-dilution provision and warrants issued was $0, $689,109, $4,263,069 and $1,862,558, respectively, which was recorded as a deemed dividend.
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On March 22, 2010, one of the Companys preferred stockholders 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.
In connection with the Public Offering and AMEX listing on May 19, 2011, the Companys preferred stockholders converted 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 converted into 2,340,176 and 243,956 shares of common stock, respectively. These shares of common stock were registered on June 30, 2011. As a result of the conversion of the Series A Convertible Preferred Stock, the Company reclassified the balance of the derivative liabilities at the date of conversion of $4,182,992 to additional paid-in capital and recorded the remaining balance of the preferred stock discount at the date of conversion as a deemed dividend.
As of September 30, 2011 and December 31, 2010, the unamortized discount related to the conversion feature of the Preferred Stock was $0 and $4,263,069, respectively.
On May 19, 2011, the Company entered into agreements with certain holders of Class G warrants to amend their Class G warrants such that the price-based anti-dilution provisions would be removed. In exchange, the exercise price of the warrants was fixed at $5.00 per share. As a result of the agreements, the Company reclassified the fair value of the derivative liabilities related to these warrants on the date of the agreements of $2,388,503 to additional paid-in capital.
On May 19, 2011, Vision converted the Debentures into units of the Companys securities. As a result of the conversion, the Company reclassified the remaining derivative balance related to the conversion feature of $702,605 to additional paid-in capital.
During the three and nine months ended September 30, 2011 and 2010, the Company recorded other income of $404,139, $1,228,577, $2,228,927 and $3,095,754, 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.
Loss Per Share
Basic loss per share is computed by dividing net loss attributable 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 12.1 million and 5.1 million shares of common stock were outstanding at September 30, 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Net loss |
$ | (1,207,394 | ) | $ | (1,262,311 | ) | $ | (2,516,360 | ) | $ | (4,390,237 | ) | ||||
Deemed dividend to preferred stockholders |
| (689,109 | ) | (4,263,069 | ) | (2,962,300 | ) | |||||||||
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Net loss attributable to common stockholders |
$ | (1,207,394 | ) | $ | (1,951,420 | ) | $ | (6,779,429 | ) | $ | (7,352,537 | ) | ||||
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Weighted average number of common shares outstanding: |
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Basic and diluted |
12,881,027 | 4,855,390 | 8,901,895 | 4,739,394 | ||||||||||||
Net loss per share: |
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Basic and diluted |
$ | (0.09 | ) | $ | (0.40 | ) | $ | (0.76 | ) | $ | (1.55 | ) | ||||
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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 were 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. The 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 $0 and $4,126 at September 30, 2011 and December 31, 2010, respectively.
In May 2011, the Company repaid the outstanding note balance and related accrued interest. The case was dismissed on June 22, 2011. During the three and nine months ended September 30, 2011, the Company recorded $0 and $4,014 of interest expense, respectively.
In the ordinary course of business, the Company may face various claims brought by third parties in addition to the claim described above and may from time to time, make claims or take legal actions to assert the Companys rights, including intellectual property rights as well as claims relating to employment and the safety or efficacy of the Companys products. Any of these claims could subject us to costly litigation and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, the insurance carriers may deny coverage or the policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of such awards could have a material adverse effect on the consolidated operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage the Companys reputation and business. Management believes the outcome of currently pending claims and lawsuits will not likely have a material effect on the consolidated operations or financial position.
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Results of Operations
The following table sets forth the results of our operations for the three and nine months ended September 30, 2011 and 2010 (unaudited):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenues |
$ | 1,884,321 | $ | 1,047,573 | $ | 4,211,849 | $ | 3,625,531 | ||||||||
Cost of net revenues |
1,498,810 | 915,922 | 3,634,606 | 3,265,195 | ||||||||||||
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Gross profit |
385,511 | 131,651 | 577,243 | 360,336 | ||||||||||||
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Operating expenses: |
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Sales and marketing |
527,689 | 435,562 | 1,171,698 | 1,305,819 | ||||||||||||
Research and development |
350,332 | 316,759 | 810,891 | 1,069,226 | ||||||||||||
General and administrative |
1,071,832 | 813,786 | 2,818,712 | 2,730,770 | ||||||||||||
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Total operating expenses |
1,949,853 | 1,566,107 | 4,801,301 | 5,105,815 | ||||||||||||
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Loss from operations |
(1,564,342 | ) | (1,434,456 | ) | (4,224,058 | ) | (4,745,479 | ) | ||||||||
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Other income (expense): |
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Interest income |
2,737 | 54 | 4,558 | 1,281 | ||||||||||||
Other income, net |
402,656 | 1,238,138 | 2,225,837 | 3,113,919 | ||||||||||||
Interest expense |
(47,695 | ) | (1,066,047 | ) | (521,147 | ) | (2,759,158 | ) | ||||||||
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Total other income, net |
357,698 | 172,145 | 1,709,248 | 356,042 | ||||||||||||
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Loss before provision for income tax |
(1,206,644 | ) | (1,262,311 | ) | (2,514,810 | ) | (4,389,437 | ) | ||||||||
Provision for income tax |
750 | | 1,550 | 800 | ||||||||||||
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Net loss |
(1,207,394 | ) | (1,262,311 | ) | (2,516,360 | ) | (4,390,237 | ) | ||||||||
Deemed dividend to preferred stockholders |
| (689,109 | ) | (4,263,069 | ) | (2,962,300 | ) | |||||||||
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Net loss attributable to common stockholders |
$ | (1,207,394 | ) | $ | (1,951,420 | ) | $ | (6,779,429 | ) | $ | (7,352,537 | ) | ||||
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Other comprehensive income: |
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Foreign currency translation income (loss) |
| (206 | ) | | 318 | |||||||||||
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Comprehensive loss |
$ | (1,207,394 | ) | $ | (1,262,517 | ) | $ | (2,516,360 | ) | $ | (4,389,919 | ) | ||||
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Net loss attributable to common stockholders per share: basic and diluted |
$ | (0.09 | ) | $ | (0.40 | ) | $ | (0.76 | ) | $ | (1.55 | ) | ||||
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Weighted average number of common shares outstanding: |
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Basic and diluted |
12,881,027 | 4,855,390 | 8,901,895 | 4,739,394 | ||||||||||||
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Net revenues. Net revenues are primarily from sales of the T3 Series, T3i Series, power modules, chargers, related accessories and service. Net revenues increased $836,748, or 79.9%, to $1,884,321 for the three months ended September 30, 2011 and increased $586,318, or 16.2%, to $4,211,849 for the nine months ended September 30, 2011 compared to the same periods of the prior year. The increase was primarily due to the execution of our global deployment strategy resulting in an increase in international sales, achieving higher average selling prices per unit and increased service and parts revenue.
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The net proceeds from the Public Offering allowed us to place orders with our vendors in accordance with their current lead times and returned our lead times back to our standard of approximately 2-4 weeks. Our backlog at September 30, 2011 was approximately $3.3 million compared to $1.3 million as of September 30, 2010.
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 increased $582,888, or 63.6%, to $1,498,810 for the three months ended September 30, 2011 and increased $369,411, or 11.3%, to $3,634,606 for the nine months ended September 30, 2011 compared to the same periods of the prior year. This increase in cost of net revenues is primarily attributable to the increase in net revenues. The increase for the nine months ended September 30, 2011 was also due to 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. The net proceeds from the Public Offering allowed us to purchase product under our vendor terms and in accordance with appropriate shipping lead-times. The increase was offset in part by managements cost reduction strategy.
Gross profit. Managements efforts to continue to source lower product costs and increase production efficiencies, was offset in part by cash constraints prior to the closing of the Public Offering. The cash constraints resulted in increased shipping costs, and vendor supply issues, resulted in gross profit of $385,511 for the three months ended September 30, 2011, compared to a gross profit of $131,651 for the same period of the prior year and achieved a gross profit of $577,243 for the nine months ended September 30, 2011, compared to gross profit of $360,336 for the same period of the prior year. Gross profit margin was 20.5% and 12.6%, respectively, for the three months ended September 30, 2011 and 2010 and 13.7% and 9.9% for the nine months ended September 30, 2011 and 2010, respectively.
Sales and marketing. Sales and marketing increased by $92,127, or 21.2%, to $527,689 for the three months ended September 30, 2011, compared to the same period of the prior year and decreased by ($134,121), or (10.3%), to $1,171,698 for the nine months ended September 30, 2011 compared to the same period of the prior year. The increase in sales and marketing expense during the three months ended September 30, 2011 was primarily due to using proceeds from the Public Offering to promote sales with increased advertising and trade show participation. Further contributing to the increase was commission expense related to the increase in sales. The decrease in sales and marketing expense during the nine months ended September 30, 2011 was attributable to a reduction in salaries and commissions due to restructuring of commission plans along with decreases in trade show and travel expenses, prior to the Public Offering, offset in part by the current sales and marketing efforts during the three months ended September 30, 2011.
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 increased by $33,573, or 10.6% to $350,332 for the three months ended September 30, 2011 compared to the same period of the prior year and decreased by ($258,335), or (24.2%), to $810,891 for the nine months ended September 30, 2011 compared to the prior year. The decrease for the nine months ended September 30, 2011, was primarily due to the completion of the R3 Series prototype during the first quarter of this year, offset in part by the execution of the LOI with Panoz for the start of the next phase of the R3 Series project.
General and administrative. General and administrative expenses increased by $258,046, or 31.7%, to $1,071,832, for the three months ended September 30, 2011 compared to the same period of the prior year and increased $87,942, or 3.2%, to $2,818,712 for the nine months ended September 30, 2011 compared to the prior year. The increase during the three months and nine months ended September 30, 2011 was primarily due to the implementation of the Companys investor relations strategy and increase in charitable contributions by the Company.
Other income, net. Other income, net increased by $185,553, or 107.8%, to $357,698 for the three months ended September 30, 2011 and increased by $1,353,206, or 380.1%, to $1,709,248 for the nine months ended September 30, 2011 compared to the prior year. The increase was primarily due to a decrease in interest expense due to the conversion of certain notes payable into the Companys common stock, the decrease in debt discount amortization from the prior year and decreased interest due to the Company paying off $1.0 million of debt. These decreases were offset in part by the decrease in the gain on change in fair value of the mark-to-market of the Companys derivative liabilities due to the reclassification of the derivatives to equity as a result of the transactions associated with the AMEX listing.
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Deemed dividend. Deemed dividend decreased by ($689,109) or (100%), to $0 for the three months ended September 30, 2011 compared to the same period of the prior year and increased by $1,300,769, or 43.9%, to $4,263,069 for the nine months ended September 30, 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 increase was attributable to the conversion of 11,502,263 shares of Series A Preferred Stock into 2,872,574 shares of common stock resulting in full amortization of the preferred stock deemed dividend as a result of the Public Offering.
Net loss attributable to common stockholders. Net loss attributable to common stockholders for the three months ended September 30, 2011 was ($1,207,394), or ($0.09) per basic and diluted share compared to a loss of ($1,951,420), or ($0.40) per basic and diluted share, for the same period of the prior year. Net loss attributable to common stockholders for the nine months ended September 30, 2011, was ($6,779,429), or ($0.76) per basic and diluted share compared to a loss of ($7,352,537), or ($1.55) 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. On May 19, 2011, we have completed the Public Offering raising net proceeds of approximately $9.0 million, after deduction of underwriting discounts and offering expenses.
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. The Company has incurred significant operating losses and has used substantial amounts of working capital in its operations since its inception (March 16, 2006). The Company has an accumulated deficit of $(51.9) million as of September 30, 2011, and has a net loss of $(2.5) million and used cash in operations of $(5.4) million for the nine months ended September 30, 2011. These factors raise substantial doubt about the Companys ability to continue as a going concern.
The Company expects to continue to incur substantial additional operating losses from costs related to the continuation of product and technology development and administrative activities. The Company believes that its working capital at September 30, 2011 of $4.7 million, together with the revenues from the sale of its products, the implementation of its cost reduction strategy for material, production and service costs and the recent $11.1 million Public Offering of its securities, is sufficient to sustain its planned operations into the second quarter of 2012; however, the Company cannot assure you of this and may require additional debt or equity financing in the future to maintain operations.
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.
During 2011, the Company has received proceeds from related-party loans of $1.3 million, completed a public offering raising $9.0 million (net of offering costs), converted related party notes payable outstanding balances of $5.6 million, plus accrued interest of $0.6 million, into equity and paid off the outstanding balance of the $1.0 million related to the note to Immersive. 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.
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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 September 30, 2011, cash and cash equivalents were $3,754,316 or 46.3% of total assets compared to $123,861, or 3.5% of total assets as of December 31, 2010.
Cash Flows
For the nine months ended September 30, 2011 and 2010
Net cash used in operating activities for the nine months ended September 30, 2011 and 2010 were ($5,401,815) and ($3,900,772), respectively. Net cash flows used were primarily due to a net loss of ($2,516,360), net non-cash reconciling items of ($1,126,761), a decrease in accounts payable and accrued expenses of ($600,440), an increase in accounts receivable and other receivables of ($500,876), and increase in inventories of ($458,641).
For the nine months ended September 30, 2010, cash flows used in operating activities related primarily to the net loss of ($4,390,237) and net non-cash reconciling items of $257,170. Net cash flows used were due in part by increases in inventories, prepaid expense and other current assets, and related party payables of ($172,954), ($148,326) and ($104,931), respectively, and a decrease in accounts receivable and an increase in accounts payable of $268,355 and $368,278, respectively.
Net cash used in investing activities of $23,604 for the nine months ended September 30, 2011 primarily related to purchase of property and equipment of $20,147.
Net cash used in investing activities of $54,378 for the nine months ended September 30, 2010 related primarily to purchases of property and equipment of $43,645 and loans to related parties of $28,795, offset by repayment of loans to related parties of $18,062.
Net cash provided by financing activities of $9,055,874 for the nine months ended September 30, 2011 related primarily to proceeds of $8,999,342 from sale of units of the Companys securities, net of issuance costs, proceeds from related party note payables of $1,300,000 offset by the payment of $1,000,000 related party notes payable.
Net cash provided by financing activities was $1,415,000 for the nine months ended September 30, 2010. For the nine months ended September 30, 2010, cash flows provided by financing activities related to proceeds from the sale of preferred stock of $1,155,000, and a related party payable for $610,000, offset by payments for 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.
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The following table is the warrants issued and outstanding as of September 30, 2011:
Warrants Exercisable | Exercise Price | Expiration | ||||||||
12,000 | $ | 15.40 | 3/31/2013 | |||||||
27,478 | $ | 7.87 | 12/29/2014 | |||||||
195,373 | $ | 5.00 | 12/29/2014 | |||||||
400,000 | $ | 5.00 | 12/30/2014 | |||||||
160,000 | $ | 5.00 | 2/2/2015 | |||||||
71,000 | $ | 5.00 | 3/22/2015 | |||||||
94,764 | $ | 4.68 | 3/31/2015 | |||||||
104,000 | $ | 4.68 | 4/30/2015 | |||||||
5,000 | $ | 7.00 | 8/25/2015 | |||||||
4,942,557 | $ | 3.00 | 5/13/2013 | |||||||
4,942,557 | $ | 3.50 | 5/13/2016 | |||||||
142,858 | $ | 4.38 | 5/13/2016 | |||||||
50,000 | $ | 3.50 | 4/25/2016 |
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, as amended (the Exchange Act) 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 Exchange Act s recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms.
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 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 September 30, 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 September 30, 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.
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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.
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 action, which management believes is reasonably likely to materially affect our controls and procedures as it is 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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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 Chief Operating Officer (collectively Defendants) for breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed between Plaintiff and the Company. In July 2010, the case was settled in its entirety and 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 $0 and $4,126 at September 30, 2011 and December 31, 2010, respectively.
As of September 30, 2011, the Company has paid the balance in full and the case was dismissed on June 22, 2011. During the three and nine months ended September 30, 2011, the Company recorded $0 and $4,014 of interest expense, respectively.
Other than as described above, there have been no material developments during the nine months ended September 30, 2011 in any material pending legal proceedings to which the Company is a party or of which any of our property is the subject.
There were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. (Removed and Reserved)
None
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The exhibits listed on the Exhibit Index are provided as part of this report.
INDEX TO EXHIBITS
Exhibit Number |
Description | |
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 | |
101.INS** | XBRL Instance Document | |
101.SCH** | XBRL Taxonomy Extension Schema Document | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |
** | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
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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.
T3 MOTION, INC. (Registrant) | ||||||
Date: November 14, 2011 | By: | /s/ Ki Nam | ||||
Ki Nam | ||||||
Chairman of the Board and Chief Executive Officer |
T3 MOTION, INC. (Registrant) | ||||||
Date: November 14, 2011 | By: | /s/ Kelly Anderson | ||||
Kelly Anderson | ||||||
Executive Vice President and Chief Financial Office |
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