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EX-32.1 - EX-32.1 - T3M INC. | a59023exv32w1.htm |
EX-32.2 - EX-32.2 - T3M INC. | a59023exv32w2.htm |
EX-31.1 - EX-31.1 - T3M INC. | a59023exv31w1.htm |
EX-31.2 - EX-31.2 - T3M INC. | a59023exv31w2.htm |
EX-10.53 - EX-10.53 - T3M INC. | a59023exv10w53.htm |
EX-10.54 - EX-10.54 - T3M INC. | a59023exv10w54.htm |
EX-14.1 - EX-14.1 - T3M INC. | a59023exv14w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 333-150888
T3 Motion, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 20-4987549 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
2990 Airway Ave., Building A Costa Mesa, California |
92626 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number: (714) 619-3600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
As of the last business day of the registrants most recently completed second fiscal quarter,
the aggregate market value of the registrants voting common stock held by
non-affiliates of the registrant was approximately $36.4 million (computed using the closing sales price
of $0.75 per share of common stock on such date). For the purposes of this calculation, shares
owned by officers, directors and persons known to the registrant to own 10% or more of the
outstanding voting power of the registrant have been deemed to be owned by affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
Number of shares of common stock outstanding as of March 31, 2011: 50,658,462.
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2010
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EX-32.2 |
i
Table of Contents
FORWARD-LOOKING STATEMENTS AND CERTAIN TERMINOLOGY
This annual report on Form 10-K 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,
possible, 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, availability of additional equity or debt financing, 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 and speak
only as of the date hereof. Management undertakes no obligation to publicly release any revisions
to these forward-looking statements that may reflect events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events. This cautionary statement is applicable to
all forward-looking statements contained in this report.
In this document, unless the context otherwise indicates, the terms we, our, ours, us,
T3 Motion and the Company collectively refer to T3 Motion, Inc. and its wholly-owned
subsidiary, T3 Motion, Ltd.
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PART I
ITEM 1. BUSINESS
Overview
T3 Motion designs, manufactures and markets personal mobility vehicles powered by electric
motors. Our initial product is the T3 Series, which is a three wheel, electric stand-up vehicle
(ESV) powered by a quiet, zero-gas emission electric motor that is designed specifically for
public and private security personnel. Substantially all of our revenues to date have been derived
from sales of the T3 Series ESVs and related accessories.
The T3 Series has received recognition for its iconic design, including the Innovation Award
for Best Vehicle at the 2007 International Association of Chiefs of Police (IACP) Convention and
the Spark Award in the Vehicle Mobility category at the 2007 International Spark Design Awards. The
T3 Series has been featured on television and print media being deployed by professionals in law
enforcement and the private security industry due to its innovative design and convenient access.
The elevated nine inch raised platform provides the officer with a command presence, allowing the
public to be aware of the officers presence, while providing the officer with a better vantage
point to evaluate any situation. By using a T3 Series ESV, an officer can effectively patrol a
larger area than on foot or riding a bicycle, and enables the officer to safely and quickly
maneuver in crowded pedestrian areas or other areas where cars and other standard modes of
transportation cannot access easily, if at all. The T3 Series also improves the officers
approachability with the public as a result of its design and open platform that allow the officer
to interact with pedestrians more easily than is possible while patrolling by automobile,
motorcycle, or horseback.
We were incorporated in Delaware in 2006 and introduced our first T3 Series vehicles in early
2007. We currently sell our products in the U.S. directly and through distributors, and also market
our T3i Series ESV (the international version of our T3 Series) in the Middle East, Mexico, Canada,
Asia, South Africa, South America and Europe. Our net revenues for the years ended December 31,
2010, 2009, 2008 and 2007 were approximately $4.7 million, $4.6 million, $7.6 million and $1.8
million, respectively, and our net losses for the same periods were approximately $(8.3 million),
$(6.7 million), $(12.3 million) and $(8.6 million), respectively. Our accumulated deficit as of
December 31, 2010, 2009 and 2008 was approximately $(45.1 million), $(33.1 million) and $(24.4
million), respectively. At December 31, 2010, the Company had a working capital deficit of $(15.1
million) and a cash and cash equivalents balance (including restricted cash) of $133,861. The
report of the Companys independent registered public accounting firm that accompanies the
Companys audited consolidated financial statements for the years ended December 31, 2010 and 2009
contains a going concern qualification in which the independent registered public accounting firm
expressed substantial doubt about the Companys ability to continue as a going concern. Management
believes that its current sources of funds and current liquid assets will allow the Company to
continue as a going concern through at least April 30, 2011.
The Company has filed a registration statement in connection with a proposed public offering
of its securities. Management has been implementing cost reduction strategies and believes that its
cash from operations, together with the net proceeds of that offering, will be sufficient to allow
the Company to continue as a going concern through at least December 31, 2011; however, the Company
cannot assure you of this and may require additional debt or equity financing in the future to
maintain operations. The Company also anticipates that it will pursue raising additional debt or
equity financing to fund its new product development and expansion plans. We cannot assure you that
such financing will be available on a timely basis, on acceptable terms or at all.
Corporate Information
Our principal executive office is located at 2990 Airway Avenue, Building A, Costa Mesa,
California 92626 and our telephone number is (714) 619-3600. Our website is
www.T3motion.com. Information provided on, or accessible through, our website, however, is
not part of this report and is not incorporated herein.
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Table of Contents
Proposed Public Offering
The Company has filed a registration statement in connection with a proposed follow-on public
offering with anticipated gross proceeds to the Company of
approximately $8.75 million. The
registration statement is for the sale of 2.5 million units (consisting of one share of common
stock, one nine month warrant to purchase one share of stock at an exercise price of $3.00 per
share (Class H Warrant) and one five year warrant to purchase one share of stock at an exercise
price of $5.25 per share (Class I Warrant)). In conjunction with the registration statement, the
Company intends to list its securities on the NYSE Amex (AMEX). In order to meet the
requirements of AMEX, the Company intends to effect a one-for-10 reverse stock split immediately
prior to the closing of the offering. The Company cannot guarantee that the offering will be
completed on a timely basis, on acceptable terms, or at all.
If the Company is able to complete the offering, the Company anticipates that the following
transactions will occur in conjunction with such offering:
| the conversion of 11,502,563 shares of our outstanding Series A convertible preferred stock upon completion of the offering into 2,662,072 shares of our common stock; | ||
| the conversion of the outstanding $1,121,000 loan plus accrued interest of $23,756 from Ki Nam, the Companys Chief Executive Officer, into 327,073 shares of our common stock upon completion of the offering; | ||
| the conversion of $3.5 million of the Vision Debentures plus accrued interest of $350,959 into 1,100,274 shares of our common stock upon completion of the offering; | ||
| a one-for-10 reverse stock split of our common stock, which is expected to be completed immediately prior to the closing of the offering; and | ||
| the reclassification of the derivative liabilities (related to anti-dilution features associated with the conversion of the Vision Debentures, Series A convertible preferred stock and Class G warrants to additional paid-in capital upon completion of the offering), and the accretion of the remaining preferred stock discount related to the anti-dilution feature. |
Our Products and Services
T3 Series and T3i Series ESVs
The T3 Series and the T3i Series (the version with the headset, power modules and batteries
designed for international use and compliance with international standards) are a three-wheel,
front wheel drive, stand-up, electric personal mobility vehicles with a zero-gas emission electric
motor. They have hydraulic disk brakes on both rear wheels that are matched with 17-inch low
profile motorcycle tires for long treadwear and demanding performance. The vehicles are equipped
with an LCD control panel display and utilizes high intensity LED lighting for its vertically
adjustable headlights and taillights. It also features emergency lights, as well as a siren on the
law enforcement model. The T3 Series and T3i Series enable the operator to respond rapidly to calls
with low physical exertion. The nine-inch elevated riding platform allows 360 degrees visibility
while the ergonomic riding position reduces fatigue. The zero degree turning radius makes it highly
maneuverable. The T3 Series and T3i Series come standard with a lockable storage compartment for
equipment and supplies. An image of the T3 Series vehicle is shown below:
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Power Modules
The T3 Series and T3i Series have replaceable power modules that allow continuous vehicle
operation without downtime required for charging. The T3 Series and T3i Series offer a variety of
battery technology options in its power modules. The power modules and charger can be sold
separately as replacement parts.
Accessories
Each T3 Series and T3i Series have the following accessory options:
Each T3 Series and T3i Series features reversible rear tires which enables customers to
determine whether to set up their T3 or T3i Series in a wide stance (36 wide) or a narrow stance
(32 wide), depending on their needs.
The side-mount External Storage Pack allows the operator to carry additional items on the
vehicle. The front-mount external storage case enables the T3 Series and T3i Series to distribute
parcels, documents, and cargo in indoor and outdoor narrow space environments.
The Sun Shade provides the operator protection from elements like the sun or rain.
The front and rear turn indicator system is available for international deployments and
domestic up-fitting opportunities.
The on-board video camera system and digital video recorder is available for patrol tracking
and incident response data.
Additional accessories include an external shotgun mount, a fitted vehicle cover, a parcel
delivery trailer, and a multi-function trailer option.
We plan to continue to design and field test accessories as demand or needs arise.
Camera System
We offer multiple CCTV and camera systems including the 360-IP DN Camera, a stand-alone
360-degree camera and DVR, the Motiontrak, black-box in car video and data recording system
integrated with Google maps
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and the TVS-4050WK, a fully wireless IP four-camera system targeted at facilities, warehouse,
business districts, and campuses. They also offer the option of GPS positioning, real-time
surveillance or DVR recording options.
CT Series Micro Car
The CT Micro Car, is a low-speed four-wheel electric car. Leveraging the market and brand of the T3
Series, we intend to market the CT Series using our existing sales channels in the law enforcement
and private security, sectors. The CT Series offers a variety of battery technology options with
varying range options. The CT Series has lighting, siren and PA system options. Our exclusive
distribution agreement with manufacturing partner, CT&T dated November 24, 2008, provides us with
the exclusive territories of North America for all law enforcement, government, military and
security markets and the exclusive markets of all U.S. government law-enforcement and security
markets. The initial term of the distribution agreement expires in November 2011, but automatically
renews for additional one year terms unless we or CT&T give 90 days written notice prior to the end
of any term.
Electric/Hybrid Vehicle
The Electric/Hybrid Vehicle is the newest product in development. The Electric/Hybrid Vehicle is a
plug-in hybrid. The proprietary rear-wheel design features a patent-pending single, wide-stance
wheel with two high-performance tires sharing one rear wheel. Due to its three-wheel design, the
Electric/Hybrid Vehicle is classified as a motorcycle. The Electric/Hybrid Vehicle is expected to
be released for the market in late 2011.
Future Products
We plan to introduce a series of product variants based on the initial T3 Series, the T3i
Series and CT Series vehicles and the modularity of the sub-systems we have created. While both the
initial T3 Series, T3i Series and the CT Series vehicles are targeted at law enforcement, security
and enterprise markets, we intend to expand our base of T3 Series, T3i Series and CT Series vehicle
variants by utilizing the modularity of the sub-systems to configure vehicles for specific market
uses such as delivery services, personnel transport and personal mobility. As with all new
development and products, we cannot guarantee that the products will make it to market and if they
are released to market, whether they will be successful.
Research and Development
We emphasize on product research and development (R&D). For the years ended December 31,
2010 and 2009, we spent $1,602,961 and $1,395,309, respectively, on R&D for development of products
such as the CT-Series, the Electric/Hybrid Vehicle and to ensure that the T3 Series and T3i Series
personal mobility vehicles are properly designed to be more effective and useful tools for the
public safety and private security market. In addition, we will continue to refine and optimize all
aspects of the vehicle design to maintain the high standards of vehicle performance, cost
effectiveness and to continue to meet the needs of our customers.
Growth Strategies
Our mission is to become the leader in clean energy, personal, professional mobility electric
stand-up vehicles, and to continue providing products that are economical, functional, safe,
dependable and meet the needs of the professional end user. We plan to pursue the following growth
strategies in pursuit of our mission:
Capitalize on broader private security opportunities. Our initial focus on the law
enforcement market has increased the demand for the T3 Series and T3i Series ESV from other
security markets, which may hold equal, if not greater, potential for our products. We plan to
focus our marketing efforts to pursue the sale of our products into private security markets, which
could include corporate campuses, manufacturing facilities, government facilities, military bases,
shopping malls, airports and events/promotions.
Increase our branding in law enforcement. We intend to continue to build on our
reputation within the law enforcement community and plan to pursue additional branding activities
in this regard. We believe that maintaining a strong brand within the law enforcement community
will facilitate our expansion into other private security markets.
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Pursue international expansion. We believe the international markets represent a
significant opportunity to expand our current sales. We plan to continue to expand our presence in
our existing international markets, and to pursue adding new distributors to increase our sales in
Asia and Europe.
Expand the T3 Series product line to address broader markets. We believe the
modularity of our sub-systems may be used to configure additional vehicles that address the
personal transportation and personal mobility requirements in existing and new markets. We plan to
evaluate the expansion of our product line to leverage our technologies for additional commercial
markets such as for delivery services, property management, utility and maintenance providers, in
addition to any other private venue requiring security.
Leverage our brand into the consumer market. As we gain additional brand name
recognition, we plan to leverage our brand to enter the consumer market for personal
transportation. We are currently working on the development of the Electric/Hybrid Vehicle to
address the consumer markets and plan to evaluate the expansion of our product line for other
consumer applications.
Marketing and Distribution
We market and sell our products through our direct sales force located at our headquarters in
Costa Mesa, California. We have agreements with numerous domestic and international distributors
and manufacturers representatives, adding substantially to our direct sales force. We plan to
continue to expand our international sales by engaging additional distributors in new and existing
markets, particularly in Asia and Europe. Our standard distribution agreements provide for the
right to distribute our vehicle and accessories within defined geographic locations and defined
markets. Our distribution agreements allow the distributor to purchase our products at set prices,
however, generally there is no requirement that the distributors meet a minimum order quantity. Our
distribution agreements usually can be cancelled by either party upon 30 days prior written notice.
We value our customer input as we are a customer-driven company. We generally follow a
fundamental approach using the following core customer interests:
| We evaluate the available budget from the customer, building the value of the product rather than price. | ||
| Return on Investment (ROI). Our products have demonstrated significant operational savings over gas powered vehicles and allow the end user greater mobility and work efficiencies. | ||
| We strive to maintain a manufacturing process that generally holds lead times to approximately a 4 to 6 week timeframe. | ||
| We have an in-field swappable power system that enables our clients to operate vehicles without downtime for charging. The sustainable engineering and design was specifically tailored for the professional end user in law enforcement and private security. | ||
| Our vehicle has demonstrated that the iconic look and command presence has a crime deterrent ability. | ||
| The T3 Series and T3i Series ESVs allow the user greater mobility to maneuver through crowds and tight areas than other vehicles such as motorcycles, effectively increasing the patrol area and granting the user job efficiencies. |
Our Operations
Our principal executive offices and operations facility is located in Costa Mesa, California.
Our main corporate headquarters facility located at 2990 Airway Avenue, Building A is a leased
34,000 square foot facility that is home to the executive staff and sales staff and is our main
operational and manufacturing location. The facility is equipped with multiple production lines
capable of producing up to 750 T3 vehicles per month. Located directly across the street at 2975
Airway is our 14,000 square feet warehouse and R&D center that is fully equipped with all of the
necessary machines and equipment needed to design and build development products.
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Our manufacturing activities largely consist of final assembly, testing and quality assurance.
We manufacture our T3 Series at our headquarters. Our raw materials are sourced from various
suppliers, both domestic and international. Currently, our electronics and wire harness assembly
manufacturing, embedded digital processing application development and electronics hardware and
software development occur at our headquarters and operations center. Final assembly, testing,
warehousing, quality control and shipping take place at our U.S. operations center.
Our sales and marketing operations are located at our headquarters. We have agreements with
various distributors and manufacturing representative companies, which generally give the
distributors and manufacturers representatives the exclusive rights to sell the T3 Series and CT
Micro Car in specified geographic regions. Each agreement typically contains a 30 day cancellation
clause.
Sources and Availability of Raw Materials; Principal Suppliers
Currently, over 70% of our T3 Series suppliers are local suppliers who provide products and
services to low volume early stage development companies. As the vehicle design has become stable
and sales volumes have increased, we have begun our transition to incorporate a global supply
chain. We have made significant progress in establishing relationships with suppliers who service
volume production stage companies. In addition, we plan to invest in production tooling that will
yield consistent high quality and lower cost parts designed to our specifications. We plan to
implement our multi-source supply chain strategy in working directly with established factories
within the automotive and motorcycle industry. The supply chain could include materials sourcing
and subassembly operations from sources in China, South Korea and Mexico. These components will be
shipped to our operations facility in Costa Mesa, California for final assembly, test, inspection,
and shipments to our customers. We plan to continue to expand this multiple source supplier base to
allow us to utilize both current U.S. based suppliers and newly acquired global suppliers to reduce
the risks of our existing single sourced components and reduce product costs.
We do not manufacture the CT Micro Car. Fully-built versions are delivered to us from the
developer and manufacturer, CT&T, a Korean electric car manufacturer. We outfit the CT Micro Car
with our power management and battery technologies.
Operating and Manufacturing Strategy
Our management and engineering teams have experience working with off-shore manufacturers and
believe there are advantages of partnering with reputable off-shore suppliers to access reliable
manufacturing practices at lower labor cost. Our staff continuously seeks out new qualified
suppliers and we evaluate suppliers for the maximum benefit that can be realized. We generally seek
suppliers and manufacturers with a well established history of supplying quality products within
their respective industries, a trained and experienced technical work force, state of the art
facilities and knowledge of all aspects of supply chain management, operational execution, global
logistics and reverse logistics.
Competition
We currently compete with other providers of personal mobility vehicle including, without
limitation, Segway, California Motors-Ride Vehicles and Gorilla Vehicles, but also compete with
other forms of transportation such as bicycles, horses and standard police cars.
Some of our competitors are larger than we are and may have significantly greater name
recognition and financial, sales and marketing, technical, manufacturing and other resources. These
competitors may also be able to respond rapidly to new or emerging technologies and changes in
customer requirements or devote greater resources to the development, promotion and sale of their
products. Our competitors may enter our existing or future markets with products that may provide
additional features or that may be introduced earlier than our products.
We attempt to differentiate ourselves from our competitors by working to provide superior
customer service and developing products with appealing functions targeted to our core markets of
professional end users in law enforcement, private security, and government.
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We value our customer input as we are a customer-driven company. Entering into any negotiation
we follow a fundamental approach using one of three core customer interests:
| We evaluate the available budget from the customer, building the value of the product rather than price. | ||
| We maintain a manufacturing process that generally requires a four to six week lead times; although standard lead times may change if orders increase or our supply chain lead times increase. | ||
| We have an in-field swappable power system that enables our clients to operate vehicles without downtime for charging. The sustainable engineering and design was specifically tailored for the professional end user in law enforcement and private security. |
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Intellectual Property
The following table describes the intellectual property owned by the Company:
Type | Name | Issued by | Description | |||
Trademark
|
United State Patent and Trademark Office | Logo, brand name used on our products |
||||
Trademark
|
United State Patent and Trademark Office | Logo, brand name used on our products |
||||
Trademark
|
ENABLING PERSONAL MOBILITY | United State Patent and Trademark Office | Logo, brand name used on our products |
We also have a patent license agreement from Evolutionary Electric Vehicles to us granting a
perpetual, fully paid, transferable exclusive license to make, have made, use, improve and sell an
over 10 Horsepower Brushless DC Motor for Traction (US Patent #4,882,524) with respect to products
in the world. This patent covers a motor technology that we plan on fully developing and using in
our products. Currently, we do not use the motors covered by this patent; however, this patented
technology will be utilized in future motors that we intend to use on future products. It is still
too early in the developmental phase to determine when the motor technology and products will be
available for the market.
On March 21, 2008, we filed a United States Patent Application for Batteries and Battery
Monitoring and Charging System. The intellectual property covered in this multi-claim patent is our
proprietary power management system that is currently used on all T3 Series products.
On September 17, 2008, we filed a United States Patent Application for the Battery Powered
Vehicle Control Systems and Methods. The intellectual property covered in this multi-claim patent
is our proprietary control system that is currently used on all T3 Series products.
On July 27, 2009, we filed a United States Patent Application for Dual Tires on a Single Wheel
(Provisional). The intellectual property covered in this patent offers enhanced stability, reduces
rolling and aerodynamic resistance and increases rider safety.
On September 30, 2009, we filed a United States Patent Application for Vehicle Hood, Fenders,
and Bumper (Design). Our unique design showcases custom built parts that are task specific and
visually appealing.
On December 7, 2009, we filed a United States Patent Application for Rechargeable Battery
Systems and Methods (Provisional). The claim covers a battery charging management system that we
will deploy in our electric CT-Series and GT3 vehicle in the future. While utilizing modular
technology was already used in the T3 Series vehicle , this new battery and charger system will
provide more efficiency and no downtime.
We cannot assure you that any patents will be issued, or even if issued, that they will
provide adequate protection for the Companys intellectual property.
Government Approvals and Regulation
On September 17, 2008, T3 Motion completed and passed its third party lab testing to obtain
its CE certification for the T3i Series product, battery, and charging system. CE is the governing
regulatory body and standard for electrical products meant to be exported to the European Union,
Africa, Australia, the Middle East and other foreign countries.
| The T3i Series product has passed EMC testing for EN6100-6-1 and EN61000-6-3. | ||
| Batteries and chargers were found to be technically compliant with the EN55022, EN61000-3-2, EN61000-3-3, and EN55024 requirements. |
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| In 2009, the Electric Vehicle 3-Wheel and Charger has passed EMC testing for EN60950-1:2006 (Information Technology Equipment Safety Standards) as well as EN6100-6-1 and EN61000-6-3 (European Standards). | ||
On July 28, 2009, we received our GSA license number, GS-07F-0403V. |
Customers
Our marketing focus includes customers that have large areas to patrol such as law
enforcement, airports, hospitals, universities, security companies, property management companies,
shopping malls or large corporate campuses. One customer and no single customer accounted for more
than 10% of our net revenues for the years ended December 31, 2010 and 2009, respectively.
Employees
As of December 31, 2010, we have a total of 53 employees, all of which are full-time
employees. We have not experienced a work stoppage. Management believes that our relations with our
employees are good.
Recent Financings
Vision Opportunity Master Fund, Ltd. Bridge Financing
December 30, 2008 10% Convertible Debenture
On December 30, 2008, the Company sold $2.2 million in debentures and issued Class D warrants
through a private placement to Vision Opportunity Master Fund, Ltd. (Vision) pursuant to a
Securities Purchase Agreement. In connection with this financing, the Company recorded a debt
discount of $607,819 related to the beneficial conversion feature (BCF) of the debenture and a
debt discount of $607,819 related to the relative fair value of the Class D warrants. The debt
discount for the Class D warrants was calculated using the Black-Scholes-Merton option pricing
model. The BCF and warrants were amortized to interest expense over the one-year life of the note.
As a result of the adoption of a new accounting pronouncement on January 1, 2009, the Company
recorded an additional debt discount of $859,955 which was amortized through maturity of the
debentures.
On December 30, 2009, pursuant to the Exchange Agreement (see below), the Company issued to
Vision and Vision Capital Advantage Fund, L.P. (VCAF and, together with Vision, the Vision
Parties), shares of Preferred Stock in exchange for the delivery and cancellation of these
debentures and accrued interest.
May 28, 2009 10% Convertible Debenture
On May 28, 2009, the Company issued to Vision, 10% Debentures with an aggregate principal
value of $600,000. Additionally, Vision received Class E common stock purchase warrants, (Class E
Warrants) to purchase up to an aggregate 300,000 shares of the Companys common stock at an
exercise price of $1.20 per share. In connection with this financing, the Company recorded a debt
discount of $291,327 related to the conversion feature of the debenture and a debt discount of
$201,222 related to the estimated fair value of the Class E Warrants. The debt discount for the
Class E Warrants was calculated using the Black-Scholes-Merton option pricing model. The conversion
feature and warrants were amortized to interest expense through the date of exchange of these
debentures (see below). As noted below, these 10% Debentures were cancelled in connection with the
December 30, 2009 financing with Vision. Additionally, the Class E Warrants were exchanged for
shares of Preferred Stock in connection with the December 30, 2009 financing with Vision (see
below).
December 30, 2009 10% Convertible Debenture
On December 30, 2009, the Company sold $3,500,000 in debentures and warrants to Vision through
a private placement pursuant to a Securities Purchase Agreement (the Purchase Agreement). The
Company issued to Vision, 10% secured convertible debentures (Debentures), with an aggregate
principal value of $3,500,000.
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The Debentures accrue interest on the unpaid principal balance at a rate equal to 10% per
annum. The maturity date of the Debentures was December 30, 2010 (see below). At any time after the
240th calendar day following the issue date, the Debentures are convertible into units of Company
securities at a conversion price of $1.00 per unit, subject to adjustment. Each unit consists of
one share of the Companys Preferred Stock and a warrant to purchase one share of 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. The Company may redeem the Debentures in whole or part at any time after June 30, 2010 for
cash in an amount equal to 120% of the principal amount plus accrued and unpaid interest and
certain other amounts due in respect of the Debenture. Interest on the Debentures is payable in
cash on the maturity date or, if sooner, upon conversion or redemption of the Debentures. In the
event of default under the terms of the Debentures, the interest rate increases to 15% per annum.
The Company recorded interest expense of $350,000 and $959, related to the stated rate of interest,
for the years ended December 31, 2010 and 2009, respectively, and had accrued interest of $350,959
and $959 as of December 31, 2010 and 2009, respectively.
The Purchase Agreement provides that during the 18 months following December 30, 2009, if the
Company or its wholly owned subsidiary, T3 Motion, Ltd., a company incorporated under the laws of
the United Kingdom (the Subsidiary), issue common stock, common stock equivalents for cash
consideration, indebtedness, or a combination of such securities in a subsequent financing (the
Subsequent Financing), Vision may participate in such Subsequent Financing in up to an amount
equal to Visions then percentage ownership of the Companys common stock.
The Purchase Agreement also provides that from December 30, 2009 to the date that the
Debentures are no longer outstanding, if the Company effects a Subsequent Financing, Vision may
elect, in its sole discretion, to exchange some or all of the Debentures then held by Vision for
any securities issued in a Subsequent Financing on a $1.00 for $1.00 basis (the Exchange);
provided, however, that the securities issued in a Subsequent Financing will be irrevocably
convertible, exercisable, exchangeable, or resettable (or any other similar feature) based on the
price equal to the lesser of (i) the conversion price, exercise price, exchange price, or reset
price (or such similar price) in such Subsequent Financing and (ii) $1.00 per share of common
stock. Vision is obligated to elect the Exchange on a $0.90 per $1.00 basis (not a $1.00 for $1.00
basis) if certain conditions regarding the Subsequent Financing and other matters are met.
Also pursuant to the Purchase Agreement, Vision received Class G common stock purchase
warrants (the Class G Warrants). Pursuant to the terms of the Class G Warrants, Vision is
entitled to purchase up to an aggregate of 3,500,000 shares of the Companys common stock at an
exercise price of $0.70 per share, subject to adjustment. The Class G Warrants have a term of five
years after the issue date of December 30, 2009.
The Subsidiary entered into a subsidiary guarantee (Subsidiary Guarantee) for Visions
benefit to guarantee to Vision T3 Motions obligations due under the Debentures. T3 Motion and the
Subsidiary also entered into a security agreement (Security Agreement) with Vision, under which
it and the Subsidiary granted to Vision a security interest in certain of our and the Subsidiarys
property to secure the prompt payment, performance, and discharge in full of all obligations under
the Debentures and the Subsidiary Guarantee.
December 30, 2009 Exchange Agreement
On December 30, 2009, the Company also entered into a securities exchange agreement (the
Exchange Agreement) with the Vision Parties. Pursuant to the Exchange Agreement, the Company
issued to the Vision Parties an aggregate of 9,370,698 shares of Preferred Stock. 3,055,000 shares
of Preferred Stock were issued in exchange for the delivery and cancellation of 10% Secured
Convertible Debentures previously issued by the Company to the Vision Parties in the principal
amount of $2,200,000 (issued December 30, 2008) and $600,000 (issued May 28, 2009) plus accrued
interest of $255,000 (in conjunction with the issuance of Preferred Stock, the Company issued Class
F warrants to purchase 6,110,000 shares of common stock at $0.70 per share); 2,263,750 shares of
Preferred Stock were issued in exchange for the delivery and cancellation of all Class A, B, C, D,
E and F warrants (which were exercisable for an aggregate of 10,972,769 shares) previously issued
by the Company to the Vision Parties valued at $1,155,390, (the Company recorded a gain of $45,835
related to the exchange of the warrants for Preferred Stock); and 4,051,948 shares of Preferred
Stock were issued to satisfy the Companys
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obligation to issue equity to the Vision Parties pursuant to a securities purchase agreement
dated March 24, 2008 and amended on May 28, 2009.
Under the Exchange Agreement, Ki Nam, the Chief Executive Officer and Chairman of the board of
directors of the Company, also agreed to convert a promissory note plus the accrued interest,
previously issued to him by the Company into 976,865 shares of Preferred Stock and Class G Warrants
to purchase up to 1,953,730 shares of common stock (which warrants have the same terms as the Class
G Warrants issued to Vision pursuant to the Purchase Agreement).
The Company, Mr. Nam and the Vision Parties also entered into a stockholders agreement,
whereby Mr. Nam agreed to vote, in the election of members of the Companys board of directors, all
of his voting shares of the Company in favor of (i) two nominees of the Vision Parties so long as
their ownership of common stock of the Company is 22% or more or (ii) one nominee of The Vision
Parties so long as their ownership of common stock of the Company is 12% or more.
Amendment of December 30, 2009 10% Convertible Debenture
On December 31, 2010, the Company and the Vision Parties 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.
December 31, 2010 Exchange Agreement
On December 31, 2010, the Company entered into a securities exchange agreement with Vision
pursuant to which the Company exchanged 3.5 million Class G Warrants for 2.1 million shares of the
Companys common stock. On the date of the exchange, the warrants were classified as derivative
liabilities and had an estimated fair value of $1,208,478 and the shares of the Companys common
stock were valued at the fair market price of $0.40 per share for a total value of $840,000,
resulting in a gain on the transaction of $368,478, which was recorded in other income.
Debt Discounts and Amortization
The debt discount recorded on the December 30, 2009 Debentures was allocated between the
warrants and conversion feature in the amount of $1,077,652 and $1,549,481, respectively. In
addition, the Company recorded an additional debt discount during the year ended December 31, 2010
of $275,676 (see above). The debt discounts were amortized through the original maturity of the
Debentures of December 30, 2010. During the years ended December 31, 2010 and 2009, the Company
amortized $2,897,574 and $5,235, respectively, of the debt discounts to interest expense.
During the year ended December 31, 2009, the Company amortized $2,565,906 of interest expense
related to debt discounts on different notes to Vision that were ultimately exchanged for shares of
the Companys Preferred Stock on December 30, 2009 (see above).
Ki Nam Note
2010 Note
On February 24, 2011, the Company entered into a loan agreement with Ki Nam, its chairman and
CEO, for previous advances to the Company. The agreement allows Mr. Nam to advance up to $2.5
million for operating requirements. The note bears interest at 10% per annum. The note is due on
March 31, 2012 and allows for an automatic one year extension. During the year ended December 31,
2010, Mr. Nam advanced $1,511,000 to the Company to be used for operating requirements. During
October 2010, the Company repaid $390,000 of the advances, leaving a balance of $1,121,000
outstanding as of December 31, 2010. The Company recorded interest expense of $23,756 for the year
ended December 31, 2010 and had accrued interest of $23,756 as of December 31, 2010.
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2009 Note
On March 30, 2009, the Company entered into a loan agreement with Ki Nam, its chairman and
CEO, whereby, Mr. Nam agreed to advance the Company up to $1,000,000, including $498,528 that had
already been advanced by Mr. Nam for operating capital requirements through December 31, 2008. The
line of credit was to remain open until the Company raised $10.0 million in equity. The note bore
interest at 10% per annum. In the event the Company received (i) $10,000,000 or more in private
placement financing or (ii) $15,000,000 or more in equity financing at any time after the date of
the loan, the note was to become immediately due and payable.
In connection with the loan agreement, the Company agreed to issue warrants to Mr. Nam for the
purchase of up to 303,030 shares of the Companys common stock, $0.001 par value per share, at an
exercise price of $2.00 per share, subject to adjustment. The total number of warrants to be issued
was dependent on the final amount of the loan. During the year ended December 31, 2009, the Company
was advanced $414,963, including accrued interest, under the loan agreement. During the year ended
December 31, 2009, 274,774 warrants were issued to Mr. Nam pursuant to the terms of the loan
agreement. The Company recorded a debt discount of $246,228 related to the estimated fair value of
warrants, which was to be amortized as interest expense over the term of the loan agreement. The
loan was convertible during the pendency of any current open equity financing round at $1.65 per
share, subject to adjustment. Upon conversion, Mr. Nam was to receive additional warrants for the
purchase of up to 606,060 shares of the Companys common stock at $2.00 per share.
In December 2009, the Company issued 2,000,000 shares of its 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 $443 as a debt discount, which was to be
amortized to interest expense over the remaining term of the loan agreement. The Company recorded
the corresponding amount as a derivative liability and any change in fair value of the conversion
feature was to be recorded through earnings at each reporting date. The change in fair value of the
conversion feature was not significant for the period ended December 31, 2009.
On December 30, 2009, the Company entered into a Securities Exchange Agreement (the Exchange
Agreement) with Mr. Nam. Under the Exchange Agreement, Mr. Nam agreed to convert the balance of
the promissory note, including accrued interest, of $976,865 into 976,865 shares of the Companys
Preferred Stock and warrants to purchase up to 1,953,730 shares of the Companys common stock,
exercisable at $0.70 per share, subject to adjustment. The ability for Mr. Nam to receive
additional warrants for up to 606,060 shares of common stock was cancelled.
In connection with the Exchange Agreement, the Company agreed to convert Mr. Nams outstanding
debt balance of $976,865 at $0.50 per share, which was below the adjusted conversion price pursuant
to the terms of the loan agreement. Pursuant to the conversion terms of the loan agreement, Mr. Nam
would have received only 313,098 shares of stock. As a result, the Company issued Mr. Nam 663,767
additional shares of the Companys Preferred Stock in connection with his debt conversion.
As a result of the Exchange Agreement, the entire debt discount amounting to $246,671 was
amortized to interest expense. In addition, as the Company issued shares to Mr. Nam in excess of
the number of shares pursuant to the terms of the loan agreement, the Company recorded the fair
value of the 663,767 additional shares issued as a loss on debt extinguishment. The amount recorded
of $663,767 was included in other expense in the accompanying consolidated statement of operations
for the year ended December 31, 2009.
Lock-Up Agreement
In connection with the Vision financing, Ki Nam, our Chief Executive Officer and Chairman of
the board of directors of the Company, agreed not to transfer, sell, assign, pledge, hypothecate,
give, create a security interest in or lien on, place in trust (voting trust or otherwise), or in
any other way encumber or dispose of, directly or indirectly and whether or not voluntarily,
without express prior written consent of Vision, any of our common stock equivalents of the Company
until August 27, 2010; provided, however, that commencing on August 27, 2010, he may sell up to
1/24th of the shares of common stock of the Company in each calendar month through February 28,
2011.
Alfonso
Cordero and Mercy Cordero Note
On
January 14, 2011, the Company 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
(Noteholder) for amounts previously loaned to the Company in October 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 Noteholder has agreed to waive payment obligations from November 1, 2010 through April 15, 2011. The Company recorded interest expense and accrued
interest of $24,777 as of and for the year ended December 31, 2010.
The Company may prepay the Note, but must prepay in full only. The Company will be in default under the Note
upon: (1) failure to timely make payments due under the Note; and (2) failure to perform other agreements under the Note within 10 days of request from the Noteholder. Upon such event of default, the Noteholder may declare the
Note immediately due and payable. The applicable interest rate will be upon default will be increased to 15% or the
maximum rate allowed by law. The Noteholder has waived any and all defaults under the Note at December 31,
2010 and through April 15, 2011.
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ITEM 1A. RISK FACTORS
You should carefully consider the risks described below before making an investment decision
regarding any of our securities. Our business could be harmed by any of these risks. The trading
price of our securities could decline due to any of these risks, and you may lose all or part of
your investment. In assessing these risks, you should also refer to the other information contained
in this report, including our consolidated financial statements and related notes.
Risks Related to Our Company and Our Industry
We have a history of losses and we expect to continue to have additional net losses in the near future, which could cause the value of our securities to decline and may even cause our business to fail. |
We have generated net losses since our inception (March 16, 2006). Our net losses for the
years ended December 31, 2010, 2009, 2008 and 2007 were approximately $(8.3 million), $(6.7
million), $(12.3 million) and $(8.6 million), respectively. A large portion of our expenses are
fixed, and accordingly, we will need to significantly increase our sales in order to achieve
profitability. We anticipate that we will continue to generate losses in the near future, and the
rate at which we will incur losses could continue or even increase in future periods from current
levels as a result of any of the following:
| We may be unable to increase sales sufficiently to recognize economies of scale; | ||
| We may be unable to successfully expand into other private security markets or achieve broad brand recognition for our products; | ||
| We may be unable to reduce our costs or experience unanticipated costs or expenses in connection with our current development, marketing and manufacturing plans; | ||
| We may encounter technological challenges in connection with the development, introduction or manufacturing of enhancements to our existing vehicles or in the addition of new products; and | ||
| We may be unable to obtain sufficient components or materials used in our products due to capital constraints, which could adversely effect our sales, our reputation and credibility. |
To date, we have financed our operations primarily through equity and debt financing. Because
we anticipate additional net losses in the near future, we believe we will require additional
financings. We have filed a registration statement to raise additional capital in a follow-on
public offering but cannot guarantee that such offering will be consummated in a timely manner, on
acceptable terms or at all. Our ability to arrange future financing from third parties will depend
upon our perceived performance and market conditions. Our inability to raise additional working
capital on a timely basis, on acceptable terms or at all would materially and adversely impact our
business and operations, which could cause the price of our common stock to decline. It could also
lead to the reduction or suspension of our operations and ultimately force us to go out of
business.
If we are unable to continue as a going concern, our securities will have little or no value.
The report of our independent registered public accounting firm that accompanies our audited
consolidated financial statements for the years ended December 31, 2010 and 2009 contains a going
concern qualification in which such firm expressed substantial doubt about our ability to continue
as a going concern. In addition to our history of losses, our accumulated deficit as of December
31, 2010 and 2009 was approximately $(45.1 million) and $(33.1 million), respectively. At December
31, 2010, we had a working capital deficit of $(15.1 million) and cash and cash equivalents
(including restricted cash) of $133,861.
While management plans to continue to implement a cost reduction strategy and is seeking to
increase our cash flow from operations, we cannot assure you that we will be successful in this
regard.
Since inception, we have used cash in excess of operating revenues. Until management achieves
its cost reduction strategy and is able to generate significantly higher sales to realize the
benefits of the strategy, and
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significantly increase our cash flow from operations, we will require additional capital to
meet our working capital requirements, achieve our expansion plans and fund our research and
development. We plan to continue to raise additional equity or debt financing to meet our working
capital requirements, but cannot guarantee we will be successful in this regard. If we fail as a
going concern, our shares of common stock will hold little or no value.
Our business depends substantially on the continuing efforts of our executive officers, and our
ability to maintain a skilled labor force, and our business may be severely disrupted if we lose
their services.
Our future success depends substantially on the continued services of our executive officers,
especially Ki Nam, our Chief Executive Officer and the Chairman of our Board of Directors, who has
significantly contributed to the design and manufacturing of substantially all of our products and
Kelly Anderson, our Chief Financial Officer. We do not maintain key man life insurance on any of
our executive officers. If one or more of our executive officers are unable or unwilling to
continue in their present positions, we may not be able to replace them readily, if at all.
Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit
and retain new officers. In addition, if any of our executives joins a competitor or forms a
competing company, we may lose some of our customers.
Our future growth is dependent upon the publics willingness to accept electric vehicles.
Our future growth is largely dependent upon the adoption by the public of, and we are subject
to an elevated risk of any reduced demand for, alternative fuel vehicles in general and electric
vehicles in particular. If the market for electric vehicles does not develop as we expect or
develops more slowly than we expect, our business, prospects, financial condition and operating
results will be harmed. The market for electric vehicles is relatively new, rapidly evolving,
characterized by rapidly changing technologies, price competition, additional competitors, evolving
government regulation and industry standards, frequent new vehicle announcements and changing
consumer demands and behaviors. Factors that may influence the adoption of electric vehicles,
include:
| perceptions about electric vehicle quality, safety (in particular with respect to lithium-ion battery packs), design, performance and cost, especially if adverse events or accidents occur that are linked to the quality or safety of electric vehicles; | ||
| perceptions about vehicle safety in general, and in particular safety issues that may be attributed to the use of advanced technology; | ||
| the range over which electric vehicles may be driven on a single battery charge; | ||
| the decline of an electric vehicles range resulting from deterioration over time in the batterys ability to hold a charge; | ||
| improvements in the fuel economy of the internal combustion engine; | ||
| volatility in the cost of oil and gasoline; | ||
| access to charging stations, standardization of electric vehicle charging systems and consumers perceptions about convenience and cost to charge an electric vehicle; | ||
| concerns that extreme temperatures, cold or hot, could reduce the performance of the electric vehicle or life of the batteries included in such vehicles; | ||
| the availability of tax and other governmental incentives to purchase and operate electric vehicles or future regulation requiring increased use of nonpolluting vehicles; and | ||
| macroeconomic factors. |
Additionally, we may become subject to regulations that may require us to alter the design of
our vehicles, which could negatively impact the publics interest in our vehicles or increase the
cost to manufacture such
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vehicles. The influence of any of the factors described above may cause current or potential
customers not to purchase our electric vehicles, which would materially adversely affect our
business, operating results, financial condition and prospects.
We may become subject to product liability claims, which could harm our financial condition and
liquidity if we are not able to successfully defend or insure against such claims.
The motor vehicle industry in general has historically been subject to a large number of
product liability claims in recent years due to the nature of personal injuries that can result
from accidents or malfunctions. We face an inherent risk of exposure to claims in the event people
fail to use our vehicles for their intended purposes or if owners fail to use or care for them
properly. These accidents can also occur as a result of user error or inadequate training, through
no fault of the manufacturer of the vehicle. A successful product liability claim against us could
require us to pay a substantial monetary award. We maintain product liability insurance for all our
vehicles with annual limits of approximately $2.0 million on a claims made basis, but we cannot
assure that our insurance will be sufficient to cover all potential product liability claims. Any
lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our
coverage, may have a material adverse effect on our business and financial condition. We may not be
able to secure additional product liability insurance coverage on commercially acceptable terms or
at reasonable costs when needed, particularly if we do face liability for our products and are
forced to make a claim under our policy. In addition, a product liability claim could generate
substantial negative publicity about our vehicles and business, and inhibit or prevent
commercialization of other future vehicles, which would have a material adverse effect on our
brand, business, prospects, financial condition and operating results.
While our products are tested for quality, our products nevertheless may fail to meet customer
expectations from time-to-time. Also, not all defects are immediately detectible. Failures could
result from faulty design or problems in manufacturing. In either case, we could incur significant
costs to repair and/or replace defective products under warranty. Liability claims could require us
to spend significant time and money in litigation and pay significant damages. As a result, any of
these claims, whether or not valid or successfully prosecuted, could have a substantial, adverse
effect on our business and financial results. In addition, although we currently have product
liability insurance, the amount of damages awarded against us in such a lawsuit may exceed the
policy limits of such insurance. Further, in some cases, product redesigns and/or rework may be
required to correct a defect and such occurrences could adversely impact future business with
affected customers. Our business, financial condition, results of operations and liquidity could be
materially and adversely affected by any unexpected significant warranty costs.
If our suppliers fail to consistently provide high quality parts and components or fail to comply
with applicable laws and regulations, our brand image could be harmed due to negative publicity.
We rely on independent suppliers to source most of our T3 Series products and to conduct most
of the manufacturing process for our products. We have to rely on our suppliers to continue to
provide the highest quality electric vehicles and operate with integrity. Because we do not control
the operations of our suppliers, we cannot guarantee their compliance with ethical business
practices, such as environmental responsibility, fair wage practices, and compliance with child
labor laws, among others. A lack of demonstrated compliance could lead us to seek alternative
suppliers, which could increase our costs and result in delayed delivery of our products, product
shortages or other disruptions of our operations.
If our suppliers do not comply with laws or fail to control the quality of products supplied,
it could result in negative publicity for us and diminish our brand.
If the purchasers of our vehicles customize our vehicles or change the charging infrastructure with
aftermarket products, the vehicle may not operate properly, which could adversely impact our
reputation and harm our business.
Purchasers of our vehicles may seek to modify their existing vehicles, which could adversely
impact the performance of the vehicles and could compromise vehicle safety systems. Also, if
customers customize their vehicles with after-market parts or change the charging infrastructure,
such parts may compromise driver safety.
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We have not tested, nor do we endorse such changes or parts. Such unauthorized modifications
could reduce the safety of our vehicles and any injuries resulting from such modifications could
result in adverse publicity, which would negatively affect our brand and harm our business,
prospects, financial condition and operating results.
Adverse conditions in the global economy and disruption in financial markets could impair our revenues. |
As widely reported, financial markets in the United States, Europe, the Middle East, Latin
America and Asia have been experiencing extreme disruption in recent months, including, among other
things, extreme volatility in security prices, severely diminished liquidity and credit
availability, rating downgrades of certain investments and declining valuations of others. These
conditions have already impaired our ability to access credit markets and finance operations. There
can be no assurance that there will not be a further deterioration in financial markets and
confidence in major economies. We have been, and may continue to be, impacted by these economic
developments, both domestically and globally. We believe that the current tightening of credit in
financial markets has adversely affected the ability of our customers and suppliers to obtain
financing for significant purchases and operations, and could result in a decrease in orders for
our products and services. Similarly, the downturn has resulted in budgetary constraints and delays
in government funding, which we believe has also adversely affected the ability of certain law
enforcement agencies and police departments to fund additional capital equipment purchases. These
economic conditions may negatively impact us as some of our customers defer purchasing decisions,
thereby lengthening our sales cycles. Our customers ability to pay for our products and services
may also be impaired, which may lead to an increase in our allowance for doubtful accounts and
write-offs of accounts receivable. Our revenues in fiscal year 2010 were relatively flat as
compared to 2009. Net revenues in 2009 decreased $2.9 million from 2008 due in part to many of the
foregoing factors, which factors may continue to affect our revenues and operating results in
future periods.
Our markets are highly competitive, and if we are unable to compete effectively, or demonstrate a perceived advantage for our products over traditional means of transportation, our business will be adversely affected. |
We compete with other manufacturers of electric vehicles, as well as other traditional modes
of transportation, such as bicycles, cars and motorcycles. The industries in which we operate
include competitors who are larger, better financed and better known than we are and may compete
more effectively than we can. In order to stay competitive in our industry, we must keep pace with
changing technologies and customer preferences. If we are unable to differentiate our products from
those of our competitors, our revenues may decline. In addition, our competitors have established
relationships among themselves or with third parties to increase their ability to address customer
needs. As a result, new competitors or alliances among competitors may emerge and compete more
effectively than we can.
Our failure to further refine our technology and develop and introduce new personal mobility
products could render our products uncompetitive or obsolete, and reduce our sales and market
share.
The personal mobility industry is characterized by rapid increases in the diversity and
complexity of technologies, products and services. We will need to invest significant financial
resources in research and development to keep pace with technological advances in the personal
mobility industry, evolving industry standards and changing customer requirements. However,
research and development activities are inherently uncertain, and we might encounter practical
difficulties in commercializing our research results or gaining broad market acceptance for our
products. Our significant expenditures on research and development may not reap corresponding
benefits. A variety of competing personal mobility technologies that other companies may develop
could prove to be more cost-effective and have better performance than our products. Therefore, our
development efforts may be rendered obsolete by the technological advances of others. Our failure
to further refine our technology and develop and introduce new personal mobility products could
render our products uncompetitive or obsolete, and result in a decline in our market share and
revenue.
We face risks associated with the marketing, distribution and sale of our personal mobility products internationally, and if we are unable to effectively manage these risks, they could impair our ability to expand our business abroad. |
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We have expanded our marketing, distribution, and sales efforts to include the Middle East,
Canada, Mexico, South Africa, South America and Europe. As a result, we are exposed to a number of
risks, including:
| fluctuations in currency exchange rates; | ||
| difficulty in engaging and retaining distributors who are knowledgeable about and, can function effectively in, overseas markets; | ||
| increased costs associated with maintaining marketing efforts in various countries; | ||
| difficulty and cost relating to compliance with the different commercial and legal requirements of the overseas markets in which we offer our products; and | ||
| inability to obtain, maintain or enforce intellectual property rights. |
Our prospects for sales growth and profitability will be adversely affected if we have product
replacement issues, or if we otherwise fail to maintain product quality and product performance at
an acceptable cost.
We will be able to expand our net sales and to achieve, sustain and enhance profitable
operations only if we succeed in maintaining the quality and performance of our products. If we
should not be able to produce high-quality products at standard manufacturing rates and yields,
unit costs may be higher. In recent periods, we have occasionally had to replace components of
existing products. For instance, we are voluntarily replacing external chargers due to the fact
that the chargers could fail over time. This may adversely affect our reputation with potential
customers. We have increased our warranty reserve accordingly. Because the establishment of
reserves is an inherently uncertain process involving estimates of the number of future claims and
the cost to settle claims, our ultimate losses may exceed our warranty reserve. Future increases to
the warranty reserve would have an adverse effect on our profitability in the periods in which we
make such increases. Additional product replacement issues could materially affect our business as
it could increase cost of sales as a result of increased warranty service costs, reduce customer
confidence on our products, reduce sales revenue, or increase product liability claims.
The failure to achieve acceptable manufacturing yields could adversely affect our business. |
We may have difficulty achieving acceptable yields in the manufacture of our products which
could lead to higher costs, a loss of customers or delay in market acceptance of our products.
Slight impurities or defects can cause significant difficulties, particularly in connection with
the production of a new product, the adoption of a new manufacturing process or any expansion of
our manufacturing capacity and related transitions. Yields below our target levels can negatively
impact our gross profit.
From time to time we engage in related party transactions. There are no assurances that these transactions are fair to our company. |
From time to time we enter into transactions with related parties which include the purchase
from or sale to of products and services from related parties, and advancing these related parties
significant sums as prepayments for future goods or services and for working capital requirements,
among other transactions, including advances from related parties. Our Audit Committee is
responsible for reviewing our related party transactions. Notwithstanding these policies, we cannot
assure you that in every instance the terms of the transactions with these various related parties
are on terms as fair as we might receive from or extend to third parties. In addition, related
party transactions in general have a higher potential for conflicts of interest than third-party
transactions, could result in significant losses to our company and may impair investor confidence,
which could adversely affect our business and our stock price.
We are dependent on a few single sourced third party manufacturers. Any interruption in our relationships with these parties may adversely affect our business. |
Most components used in our products are purchased from outside sources. Certain components
are purchased from single sourced suppliers. These single source suppliers provide components used
on our products and include
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domestic suppliers such as American Made, Performance Composites, Imperial Electric and Santa
Fe Mold. These suppliers provide the frame, fiberglass body, electric motor, and various small
plastic parts, respectively. The failure of any such supplier to meet its commitment on schedule
could have a material adverse effect on our business, operating results, financial condition
prospects. If a sole-source supplier were to go out of business or otherwise become unable to meet
its supply commitments, the process of locating and qualifying alternate sources could require up
to several months, during which time our production could be delayed. Such delays could have a
material adverse effect on our business, operating results, financial condition prospects. For
instance, our revenues for the six months ended December 31, 2010 were adversely affected by vendor
supply issues, which we believe was due to reduced vendor staffing and their inability to respond
to our orders coupled with our inadequate cash flow which resulted in certain vendors requiring
terms to be cash in advance.
Our dependence on third party suppliers for key components of our devices could delay shipment of our products and reduce our sales. |
We depend on certain domestic and foreign suppliers for the delivery of components used in the
assembly of our products. Our reliance on third-party suppliers creates risks related to our
potential inability to obtain an adequate supply of components or subassemblies and reduced control
over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on
suppliers of batteries and battery components and other miscellaneous customer parts for our
products. We also do not have long-term agreements with any of our suppliers and there is no
guarantee that supply will not be interrupted. Any interruption of supply for any material
components of our products could significantly delay the shipment of our products and have a
material adverse effect on our revenues, profitability and financial condition.
Many of our customers have fluctuating budgets, which may cause substantial fluctuations in our results of operations. |
Customers for our products include, and may include in the future, federal, state, municipal,
foreign and military, law enforcement and other governmental agencies. Government tax revenues and
budgetary constraints, which fluctuate from time to time, can affect budgetary allocations for
these customers. Many domestic and foreign government agencies have in the past experienced budget
deficits that have led to decreased spending in defense, law enforcement and other military and
security areas. Our results of operations may be subject to substantial period-to-period
fluctuations because of these and other factors affecting military, law enforcement and other
governmental spending. A reduction of funding for federal, state, municipal, foreign and other
governmental agencies could have a material adverse effect on sales of our products and our
business, financial condition, results of operations and liquidity.
Our resources may be insufficient to manage the demands imposed by our growth. |
We have rapidly expanded our operations, and this growth has placed significant demands on our
management, administrative, operating and financial resources. The continued growth of our customer
base and the geographic markets served can be expected to continue to place a significant strain on
our resources. In addition, we cannot easily identify and hire personnel qualified both in the
provision and marketing of our products. Our future performance and profitability will depend in
large part on our ability to attract and retain additional management and other key personnel, and
our ability to implement successful enhancements to our management, marketing and sales team and
technology personnel.
Our success is dependent on protecting our intellectual property rights. |
We rely on a combination of patent, copyright, trademark and trade secret protections to
protect our proprietary technology. Our success will, in part, depend on our ability to obtain
trademarks and patents. We license one patent and hold three trademarks registered with the United
States Patent and Trademark Office and have five patent applications filed. We cannot assure you
that these trademarks and patents will not be challenged, invalidated, or circumvented, or that the
rights granted under those registrations will provide competitive advantages to us.
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We also rely on trade secrets and new technologies to maintain our competitive position, but
we cannot be certain that others will not gain access to these trade secrets. Others may
independently develop substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets.
We may be exposed to liability for infringing intellectual property rights of other companies. |
Our success will, in part, depend on our ability to operate without infringing on the
proprietary rights of others. Although we have conducted searches and are not aware of any patents
and trademarks which our products or their use might infringe, we cannot be certain that
infringement has not or will not occur. We could incur substantial costs, in addition to the great
amount of time lost, in defending any patent or trademark infringement suits or in asserting any
patent or trademark rights, in a suit with another party.
Our officers and directors own a substantial portion of our outstanding common stock, which
will enable them to influence many significant corporate actions and in certain circumstances may
prevent a change in control that would otherwise be beneficial to our shareholders.
Our directors and executive officers controlled at least 68.9% of our outstanding shares of
common stock that are entitled to vote on all corporate actions as of December 31, 2010. In
particular, our controlling stockholder, Chairman and Chief Executive Officer, Ki Nam, together
with his children, owns 57.2% of the outstanding shares of common stock and the Vision Parties own
11.8% of the outstanding shares of common stock. The Vision Parties and Mr. Nam could have a
substantial impact on matters requiring the vote of the shareholders, including the election of our
directors and most of our corporate actions. This control could delay, defer, or prevent others
from initiating a potential merger, takeover, or other change in our control, even if these actions
would benefit our shareholders and us. This control could adversely affect the voting and other
rights of our other shareholders and could depress the market price of our common stock.
Risks Relating Ownership of Our Securities
If a significant public market for our common stock develops, we expect to experience volatility in the price of our common stock. This may result in substantial losses to investors if they are unable to sell their shares at or above their purchase price. |
If a significant public market for our common stock develops, we expect the market price of
our common stock to fluctuate substantially for the foreseeable future, primarily due to a number
of factors, including:
| our status as a company with a limited operating history and limited revenues to date, which may make risk-averse investors more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the shares of a seasoned issuer in the event of negative news or lack of progress; | ||
| announcements of technological innovations or new products by us or our competitors; | ||
| the timing and development of our products; | ||
| general and industry-specific economic conditions; | ||
| actual or anticipated fluctuations in our operating results; | ||
| liquidity; | ||
| actions by our stockholders; | ||
| changes in our cash flow from operations or earning estimates; | ||
| changes in market valuations of similar companies; | ||
| our capital commitments; and |
| the loss of any of our key management personnel. |
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In addition, the financial markets have experienced extreme price and volume fluctuations. The
market prices of the securities of technology companies, particularly companies like ours without
consistent revenues and earnings, have been highly volatile and may continue to be highly volatile
in the future, some of which may be unrelated to the operating performance of particular companies.
The sale or attempted sale of a large amount of common stock into the market may also have a
significant impact on the trading price of our common stock. Many of these factors are beyond our
control and may decrease the market price of our common stock, regardless of our operating
performance. In the past, securities class action litigation has often been brought against
companies that experience volatility in the market price of their securities. Whether or not
meritorious, litigation brought against us could result in substantial costs, divert managements
attention and resources and harm our financial condition and results of operations.
We do not anticipate paying any cash dividends in the foreseeable future, which may reduce your return on an investment in our common stock. |
We plan to use all of our earnings; to the extent we have earnings, to fund our operations. We
do not plan to pay any cash dividends in the foreseeable future. We cannot guarantee that we will,
at any time, generate sufficient surplus cash that would be available for distribution as a
dividend to the holders of our common stock. Therefore, any return on your investment would derive
from an increase in the price of our stock, which may or may not occur.
Substantial future sales of our common stock in the public market may depress our stock price. |
As of December 31, 2010, 50,658,462 shares of common stock, 11,502,563 shares of preferred
stock, and warrants for the purchase of 10,301,369, 120,000 and 274,774 shares of common stock at
an exercise price of $0.70, $1.54 and $1.65 per share, respectively, are outstanding.
In addition, we intend to file a registration statement on Form S-8 under the Securities Act
of 1933, as amended, to register approximately 10,211,395 shares of our common stock underlying
options granted or to be granted to our officers, directors, employees and consultants. These
shares, if issued in accordance with these plans, will be eligible for immediate sale in the public
market, subject to volume limitations. As of December 31, 2010, there were 6,490,895 options
outstanding, of which 3,248,371 were exercisable. We have also filed a registration statement in
connection with a proposed public offering to raise approximately $8.75 million, which will entail
the issuance of a large number of freely tradable additional shares of common stock and will result
in significant dilution to our existing stockholders. In addition, we intend to enter into a registration rights agreement
with the Vision Entities and Ki Nam to register all of the common stock held by them or issuable upon exercise or
conversion of any of their securities. If we or our stockholders sell substantial
amounts of common stock in the public market, or the market perceives that such sales may occur,
the market price of our common stock could fall. The sale of a large number of shares could impair
our ability to raise needed capital by depressing the price at which we could sell our common
stock.
We may raise additional capital through a securities offering that could dilute your ownership interest and voting rights. |
Our certificate of incorporation currently authorizes our board of directors to issue up to
150,000,000 shares of common stock and 20,000,000 shares of preferred stock. After the conversion
of all of our Series A convertible preferred stock our board of directors will be entitled to issue
up to 20,000,000 additional shares of preferred stock with rights, preferences and privileges that
are senior to our common stock. The power of the board of directors to issue additional securities
is generally not subject to stockholder approval.
We will require substantial additional working capital to fund our business. If we raise
additional funds through the issuance of equity, equity-related or convertible debt securities,
these securities may have rights, preferences or privileges senior to those of the holders of our
common stock. The issuance of additional common stock or securities convertible into common stock
by our board of directors will also have the effect of diluting the proportionate equity interest
and voting power of holders of our common stock.
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Our incorporation documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of your stock, which may inhibit an attempt by our stockholders to change our direction or management. |
Our certificate of incorporation and bylaws contain provisions that could delay or prevent a
change in control of our company. Some of these provisions:
| authorize our board of directors to determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the preferred stock and to fix the number of shares constituting any series and the designation of such series without further action by our stockholders; | ||
| prohibit stockholders holding less than 25% of the outstanding voting shares from calling special meetings; and | ||
| establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting. |
In addition, we are governed by the provisions of Section 203 of Delaware General Corporate
Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of
our outstanding voting stock, from merging or combining with us, which may prevent or frustrate any
attempt by our stockholders to change our management or the direction in which we are heading.
These and other provisions in our amended and restated certificate of incorporation and bylaws and
under Delaware law could reduce the price that investors might be willing to pay for shares of our
common stock in the future and result in the market price being lower than it would be without
these provisions.
The market for our stock is subject to rules relating to low-priced stock (Penny Stock) which may limit our ability to raise capital. |
Our common stock is currently listed for trading on the OTC Bulletin Board Market and is
subject to the penny stock rules adopted pursuant to Section 15(g) of the Securities Exchange Act
of 1934, as amended (the Exchange Act). In general, the penny stock rules apply to companies not
listed on a national stock exchange whose common stock trades at less than $0.50 per share or which
have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for
three or more years). Such rules require, among other things, that brokers who trade penny stock
on behalf of persons other than established customers complete certain documentation, make
suitability inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document, quote information, brokers
commission information and rights and remedies available to investors in penny stocks. Many brokers
have decided not to trade penny stock because of the requirements of the penny stock rules, and
as a result, the number of broker-dealers willing to act as market makers in such securities is
limited.
We have applied to list our common stock and certain other securities on the NYSE Amex, but we
cannot assure you that such listing will be complete. As such, our common stock may not still be
deemed as penny stock. The penny stock rules, therefore, may have an adverse impact on the
market for our common stock and may affect our ability to raise additional capital if we decide to
do so.
We will incur increased costs and compliance risks as a result of becoming a public company. |
We are a public company and we will incur significant legal, accounting and other expenses
that we did not incur as a private company. We will incur costs associated with our public company
reporting requirements. We also anticipate that we will incur costs associated with recently
adopted corporate governance requirements, including certain requirements under the Sarbanes-Oxley
Act of 2002, as well as new rules implemented by the SEC and the Financial Industry Regulatory
Authority (FINRA). We expect these rules and regulations, in particular Section 404 of the
Sarbanes-Oxley Act of 2002, to significantly increase our legal and financial compliance costs and
to make some activities more time-consuming and costly. Like many smaller public companies, we face
a significant impact from required compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Section 404 requires management of public companies to evaluate the effectiveness of internal
control over
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financial reporting. The SEC has adopted rules implementing Section 404 for public companies
as well as disclosure requirements. We cannot assure you that we will be able to effectively meet
all of the requirements of Section 404 as currently known to us on a timely basis or at all. Any
failure to implement effectively new or improved internal controls, or to resolve difficulties
encountered in their implementation, could harm our operating results, cause us to fail to meet
reporting obligations or result in management being required to give a qualified assessment of our
internal controls over financial reporting. Any such result could cause investors to lose
confidence in our reported financial information, which could have a material adverse effect on our
stock price.
We also expect these new rules and regulations may make it more difficult and more expensive
for us to obtain director and officer liability insurance and we may be required to accept reduced
policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain qualified individuals
to serve on our Board of Directors or as executive officers. We are currently evaluating and
monitoring developments with respect to these new rules, and we cannot predict or estimate the
amount of additional costs we may incur or the timing of such costs.
Our shares are traded on the OTC Bulletin Board, and may be thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares. |
Our Common Stock trades on the OTC Bulletin Board under the ticker symbol, TMMM. Through the
listing process on the OTC Bulletin Board (Listing), we essentially went public without the
typical initial public offering procedures which usually include a large selling group of
broker-dealers who may provide market support after going public. Thus, we must undertake efforts
to develop market recognition for us and support for our shares of Common Stock in the public
market. The price and volume for our Common Stock that will develop after the Registration and
Listing cannot be assured. The numbers of persons interested in purchasing our Common Stock at or
near ask prices at any given time may be relatively small or non-existent. This situation may be
attributable to a number of factors, including the fact that we are a small company which is
relatively unknown to stock analysts, stock brokers, institutional investors and others in the
investment community that generate or influence sales volume, and that even if we came to the
attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven
company such as ours or purchase or recommend the purchase of our shares until such time as we
became more seasoned and viable. As a consequence, there may be periods of several days, weeks or
months when trading activity in our shares is minimal or non-existent, as compared to a seasoned
issuer which has a large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We cannot give you any assurance that a
broader or more active public trading market for our common stock will develop or be sustained, or
that current trading levels will be sustained or not diminish. We have applied to list our
securities on the NYSE Amex, but there can be no assurance that such listing will be approved or will
be able to be maintained if it is approved. While we are trading on the OTC Bulletin Board, the
trading volume we will develop may be limited by the fact that many major institutional investment
funds, including mutual funds, as well as individual investors follow a policy of not investing in
OTC Bulletin Board stocks and certain major brokerage firms restrict their brokers from
recommending OTC Bulletin Board stocks because they are considered speculative, volatile and thinly
traded.
There is no guarantee that our securities will be listed on AMEX.
We have applied
to list our common stock and certain other securities on the AMEX. Such listing is dependent upon the completion
of the proposed public offering and the reverse stock split among other things. We cannot guarantee that we will
be able to satisfy or maintain such listing requirements, and accordingly, our securities may not be listed on
AMEX in the near future or at all.
Our
liquidity of our common stock and market capitalization could be
adversely affected by the reverse stock split.
Our stockholders have approved the reverse stock split so that
we can meet the minimum share price requirements of AMEX. If
consummated by our board of directors, the reverse stock split
may be viewed negatively by the market and, consequently, can
lead to a decrease in our price per share and overall market
capitalization. If the per share market price does not increase
proportionately as a result of the reverse stock split, then our
value as measured by our market capitalization will be reduced,
perhaps significantly.
The market price for our common stock may be particularly volatile given our status as a relatively unknown company with a small and thinly traded public float, limited operating history and lack of profits which could lead to wide fluctuations in our share price. The price at which you purchased the shares may not be indicative of the price of the common stock that will prevail in the trading market. You may be unable to sell your shares at or above your purchase price, which may result in substantial losses to you. |
In addition, the market price of our common stock could be subject to wide fluctuations in
response to:
| quarterly variations in our revenues and operating expenses; | ||
| announcements of new products or services by us; | ||
| fluctuations in interest rates; |
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| significant sales of our common stock; | ||
| the operating and stock price performance of other companies that investors may deem comparable to us; and | ||
| news reports relating to trends in our markets or general economic conditions. |
The stock markets in general and the market prices for penny stock companies in particular,
have experienced volatility that often has been unrelated to the operating performance of such
companies. These broad market and industry fluctuations may adversely affect the price of our
stock, regardless of our operating performance.
Our operating results may fluctuate significantly, and these fluctuations may cause our common stock price to fall. |
Our quarterly operating results may fluctuate significantly in the future due to a variety of
factors that could affect our revenues or our expenses in any particular quarter. You should not
rely on quarter-to-quarter comparisons of our results of operations as an indication of future
performance. Factors that may affect our quarterly results include:
| market acceptance of our products and those of our competitors; | ||
| our ability to attract and retain key personnel; | ||
| development of new designs and technologies; and | ||
| our ability to manage our anticipated growth and expansion. |
Shares eligible for future sale may adversely affect the market. |
From time to time, certain of our stockholders may be eligible to sell all or some of their
shares of our common stock by means of ordinary brokerage transactions in the open market pursuant
to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general,
pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject
only to the current public information requirement (which disappears after one year).
Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for
equity securities), current public information and notice requirements. Any substantial sale of our
Common Stock pursuant to Rule 144 may have a material adverse effect on the market price of our
Common Stock.
Certain prior investors who purchased our securities, consisting of convertible notes, preferred stock, common stock and warrants to purchase common stock, from December 2007 through March 2010, have anti-dilution rights with respect to their shares of our common stock (including shares underlying warrants). If future issuances of our common stock trigger these anti-dilution rights, holders of our common stock would have their investments diluted. |
Certain security holders who purchased our units consisting of shares of our preferred stock,
common stock and warrants to purchase shares of our common stock have anti-dilution rights, and in
particular, price-based anti-dilution rights. Except for certain exceptions such as issuances
relating to employee stock option exercises, in the event that we sell common stock for less than
$0.50 per share or issue securities convertible into or exercisable for common stock at a
conversion price or exercise price less than $0.50 per share (a Dilutive Issuance), then we are
required to issue a number of additional shares of common stock to each unit purchaser of our
preferred stock, without additional consideration Our convertible note with Immersive converts into
our common stock at $1.54 per share. In the event we sell common stock for lower than $1.54 per
share, our conversion price will be calculated in accordance with Dilutive Issuance calculations.
The number of additional shares to be issued will be equal to the product of the purchasers
subscription amount multiplied by a fraction, the numerator of which is the number of shares of
common stock sold and issued at the closing of such Dilutive Issuance plus the number of
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shares which the aggregate offering price of the total number of shares of common stock sold
and issued at the closing of such Dilutive Issuance would purchase at $0.50 per share, and the
denominator of which is the number of shares of common stock issued and outstanding on the date of
such Dilutive Issuance plus the number of additional shares of common stock sold and issued at the
closing of such Dilutive Issuance. We are anticipating to obtain agreements to convert all of our
outstanding preferred stock and amendments to our warrants that remove price-based, anti-dilution
provisions. In the event we issue warrants to purchase our common stock below $0.70 per share, our
Class G warrant holders will be allowed to reset the price of their warrants (for the first year
after the issuance, the price will be reset to the price of the new issuance and for issuances
after the 12th month and before the 24th month, the price will be reset in accordance with Dilutive
Issuance calculations.). We cannot assure you that we will be successful. In the event that we are
not successful, other holders of our common stock, including purchases of units in the proposed offering,
would be diluted to a greater extent than they would be if the anti-dilution provision were not
triggered. The holders of the convertible note will convert such notes into common shares upon the
close of the proposed offering.
We are responsible for the indemnification of our officers and directors, which could result in substantial expenditures. |
Our Bylaws provide for the indemnification of our directors, officers, employees, and agents,
under certain circumstances, against attorneys fees and other expenses incurred by them in any
litigation to which they become a party arising from their association with or activities on behalf
of our company. This indemnification policy could result in substantial expenditures, which we may
be unable to recoup.
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ITEM 2. PROPERTIES
Our main office and manufacturing facility is located in Costa Mesa, California. The table
below provides a general description of our properties:
Location | Principal Activities | Area (Sq. Meters) | Lease Expiration Date | |||||
2990 Airway
Ave., Costa Mesa,
California 92626
|
Main office and manufacturing facility | 33,520 | August 31, 2012 | |||||
2975 Airway Ave.,
Costa Mesa,
California 92626
|
Research and development, warehouse, and service facility | 14,000 | December 31, 2010(1) |
(1) | While the original term of this lease expired in December 2010, the Company is currently leasing this facility on a month-to-month basis. |
The Company leases two facilities in Costa Mesa, California under non-cancelable operating
lease agreements that expired in 2010 but were extended on a month-to-month basis and will expire
in 2012. These leases require monthly lease payments of approximately $9,000 and $25,000 per month.
Lease expense for the facilities was approximately $384,000 and $448,000 for the years ended
December 31, 2010 and 2009, respectively.
Future minimum annual payments under these non-cancelable operating leases are as follows:
Years Ending December 31, | Total | |||
2011 |
$ | 305,000 | ||
2012 |
209,000 | |||
$ | 514,000 |
ITEM 3. LEGAL PROCEEDINGS
With the exception of the following, we know of no material, existing or pending legal
proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending
litigation. We are also unaware of any proceedings in which any of our directors, officers, or
affiliates, or any registered or beneficial holder of more than 5% of our voting securities, or any
associate of such persons, is an adverse party or has a material interest adverse to our Company.
Preproduction Plastics, Inc. v. T3 Motion., Inc., Ki Nam and Jason Kim (Orange County Superior
Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (Plaintiff)
filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki
Nam, the Companys CEO, and Jason Kim, the Companys former COO (collectively the Defendants) for
breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly
executed between Plaintiff and the Company. On August 24, 2009, Defendants filed a Demurrer to the
Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against
Defendants for breach of contract, fraud and common counts, seeking compensatory damages of
$470,599, attorneys fees, punitive damages, interest and costs. On October 27, 2009, Defendants
filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court
denied the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the
First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case
was settled in its entirety. The Company agreed to pay compensatory damages, attorneys fees and
costs totaling $493,468, through monthly payments of $50,000, with 6% interest accruing from the
date of the settlement. Periodic payments are expected to be made through May 2011. The first
payment of $50,000 was made on August 3, 2010 and subsequent principal payments totaling $200,000
were made by the Company through December 31, 2010. 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
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amount of $243,468 is recorded as a note payable in the accompanying consolidated balance
sheet. The Company has recorded accrued interest of $4,126 at December 31, 2010.
Commencing January 1, 2011, the Company has failed to make the scheduled payments required by
the July 29, 2010 settlement agreement and stipulation for entry of judgment. The Plaintiff has
filed a motion for entry of judgment pursuant to the terms of the July 29, 2010 settlement
agreement and stipulation for entry of judgment, which if granted, would cause the acceleration of
all amounts owed under the settlement agreement. This motion is scheduled to be heard on April 21,
2011.
In the ordinary course of business, the Company may face various claims brought by third
parties in addition to the claim described above and may from time to time, make claims or take
legal actions to assert the Companys rights, including intellectual property rights as well as
claims relating to employment and the safety or efficacy of the Companys products. Any of these
claims could subject us to costly litigation and, while the Company generally believes that it has
adequate insurance to cover many different types of liabilities, the insurance carriers may deny
coverage or the policy limits may be inadequate to fully satisfy any damage awards or settlements.
If this were to happen, the payment of such awards could have a material adverse effect on the
consolidated operations, cash flows and financial position. Additionally, any such claims, whether
or not successful, could damage the Companys reputation and business. Management believes the
outcome of currently pending claims and lawsuits will not likely have a material effect on the
consolidated operations or financial position.
ITEM 4. (Removed and Reserved)
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock has been listed on the OTC Bulletin Board under the symbol TMMM since
December 6, 2009. Prior to December 6, 2009, there was no public market for our common stock. The
following table sets forth the range of high and low prices per share as reported on
OTC Bulletin Board for the periods indicated.
High | Low | |||||||
2010 |
||||||||
Fourth Quarter |
$ | 0.70 | | $ | 0.30 | |||
Third Quarter |
$ | 1.01 | | $ | 0.27 | |||
Second Quarter |
$ | 1.00 | | $ | 0.25 | |||
First Quarter |
$ | 2.00 | | $ | 0.89 | |||
2009 |
||||||||
Fourth Quarter (from December 6, 2009) |
$ | 2.00 | | $ | 1.25 |
Holders
As of December 31, 2010, there were 112 shareholders of record of our common stock based upon
the shareholder list provided by our transfer agent. Our transfer agent is Signature Stock Transfer
located at 2632 Coachlight Court, Plano, Texas 75093, and their telephone number is (972) 612-4120.
Dividends
We have never declared or paid any cash dividends on our common stock. We currently intend to
retain all future earnings for the operation and expansion of our business and, therefore, we do
not anticipate declaring or paying cash dividends in the foreseeable future. In addition, we are
subject to several covenants under our debt arrangements that place restrictions on our ability to
pay dividends. Other than such restrictions, the payment of dividends will be at the discretion of
our Board of Directors and will depend on our results of operations, capital requirements,
financial condition, prospects, contractual arrangements, any limitations on payment of dividends
present in our current and future debt agreements, and other factors that our Board of Directors
may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth, as of December 31, 2010, certain information related to our
compensation plans under which shares of our common stock are authorized for issuance.
Number of Securities | ||||||||||||
Weighted-Average | Remaining Available | |||||||||||
Exercise Price of | for Future Issuance | |||||||||||
Number of Securities to be | Outstanding | Under Equity | ||||||||||
Issued Upon Exercise of | Options, | Compensation Plans | ||||||||||
Outstanding Options, | Warrants and | (Excluding Securities | ||||||||||
Warrants and Rights | Rights | Reflected in Column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
Equity
compensation plans
approved by
stockholders |
6,490,895 | $ | 0.57 | 3,720,500 | ||||||||
Equity compensation
plans not approved
by stockholders |
10,696,143 | $ | 0.73 | | ||||||||
Total |
17,187,038 | 3,720,500 |
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Equity Incentive Plans
2007 Stock Option/Stock Issuance Plan
The 2007 Stock Option/Stock Issuance Plan (the 2007 Plan) became effective on August 2007,
the effective date the Board of Directors of T3 Motion approved the 2007 Plan. The maximum number
of shares of common stock that may be issued over the term of the 2007 Plan is 7,450,000 shares.
Awards under the 2007 Plan may be granted to any of the T3 Motions employees, non-employee
directors of T3 Motion or any of its parents or subsidiaries, and consultants and other independent
advisors who provide services to T3 Motion or any of its parents or subsidiaries. Awards may
consist of stock options (both incentive stock options and non-statutory stock options) and stock
awards. An incentive stock option may be granted under the 2007 Plan only to a person who, at the
time of the grant, is an employee of T3 Motion or a parent or subsidiary of T3 Motion.
The 2007 Plan was administered by T3 Motions Board of Directors, with full power to authorize
the issuance of shares of the T3 Motions common stock and to grant options to purchase shares of
T3 Motions common stock. The administrator has the power to determine the terms of the awards,
including the exercise price, the number of shares subject to each award, and the exercisability of
the awards. Any or all administrative functions, however, may be delegated by the Board to a
committee of the Board.
The 2007 Plan provides that in the event of a merger of T3 Motion with or into another
corporation or of a change in control of T3 Motion, including the sale of all or substantially
all of T3 Motions assets, and certain other events, the Board of Directors may, in its discretion,
provide for the assumption or substitution of, or adjustment to, each outstanding award and
accelerate the vesting of options.
The 2007 Plan will terminate on the earlier of (i) May 15, 2017, or (ii) the date on which all
7,450,000 shares available for issuance under the 2007 Plan is issued, or (iii) the termination of
all outstanding options in connection with a merger with or into another corporation or a change
in control of T3 Motion. No further options may be granted under the 2007 Plan. As of December 31,
2010, there were outstanding options to purchase 3,661,395 shares of our common stock under the
2007 Plan.
The Board of Directors may generally amend or terminate the 2007 Plan as determined to be
advisable. No such amendment or modification, however, may adversely affect the rights and
obligations with respect to options or unvested stock issuances at the time outstanding under the
2007 Plan unless the optionee or the participant consents to such amendment or modification. Also,
certain amendments may require shareholder approval pursuant to applicable laws and regulations.
2010 Stock Option/Stock Issuance Plan
The 2010 Stock Option/Stock Issuance Plan (the 2010 Plan) became effective in January 2010, and was approved by the Companys stockholders in June 2010. The maximum number of shares of common stock that may be issued over the term of the 2010 Plan is 6,500,000 shares. |
Awards under the 2010 Plan may be granted to any of the employees and non-employee directors
of the Company or any of its parents or subsidiaries, as well as any consultants and other
independent advisors who provide services to the Company or any of its parents or subsidiaries.
Awards may consist of stock options (both incentive stock options and non-statutory stock options)
and stock awards. An incentive stock option may be granted under the 2010 Plan only to a person
who, at the time of the grant, is an employee of the Company or its parent or subsidiary.
The 2010 Plan is administered by the Companys Board of Directors; however, the Board may
delegate such authority to a committee (Committee) appointed by the Board. The plan administrator
may authorize the issuance of shares of the common stock and to grant options to purchase shares of
common stock. The plan administrator has the power to determine the terms of the awards, including
the exercise price, the number of shares subject to each award, and the exercisability of the
awards.
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The 2010 Plan provides that in the event of a merger of the Company with or into another
corporation or of a change in control of the Company, including the sale of all or substantially
all of the Companys assets, and certain other events, the Board of Directors may, in its
discretion, provide for the assumption or substitution of, or adjustment to, each outstanding award
and accelerate the vesting of options.
The 2010 Plan will terminate on the earlier of (i) January 26, 2020, (ii) the date on which
all 6,500,000 shares available for issuance under the Option Plan is issued, or (iii) the
termination of all outstanding options in connection with a merger with or into another corporation
or a change in control of the Company.
The Board of Directors may generally amend or terminate the 2010 Plan as determined to be
advisable. No such amendment or modification, however, may adversely affect the rights and
obligations with respect to options or unvested stock issuances at the time outstanding under the
2010 Plan unless the optionee or the participant consents to such amendment or modification. Also,
certain amendments may require stockholder approval pursuant to applicable laws and regulations.
As of December 31, 2010, there were outstanding options to purchase 2,829,500 shares of our
common stock under the 2010 Plan.
Warrants
From time to time, we issue 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.
Such warrants are issued outside of the 2010 Plan and the 2007 Plan.
Sales of Unregistered Securities
There were no unregistered sales of securities during the period covered by this report that
were not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
ITEM 6. SELECTED FINANCIAL DATA
The following summary of our selected financial information for the years ended December 31,
2010 and 2009 have been derived from, and should be read in conjunction with, our consolidated
financial statements included elsewhere in this report.
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Income Statement Data: |
||||||||
Net Revenues |
$ | 4,682,908 | $ | 4,644,022 | ||||
Gross Profit (Loss) |
170,411 | (344,096 | ) | |||||
Operating Expenses |
7,009,514 | 8,449,934 | ||||||
Loss from Operations |
(6,839,103 | ) | (8,794,030 | ) | ||||
Net Loss |
(8,327,887 | ) | (6,698,893 | ) | ||||
Net Loss per Share Basic and Diluted |
$ | (0.25 | ) | $ | (0.15 | ) | ||
Statement of Cash Flow Data: |
||||||||
Net Cash Used in Operating Activities |
$ | (5,185,067 | ) | $ | (5,356,937 | ) | ||
Net Cash Used in Investing Activities |
(48,214 | ) | (38,450 | ) | ||||
Net Cash Provided by Financing Activities |
2,776,000 | 6,294,076 |
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Balance Sheet Data:
2010 | 2009 | |||||||
Total Assets |
$ | 3,579,916 | $ | 6,059,321 | ||||
Related
Party Notes Payable, Net of Debt Discount |
6,512,121 | 1,836,837 | ||||||
Total Liabilities |
19,259,648 | 15,703,734 | ||||||
Total Stockholders Deficit |
(15,679,732 | ) | (9,644,413 | ) |
Going Concern
The Companys consolidated financial statements have been prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the United States of
America (GAAP) and have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities in the normal course of business. The
Company has sustained operating losses since its inception (March 16, 2006) and has used
substantial amounts of working capital in its operations. Further, at December 31, 2010, the
Company had an accumulated deficit of $(45,120,210), a working capital deficit of $(15,057,791) and
cash and cash equivalents (including restricted cash) of $133,861. Additionally, the Company used
cash in operations of $(5,185,067) during the year ended December 31, 2010. These factors raise
substantial doubt about the Companys ability to continue as a going concern.
The Company has filed a registration statement in connection with a proposed public offering
of its securities. Management has been implementing cost reduction strategies and believes that its
cash from operations, together with the net proceeds of that offering, will be sufficient to allow
the Company to continue as a going concern through at least December 31, 2011; however, the Company
cannot assure you of this and may require additional debt or equity financing in the future to
maintain operations. The Company also anticipates that it will pursue raising additional debt or
equity financing to fund its new product development and expansion plans. We cannot assure you that
such financing will be available on a timely basis, on acceptable terms or at all.
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our results of operations and financial condition for
the years ended December 31, 2010 and 2009 should be read in conjunction with our financial
statements and the notes to those financial statements that are included elsewhere in this Annual
Report on Form 10-K. 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, possible, 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, availability of additional equity or debt
financing, 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 and speak only as of the date hereof. Management undertakes no
obligation to publicly release any revisions to these forward-looking statements that may reflect
events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
This cautionary statement is applicable to all forward-looking statements contained in this report.
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. (collectively, the Company, we,
our), develop and manufacture personal mobility vehicles powered by electric motors. The
Companys initial product, the T3 Series ESV, is an electric, three-wheel stand-up vehicle that is
directly targeted to the law enforcement and private security markets. Substantially all of the
Companys revenues to date have been derived from sales of the T3 Series ESVs and related
accessories.
The Company has entered into a distribution agreement with CT&T pursuant to which the Company
has the exclusive right to market and sell the CT Series Micro Car, which is a low speed,
four-wheel electric car, in the U.S. to the government, law enforcement and security markets. The
Company is also currently developing the Electric/Hybrid Vehicle, which is a plug-in hybrid vehicle
that features a single, wide-stance wheel with two high-performance tires sharing one rear wheel.
The Company anticipates introducing the Electric/Hybrid Vehicle in late 2011.
Going Concern
The Companys consolidated financial statements have been prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the United States of
America (GAAP) and have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities in the normal course of business. The
Company has sustained operating losses since its inception (March 16, 2006) and has used
substantial amounts of working capital in its operations. Further, at December 31, 2010, the
Company had an accumulated deficit of $(45,120,210), a working capital deficit of $(15,057,791) and
cash and cash equivalents (including restricted cash) of $133,861. Additionally, the Company used
cash in operations of $(5,185,067) during the year ended December 31, 2010. These factors raise
substantial doubt about the Companys ability to continue as a going concern.
The Company has filed a registration statement in connection with a proposed public offering
of its securities. Management has been implementing cost reduction strategies and believes that its
cash from operations, together with the net proceeds of that offering, will be sufficient to allow
the Company to continue as a going concern through at least December 31, 2011; however, the Company
cannot assure you that the offering will be completed on a timely basis, on acceptable terms or at
all. As such, we may require additional debt or equity financing in the
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future to maintain our operations. The Company also anticipates that it will pursue raising
additional debt or equity financing to fund its new product development and expansion plans. We
cannot assure you that such financing will be available on a timely basis, on acceptable terms or
at all.
Critical Accounting Policies and Estimates
Our managements discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in accordance with
GAAP. The preparation of these consolidated 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.
While our significant accounting policies are more fully described in Note 2 to our
consolidated financial statements, we believe that the following accounting policies are the most
critical to aid you in fully understanding and evaluating this management discussion and analysis:
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. 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 December
31, 2010, the Company did not have cash deposits in excess of the FDIC limit.
The Company considers cash equivalents to be all short-term investments that have an initial
maturity of 90 days or less and are not restricted. The Company invests its cash in short-term
money market accounts.
Restricted Cash
Under a credit card processing agreement with a financial institution, the Company is required
to maintain a security deposit as collateral. The amount of the deposit is at the discretion of the
financial institution and as of December 31, 2010 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 December 31, 2010 and 2009, the Company has an allowance for doubtful accounts of
$50,000 and $37,000, respectively. Although the Company expects to collect amounts due, actual
collections may differ from the estimated amounts.
As of December 31, 2010 and 2009, two customers accounted for approximately 51% and 36% of
total accounts receivable, respectively. One customer and no single customer accounted for more
than 10% of net revenues for the years ended December 31, 2010 and 2009, respectively.
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Accounts Payable
As of December 31, 2010 and 2009, no single vendor and one vendor accounted for more than 10%
of total accounts payable, respectively. Two vendors and no single vendor each accounted for more
than 10% of purchases for the years ended December 31, 2010 and 2009, respectively.
Inventories
Inventories, which consist of raw materials, finished goods and work-in-process, are stated at
the lower of cost or net realizable value, with cost being determined by the average-cost method,
which approximates the first-in, first-out method. At each balance sheet date, we evaluate our
ending inventories for excess quantities and obsolescence. This evaluation primarily includes an
analysis of forecasted demand in relation to the inventory on hand, among consideration of other
factors. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories to
their estimated net realizable values. Once established, write-downs are considered permanent
adjustments to the cost basis of the respective inventories.
Property and Equipment
Property and equipment are stated at cost, and are being depreciated using the straight-line
method over the estimated useful lives of the related assets, ranging from three to five years.
Leasehold improvements are recorded at cost and amortized on a straight-line basis over the shorter
of their estimated lives or the remaining lease term. Significant renewals and betterments are
capitalized. Maintenance and repairs that do not improve or extend the lives of the respective
assets are expensed. At the time property and equipment are retired or otherwise disposed of, the
cost and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or
losses from retirements or sales are reflected in the consolidated statement of operations.
Deposits
Deposits primarily consist of amounts incurred or paid in advance of the receipt of fixed
assets.
Impairment of Long-Lived Assets
We account for our long-lived assets in accordance with the accounting standards which require
that long-lived assets be reviewed for impairment whenever events or changes in circumstances
indicate that the historical cost carrying value of an asset may no longer be appropriate. We
assess recoverability of the carrying value of an asset by estimating the future net cash flows
expected to result from the asset, including eventual disposition. If the future net cash flows are
less than the carrying value of the asset, an impairment loss is recorded equal to the difference
between the assets carrying value and fair value or disposable value. As of December 31, 2009, we
performed an annual review of our identified intangible asset related to the GeoImmersive license
agreement to assess potential impairment. At December 31, 2009, management deemed the intangible
asset to be fully impaired, as management has decided to allocate the resources required to map the
data elsewhere. As a result, the remaining value of $625,000 was fully amortized as of December 31,
2009. As of December 31, 2010 and 2009, we do not believe there has been any other impairment of
our long-lived assets. There can be no assurance, however, that market conditions will not change
or demand for our products will continue, which could result in impairment of long-lived assets in
the future.
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
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observable or unobservable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Companys market assumptions. This
hierarchy requires the use of observable market data when available. These two types of inputs have
created the following fair-value hierarchy:
Level 1 Valuations based on unadjusted quoted market prices in active markets for
identical securities. Currently, the Company does not have any items classified as Level 1.
Level 2 Valuations based on observable inputs (other than Level 1 prices), such as
quoted prices for similar assets at the measurement date; quoted prices in markets that are not
active; or other inputs that are observable, either directly or indirectly. Currently the
Company does not have any items classified as Level 2.
Level 3 Valuations based on inputs that are unobservable and significant to the overall
fair value measurement, and involve management judgment. The Company used the
Black-Scholes-Merton option pricing model to determine the fair value of the financial
instruments.
If the inputs used to measure fair value fall in different levels of the fair value hierarchy,
a financial securitys hierarchy level is based upon the lowest level of input that is significant
to the fair value measurement.
Beneficial Conversion Features and Debt Discounts
The convertible features of convertible debentures provide for a rate of conversion that is
below market value. Such feature is normally characterized as a beneficial conversion feature
(BCF). The relative fair values of the BCF were recorded as discounts from the face amount of the
respective debt instrument. The Company amortized the discount using the effective interest method
through maturity of such instruments.
Revenue Recognition
We recognize revenues in accordance with the accounting standards. Under the accounting
standards, we recognize 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, we use a binding purchase order as evidence of an arrangement. We ship either
FOB shipping point or destination terms. Shipping documents are used to verify delivery and
customer acceptance. For FOB destination, we record revenue when proof of delivery is confirmed by
the shipping company. We assess 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. We
offer a standard product warranty to our customers for defects in materials and workmanship for a
period of one year or 2,500 miles, whichever comes first, and have no other post-shipment
obligations. We assess 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 us for shipping and handling are classified as cost of net
revenues.
We do 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, we do not
allow returns of unsold items.
We have 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 we deem the items sold at delivery to the distributor.
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Share-Based Compensation
We maintain a stock option plan and record expenses attributable to our stock option plan. We
elected to amortize share-based compensation for awards granted on or after March 16, 2006 (date of
inception) on a straight-line basis over the requisite service (vesting) period for the entire
award.
We account 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 consultants
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, we record the fair value of the fully vested, non-forfeitable common stock
issued for future consulting services as prepaid expense in our consolidated balance sheet.
Income Taxes
We account for income taxes under the provisions of the accounting standards. Under the
accounting standard, deferred tax assets and liabilities are recognized for future tax benefits or
consequences attributable to temporary differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. A valuation allowance
is provided for significant deferred tax assets when it is more likely than not, that such asset
will not be realized through future operations.
Derivative Liabilities
Effective January 1, 2009, the Company adopted 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.
As a result of the adoption of the accounting standard, 4,562,769 of the Companys issued and
outstanding common stock purchase warrants and embedded conversion features previously treated as
equity pursuant to the derivative treatment exemption were no longer afforded equity treatment.
These warrants had exercise prices ranging from $1.08 to $2.00 and expire between December 2012 and
December 2014. Effective January 1, 2009, the Company reclassified the fair value of these common
stock purchase warrants and embedded conversion features, all of which have exercise price reset
features and price protection clauses, from equity to liability status as if these warrants and
conversion features were treated as derivative liabilities since their date of original issuance
ranging from March 2008 through December 2008.
On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative
effect adjustment, approximately $4.0 million to a derivative liability to recognize the fair value
of such warrants and embedded conversion features, at the original issuance date and reclassified
from retained earnings, as a cumulative effect adjustment, approximately $2.0 million to recognize
the change in the fair value from original issuance through December 31, 2008, and recorded
additional debt discounts of approximately $0.9 million related to the fair value of warrants
issued with related party notes outstanding at December 31, 2008.
During 2010 and 2009, the Company issued 1,040,000 and 9,928,504 of additional warrants,
respectively, related to convertible debt and during 2009 recorded liabilities related to
conversion options. During 2010, the Company exchanged 697,639 of Class A warrants and 250,000 of
Class B warrants for 947,639 Class G warrants.
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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 and $3,510,751 during 2010 and 2009, respectively.
The debt discount will be amortized over the remaining life of the related debt. The change in fair
value of the derivative liability will be recorded through earnings at each reporting date.
During 2010 and 2009, the Company issued additional warrants of 2,310,000 and 5,953,730,
respectively, related to Preferred Stock. The Company estimated the fair value of the warrants of
$716,236 and $1,740,578, respectively, at the dates of issuance and recorded a discount on the
issuance of the equity and a corresponding derivative liability. The discount will be recorded as a
deemed dividend with a reduction to retained earnings. The change in fair value of the derivative
will be recorded through earnings at each reporting date.
During 2010 and 2009, the Company recorded a discount on the issuance of Preferred Stock and a
corresponding derivative liability of $685,124 and $7,314,273, respectively, related to the
anti-dilution provision of the Preferred Stock issued. The discount will be recorded as a deemed
dividend with a reduction to retained earnings during the 24-month period that the anti-dilution
provision is outstanding. The change in fair value of the derivative liabilities will be recorded
through earnings at each reporting date.
During 2010 and 2009, the amortization of the discounts related to the Preferred Stock
anti-dilution provision and warrants issued was $3,730,150 and $6,116, respectively, which was
recorded as a deemed dividend.
During the years ended December 31, 2010 and 2009, the Company exchanged 3,500,000 warrants
for 2,100,000 shares of common stock and 10,972,769 warrants to 2,263,750 shares of Preferred
Stock, respectively, pursuant to the Exchange Agreement. As a result of these exchanges, the
Company exchanged warrants with a fair value of $1,208,478 and $1,201,225 during 2010 and 2009,
respectively, for shares of common stock valued at $840,000 and preferred stock valued at
$1,155,390, resulting in gains on the exchanges of $368,478 and $45,835 during the years ended
December 31, 2010 and 2009, respectively.
During 2009, in connection with the conversion of the Vision Parties and Mr. Nams note
payable, the Company reclassified the fair value of the derivative liability related to the
conversion feature of $208,857 to additional paid-in capital.
On March 22, 2010, one of the Companys preferred shareholders exercised their option to
convert their 2,000,000 preferred shares into 4,000,000 shares of common stock. As a result of the
conversion, the Company reclassified the balance of the derivative liability of $1,121,965 to
additional paid-in capital and the balance of the discount of $1,099,742 as a deemed dividend.
As of December 31, 2010, the unamortized discount related to the conversion feature of the
Preferred Stock was $4,263,068.
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.
During the years ended December 31, 2010 and 2009, the Company recorded other income of
$2,101,067 and $6,184,151, 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 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 earnings
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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 54.7
million and 50.5 million shares of common stock were outstanding at December 31, 2010 and 2009,
respectively, but were excluded from the computation of diluted earnings per share due to the
anti-dilutive effect on net loss per share.
Research and Development
We expense research and development costs as incurred.
Advertising
Advertising expenses are charged against operations when incurred. Advertising expenses for
the years ended December 31, 2010 and 2009 were $12,709 and $4,226, respectively, and are included
in sales and marketing expenses in the accompanying consolidated statements of operations.
Commitments and Contingencies
Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim (Orange County Superior
Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (Plaintiff)
filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki
Nam, the Companys CEO, and Jason Kim, the Companys former COO (collectively the Defendants) for
breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly
executed between Plaintiff and the Company. On August 24, 2009, Defendants filed a Demurrer to the
Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against
Defendants for breach of contract, fraud and common counts, seeking compensatory damages of
$470,599, attorneys fees, punitive damages, interest and costs. On October 27, 2009, Defendants
filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court
denied the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the
First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case
was settled in its entirety. The Company agreed to pay compensatory damages, attorneys fees and
costs totaling $493,468, through monthly payments of $50,000, with 6% interest accruing from the
date of the settlement. Periodic payments are expected to be made through May 2011. The first
payment of $50,000 was made on August 3, 2010 and subsequent principal payments totaling $200,000
were made by the Company through December 31, 2010. 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 consolidated balance sheet. The Company
has recorded accrued interest of $4,126 at December 31, 2010.
Commencing January 1, 2011, the Company has failed to make the scheduled payments required by
the July 29, 2010 settlement agreement and stipulation for entry of judgment. The Plaintiff has
filed a motion for entry of judgment pursuant to the terms of the July 29, 2010 settlement
agreement and stipulation for entry of judgment, which if granted, would cause the acceleration of
all amounts owed under the settlement agreement. This motion is scheduled to be heard on April 21,
2011.
In the ordinary course of business, the Company may face various claims brought by third
parties in addition to the claim described above and may from time to time, make claims or take
legal actions to assert the Companys rights, including intellectual property rights as well as
claims relating to employment and the safety or efficacy of the Companys products. Any of these
claims could subject us to costly litigation and, while the Company generally believes that it has
adequate insurance to cover many different types of liabilities, the insurance carriers may deny
coverage or the policy limits may be inadequate to fully satisfy any damage awards or settlements.
If this were to happen, the payment of such awards could have a material adverse effect on the
consolidated operations, cash flows and financial position. Additionally, any such claims, whether
or not successful, could damage the Companys reputation and business. Management believes the
outcome of currently pending claims and lawsuits will not likely have a material effect on the
consolidated operations or financial position.
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Recent Accounting Pronouncements
In January 2010, the FASB issued guidance that expands the interim and annual disclosure
requirements of fair value measurements, including the information about movement of assets between
Level 1 and 2 of the three-tier fair value hierarchy established under its fair value measurement
guidance. This guidance also requires separate disclosure for purchases, sales, issuances and
settlements in the reconciliation for fair value measurements using significant unobservable inputs
using Level 3 methodologies. Except for the detailed disclosure in the Level 3 reconciliation,
which is effective for the fiscal years beginning after December 15, 2010, we adopted the relevant
provisions of this guidance effective January 1, 2010, which did not have a material impact on our
consolidated financial statements.
Business Segments
The Company currently only has one reportable business segment due to the fact that the
Company derives its revenue primarily from one product. The CT Micro Car is not included in a
separate business segment due to nominal net revenues during the years ended December 31, 2010 and
2009. The net revenues from domestic and international sales are shown below:
For the Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Net revenues: |
||||||||
T3 Series domestic |
$ | 3,842,030 | $ | 3,654,290 | ||||
T3 Series international |
840,878 | 963,911 | ||||||
CT Series domestic |
| 25,821 | ||||||
Total net revenues |
$ | 4,682,908 | $ | 4,644,022 | ||||
Recent Events
Mr. Nam
advanced $1.0 million to the Company in accordance with his loan agreement as follows:
Date of Advance | Amount Advanced | |||
January 7, 2011
|
$ | 75,000 | ||
January 25, 2011
|
50,000 | |||
February 9, 2011
|
45,000 | |||
February 25, 2011
|
30,000 | |||
February 28, 2011
|
100,000 | |||
March 10, 2011
|
25,000 | |||
March 11, 2011
|
475,000 | |||
March 23, 2011
|
200,000 |
On February 4, 2011, the Companys Board of Directors approved the grant of stock options to certain
employees for the purchase of 3,250,000 shares of the Companys
common stock at $0.50 per share.
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Results of Operations
The following table sets forth the results of our operations for the years ended December 31, 2010
and 2009:
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Net revenues |
$ | 4,682,908 | $ | 4,644,022 | ||||
Cost of net revenues |
4,512,497 | 4,988,118 | ||||||
Gross profit (loss) |
170,411 | (344,096 | ) | |||||
Operating expenses: |
||||||||
Sales and marketing |
1,826,736 | 1,927,824 | ||||||
Research and development |
1,602,961 | 1,395,309 | ||||||
General and administrative |
3,579,817 | 5,126,801 | ||||||
Total operating expenses |
7,009,514 | 8,449,934 | ||||||
Loss from operations |
(6,839,103 | ) | (8,794,030 | ) | ||||
Other income (expense), net: |
||||||||
Interest income |
1,321 | 2,510 | ||||||
Other income, net |
2,487,310 | 5,565,869 | ||||||
Interest expense |
(3,976,615 | ) | (3,472,442 | ) | ||||
Total other income (expense), net |
(1,487,984 | ) | 2,095,937 | |||||
Loss before provision for income taxes |
(8,327,087 | ) | (6,698,093 | ) | ||||
Provision for income tax |
800 | 800 | ||||||
Net loss |
(8,327,887 | ) | (6,698,893 | ) | ||||
Deemed divided to preferred stockholders |
(3,730,149 | ) | (6,116 | ) | ||||
Net loss attributable to common stockholders |
$ | (12,058,036 | ) | $ | (6,705,009 | ) | ||
Other comprehensive income (loss): |
||||||||
Foreign currency translation income (loss) |
344 | (632 | ) | |||||
Comprehensive loss |
$ | (8,327,543 | ) | $ | (6,699,525 | ) | ||
Net loss attributable to common stockholders
per share: |
||||||||
Basic and diluted |
$ | (0.25 | ) | $ | (0.15 | ) | ||
Weighted average number of common shares
outstanding: |
||||||||
Basic and diluted |
47,689,785 | 44,445,042 | ||||||
Net Revenues. Net revenues are primarily from sales of the T3 Series, T3i Series, power
modules, chargers, related accessories and service. Net revenues increased $38,886, or 0.8%, to
$4,682,908 for the year ended December 31, 2010, compared to the same period of the prior year. The
increase was primarily due the expansion into new markets, increase in orders placed due to the
slight economic recovery, achieving a higher average selling price per unit and an increase in
service and parts revenue. These increases were offset in part by certain of our customers
deferring purchasing decisions, thereby lengthening our sales cycles, as well as vendor supply
issues resulting in orders placed by customers not being shipped during the last half of the year
coupled with our short supply of cash to adequately purchase parts in a timely and cost-effective
manner to meet our orders. The delays in our parts due to our increased vendor lead times along
with our inadequate cash position, has resolute in increased backlog. To date, we have not
experienced cancelled orders. We anticipate that the proceeds from the offering will reduce our
delays and also allow us to place orders with our vendors in accordance with their current lead
times, therefore should return our lead times back to our standard of approximately 4-6 weeks. Our
backlog at December 31, 2010 was approximately $2.2 million.
Cost of net revenues. Cost of net revenues primarily consisted of materials, labor to produce
vehicles and accessories, warranty and service costs and applicable overhead allocations. Cost of
net revenues decreased $(475,621), or (9.5%), to $4,512,497 for the year ended December 31, 2010,
compared to the prior year. This decrease in cost of revenues is attributable to managements cost
reduction strategy and lower warranty cost experience due to increase in product reliability. The
decrease was offset in part by increased shipping costs due to our cash position and the inability
to purchase product at the appropriate lead times to prevent overnight or air freight charges,
thereby increasing our costs. The decrease in cost of revenues was also offset by the addition of
$65,000 to inventory reserve for the year ended December 31, 2010.
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Gross profit (loss). During 2010, management has continued to source lower product costs,
increase production efficiencies and experienced lower warranty costs, offset in part by cash
constraints resulting in increased shipping costs, inventory reserve and vendor supply issues,
resulting in gross profit of $170,411, compared to a gross loss of $(344,096) for the prior year.
Management has and will continue to evaluate the processes and materials to reduce the costs of
revenue over the next year. Gross profit (loss) margin was 3.6% and (7.4%), respectively, for the
years ended December 31, 2010 and 2009.
Sales and marketing. Sales and marketing decreased by $(101,088), or (5.2%), to $1,826,736 for
the year ended December 31, 2010, compared to the prior year. The decrease in sales and marketing
expense is attributable to a reduction in salaries and commissions due to restructuring of
commission plans and decreases in trade show and travel expenses.
Research and development. Research and development costs generally consist of 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
$207,652, or 14.9%, to $1,602,961 for the year ended December 31, 2010, compared to the prior year.
The increase was primarily attributable to the costs associated to build the electric/hybrid
vehicle prototype.
General and administrative. General and administrative expenses decreased $(1,546,984), or
(30.2%), to $3,579,817, for the year ended December 31, 2010 compared to the prior year. The
decrease was primarily due to decreases in salaries, legal expenses, stock compensation expenses
and accounting compliance costs.
Other income (expense),net. Other income (expense ), net decreased $(3,583,921) to
($1,487,984) for the year ended December 31, 2010 primarily due to the change in the fair value of
the derivative liabilities and the amortization of debt discount when compared to the prior year.
Deemed dividend. During 2010, as a result of the issuance of Series A convertible preferred
stock, we recorded a deemed dividend related to the amortization of discounts on the preferred
stock of $3,730,149 for the year ended December 31, 2010 compared to $6,116 for the prior year.
Net loss attributable to common stockholders. Net loss attributable to common stockholders for
the year ended December 31, 2010, was $(12,058,036), or $(0.25) per basic and diluted share
compared to $(6,705,009), or $(0.15) per basic and diluted share, for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund our working capital requirements, invest in
research and development and capital equipment, to make debt service payments and the continued
costs of public company filing requirements. We have historically funded our operations through
debt and equity financings, raising $3,666,000 and $6,493,905 in 2010 and 2009, respectively. We
will continue to raise equity and/or secure additional debt to meet our working capital
requirements. For the year ended December 31, 2010, our independent registered public accounting
firm noted in its report that we have incurred losses from operations and have an accumulated
deficit and working capital deficit of approximately $(45.1) million and $(15.1) million,
respectively, as of December 31, 2010, which raises substantial doubt about our ability to continue
as a going concern.
Management believes that cash from operations, together with the net proceeds of the offering,
should be sufficient to allow the Company to continue as a going concern through at least December
31, 2011; however, the Company cannot assure you of this and may require additional debt or equity
financing in the future to maintain operations. The Company also anticipates that it will pursue
raising additional debt or equity financing to fund its new product development and expansion
plans. We cannot assure you that such financing will be available on a timely basis, or acceptable
terms or at all.
During 2010, the Company has obtained equity financing from third parties of approximately
$1.2 million, received proceeds from related-party loans of approximately $2.5 million and
refinanced the outstanding balance of the $1.0 million related to the note to Immersive Media Corp.
(Immersive). The board of directors has allowed for Ki Nam, the Companys CEO and chairman of the
board to loan the Company up to $2.5 million and
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additional stockholders to loan the Company up to $1.0 million. In light of these plans,
management is confident in the Companys ability to continue as a going concern. These consolidated
financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Until management achieves our cost reduction strategy and is able to generate sales to realize
the benefits of the strategy and sufficiently increases cash flow from operations, we will require
additional capital to meet our working capital requirements, debt service, research and
development, capital requirements and compliance requirements We will continue to raise additional
equity and/or financing to meet our working capital requirements.
Our principal sources of liquidity are cash and receivables. As of December 31, 2010, cash and
cash equivalents (including restricted cash) were $133,861, or 3.7%, of total assets compared to
$2,580,798, or 42.6% of total assets as of December 31, 2009. The decrease in cash and cash
equivalents was primarily attributable to net cash used in operating activities.
Cash Flows
For the Years Ended December 31, 2010 and 2009
Net cash flows used in operating activities for the years ended December 31, 2010 and 2009
were $(5,185,067) and $(5,356,937), respectively. For the year ended December 31, 2010, cash flows
used in operating activities related primarily to the net loss of $(8,327,887), offset by net
non-cash reconciling items of $2,245,845. Further contributing to the decrease were increases in
prepaid expenses and other current assets, restricted cash and related party payables of $(89,470),
$(10,000) and $(52,958), respectively. Net cash flows used were offset in part by decreases in
accounts receivable, inventories, and deposits and increases in accounts payable of $139,400,
$104,670, $31,888, and $773,445, respectively.
For the year ended December 31, 2009, cash flows used in operating activities related
primarily to the net loss of $(6,698,893), offset by net non-cash reconciling items of $295,988 and
a decrease in accounts payable of $(719,720). Net cash flows used were offset in part by decreases
in accounts receivable, inventories, and prepaid expenses other current assets of $689,343,
$645,254, and $450,798, respectively.
Net cash used in investing activities was $(48,214) and $(38,450) for the years ended December
31, 2010 and 2009, respectively. For the year ended December 31, 2010, cash flows used in investing
activities related primarily to purchases of property and equipment of $(62,469). For the year
ended December 31, 2009, cash flows used in investing activities related primarily to purchases of
property and equipment of $(36,040).
Net cash provided by financing activities was $2,776,000 and $6,294,076 for the years ended
December 31, 2010 and 2009, respectively. For the year ended December 31, 2010, cash flows provided
by financing activities related primarily to proceeds received from related party notes of
$2,511,000, proceeds from the sale of stock of $1,155,000, offset in part by repayment of notes
payable, rescission of common stock and repayment of loans/advances from related parties of
$250,000, $250,000 and $390,000, respectively.
For the year ended December 31, 2009, cash flows provided by financing activities related
primarily to proceeds received from related party notes of $4,514,963, proceeds from the sale of
stock of $1,978,942, offset in part by repayment of notes payable of $199,829.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated
payments. Changes in our business needs, cancellation provisions, changing interest rates, and
other factors may result in actual payments differing from the estimates. We cannot provide
certainty regarding the timing and amounts of payments. We have presented below a summary of the
most significant assumptions used in our determination of amounts presented in the tables, in order
to assist in the review of this information within the context of our financial position, results
of operations, and cash flows.
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The following table summarizes our contractual obligations as of December 31, 2010, and the
effect these obligations are expected to have on our liquidity and cash flows in future periods.
Less than | ||||||||||||
Contractual Obligation | Total | 1 Year | 1-3 Years | |||||||||
Related party notes payable |
$ | 6,621,000 | $ | 4,500,000 | $ | 2,121,000 | ||||||
Note payable |
243,468 | 243,468 | | |||||||||
Operating lease |
514,000 | 305,000 | 209,000 | |||||||||
Total Contractual Obligations |
$ | 7,378,468 | $ | 5,048,468 | $ | 2,330,000 | ||||||
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
investors, note holders and to non-employee consultants for services rendered or to be rendered in
the future. Warrants issued in conjunction with equity, are recorded to equity as exercised.
The following table summarizes the warrants issued and outstanding as of December 31, 2010:
Warrants Outstanding & Exercisable | Exercise Price | Expiration Date | ||||||
120,000 |
$ | 1.54 | 3/31/2013 | |||||
274,774 |
$ | 1.65 | 12/29/2014 | |||||
1,953,730 |
$ | 0.70 | 12/29/2014 | |||||
4,000,000 |
$ | 0.70 | 12/30/2014 | |||||
1,600,000 |
$ | 0.70 | 2/2/2015 | |||||
947,639 |
$ | 0.70 | 3/31/2015 | |||||
710,000 |
$ | 0.70 | 3/22/2015 | |||||
1,040,000 |
$ | 0.70 | 4/30/2015 | |||||
50,000 |
$ | 0.70 | 8/25/2015 |
The exercise price and the number of shares issuable upon exercise of the warrants will be
adjusted upon the occurrence of certain events, including reclassifications, reorganizations or
combinations of the common stock. At all times that the warrants are outstanding, we will authorize
and reserve at least that number of shares of common stock equal to the number of shares of common
stock issuable upon exercise of all outstanding warrants.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our investment portfolio and have no foreign
exchange contracts. Financial instruments consist of cash and cash equivalents, trade accounts
receivable, related-party receivables, accounts payable, accrued liabilities and related-party
payables. We consider investments in highly liquid instruments purchased with a remaining maturity
of 90 days or less at the date of purchase to be cash equivalents.
Interest Rates. Exposure to market risk for changes in interest rates relates primarily to
short-term investments and short-term obligations; thus, fluctuations in interest rates would not
have a material impact on the fair value of these securities. At December 31, 2010 and 2009, we
have $133,861 and $2,580,798, respectively, in cash and
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cash equivalents. A hypothetical 0.5% increase or decrease in interest rates would not have a
material impact on earnings or loss, or the fair market value or cash flows of these instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required financial statements are included in a separate section of this report commencing
on page F-1, and are hereby incorporated into this Item 8 by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. 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, as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act.
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, 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 December 31, 2010, our disclosure
controls and procedures were not effective at the reasonable assurance level due to the material
weaknesses described below.
We performed additional analysis and other post-closing procedures to ensure our consolidated
financial statements were prepared in accordance with GAAP. Accordingly, we believe that the
consolidated financial statements included in this Annual Report fairly present, in all material
aspects, our financial condition for the periods presented.
Internal Control over Financial Reporting
(a) Managements annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and
15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of,
the Companys principal executive officer and principal financial officer and effected by the
Companys board of directors, management, and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP and includes those policies and procedures that:
| Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
| Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
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| Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the financial statements. |
Because of its inherent limitations, the Companys internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement preparation and
presentation. Projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2010. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework.
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
December 31, 2010, our internal control over financial reporting was not effective at the
reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures.
Management evaluated the impact of our failure to have written documentation of our internal
controls and procedures on our assessment of our disclosure controls and procedures and has
concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a
basic internal control. Due to our size and nature, segregation of all conflicting duties may not
always be possible and may not be economically feasible. However, to the extent possible, the
initiation of transactions, the custody of assets and the recording of transactions should be
performed by separate individuals. Management evaluated the impact of our failure to have
segregation of duties on our assessment of our disclosure controls and procedures and has
concluded that the control deficiency that resulted represented a material weakness.
3. We did not maintain sufficient accounting resources with adequate training in the
application of GAAP commensurate with our financial reporting requirements and the complexity of
our operations and transactions, specifically related to the accounting and reporting of debt and
equity transactions, including derivative instruments.
4. We have had, and continue to have, a significant number of audit adjustments. Audit
adjustments are the result of a failure of the internal controls to prevent or detect
misstatements of accounting information. The failure could be due to inadequate design of the
internal controls or to a misapplication or override of controls. Management evaluated the impact
of our significant number of audit adjustments and has concluded that the control deficiency that
resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other
procedures to ensure that the financial statements included herein fairly present, in all material
respects, our financial position, results of operations and cash flows for the periods presented.
We are attempting to remediate the material weaknesses in our disclosure controls and
procedures and internal controls over financial reporting identified above by refining our internal
procedures (see below).
This Annual Report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our independent registered public accounting firm pursuant to the rules
of the Securities and Exchange Commission that permit us to provide only managements report in
this Annual Report.
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(b) Changes in internal control over financial reporting
The following change in our internal control over financial reporting occurred during the
quarter ended December 31, 2010, which has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting:
| We have standardized our shipping terms to be FOB shipping point and have implemented review and sign off procedures of approval of any deviation from the standard shipping terms. |
We have initiated the following corrective actions, which management believes are reasonably
likely to materially affect over our financial reporting as they are designed to remediate the
material weaknesses as described above:
| We are in the process of further enhancing our internal finance and accounting organizational structure, which includes hiring additional resources. |
| We are in the process of further enhancing the supervisory procedures to include additional levels of analysis and quality control reviews within the accounting and financial reporting functions. |
| We are in the process of strengthening our internal policies and enhancing our processes for ensuring consistent treatment and recording of reserve estimates and that validation of our conclusions regarding significant accounting policies and their application to our business transactions are carried out by personnel with an appropriate level of accounting knowledge, experience and training. |
We do not expect to have fully remediated these material weaknesses until management has
tested those internal controls and found them to have been remediated. We expect to complete this
process during our annual testing for fiscal 2011.
ITEM 9B. OTHER INFORMATION
Item 1. Legal Proceedings.
With the exception of the following, we know of no material, existing or pending legal
proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending
litigation. We are also unaware of any proceedings in which any of our directors, officers, or
affiliates, or any registered or beneficial holder of more than 5% of our voting securities, or any
associate of such persons, is an adverse party or has a material interest adverse to our Company.
Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim (Orange County Superior
Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (Plaintiff)
filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki
Nam, the Companys CEO, and Jason Kim, the Companys former COO (collectively the Defendants) for
breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly
executed between Plaintiff and the Company. On August 24, 2009, Defendants filed a Demurrer to the
Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against
Defendants for breach of contract, fraud and common counts, seeking compensatory damages of
$470,599, attorneys fees, punitive damages, interest and costs. On October 27, 2009, Defendants
filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court
denied the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the
First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case
was settled in its entirety. The Company agreed to pay compensatory damages, attorneys fees and
costs totaling $493,468, through monthly payments of $50,000, with 6% interest accruing from the
date of the settlement. Periodic payments are expected to be made through May 2011. The first
payment of $50,000 was made on August 3, 2010 and subsequent principal payments totaling $200,000
were made by the Company through December 31, 2010. The Company recorded the entire settlement
amount of $493,468 as a note payable, $470,599 as a deposit on fixed
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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
consolidated balance sheet. The Company has recorded accrued interest of $4,126 at December 31,
2010.
Commencing January 1, 2011, the Company has failed to make the scheduled payments required by
the July 29, 2010 settlement agreement and stipulation for entry of judgment. The Plaintiff has
filed a motion for entry of judgment pursuant to the terms of the July 29, 2010 settlement
agreement and stipulation for entry of judgment, which if granted, would cause the acceleration of
all amounts owed under the settlement agreement. This motion is scheduled to be heard on April 21,
2011.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
The following table sets forth the names and ages of all of our directors and executive
officers as of December 31, 2010. Also provided below are a brief description of the business
experience during the past five years of each director, executive officer and significant employee
during the past five years, an indication of directorships currently held, or held at any time
since January 1, 2006, by each director in other companies subject to the reporting requirements
under the Federal securities laws, and certain other information and attributes that our nominating
committee determined qualify our directors to service in such capacity. All of the directors will
serve until the next annual meeting of stockholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Name | Age | Positions Held: | ||||
Ki Nam
|
51 | Chief Executive Officer and Chairman | ||||
Kelly J. Anderson
|
43 | Executive Vice President, Chief Financial Officer and President | ||||
Noel Chewrobrier
|
46 | Vice President International Sales | ||||
Dave Fusco
|
60 | Vice President Domestic Sales | ||||
David Snowden
|
66 | Director | ||||
Steven Healy
|
50 | Director | ||||
Mary S. Schott
|
50 | Director | ||||
Rob Thomson(1)
|
34 | Director |
(1) | Mr. Thomson was appointed to our Board of Directors in February 2010 pursuant to the Securities Purchase Agreement entered into on December 30, 2009 between us and Vision Opportunity Master Fund, Ltd. (VOMF). Pursuant to this agreement, VOMF may designate one nominee to our Board of Directors. |
Biographical Information
Ki Nam has served as the Chief Executive Officer of T3 Motion since March 16, 2006. Mr. Nam
founded Paradigm Wireless Company in 1999, a supplier of quality wireless equipment to the telecom
industry, and Aircept founded in 2000, a leading developer, manufacturer, and service provider in
the Global Positioning System (GPS) marketplace. In 2001, Mr. Nam founded Evolutionary Electric
Vehicles (EEV) to provide high performance motor-controller packages to the emerging hybrid and
electric vehicle market. Prior to founding his own companies, Mr. Nam co-founded Powerwave
Technologies, Inc., a publicly-held company, where he held the position of Executive Vice
President, Business Development. We believe Mr. Nam is qualified to serve as a director as a result
of his insight, detailed understanding of electric vehicles and our technologies, and information
related to the Companys strategy, operations, and business. As founder of T3 Motion, his vision
and know-how have been instrumental in the development of our products and business. His prior
experience as the Chief Executive Officer of EEV and his experience at Powerwave Technologies, Inc.
also have afforded him with strong leadership skills and a broad technology background.
Kelly J. Anderson, has been the President since April 2010 and Executive Vice President, Chief
Financial Officer since March 2008 and served as a director of the Company from January 2009 until
January 2010. From 2006 until 2008, Ms. Anderson was Vice President at Experian, a leading credit
report agency. From 2004 until 2006, Ms. Anderson was Chief Accounting Officer for TripleNet
Properties, G REIT, Inc., T REIT, Inc., NNN 2002 Value Fund, LLC, and Chief Financial Officer of
NNN 2003 Value Fund, LLC and A REIT, Inc., all of which were real estate investment funds managed
by TripleNet Properties. From 1996 to 2004, Ms. Anderson held senior financial positions with The
First American Corp., a Fortune 500 title insurance company.
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Noel Chewrobrier has been Vice President of International sales since 2007. Over the past 15
years, Noel has held various senior executive sales management positions at various technology
companies located in the U.K. and in the U.S., at the following companies: Tecan UK and USA
(Executive Vice President from 1995 to 2004, and President from 2004 to 2007); Homark Ltd. (Global
Sales Manager from 1989 to 1995); and Fast Moving Consumer Goods (Sales and Marketing Regional
Manager from 1986 to 1995).
David Fusco was named Vice President, Domestic Sales, on October 1, 2010. Over the past 25
years David has held senior executive sales management positions at Texas Instruments, Compaq
Computer, and Hewlett-Packard. From 2006 to October 2010, David founded Andal Holdings, LLC, and
provided sales and management consulting services to a variety of companies. David holds a B.S.
degree from Miami University in Oxford, OH.
David Snowden has served as a director of the Company since 2007, Mr. Snowden has been the
Chief of Police of Beverly Hills for the past seven years. He has over 40 years of professional
experience including holding positions as Chief of Police for Beverly Hills (2003- current), Costa
Mesa (1986-2003), and Baldwin Park (1980-1986). Chief Snowden has held numerous Presidential
positions including Police Chiefs Department of the League of Cities (1993), Orange County Chiefs
and Sheriffs Association (1990) and was Chairman of the Airbourne Law Enforcement. Chief Snowden
was inducted to the Costa Mesa Hall of Fame in 2003 and was voted top 103 most influential persons
on the Orange Coast for 12 years. We believe Mr. Snowden is suited to serve as a director of T3
Motion due to his deep experience in and understanding of the law enforcement industry and his
contacts within that industry. Mr. Snowdens experience and background with police departments and
municipalities has enabled the Board and the Company to better understand the needs and interests
of some of our primary clients.
Steven Healy has served as a director of the Company since 2007, Mr. Healy has been the
Director of Public Safety at Princeton University since 2003, and was the President of the
International Association of Campus Law Enforcement Administrators (IACLEA) until June 2007. He has
served as a member of the IACLEA Government Relations Committee for the past 10 years and is active
with issues regarding the Clery Act. Chief Healy was recently appointed by the governor of New
Jersey to serve on the states Campus Security Task Force. Prior to his position at Princeton
University, Mr. Healy was the Chief of Police at Wellesley College in Wellesley, MA. He also served
as Director of Operations at the Department of Public Safety at Syracuse University. During his
tenure at Wellesley College, Chief Healy was the IACLEA North Atlantic Regional Director and
President of the Massachusetts Association of Campus Law Enforcement Administrators. We believe Mr.
Healy is suited to serve as a director of T3 Motion due to his experience in private security
markets, and in particular with campus security issues, as well as his understanding of law
enforcement, in general.
Mary S. Schott has served as a director of the Company since 2009 and has over 25 years
experience in the accounting finance functions with extensive experience in finance and accounting
compliance and systems including SOX applications. Ms. Schott has been the Chief Financial Officer
of San Manuel Band of Serrano Mission Indians since 2008. A CPA and MBA, Ms. Schott served as Chief
Accounting Officer of First American Title Insurance Company, a division of First American
Corporation for three years and held various finance and accounting functions for the previous 17
years at First American. Ms. Schott was the President and Treasurer of the First American Credit
Union for eight years. We believe Ms. Schott is qualified to serve as a director due to her
experience as a Chief Financial Officer of a public company and as a CPA and MBA, as well as her
ability to understand any technical financial issues that may be raised by our independent
registered public accounting firm from time to time. Ms. Schott has extensive knowledge and
background relating to accounting and financial reporting rules and regulations, as well as
internal controls and business processes.
Rob Thomson, has served as a director of the Company since 2010, Mr. Thomson has been a
Director at Vision Capital Advisors, LLC since 2007, a New York based private equity manager, where
he oversees the firms growth equity investments in consumer retail, industrials, and homeland
defense and security companies. Vision Capital Advisors LLC is the manager of two funds that hold
debt and equity securities of the Registrant Vision Opportunity Master Fund, Ltd. and Vision
Capital Advantage Funds LP. At Vision, Mr. Thomson manages investment opportunities for the funds
and works closely with its portfolio companies in executing their growth plans. He currently sits
on the Board of Directors for Juma Technology Corp., a converged network integrator and software
developer based in New York that trades on the OTC Bulletin Board and Microblend Technologies,
Inc.,
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a private company that is a developer of automatic paint creation systems for retailers. From
2005 to 2007, Mr.
Thomson was the Managing Director of The Arkin Group, LLC in charge of operations, financial
management and growth strategies for this international business intelligence firm. Mr. Thomson has
an MBA from the Harvard Business School and a B.A. degree from Haverford College. He has studied
Chinese language and history at Nankai University in China and Tunghai University in Taiwan. Mr.
Thomson is also a term member at the Council on Foreign Relations. We believe Mr. Thomson is
qualified to serve on our board as a result of his broad experience advising other emerging growth
companies and experience with other companies in our target markets. Mr. Thomson also has a deep
understanding of capital markets, mergers and acquisitions, business restructuring, business
development, as well as fundraising and investment strategies.
Family Relationships
There are no family relationships among our directors and executive officers.
Section
16(a) Beneficial Ownership Reporting Compliance
Not
Applicable.
Code of Conduct and Ethics
We adopted a Code of Conduct and Ethics in 2011 that applies to all directors, officers and
employees, including our Chief Executive Officer and Chief Financial Officer, and members of the
Board of Directors. Our Code of Conduct and Ethics will be available on our website at www.t3motion.com. A copy of our code of conduct
and ethics will also be provided to any person without
charge, upon written request sent to us at our offices located at 2990 Airway Avenue, Building A, Costa Mesa, California 92626.
Material
Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors
There have been no material changes to the procedures by which security holders may recommend
nominees to the Board of Directors.
Board Committees
Our Board has an audit committee, a compensation committee and a nominating committee, each of
which has the composition and the responsibilities described below.
Audit Committee. Our audit committee oversees our corporate accounting and financial
reporting process and assists the Board in monitoring our financial systems and our legal and
regulatory compliance. Our audit committee is authorized to, among other things, to assist the
Boards oversight of the following:
| the integrity of our financial statements; | ||
| our compliance with legal and regulatory requirements; | ||
| the qualification and independence of our independent auditors; and |
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| the performance of the Companys auditor qualifications and the work of our independent auditors. |
Our
audit committee currently consists of Mary Schott (Chairperson) and
Dave Snowden. The Board of Directors has determined that
Ms. Schott is an audit committee financial expert as defined
by the SECs rules, and she qualifies as an independent director
as defined by the SECs rules and by the NYSE Amex rules.
Compensation Committee. Our compensation committee oversees, and makes recommendations
to the Board regarding the annual salaries and other compensation of the Companys executive
officers, the Companys general employee compensation and the Companys other compensation policies
and practices. The compensation committee is also responsible for administering the Companys 2007
Plan and 2010 Plan. Our compensation committee currently consists of Mary Schott (Chairperson) and
Steven Healy.
Nominating Committee. Our nominating committee assists the Board in reviewing and
recommending nominees for election as directors, as well as establishing procedures to address
stockholder proposals and the structure of the board and its committees. The members of our
nominating committee are Dave Snowden (Chairman) and Steven Healy. Our board of directors may from
time to time establish other committees.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table indicates the cash and non-cash compensation earned
during the years ended December 31, 2010 and 2009 by (i) our Chief Executive Officer (principal
executive officer) ((ii) our two most highly compensated executive officers other than our CEO who
were serving as executive officers at the end of our last completed fiscal year, whose total
compensation exceeded $100,000 in 2010, and (iii) up to two additional individuals for whom
disclosure would have been provided but for the fact that the individual was not serving as an
executive officer at the end of our last completed fiscal year, whose total compensation exceeded
$100,000 during such fiscal year ends. The persons listed in the summary compensation table below
are referred to in this report as our Named Executive Officers.
Executive Compensation Summary Compensation Table
Stock | Option | All Other | ||||||||||||||||||||||||||
Salary | Bonus | Awards | Awards | Compensation | Total | |||||||||||||||||||||||
Name and Principal Position | Year | ($) | ($) | ($) | ($)(1) | ($)(2) | ($) | |||||||||||||||||||||
Ki Nam, |
2010 | $ | 190,000 | $ | | $ | | $ | 114,900 | $ | | $ | 304,900 | |||||||||||||||
Chief Executive Officer and Chairman(2) |
2009 | 150,000 | | | | | 150,000 | |||||||||||||||||||||
Kelly J. Anderson, |
2010 | 187,962 | | | 229,800 | | 417,762 | |||||||||||||||||||||
Executive Vice President, President and |
2009 | 175,000 | | | | | 175,000 | |||||||||||||||||||||
Chief Financial Officer |
(1) | The amounts shown in this column represent the dollar amount recognized for financial statement reporting purposes for the years ended December 31, 2010 and 2009 with respect to stock options granted, as determined pursuant to the accounting standards. See Note 11 of the notes to our audited consolidated financial statements for a discussion of valuation assumptions made in determining the grant date fair value and compensation expense of our stock options. | |
(2) | Pursuant to Mr. Nams employment agreement, his annual salary is $190,000, commencing January 1, 2010. Mr. Nam has elected to defer payment of the $40,000 increase in his base salary in 2010 until the completion of the Companys next round of financing, which may include the Companys pending public offering. |
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Employment Agreements
Ki Nam
The Company entered into a written employment agreement with Mr. Ki Nam on August 13, 2010 in
which it agreed to employ Mr. Nam during the term of such agreement as its Chief Executive Officer.
The initial term of Mr. Nams employment expires on December 30, 2011, but the agreement
automatically renews, annually, upon the terms and conditions set forth in this agreement unless
terminated by either party by giving written notice 60 days prior to the expiration of the then
term.
For the period of one year commencing on January 1, 2010, the Company shall pay Mr. Nam a base
salary of $190,000 per annum. During his employment and any renewal or extension period thereafter,
Mr. Nam shall be entitled to receive, on March 15 of each calendar year, an annual bonus based upon
an approved budget by the Companys board of directors and/or its compensation committee.
If the Board determines that the Company does not have sufficient cash available to make the
above described cash obligations, the Board may, in its discretion, make such payments in stock,
but at no time shall the cash payment due under the cash obligation fall below one third of the
payment obligation. Mr. Nam shall be eligible to participate in any compensation plan or program
(401(k) plan and stock option plan) maintained by the Company in which other executives or
employees of the Company participate, on similar terms. The Company shall provide to Mr. Nam and
his family, during the employment with coverage under all employee medical, dental and vision
benefit programs, plans or practices adopted by the Company and made available to all employees of
the Company. Mr. Nam shall be entitled to four weeks paid vacation in each calendar year (but no
more than ten consecutive business days at any given time).
The Company may terminate Mr. Nams employment at any time for any reason. If Mr. Nams
employment is terminated by the Company other than for Cause (as defined in such agreement), Mr.
Nam shall receive a severance payment equal to twelve months base salary and twelve months
benefits, and any earned and/or accrued bonus, as in effect immediately prior to such termination,
payable in accordance with the ordinary payroll practices of the Company, but not less frequently
than semi-monthly following such termination of employment. In the event that Mr. Nams employment
is terminated (i) by the Company for Cause; (ii) by Mr. Nam on a voluntary basis; (iii) as a result
of Mr. Nams permanent disability; or (iv) by Mr. Nams death, he or his estate shall only be
entitled to receive base salary and bonuses already earned and accrued through the last day of his
employment. In the event of termination by Mr. Nams death or permanent disability, all such
benefits identified under the employment agreement shall be maintained and in effect for twelve
(12) additional months by the Company. Any and all such unvested benefits (i.e. 401(k), restricted
stock or stock options) shall immediately vest.
If Mr. Nams employment with the Company is terminated by the Company (other than upon the
expiration of the Employment terms, for Cause, or by reason of disability, or upon Mr. Nams death)
at any time within ninety (90) days before, or within twelve (12) months after, a Change in Control
of the Company (as defined in such agreement), or if Mr. Nams employment with the Company is
terminated by him for Good Reason (as defined in such agreement) within six (6) months after a
Change in Control, or if Mr. Nams employment with the Company is terminated by Mr. Nam for any
reason, including without Good Reason, during the period commencing six (6) months after a Change
in Control and ending twelve (12) months after a Change in Control, then the Company shall pay to
Mr. Nam: (i) any accrued, unpaid base salary payable as in effect on the date of termination, (ii)
any unreimbursed business expenses and (iii) a severance benefit, in a lump sum cash payment, in an
amount equal to: (A) twice Mr. Nams annual rate of base salary, as in effect as of the date of
termination, plus (B) two times Mr. Nams target bonus for the fiscal year of the Company in which
the date of termination occurs.
In the event Mr. Nam is entitled to the severance benefits, each stock option exercisable for
shares of Company common stock granted under the Companys stock incentive plan that is held by Mr.
Nam, if then outstanding, shall become immediately vested and exercisable with respect to all of
the shares of Company common stock subject thereto on the date of termination and shall be
exercisable in accordance with the
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provisions of the Companys stock incentive plan and option agreement pursuant to which such
option was granted. In addition, in the event Mr. Nam is entitled to severance benefits, a
restricted stock award and restricted shares of the Company common stock granted under the
Companys stock incentive plan that is held by Mr. Nam that is subject to a forfeiture,
reacquisition or repurchase option held by the Company shall become fully vested, nonforfeitable
and no longer subject to reacquisition or repurchase by the Company or other restrictions on the
date of termination.
Mr. Nam shall not, without the prior written consent of the Company, use or make accessible to
any other person, any confidential information pertaining to the business or affairs of the
Company, except (i) while employed by the Company, in the business of and for the benefit of the
Company, or (ii) when required to do so by applicable law.
Mr. Nam has also agreed for the two years following his termination of employment, he and his
affiliates will not directly or indirectly, through any other person, (i) employ, solicit or induce
any individual who is, or was at any time during the one (1) year period prior to the termination
date, an employee or consultant of the Company, (ii) cause such individual to terminate or refrain
from renewing or extending his or her employment by or consulting relationship with the Company, or
(iii) cause such individual to become employed by or enter into a consulting relationship with a
competitor, the Company and its affiliates or any other individual, person or entity.
Mr. Nam and his affiliates also shall not solicit, persuade or induce any customer to
terminate, reduce or refrain from renewing or extending its contractual or other relationship with
the Company in regard to the purchase of products or services, performed, manufactured, marketed or
sold by the Company or any other person. Mr. Nam and his affiliates shall not solicit, persuade or
induce any supplier to terminate, reduce or refrain from renewing or extending his or its
contractual or other relationship with the Company. During the term of his employment, Mr. Nam
shall not engage or assist others to engage in a competing business.
Kelly Anderson
The Company entered into a written employment agreement with Kelly Anderson on April 17, 2010.
The term of this agreement continues until December 30, 2011 but it automatically renews for an
additional one year period unless either the Company or Ms. Anderson give the other party written
notice of at least 60 days prior to the expiration of the then term. Pursuant to this agreement,
Ms. Andersons base salary for the first year of the agreement is $190,000 per year, and she is
eligible to receive an annual bonus based upon an approved budget and other requirements as
established from time to time by the Companys Board of Directors and/or its Compensation
Committee. If the Board determines that the Company does not have sufficient cash available to make
the foregoing cash obligations, the Board may, in its discretion, make such payments in stock, but
at no time shall the cash payment due under the cash obligation fall below one third of the
foregoing payment obligation to Ms. Anderson.
While the Company may terminate Ms. Andersons employment at any time for any reason, if the
Company terminates her employment for other than for Cause (as defined in such agreement), she
shall receive (a) a severance payment equal to six (6) months of her then Base Salary; (b)
continuation of her insurance benefits for six (6) months following her termination; and (c) any
earned and/or accrued bonus, as in effect immediately prior to such termination, payable in
accordance with the ordinary payroll practices of the Company, but not less frequently than
semi-monthly following such termination of employment.
In the event (i) the Company terminates Ms. Andersons employment for Cause (as defined in the
employment agreement), (ii) she voluntarily resigns from the Company; or (iii) her termination is
as a result of her Permanent Disability (as defined in the agreement); or (iv) her termination is
due to her death, then Ms. Anderson or her estate shall only be entitled to receive any base salary
or bonus earned and accrued through the date of her termination of employment. Notwithstanding the
foregoing, in the event her termination is due to her death or Permanent Disability, her salary and
benefits will also continue for six months after her termination, and any of her unvested benefits
(i.e. 401(k), restricted stock or stock options) shall immediately vest upon her termination.
If (a) Ms. Andersons employment with the Company is terminated by the Company (other than
upon the expiration of her employment term under the agreements, for Cause, or by reason of a
Permanent Disability, or upon Executives death)at any time within ninety (90) days before, or
within twelve (12) months after, a Change in Control (as defined in the agreement), or (b) if she
resigns for Good Reason (as defined in the agreement)
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within six (6) months after a Change in Control, or (c) her employment with the Company is
terminated by Ms. Anderson for any reason, including without Good Reason, during the period
commencing six (6) months after a Change in Control and ending twelve (12) months after a Change in
Control, then the Company shall be required to pay to Ms. Anderson the following benefits: (i) any
accrued, unpaid base salary payable as in effect on her termination date; (ii) any unreimbursed
business expenses; and (iii) a severance benefit, in a lump sum cash payment, in an amount equal
to: (i) her annual base salary then in effect, plus her Target Bonus (as defined in the agreement)
for the fiscal year of the Company during which her termination occurs.
In the event Ms. Anderson is entitled to the severance benefits under her employment
agreement, all of her outstanding stock options granted under the Companys stock incentive plan
shall immediately vest and become exercisable and any restricted stock award and restricted shares
of the Company common stock granted to Ms. Anderson under the Companys stock incentive plan that
is subject to a forfeiture, reacquisition or repurchase option held by the Company shall become
fully vested, nonforfeitable and no longer subject to reacquisition or repurchase by the Company or
other restrictions as of her termination date.
Following her termination of employment, Ms. Anderson shall continue to be subject to certain
confidentiality obligations and is also subject to certain nonsolicitation obligations contained in
the agreement for two years following her termination concerning certain of the Companys current
and prior employees and consultants.
Other than such arrangements described above, we have no other formal employment agreements
with any of our executive officers, nor any compensatory plans or arrangements resulting from the
resignation, retirement or any other termination of any of our executive officers, from a
change-in-control, or from a change in any executive officers responsibilities following a
change-in-control.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table summarizes the amount of our executive officers equity-based compensation
outstanding at the fiscal year ended December 31, 2010:
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||
Incentive | ||||||||||||||||||||||||||||||||
Equity | Plan Awards: | |||||||||||||||||||||||||||||||
Incentive | Market or | |||||||||||||||||||||||||||||||
Market | Plan Awards: | Payout Value | ||||||||||||||||||||||||||||||
Number of | Number of | Number | Value of | Number of | of Unearned | |||||||||||||||||||||||||||
Securities | Securities | of Shares | Shares or | Unearned | Shares, Units | |||||||||||||||||||||||||||
Underlying | Underlying | or Units of | Units of | Shares, Units | or Other | |||||||||||||||||||||||||||
Unexercised | Unexercised | Option | Option | Stock that | Stock that | or Other | Rights that | |||||||||||||||||||||||||
Options (#) | Options (#) | Exercise | Expiration | Have Not | Have Not | Rights that | Have Not | |||||||||||||||||||||||||
Name | Exercisable | Unexercisable | Price ($) | Date | Vested (#) | Vested ($) | Have Not Vested (#) | Vested ($) | ||||||||||||||||||||||||
Ki Nam |
| 300,000 | $0.50 | 7/21/2020 | | $ | | | $ | | ||||||||||||||||||||||
1,000,000 | | 0.77 | 12/10/2017 | | | | | |||||||||||||||||||||||||
Kelly J. Anderson |
| 600,000 | 0.50 | 7/21/2020 | | | | | ||||||||||||||||||||||||
137,500 | 62,500 | 0.60 | 3/17/2018 | | | | | |||||||||||||||||||||||||
104,167 | 95,833 | 0.50 | 11/13/2018 | | | | |
(1) | Each option vests as follows: 25% of the option shares vest on the first anniversary of the grant date and the balance vest on 36 equal monthly installments thereafter. The option expiration date indicated with respect to each option is the tenth anniversary of the grant date with respect to such option. |
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Director Compensation
The Company pays each of its non-employee directors a $20,000 cash retainer for the directors
participation on the Board and its committees. The Board pays no additional fees for attending
meetings or telephone conferences. The following table sets forth information concerning
compensation paid or accrued for services rendered to us by members of our board of directors for
2010.
Fees Earned or | ||||||||||||
Name (1) | Paid in Cash ($) | Option Awards($)(2) | Total ($) | |||||||||
Ki Nam(3) |
$ | | $ | | $ | | ||||||
Steven Healy |
20,000 | 18,390 | 38,390 | |||||||||
David Snowden |
20,000 | 18,390 | 38,390 | |||||||||
Mary S. Schott |
20,000 | 18,390 | 38,390 | |||||||||
Robert Thomson |
| (4) | 18,390 | (5) | 18,390 |
(1) | The Company has not granted any stock awards to its non-employee directors and no such awards were outstanding at fiscal year end. As of December 31, 2010, the non-employee directors held options for the following number of shares of common stock: Steven Healy 100,000; David Snowden 100,000; Mary S. Schott 100,000; and Robert Thomson 50,000. | |
(2) | Amounts represent the aggregate grant date fair value of the stock or option award calculated in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718, Stock Compensation, as amended, without regard to estimated forfeitures, or, with respect to re-priced options. See Note 11 of the notes to our audited consolidated financial statements for a discussion of valuation assumptions made in determining the grant date fair value and compensation expense of our stock options. | |
(3) | Mr. Nam does not receive compensation for serving as a director of the Company. His compensation for serving as an officer of the Company is reflected in the table titled Summary Compensation Table. | |
(4) | Mr. Thomson has waived his annual cash retainer Board fee for 2010. | |
(5) | Such options are expected to be assigned to Vision Capital Advisors or its affiliates. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Securities Authorized for Issuance under Equity Compensation Plans or Individual Compensation
Arrangements
Please see the section titled Securities Authorized for Issuance under Equity Compensation
Plans under Item 5 above.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as to each person who is known to us to be the
beneficial owner of more than 5% of our outstanding common stock or Series A convertible preferred
stock and as to the security and percentage ownership of each executive officer and director of the
Company (including our Named Executive Officers) and all officers and directors of the Company as a
group as of February 28, 2011.
We have determined beneficial ownership in accordance with the rules of the Securities and
Exchange Commission. Except as otherwise indicated, we believe that the beneficial owners listed
below, based on the information furnished by these owners, have sole investment and voting power
with respect to the securities indicated as beneficially owned by them, subject to applicable
community property laws.
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Unless otherwise indicated, the address of each beneficial owner listed below is 2990 Airway
Avenue, Building A., Costa Mesa, California 92626.
Number of | Percentage of | |||||||||||||||
Number of | Percent of | Shares of | Shares of | |||||||||||||
Shares of | Shares of | Series A | Series A | |||||||||||||
Common Stock | Common Stock | Preferred Stock | Preferred Stock | |||||||||||||
Beneficially | Beneficially | Beneficially | Beneficially | |||||||||||||
Name of Beneficial Owner and Address | Owned(1) | Owned(1)(2) | Owned | Owned(13) | ||||||||||||
Executive Officers and/or Directors: |
||||||||||||||||
Ki Nam |
33,237,464 | 59.5 | %(3) | 976,865 | 8.5 | % | ||||||||||
Kelly Anderson |
258,333 | * | (4) | | | |||||||||||
David Snowden |
100,000 | * | (5) | | | |||||||||||
Steven Healy |
100,000 | * | (6) | | | |||||||||||
Mary S. Schott |
100,000 | * | (7) | | | |||||||||||
Robert Thomson |
6,033,604 | 11.9 | %(8) | 12,870,698 | 85.8 | %(14) | ||||||||||
5% Stockholders: |
||||||||||||||||
Immersive Media Corp. |
4,473,342 | 8.4 | %(9) | | | |||||||||||
Vision Opportunity Master Fund, Ltd. |
5,147,635 | 10.2 | %(10) | 10,951,765 | 73.0 | % | ||||||||||
Total Force International Limited |
8,000,000 | 14.6 | %(11) | | | |||||||||||
Vision Capital Advantage Fund |
2,614,090 | 4.9 | %(15) | 1,918,933 | 16.7 | % | ||||||||||
All Executive Officers and Directors as
a Group (7 persons) |
39,829,401 | 70.6 | %(12) | 13,847,563 | 92.3 | % |
* | Holders beneficially own less than 1%. | |
(1) | Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; or (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the persons actual ownership or voting power with respect to the number of shares of common stock actually outstanding. | |
(2) | As of February 28, 2011, there were 50,658,462 shares of common stock issued and outstanding. | |
(3) | This number includes 27,155,230 shares of common stock, 1,953,730 shares of common stock issuable upon conversion of the preferred stock held by Mr. Nam, and 2,228,504 shares of common stock issuable upon exercise of warrants held by The Nam Family Trust Dated 02/17/07, Ki Nam and Yeong Hee Nam as the Trustees. This number also includes 900,000 shares of common stock held by Justin Nam, who is the son of this stockholder. Further, this number does not include 900,000 shares of common stock held by Michelle Nam, who is the adult daughter of this stockholder and does not reside in the same household as Mr. Nam. This amount includes 1,000,000 shares subject to an option to purchase common stock. Thus, the percentage of common stock beneficially owned by Mr. Nam is based on a total of 55,840,696 shares of common stock. | |
(4) | This number includes options to purchase 258,333 shares of common stock held by Ms. Anderson. Thus, the percentage of common stock beneficially owned by Ms. Anderson is based on a total of 50,916,785 shares of common stock. | |
(5) | This number includes options to purchase 100,000 shares of common stock held by Mr. Snowden. Thus the percentage of common stock beneficially owned by Mr. Snowden is based on a total of 50,758,462 shares of common stock. |
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(6) | This number includes options to purchase 100,000 shares of common stock held by Mr. Healy. Thus the percentage of common stock beneficially owned by Mr. Healy is based on a total of 50,758,462 shares of common stock. | |
(7) | This number includes options to purchase 100,000 shares of common stock held by Ms. Schott. Thus, the percentage of common stock beneficially owned by Ms. Schott is based on a total of 50,758,462 shares of common stock. | |
(8) | Robert Thomson has been designated by Vision Opportunity Master Fund, Ltd. to our board of directors. The reported securities are owned directly by Vision Opportunity Master Fund, Ltd. (VOMF) and its affiliate Vision Capital Advantage Fund, L.P. (VCAF), and together with VOMF, the Vision Entities), and Mr. Thomson has no direct interest in these shares. VOMF and VCAF are the direct owners of the subject securities. VCAF GP, LLC (the General Partner) serves as general partner of VCAF; the Managing Member of the General Partner is Adam Benowitz. Vision Capital Advisors, LLC (the Investment Manager) serves as investment manager to VOMF and VCAF. Adam Benowitz is the Managing Member of the Investment Manager. Robert Thomson currently serves as VOMFs and VCAFs representative on our board of directors; VOMF and VCAF may be deemed a director by virtue of their right to appoint a director. The 5,983,604 shares listed represent the 5,097,635 and 885,969 common shares held by VOMF and VCAF, respectively, as well as (all figures given in the aggregate) options to purchase up to 50,000 shares of our common stock. This number excludes (a) the 10% Convertible Promissory Notes (the Notes) currently convertible into 7,000,000 shares of our common stock and 7,000,000 warrants, (b) 7,451,765 shares of Series A convertible preferred stock convertible into 14,903,530 shares of our common stock held by VOMF, and (c) the 1,918,933 shares of Series A convertible preferred stock convertible into 3,837,766 shares of our common stock held by VCAF due to beneficial ownership limitations. The Notes and the Series A convertible preferred stock owned by VOMF and VCAF are subject to a beneficial ownership limitation such that at no time may VOMF or VCAF convert all or a portion of such securities if the number of shares of common stock to be issued pursuant to such conversion when aggregated with all other shares of common stock owned by VOMF, VCAF and its affiliates at such time, would exceed the number of shares of common stock which would result in VOMF, VCAF and its affiliates beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of all of our common stock outstanding at such time; provided, however, that upon VOMF or VCAF providing us with sixty-one (61) days notice that VOMF or VCAF can waive the beneficial ownership limitation with regard to any or all shares of common stock issuable upon conversion of such securities. The Company and the Vision Entities (as defined below) are in negotiations to amend the Notes and the Companys preferred stock certificate of designation to remove the beneficial ownership limitation, but we cannot assure you that such modification will be approved. Each of VOMF, VCAF, the Investment Manager, the General Partner, Mr. Benowitz and Mr. Thomson and any affiliate (collectively, the Vision Entities) disclaims beneficial ownership of all securities reported herein, except to the extent of his or its pecuniary interest therein, if any, and this report shall not be deemed an admission that such Vision Entities are the beneficial owner of the shares for purposes of Section 16 of the Exchange Act or for any other purpose. Mr. Thomson disclaims beneficial ownership of all securities reported herein. Thus, the percentage of common stock beneficially owned by Robert Thomson is based on a total of 50,708,462 shares of common stock. The principal business office of VCAF is 20 West 55th Street, 5th Floor, New York, New York 10019. The principal business office of VOMF is Vision Opportunity Master Fund, Ltd. c/o Ogier Fiduciary Services (Cayman) Limited, 89 Nexus Way, Camana Bay, Grand Cayman , Cayman Islands KY1-9007. | |
(9) | This number includes warrants to purchase 1,987,639 shares of common stock held by Immersive Media Corp. and 649,351 shares of common stock upon conversion of the convertible note. Thus, the percentage of common stock beneficially owned by Immersive Media Corp. is based on a total of 53,295,452 shares of common stock. The address for Immersive Media Corp. is 224 15th Avenue SW, Calgary, AB T2R 0P7 Canada. The person exercising voting or dispositive control of shares held by Immersive Media Corp. is David Anderson. | |
(10) | VOMF and VCAF are the direct owners of the subject securities. VCAF GP, LLC (the General Partner) serves as general partner of VCAF; the Managing Member of the General Partner is Adam Benowitz. Vision Capital Advisors, LLC (the Investment Manager) serves as investment manager to VOMF and VCAF. |
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Adam Benowitz is the Managing Member of the Investment Manager. Robert Thomson currently serves as VOMFs and VCAFs representative on our board of directors; VOMF and VCAF may be deemed a director by virtue of their right to appoint a director. The 5,983,604 shares listed represent the 5,097,635 and 885,969 common shares held by VOMF and VCAF, respectively, as well as (all figures given in the aggregate) options to purchase up to 50,000 shares of our common stock held by Robert Thomson. This number excludes (a) the 10% convertible promissory notes (the Notes) that are currently convertible into 7,000,000 shares of our common stock and 7,000,000 warrants, (b) 7,451,765 shares of Series A convertible preferred stock convertible into 14,903,530 shares of the our common stock held by VOMF, and (c) 1,918,933 shares of Series A convertible preferred stock convertible into 3,837,766 shares of our common stock held by VCAF due to beneficial ownership limitations. The Notes, and the Series A convertible preferred stock owned by VOMF and VCAF are subject to a beneficial ownership limitation such that at no time may VOMF or VCAF convert all or a portion of such securities if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by VOMF, VCAF and its affiliates at such time, the number of shares of common stock which would result in VOMF, VCAF and its affiliates beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of all of our common stock outstanding at such time; provided, however, that upon VOMF or VCAF providing us with sixty-one (61) days notice , VOMF or VCAF can waive the beneficial ownership Limitation with regard to any or all shares of common stock issuable upon conversion of such securities. The Company and the Vision Entities (as defined below) are in negotiations to amend the Notes and the Companys preferred stock certificate of designation to remove the beneficial ownership limitation, but we cannot assure you that such modification will be approved. VOMF, VCAF, the Investment Manager, the General Partner, Mr. Benowitz and Mr. Thomson and any affiliate (the Vision Entities) disclaim beneficial ownership of all securities reported herein, except to the extent of their pecuniary interest therein, if any, and this report shall not be deemed an admission that such Vision Entities are the beneficial owner of the shares for purposes of Section 16 of the Exchange Act or for any other purpose. Thus, the percentage of common stock beneficially owned by VOMF is based on a total of 50,708,462 shares of common stock. | ||
(11) | This number includes 4,000,000 shares of common stock, and warrants to purchase 4,000,000 shares of common stock held by Total Force International Limited. Thus, the percentage of common stock beneficially owned by Total Force International Limited is based on a total of 54,658,462 shares of common stock. The address for Total Force International Limited is Rm 1604 West Tower, Shun Tak Center, Hong Kong. The person exercising voting or dispositive control of shares held by Total Force International Limited is Sam Lee. | |
(12) | This number includes 34,038,834 shares of common stock, 1,953,730 shares of common stock issuable upon conversion of preferred stock, warrants to purchase 2,228,504 shares of common stock and options to purchase 1,608,333 shares of common stock held by the executive officers and directors. Thus, the percentage of common stock beneficially owned by the executive officers and directors is based on a total of 56,449,029 shares of common stock. | |
(13) | As of February 28, 2011, there were 11,502,563 shares of Series A convertible preferred stock outstanding. | |
(14) | The reported shares of Series A convertible preferred stock are owned directly by the Vision Entities; such shares are convertible at any time, at the holders election, into 18,741,396 shares of our common stock (the quotient of the liquidation preference amount of $0.70 per share divided by the current conversion price of $0.35 per share times the number of shares of Series A convertible preferred stock. The Notes convert into 3,500,000 shares of our preferred stock. The Vision Entities may not acquire shares of common stock upon conversion of the convertible preferred stock to the extent that, upon conversion, the number of shares of common stock beneficially owned by the Vision Entities and its affiliates would exceed 4.99% of the issued and outstanding shares of our common stock; provided, that this restriction on conversion can be waived at any time by the funds on 61 days notice. Mr. Thomson disclaims beneficial ownership of all securities reported herein. | |
(15) | The reported securities are owned directly by VCAF and include 885,969 shares of common stock, as well as (all figures given in the aggregate) 864,061 shares of Series A convertible preferred stock, which are |
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convertible into 1,728,121 shares of our common stock within 60 days. It does not include the remaining preferred stock, which shares are not convertible within 60 days due to the following beneficial ownership limitation. The Series A convertible preferred stock are subject to a beneficial ownership limitation such that VCAF may not convert or exercise such securities to the extent that the conversion or exercise would cause VCAF common stock holdings to exceed 4.99% of our total common shares outstanding, provided that this restriction on conversion can be waived at any time by the funds on 61 days notice. Thus, the percentage of common stock beneficially owned by VCAF is based on a total of 52,386,583 shares of common stock. The address for VCAF is 20 West 55th Street, Fifth Floor, New York, New York, 10019. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director Independence
Four of our directors, Steven Healy, David Snowden, Robert Thomson, and Mary Schott are
independent directors as that term is defined under NYSE Amexs Company Guide Section 803. All of the
members of our audit committee, compensation committee and nominating committee are independent.
Transactions with Related Parties
The following (in addition to the transaction and agreements described in Item 11. Executive
Compensation) reflects the related party transactions since January 1, 2009 that exceed the lesser
of (i) $120,000 or (ii) one percent of the average of our total assets at year end for the last two
completed fiscal years.
Accounts Receivable
As of December 31, 2010 and 2009, the Company has receivables of $35,722 and $28,902,
respectively, due from Graphion Technology USA LLC (Graphion) related to consulting services
rendered and/or fixed assets sold to Graphion. During 2010, the Company sold fixed assets to
Graphion for a purchase price of $6,820, and there was no gain or loss recorded on the sale of the
fixed assets. Graphion is wholly owned by Mr. Nam, the Companys Chief Executive Officer. The
amounts due are non-interest bearing and are due upon demand.
As of December 31, 2010 and 2009, there were outstanding related party receivables of $0 and
$6,756, respectively, which primarily relate to receivables due from Mr. Nam, which represents the
rental obligation of Mr. Nam for his month-to-month lease of excess warehouse space at the
Companys facility in Costa Mesa, CA.
Fixed Assets
On December 20, 2010, the Company purchased a vehicle from Mr. Nam for $7,000 cash to be used
for sales and service. The purchase price was $7,000 and was determined to be the estimated fair
value of the vehicle at the time of the purchase.
Related Party Payables
From time to time, the Company purchases batteries and outsources research and development
from Graphion. During the years ended December 31, 2010 and 2009, the Company purchased $151,973 of
research and development services, and $622,589 of parts, respectively, from Graphion and had an
outstanding accounts payable balance of $51,973 and $104,931 owed to Graphion at December 31, 2010
and 2009, respectively.
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Accrued Salary
As of December 31, 2010, the Company owed Mr. Nam $40,000 of salary pursuant to his employment
agreement which is included in accrued expenses. Mr. Nam has elected to defer payment of this
amount until the next round of funding is received by the Company.
Intangible Assets
On March 31, 2008, the Company entered into a purchase agreement with Immersive, one of the
Companys stockholders, for a GeoImmersive License Agreement, pursuant to which Immersive granted
the Company the right to resell data in the Immersive mapping database. The Company paid Immersive
$1,000,000 for the license.
On March 16, 2009, the Company revised the terms of the agreement to revise the start of the
two year license to begin upon the completion and approval of the post-production data. The
revision includes automatic one-year renewals unless either party cancels within 60 days of the end
of the contract. Upon the execution of the revision, the Company ceased amortizing the license and
tested annually for impairment until the post-production of the data is complete. At December 31,
2009, management performed its annual review to assess potential impairment and deemed the
intangible asset to be fully impaired, as management decided to allocate the resources required to
map the data elsewhere. As a result, the remaining value of $625,000 was fully amortized as of
December 31, 2009.
Notes Payable
Immersive Note
On December 31, 2007, the Company issued a 12% secured promissory note in the principal amount
of $2,000,000 to Immersive Media Corp. (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 is secured by all of the Companys assets (see amendments below).
In connection with the issuance of the promissory note, the Company issued a warrant to
Immersive for the purchase of 697,639 shares of the Companys common stock at an exercise price of
$1.08 per share. The warrants are immediately exercisable. The Company recorded a debt discount of
$485,897 related to the fair value of the warrants, which was calculated using the Black-Scholes
Merton option pricing model. The debt discount was amortized to interest expense over the original
term of the promissory note.
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 $1.65 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 $2.00 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 is 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 (see Note 10). 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
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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 250,000 shares of the Companys
common stock at an exercise price of $2.00 per share, subject to adjustment. For every three months
that the promissory note is outstanding, the Company issued Immersive a warrant to purchase 50,000
shares of the Companys common stock. During the year ended December 31, 2009, the Company issued
warrants to Immersive to purchase 200,000 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 $0.50 per share (see Note 9 for a discussion on
derivative liabilities). During the year ended December 31, 2010, the Company issued the remaining
50,000 warrants under the note. The Company recorded an additional debt discount of $15,274 based
on the estimated fair value of the 50,000 warrants issued during the year ended December 31, 2010.
During the years ended December 31, 2010 and 2009, the Company amortized $56,539 and $99,043,
respectively, 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
697,639 shares of the Companys common stock at an exercise price of $1.08 per share and its Class
D warrants to purchase up to 250,000 shares of the Companys common stock at an adjusted exercise
price of $0.70 per share, for Class G warrants to purchase up to 697,639 shares and 250,000 shares
of the Companys common stock, respectively, each with an exercise price of $0.70 per share. The
Company recorded a debt discount and derivative liability of $1,898 based on the incremental
increase in the estimated fair value of the re-pricing of the 250,000 warrants. The Company
recorded an additional debt discount and derivative liability in the amount of $216,811 based on
the estimated fair value of the 697,639 warrants issued. The total debt discount was amortized in
April 2010. The amended terms did not result in terms that were substantially different from the
terms of the original note. Therefore, there was no extinguishment of debt as a result of the
second amendment.
The note and accrued interest were not repaid in full by April 30, 2010. As a result, per the
agreement, the maturity date was extended to March 31, 2011 and the Company issued Class G warrants
to purchase up to 1,040,000 shares of the Companys common stock at an exercise price of $0.70 per
share. The interest rate, which compounds annually, was also amended to 15.0%. The Company recorded
interest expense of $140,000 and $120,000, related to the stated rate of interest during the years
ended December 31, 2010 and 2009, respectively, and had accrued interest of $110,000 and $0 at
December 31, 2010 and 2009, 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 $220,241 for the year ended December 31, 2010, resulting in an unamortized debt
discount balance of $108,879 at December 31, 2010.
Vision Opportunity Master Fund, Ltd. Bridge Financing
December 30, 2008 10% Convertible Debenture
On December 30, 2008, the Company sold $2.2 million in debentures and issued Class D warrants
through a private placement to Vision Opportunity Master Fund, Ltd. (Vision) pursuant to a
Securities Purchase Agreement. In connection with this financing, the Company recorded a debt
discount of $607,819 related to the BCF of the debenture and a debt discount of $607,819 related to
the relative fair value of the Class D warrants. The debt discount for the Class D warrants was
calculated using the Black-Scholes-Merton option pricing model. The BCF and warrants were amortized
to interest expense over the one-year life of the note. As a result of the adoption of a new
accounting pronouncement on January 1, 2009, the Company recorded an additional debt discount of
$859,955 which was amortized through maturity of the debentures.
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On December 30, 2009, pursuant to the Exchange Agreement (see below), the Company issued to
Vision and Vision Capital Advantage Fund, L.P. (VCAF and, together with Vision, the Vision
Parties), shares of Preferred Stock in exchange for the delivery and cancellation of these
debentures and accrued interest.
May 28, 2009 10% Convertible Debenture
On May 28, 2009, the Company issued to Vision, 10% Debentures with an aggregate principal
value of $600,000. Additionally, Vision received Class E common stock purchase warrants, (Class E
Warrants) to purchase up to an aggregate 300,000 shares of the Companys common stock at an
exercise price of $1.20 per share. In connection with this financing, the Company recorded a debt
discount of $291,327 related to the conversion feature of the debenture and a debt discount of
$201,222 related to the estimated fair value of the Class E Warrants. The debt discount for the
Class E Warrants was calculated using the Black-Scholes-Merton option pricing model. The conversion
feature and warrants were amortized to interest expense through the date of exchange of these
debentures (see below). As noted below, these 10% Debentures were cancelled in connection with the
December 30, 2009 financing with Vision. Additionally, the Class E Warrants were exchanged for
shares of Preferred Stock in connection with the December 30, 2009 financing with Vision (see
below).
December 30, 2009 10% Convertible Debenture
On December 30, 2009, the Company sold $3,500,000 in debentures and warrants to Vision through
a private placement pursuant to a Securities Purchase Agreement (the Purchase Agreement). The
Company issued to Vision, 10% secured convertible debentures (Debentures), with an aggregate
principal value of $3,500,000.
The Debentures accrue interest on the unpaid principal balance at a rate equal to 10% per
annum. The maturity date of the Debentures was December 30, 2010 (see below). At any time after the
240th calendar day following the issue date, the Debentures are convertible into units of Company
securities at a conversion price of $1.00 per unit, subject to adjustment. Each unit consists of
one share of the Companys Preferred Stock and a warrant to purchase one share of 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. The Company may redeem the Debentures in whole or part at any time after June 30, 2010 for
cash in an amount equal to 120% of the principal amount plus accrued and unpaid interest and
certain other amounts due in respect of the Debenture. Interest on the Debentures is payable in
cash on the maturity date or, if sooner, upon conversion or redemption of the Debentures. In the
event of default under the terms of the Debentures, the interest rate increases to 15% per annum.
The Company recorded interest expense of $350,000 and $959, related to the stated rate of interest,
for the years ended December 31, 2010 and 2009, respectively, and had accrued interest of $350,959
and $959 as of December 31, 2010 and 2009, respectively.
The Purchase Agreement provides that during the 18 months following December 30, 2009, if the
Company or its wholly owned subsidiary, T3 Motion, Ltd., a company incorporated under the laws of
the United Kingdom (the Subsidiary), issue common stock, common stock equivalents for cash
consideration, indebtedness, or a combination of such securities in a subsequent financing (the
Subsequent Financing), Vision may participate in such Subsequent Financing in up to an amount
equal to Visions then percentage ownership of the Companys common stock.
The Purchase Agreement also provides that from December 30, 2009 to the date that the
Debentures are no longer outstanding, if the Company effects a Subsequent Financing, Vision may
elect, in its sole discretion, to exchange some or all of the Debentures then held by Vision for
any securities issued in a Subsequent Financing on a $1.00 for $1.00 basis (the Exchange);
provided, however, that the securities issued in a Subsequent Financing will be irrevocably
convertible, exercisable, exchangeable, or resettable (or any other similar feature) based on the
price equal to the lesser of (i) the conversion price, exercise price, exchange price, or reset
price (or such similar price) in such Subsequent Financing and (ii) $1.00 per share of common
stock. Vision is obligated to elect the Exchange on a $0.90 per $1.00 basis (not a $1.00 for $1.00
basis) if certain conditions regarding the Subsequent Financing and other matters are met.
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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 3,500,000 shares of the Companys common stock at an
exercise price of $0.70 per share, subject to adjustment. The Class G Warrants have a term of five
years after the issue date of December 30, 2009.
The Subsidiary entered into a subsidiary guarantee (Subsidiary Guarantee) for Visions
benefit to guarantee to Vision T3 Motions obligations due under the Debentures. T3 Motion and the
Subsidiary also entered into a security agreement (Security Agreement) with Vision, under which
it and the Subsidiary granted to Vision a security interest in certain of our and the Subsidiarys
property to secure the prompt payment, performance, and discharge in full of all obligations under
the Debentures and the Subsidiary Guarantee.
December 30, 2009 Exchange Agreement
On December 30, 2009, the Company also entered into a securities exchange agreement (the
Exchange Agreement) with the Vision Parties. Pursuant to the Exchange Agreement, the Company
issued to the Vision Parties an aggregate of 9,370,698 shares of Preferred Stock. 3,055,000 shares
of Preferred Stock were issued in exchange for the delivery and cancellation of 10% Secured
Convertible Debentures previously issued by the Company to the Vision Parties in the principal
amount of $2,200,000 (issued December 30, 2008) and $600,000 (issued May 28, 2009) plus accrued
interest of $255,000 (in conjunction with the issuance of Preferred Stock, the Company issued Class
F warrants to purchase 6,110,000 shares of common stock at $0.70 per share); 2,263,750 shares of
Preferred Stock were issued in exchange for the delivery and cancellation of all Class A, B, C, D,
E and F warrants (which were exercisable for an aggregate of 10,972,769 shares) previously issued
by the Company to the Vision Parties valued at $1,155,390, (the Company recorded a gain of $45,835
related to the exchange of the warrants for Preferred Stock); and 4,051,948 shares of Preferred
Stock were issued to satisfy the Companys obligation to issue equity to the Vision Parties
pursuant to a securities purchase agreement dated March 24, 2008 and amended on May 28, 2009.
Under the Exchange Agreement, Ki Nam, the Chief Executive Officer and Chairman of the board of
directors of the Company, also agreed to convert a promissory note plus the accrued interest,
previously issued to him by the Company into 976,865 shares of Preferred Stock and Class G Warrants
to purchase up to 1,953,730 shares of common stock (which warrants have the same terms as the Class
G Warrants issued to Vision pursuant to the Purchase Agreement).
The Company, Mr. Nam and the Vision Parties also entered into a stockholders agreement,
whereby Mr. Nam agreed to vote, in the election of members of the Companys board of directors, all
of his voting shares of the Company in favor of (i) two nominees of the Vision Parties so long as
their ownership of common stock of the Company is 22% or more or (ii) one nominee of The Vision
Parties so long as their ownership of common stock of the Company is 12% or more.
Amendment of December 30, 2009 10% Convertible Debenture
On December 31, 2010, the Company and the Vision Parties 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.
December 31, 2010 Exchange Agreement
On December 31, 2010, the Company entered into a securities exchange agreement with Vision
pursuant to which the Company exchanged 3.5 million Class G Warrants for 2.1 million shares of the
Companys common stock. On the date of the exchange, the warrants were classified as derivative
liabilities and had an estimated fair value of $1,208,478 and the shares of the Companys common
stock were valued at the fair market price of $0.40 per share for a total value of $840,000,
resulting in a gain on the transaction of $368,478, which was recorded in other income.
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Debt Discounts and Amortization
The debt discount recorded on the December 30, 2009 Debentures was allocated between the
warrants and conversion feature in the amount of $1,077,652 and $1,549,481, respectively. In
addition, the Company recorded an additional debt discount during the year ended December 31, 2010
of $275,676 (see above). The debt discounts were amortized through the original maturity of the
Debentures of December 30, 2010. During the years ended December 31, 2010 and 2009, the Company
amortized $2,897,574 and $5,235, respectively, of the debt discounts to interest expense.
During the year ended December 31, 2009, the Company amortized $2,565,906 of interest expense
related to debt discounts on different notes to Vision that were ultimately exchanged for shares of
the Companys Preferred Stock on December 30, 2009 (see above).
Ki Nam Note |
2010 Note
On February 24, 2011, the Company entered into a loan agreement with Ki Nam, its chairman and
CEO, for previous advances to the Company. The agreement allows Mr. Nam to advance up to $2.5
million for operating requirements. The note bears interest at 10% per annum. The note is due on
March 31, 2012 and allows for an automatic one year extension. During the year ended December 31,
2010, Mr. Nam advanced $1,511,000 to the Company to be used for operating requirements. During
October 2010, the Company repaid $390,000 of the advances, leaving a balance of $1,121,000
outstanding as of December 31, 2010. The Company recorded interest expense of $23,756 for the year
ended December 31, 2010 and had accrued interest of $23,756 as
of December 31, 2010. Since January 1, 2011, Mr. Nam has advanced
an additional $1.0 million, therefore, the outstanding balance on his
note as of March 31, 2011 is $2,121,000.
2009 Note
On March 30, 2009, the Company entered into a loan agreement with Ki Nam, its chairman and
CEO, whereby, Mr. Nam agreed to advance the Company up to $1,000,000, including $498,528 that had
already been advanced by Mr. Nam for operating capital requirements through December 31, 2008. The
line of credit was to remain open until the Company raised $10.0 million in equity. The note bore
interest at 10% per annum. In the event the Company received (i) $10,000,000 or more in private
placement financing or (ii) $15,000,000 or more in equity financing at any time after the date of
the loan, the note was to become immediately due and payable.
In connection with the loan agreement, the Company agreed to issue warrants to Mr. Nam for the
purchase of up to 303,030 shares of the Companys common stock, $0.001 par value per share, at an
exercise price of $2.00 per share, subject to adjustment. The total number of warrants to be issued
was dependent on the final amount of the loan. During the year ended December 31, 2009, the Company
was advanced $414,963, including accrued interest, under the loan agreement. During the year ended
December 31, 2009, 274,774 warrants were issued to Mr. Nam pursuant to the terms of the loan
agreement. The Company recorded a debt discount of $246,228 related to the estimated fair value of
warrants, which was to be amortized as interest expense over the term of the loan agreement. The
loan was convertible during the pendency of any current open equity financing round at $1.65 per
share, subject to adjustment. Upon conversion, Mr. Nam was to receive additional warrants for the
purchase of up to 606,060 shares of the Companys common stock at $2.00 per share.
In December 2009, the Company issued 2,000,000 shares of its 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 $443 as a debt discount, which was to be
amortized to interest expense over the remaining term of the loan agreement. The Company recorded
the corresponding amount as a derivative liability and any change in fair value of the conversion
feature was to be recorded through earnings at each reporting date. The change in fair value of the
conversion feature was not significant for the period ended December 31, 2009.
On December 30, 2009, the Company entered into a Securities Exchange Agreement (the Exchange
Agreement) with Mr. Nam. Under the Exchange Agreement, Mr. Nam agreed to convert the balance of
the promissory note, including accrued interest, of $976,865 into 976,865 shares of the Companys
Preferred Stock and warrants to purchase up to 1,953,730 shares of the Companys common stock,
exercisable at $0.70 per share,
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subject to adjustment. The ability for Mr. Nam to receive additional warrants for up to
606,060 shares of common stock was cancelled.
In connection with the Exchange Agreement, the Company agreed to convert Mr. Nams outstanding
debt balance of $976,865 at $0.50 per share, which was below the adjusted conversion price pursuant
to the terms of the loan agreement. Pursuant to the conversion terms of the loan agreement, Mr. Nam
would have received only 313,098 shares of stock. As a result, the Company issued Mr. Nam 663,767
additional shares of the Companys Preferred Stock in connection with his debt conversion.
As a result of the Exchange Agreement, the entire debt discount amounting to $246,671 was
amortized to interest expense. In addition, as the Company issued shares to Mr. Nam in excess of
the number of shares pursuant to the terms of the loan agreement, the Company recorded the fair
value of the 663,767 additional shares issued as a loss on debt extinguishment. The amount recorded
of $663,767 was included in other expense in the accompanying consolidated statement of operations
for the year ended December 31, 2009.
Lock-Up Agreement
In connection with the Vision financing, Ki Nam, our Chief Executive Officer and Chairman of
the board of directors of the Company, agreed not to transfer, sell, assign, pledge, hypothecate,
give, create a security interest in or lien on, place in trust (voting trust or otherwise), or in
any other way encumber or dispose of, directly or indirectly and whether or not voluntarily,
without express prior written consent of Vision, any of our common stock equivalents of the Company
until August 27, 2010; provided, however, that commencing on August 27, 2010, he may sell up to
1/24th of the shares of common stock of the Company in each calendar month through February 28,
2011.
Alfonso Cordero and Mercy Cordero Note
On January 14, 2011, the Company 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
(Noteholder) for amounts previously loaned to the Company in October 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 Noteholder has agreed to waive payment obligations from November 1, 2010
through April 15, 2011. The Company recorded interest expense and accrued interest of $24,777 as of
and for the year ended December 31, 2010.
The Company may prepay the Note, but must prepay in full only. The Company will be in default
under the Note upon: (1) failure to timely make payments due under the Note; and (2) failure to
perform other agreements under the Note within 10 days of request from the Noteholder. Upon such
event of default, the Noteholder may declare the Note immediately due and payable. The applicable
interest rate will be upon default will be increased to 15% or the maximum rate allowed by law. The
Noteholder has waived any and all defaults under the Note at December 31, 2010 and through April
15, 2011.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
KMJ Corbin & Company LLP served as our independent registered public accounting firm for the
fiscal years ended December 31, 2010 and 2009. The following table shows the fees that were billed
for audit and other services provided by this firm during the fiscal years indicated.
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Audit Fees |
$ | 176,880 | $ | 171,270 | ||||
Audit Related Fees |
3,640 | | ||||||
Tax Fees |
| 3,525 | ||||||
All Other Fees |
| | ||||||
Total |
$ | 180,520 | $ | 174,795 | ||||
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(1) | Audit Fees This category includes the audit of our annual financial statements, review of our registration statement on Form S-1, review of financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection with the engagement for fiscal years. | |
(2) | Audit-Related Fees This category consists of fees reasonably related to the performance of the audit or review of our financial statements that are not reported as Audit Fees. Such fees included fees for review of the Companys responses to SEC comment letters in 2010 | |
(3) | Tax Fees This category consists of tax compliance, tax advice and tax planning work. | |
(4) | All Other Fees This category consists of fees for other miscellaneous items, |
Pre-Approval Policies and Procedures of the Audit Committee
The audit committee has adopted policies and practices relating to the approval of all audit
and non-audit services that are to be performed by our registered public accounting firm. This
policy generally provides that we will not engage our registered public accounting firm to render
audit or non-audit services unless the service is specifically approved in advance by the audit
committee or the engagement is entered into pursuant to one of the pre-approval procedures
described below.
From time to time, the audit committee may pre-approve specified types of services that are
expected to be provided to us by our registered public accounting firm during the next 12 months.
Any pre-approval is detailed as to the particular service or type of services to be provided and is
subject to a maximum dollar amount.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements
A list of the financial statements of the Company filed as part of this annual report on Form
10-K can be found in the Index to Financial Statements on page F-1 and is incorporated herein by
reference.
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Exhibits
Exhibit | ||||||
Exhibit | No. Where | |||||
Number | Description | Filed | ||||
3.1
|
Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on March 15, 2006(1) | 3.1 | ||||
3.2
|
Bylaws adopted April 1, 2006(1) | 3.2 | ||||
3.3
|
Amendment to Bylaws, dated January 16, 2009(5) | 3.1 | ||||
3.4
|
Amendment to Certificate of Incorporation dated November 12, 2009(9) | 3.4 | ||||
3.5
|
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock dated November 12, 2009(9) | 3.5 | ||||
10.1
|
Standard Industrial/Commercial Multi-Tenant Lease between Land Associates Trust, E.C. Alsenz, Trustee and T3 Motion, Inc., for 2990 Airway Avenue, Costa Mesa, CA 92626, dated February 14, 2007(1) | 10.2 | ||||
10.2
|
Rent Adjustment, Standard Lease Addendum between Land Associates Trust, E.C. Alsenz, Trustee and T3 Motion, Inc., for 2990 Airway Avenue, Costa Mesa, CA 92626, dated February 14, 2007(1) | 10.3 | ||||
10.3
|
Option to Extend, Standard Lease Addendum between Land Associates Trust, E.C. Alsenz, Trustee and T3 Motion, Inc., for 2990 Airway Avenue, Costa Mesa, CA 92626, dated February 14, 2007(1) | 10.4 | ||||
10.4
|
Addendum to the Air Standard Industrial/Commercial Multi-Tenant Lease between Land Associates Trust, E.C. Alsenz, Trustee and T3 Motion, Inc., for 2990 Airway Avenue, Costa Mesa, CA 92626, dated February 14, 2007(1) | 10.5 | ||||
10.5
|
Standard Sublease Agreement between Delta Motors, LLC and T3 Motion, Inc. for 2975 Airway Avenue, Costa Mesa, CA 92626, dated November 1, 2006(1) | 10.6 | ||||
10.6
|
Form of Distribution Agreement(1) | 10.7 | ||||
10.7+
|
Director Agreement between David L. Snowden and T3 Motion, Inc., dated February 28, 2007(1) | 10.8 | ||||
10.8+
|
Director Agreement between Steven J. Healy and T3 Motion, Inc., dated July 1, 2007(1) | 10.9 | ||||
10.9+
|
Director Indemnification Agreement between Steven J. Healy and T3 Motion, Inc., dated July 1, 2007(1) | 10.10 | ||||
10.10
|
Securities Purchase Agreement between T3 Motion, Inc. and Immersive Media Corp., dated December 31, 2007(1) | 10.11 | ||||
10.11
|
Promissory Note issued by T3 Motion, Inc. to Immersive Media Corp., dated December 31, 2007 in the original principal amount of $2,000,000(1) | 10.12 | ||||
10.12
|
Common Stock Purchase Warrant issued by T3 Motion, Inc. to Immersive Media Corp., dated December 31, 2007(1) | 10.13 |
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Exhibit | ||||||
Exhibit | No. Where | |||||
Number | Description | Filed | ||||
10.13
|
Investor Rights Agreement between T3 Motion, Inc. and Immersive Media Corp., dated December 31, 2007(1) | 10.14 | ||||
10.14
|
Securities Purchase Agreement between T3 Motion, Inc. and certain Purchasers, dated March 28, 2008(1) | 10.15 | ||||
10.15
|
Registration Rights Agreement between T3 Motion, Inc. and certain Purchasers, dated March 28, 2008(1) | 10.16 | ||||
10.16
|
GeoImmersive Image Data & Software Licensing Agreement between the Company and Immersive Media Company, dated July 9, 2008(2) | 10.20 | ||||
10.17
|
Amendment to Promissory Note issued by the Company in favor of Immersive Media Corp., dated as of December 19, 2008(3) | 10.1 | ||||
10.18
|
Securities Purchase Agreement between the Company and Vision Opportunity Master Fund., Ltd. (Vision), dated December 30, 2008(4) | 10.1 | ||||
10.19
|
Form of 10% Secured Convertible Debenture Due December 30, 2008(4) | 10.2 | ||||
10.20
|
Subsidiary Guarantee, dated December 30, 2008(4) | 10.4 | ||||
10.21
|
Security Agreement, dated December 30, 2008 between the Company and the holders of the Companys 10% Secured Convertible Debentures(4) | 10.5 | ||||
10.22
|
Form of Lock-up Agreement, dated December 30, 2008(4) | 10.6 | ||||
10.23
|
Director Offer Letter to Mary S. Schott from Company, dated January 16, 2009(5) | 10.1 | ||||
10.24
|
Distribution Agreement, dated November 24, 2008 by and between the Company and CT&T(7) | 10.28 | ||||
10.25
|
Settlement Agreement dated as of February 20, 2009 by and between the Company on the one hand, and Sooner Cap, Albert Lin and Maddog Executive Services on the other(7) | 10.29 | ||||
10.26
|
Distribution Agreement dated as of March 20, 2009 by and between the Company and Spear International, Ltd.(6) | 10.1 | ||||
10.27
|
Amendment to GeoImmersive Image Data and Software License Agreement by and between the Company and Immersive Media Company dated as of March 16, 2009(7) | 10.31 | ||||
10.28
|
Securities Purchase Agreement dated as of February 23, 2009 between the Company and Ki Nam(7) | 10.32 | ||||
10.29
|
10% Convertible Note issued by the Company to Ki Nam in the original principal amount of up to $1,000,000(7) | 10.33 | ||||
10.30
|
Series E Common Stock Purchase Warrant issued by the Company to Ki Nam(7) | 10.34 | ||||
10.31
|
Amendment to Debenture, Warrant and Securities Purchase Agreement between the Company and Vision(7) | 10.35 | ||||
10.32
|
Securities Purchase Agreement dated as of May 28, 2009 between the Company and Vision, dated May 28, 2009(8) | 10.1 | ||||
10.33
|
Form of 10% Secured Convertible Debenture issued by the Company to Vision, dated May 28, 2009(8) | 10.2 | ||||
10.34
|
Subsidiary Guarantee, dated as of May 28, 2009(8) | 10.4 | ||||
10.35
|
Security Agreement between the Company and Vision dated as of May 28, 2009(8) | 10.5 | ||||
10.36
|
Securities Purchase Agreement between the Company and Vision, dated as of December 30, 2009(10) | 10.1 | ||||
10.37
|
Form of 10% Secured Convertible Debenture issued by the Company to Vision, dated as of December 30, 2009 in the original principal amount of $3,500,000(10) | 10.2 | ||||
10.38
|
Form of Series G Common Stock Purchase Warrant issued by the Company dated as of December 30, 2009(10) | 10.3 | ||||
10.39
|
Subsidiary Guarantee dated as of December 30, 2009, issued by T3 Motion, Ltd.(10) | 10.4 |
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Exhibit | ||||||
Exhibit | No. Where | |||||
Number | Description | Filed | ||||
10.40
|
Security Agreement dated as of December 30, 2009, among the Company, T3 Motion, Ltd. and Vision(10) | 10.5 | ||||
10.41
|
Securities Exchange Agreement dated as of December 30, 2009, among the Company, Vision and Vision Capital Advantage Fund, L.P. (VCAF)(10) | 10.6 | ||||
10.42
|
Lock-Up Agreement dated as of December 30, 2009 between the Company and Ki Nam(10) | 10.7 | ||||
10.43
|
Stockholders Agreement dated as of December 30, 2009, among the Company, Ki Nam, Vision and VCAF(10) | 10.8 | ||||
10.44
|
Amendment No. 2 dated as of March 31, 2010 to Immersive Media Promissory Note (11) | 10.1 | ||||
10.45
|
Employment Agreement dated as of January 1, 2010 between the Company and Kelly Anderson (11) | 10.2 | ||||
10.46
|
2010 Stock Option/Stock Issuance Plan (12) | 10.1 | ||||
10.47
|
Employment Agreement dated as of August 13, 2010 between the Company and Ki Nam (14) | 10.1 | ||||
10.48
|
Settlement Agreement dated as of July 29, 2010 and executed on August 3, 2010 by and among the Company, Ki Nam, Jason Kim and Preproduction Plastics, Inc. (13) | 10.2 | ||||
10.49
|
Amendment No. 1 to 10% Senior Secured Convertible Debenture dated as of December 31, 2010 between the Company and Vision (15) | 10.1 | ||||
10.50
|
Securities Exchange Agreement dated December 31, 2010 between the Company and Vision (15) | 10.2 | ||||
10.51
|
Unsecured Promissory Note dated September 30, 2010 in the original principal amount of $1.0 million issued by the Company to Alfonso G. Cordero and Mercy B. Cordero, Trustees of the Cordero Charitable Remainder Trust (16) | 10.1 | ||||
10.52
|
2007 Stock Option/Stock Issuance Plan (1) | 10.1 | ||||
10.53*
|
Form of Stock Option Agreement for use with 2007 Stock Option/Stock Issuance Plan | |||||
10.54*
|
Form of Stock Option Agreement for use with 2010 Stock Option/Stock Issuance Plan | |||||
10.55
|
10% Promissory Note dated as of February 24, 2011 in the original principal amount of up to $2.5 million issued to Ki Nam(17) | 10.1 | ||||
14.1*
|
Code of Conduct and Ethics | |||||
21.1
|
List of Subsidiaries(1) | |||||
31.1*
|
Section 302 Certificate of Chief Executive Officer | |||||
31.2*
|
Section 302 Certificate of Chief Financial Officer | |||||
32.1*
|
Section 906 Certificate of Chief Executive Officer | |||||
32.2*
|
Section 906 Certificate of Chief Financial Officer |
* | Filed herewith. | |
| A contract, compensatory plan or arrangement in which directors or executive officers are eligible to participate. | |
| Confidential treatment has previously been granted by the SEC for certain portions of the referenced exhibit pursuant to Rule 406 under the Securities Act. | |
(1) | Filed with the Companys Registration Statement on Form S-1 filed on May 13, 2008. | |
(2) | Filed with the Companys Amendment No. 1 to the Registration Statement on Form S-1 filed on July 14, 2008. | |
(3) | Filed with the Companys Current Report on Form 8-K filed on December 31, 2008. | |
(4) | Filed with the Companys Current Report on Form 8-K filed on January 12, 2009. |
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(5) | Filed with the Companys Current Report on Form 8-K filed on January 20, 2009. | |
(6) | Filed with the Companys Current Report on Form 8-K filed on March 26, 2009. | |
(7) | Filed with the Companys Annual Report on Form 10-K filed on March 31, 2009. | |
(8) | Filed with the Companys Current Report on Form 8-K filed on June 5, 2009. | |
(9) | Filed with the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and filed on November 16, 2009. | |
(10) | Filed with the Companys Current Report on Form 8-K filed on January 6, 2010. | |
(11) | Filed with the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and filed on May 17, 2010. | |
(12) | Filed with the Companys Current Report on Form 8-K filed on July 7, 2010. | |
(13) | Filed with the Companys Current Report on Form 8-K filed on August 9, 2010. | |
(14) | Filed with the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 16, 2010. | |
(15) | Filed with the Companys Current Report on Form 8-K filed on January 6, 2011. | |
(16) | Filed with the Companys Current Report on Form 8-K filed on January 21, 2011. | |
(17) | Filed with the Companys Current Report on Form 8-K filed on March 1, 2011. |
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T3 MOTION, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
CONSOLIDATED FINANCIAL STATEMENTS |
||
F-2 | ||
F-3 | ||
F-4 | ||
F-5 | ||
F-6 | ||
F-8 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
T3 Motion, Inc.
T3 Motion, Inc.
We have audited the accompanying consolidated balance sheets of T3 Motion, Inc. and subsidiary (the
Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations
and comprehensive loss, stockholders equity (deficit) and cash flows for each of the two years in
the period ended December 31, 2010. These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of T3 Motion, Inc. and subsidiary as of
December 31, 2010 and 2009, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 9 to the consolidated financial statements, effective January 1, 2009, the
Company changed the manner in which it accounts for certain financial instruments that are indexed
to its own stock due to the adoption of a new accounting standard.
The accompanying consolidated financial statements have been prepared assuming the Company will
continue as a going concern. As described in Note 1, the Company has incurred significant operating
losses and has used substantial amounts of working capital in its operations since inception, and
at December 31, 2010, has a working capital deficit of $15,057,791 and an accumulated deficit of
$45,120,210. These factors raise substantial doubt about the Companys ability to continue as a
going concern. Managements plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ KMJ Corbin & Company LLP
Costa Mesa, California
March 18, 2011
March 18, 2011
F-2
Table of Contents
T3 MOTION, INC.
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 123,861 | $ | 2,580,798 | ||||
Restricted cash |
10,000 | | ||||||
Accounts receivable, net of reserves of $50,000 and
$37,000 at December 31, 2010 and 2009, respectively |
595,261 | 747,661 | ||||||
Related party receivables |
35,722 | 35,658 | ||||||
Inventories |
1,064,546 | 1,169,216 | ||||||
Prepaid expenses and other current assets |
251,467 | 161,997 | ||||||
Total current assets |
2,080,857 | 4,695,330 | ||||||
Property and equipment, net |
564,700 | 868,343 | ||||||
Deposits |
934,359 | 495,648 | ||||||
Total assets |
$ | 3,579,916 | $ | 6,059,321 | ||||
LIABILITIES
AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,335,761 | $ | 872,783 | ||||
Accrued expenses |
1,483,220 | 1,064,707 | ||||||
Related party payables |
51,973 | 104,931 | ||||||
Note payable |
243,468 | | ||||||
Derivative liabilities |
9,633,105 | 11,824,476 | ||||||
Related party notes payable, net of debt discounts |
4,391,121 | 1,836,837 | ||||||
Total current liabilities |
17,138,648 | 15,703,734 | ||||||
Long-term liabilities: |
||||||||
Related party notes payable |
2,121,000 | | ||||||
Total liabilities |
19,259,648 | 15,703,734 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity (deficit): |
||||||||
Series A convertible preferred stock, $0.001 par
value; 20,000,000 shares authorized; 11,502,563 and
12,347,563 shares issued and outstanding at December
31, 2010 and 2009, respectively |
11,503 | 12,348 | ||||||
Common stock, $0.001 par value; 150,000,000 shares
authorized; 50,658,462 and 44,663,462 shares issued
and outstanding at December 31, 2010 and 2009,
respectively |
50,659 | 44,664 | ||||||
Additional paid-in capital |
29,373,947 | 23,356,724 | ||||||
Accumulated deficit |
(45,120,210 | ) | (33,062,174 | ) | ||||
Accumulated other comprehensive income |
4,369 | 4,025 | ||||||
Total stockholders equity (deficit) |
(15,679,732 | ) | (9,644,413 | ) | ||||
Total liabilities and stockholders equity (deficit) |
$ | 3,579,916 | $ | 6,059,321 | ||||
See accompanying notes to consolidated financial statements
F-3
Table of Contents
T3 MOTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Net revenues |
$ | 4,682,908 | $ | 4,644,022 | ||||
Cost of net revenues |
4,512,497 | 4,988,118 | ||||||
Gross profit (loss) |
170,411 | (344,096 | ) | |||||
Operating expenses: |
||||||||
Sales and marketing |
1,826,736 | 1,927,824 | ||||||
Research and development |
1,602,961 | 1,395,309 | ||||||
General and administrative |
3,579,817 | 5,126,801 | ||||||
Total operating expenses |
7,009,514 | 8,449,934 | ||||||
Loss from operations |
(6,839,103 | ) | (8,794,030 | ) | ||||
Other income (expense), net: |
||||||||
Interest income |
1,321 | 2,510 | ||||||
Other income, net |
2,487,310 | 5,565,869 | ||||||
Interest expense |
(3,976,615 | ) | (3,472,442 | ) | ||||
Total other income (expense), net |
(1,487,984 | ) | 2,095,937 | |||||
Loss before provision for income taxes |
(8,327,087 | ) | (6,698,093 | ) | ||||
Provision for income taxes |
800 | 800 | ||||||
Net loss |
(8,327,887 | ) | (6,698,893 | ) | ||||
Deemed dividend to preferred stockholders |
(3,730,149 | ) | (6,116 | ) | ||||
Net loss attributable to common stockholders |
$ | (12,058,036 | ) | $ | (6,705,009 | ) | ||
Other comprehensive income (loss): |
||||||||
Foreign currency translation income (loss) |
344 | (632 | ) | |||||
Comprehensive loss |
$ | (8,327,543 | ) | $ | (6,699,525 | ) | ||
Net loss per share: |
||||||||
Basic and diluted |
$ | (0.25 | ) | $ | (0.15 | ) | ||
Weighted average number of common shares
outstanding: |
||||||||
Basic and diluted |
47,689,785 | 44,445,042 | ||||||
See accompanying notes to consolidated financial statements
F-4
Table of Contents
T3 MOTION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
Other | Total | |||||||||||||||||||||||||||||||
Preferred | Common | Additional | Comprehensive | Stockholders | ||||||||||||||||||||||||||||
Preferred | Stock | Common | Stock | Paid-in | Accumulated | Income | (Deficit) | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | (Loss) | Equity | |||||||||||||||||||||||||
Balance, January 1, 2009 |
| $ | | 43,592,428 | $ | 43,593 | $ | 25,043,452 | $ | (24,375,827 | ) | $ | 4,657 | $ | 715,875 | |||||||||||||||||
Issuance of preferred stock for cash, net of issuance costs of $21,058 |
2,000,000 | 2,000 | | | 1,976,942 | | | 1,978,942 | ||||||||||||||||||||||||
Conversion of notes payable and accrued interest to equity |
4,031,865 | 4,032 | | | 4,691,600 | | | 4,695,632 | ||||||||||||||||||||||||
Issuance of preferred stock for anti-dilution |
4,051,948 | 4,052 | | | (4,052 | ) | | | | |||||||||||||||||||||||
Issuance of preferred stock for exchange of warrants |
2,263,750 | 2,264 | | | 1,153,126 | | | 1,155,390 | ||||||||||||||||||||||||
Amortization of preferred stock discount related to conversion
feature and warrants |
| | | | 6,116 | (6,116 | ) | | | |||||||||||||||||||||||
Cumulative effect of change in accounting principle |
| | | | (4,013,085 | ) | (1,981,338 | ) | | (5,994,423 | ) | |||||||||||||||||||||
Preferred stock discount related to conversion feature and warrants |
| | | | (9,054,851 | ) | | | (9,054,851 | ) | ||||||||||||||||||||||
Reclassification of derivative liability to equity |
| | | | 208,857 | | | 208,857 | ||||||||||||||||||||||||
Issuance of common stock for outside services |
| | 1,071,034 | 1,071 | 1,665,135 | | | 1,666,206 | ||||||||||||||||||||||||
Share-based compensation expense |
| | | | 1,683,484 | | | 1,683,484 | ||||||||||||||||||||||||
Foreign currency translation loss |
| | | | | | (632 | ) | (632 | ) | ||||||||||||||||||||||
Net loss |
| | | | | (6,698,893 | ) | | (6,698,893 | ) | ||||||||||||||||||||||
Balance, December 31, 2009 |
12,347,563 | 12,348 | 44,663,462 | 44,664 | 23,356,724 | (33,062,174 | ) | 4,025 | (9,644,413 | ) | ||||||||||||||||||||||
Recission of common stock for cash |
| | (125,000 | ) | (125 | ) | (249,875 | ) | | | (250,000 | ) | ||||||||||||||||||||
Conversion of preferred to common stock |
(2,000,000 | ) | (2,000 | ) | 4,000,000 | 4,000 | (2,000 | ) | | | | |||||||||||||||||||||
Issuance of preferred stock for cash |
1,155,000 | 1,155 | | | 1,153,845 | | | 1,155,000 | ||||||||||||||||||||||||
Issuance of common stock for exchange of warrants |
| | 2,100,000 | 2,100 | 837,900 | | | 840,000 | ||||||||||||||||||||||||
Amortization of preferred stock discount related to conversion
feature and warrants |
| | | | 3,730,149 | (3,730,149 | ) | | | |||||||||||||||||||||||
Preferred stock discount related to conversion feature and warrants |
| | | | (1,401,360 | ) | | | (1,401,360 | ) | ||||||||||||||||||||||
Reclassification of derivative liability to equity due to conversion
of preferred stock to common stock |
| | | | 1,121,965 | | | 1,121,965 | ||||||||||||||||||||||||
Issuance of common stock for outside services |
| | 20,000 | 20 | 9,980 | | | 10,000 | ||||||||||||||||||||||||
Share-based compensation expense |
| | | | 816,619 | | | 816,619 | ||||||||||||||||||||||||
Foreign currency translation loss |
| | | | | | 344 | 344 | ||||||||||||||||||||||||
Net loss |
| | | | | (8,327,887 | ) | | (8,327,887 | ) | ||||||||||||||||||||||
Balance, December 31, 2010 |
11,502,563 | $ | 11,503 | 50,658,462 | $ | 50,659 | $ | 29,373,947 | $ | (45,120,210 | ) | $ | 4,369 | $ | (15,679,732 | ) | ||||||||||||||||
See accompanying notes to consolidated financial statements
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Table of Contents
T3 MOTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (8,327,887 | ) | $ | (6,698,893 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Bad debt expense |
13,000 | 10,000 | ||||||
Depreciation and amortization |
359,292 | 989,867 | ||||||
Warranty expense |
130,916 | 129,183 | ||||||
Share-based compensation expense |
816,619 | 1,683,484 | ||||||
Gain on exchange of warrants for common stock |
(368,478 | ) | | |||||
Gain on sale of property and equipment |
(7,500 | ) | | |||||
Loss on conversion of debt to preferred stock, net |
| 617,932 | ||||||
Change in fair value of derivative liabilities |
(2,101,067 | ) | (6,184,151 | ) | ||||
Investor relations expense |
10,000 | 130,000 | ||||||
Amortization of debt discounts |
3,393,063 | 2,919,673 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
139,400 | 689,343 | ||||||
Inventories |
104,670 | 645,254 | ||||||
Prepaid expenses and other current assets |
(89,470 | ) | 450,798 | |||||
Deposits |
31,888 | (3,887 | ) | |||||
Restricted cash |
(10,000 | ) | | |||||
Accounts payable and accrued expenses |
773,445 | (719,720 | ) | |||||
Related party payables |
(52,958 | ) | (15,818 | ) | ||||
Net cash used in operating activities |
(5,185,067 | ) | (5,356,937 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Loans/advances to related parties |
(32,741 | ) | (6,756 | ) | ||||
Repayment of loans/advances to related parties |
39,496 | 4,346 | ||||||
Purchases of property and equipment |
(62,469 | ) | (36,040 | ) | ||||
Proceeds from sale of property and equipment |
7,500 | | ||||||
Net cash used in investing activities |
(48,214 | ) | (38,450 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from notes payable from related parties |
| 4,514,963 | ||||||
Proceeds from notes payable to related parties |
2,511,000 | | ||||||
Recission of common stock |
(250,000 | ) | | |||||
Repayment of notes payable to related parties |
(390,000 | ) | | |||||
Repayment of note payable |
(250,000 | ) | (199,829 | ) | ||||
Proceeds from the sale of preferred stock, net of issuance costs |
1,155,000 | 1,978,942 | ||||||
Net cash provided by financing activities |
2,776,000 | 6,294,076 | ||||||
Effect of exchange rates on cash |
344 | (632 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(2,456,937 | ) | 898,057 | |||||
Cash and cash equivalents, beginning of year |
2,580,798 | 1,682,741 | ||||||
Cash and cash equivalents, end of year |
$ | 123,861 | $ | 2,580,798 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 41,877 | $ | 127,116 | ||||
Income taxes |
$ | 800 | $ | 800 | ||||
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Table of Contents
T3 MOTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Supplemental disclosure of non-cash activities: |
||||||||
Issuance of common stock for related party payables |
$ | | $ | 1,536,206 | ||||
Conversion of related party payable to related party notes payable |
$ | | $ | 498,528 | ||||
Conversion of accounts payable to note payable |
$ | | $ | 199,829 | ||||
Cumulative effect to retained earnings due to adoption of accounting standard |
$ | | $ | 1,981,338 | ||||
Cumulative effect to additional paid-in capital due to adoption of accounting standard |
$ | | $ | 4,013,085 | ||||
Cumulative effect to debt discount due to adoption of accounting standard |
$ | | $ | 859,955 | ||||
Conversion option of preferred stock and warrants issued with preferred stock
recorded as derivative liabilities |
$ | 1,401,360 | $ | 9,054,851 | ||||
Conversion of debt and accrued interest to equity |
$ | | $ | 4,031,865 | ||||
Reclassification of derivative liability to equity |
$ | 1,121,965 | $ | 208,857 | ||||
Issuance of preferred stock for exchange of warrants |
$ | | $ | 1,155,390 | ||||
Issuance of common stock for exchange of warrants |
$ | 840,000 | $ | | ||||
Debt discount and warrant liability recorded upon issuance of warrants |
$ | 838,779 | $ | 3,510,751 | ||||
Amortization of preferred stock discount related to conversion feature and warrants |
$ | 3,730,149 | $ | 6,116 | ||||
Issuance of preferred stock for anti-dilution |
$ | | $ | 4,052 | ||||
Conversion of preferred stock to common stock |
$ | 4,000 | $ | | ||||
Deposits for equipment recorded as note payable due to settlement agreement |
$ | 470,599 | $ | | ||||
Sale of property and equipment to related party for a related party receivable |
$ | 6,820 | $ | | ||||
See accompanying notes to consolidated financial statements
F-7
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2010 and 2009
DECEMBER 31, 2010 and 2009
NOTE 1 DESCRIPTION OF BUSINESS
Organization
T3 Motion, Inc. was incorporated on March 16, 2006, under the laws of the state of Delaware.
T3 Motion and its wholly-owned subsidiary, T3 Motion, Ltd. (collectively, the Company), develop
and manufacture personal mobility vehicles powered by electric motors. The Companys initial
product, the T3 Series, is an electric, three-wheel stand-up vehicle (ESV) that is directly
targeted to the law enforcement and private security markets. Substantially all of the Companys
revenues to date have been derived from sales of the T3 Series ESVs and related accessories.
The Company has entered into a distribution agreement with CT&T pursuant to which the Company
has the exclusive right to market and sell the CT Series Micro Car, which is a low speed,
four-wheel electric car, in the U.S. to the government, law enforcement and security markets. The
Company is also currently developing the Electric/Hybrid Vehicle, which is a plug-in hybrid vehicle
that features a single, wide-stance wheel with two high-performance tires sharing one rear wheel.
The Company anticipates introducing the Electric/Hybrid Vehicle in late 2011.
Going Concern
The Companys consolidated financial statements have been prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the United States of
America (GAAP) and have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities in the normal course of business. The
Company has incurred significant operating losses and has used substantial amounts of working
capital in its operations since its inception (March 16, 2006). Further, at December 31, 2010, the
Company had an accumulated deficit of $(45,120,210), a working capital deficit of $(15,057,791) and
cash and cash equivalents (including restricted cash) of $133,861. Additionally, the Company used
cash in operations of $(5,185,067) during the year ended December 31, 2010. These factors raise
substantial doubt about the Companys ability to continue as a going concern for a reasonable
period of time. Management has been and plans to continue to implement its cost reduction strategy
for material, production and service costs. Until management achieves its cost reduction strategy
and is able to generate sales to realize the benefits of the strategy, and sufficiently increases
cash flow from operations, the Company will require additional capital to meet working capital
requirements, debt service, research and development, capital requirements and compliance
requirements.
Management believes that its current sources of funds and current liquid assets will allow the
Company to continue as a going concern through at least April 30, 2011. The Company has filed a
registration statement in connection with a proposed public offering of its securities. Management
has been implementing cost reduction strategies and believes that its cash from operations,
together with the net proceeds of that offering, will be sufficient to allow the Company to
continue as a going concern through at least December 31, 2011. As such, these consolidated
financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
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
that managements cost reduction strategies will be effective or that the public offering or 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 its
public offering or any other financing will adversely impact the Companys ability to continue as a
going concern.
F-8
Table of Contents
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of T3 Motion, Inc. and
its wholly owned subsidiary, T3 Motion Ltd. (UK) (the subsidiary). All significant inter-company
accounts and transactions are eliminated in consolidation.
Reclassifications
Certain amounts in the 2009 consolidated financial statements have been reclassified to
conform with the current year presentation.
Use of Estimates
The preparation of 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 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.
Foreign Currency Translation
The Company measures the financial statements of its foreign subsidiary using the local
currency as the functional currency. Assets and liabilities of this subsidiary are translated at
the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the
rates of exchange prevailing during the year. Translation adjustments resulting from this process
are included as a separate component in stockholders equity (deficit). Gains and losses from
foreign currency translations are included in other comprehensive income (loss). Translation gains
(losses) of $344 and $(632) were recognized during the years ended December 31, 2010 and 2009,
respectively.
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. 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 December
31, 2010, the Company did not have cash deposits in excess of the FDIC limit.
The Company considers cash equivalents to be all short-term investments that have an initial
maturity of 90 days or less and are not restricted. The Company invests its cash in short-term
money market accounts.
Restricted Cash
Under a credit card processing agreement with a financial institution, the Company is required
to maintain a security deposit as collateral. The amount of the deposit is at the discretion of the
financial institution and as of December 31, 2010 was $10,000.
F-9
Table of Contents
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 December 31, 2010 and 2009, the Company had an allowance for doubtful accounts of
$50,000 and $37,000, respectively. Although the Company expects to collect amounts due, actual
collections may differ from the estimated amounts.
As of December 31, 2010 and 2009, two customers accounted for approximately 51% and 36% of
total accounts receivable, respectively. One customer and no single customer accounted for more
than 10% of net revenues for the years ended December 31, 2010 and 2009, respectively.
Accounts Payable
As of December 31, 2010 and 2009, no single vendor and one vendor accounted for more than 10%
of total accounts payable, respectively. Two vendors and no single vendor each accounted for more
than 10% of purchases for the years ended December 31, 2010 and 2009, respectively.
Inventories
Inventories, which consist of raw materials, finished goods and work-in-process, are stated at
the lower of cost or net realizable value, with cost being determined by the average-cost method,
which approximates the first-in, first-out method. At each balance sheet date, the Company
evaluates its ending inventories for excess quantities and obsolescence. This evaluation primarily
includes an analysis of forecasted demand in relation to the inventory on hand, among consideration
of other factors. Based upon the evaluation, provisions are made to reduce excess or obsolete
inventories to their estimated net realizable values. Once established, write-downs are considered
permanent adjustments to the cost basis of the respective inventories.
Property and Equipment
Property and equipment are stated at cost, and are depreciated using the straight-line method
over the estimated useful lives of the related assets, ranging from three to five years. Leasehold
improvements are recorded at cost and amortized on a straight-line basis over the shorter of their
estimated lives or the remaining lease term. Significant renewals and betterments are capitalized.
Maintenance and repairs that do not improve or extend the lives of the respective assets are
expensed. At the time property and equipment are retired or otherwise disposed of, the cost and
related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses
from retirements or sales are reflected in the consolidated statements of operations.
Deposits
Deposits primarily consist of amounts incurred or paid in advance of the receipt of fixed
assets (see Note 12).
Impairment of Long-Lived Assets
The Company accounts for its long-lived assets in accordance with the accounting standards
which require that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the historical cost carrying value of an asset may no longer be
appropriate. The Company assesses recoverability of the carrying value of an asset by estimating
the future net cash flows expected to result from the asset, including eventual disposition. If the
future net cash flows are less than the carrying value of the asset, an impairment loss is recorded
equal to the difference between the assets carrying value and fair value or disposable value. As
of December 31, 2009, the Company performed an annual review of its identified intangible asset
related to the GeoImmersive license agreement to assess potential impairment. At December 31, 2009,
management deemed the intangible asset to be fully impaired, as management has decided to allocate
the resources required to map the data elsewhere. As a result, the remaining value of $625,000 was
fully amortized as of December 31, 2009. As of
F-10
Table of Contents
December 31, 2010 and 2009, the Company does not
believe there has been any other impairment of its long-lived assets. There can be no assurance,
however, that market conditions will not change or demand for the Companys products will continue,
which could result in impairment of long-lived assets in the future.
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 of such instruments and
because instruments similar to the notes payable could not be found. The Companys derivative
liabilities are recorded at fair value (see Note 9).
The Company determines the fair value of its financial instruments based on a three-level
hierarchy for fair value measurements under which these assets and liabilities must be grouped,
based on significant levels of observable or unobservable inputs. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. This hierarchy requires the use of observable market data when available. These two
types of inputs have created the following fair-value hierarchy:
Level 1 Valuations based on unadjusted quoted market prices in active markets for
identical securities. Currently the Company does not have any items classified as Level 1.
Level 2 Valuations based on observable inputs (other than Level 1 prices), such as quoted
prices for similar assets at the measurement date; quoted prices in markets that are not active;
or other inputs that are observable, either directly or indirectly. Currently the Company does
not have any items classified as Level 2.
Level 3 Valuations based on inputs that are unobservable and significant to the overall
fair value measurement, and involve management judgment. The Company used the
Black-Scholes-Merton option pricing model to determine the fair value of the financial
instruments.
If the inputs used to measure fair value fall in different levels of the fair value hierarchy,
a financial securitys hierarchy level is based upon the lowest level of input that is significant
to the fair value measurement.
Beneficial Conversion Features and Debt Discounts
The convertible features of convertible debentures provide for a rate of conversion that is
below market value. Such feature is normally characterized as a beneficial conversion feature
(BCF). The relative fair values of the BCF were recorded as discounts from the face amount of the
respective debt instrument. The Company amortized the discount using the effective interest method
through maturity of such 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 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 12), 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.
F-11
Table of Contents
All amounts billed to customers related to shipping and handling are classified as net
revenues, while all costs incurred by the Company for shipping and handling are classified as cost
of net revenues.
The Company does not enter into contracts that require fixed pricing beyond the term of the
purchase order. All sales via distributor agreements are accompanied by a purchase order. Further,
the Company does not allow returns of unsold items.
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 11) and records expenses attributable to
the stock option plan. The Company amortizes share-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
consultants 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.
Income Taxes
The Company accounts for income taxes under the provisions of the accounting standards. Under
the accounting standards, deferred tax assets and liabilities are recognized for future tax
benefits or consequences attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. A valuation
allowance is provided for significant deferred tax assets when it is more likely than not that such
asset will not be realized through future 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 earnings 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 54.7 million and 50.5 million shares of common stock were outstanding at
December 31, 2010 and 2009, respectively, but were excluded from the computation of diluted
earnings per share due to the anti-dilutive effect on net loss per share.
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Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Net loss |
$ | (8,327,887 | ) | $ | (6,698,893 | ) | ||
Deemed dividend to preferred stockholders |
(3,730,149 | ) | (6,116 | ) | ||||
Net loss attributable to common stockholders |
$ | (12,058,036 | ) | $ | (6,705,009 | ) | ||
Weighted average number of common shares outstanding: |
||||||||
Basic and diluted |
47,689,785 | 44,445,042 | ||||||
Net loss per share: |
||||||||
Basic and diluted |
$ | (0.25 | ) | $ | (0.15 | ) | ||
Research and Development
The Company expenses research and development costs as incurred.
Advertising
Advertising expenses are charged against operations when incurred. Advertising expenses for
the years ended December 31, 2010 and 2009 were $12,709 and $4,226, respectively, and are included
in sales and marketing expenses in the accompanying consolidated statements of operations.
Business Segments
The Company currently only has one reportable business segment due to the fact that the
Company derives its revenue primarily from one product. The CT Micro Car is not included in a
separate business segment due to nominal net revenues during the years ended December 31, 2010 and
2009. The net revenues from domestic and international sales are shown below:
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Net revenues: |
||||||||
T3 Series domestic |
$ | 3,842,030 | $ | 3,654,290 | ||||
T3 Series international |
840,878 | 963,911 | ||||||
CT Series domestic |
| 25,821 | ||||||
Total net revenues |
$ | 4,682,908 | $ | 4,644,022 | ||||
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (the FASB) issued guidance that
expands the interim and annual disclosure requirements of fair value measurements, including the
information about movement of assets between Level 1 and 2 of the three -tier fair value hierarchy
established under its fair value measurement guidance. This guidance also requires separate
disclosure for purchases, sales, issuances and settlements in the reconciliation for fair value
measurements using significant unobservable inputs using Level 3 methodologies. Except for the
detailed disclosure in the Level 3 reconciliation, which is effective for the fiscal years
beginning after December 15, 2010, we adopted the relevant provisions of this guidance effective
January 1, 2010, which did not have a material impact on our consolidated financial statements.
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NOTE 3 INVENTORIES
Inventories consist of the following at December 31:
2010 | 2009 | |||||||
Raw materials |
$ | 788,496 | $ | 959,909 | ||||
Work-in-process |
212,723 | 91,013 | ||||||
Finished goods |
63,327 | 118,294 | ||||||
$ | 1,064,546 | $ | 1,169,216 | |||||
NOTE 4 PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following at December 31:
2010 | 2009 | |||||||
Prepaid inventory |
$ | 148,410 | $ | 71,370 | ||||
Prepaid expenses and other current assets |
103,057 | 90,627 | ||||||
$ | 251,467 | $ | 161,997 | |||||
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2010 | 2009 | |||||||
Office and computer equipment |
$ | 316,718 | $ | 291,874 | ||||
Demonstration vehicles |
390,220 | 370,456 | ||||||
Manufacturing equipment |
952,361 | 1,015,320 | ||||||
Leasehold improvements |
108,336 | 108,336 | ||||||
1,767,635 | 1,785,986 | |||||||
Less accumulated depreciation and amortization |
(1,202,935 | ) | (917,643 | ) | ||||
$ | 564,700 | $ | 868,343 | |||||
Depreciation and amortization expense consisted of the following for the years ended December 31,:
2010 | 2009 | |||||||
Cost of revenues |
$ | 197,799 | $ | 200,151 | ||||
Sales and marketing |
79,795 | 75,480 | ||||||
General and administrative |
81,698 | 89,236 | ||||||
$ | 359,292 | $ | 364,867 | |||||
NOTE 6 INCOME TAXES
The provision for income taxes consists of the following for the years ended December 31:
2010 | 2009 | |||||||
Current: |
||||||||
Federal |
$ | | $ | | ||||
State |
800 | 800 | ||||||
Foreign |
| | ||||||
$ | 800 | $ | 800 | |||||
Deferred: |
||||||||
Federal |
$ | (2,290,997 | ) | $ | (2,580,732 | ) | ||
State |
(605,504 | ) | (702,405 | ) | ||||
Foreign |
(3,006 | ) | (30,563 | ) | ||||
(2,899,507 | ) | (3,313,700 | ) | |||||
Less change in allowance |
2,899,507 | 3,313,700 | ||||||
Provision for income taxes |
$ | 800 | $ | 800 | ||||
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Income taxes differ from the amounts computed by applying the federal income tax rate of
34.0%. A reconciliation of this difference is as follows at December 31:
2010 | 2009 | |||||||
Taxes calculated at federal rate |
$ | (2,816,761 | ) | $ | (2,277,629 | ) | ||
State tax, net of federal benefit |
800 | 528 | ||||||
Exclusion of certain meals and entertainment |
3,842 | 4,678 | ||||||
Foreign losses not benefitted |
3,406 | 34,638 | ||||||
Incentive stock options |
277,651 | 572,385 | ||||||
(Gain) loss on debt conversion |
(125,283 | ) | 225,686 | |||||
Research credits |
(55,183 | ) | (36,723 | ) | ||||
Other, net |
13,915 | 35,575 | ||||||
Valuation allowance |
2,698,414 | 1,441,662 | ||||||
Provision for income taxes |
$ | 800 | $ | 800 | ||||
The components of the net deferred assets as of December 31 are as follows:
2010 | 2009 | |||||||
Accruals and reserves |
$ | 920,716 | $ | 240,483 | ||||
Basis difference in fixed assets |
(51,454 | ) | (70,771 | ) | ||||
Stock options |
21,109 | 21,109 | ||||||
Tax credits |
420,608 | 353,808 | ||||||
Net operating loss carryforward |
14,208,405 | 12,075,249 | ||||||
15,519,384 | 12,619,878 | |||||||
Valuation allowance |
(15,519,384 | ) | (12,619,878 | ) | ||||
Net deferred tax asset |
$ | | $ | | ||||
An allowance has been provided for by the Company which reduced the tax benefits accrued by
the Company for its net operating losses to zero, as it cannot be determined when, or if, the tax
benefits derived from these operating losses will be realized. As of December 31, 2010, the Company
has available net operating loss carryforwards of approximately $32.8 million for federal purposes
and $33.0 million for state purposes and $0.4 million for foreign purposes, which will start to
expire beginning in 2026 for federal purposes and 2018 for California purposes and carried forward
indefinitely for foreign purposes. The Companys use of its net operating losses may be restricted
in future years due to the limitations pursuant to IRC Section 382 on changes in ownership. The
Company also has federal and state research and experimentation tax credits of approximately $0.2
million and $0.2 million, respectively, that begin to expire in 2027 for federal purposes and have
an indefinite carryforward for state purposes.
The Company accounts for income taxes under the asset and liability method, which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent it believes these assets will more
likely than not be realized. In making such determination, the Company considered all available
positive and negative evidence, including scheduled reversals of deferred tax liabilities,
projected future taxable income, tax planning strategies and recent financial operations. In the
event the Company was to determine that it would be able to realize deferred income tax assets in
the future in excess of net recorded amount, the Company would make an adjustment to the valuation
allowance which would reduce the provision for income taxes. The valuation allowance increased by
$2.7 million and $1.5 million in 2010 and 2009, respectively.
The accounting guidance for uncertainty in income taxes provides that a tax benefit from an
uncertain tax position may be recognized when it is more likely than not that the position will be
sustained upon examination, including resolutions of any related appeals or litigation processes,
based on the technical merits. Income tax
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positions must meet a more-likely-than-not recognition
threshold at the effective date to be recognized upon the adoption of the accounting standard and
in subsequent periods. This interpretation also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The adoption of the accounting standard for uncertainty in income taxes on January 1, 2008,
did not require an adjustment to the consolidated financial statements. There were no adjustments
required for the years ended December 31, 2010 and 2009.
The Company expects resolution of unrecognized tax benefits, if created, would occur while the
full valuation allowance of deferred tax assets is maintained, therefore, the Company does not
expect to have any unrecognized tax benefit, that if recognized, would affect the effective tax
rate.
The Company will recognize interest and penalties related to unrecognized tax benefits and
penalties as income tax expense. As of December 31, 2010, the Company has not recognized
liabilities for interest and penalties as the Company does not have liability for unrecognized tax
benefits.
The Company is subject to taxation in the U.S. and various states and foreign jurisdiction.
The Companys tax years for 2006 through 2009 are subject to examination by the taxing authorities.
With few exceptions, the Company is no longer subject to U.S., state, local, and foreign
examination by taxing authorities for years before 2006.
NOTE 7 NOTE PAYABLE
Note payable consisted of the following at December 31:
2010 | 2009 | |||||||
Note payable to Preproduction Plastics, Inc.,
interest payable monthly at 6% per annum, monthly
payments of $50,000 plus interest, due May 2011 |
$ | 243,468 | $ | | ||||
In accordance with a settlement agreement (see Note 12), the Company agreed to pay
compensatory damages, attorneys fees and costs totaling $493,468, to Preproduction Plastics, Inc.,
which is payable in monthly payments of $50,000 each, plus interest accruing at 6% per annum from
the date of the settlement. Commencing January 1, 2011, the Company has failed to make the
scheduled payments required by the July 29, 2010 settlement agreement and stipulation for entry of
judgment. The Plaintiff has filed a motion for entry of judgment pursuant to the terms of the July
29, 2010 settlement agreement and stipulation for entry of judgment, which if granted, would cause
the acceleration of all amounts owed under the settlement agreement. This motion is scheduled to be
heard on April 21, 2011. During the year ended December 31, 2010, the Company recorded $8,587 of
interest expense and had accrued interest of $4,126 at December 31, 2010.
NOTE 8 RELATED PARTY NOTES PAYABLE
Related party notes payable, net of discounts, consisted of the following at December 31:
2010 | 2009 | |||||||
Note payable to Immersive Media Corp., 15% interest rate per
annum, net of discount of $108,879 and $41,265, respectively, due
March 31, 2011 |
$ | 891,121 | $ | 958,735 | ||||
Note payable to Vision Opportunity Master Fund, Ltd., 10% interest
rate per annum, net of discount of $0 and $2,621,898, respectively,
due March 31, 2011 |
3,500,000 | 878,102 | ||||||
Note payable to Ki Nam, 10% interest rate per annum, due March 31, 2012 |
1,121,000 | | ||||||
Note payable to Alfonso and Mercy Cordero, 10% interest rate per
annum, due October 1, 2013 |
1,000,000 | | ||||||
$ | 6,512,121 | $ | 1,836,837 | |||||
Less: current portion |
(4,391,121 | ) | (1,836,837 | ) | ||||
$ | 2,121,000 | $ | | |||||
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The aggregate annual maturities for related party notes payable in each of the years after
December 31, 2010, are as follows:
Year Ending December 31, | Related Party Notes Payable |
|||
2011 |
$ | 4,500,000 | ||
2012 |
$ | 1,121,000 | ||
2013 |
$ | 1,000,000 |
Immersive Note
On December 31, 2007, the Company issued a 12% secured promissory note in the principal amount
of $2,000,000 to Immersive Media Corp. (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 is secured by all of the Companys assets (see amendments below).
In connection with the issuance of the promissory note, the Company issued a warrant to
Immersive for the purchase of 697,639 shares of the Companys common stock at an exercise price of
$1.08 per share. The warrants are immediately exercisable. The Company recorded a debt discount of
$485,897 related to the fair value of the warrants, which was calculated using the Black-Scholes
Merton option pricing model. The debt discount was amortized to interest expense over the original
term of the promissory note.
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 $1.65 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 $2.00 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 is 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 (see Note 10). 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 250,000 shares of the Companys
common stock at an exercise price of $2.00 per share, subject to adjustment. For every three months
that the promissory note is outstanding, the Company issued Immersive a warrant to purchase 50,000
shares of the Companys common stock. During the year ended December 31, 2009, the Company issued
warrants to Immersive to purchase 200,000 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 $0.50 per share (see Note 9 for a discussion on
derivative liabilities). During the year ended December 31, 2010, the Company issued the remaining
50,000 warrants under the note. The Company recorded an additional debt discount of $15,274 based
on the estimated fair value of the 50,000 warrants issued during the year ended December 31, 2010.
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During the years ended December 31, 2010 and 2009, the Company amortized $56,539 and $99,043,
respectively, 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
697,639 shares of the Companys common stock at an exercise price of $1.08 per share and its Class
D warrants to purchase up to 250,000 shares of the Companys common stock at an adjusted exercise
price of $0.70 per share, for Class G warrants to purchase up to 697,639 shares and 250,000 shares
of the Companys common stock, respectively, each with an exercise price of $0.70 per share. The
Company recorded a debt discount and derivative liability of $1,898 based on the incremental
increase in the estimated fair value of the re-pricing of the 250,000 warrants. The Company
recorded an additional debt discount and derivative liability in the amount of $216,811 based on
the estimated fair value of the 697,639 warrants issued. The total debt discount was amortized in
April 2010. The amended terms did not result in terms that were substantially different from the
terms of the original note. Therefore, there was no extinguishment of debt as a result of the
second amendment.
The note and accrued interest were not repaid in full by April 30, 2010. As a result, per the
agreement, the maturity date was extended to March 31, 2011 and the Company issued Class G warrants
to purchase up to 1,040,000 shares of the Companys common stock at an exercise price of $0.70 per
share. The interest rate, which compounds annually, was also amended to 15.0%. The Company recorded
interest expense of $140,000 and $120,000, related to the stated rate of interest during the years
ended December 31, 2010 and 2009, respectively, and had accrued interest of $110,000 and $0 at
December 31, 2010 and 2009, 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 $220,241 for the year ended December 31, 2010, resulting in an unamortized debt
discount balance of $108,879 at December 31, 2010.
Vision Opportunity Master Fund, Ltd. Bridge Financing
December 30, 2008 10% Convertible Debenture
On December 30, 2008, the Company sold $2.2 million in debentures and issued Class D warrants
through a private placement to Vision Opportunity Master Fund, Ltd. (Vision) pursuant to a
Securities Purchase Agreement. In connection with this financing, the Company recorded a debt
discount of $607,819 related to the BCF of the debenture and a debt discount of $607,819 related to
the relative fair value of the Class D warrants. The debt discount for the Class D warrants was
calculated using the Black-Scholes-Merton option pricing model. The BCF and warrants were amortized
to interest expense over the one-year life of the note. As a result of the adoption of a new
accounting pronouncement on January 1, 2009, the Company recorded an additional debt discount of
$859,955 which was amortized through maturity of the debentures (see Note 9).
On December 30, 2009, pursuant to the Exchange Agreement (see below), the Company issued to
Vision and Vision Capital Advantage Fund, L.P. (VCAF and, together with Vision, the Vision
Parties), shares of Preferred Stock in exchange for the delivery and cancellation of these
debentures and accrued interest.
May 28, 2009 10% Convertible Debenture
On May 28, 2009, the Company issued to Vision, 10% Debentures with an aggregate principal
value of $600,000. Additionally, Vision received Class E common stock purchase warrants, (Class E
Warrants) to purchase up to an aggregate 300,000 shares of the Companys common stock at an
exercise price of $1.20 per share. In connection with this financing, the Company recorded a debt
discount of $291,327 related to the conversion feature of the debenture and a debt discount of
$201,222 related to the estimated fair value of the Class E Warrants. The debt discount for the
Class E Warrants was calculated using the Black-Scholes-Merton option pricing model. The conversion
feature and warrants were amortized to interest expense through the date of exchange of these
debentures (see below). As noted below, these 10% Debentures were cancelled in connection with the
December 30,
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2009 financing with Vision. Additionally, the Class E Warrants were exchanged for
shares of Preferred Stock in connection with the December 30, 2009 financing with Vision (see
below).
December 30, 2009 10% Convertible Debenture
On December 30, 2009, the Company sold $3,500,000 in debentures and warrants to Vision through
a private placement pursuant to a Securities Purchase Agreement (the Purchase Agreement). The
Company issued to Vision, 10% secured convertible debentures (Debentures), with an aggregate
principal value of $3,500,000.
The Debentures accrue interest on the unpaid principal balance at a rate equal to 10% per
annum. The maturity date of the Debentures was December 30, 2010 (see below). At any time after the
240th calendar day following the issue date, the Debentures are convertible into units of Company
securities at a conversion price of $1.00 per unit, subject to adjustment. Each unit consists of
one share of the Companys Preferred Stock and a warrant to purchase one share of 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 9). The Company may redeem the Debentures in whole or part at any time after June
30, 2010 for cash in an amount equal to 120% of the principal amount plus accrued and unpaid
interest and certain other amounts due in respect of the Debenture. Interest on the Debentures is
payable in cash on the maturity date or, if sooner, upon conversion or redemption of the
Debentures. In the event of default under the terms of the Debentures, the interest rate increases
to 15% per annum. The Company recorded interest expense of $350,000 and $959, related to the stated
rate of interest, for the years ended December 31, 2010 and 2009, respectively, and had accrued
interest of $350,959 and $959 as of December 31, 2010 and 2009, respectively.
The Purchase Agreement provides that during the 18 months following December 30, 2009, if the
Company or its wholly owned subsidiary, T3 Motion, Ltd., a company incorporated under the laws of
the United Kingdom (the Subsidiary), issue common stock, common stock equivalents for cash
consideration, indebtedness, or a combination of such securities in a subsequent financing (the
Subsequent Financing), Vision may participate in such Subsequent Financing in up to an amount
equal to Visions then percentage ownership of the Companys common stock.
The Purchase Agreement also provides that from December 30, 2009 to the date that the
Debentures are no longer outstanding, if the Company effects a Subsequent Financing, Vision may
elect, in its sole discretion, to exchange some or all of the Debentures then held by Vision for
any securities issued in a Subsequent Financing on a $1.00 for $1.00 basis (the Exchange);
provided, however, that the securities issued in a Subsequent Financing will be irrevocably
convertible, exercisable, exchangeable, or resettable (or any other similar feature) based on the
price equal to the lesser of (i) the conversion price, exercise price, exchange price, or reset
price (or such similar price) in such Subsequent Financing and (ii) $1.00 per share of common
stock. Vision is obligated to elect the Exchange on a $0.90 per $1.00 basis (not a $1.00 for $1.00
basis) if certain conditions regarding the Subsequent Financing and other matters are met.
Also pursuant to the Purchase Agreement, Vision received Class G common stock purchase
warrants (the Class G Warrants). Pursuant to the terms of the Class G Warrants, Vision is
entitled to purchase up to an aggregate of 3,500,000 shares of the Companys common stock at an
exercise price of $0.70 per share, subject to adjustment. The Class G Warrants have a term of five
years after the issue date of December 30, 2009.
The Subsidiary entered into a subsidiary guarantee (Subsidiary Guarantee) for Visions
benefit to guarantee to Vision T3 Motions obligations due under the Debentures. T3 Motion and the
Subsidiary also entered into a security agreement (Security Agreement) with Vision, under which
it and the Subsidiary granted to Vision a security interest in certain of our and the Subsidiarys
property to secure the prompt payment, performance, and discharge in full of all obligations under
the Debentures and the Subsidiary Guarantee.
December 30, 2009 Exchange Agreement
On December 30, 2009, the Company also entered into a securities exchange agreement (the
Exchange Agreement) with the Vision Parties. Pursuant to the Exchange Agreement, the Company
issued to the Vision Parties an aggregate of 9,370,698 shares of Preferred Stock. 3,055,000 shares
of Preferred Stock were issued in
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exchange for the delivery and cancellation of 10% Secured
Convertible Debentures previously issued by the Company to the Vision Parties in the principal
amount of $2,200,000 (issued December 30, 2008) and $600,000 (issued May 28, 2009) plus accrued
interest of $255,000 (in conjunction with the issuance of Preferred Stock, the Company issued Class
F warrants to purchase 6,110,000 shares of common stock at $0.70 per share); 2,263,750 shares of
Preferred Stock were issued in exchange for the delivery and cancellation of all Class A, B, C, D,
E and F warrants (which were exercisable for an aggregate of 10,972,769 shares) previously issued
by the Company to the Vision Parties valued at $1,155,390, (the Company recorded a gain of $45,835
related to the exchange of the warrants for Preferred Stock); and 4,051,948 shares of Preferred
Stock were issued to satisfy the Companys obligation to issue equity to the Vision Parties
pursuant to a securities purchase agreement dated March 24, 2008 and amended on May 28, 2009.
Under the Exchange Agreement, Ki Nam, the Chief Executive Officer and Chairman of the board of
directors of the Company, also agreed to convert a promissory note plus the accrued interest,
previously issued to him by the Company into 976,865 shares of Preferred Stock and Class G Warrants
to purchase up to 1,953,730 shares of common stock (which warrants have the same terms as the Class
G Warrants issued to Vision pursuant to the Purchase Agreement).
The Company, Mr. Nam and the Vision Parties also entered into a stockholders agreement,
whereby Mr. Nam agreed to vote, in the election of members of the Companys board of directors, all
of his voting shares of the Company in favor of (i) two nominees of the Vision Parties so long as
their ownership of common stock of the Company is 22% or more or (ii) one nominee of The Vision
Parties so long as their ownership of common stock of the Company is 12% or more.
Amendment of December 30, 2009 10% Convertible Debenture
On December 31, 2010, the Company and the Vision Parties 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.
December 31, 2010 Exchange Agreement
On December 31, 2010, the Company entered into a securities exchange agreement with Vision
pursuant to which the Company exchanged 3.5 million Class G Warrants for 2.1 million shares of the
Companys common stock. On the date of the exchange, the warrants were classified as derivative
liabilities and had an estimated fair value of $1,208,478 and the shares of the Companys common
stock were valued at the fair market price of $0.40 per share for a total value of $840,000,
resulting in a gain on the transaction of $368,478, which was recorded in other income.
Debt Discounts and Amortization
The debt discount recorded on the December 30, 2009 Debentures was allocated between the
warrants and conversion feature in the amount of $1,077,652 and $1,549,481, respectively. In
addition, the Company recorded an additional debt discount during the year ended December 31, 2010
of $275,676 (see above). The debt discounts were amortized through the original maturity of the
Debentures of December 30, 2010. During the years ended December 31, 2010 and 2009, the Company
amortized $2,897,574 and $5,235, respectively, of the debt discounts to interest expense.
During the year ended December 31, 2009, the Company amortized $2,565,906 of interest expense
related to debt discounts on different notes to Vision that were ultimately exchanged for shares of
the Companys Preferred Stock on December 30, 2009 (see above).
Ki Nam Note
2010 Note
On February 24, 2011, the Company entered into a loan agreement with Ki Nam, its chairman and
CEO, for previous advances to the Company. The agreement allows Mr. Nam to advance up to $2.5
million for operating
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requirements. The note bears interest at 10% per annum. The note is due on
March 31, 2012 and allows for an automatic one year extension. During the year ended December 31,
2010, Mr. Nam advanced $1,511,000 to the Company to be used for operating requirements. During
October 2010, the Company repaid $390,000 of the advances, leaving a balance of $1,121,000
outstanding as of December 31, 2010. The Company recorded interest expense of $23,756 for the year
ended December 31, 2010 and had accrued interest of $23,756 as of December 31, 2010.
2009 Note
On March 30, 2009, the Company entered into a loan agreement with Ki Nam, its chairman and
CEO, whereby, Mr. Nam agreed to advance the Company up to $1,000,000, including $498,528 that had
already been advanced by Mr. Nam for operating capital requirements through December 31, 2008. The
line of credit was to remain open until the Company raised $10.0 million in equity. The note bore
interest at 10% per annum. In the event the Company received (i) $10,000,000 or more in private
placement financing or (ii) $15,000,000 or more in equity financing at any time after the date of
the loan, the note was to become immediately due and payable.
In connection with the loan agreement, the Company agreed to issue warrants to Mr. Nam for the
purchase of up to 303,030 shares of the Companys common stock, $0.001 par value per share, at an
exercise price of $2.00 per share, subject to adjustment. The total number of warrants to be issued
was dependent on the final amount of the loan. During the year ended December 31, 2009, the Company
was advanced $414,963, including accrued interest, under the loan agreement. During the year ended
December 31, 2009, 274,774 warrants were issued to Mr. Nam pursuant to the terms of the loan
agreement. The Company recorded a debt discount of $246,228 related to the estimated fair value of
warrants, which was to be amortized as interest expense over the term of the loan agreement. The
loan was convertible during the pendency of any current open equity financing round at $1.65 per
share, subject to adjustment. Upon conversion, Mr. Nam was to receive additional warrants for the
purchase of up to 606,060 shares of the Companys common stock at $2.00 per share.
In December 2009, the Company issued 2,000,000 shares of its Preferred Stock in connection
with an equity offering (see Note 10). As a result of the December 2009 equity offering, the
Company recorded the estimated fair value of the conversion feature of $443 as a debt discount,
which was to be amortized to interest expense over the remaining term of the loan agreement. The
Company recorded the corresponding amount as a derivative liability and any change in fair value of
the conversion feature was to be recorded through earnings at each reporting date. The change in
fair value of the conversion feature was not significant for the period ended December 31, 2009.
On December 30, 2009, the Company entered into a Securities Exchange Agreement (the Exchange
Agreement) with Mr. Nam. Under the Exchange Agreement, Mr. Nam agreed to convert the balance of
the promissory note, including accrued interest, of $976,865 into 976,865 shares of the Companys
Preferred Stock and warrants to purchase up to 1,953,730 shares of the Companys common stock,
exercisable at $0.70 per share, subject to adjustment. The ability for Mr. Nam to receive
additional warrants for up to 606,060 shares of common stock was cancelled.
In connection with the Exchange Agreement, the Company agreed to convert Mr. Nams outstanding
debt balance of $976,865 at $0.50 per share, which was below the adjusted conversion price pursuant
to the terms of the loan agreement. Pursuant to the conversion terms of the loan agreement, Mr. Nam
would have received only 313,098 shares of stock. As a result, the Company issued Mr. Nam 663,767
additional shares of the Companys Preferred Stock in connection with his debt conversion.
As a result of the Exchange Agreement, the entire debt discount amounting to $246,671 was
amortized to interest expense. In addition, as the Company issued shares to Mr. Nam in excess of
the number of shares pursuant to the terms of the loan agreement, the Company recorded the fair
value of the 663,767 additional shares issued as a loss on debt extinguishment. The amount recorded
of $663,767 was included in other expense in the accompanying consolidated statement of operations
for the year ended December 31, 2009.
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Lock-Up Agreement
In connection with the Vision financing, Ki Nam, our Chief Executive Officer and Chairman of
the board of directors of the Company, agreed not to transfer, sell, assign, pledge, hypothecate,
give, create a security interest in or lien on, place in trust (voting trust or otherwise), or in
any other way encumber or dispose of, directly or indirectly and whether or not voluntarily,
without express prior written consent of Vision, any of our common stock equivalents of the Company
until August 27, 2010; provided, however, that commencing on August 27, 2010, he may sell up to
1/24th of the shares of common stock of the Company in each calendar month through February 28,
2011.
Alfonso Cordero and Mercy Cordero Note
On January 14, 2011, the Company delivered a 10% unsecured promissory note (the Note) in the
principal amount of $1,000,000 that matures on October 1, 2013 to Alfonso G. Cordero and Mercy B.
Cordero, Trustees of the Cordero Charitable Remainder Trust (Noteholder) for amounts previously
loaned to the Company in October 2010. The Note was dated as of September 30, 2010. Interest
payments of $8,333 are due on the first day of each calendar month commencing November 1, 2010 and
continuing each month thereafter. The Noteholder has agreed to waive payment obligations from
November 1, 2010 through April 15, 2011. The Company recorded interest expense and accrued interest
of $24,777 as of and for the year ended December 31, 2010.
The Company may prepay the Note, but must prepay in full only. The Company will be in default
under the Note upon: (1) failure to timely make payments due under the note; and (2) failure to
perform other agreements under the Note within 10 days of request from the Noteholder. Upon such
event of default, the Noteholder may declare the Note immediately due and payable. The applicable
interest rate will be upon default will be increased to 15% or the maximum rate allowed by law. The
Noteholder has waived any and all defaults under the Note at December 31, 2010 and through April
15, 2011.
NOTE 9 DERIVATIVE LIABILITIES
Effective January 1, 2009, the Company adopted 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.
As a result of the adoption of the accounting standard, 4,562,769 of the Companys issued and
outstanding common stock purchase warrants and embedded conversion features previously treated as
equity pursuant to the derivative treatment exemption were no longer afforded equity treatment.
These warrants had exercise prices ranging from $1.08 to $2.00 and expire between December 2012 and
December 2014. Effective January 1, 2009, the Company reclassified the fair value of these common
stock purchase warrants and embedded conversion features, all of which have exercise price reset
features and price protection clauses, from equity to liability status as if these warrants and
conversion features were treated as derivative liabilities since their date of original issuance
ranging from March 2008 through December 2008.
On January 1, 2009, the Company reclassified from additional paid-in capital, as a cumulative
effect adjustment, approximately $4.0 million to a derivative liability to recognize the fair value
of such warrants and embedded conversion features, at the original issuance date and reclassified
from retained earnings, as a cumulative effect adjustment, approximately $2.0 million to recognize
the change in the fair value from original issuance through December 31, 2008, and recorded
additional debt discounts of approximately $0.9 million related to the fair value of warrants
issued with related party notes outstanding at December 31, 2008.
During 2010 and 2009, the Company issued 1,040,000 and 9,928,504 of additional warrants ,
respectively, related to convertible debt and during 2009 recorded liabilities related to
conversion options (see Note 8). During 2010, the Company exchanged 697,639 of Class A warrants and
250,000 of Class B warrants for 947,639 Class G warrants (see Note 8). The Company also recorded an
additional derivative liability of $275,676 related to the
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Vision Debentures during the year ended
December 31, 2010 (see Note 8). 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 and $3,510,751 during 2010 and 2009, respectively. The debt discount will be
amortized over the remaining life of the related debt. The change in fair value of the derivative
liability will be recorded through earnings at each reporting date.
During 2010 and 2009, the Company issued additional warrants of 2,310,000 and 5,953,730,
respectively, related to Preferred Stock (see Note 10). The Company estimated the fair value of the
warrants of $716,236 and $1,740,578, respectively, at the dates of issuance and recorded a discount
on the issuance of the equity and a corresponding derivative liability. The discount will be
recorded as a deemed dividend with a reduction to retained earnings. The change in fair value of
the derivative will be recorded through earnings at each reporting date.
During 2010 and 2009, the Company recorded a discount on the issuance of Preferred Stock and a
corresponding derivative liability of $685,124 and $7,314,273, respectively, related to the
anti-dilution provision of the Preferred Stock issued. The discount will be recorded as a deemed
dividend with a reduction to retained earnings during the 24-month period that the anti-dilution
provision is outstanding. The change in fair value of the derivative liabilities will be recorded
through earnings at each reporting date.
During 2010 and 2009, the amortization of the discounts related to the Preferred Stock
anti-dilution provision and warrants issued was $3,730,150 and $6,116, respectively, which was
recorded as a deemed dividend.
During the years ended December 31, 2010 and 2009, the Company exchanged 3,500,000 warrants
for 2,100,000 shares of common stock and 10,972,769 warrants to 2,263,750 shares of Preferred
Stock, respectively, pursuant to the Exchange Agreement (see Note 10). As a result of these
exchanges, the Company exchanged warrants with a fair value of $1,208,478 and $1,201,225 during
2010 and 2009, respectively, for shares of common stock valued at $840,000 and Preferred Stock
valued at $1,155,390, resulting in gains on the exchanges of $368,478 and $45,835 during the years
ended December 31, 2010 and 2009, respectively.
During 2009, in connection with the conversion of the Vision Parties and Mr. Nams notes
payable (see Note 8), the Company reclassified the fair value of the derivative liability related
to the conversion feature of $208,857 to additional paid-in capital.
On March 22, 2010, one of the Companys preferred shareholders exercised their option to
convert their 2,000,000 preferred shares into 4,000,000 shares of common stock (see Note 10). As a
result of the conversion, the Company reclassified the balance of the derivative liability of
$1,121,965 to additional paid-in capital and the balance of the discount of $1,099,742 as a deemed
dividend.
As of December 31, 2010, the unamortized discount related to the conversion feature of the
Preferred Stock was $4,263,068.
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 as of
December 31,:
2010 | 2009 | ||||
Annual dividend yield
|
| | |||
Expected life (years)
|
0.25-5 | 0.25-5.00 | |||
Risk-free interest rate
|
0.12%-2.55 | % | 0.40%-2.69 | % | |
Expected volatility
|
79%-162 | % | 84%-159 | % |
Expected volatility is based primarily on historical volatility of the Company and the
Companys peer group. Historical volatility was computed using daily pricing observations for
recent periods that correspond to the
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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.
During the years ended December 31, 2010 and 2009, the Company recorded other income of
$2,101,067 and $6,184,151, 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 consolidated
statements of operations.
The following table presents the Companys warrants and embedded conversion options measured
at fair value on a recurring basis as of December 31:
Level 3 Carrying Value | ||||||||
2010 | 2009 | |||||||
Embedded conversion options |
$ | 5,991,957 | $ | 8,853,893 | ||||
Warrants |
3,641,148 | 2,970,583 | ||||||
$ | 9,633,105 | $ | 11,824,476 | |||||
Decrease in fair value |
$ | 2,101,067 | $ | 6,184,151 | ||||
The following table provides a reconciliation of the beginning and ending balances for the
Companys liabilities measured at fair value using Level 3 inputs for the years ended December 31:
2010 | 2009 | |||||||
Balance at December 31, |
$ | 11,824,476 | $ | | ||||
Cumulative effect of adoption |
| 6,853,108 | ||||||
Issuance of warrants and conversion option |
2,240,139 | 12,565,601 | ||||||
Conversion of debt |
| (1,410,082 | ) | |||||
Conversion of preferred stock to common stock |
(1,121,965 | ) | | |||||
Exchange of warrants for common stock |
(1,208,478 | ) | | |||||
Change in fair value |
(2,101,067 | ) | (6,184,151 | ) | ||||
Balance at December 31, |
$ | 9,633,105 | $ | 11,824,476 |
NOTE 10 EQUITY
Series A Convertible Preferred Stock
The Companys board of directors has authorized 20,000,000 shares of Series A Convertible
Preferred Stock (Preferred Stock). Except as otherwise provided in the Certificate of Designation
which created the Series A Preferred Stock (the Series A Certificate) or by law, each holder of
shares of Preferred Stock shall have no voting rights. As long as any shares of Preferred Stock are
outstanding, however, the Company shall not, without the affirmative vote of the holders of a
majority of the then outstanding shares of the Preferred Stock, (a) alter or change adversely the
powers, preferences, or rights given to the Preferred Stock or alter or amend the Series A
Certificate, (b) authorize or create any class of stock ranking as to dividends, redemption or
distribution of assets upon a liquidation senior to or otherwise pari passu with the Preferred
Stock, (c) amend its certificate of incorporation or other charter documents in any manner that
adversely affects any rights of the holders of Preferred Stock, (d) increase the number of
authorized shares of the Preferred Stock, or (e) enter into any agreement with respect to any of
the foregoing.
Each share of Preferred Stock 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 (as defined below).
Holders of our Preferred Stock are restricted from converting their shares of Preferred Stock
to common stock if the number of shares of common stock to be issued pursuant to such conversion
would cause the number of shares of common stock beneficially owned by such holder, together with
its affiliates, at such time to exceed 4.99% of the
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then issued and outstanding shares of common
stock; provided, however, that such holder may waive this limitation upon 61 days notice to the
Company. The Company has not received any such notice. There are no redemption rights.
The Conversion Price shall be proportionately reduced for a stock dividend, stock split,
subdivision, combination or similar arrangements. The Conversion Price will also be reduced for any
sale of common stock (or options, warrants or convertible debt or other derivative securities) at a
purchase price per share less than the Conversion Price, subject to certain excepted issuances. The
Conversion Price will be reduced to such purchase price if such issuance occurs within the first 12
months of the original issuance date. The Conversion Price will be reduced to a price derived using
a weighted-average formula if the issuance occurs after the first 12 months but before the 24 month
anniversary of the original issuance date.
If, at any time while the Preferred Stock 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 (each of the foregoing, a Fundamental
Transaction), then, upon any subsequent conversion of Preferred Stock, 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.
In September 2009, the Company offered up to 15,000,000 shares of Preferred Stock, at a
purchase price of $1.00 per share, or up to an aggregate purchase price of $15,000,000, on a best
efforts basis to selected qualified investors (the Offering). The minimum offering was
$6,000,000. The proceeds of this Offering were delivered to the Company at multiple closings.
During the years ended December 31, 2010 and 2009, the Company raised $1,155,000 and $1,978,942
(net of issuance costs), respectively, and issued 1,155,000 shares and 2,000,000 shares of
Preferred Stock, respectively. In connection with the financing, the Company granted warrants to
purchase 2,310,000 shares and 4,000,000 shares of common stock, respectively, at an exercise price
of $0.70 per share. The warrants are exercisable for five years. The Company used the proceeds for
working capital requirements.
On December 30, 2009, the Company entered into an Exchange Agreement with Mr. Nam. Under the
Exchange Agreement, Mr. Nam agreed to convert a promissory note plus the accrued interest,
previously issued to him by the Company, of $976,865, into 976,865 shares of Preferred and warrants
to purchase up to 1,953,730 shares of common stock (See Note 8).
On December 30, 2009, the Company entered into an Exchange Agreement with Vision. Pursuant to
the Exchange Agreement, the Company issued to the Vision Parties an aggregate of 9,370,698 shares
of Preferred Stock (See Note 8).
On March 22, 2010, one of the Companys holders of Preferred Stock exercised their option to
convert their 2,000,000 shares of Preferred Stock into 4,000,000 shares of common stock.
Common Stock
On July 21, 2010, the Company issued 20,000 shares of its common stock for investor relations
services and recorded expense of $10,000.
On November 6, 2009, the Company issued 100,000 shares of its common stock for investor
relations services and recorded expense of $50,000.
Pursuant to the consulting agreement dated September 17, 2008, the Company authorized to issue
up to 160,000 shares of common stock at $2.00 per share, to Investor Relations Group (IRG) for
investor relationship services to be rendered from September 17, 2008 through September 17, 2009.
The shares vested 1/12th each month. The
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consulting agreement could be cancelled with a 30 day
cancellation notice by either party. On June 6, 2009, the Company terminated the agreement with
IRG. During the year ended December 31, 2009, 40,000 shares of common stock were issued under the
consulting agreement and the fair value of the shares issued and earned of $80,000 was recorded and
expensed.
On February 20, 2009, the Company entered into a settlement agreement with Mr. Albert Lin, the
CEO of Sooner Capital, principal of Maddog and a Director of Immersive Media Corp., whereby Mr. Lin
released the Company from its obligations to issue certain securities upon the occurrence of
certain events, under an agreement dated December 30, 2007, in exchange for the Company issuing
931,034 shares of common stock at $1.65 per share totaling $1,536,206, for investor relations
services performed for the Company. The Company recorded the value of the shares in related party
payables at December 31, 2008. The Company issued the shares on February 20, 2009.
In September 2008, the Company sold to Piedmont Select Equity Fund (Piedmont) 125,000 shares
of the Companys common stock at $2.00 per share for an aggregate price of $250,000. In December
2008, the Company entered into a rescission agreement with Piedmont in which it agreed to rescind
Piedmonts stock purchase so long as affiliates of Piedmont purchased at least $250,000 of the
Companys equity securities. In March 2010, two investors affiliated with Piedmont purchased an
aggregate of 250,000 shares of the Companys Preferred Stock at a purchase price of $1.00 per share
and were issued Class G Warrants to purchase 500,000 shares of Companys common stock at $0.70 per
share. Concurrent with the closing of such offering, the Company rescinded the purchase of the
125,000 shares of common stock Piedmont. delivered the stock certificate for 125,000 shares to the
Company and the Company returned the original purchase price of $250,000 to Piedmont.
NOTE 11 STOCK OPTIONS AND WARRANTS
Stock Option/Stock Issuance Plans
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 7,450,000 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 Plan (see below); no further options or
awards may be granted under the 2007 Plan.
During 2010, the Company adopted the 2010 Stock Option/Stock Issuance Plan (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 6,500,000 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.
In July 2010, the exercise prices of certain outstanding employee stock options previously
granted under the 2007 Plan were amended by the Companys board of directors to have an exercise
price of $0.50 per share. The amendments did not change the vesting schedules or any of the other
terms of the respective stock options. As a result of the repricing of the options affected by the
amendments, the Company will recognize a non-cash charge of $68,578 for the incremental change in
fair value of the repriced options. Of the $68,578, the Company recorded $37,087 as share-based
compensation for the year ended December 31, 2010 for the previously vested options. The remainder
of the balance, $31,491, related to the unvested options will be amortized over the remaining
vesting period of the related options. This repricing affected 24 employees who held 859,000 stock
options in July 2010.
The following table sets forth the share-based compensation expense:
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Stock compensation expense cost of net revenues |
$ | 57,466 | $ | 124,373 | ||||
Stock compensation expense sales and marketing |
148,649 | 347,556 | ||||||
Stock compensation expense research and development |
125,527 | 202,507 | ||||||
Stock compensation expense general and administrative |
484,977 | 1,009,048 | ||||||
Total stock compensation expense |
$ | 816,619 | $ | 1,683,484 | ||||
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A summary of common stock option activity under the 2007 Plan and the 2010 Plan for the year
ended December 31, 2010 is presented below:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Number of | Exercise | Contractual | Intrinsic | |||||||||||||
Shares | Price | Life | Value | |||||||||||||
Options outstanding January 1, 2010 |
6,033,188 | $ | 0.64 | |||||||||||||
Options granted |
2,960,500 | 0.50 | ||||||||||||||
Options exercised |
| | ||||||||||||||
Options forfeited |
(2,502,793 | ) | 0.65 | |||||||||||||
Options cancelled |
| | ||||||||||||||
Total options outstanding December 31, 2010 |
6,490,895 | $ | 0.57 | 8.22 | $ | | ||||||||||
Options exercisable December 31, 2010 |
3,248,371 | $ | 0.64 | 7.10 | $ | | ||||||||||
Options vested and expected to vest December 31, 2010 |
6,352,288 | $ | 0.57 | 8.18 | $ | | ||||||||||
Options available for grant under the 2010 Plan at December 31, 2010 |
3,720,500 | |||||||||||||||
Weighted average fair value of options granted |
$ | 0.38 | ||||||||||||||
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2010:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted Average | Weighted | |||||||||||||||||||
Remaining | Average | |||||||||||||||||||
Exercise | Contractual | Exercise | Weighted Average | |||||||||||||||||
Prices | Number of Shares | Life | Price | Number of Shares | Exercise Price | |||||||||||||||
(In years) | ||||||||||||||||||||
$0.50 |
3,545,583 | 9.23 | $ | 0.50 | 458,228 | $ | 0.50 | |||||||||||||
$0.60 |
1,945,312 | 7.03 | $ | 0.60 | 1,790,143 | $ | 0.60 | |||||||||||||
$0.77 |
1,000,000 | 6.95 | $ | 0.77 | 1,000,000 | $ | 0.77 | |||||||||||||
6,490,895 | 8.20 | $ | 0.57 | 3,248,371 | $ | 0.64 | ||||||||||||||
Summary of Assumptions and Activity
The fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton option pricing model for service and performance based awards, and a binomial
model for market based awards. The Company has only granted service based awards. In estimating
fair value, expected volatilities used by the Company were based on the historical volatility of
the underlying common stock of its peer group, and other factors such as implied volatility of
traded options of a comparable peer group. The expected life assumptions for all periods were
derived from a review of annual historical employee exercise behavior of option grants with similar
vesting periods of a comparable peer group. The risk-free rate used to calculate the fair value is
based on the expected term of the option. In all cases, the risk-free rate is based on the U.S.
Treasury yield bond curve in effect at the time of grant.
The assumptions used to calculate the fair value of options 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:
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Expected term (in years) |
6.1 | 5.5 | ||||||
Expected volatility |
93 | % | 94% 100 | % | ||||
Risk-free interest rate |
1.8 | % | 2.0 | % | ||||
Expected dividends |
| | ||||||
Forfeiture rate |
2.8 | % | 2.8 | % | ||||
Weighted-average grant date fair value per share |
$ | 0.38 | $ | 1.03 |
Upon the exercise of common stock options, the Company issues new shares from its authorized
shares.
At December 31, 2010, the amount of unearned stock-based compensation currently estimated to
be expensed from fiscal years 2011 through 2014 related to unvested common stock options is
approximately $1.3 million. The weighted-average period over which the unearned stock-based
compensation is expected to be recognized is
approximately 3.0 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
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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, noteholders and to non-employees for services rendered or to be rendered in the
future (See Notes 8 and 10). Such warrants are issued outside of any equity incentive plans of the
Company including the 2007 Plan and 2010 Plan. A summary of the warrant activity for the year ended
December 31, 2010 is presented below:
Weighted- | Weighted-Average | |||||||||||||||
Exercise | Contractual | Aggregate Intrinsic | ||||||||||||||
Number of Shares | Price | Life | Value | |||||||||||||
(In years) | ||||||||||||||||
Warrants outstanding January 1, 2010 |
10,746,143 | $ | 0.87 | |||||||||||||
Warrants granted (See Notes 8 and 10) |
4,397,639 | 0.70 | ||||||||||||||
Warrants exchanged |
(3,500,000 | ) | 0.70 | |||||||||||||
Warrants cancelled (See Note 8) |
(947,639 | ) | 0.93 | |||||||||||||
Warrants outstanding and
exercisable-December 31, 2010 |
10,696,143 | $ | 0.73 | 4.07 | $ | | ||||||||||
NOTE 12 COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases two facilities in Costa Mesa, California under non-cancelable operating
lease agreements that expired in 2010 but were extended on a month-to-month basis and will expire
in 2012. These leases require monthly lease payments of approximately $9,000 and $25,000 per month.
Lease expense for the facilities was approximately $384,000 and $448,000 for the years ended
December 31, 2010 and 2009, respectively.
Future minimum annual payments under these non-cancelable operating leases are as follows:
Years | ||||
Ending | ||||
December 31, | Total | |||
2011 |
305,000 | |||
2012 |
209,000 | |||
$ | 514,000 | |||
Indemnities and Guarantees
During the normal course of business, the Company has made certain indemnities and guarantees
under which it may be required to make payments in relation to certain transactions. These
indemnities include certain agreements with the Companys officers under which the Company may be
required to indemnify such person for liabilities arising out of their employment relationship. In
connection with its facility leases, the Company has indemnified its lessors for certain claims
arising from the use of the facilities. The duration of these indemnities and guarantees varies,
and in certain cases, is indefinite. The majority of these indemnities and guarantees do not
provide for any limitation of the maximum potential future payments the Company would be obligated
to make. Historically, the Company has not been obligated to make significant payments for these
obligations and no liability has been recorded for these indemnities and guarantees in the
accompanying consolidated balance sheets.
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
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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.
On June 25, 2008, the Company elected to upgrade or replace approximately 500 external
chargers (revision D or older) due to a chance that the chargers could fail over time. A failed
charger could result in degrading the life of the batteries or cause the batteries to be
permanently inoperable, or in extreme conditions result in thermal runaway of the batteries. The
charges were placed in service between January 2007 and April 2008. The Company notified customers
informing them of the need for an upgrade and began sending out new and/or upgraded chargers
(revision E) in July 2008 to replace all existing revision D or older chargers that are in the
field. The total costs of upgrading or replacing these chargers was approximately $68,000. All
returned chargers will be upgraded to revision E and resold as refurbished units. The Company has
completed the charger replacements as of December 31, 2010.
The following table presents the changes in the product warranty accrual included in accrued
expenses in the accompanying consolidated balance sheets as of and for the years ended December 31:
2010 | 2009 | |||||||
Beginning balance, January 1, |
$ | 235,898 | $ | 362,469 | ||||
Charged to cost of revenues |
130,916 | 129,183 | ||||||
Usage |
(201,173 | ) | (255,754 | ) | ||||
Ending balance, December 31 |
$ | 165,641 | $ | 235,898 | ||||
Legal Contingency
Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim (Orange County Superior
Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (Plaintiff)
filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki
Nam, the Companys CEO, and Jason Kim, the Companys former COO (collectively the Defendants) for
breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly
executed between Plaintiff and the Company. On August 24, 2009, Defendants filed a Demurrer to the
Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against
Defendants for breach of contract, fraud and common counts, seeking compensatory damages of
$470,599, attorneys fees, punitive damages, interest and costs. On October 27, 2009, Defendants
filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court
denied the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an answer to the
First Amended Complaint, and trial was set for July 30, 2010. On or about July 29, 2010, the case
was settled in its entirety. The Company agreed to pay compensatory damages, attorneys fees and
costs totaling $493,468, through monthly payments of $50,000, with 6% interest accruing from the
date of the settlement. Periodic payments are expected to be made through May 2011. The first
payment of $50,000 was made on August 3, 2010 and subsequent principal payments totaling $200,000
were made by the Company through December 31, 2010. Company recorded the entire settlement amount
of $493,468 as a note payable, $470,599 as a deposit on fixed assets and the remaining $22,869 as a
charge to legal expense. At December 31, 2010, the remaining settlement amount of $243,468 is
recorded as a note payable in the accompanying consolidated balance sheet. The Company has recorded
accrued interest of $4,126 at December 31, 2010.
Commencing January 1, 2011, the Company has failed to make the scheduled payments required by
the July 29, 2010 settlement agreement and stipulation for entry of judgment. The Plaintiff has
filed a motion for entry of judgment pursuant to the terms of the July 29, 2010 settlement
agreement and stipulation for entry of judgment, which if granted, would cause the acceleration of
all amounts owed under the settlement agreement. This motion is scheduled to be heard on April 21,
2011.
In the ordinary course of business, the Company may face various claims brought by third
parties in addition to the claim described above and may, from time to time, make claims or take
legal actions to assert the Companys rights, including intellectual property rights as well as
claims relating to employment and the safety or efficacy of the Companys products. Any of these
claims could subject us to costly litigation and, while the Company generally
believes that it has adequate insurance to cover many different types of liabilities, the
insurance carriers may deny coverage or the policy limits may be inadequate to fully satisfy any
damage awards or settlements. If this were to
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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.
NOTE 13 RELATED PARTY TRANSACTIONS
The following reflects the related party transactions during the years ended December 31, 2010
and 2009.
Controlling Ownership
Mr. Nam, the Companys CEO and Chairman of the Board of Directors, together with his children,
owns 57.2% of the outstanding shares of the Companys common stock.
Accounts Receivable
As of December 31, 2010 and 2009, the Company has receivables of $35,722 and $28,902,
respectively, due from Graphion Technology USA LLC (Graphion) related to consulting services
rendered and/or fixed assets sold to Graphion. During 2010, the Company sold fixed assets to
Graphion for a purchase price of $6,820, and there was no gain or loss recorded on the sale of the
fixed assets. Graphion is wholly owned by Mr. Nam, the Companys Chief Executive Officer . The
amounts due are non-interest bearing and are due upon demand.
As of December 31, 2010 and 2009, there were outstanding related party receivables of $0 and
$6,756, respectively, which primarily relate to receivables due from Mr. Nam, which represents the
rental obligation of Mr. Nam for his month-to-month lease of excess warehouse space at the
Companys facility in Costa Mesa, CA.
Fixed Assets
On December 20, 2010, the Company purchased a vehicle from Mr. Nam for cash to be used for
sales and service. The purchase price was $7,000 and was determined to be the estimated fair value
of the vehicle at the time of the purchase.
Related Party Payables
From time to time, the Company purchases batteries and outsources research and development
from Graphion. During the years ended December 31, 2010 and 2009, the Company purchased $151,973 of
research and development services, and $622,589 of parts, respectively, from Graphion and had an
outstanding accounts payable balance of $51,973 and $104,931 owed to Graphion at December 31, 2010
and 2009, respectively.
Accrued Salary
As of December 31, 2010, the Company owed Mr. Nam $40,000 of salary pursuant to his employment
agreement which is included in accrued expenses. Mr. Nam has elected to defer payment of this
amount until the next round of funding is received by the Company.
Intangible Assets
On March 31, 2008, the Company entered into a purchase agreement with Immersive, one of the
Companys stockholders, for a GeoImmersive License Agreement, pursuant to which Immersive granted
the Company the right to resell data in the Immersive mapping database. The Company paid Immersive
$1,000,000 for the license.
On March 16, 2009, the Company revised the terms of the agreement to revise the start of the
two year license to begin upon the completion and approval of the post-production data. The
revision includes automatic one-year renewals unless either party cancels within 60 days of the end
of the contract. Upon the execution of the revision,
the Company ceased amortizing the license and tested annually for impairment until the
post-production of the data is complete. At December 31, 2009, management performed its annual
review to assess potential impairment and
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deemed the intangible asset to be fully impaired, as
management decided to allocate the resources required to map the data elsewhere. As a result, the
remaining value of $625,000 was fully amortized as of December 31, 2009.
Notes Payable See Note 8
NOTE 14 SUBSEQUENT EVENTS
Subsequent events have been evaluated through the date that the consolidated financial
statements were issued. There are no reportable subsequent events, except as disclosed below.
Mr. Nam advanced $800,000 to the Company in accordance with his loan agreement as follows (see Note
8):
Date of Advance | Amount Advanced | |||
January 7, 2011 |
$ | 75,000 | ||
January 25, 2011 |
50,000 | |||
February 9, 2011 |
45,000 | |||
February 25, 2011 |
30,000 | |||
February 28, 2011 |
100,000 | |||
March 10, 2011 |
25,000 | |||
March 11, 2011 |
475,000 |
On February 4, 2011, the Companys Board of Directors approved the grant of stock options to certain
employees for the purchase of 3,250,000 shares of the Companys common stock at $0.50 per share.
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SIGNATURES
Pursuant to the requirements of section 13 or 15 (d) of the Securities Exchange Act of 1934,
the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
T3 MOTION, INC. |
||||
By: | /s/ Ki Nam | |||
Ki Nam, | ||||
President, Chief Executive Officer and Chief Operating Officer | ||||
Dated: March 31, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of the Company and in the capacities and
on the dates indicated.
Signature | Position | Date | ||
/s/ Ki Nam |
Chairman and Chief Executive Officer (principal executive officer) |
March 31, 2011 | ||
/s/ Kelly J. Anderson |
Executive Vice President and Chief Financial Officer (principal financial and accounting officer) |
March 31, 2011 | ||
/s/ David Snowden |
Director | March 31, 2011 | ||
/s/ Steven J. Healy |
Director | March 31, 2011 | ||
/s/ Mary S. Schott |
Director | March 31, 2011 | ||
/s/ Robert Thomson |
Director | March 31, 2011 |
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INDEX TO EXHIBITS
Exhibit | ||||||
Exhibit | No. Where | |||||
Number | Description | Filed | ||||
3.1
|
Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on March 15, 2006(1) | 3.1 | ||||
3.2
|
Bylaws adopted April 1, 2006(1) | 3.2 | ||||
3.3
|
Amendment to Bylaws, dated January 16, 2009(5) | 3.1 | ||||
3.4
|
Amendment to Certificate of Incorporation dated November 12, 2009(9) | 3.4 | ||||
3.5
|
Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock dated November 12, 2009(9) | 3.5 | ||||
10.1
|
Standard Industrial/Commercial Multi-Tenant Lease between Land Associates Trust, E.C. Alsenz, Trustee and T3 Motion, Inc., for 2990 Airway Avenue, Costa Mesa, CA 92626, dated February 14, 2007(1) | 10.2 | ||||
10.2
|
Rent Adjustment, Standard Lease Addendum between Land Associates Trust, E.C. Alsenz, Trustee and T3 Motion, Inc., for 2990 Airway Avenue, Costa Mesa, CA 92626, dated February 14, 2007(1) | 10.3 | ||||
10.3
|
Option to Extend, Standard Lease Addendum between Land Associates Trust, E.C. Alsenz, Trustee and T3 Motion, Inc., for 2990 Airway Avenue, Costa Mesa, CA 92626, dated February 14, 2007(1) | 10.4 | ||||
10.4
|
Addendum to the Air Standard Industrial/Commercial Multi-Tenant Lease between Land Associates Trust, E.C. Alsenz, Trustee and T3 Motion, Inc., for 2990 Airway Avenue, Costa Mesa, CA 92626, dated February 14, 2007(1) | 10.5 | ||||
10.5
|
Standard Sublease Agreement between Delta Motors, LLC and T3 Motion, Inc. for 2975 Airway Avenue, Costa Mesa, CA 92626, dated November 1, 2006(1) | 10.6 | ||||
10.6
|
Form of Distribution Agreement(1) | 10.7 | ||||
10.7+
|
Director Agreement between David L. Snowden and T3 Motion, Inc., dated February 28, 2007(1) | 10.8 | ||||
10.8+
|
Director Agreement between Steven J. Healy and T3 Motion, Inc., dated July 1, 2007(1) | 10.9 | ||||
10.9+
|
Director Indemnification Agreement between Steven J. Healy and T3 Motion, Inc., dated July 1, 2007(1) | 10.10 | ||||
10.10
|
Securities Purchase Agreement between T3 Motion, Inc. and Immersive Media Corp., dated December 31, 2007(1) | 10.11 | ||||
10.11
|
Promissory Note issued by T3 Motion, Inc. to Immersive Media Corp., dated December 31, 2007 in the original principal amount of $2,000,000(1) | 10.12 | ||||
10.12
|
Common Stock Purchase Warrant issued by T3 Motion, Inc. to Immersive Media Corp., dated December 31, 2007(1) | 10.13 | ||||
10.13
|
Investor Rights Agreement between T3 Motion, Inc. and Immersive Media Corp., dated December 31, 2007(1) | 10.14 | ||||
10.14
|
Securities Purchase Agreement between T3 Motion, Inc. and certain Purchasers, dated March 28, 2008(1) | 10.15 | ||||
10.15
|
Registration Rights Agreement between T3 Motion, Inc. and certain Purchasers, dated March 28, 2008(1) | 10.16 |
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Exhibit | ||||||
Exhibit | No. Where | |||||
Number | Description | Filed | ||||
10.16
|
GeoImmersive Image Data & Software Licensing Agreement between the Company and Immersive Media Company, dated July 9, 2008(2) | 10.20 | ||||
10.17
|
Amendment to Promissory Note issued by the Company in favor of Immersive Media Corp., dated as of December 19, 2008(3) | 10.1 | ||||
10.18
|
Securities Purchase Agreement between the Company and Vision Opportunity Master Fund, Ltd. (Vision), dated December 30, 2008(4) | 10.1 | ||||
10.19
|
Form of 10% Secured Convertible Debenture Due December 30, 2008(4) | 10.2 | ||||
10.20
|
Subsidiary Guarantee, dated December 30, 2008(4) | 10.4 | ||||
10.21
|
Security Agreement, dated December 30, 2008 between the Company and the holders of the Companys 10% Secured Convertible Debentures(4) | 10.5 | ||||
10.22
|
Form of Lock-up Agreement, dated December 30, 2008(4) | 10.6 | ||||
10.23
|
Director Offer Letter to Mary S. Schott from Company, dated January 16, 2009(5) | 10.1 | ||||
10.24
|
Distribution Agreement, dated November 24, 2008 by and between the Company and CT&T(7) | 10.28 | ||||
10.25
|
Settlement Agreement dated as of February 20, 2009 by and between the Company on the one hand, and Sooner Cap, Albert Lin and Maddog Executive Services on the other(7) | 10.29 | ||||
10.26
|
Distribution Agreement dated as of March 20, 2009 by and between the Company and Spear International, Ltd.(6) | 10.1 | ||||
10.27
|
Amendment to GeoImmersive Image Data and Software License Agreement by and between the Company and Immersive Media Company dated as of March 16, 2009(7) | 10.31 | ||||
10.28
|
Securities Purchase Agreement dated as of February 23, 2009 between the Company and Ki Nam(7) | 10.32 | ||||
10.29
|
10% Convertible Note issued by the Company to Ki Nam in the original principal amount of up to $1,000,000(7) | 10.33 | ||||
10.30
|
Series E Common Stock Purchase Warrant issued by the Company to Ki Nam(7) | 10.34 | ||||
10.31
|
Amendment to Debenture, Warrant and Securities Purchase Agreement between the Company and Vision(7) | 10.35 | ||||
10.32
|
Securities Purchase Agreement dated as of May 28, 2009 between the Company and Vision, dated May 28, 2009(8) | 10.1 | ||||
10.33
|
Form of 10% Secured Convertible Debenture issued by the Company to Vision, dated May 28, 2009(8) | 10.2 | ||||
10.34
|
Subsidiary Guarantee, dated as of May 28, 2009(8) | 10.4 | ||||
10.35
|
Security Agreement between the Company and Vision dated as of May 28, 2009(8) | 10.5 | ||||
10.36
|
Securities Purchase Agreement between the Company and Vision, dated as of December 30, 2009(10) | 10.1 | ||||
10.37
|
Form of 10% Secured Convertible Debenture issued by the Company to Vision, dated as of December 30, 2009 in the original principal amount of $3,500,000(10) | 10.2 | ||||
10.38
|
Form of Series G Common Stock Purchase Warrant issued by the Company dated as of December 30, 2009(10) | 10.3 | ||||
10.39
|
Subsidiary Guarantee dated as of December 30, 2009, issued by T3 Motion, Ltd.(10) | 10.4 |
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Exhibit | ||||||
Exhibit | No. Where | |||||
Number | Description | Filed | ||||
10.40
|
Security Agreement dated as of December 30, 2009, among the Company, T3 Motion, Ltd. and Vision(10) | 10.5 | ||||
10.41
|
Securities Exchange Agreement dated as of December 30, 2009, among the Company, Vision and Vision Capital Advantage Fund, L.P. (VCAF)(10) | 10.6 | ||||
10.42
|
Lock-Up Agreement dated as of December 30, 2009 between the Company and Ki Nam(10) | 10.7 | ||||
10.43
|
Stockholders Agreement dated as of December 30, 2009, among the Company, Ki Nam, Vision and VCAF(10) | 10.8 | ||||
10.44
|
Amendment No. 2 dated as of March 31, 2010 to Immersive Media Promissory Note (11) | 10.1 | ||||
10.45
|
Employment Agreement dated as of January 1, 2010 between the Company and Kelly Anderson (11) | 10.2 | ||||
10.46
|
2010 Stock Option/Stock Issuance Plan (12) | 10.1 | ||||
10.47 |
Employment Agreement dated as of August 13, 2010 between the Company and Ki Nam (14) | 10.1 | ||||
10.48
|
Settlement Agreement dated as of July 29, 2010 and executed on August 3, 2010 by and among the Company, Ki Nam, Jason Kim and Preproduction Plastics, Inc. (13) | 10.2 | ||||
10.49
|
Amendment No. 1 to 10% Senior Secured Convertible Debenture dated as of December 31, 2010 between the Company and Vision(15) | 10.1 | ||||
10.50
|
Securities Exchange Agreement dated December 31, 2010 between the Company and Vision(15) | 10.2 | ||||
10.51
|
Unsecured Promissory Note dated September 30, 2010 in the original principal amount of $1.0 million issued by the Company to Alfonso G. Cordero and Mercy B. Cordero, Trustees of the Cordero Charitable Remainder Trust(16) | 10.1 | ||||
10.52
|
2007 Stock Option/Stock Issuance Plan (1) | 10.1 | ||||
10.53*
|
Form of Stock Option Agreement for use with 2007 Stock Option/Stock Issuance Plan | |||||
10.54*
|
Form of Stock Option Agreement for use with 2010 Stock Option/Stock Issuance Plan | |||||
10.55
|
10% Promissory Note dated as of February 24, 2011 in the original principal amount of up to $2.5 million issued to Ki Nan(17) | 10.1 | ||||
14.1*
|
Code of Conduct and Ethics | |||||
21.1
|
List of Subsidiaries(1) | |||||
31.1*
|
Section 302 Certificate of Chief Executive Officer | |||||
31.2*
|
Section 302 Certificate of Chief Financial Officer | |||||
32.1*
|
Section 906 Certificate of Chief Executive Officer | |||||
32.2*
|
Section 906 Certificate of Chief Financial Officer |
* | Filed herewith. | |
| A contract, compensatory plan or arrangement in which directors or executive officers are eligible to participate. | |
| Confidential treatment has previously been granted by the SEC for certain portions of the referenced exhibit pursuant to Rule 406 under the Securities Act. | |
(1) | Filed with the Companys Registration Statement on Form S-1 filed on May 13, 2008. | |
(2) | Filed with the Companys Amendment No. 1 to the Registration Statement on Form S-1 filed on July 14, 2008. | |
(3) | Filed with the Companys Current Report on Form 8-K filed on December 31, 2008. | |
(4) | Filed with the Companys Current Report on Form 8-K filed on January 12, 2009. |
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(5) | Filed with the Companys Current Report on Form 8-K filed on January 20, 2009. | |
(6) | Filed with the Companys Current Report on Form 8-K filed on March 26, 2009. | |
(7) | Filed with the Companys Annual Report on Form 10-K filed on March 31, 2009. | |
(8) | Filed with the Companys Current Report on Form 8-K filed on June 5, 2009. | |
(9) | Filed with the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and filed on November 16, 2009. | |
(10) | Filed with the Companys Current Report on Form 8-K filed on January 6, 2010. | |
(11) | Filed with the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 and filed on May 17, 2010. | |
(12) | Filed with the Companys Current Report on Form 8-K filed on July 7, 2010. | |
(13) | Filed with the Companys Current Report on Form 8-K filed on August 9, 2010. | |
(14) | Filed with the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 16, 2010. | |
(15) | Filed with the Companys Current Report on Form 8-K filed on January 6, 2011. | |
(16) | Filed with the Companys Current Report on Form 8-K filed on January 21, 2011. | |
(17) | Filed with the Companys Current Report on Form 8-K filed on March 1, 2011. |
75