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EX-32.2 - EXHIBIT 32.2 - ALTAIR NANOTECHNOLOGIES INCex32-2.htm
EX-32.1 - EXHIBIT 32.1 - ALTAIR NANOTECHNOLOGIES INCex32-1.htm
EX-31.2 - EXHIBIT 31.2 - ALTAIR NANOTECHNOLOGIES INCex31-2.htm
EX-31.1 - EXHIBIT 31.1 - ALTAIR NANOTECHNOLOGIES INCex31-1.htm
EX-16.1 - EXHIBIT 16.1 - ALTAIR NANOTECHNOLOGIES INCex16-1.htm
EX-10.51 - EXHIBIT 10.51 - ALTAIR NANOTECHNOLOGIES INCex10-51.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

[X]

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE YEAR ENDED DECEMBER 31, 2016

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No.   1-12497

 

ALTAIR NANOTECHNOLOGIES INC.

 

(Exact Name of Registrant as Specified in Charter)

 

Delaware

 

33-1084375

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

204 Edison Way

Reno, Nevada 89502-2306

Registrant’s telephone number,

including area code: 775-856-2500

92882

(Address of Principal Executive Offices)

  

(Zip Code)

 

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 [  ]  No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes [X]  No []

 

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 [ ]  No [X]

 

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 []  No [X]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s 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. [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer

 

☐ 

 

Accelerated filer

 

☐ 

Non-accelerated filer

 

☐ 

 

Smaller reporting company

 

[x]  

       

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes [  ]  No [X] 

   

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, as of the last business day of the quarter ended June 30, 2016, was approximately $4.9 million.

 

As of May 15, 2017, there were 11,606,735 shares of the registrant’s common stock, $0.001 par value per share, outstanding.

 

 
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ALTAIR NANOTECHNOLOGIES INC.

 

FORM 10-K

 

For the Year Ended December 31, 2016

 

 

 

 

INDEX

 

 

 

 

 Page

PART I

ITEM 1.

Business

4

ITEM 1A.

Risk Factors 

14

ITEM 1B.

Unresolved Staff Comments 

25

ITEM 2.

Properties

25

ITEM 3.

Legal Proceedings

25

ITEM 4.

Mine Safety Disclosures

26

 

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

26

ITEM 6.

Selected Financial Data

27

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

36

ITEM 8.

Financial Statements and Supplementary Data

37

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

75

ITEM 9A.

Controls and Procedures

76

ITEM 9B.

Other Information

78

 

PART III

ITEM 10.

Directors, Executive Officers and Corporate Governance

79

ITEM 11.

Executive Compensation

84

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

86

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

88

ITEM 14.

Principal Accounting Fees and Services

89

 

PART IV

ITEM 15.

Exhibits, Financial Statements Schedules

90

 

 
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 Explanatory Note

 

Altair Nanotechnologies Inc. (the “Company” and versions of “we”) is filing this Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (this “Report”) in order to comply with certain obligations that may have applied to it. On November 17, 2016, the SEC found that the Company had not complied with a settlement agreement and issued an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934, as a result of which the registration of the common stock of the Company under Section 12 of the Exchange Act was revoked. Except as otherwise required and permitted, the Company does not expect to file additional periodic reports.  

 

Note About Forward-Looking Statements

 

This Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act that involve risks and uncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in Item 1—“Business” and Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may also appear in other areas of this Report. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements regarding or assuming our ability to continue as a going concern; any statements regarding development of customers in China or elsewhere; statements concerning our customers and diversification of our customer base; statements concerning new products or services; statements related to change of control transactions and how any transaction may affect our business or financial situation; statements related to future economic conditions or performance; statements as to industry trends; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” or “plan,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed under Part I, Item 1.A. “Risk Factors” in this Report, and such forward looking statements are qualified in their entirety by reference to such risk factors. Furthermore, such forward-looking statements speak only as of the date of this 10-K. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. New factors emerge from time to time, and their emergence is impossible for us to predict. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

 

PART I

 

 

Unless the context requires otherwise, all references to “Altair,” “we,” “Altair Nanotechnologies Inc,” or the “Company” in this Report refer to Altair Nanotechnologies Inc. and all of its consolidated subsidiaries. Altair currently has one wholly owned subsidiary, Altair U.S. Holdings, Inc. Altair U.S. Holdings, Inc. directly or indirectly wholly owns Altairnano, Inc. Altairnano, Inc. directly wholly owns Altair Nanotechnologies (China) Co., Ltd., a Wholly Foreign Owned Enterprise (“WOFE”) in China (“Altair China”) and Altair China directly wholly owns Northern Altair Nanotechnologies Co., Ltd., a domestic company in China (“Northern Altair”).

 

We have registered the following trademarks: Altair Nanotechnologies Inc® and Altairnano®. Any other trademarks and service marks used in this Report are the property of their respective holders.

 

 

ITEM 1: BUSINESS

 

We are a Delaware corporation that develops, manufactures and sells nano lithium titanate (“nLTO”) materials, batteries and energy storage systems (referred to as “ESS” or by our brand name “ALTI-ESS”). Our nano lithium titanate battery systems offer higher power density, longer cycle life, rapid charge and discharge capabilities, a wider operating temperature range and higher levels of safety than conventional lithium-ion batteries. We target applications that effectively utilize the key attributes of our technology, and these applications can be found primarily in the electric grid, transportation (commercial vehicles), and industrial market segments.

 

 
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             Since 2012, we have focused on transitioning our operations from the United States to China. As of December 31, 2016, we have in place a phase three nLTO production line with an annual production capacity of 3,500 metric tons.

 

We do not currently manufacture our batteries, but our Original Equipment Manufacturer (“OEM”) cell producer’s capacity can reach 70,000 Altair format cells per year. Sometime in the future, we expect to validate another OEM cell producer to reduce dependency on one supplier, which we expect will provide competition between suppliers and reduce our costs. We also have in place two operational battery module production lines with a total capacity of approximately 6,000 modules per year. As of the date of this Report, we manufacture all of our products in China and sell all of our products from China

 

By building manufacturing and assembly facilities in Wu’an, China for our nLTO material, modules and soon our energy storage systems, we have centered the whole supply chain in China. In adopting this strategy, we expect to achieve:

 

 

Reduction of production costs

 

Better quality control

 

Decreased shipping costs due to all production facilities being located in one central location

 

Centralized management control and internal communications, and

 

Centralized sales management

 

 

Primary Market Areas

 

China Market

 

Our primary business in the China market is to sell our nLTO to Hebei Yinlong New Energy Co., LTD (“YLE”) and Zhuhai Yinlong New Energy Co., LTD (“ZYLE”) for use by YLE and ZYLE in their production batteries to be used in electric buses it manufactures and sells. ZYLE is our majority shareholder and YLE is a subsidiary of ZYLE.  

 

In the electric grid market, Northern Altair won a bid for a nLTO battery module rack system designed specifically for a China State grid 2MW Solar-wind ESS demonstration project. Total value is approximately $2.4 million and this project represents our first bid won in the China grid market. The project was completed in January 2017, subject to warranty. China has announced their “Energy Saving and New Energy Auto Industry Development Plan (2012-2020)" issued in 2012 which provides: by 2020, China aims to achieve manufacturing capacity of pure electric car and plug-in hybrid car for 2 million sets, and the accumulative output and sale of these cars exceeds 5 million sets. The development of fuel cell car and automotive hydrogen energy industry will be in sync with the international society. China announced their “Energy Development Strategic Action Plan (2014-2020)” in 2014. By 2020, China aims to control its primary energy consumption under 4.8 billion tons standard coal to limit greenhouse gas emissions, increase the share of non-fossil fuels to at least 15% of primary energy consumption, natural gas to more than 10%, and restrict coal to beneath 62%. China is investing huge amounts of money to support new energy projects, aims to achieve installed wind power capacity of 0.2 billion KW, installed photovoltaic capacity of about 0.1 billion KW, and geothermal energy usage for 50 million tons of standard coal by 2020.

 

European Market

 

Our marketing and sales effort in the European market are focused on the transportation industry. Examples of our customers include the following:

 

Electric Bus (“EV Bus”): Hybricon in Sweden, a Swedish public company, produces a high standard EV Bus incorporated with our nLTO battery modules. In their EV Buses, our modules operate in -30+°C winter environment in Sweden. In addition, there are some traditional EV Bus conversion companies also using our batteries.

Trolley bus: We sell nLTO battery modules in three Middle Europe countries: Czech Republic, Slovakia and Poland. We provide nLTO battery modules to Skoda, Ekowa Electric and Solaris Bus & Coach S.A. Since 2014, our nLTO battery modules have been successfully operating in transportation vehicles, all produced by middle European producers: 6 Trolley buses in Castellón; 2 Trolley buses in Cagliari; 12 Trams in Konya; 1 Tram in Beijing; 1 tram and 1 pure EV Bus in Pearson; and 2 trolley buses in Zlin.

 

 
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Port container handling machine: Cargotec in Finland, is a subsidiary company of Kalmar the world leader of port handling solutions. Our batteries have been successfully used in their hybrid systems and machines, which are used in the development of their pure electric power systems. Cargotec signed long term purchase agreement with Altair in 2013, for a period of 3 years and thereafter for 1 year at a time under the terms and termination provisions of the agreement.

In 2016, we delivered approximately 1,249 modules to our European customers with a plan to increase this quantity to approximately 3,232 modules to our European customers in 2017.

 

The EU announced a “2020 Energy Strategy” in 2010. By 2020, the EU aims to reduce its greenhouse gas emissions by at least 20%, increase the share of renewable energy to at least 20% of consumption, and achieve energy savings of 20% or more. All EU countries must also achieve a 10% share of renewable energy in their transport sector. The EU is investing huge amounts of money to support new energy projects in EU countries. Many new energy companies or research institutes will get funding from the strategy. The amount of capital available to companies in the industry has increased and is helping to lead the new energy industrialization. The European market has 98% of Altair’s battery module market share. Over the long term, we plan to seek to sell ESS in Europe.

 

Marketing

 

We market our product primarily through the reputation of our products, providing samples and relationships we have generated over time. As capital becomes available, we may commence a more active marketing campaign.

 

Global Trends Driving Growth in Our Markets

 

 

Driver

 

 

Impact

 

 

Solution

 

 

 

 

 

 

 

 

 

 

 

Energy Security

 

 

Smart Grid

 

 

Batteries manage frequency regulation, reducing inefficient thermal generation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emissions Reduction / Global Warming

 

 

Growth of Renewable Energy

 

 

Batteries manage ramping and smoothing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Costs of Fossil Fuels

 

 

Electric and Hybrid Vehicles

 

 

High power batteries enable cost effective PHEV and EV with fast charging

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sustainability

 

 

Reducing dependency on lead-acid technology

 

 

Environmentally-friendly relative to lead acid

 

 

 

 

 

 

 

 

 

 

 

 

Recent Achievements and Key Targets

  

Since the beginning of 2016, we have achieved or began focusing on the following:

 

 

In 2017, we reached a preliminary settlement in our derivative proceeding, subject to court approval; the hearing is scheduled for August 2017.

 

In 2016, we built the new 3,500 metric ton nLTO production line equipped to produce in 2017.

 

In 2016, we delivered approximately 1,249 modules to European clients with plans to increase this quantity to 3,232 modules to customers in 2017.

 

 
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We are submitting proposals to customers Altair Energy Storage Systems (“ESS””) in 2017, as we continue to focus on developing the energy storage market for China, as well as focusing on the European and American market. We are actively responding to customer inquiries for our products and plan to sell a higher volume in 2017.

 

In 2016, we began the process establishing a research and development team testing facility in China to carry forward continued product research and development to enhance and control costs even further for the products we already produce.

 

We offer a range of products for 2017 including: nLTO powder, cells, modules, packs, configurable Power-Rack systems, and turn-key energy storage systems (ESS) for our target customers. Our standard module size is 24V 70 Amp, however higher, voltages are available.

 

We also are working towards improving and developing our opportunities in the ESS market, while seeking to expand our footprint in the European EV Bus, equipment handling machines and ESS markets. 

 

Primary Products and Target Energy Markets

 

Primary Products

 

We have developed, and continue to develop, through our primary materials science research, a lithium-ion battery chemistry using nanotechnologies to create materials offering unique electrochemistry properties for rechargeable batteries. We refer to this material as nano lithium titanate, or nLTO, and it is applied to the battery anode. Our nLTO battery cells offer 5 to 11 times greater cycle life than conventional lithium-ion technologies, an ability to rapidly discharge and charge, an ability to operate in extremely cold and hot temperatures, and a greater margin of safety than conventional lithium-ion technologies. Our Gen 4 products have improved on these aspects. Our nLTO batteries are designed to focus on high power applications, and are ideally suited for fast response applications in the electric grid segment for grid stability, hybrid and all-electric vehicles, and industrial applications.

 

We offer a range of products for 2017 including: nLTO powder, cells, modules, packs, configurable PowerRack systems, and turn-key energy storage systems (ESS) for our target customers. Our standard module size is 24V, however higher voltages are available.

 

 

Target Energy Related Markets

 

Transportation (Commercial Vehicles)

 

Large cities, counties and transit authorities are increasingly turning to electric and hybrid EV Buses to reduce pollution and reliance on diesel fuel for their transportation systems, especially in markets like China where there are significant levels of pollution. Commercial vehicle manufacturers, including medium-duty and heavy-duty trucks, are likewise evaluating hybrid systems to improve fuel economy and in some instances run battery-only systems at low speeds. At this stage of the market development, electric and hybrid electric vehicles generally cost more than their conventional counterparts, although the upfront cost may be offset by lower operating costs and a potentially longer operating life. Proterra, a U.S based EV Bus manufacturer had one of its all-EV Buses using our batteries tested at the Altoona Test Track by Penn State University and demonstrated a 17.5 to 29.5 miles per gallon (mpg) fuel equivalent vs. a normal diesel bus that achieved under 4 mpg. This difference translates into a fuel savings of about $350,000 over the life of the bus assuming a fuel cost of $3.50 per gallon. This is in addition to the savings in maintenance costs over the life of the bus, as a result of fewer mechanical systems and moving parts to maintain. We believe that cities, counties and commercial vehicle operators are willing to accept the higher upfront costs in order to benefit from the expected savings in long-term operating costs and potentially longer operating life, as well as the environmental benefits.

 

Electric and hybrid-electric commercial vehicles require a significant amount of power, operate throughout the day, have a long-expected life and run in extreme temperature ranges. The relative strengths of our nLTO batteries, including the high levels of power, rapid charge and discharge rates, long cycle life and ability to function at temperature extremes, are particularly well suited for electric and hybrid commercial vehicles, giving us what we believe is a compelling competitive advantage in this market.

 

 
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With the growing concern regarding the release of pollutants associated with burning fossil fuels, the attractiveness of all electric and hybrid EV Buses is rapidly growing. We are attempting to establish our nLTO batteries as the power source of choice in this emerging market. Given the projected growth of EV Buses in the Asia Pacific region, we view China as one of our largest market opportunities within the transportation segment.

 

Electric Grid

 

Globally, electric utilities and power generation companies seek to maintain high levels of grid stability while seeking cost effective ways to accurately match electricity generation with demand. Essentially, there is no inventory of electricity; demand and generation must match. While the industry is capable of doing this from hour to hour, variations in load and demand from minute to minute cannot be accurately forecasted. When imbalances occur, the frequency (60 Hz in the U.S) can vary and must be balanced within very tight tolerances. Maintaining these tolerances is typically achieved through the use of auxiliary generators. If the load is either higher or lower than the power being generated, an auxiliary generator is either started or stopped. However, it takes these generators from generally five to fifteen minutes to ramp up to full efficient operation or to shut down. During that period, the load may change directions and the grid operator then must direct another auxiliary generator to shut down or ramp up. This is a very inefficient process with the grid operators constantly chasing a variable load. The process of managing these very short-term changes in energy demand is referred to as “frequency regulation.”

  

Utilities can address frequency regulation issues by maintaining on-line generating capacity at a level that is always higher than expected peak demand; however, this can be an expensive solution, particularly where natural gas, diesel and other alternative fuels are not affordable alternatives. Most U.S. utilities are required to maintain between 1% - 1.5% of their peak load capacity to provide frequency regulation. In many foreign countries where the electric grid is not as well developed as it is in the U.S., utilities need to reserve up to 5% or more of their capacity strictly to provide frequency regulation.

 

To reduce the costs of providing frequency regulation, utilities and grid operators are seeking “fast response” energy storage systems, and battery-based systems can offer significant advantages over slower response sources of conventional generation. When supply exceeds demand for a short period, fast response storage systems deliver electric energy back to the grid for a short period to give operators time to reroute energy from another power generator or power-up a new power source. Our large-scale nLTO battery systems can react in milliseconds and meet this need.

 

The need for a fast response energy storage technology, like our large-scale nLTO ESS, is increased by the accelerated use of renewable energy sources. Photo Voltaic (PV) solar and wind power generation by nature are intermittent and unpredictable sources of energy that can fluctuate widely in a very short period of time. For example, it is not uncommon for a PV array to fluctuate +/- 50% in less than 90 seconds. With a small rooftop array, it isn’t an issue, because the size of the generator is too small to matter. However, with a 50+ megawatt array, problems arise as the electric grid isn’t currently built to handle this kind of a fluctuation. According to the Federal Energy Regulatory Commission, as of December 2016, twenty-nine states, the District of Columbia and three territories require the integration of renewable energy sources into the power grid through legislated renewable portfolio standards, while eight states and one territory have set renewable energy goals.

 

Many of these states have established targets requiring the integration of renewable generation sources equal to or exceeding 25% of total generation within the next decade. California is a good case in point. California has a mandate to generate 33% of its electricity from renewable energy sources by 2020. The mandated adoption of these renewable energy sources is likely to increase the need for effective, efficient, clean energy storage technologies to provide frequency regulation services and maintain the reliability and stability of the associated electric grid systems. For example, California Assembly Bill 2514 enacted in 2010, requires the California Public Utilities Commission (CPUC) to establish energy storage procurement targets for California load serving entities in 2015 and 2020, if cost effective and commercially viable by October 2013. Implementation of AB 2514 is underway, and in February 2013, CPUC approved a long-term procurement decision and ordered Southern California Edison (SCE) to procure between 1,400 and 1,800 megawatts of energy resource capacity in the Los Angeles basin to meet long term local capacity requirements by 2021. Of this amount, CPUC required SCE to procure at least 50 megawatts from energy storage resources, as well as up to an additional 600 megawatts of capacity from preferred resources, which include energy efficiency, demand response and distributed generation, along with additional energy storage resources.

 

 
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In our view, the key to addressing this market is to continually improve the performance of our energy storage systems, while reducing their cost (or the perception of their higher cost) to the end user. One key advantage that our nLTO batteries have is their projected higher cycle life, which can be four to six times higher than that of certain competing lithium battery technologies, such as lithium iron phosphate. Accordingly, we seek to market our products not on an initial cost of acquisition basis or even on a watt-hours per kilogram basis, but rather on the total cost of ownership over time. In addition, we seek to market the fast response capabilities of our battery, the value of which cannot be captured on a simple watt-hours per kilogram basis. The importance of fast response resources is beginning to gain considerable traction, as evidenced by the Federal Energy Regulatory Commission’s (FERC) Order 755, whose “pay for performance” rules not only value the capacity of frequency regulation services, but also its speed and accuracy. We believe that these pay for performance rules will help mitigate the impact that low natural gas prices have had on the U.S. energy storage market for the electric grid.

 

Industrial

 

The industrial market segment encompasses a broad range of applications, ranging from the use of battery systems on cargo cranes to the use of battery systems with heavy industrial equipment. We believe that our high-power batteries can play an important role within this market segment. For example, our battery modules have been successfully integrated into the power system of Cargotec’s port handling machine. The company is a subsidiary of Kalmar who is the world leader of port handling solution provider.

 

Key Features of Our nLTO Batteries

 

One of the principal advantages of our nLTO battery is its rapid charge and discharge rate. The charge rate is the rate at which a battery’s energy is replenished, and the discharge rate is the rate at which the energy stored in a battery is transferred (or, in the case of self-discharge, leaked) out. Through the optimization of materials used in our nLTO battery cells, our current cells are capable of recharge times of 10 minutes to 95% or more of initial battery capacity. This rapid charge capability is important in our target markets.

 

Our nLTO batteries have both a longer cycle life and calendar life than commercially available rechargeable battery technologies such as conventional lithium ion, nickel-metal hydride (NiMH) batteries and nickel cadmium (NiCd) batteries. The ability of any rechargeable battery to store energy will diminish as a result of repeated charge/discharge cycles. A battery’s “cycle life” is the number of times it can be charged and discharged without a significant reduction in its energy storage capacity. Our nLTO is termed a zero-strain material, meaning that the material essentially does not change shape upon the entry and exit of a lithium ion in the material. Graphite, the most common material in conventional lithium ion batteries, will expand and contract as much as 8% with each charge/discharge cycle. This constant change in volume rapidly breaks down the battery resulting in significantly shorter calendar and cycle life than with our nLTO anodes. Our current generation of cells can achieve 16,000 cycles, which represents a significant improvement over conventional lithium batteries, which typically retain that level of charge capacity only through 2,500 to 4,000 deep charge/discharge cycles. Depending on the actual duty cycles and temperature, those figures can drop even lower.

 

Our nLTO also represents a breakthrough in low and high-temperature performance. Nearly 90% of room temperature charge retention is realized at -30°C from our nLTO battery cells. In contrast, common lithium ion technology possesses virtually no charging capabilities at this low temperature, and the other rechargeable battery types such as lead acid, NiMH and NiCd take 10 to 20 times longer to charge at this low temperature.

 

We also believe that relative safety is one of the strengths of our nLTO batteries. Any battery cell or large battery unit with lithium ion cell technology must take into account safety considerations, the most important of which is thermal runaway.  Thermal runaway is the temperature at which the battery chemistry will break down causing the battery to overheat and potentially explode or catch fire. This temperature is often referred to as the critical temperature.  Critical temperature for lithium ion battery cells using conventional graphite anodes is around 130° C, a direct result of chemical reaction between the graphite and the electrolyte.  With our current nLTO anode in place of graphite and an appropriate cathode material, that critical temperature will be close to 200° C, an increase in safety margin of approximately 70° C.  Materials we are using in our lab operate at 250° C before the critical temperature is reached. The batteries we and our partners are developing for high power applications often consist of dozens or even thousands of battery cells working together as part of a single modular battery unit. When a large number of cells are aggregated into a single battery unit, the likelihood of, and risks associated with, thermal runaway increases.  In this context, we believe that the additional temperature margin our individual battery cells experience before reaching the critical temperature makes our battery cells better suited than competing lithium ion batteries for the high-power applications we are targeting. 

 

 
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The current generation of batteries made with our nLTO exhibit lower energy density at room temperatures than conventional lithium ion systems, although we are developing newer generations of nLTO batteries, which will increase our energy density. Energy density is normally described as watt-hours per kilogram or watt-hours per liter and refers to the available energy per unit weight or per unit volume. A battery with high energy density will deliver more energy per unit weight or volume than a battery with lower energy density. Our batteries made with our nLTO have energy densities, watt-hours per kilogram, that are better than lead acid, NiCd and NiMH batteries and approximately 50-70% of conventional lithium ion batteries when operated at room temperature. However, this energy density disadvantage is significantly less compared to conventional lithium ion batteries as the operating temperature moves away from room temperature, particularly to colder environments, and less significant in environments such as large vehicles and utilities in which battery volume is not a significant issue. When the end use of the battery requires constant performance across a wide range of temperatures, such as the need for a hybrid bus to function comparably in both winter and summer, our nLTO cells may be the preferred solution. Also, conventional lithium ion batteries prefer to cycle between approximately 30% and 80% state of charge to achieve optimum cycle life. As a result, they only use about 50% of their nominal available energy. Our nLTO batteries, on the other hand, are not so limited and as a result can use approximately 90% of their nominal available energy. Given this, we believe that comparisons of battery technologies on a watt-hours per kilogram basis can be misleading, as nLTO batteries offer a greater range of actual usable energy, along with four-to-six times the cycle life across a wider range of operating conditions.

 

Sources of Supply and Raw Materials

 

An important consideration, as we begin to grow our revenue stream, is to ensure that we have access to the various components and raw materials we need to manufacture and assemble our various products. As we anticipate larger orders, establishing multiple sources for key components is becoming much more important to us. Moreover, a key focus of our business plan is to aggregate our supply chain not only to reduce cost, but also to accelerate our ability to deliver products on a timely basis to our customers.

 

The basic building block for our battery cell’s anode is nLTO powder. We use compounds of lithium and of titanium to manufacture our nLTO. We currently source our lithium compound from the largest producers in China and do not foresee any problems in scaling up our purchases as our volume of business increases. Meanwhile we are developing and qualifying more suppliers in U.S., Australia and China. From end of 2015, Lithium material price has been rising rapidly, and our company has to be ready for solutions. We currently source our titanium compound from a supplier who is a global leader in the field and a Chinese domestic supplier, and we are in the process of identifying and qualifying additional sources for this key material. The supply of our cathode material of our cells supply is from a single supplier; therefore, we are planning to test materials from another Japanese supplier. At this point we are not anticipating any problems or disruptions to our supply of these raw material compounds.

 

As of the date hereof, we have only one source for the contract manufacturing of our nLTO battery cells, which are the building blocks of our battery modules and energy storage systems. This supplier has passed our rigorous technical requirements to be as our qualified supplier. We plan over the long run to qualify more OEM suppliers to reduce our dependency on one single supplier and meanwhile create competition between suppliers and eventually reduce cost.

 

Having multiple qualified suppliers for components and materials used in the manufacture and assembly of our primary products is part of the business plan and has been realized for many of the components and materials. Supplier qualification for additional sources of components and materials will continue in 2017.

 

Competition

 

Electric Grid: A number of advanced energy storage and power electronic component producers have entered into the frequency regulation market. They include Wanxiang, BYD, GS Yuasa, LG Chem, Mitsubishi, Saft, Microvast, Toshiba, Enerdel and XtremePower. As we or others continue to demonstrate traction in this market we expect to see increasing levels of competition from other suppliers and systems integrators, especially as the market rules in the U.S. and other markets move towards the acceptance of battery-based energy storage for frequency regulation. Favorable signs emerged in 2012, such as California Independent System Operator’s (CAISO) decision to adopt market changes which would reward frequency regulation resources for fast performance. CAISO now joins PJM Interconnection as the first to propose new rules which seek to comply with FERC’s Order 755, which requires pay for performance, especially for fast response resources that provide frequency regulation services. We believe that these changes are favorable for battery-based energy storage systems in general and for our nLTO battery technologies specifically, due to our unique fast response capabilities.

 

 
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Our products typically compete with existing methods for providing frequency regulation and renewable integration rather than competing battery manufacturers. Today, most utilities and regional transmission organizations use existing coal, gas and diesel generating sources to provide frequency regulation. While these sources are inefficient and can be highly polluting (coal and diesel), they are known quantities and accepted by the various regulators and utilities. In many instances, particularly in the U.S., we are attempting to displace this accepted way of doing things. Consequently, the typical sales cycle for selling an energy storage system for frequency regulation can be quite lengthy.

 

Another challenge is the cost of natural gas in the U.S. Much of the existing frequency regulation in the U.S. is provided by natural gas powered generators, and the price of natural gas pricing has been at historic lows. As a result, there is less of a financial incentive for utilities to implement our solution. This cost environment, however, is not expected to be sustainable. Natural gas prices are volatile and may rise over time, and batteries, like all technologies, will eventually see their prices drop as efficiencies are gained and as production volumes increase. As a result, we see greater opportunities for our frequency regulation products emerging over time in the U.S., especially with the introduction of new market mechanisms that place greater emphasis on fast response services. Moreover, we expect to see growing demand outside of the U.S., where fuel costs are significantly higher. If this new energy storage capability starts to get market traction, we expect the rate of acceptance to accelerate. Until then, however, we are experiencing a long sales cycle and don’t expect that to materially change in the near future. We believe that once we demonstrate revenue traction and demonstrate that the market does exist and is very large, other larger suppliers may also target this market.

 

In the Transportation (Commercial Vehicles), automotive passenger car markets, there are a large number of battery manufacturers and systems integrators currently serving the market. Many of them are larger companies with substantially stronger financial resources than we have. We believe the passenger car market will be driven by low margins and volume. As a result, we believe that only larger, well-capitalized companies will ultimately be successful in this market. We believe that commercial vehicles, including buses, medium- and heavy-duty trucks, on the other hand, present a different set of dynamics. The characteristics of our batteries are an excellent fit to satisfy the requirements of this market, and the needs here are different than in the general passenger car automotive market. We believe that we can be a successful competitor in this segment of the overall transportation market.

 

With respect to the electric and hybrid electric commercial vehicle markets, we are not aware of any commercially available products that have similar performance attributes as our nLTO batteries, although we suspect that similar batteries exist. Nonetheless, competitors have announced advanced lithium ion batteries and battery products aimed at these markets. Some may have greater energy density than our nLTO batteries.

  

Currently, NiMH batteries dominate the hybrid electric vehicle market, although major hybrid manufacturers are beginning to switch to lithium ion batteries. NiMH batteries improve upon the energy capacity and power capabilities of older alternatives, such as NiCd (for the same size cell) by 30% to 40%. Since they contain fewer toxins than NiCd batteries, NiMH batteries are more environmentally friendly than NiCd batteries, although they are not as environmentally friendly as our nLTO battery. Like NiCd batteries, NiMH batteries can be charged in about 3 hours. Charging rates must be reduced by a factor of 5 to 10 at temperatures below 0°C (32°F) and above 40°C (104°F). NiMH batteries suffer from poor deep cycle ability (i.e. the ability to be discharged to 10% or less of their capacity), possessing a recharge capability following deep discharge on the order of 200 to 300 cycles. While NiMH batteries are capable of high power discharge, dedicated usage in high power applications limits cycle life even further. NiMH batteries also possess high self-discharge rates, which is unintentional leaking of a battery’s charge. NiMH batteries are intolerant to elevated temperature and, as a result, performance and capacity degrade sharply above room temperature. The most serious issue with NiMH, though, involves safety accompanying recharge. The temperature and internal pressure of a NiMH battery cell rises sharply as the cell nears 100% state of charge, necessitating the inclusion of complex cell monitoring electronics and sophisticated charging algorithms in order to prevent thermal runaway, and ultimately fire. A potential limiting factor for the widespread use of NiMH batteries may be the supply of nickel, potentially rendering the technology economically infeasible for these applications as demand continues to rise.

 

Producers of electric and hybrid electric vehicles are seeking to replace NiMH batteries with lithium ion batteries for several reasons. The demand for these vehicles is placing pressures on the limited supply of nickel, potentially rendering the technology economically infeasible for these applications as the demand continues to rise. Compared to NiMH batteries, lithium ion batteries are stable, charge more rapidly (in hours), exhibit low self-discharge, and require very little maintenance. Except as explained below, the safety, cycle life, calendar life, environmental impact and power of lithium ion batteries is comparable to those of NiMH and NiCd batteries.

 

 
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Lithium ion batteries are the batteries of choice in small electronics, such as cell phones and portable computers, where high energy density and light weight are important. These same attributes are desired for electric vehicle, hybrid electric vehicle, fast energy storage and other markets. However, these applications are principally high power demand applications and/or pose other demands on usage, such as extremes of temperature, need for extremely short recharge times, and even longer extended lifetimes. Because of safety concerns related principally to the presence of graphite in conventional lithium ion batteries, conventional graphite-based lithium ion batteries sufficiently large for such power uses may raise safety concerns. In addition, current lithium ion technology is only capable of about 2,500 to 4,000 cycles. Conventional lithium ion batteries also do not function well at extremely hot or cold temperatures. Our batteries - which are safer, have a longer cycle life, rapid charge and discharge rates and function well at extreme temperatures - are designed to address the power market by providing many of the key benefits of lithium ion batteries without the shortcomings relative to the power market. As noted above, our competitors are developing high power, and temperature resilient non-conventional lithium ion batteries. We do not know the exact attributes of the evolving batteries.

 

Intellectual Property

 

We currently have a total of 12 U.S. and 33 foreign patents.  Of these foreign patents, none are issued in China.  We have 2 patent applications pending and these applications have been made in the U.S. and in 14 foreign countries, including China. The U.S. patents begin to expire in 2020. 

 

The granted patents covering our nLTO technology include: 1) Method for producing catalyst structures, 2) Method for producing mixed metal oxides and metal oxide compounds, 3) Process for making lithium titanate, 4) Process for making nano-sized and sub-micron-sized lithium-transition metal oxides, 5) High performance Lithium Titanium spinel Li4Ti5o12 for electrode material, 6) Method for Preparing a Lithium Ion Cell, and 7) Lithium Ion Cell Preparation. 

 

Pending patent applications are directed to a variety of inventions including: “Method for Preparing a Lithium Titanate Cell”; and “Process to Make Rutile Pigment”.

 

Research and Development Expenses

 

Research and development (“R&D”) expenditures include salaries, wages and other costs of personnel engaged in R&D, costs of services performed by others for R&D on our behalf are expensed as R&D costs when incurred. 

 

Our total R&D expenses were $3.2 million and $0.8 million for the years ended December 31, 2016 and 2015, respectively. Included in the R&D expenses are engineering, development and internal product innovation costs not billed to customers. From 2014 to 2015, we concentrated on stabilizing and expanding production in Wu’an, China and from 2016 and into 2017 we plan to put a large investment again into R&D in China with the support from our U.S. team.

 

Dependence on Significant Customers

 

For the year ended December 31, 2016, YLE (a related party) and ZYLE (a related party) were our two largest customers accounting for 66% and 18% of our total recognized revenues. For the year ended December 31, 2015, Hebei Yinlong (a related party) and TSK, were our two largest customers accounting for 49% and 12% of our total recognized revenues.

 

Open contracts include the China State Grid Project and an agreement to sell up to 2,000 tons of nLTO to our affiliate Hebei Yinlong. Completion of on-site installation, debugging and required performance testing was completed in January 2017. Thirty days from completion starts a five-year guarantee period. The Company will receive ten percent of the contract price at each stable operational use verification period, February 2018, 2019 and 2022, respectively.

  

Government Regulation

 

Our manufacturing activities and most of the business activities are now in China, we are supposed to comply with the stipulations of PRC environmental laws and regulations, including but not limited to those on air emissions, waste water discharge, solid waste disposal and noise control.  The main environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.  We are also subject to laws supervising the packaging and shipment of some of our products, including our nLTO batteries, flammable and dangerous articles. Such laws and regulations define that we take steps to, among other measures, maintain air, water and soil quality standards, as well as ensure the safety of people concerned during the production, packaging, shipment, installation and use of the products. Strict government required testing standards must pass before the shipment of our products. 

 

 
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Compliance with federal, state, or local laws or regulations represents a small part of our present budget. If we fail to comply with any such laws or regulations, however, a government entity may levy a fine on us or require us to take costly measures to ensure compliance. Any such fine or expenditure may adversely affect our development.

 

Environmental Regulation and Liability  

 

As we conduct all of our manufacturing activities in China, we are subject to the requirements of PRC environmental laws and regulations on air emission, waste water discharge, solid waste and noise. The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. We aim to comply with environmental laws and regulations and have been pushing ahead with the authentication of ISO 14001 for environmental practices. We have already passed the first step of the ISO 14001 appraisal and the second step of the appraisal is in process. Passing the second step of the appraisal will give us ISO 14001 certification.  We have built environmental treatment facilities concurrently with construction of our manufacturing facilities, where waste air, waste water and waste solids we generate can be treated in accordance with the relevant requirements. We also outsource disposal of solid waste we generate to a third-party contractor. Certain key materials used in manufacturing, such as cobalt dioxide, electrolyte and separators, have proven innocuous to worker’s health and safety as well as the environment. We are not subject to any admonitions, penalties, investigations or inquiries imposed by the environmental regulators, nor are we subject to any claims or legal proceedings to which we are named as defendant for violation of any environmental law or regulation. We do not have any reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations.

 

Financial Information Geographic Information about Foreign Sales

 

Information with respect to foreign and domestic sales and related information is also presented in Note 16, Geographic Operating Information, of Notes to Consolidated Financial Statements in Part IV. 

 

Subsidiaries

 

Altair U.S. Holdings, Inc. was incorporated by Altair in December 2003 for the purpose of facilitating a corporate restructuring and consolidation of all U.S. subsidiaries under a U.S. holding company. Altair U.S. Holdings owns the capital stock of Mineral Recovery Systems, Inc., which currently has no operations, and Altairnano, Inc.

 

Altairnano, Inc. (f/k/a Altair Nanomaterials Inc.) holds all of our interest in our nanomaterials and titanium dioxide pigment technology and related assets. Altairnano, Inc. also owns Altair China, a WFOE in China, and Altair China owns Northern Altair, a domestic company in China.

 

Corporate History

 

Altair Nanotechnologies Inc. was incorporated under the laws of the Province of Ontario, Canada in April 1973 for the purpose of acquiring and exploring mineral properties. At that time, its name was Diversified Mines Limited, which was subsequently changed to Tex-U.S. Oil & Gas Inc. in February 1981, then to Orex Resources Ltd. in November 1986, then to Carlin Gold Company Inc. in July 1988, then to Altair International Gold Inc. in March 1994, then to Altair International Inc. in November 1996 and then to Altair Nanotechnologies Inc. in July 2002. In July 2002, Altair Nanotechnologies Inc. domesticated from the Ontario Business Corporations Act to Canada’s federal corporate statute, the Canada Business Corporations Act. On May 15, 2012, Altair Nanotechnologies Inc. domesticated from Canada to the State of Delaware under the Delaware General Corporation Law.

 

During the period from inception through 1994, we acquired and explored multiple mineral properties. In each case, sub-economic mineralization was encountered and the exploration was abandoned. Beginning in 1996, we entered into leases for mineral property near Camden, Tennessee and owned the rights to the Altair jig. Subsequently, we have terminated our leases on all of the Tennessee mineral properties and during 2009 disposed of the remaining centrifugal jigs and abandoned the applicable patents since we were unable to identify an interested party to purchase them.

 

 
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In November 1999, we acquired all the rights of BHP Minerals International, Inc., or BHP, in the nanomaterials and titanium dioxide pigment technologies and the nanomaterials and titanium dioxide pigment assets from BHP. We are employing the nanomaterials technology as a platform for the production and sale of metal oxide nanoparticles in our nLTO batteries.

  

In July 2011, Energy Storage (China) (“EST China”), acquired 6,172,801 shares of common stock, representing 53% of the outstanding shares of common stock of Altair Nanotechnologies Inc.

 

On November 17, 2016, the Security Exchange Commission revoked the registration of our securities under Section 12 of the Securities Exchange Act of 1934, as amended. Following such revocation, FINRA promptly cancelled our stock trading symbol.

 

Employees

 

Our business is currently managed by Mr. Guohua Sun, Chief Executive Officer, and Ms. Karen Werner, Interim Chief Financial Officer. For the years ended December 31, 2016 and 2015; our U.S. operations had 18 and 31 employees; respectively. As of December 31, 2016 and 2015, our China operations had 1,107 and 598 employees; respectively. During 2017, we anticipate additional hiring, although this is dependent upon business volume growth and demand for our products. During 2016, we hired additional employees in China primarily in operations, engineering, research & development and sales & marketing.

 

As of January 2016, the module production was transferred from Anderson, Indiana to our manufacturing location in Wu’an, China. In the U.S., we are maintaining some of our core R&D personnel, who work out of offices in Reno, Nevada and Anderson, Indiana, who provide technical transfer and services to our China entities in the areas of core R&D, engineering operational capabilities and technologies that influence our manufacturing in Wu’an, China.

 

 

ITEM 1A. RISK FACTORS

 

An investment in our shares of common stock and related derivative securities involves significant risks. You should carefully consider the risks described in this Report before making an investment decision. Any of these risks could materially and adversely affect our business, financial condition or results of operations. In such case, you may lose all or part of your investment. Some factors in this section are forward-looking statements.

 

We may continue to experience significant losses from operations.

 

We have experienced a net loss in every fiscal year since our inception. Our loss from operations was $3.18 million for the year ended December 31, 2016 and $15.5 million for the year ended December 31, 2015. We may, or may not, be profitable in the future. Even if we are profitable in one or more future years, subsequent developments in the economy, our industry, customer base, business or cost structure, or an event such as significant litigation or a significant transaction, may cause us to again experience losses.

 

We may not be able to raise sufficient equity capital to finance our operations due to our operating results, the lack of a market for our common stock and similar factors.

 

As of December 31, 2016, we had approximately $0.8 million in cash and cash equivalents, $0.2 million in restricted cash and approximately $8.06 million in debt coming due during 2017 and approximately $37.95 million payable in and after 2018. We expect that in the future we will again need to raise capital.  With respect to any such capital raise, we may be unable to raise the amount of capital needed and may be forced to pay an extremely high price for capital.  Factors affecting the availability and price of capital may include the following:

 

 

market factors affecting the availability and cost of capital generally, including increases or decreases in major stock market indexes, the stability of the banking and investment banking systems and general economic stability or instability;

 

whether or stock is quoted on a stock market or listed on an exchange (which it currently is not);

 

our financial results, particularly the amount of revenue we are generating from product sales;

 

the market's perception of our ability to execute our business plan and any specific projects identified as uses of proceeds;

 

our ownership structure and recent or anticipated dilution;

 

 
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the amount of our capital needs;

 

our project investment requirements in China;

 

the amount of our outstanding debt;

 

the extent to which we are subject to material legal or regulatory proceeding or restrictions arising from such proceedings;

 

the influence of EST China and its appointees on the Board of Directors which, among other things, may cause the Company to seek indebtedness as a source of capital, as opposed to the sale of capital stock, in order to permit EST China to maintain control;

 

the absence of public information about our company;

 

the perception by potential investor of our company and companies in our line of business; and

 

the economics of projects being pursued.

 

If we are unable to raise required capital, we may be forced to discontinue operations.

 

The significant amount of debt we owe creates a material risk of default and insolvency.

 

As of December 31, 2016, we had approximately $8.06 million in debt that will come due in the next twelve months and approximately $37.95 million payable in and after 2018. This debt is secured by machinery and equipment, land use rights in China, third party guarantee, related party guarantee, and our building in Reno, Nevada. We do not have sufficient capital to repay such debt. If we are unable to refinance this debt, or otherwise raise sufficient capital to repay this debt, we will default. If we are in default, our creditors have a broad range of remedies, including taking action against the collateral. A default on our indebtedness, particularly that secured by our land use rights in China, would likely lead to our insolvency and a bankruptcy or similar event. In such a context, it is unlikely that there will be any amount available for distribution to its shareholders.

 

Our business is dependent upon two customers, both of which are affiliates of our majority shareholder.

 

During 2016, 84% of our revenue came from the sale of our nLTO powder to two customers in the electric bus business, both of which are affiliates of our majority shareholder EST China.  We expect our dependence upon these customers to continue in the foreseeable future. If one or both of these customers were to experience a business slowdown or begin purchasing substitute products from another provider, our business would be harmed.   This concentration also give these customer leverage in any negotiation with regard to price and other terms.  Any use of this leverage could harm our business and ability to continue as a going concern.

 

We have entered into contractual provisions that may significantly limit our ability to raise capital.

 

In conjunction with the closing of the purchase by EST China, an affiliate of Canon Investment Holdings Ltd. of shares representing over 50% of our outstanding shares in 2011, we granted certain rights to EST China, including the right to proportional representation on our Board of Directors, certain registration rights, and an option to purchase a sufficient number of our equity securities at market price to maintain their percentage of ownership should we offer, sell or issue new securities. These rights may dissuade potential investors from purchasing our capital or may require us to accept less than favorable terms in future financings.

 

Fluctuation in the value of the RMB may have a material adverse effect on your investment. 

 

The change in value of the RMB against the U.S. dollar is affected by changes in China’s political and economic conditions, among other things, as well as government actions and policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation, or depreciation, of the RMB against the U.S. dollar. As substantially all of our revenues and expenses are in RMB, an increase in the value of the RMB against the dollar would increase our expenses (and revenues) in U.S. dollars, and a decrease in the value of the RMB against the dollar would decrease our revenues (and our expenses) in U.S. dollars.  In recent years, there has been a trend of the Chinese government permitting the RMB to decrease in value relative to the U.S. dollars which would reduce our revenue and profits, if any, as reported in U.S. dollars and reduce the value of money repatriated to the United States.

 

We are subject to various regulatory regimes, and may be adversely affected by inquiries, investigations and allegations that we have not complied with governing rules and laws.

 

 
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In light of the ownership structure of our company and our lines of business, we are subject to a variety of laws and regulatory regimes in addition to those applicable to all businesses generally.  For example, we were a reporting company registered under Section 12 under the Securities Exchange Act but were delisted in 2016 for failing to timely file our annual, quarterly and other reports. Such delisting does not eliminate our obligation under Section 12 under the Securities Exchange Act to be a registered and reporting issuer due to the amount of our assets and the number of our stockholders. We are currently not in compliance with such registration obligation. The absence of such registration will limit our ability to raise capital and leaves us vulnerable to regulatory and shareholder laws suits. If we attempted to re-register under the Securities Exchange Act, we would expect to be subject to an extended review by the staff at the SEC. We are also subject to Delaware corporate laws and state and federal environmental, health, safety and similar laws. Such laws and rules change frequently and are often complex.  In connection with such laws, we are subject to periodic audits, inquiries and investigations.  Any such audits, inquiries and investigations may divert considerable financial and human resources and adversely affect the execution of our business plan. 

 

Through such audits, inquiries and investigations, we or a regulator may determine that we are out of compliance with one or more governing rules or laws.  Remedying such non-compliance would divert additional financial and human resources.  In addition, in the future, we may be subject to a formal charge or determination that we have materially violated a governing law, rule or regulation. We may also be subject to lawsuits as a result of alleged violation of the securities laws or governing corporate laws.  Any charge or allegation, and particularly any determination, that we had materially violated a governing law would harm our ability to enter into business relationships, recruit qualified officers and employees and raise capital.

 

Laws governing repatriation of investments in a China WFOE may contribute to a need to obtain capital to finance our non-China operations in the near future.

 

We have established a Wholly Foreign Owned Enterprise, or WFOE, in China through which we directly or indirectly conduct our Chinese operations. When establishing a WFOE, we have been required to designate a minimum registered capital amount and contribute at least such amount to the WFOE. Chinese law severely limits the ability of a WFOE to repatriate money to its non-Chinese parent. In general, any distributions to the non-Chinese parent must derive from profits, as determined in accordance with Chinese accounting standards and regulations. Our WFOE will also be required to set aside at least 10% of its after-tax profit based on Chinese accounting standards each year to a statutory surplus reserve fund until the accumulative amount of such reserve reaches 50% of registered capital. These reserves are not distributable as dividends.

 

In addition, our WFOE may be required to allocate a portion of its after-tax profit to a staff welfare and bonus fund. Moreover, if our WFOE incurs debt on its own behalf in the future, the instruments governing the debt may restrict our WFOEs’ ability to pay dividends or make other distributions to us. Any limitation on the ability of our WFOE to distribute dividends and other distributions to us could materially and adversely limit our ability to make investments or enter into joint ventures that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

U.S. news sources report that the Chinese government has placed, or began enforcing, limitations on lending by Chinese banks, which limits may affect our ability to borrow capital for our Chinese capital investment projects, for operations and to refinance existing debt.

 

Many U.S. news sources have reported in recent years that, due to an increase in bad loans and other reasons, the Chinese government has imposed, or began enforcing, limitations on lending by Chinese banks and other lending entities. Northern Altair has been seeking loans from Chinese banks and other lending entities for its proposed capital investments and operations. This increased regulation and scrutiny may decrease the likelihood that Northern Altair can qualify for debt financing to fund proposed projects and to refinance existing indebtedness. Even if Northern Altair does qualify, terms of financing may be more onerous than anticipated. Any inability to finance our Chinese operations through debt would likely slow our growth in China and may prevent us from completing all aspects of our proposed nLTO and energy storage system manufacturing facility in China. Any failure to refinance existing indebtedness may lead to a default and insolvency.

  

We may become subject to international economic and political risks over which we have little or no control and may be unable to alter our business practice in time to avoid the possibility of reduced revenues.

 

We conduct substantially all our business outside the United States and plan to significantly increase our presence in China. Doing business outside the United States subjects us to various risks, including changing economic and political conditions, major work stoppages, exchange controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. We have no control over most of these risks and may be unable to anticipate or adapt to changes in international economic and political conditions. This may lead to sudden and unexpected revenue reductions or expense increases.

 

 
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China’s economic policies, laws and regulations could affect our business.

 

While China’s economy has experienced significant growth in the past twenty years, such growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but they may also have a negative effect on us. For example, operating results and financial conditions may be adversely affected by the government control over capital investments or changes in tax regulations. The economy of China has been transitioning from a planned economy to a more market-oriented economy. In recent years, the PRC government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets, and the establishment of corporate governance in business enterprises; however, a substantial portion of productive assets in China are still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, the control of payment of foreign currency-denominated obligations, the setting of monetary policy and the provision of preferential treatment to particular industries or companies. Any adverse change in the economic conditions or government policies in China could directly harm our business or harm overall economic growth in China, which in either case could increase our expenses and decrease expected revenues.

 

We may have difficulty establishing adequate management, legal and financial controls internationally.

 

We are a small company with operation in multiple countries, particularly the United States and China. As a result of differences in management, accounting, legal, language and cultural norms, we may experience difficulty in establishing and enforcing management, legal and financial controls. We may also experience difficulty collecting financial data and preparing financial statements, books of account and corporate records and instituting standard business practices for our international projects as well as in our China-based operations. In fact, such difficulty is the principal reason that we failed to timely file required periodic reports beginning in 2013 and were deregistered as a reporting issuer in 2016. This issue also led to our delisting the Nasdaq Stock Market, the removal of our stock symbol by FINRA and various direct, derivative, regulatory and other investigations and lawsuits. This has harmed the price of our common stock, our ability to raise capital, our ability to sign agreements with customers and suppliers, our ability to retain key employees and hire replacement employees and other aspects of our business.

 

Such difficulties may continue in the future. Any failure to maintain controls, institute business practices or accurately collect information may have an effect on the efficiency of our business and could lead to a restatement, a regulatory action or a legal action, in addition to our inability to gain the trust of customers and suppliers.

 

If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.

 

At various times during recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our common stock.

 

China could change its policies toward private enterprise or even nationalize or expropriate private enterprises.

 

Our business is expected to be subject to significant political and economic uncertainties and may be affected by political, economic and social developments in China. Over the past several years, the PRC government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The PRC government may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice.

 

Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, or devaluations of currency could cause a decline in the price of our common stock.

 

The nature and application of many laws of China create an uncertain environment for business operations and they could have a negative effect on us.

 

 
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The legal system in China is a civil law system. Unlike the common-law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could harm our business operations and financial condition. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty. Furthermore, the political, governmental and judicial systems in China are sometimes impacted by corruption. There is no assurance that we will be able to obtain recourse in any legal disputes with suppliers, customers or other parties with whom we conduct business.

 

We may not be able to sell the land use rights in China we have acquired, and expect to acquire, at appraised value or at all, in part due to applicable restrictions.

 

In October 2012, we acquired a 50-year land use right in China related to 66 acres of commercial land north of Dongzhuchang Village in Wu'an City, China. In May 2013, we acquired a 50-year land use right for an adjoining 40 acre parcel. Our land use rights are subject to certain requirements and limitations. In May 2014 and in August 2015, we purchased three more pieces of land. The requirements on the existing five land use rights, totaling 138.3 acres, include an obligation, over the life of the land use rights, to invest approximately $314.85 million in the combined projects. The limitations include a prohibition on the transfer of the land use right prior to our investment of at least 25% of our committed investment. These requirements and limitations may harm the value of the land use right.

 

We may face delays or related issues if we cannot effectively transfer know-how from our U.S.-based employees to our China-based employees.

 

We have constructed a facility in China to be the sole site for our nLTO manufacturing and an additional site for our energy storage system and module assembly. The processes of manufacturing nLTO and assembling energy storage systems and modules are complex. We will need to transfer the complex know-how for the manufacturing and assembly from our U.S.-based employees to our existing or new Chinese employees. Language and cultural differences, as well as the inherent difficulty of communicating skills learned through experience, may lead to difficulties in the education and training of Chinese employees. Any failure to adequately educate and train Chinese employees in company-specific know-how may result in additional costs, delays, quality concerns, warranty costs and other issues.

 

Following the acquisition of a majority interest in the Company by EST China, we face risks associated with having a majority shareholder.

 

In July 2011, EST China acquired a majority of our outstanding shares of common stock. Having a controlling shareholder presents certain risks to us, including the following:

 

 

The majority shareholder controls the appointments on the Board of Directors and may appoint persons less qualified, or more loyal to the majority shareholder, than would be appointed absent a controlling shareholder;

 

The majority shareholder may be able to influence our Board of Directors to enter into transactions with related or third parties that are more favorable to such parties than would be negotiated by an independent Board of Directors;

 

We may hire employees who also work for 100% owned subsidiaries of EST China, which may create conflicts of interest and concerns regarding protection of trade secrets

 

The majority shareholder controls all matters requiring approval by the shareholders, including any determination with respect to the acquisition or disposition of assets, future issuances of a material number of securities and other major transactions; and

 

This concentration of ownership may also delay, defer or prevent a change in control and otherwise prevent shareholders other than our affiliates from influencing our direction and future.

 

 

If one or more of these risks, or other risks, materializes, our business will be harmed, and it may be harmed materially.

 

Cultural, language and other differences between the U.S. and China may create inefficiencies in our management and operations.

 

Our majority shareholder, and a majority of our directors, reside in China and several of our directors exclusively speak Chinese. As we ramp up our China-based operations, we may experience conflicts or misunderstandings within our management structure that are primarily or partially rooted in language and cultural differences, particularly differences in management and communication styles. Language and cultural differences may also affect strategy formation and create inefficient and limited communication among technical and management employees located in different countries. The occurrence of any of these events may harm our growth potential, increase costs and decrease operational efficiency.

  

 
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Our nLTO, battery materials and battery business is currently dependent upon several customers and potential customers, which presents various risks.

 

Our nLTO materials and battery business is dependent upon several current or potential customers. In addition, many of these customers are, or are expected to be, development partners who are subsidizing the research and development of products for which they may be the sole, or one of several, potential purchasers. As a result of the several potential customers and partners, our existing or potential customers and partners may have significant leverage on pricing terms, exclusivity terms and other economic and noneconomic terms. This may harm our attempts to sell products at prices that reflect desired gross margins. In addition, the decision by a single or potential customer to choose not to purchase or abandon the use or development of a product may significantly harm both our financial results and the development track of one or more products.

 

We depend upon several sole-source and limited-source third-party suppliers.

 

We rely on certain suppliers as the sole-source, or as a primary source, of certain services, raw materials and other components of our products. We do not yet have long-term supply or service agreements engaged with any such suppliers. As a result, the providers of such services and components could terminate or alter the terms of service or supply with little or no advance notice. If our arrangements with any sole-source supplier were terminated, or if such a supplier failed to provide essential services or deliver essential components on a timely basis, failed to meet our product specifications and/or quality standards, or introduced unacceptable price increases, our production schedule would be delayed, possibly by as long as one year. Any such delay in our production schedule would result in delayed product delivery and may also result in additional production costs, customer losses and litigation.

 

An area in which our dependence upon a limited number of sources creates significant vulnerability is the manufacturing of our nLTO cells. As of the date hereof, we have one contract manufacturing source for our nLTO cells, and we are currently working with a second manufacturer to qualify their cells.  We have had quality issues with some of our past contract manufacturers. Our nLTO battery cells are the building blocks of all of our products (other than our nLTO powder). If we were to experience quality issues with any of our suppliers, we may be unable to meet our deadlines, or quality specifications, with respect to existing or future orders.  This would harm our reputation and our ability to grow our business. 

 

Our operating results have fluctuated significantly in the past and will continue to fluctuate in the future, which could cause our stock price to decline.

 

Our operating results have fluctuated significantly in the past, and we believe that they will continue to fluctuate in the future, due to a number of factors, many of which are beyond our control. If in future periods our operating results do not meet the expectations of investors or analysts who choose to follow our company, the price of our shares of common stock may fall. Factors that may affect our operating results include the following:

 

 

fluctuations in the size, quantity and timing of customer orders;

 

timing of delivery of our services and products;

 

additions of new customers or losses of existing customers;

 

positive or negative business or financial developments announced by us or our key customers;

 

our ability to commercialize and obtain orders for products we are developing;

 

costs associated with developing our manufacturing capabilities;

 

the loss of our key employees;

 

new product announcements or introductions by our competitors or potential competitors;

 

the effect of variations in the market price of our shares of common stock on our equity-based compensation expenses;

 

disruptions in the supply of raw materials or components used in the manufacture of our products;

 

the pace of adoption of regulation facilitating our ability to sell our products in our target markets;

 

technology and intellectual property issues associated with our products;

 

general political, social, geopolitical and economic trends and events; and

 

availability of components sourced from Korea if tensions between North Korea and South Korea erupt into a greater military conflict.

 

Our patents and other protective measures may not adequately protect our proprietary intellectual property.

  

 
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We regard our intellectual property, particularly our proprietary rights in our nLTO technology, as critical to our success. We have received various patents, and filed other patent applications, for various applications and aspects of our nLTO technology and other intellectual property. Such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:

 

 

Our pending patent applications may not be granted for various reasons, including the existence of conflicting patents or defects in our applications, the existence of relevant prior art or the determination by an examiner that an invention was obvious to a person skilled in the art, whether or not there were other existing patents. Risks associated with patent applications are enhanced because patent applications of others remain confidential for a period of approximately 18 months after filing; as a result, our belief that we are the first creator of an invention or the first to patent it may prove incorrect, as information related to conflicting patents is first published or first brought to our attention;

 

The patents we have been granted may be challenged, invalidated, narrowed or circumvented because of the pre-existence of similar patented or unpatented intellectual property rights or for other reasons;

 

The patents we have been granted have a limited life span, and many will expire in the coming years and offer no legal protection to the technologies and processes described therein;

 

The costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make aggressive enforcement cost prohibitive;

 

We have not filed for patent protection in many countries in which we are currently selling product or seek to sell product; as a result, we may be unable to prevent competitors in such markets from selling infringing products;

 

Even if we enforce our rights aggressively, injunctions, fines and other penalties may be insufficient to deter violations of our intellectual property rights;

 

Many of our key patents begin expiring in 2020; we may be unable to protect key proprietary rights after the expiration of key patents; and

 

Other persons may independently develop proprietary information and techniques that, although functionally equivalent or superior to our intellectual proprietary information and techniques, do not breach proprietary rights.

 

Our inability to protect our proprietary intellectual property rights or gain a competitive advantage from such rights could harm our ability to generate revenues and, as a result, our business and operations.

 

We may be involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and involve adverse publicity and adverse results.

 

 Competitors or others may infringe our patents. To counter infringement or unauthorized use, we may be required to file patent infringement claims, which can be expensive and time-consuming. Interference proceedings brought by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications. Litigation or interference proceedings may result in substantial costs and be a distraction to our management.

 

 Because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure. In addition, during the course of this litigation (even if ultimately successful), there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our shares of common stock.

 

 In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover that technology. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

 

We may not prevail in any litigation or interference proceeding in which we are involved. Even if we do prevail, these proceedings can be expensive, result in adverse publicity and distract our management.

 

Other parties may bring intellectual property infringement claims against us, which would be time-consuming and expensive to defend, and if any of our products or processes is found to be infringing, we may not be able to procure licenses to use patents necessary to our business at reasonable terms, if at all.

 

Our success depends in part on avoiding the infringement of other parties’ patents and proprietary rights. We may inadvertently infringe existing third-party patents or third-party patents issued on existing patent applications. Third party holders of such patents or patent applications could bring claims against us that, even if resolved in our favor, could cause us to incur substantial expenses and, if resolved against us, could cause us to pay substantial damages. Under some circumstances in the United States, these damages could be triple the actual damages the patent holder incurs.

 

 
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If we have supplied infringing products to third parties for marketing or licensed third parties to manufacture, use or market infringing products, we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses the third parties may sustain themselves as the result of lost sales or damages paid to the patent holder. In addition, we have, and may be required to, make representations as to our right to supply and/or license intellectual property and to our compliance with laws. Such representations are usually supported by indemnification provisions requiring us to defend our customers and otherwise make them whole if we license or supply products that infringe on third party technologies or violate government regulations. Further, if a patent infringement suit were brought against us, we and our customers, development partners and licensees could be forced to stop or delay research, development, manufacturing or sales of products based on our technologies in the country or countries covered by the patent we infringe, unless we can obtain a license from the patent holder. Such a license may not be available on acceptable terms, or at all, particularly if the third party is developing or marketing a product competitive with products based on our technologies. Even if we were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property.

 

Any successful infringement action brought against us may also adversely affect marketing of products based on our technologies in other markets not covered by the infringement action. Furthermore, we may suffer adverse consequences from a successful infringement action against us even if the action is subsequently reversed on appeal, nullified through another action or resolved by settlement with the patent holder. As a result, any infringement action against us would likely harm our competitive position, be costly and require significant time and attention of our key management and technical personnel.

 

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

 

We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. Trade secrets are difficult to protect, in particular with respect to a company controlled by a potential customer and competitor. We rely in part on confidentiality agreements with our employees, contractors, consultants, outside scientific collaborators and other advisors to protect our trade secrets and other proprietary information. Parties to the confidentiality agreements may have such agreements declared unenforceable or, even if the agreements are enforceable, may breach such agreements. Remedies available in connection with the breach of such agreements may not be adequate, or enforcing such agreement may be cost prohibitive. Courts outside the United States may be less willing to protect trade secrets. In addition, others may independently discover our trade secrets or independently develop processes or products that are similar or identical to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection would harm our competitive business position.

 

If we are sued on a product liability claim, our insurance policies may not be sufficient.

 

Our insurance may not cover all potential types of product liability claims to which manufacturers are exposed or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could harm our business, including our relationships with current customers and our ability to attract and retain new customers. In addition, if the liability were substantial relative to the size of our business, any uncovered liability could harm our liquidity and ability to continue as a going concern.

 

Laws regulating the manufacture or transportation of batteries have been and may be enacted which could impose additional costs that could harm our ability to be profitable.

 

International, federal, state and local laws regulate the storage, use and disposal of the component parts of our batteries in limited ways. However, laws and regulations may be enacted in the future which could impose environmental, health and safety controls on the storage, use and disposal of certain chemicals and metals used in the manufacture of lithium and lithium-ion batteries. Satisfying any future laws or regulations could require significant time and resources from our technical staff, including those related to possible redesign which may result in substantial expenditures and delays in the production of our product, all of which could harm our business and reduce our future profitability.

 

The transportation of lithium and lithium-ion batteries is regulated both domestically and internationally. Under recommendations adopted by the International Air Transport Association (“IATA”), our batteries and battery systems currently fall within the level such that they are not exempt and require a Class 9 designation for transportation. Future U.S, Chinese, international or IATA approval process and regulations could require significant time and resources from out technical staff and, if redesign were necessary, could delay the introduction of new products.

  

 
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If our warranty expense estimates differ materially from our actual claims, or if we are unable to estimate future warranty expense for new products, our business and financial results could be harmed.

 

Our warranty for our products ranges from one to three years from the date of sale, depending on the type of product and its application. We expect that in the future some of our warranties may extend for longer periods. Because our supply arrangements are negotiated, the scope of our product warranties differ substantially depending upon the product, the purchaser and the intended use; however, we have granted and may grant broad warranties, addressing such issues as leakage, cycle life and decline in power. We have a limited product history on which to base our warranty estimates. Because of the limited operating history of our batteries and battery systems, our management is required to make assumptions and to apply judgment regarding a number of factors, including anticipated rate of warranty claims, the durability and reliability of our products, and service delivery costs. Our assumptions could prove to be materially different from the actual performance of our batteries and battery systems, which could cause us to incur substantial expense to repair or replace defective products in the future and may exceed expected levels against which we have reserved. If our estimates prove incorrect, we could be required to accrue additional expenses from the time we realize our estimates are incorrect and also face a significant unplanned cash burden at the time our customers make a warranty claim, which could harm our operating results.

 

In addition, with our new products and products that remain under development, we will be required to base our warranty estimates on historical experience of similar products, testing of our batteries under laboratory conditions and limited performance information learned during our development activities with the customer. As a result, actual warranty claims may be significantly different from our estimates and our financial results could vary significantly from period-to-period.

  

Product liability or other claims could cause us to incur losses or damage our reputation.

 

The risk of product liability claims and associated adverse publicity is inherent in the development, manufacturing and sale of batteries and battery systems. Certain materials we use in our batteries, as well as our battery systems, could, if used improperly, cause injuries to others. Improperly charging or discharging our batteries could cause fires, as could a puncture, collision or other event. Any accident involving our batteries or other products could decrease or even eliminate demand for our products. Because some of our batteries are designed to be used in electric and hybrid EV Buses, and because vehicle accidents can cause injury to persons and damage to property, we are subject to a risk of claims for such injuries and damages. In addition, we could be harmed by adverse publicity resulting from problems or accidents caused by third party products that incorporate our batteries. We could even be harmed by problems or accidents involving competing battery systems if the market viewed our batteries as being vulnerable to similar problems. Any such claims, loss of customers or reputation harm would harm our financial results and ability to continue as a going concern.

 

The commercialization of many of our products is dependent upon the efforts of commercial partners and other third parties over which we have no or little control.

 

The commercialization of our principal products requires the cooperation and efforts of commercial partners and customers. For example, because completion and testing of our large-scale stationary batteries for power suppliers requires input from utilities and connection to a power network, commercialization of such batteries can only be done in conjunction with a power or utility company. The commercialization of transportation and other applications of our technology are also dependent, in part, upon the expertise, resources and efforts of our commercial partners. This presents certain risks, including the following:

 

 

we may not be able to enter into development, licensing, supply and other agreements with commercial partners with appropriate resources, technology and expertise on reasonable terms or at all;

 

our commercial partners may not place the same priority on a project as we do, may fail to honor contractual commitments, may not have the level of resources, expertise, market strength or other characteristics necessary for the success of the project, may dedicate only limited resources to, and/or may abandon, a development project for reasons, including reasons such as a shift in corporate focus, unrelated to its merits;

 

our commercial partners may be in the early stages of development and may not have sufficient liquidity to invest in joint development projects, expand their businesses and purchase our products as expected or honor contractual commitments;

 

our commercial partners may terminate joint testing, development or marketing projects on the merits of the projects for various reasons, including determinations that a project is not feasible, cost-effective or likely to lead to a marketable end product;

 

 
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our commercial partners may not protect our intellectual property adequately or they may infringe our intellectual property rights;

 

at various stages in the testing, development, marketing or production process, we may have disputes with our commercial partners, which may inhibit development, lead to an abandonment of the project or have other negative consequences; and

 

even if the commercialization and marketing of jointly developed products is successful, our revenue share may be limited and may not exceed our associated development and operating costs.

  

As a result of the actions or omissions of our commercial partners, or our inability to identify and enter into suitable arrangements with qualified commercial partners, we may be unable to commercialize apparently viable products on a timely and cost-effective basis, or at all.

 

Interest in our nLTO batteries is affected by energy supply and pricing, political events, popular consciousness and other factors over which we have no control.

 

Currently, our marketing and development efforts for our batteries and battery materials are focused primarily on stationary power and transportation applications. In the transportation market, batteries containing our nLTO materials are designed to replace or supplement gasoline and diesel engines. In the stationary power applications, our batteries are designed to conserve and regulate the stable supply of electricity, including from renewable source, and to displace coal, gas and diesel generators used in frequency regulation. The interest of our potential customers and business partners in our products and services is affected by a number of factors beyond our control, including:

 

 

economic conditions and capital financing and liquidity constraints;

 

short-term and long-term trends in the supply and price of natural gas, gasoline, diesel, coal and other fuels;

 

the anticipated or actual granting or elimination by governments of tax and other financial incentives favoring electric or hybrid electric vehicles and renewable energy production;

 

the ability of the various regulatory bodies to define the rules and procedures under which this new technology can be deployed into the electric grid;

 

the anticipated or actual funding, or elimination of funding, for programs that support renewable energy programs and electric grid improvements;

 

changes in public and investor interest for financial and/or environmental reasons, in supporting or adopting alternatives to gasoline and diesel for transportation and other purposes;

 

the overall economic environment and the availability of credit to assist customers in purchasing our large battery systems;

 

the expansion or contraction of private and public research and development budgets as a result of global and U.S. economic trends; and

 

the speed of incorporation of renewable energy generating sources into the electric grid.

 

 

Adverse trends in one or more of these factors may inhibit our ability to commercialize our products and expand revenues from our battery materials and batteries.

 

Our competitors may have more resources than we do, and may be supported by more prominent partners, which may give them a competitive advantage.

 

We have limited financial, personnel and other resources and, because of our early stage of development, have limited access to capital. We compete or may compete against entities that are much larger than we are, have more extensive resources than we do and have an established reputation and operating history. In addition, certain of our competitors may be partnered with, associated with or supported by larger business or financial partners. This may increase their ability to raise capital, attract media attention, develop products and attract customers. Because of their size, resources, reputation and history (or that of their business and financial partners), certain of our competitors may be able to exploit acquisition, development and joint venture opportunities more rapidly, easily or thoroughly than we can. In addition, potential customers may choose to do business with our more established competitors, without regard to the comparative quality of our products, because of their perception that our competitors are more stable, are more likely to complete various projects, are more likely to continue as a going concern and lend greater credibility to any joint venture.

  

As manufacturing becomes a larger part of our operations, we will become exposed to accompanying risks and liabilities.

 

 
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In-house and outsourced manufacturing is becoming an increasingly significant part of our business. As a result, we expect to become increasingly subject to various risks associated with the manufacturing and supply of products, including the following:

 

 

If we fail to supply products in accordance with contractual terms, including terms related to time of delivery and performance specifications, we may be required to repair or replace defective products and may become liable for direct, special, consequential and other damages, even if manufacturing or delivery was outsourced;

 

Raw materials used in the manufacturing process, labor and other key inputs may become scarce and expensive, causing our costs to exceed cost projections and associated revenues;

 

Manufacturing processes typically involve large machinery, fuels and chemicals, any or all of which may lead to accidents involving bodily harm, destruction of facilities and environmental contamination and associated liabilities;

 

As our manufacturing operations expand, we expect that a significant portion of our manufacturing will be done overseas, either by third-party contractors or in a plant owned by the Company. Any manufacturing done overseas presents risks associated with quality control, currency exchange rates, foreign laws and customs, timing and loss risks associated with overseas transportation and potential adverse changes in the political, legal and social environment in the host county; and

 

We have made, and may be required to make, representations as to our right to supply and/or license intellectual property and to our compliance with laws. Such representations are usually supported by indemnification provisions requiring us to defend our customers and otherwise make them whole if we license or supply products that infringe on third-party technologies or violate government regulations.

 

Any failure to adequately manage risks associated with the manufacture and supply of materials and products could lead to losses (or smaller than anticipated gross profits) from that segment of our business and/or significant liabilities, which would harm our business, operations and financial condition.

 

Our past and future operations may lead to substantial environmental liability.

 

Virtually any prior or future production of our nanomaterials and titanium dioxide pigment technology is subject to federal, state and local environmental laws. Under such laws, we may be jointly and severally liable with prior property owners for the treatment, cleanup, remediation and/or removal of any hazardous substances discovered at any property we use. In addition, courts or government agencies may impose liability for, among other things, the improper release, discharge, storage, use, disposal or transportation of hazardous substances. If we incur any significant environmental liabilities, our ability to execute our business plan and our financial condition would be harmed.

 

Certain of our experts and directors reside in China and may be able to avoid civil liability.

 

A majority of our directors reside outside the United States, primarily in China. As a result, investors may be unable to effect service of process upon such persons within the United States and may be unable to enforce court judgments against such persons predicated upon civil liability provisions of the U.S. securities laws. It is uncertain whether Chinese courts would enforce judgments of U.S. courts obtained against us or such directors, officers or experts predicated upon the civil liability provisions of U.S. securities laws or impose liability in original actions against us or our directors, officers or experts predicated upon U.S. securities laws.

 

We are dependent on key personnel.

 

Our continued success will depend, to a significant extent, on the services of our executive management team and certain key scientists and engineers. We do not have key man insurance on any of these individuals. We have experienced, and may continue to experience, turnover in key positions, which could result in the loss of company-specific knowledge, experience and expertise. The loss or unavailability of any or all of these individuals could harm our ability to execute our business plan, maintain important business relationships and complete certain product development initiatives, which would harm our business.

 

We will not be able to issue any substantial amounts of additional shares. 

 

Our articles of incorporation authorize the issuance of 200 million shares of common stock that may be issued without any action or approval by our stockholders. In addition, we have various stock option plans that have potential for diluting the ownership interests of our stockholders. The issuance of any additional shares of common stock would further dilute the percentage ownership of our company held by existing stockholders.

 

 
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We have never declared a cash dividend and do not intend to declare a cash dividend in the foreseeable future.

 

We have never declared or paid cash dividends on our shares of common stock. We currently intend to retain any future earnings, if any, for use in our business and, therefore, do not anticipate paying dividends on our shares of common stock in the foreseeable future.  

 

  

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Our U.S. Corporate Headquarters is located at 204 Edison Way, Reno, Nevada 89502, in a building we purchased in August 2002 which is approximately 79,392 square feet on 6.773 acres of land. In the building, we continue to use laboratory space and equipment for testing nLTO manufactured at our location in Wu’an, China to provide quality control analysis. We utilize about 21,000 square feet of space, including offices, in this building. We currently lease, to a short-term tenant, approximately 10,000 square feet of warehouse space in our building at $2,500 per month.

 

The Company leased a 70,000 square feet facility in Flagship Business Accelerator Building located at 3019 Enterprise Drive, Anderson, Indiana under a triple net lease with Flagship Enterprise Center, Inc. The facility was used for the production of prototype batteries and battery systems.  The lease amended on January 27, 2015 will expire on June 30, 2017. Any lease renewal options will be negotiated no less than six (6) months prior to the expiration of this lease. Annual rent under this lease is $0.26 million plus IT fees, utilities and maintenance. Effective May 1, 2016, the Company agreed to pay $0.14 million as a payment to terminate the lease effective by the end of May 2016. Use of the facility has been agreed upon until a new tenant is found. The landlord will give the Company thirty days notice at their discretion to vacate the premises. The Company expects to find new office space for the current employees in the general Anderson, Indiana area at a reduced rate and space requirement by the end of the second quarter of 2017. 

 

In 2012, Northern Altair acquired land use rights in Altair New Energy Industrial Park, Wu’an city, Hebei Province, China. In the New Energy Industrial Park, Northern Altair has purchased the right to use approximately 138.3 acres of land for approximately $28.12 million, consisting of five parcels of useable land use rights for a lifespan of 50 years each. In addition, we have agreed to invest a minimum of $314.85 million on fixed asset investments with respect to such land use rights. We have built four factory buildings and an office building totaling a gross area of approximately 613,457 square feet. Included in the 613,457 square feet is approximately 54,820 square feet of employee housing and a new building being constructed with approximately 192,029 square feet of floor area. The factory buildings are being used for production, laboratories, testing and storage.

  

 

ITEM 3. LEGAL PROCEEDINGS

 

 

We are involved in certain legal proceedings that arise from time to time in the ordinary course of our business. Legal expenses associated with the contingency are expensed as incurred. Material legal proceedings that are currently pending are as follows:

 

In re Altair Nanotechnologies Shareholder Derivative Litigation, 1:14-cv-09418, 1:14-cv-09958 (S.D.N.Y.): In late 2014, two shareholder derivative actions were filed against the Company and certain of its current and former officers and directors of the Company in the United States District Court for the Southern District of New York.  Altair was named as a nominal defendant. The two cases, which were consolidated on May 15, 2015, allege violations of Section 14(a) of the Securities Exchange Act of 1934, as well as breaches of fiduciary duty and unjust enrichment based on substantially the same facts underlying the putative securities litigation. In July 2016, certain parties executed a stipulation of settlement, without defendants admitting liability, whereby Altair agreed to adopt certain governance proposals and pay an amount not exceeding $150,000 in plaintiffs’ attorneys’ fees and expenses. This initial stipulation and settlement was modified following the deregistration of the Altair as a reporting issuer in November 2016 because certain of the agreed to governance proposals would not apply to a corporation that was not a reporting issuer. The court entered an order preliminarily approving this modified stipulation and settlement on March 8, 2017. .  A final settlement hearing has been scheduled for August 10, 2017. If the settlement receives final approval, this action will be dismissed in its entirety.  Notice of the proposed settlement is available on Altair’s website.  A summary notice has also been published online.   

 

 
25

 

 

In the Matter of Altair Nanotechnologies, Inc. (LA-4452): In or around January 2015, SEC opened an investigation into the resignation of Crowe Horwath LLP (“Crowe”) as Altair’s independent auditor in August 2014.  As part of its investigation, the SEC issued several subpoenas to the Company and its current and former officers relating to Crowe’s resignation and a Form 8-K filed by the Company on March 13, 2015.  On May 4, 2016, the SEC sent Altair a Wells Notice identifying possible violations of Sections 13(a) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 thereunder.  On August 29, 2016, the Company made an offer of settlement to the SEC whereby it consented to the entry of an order, without admitting or denying the findings therein except as to the SEC’s jurisdiction, that the Company:  (i) cease and desist from committing or causing violations of Sections 13(a) and 13(b)(2)B) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; (ii) make certain filings with the SEC by November 15, 2016 or have the registration of its securities under the Exchange Act revoked; and (iii) pay a civil money penalty in the amount of $250,000 within 10 days of the entry of the order.  Such offer of settlement was accepted by the SEC and resulted in a Release No. 78997 dated September 29, 2016 with respect to the same. As of the balance sheet date, the Company did not have reasonable estimation of settlement amount. In August 2016, the Company paid $250,000 and deposited the funds into escrow which was paid from escrow to the SEC in October 2016. However, on November 17, 2016, the SEC found that Altair had not fully complied with the settlement agreement and issued an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934.

 

In the matter of James Zhan v. Altairnano, Inc., Altair Nanotechnologies, Inc., Guohua Sun, and Andy Wei, Case No.: CV16-01674 (Second Judicial District Court for the State of Nevada, Washoe County). James Zhan, the former CEO of the Company, has filed a complaint against Altair Nanotechnologies, Altairnano, Inc., Andy Wei and Guohua Sun (two Board members) asserting the following claims for relief in connection with the termination of his employment in September 2015: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) fraud. Because Mr. Zhan’s employment agreement contains an alternative dispute resolution clause, the Company moved to compel alternative dispute resolution. On April 12, 2017, the case was dismissed (but remains subject to being refiled in arbitration). As of the balance sheet date, the Company has accrued $100,000 for the insurance deductible with respect to this matter.

 

  

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Price

 

The common stock of the Company is not listed or quoted on any market or exchange of which the Company is aware. Following the deregistration of the Company’s common stock on November 17, 2016, which caused the Company to cease to be a reporting issuer, FINRA canceled the Company stock trading symbol, which had been “ALTI”. There is currently no market for the common stock of the Company, the Company has no current plans to facilitate the common stock trading on an exchange or a market.

 

 

Outstanding Shares and Number of Shareholders

 

As of March 31, 2017, the number of shares of common stock outstanding was 11,606,735 held by approximately 191 registered holders of record.  

 

Dividends

 

 
26

 

 

We do not anticipate paying dividends in the foreseeable future and currently intend to retain any future earnings to support the development and expansion of our business. The declaration and payment of dividends is subject to the discretion of our board of directors and to certain limitations imposed under Delaware statutes. The timing, amount and form of dividends, if any, will depend upon, among other things, our results of operation, financial condition, cash requirements, and other factors deemed relevant by our board of directors.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

We have stock option plans administered by the Compensation Committee of our Board of Directors that provide for the granting of options to employees, officers, directors and other service providers of the Company.  Security holders have approved all option plans.  See Note 14 to our consolidated financial statements contained elsewhere herein this Report. We reserved 1,187,849 shares of common stock for issuance upon exercise of options that have been, or may be, granted under our employee stock option plans and there are no outstanding warrants as of December 31, 2016.

 

Recent Sales of Unregistered Securities

 

We did not sell any securities in transactions that were not registered under the Securities Act during the years ended December 31, 2016 and 2015.

 

Transfer Agent and Registrar

 

The Transfer Agent and Registrar for our shares of common stock is Computershare, 8742 Lucent Boulevard, Suite 225, Highlands Ranch, CO 80129.

 

 

ITEM 6.     Selected Financial Data.

 

Smaller reporting companies are not required to provide the information required by this item.

 

 

 

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this Report.

 

This Report contains various forward-looking statements. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “likely,” “believe,” “intend,” “expect,” or similar words. These statements discuss future expectations, contain projections regarding future developments, operations, or financial conditions, or state other forward-looking information. When considering such forward-looking statements, you should keep in mind the risk factors noted under “Risk Factors” above under Item 1A and other cautionary statements throughout this Report and our other filings with the SEC. You should also keep in mind that all forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If one or more risks identified in this Report or any other applicable filings materializes, or any other underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected, or intended.

 

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.

 

Overview

 

 
27

 

 

We are a Delaware corporation that develops, manufactures and sells our proprietary nano lithium titanate (“nLTO”), battery modules and energy storage systems. Our nLTO battery systems offer higher power density, longer cycle life, rapid charge and discharge capabilities, a wider operating temperature range and higher levels of safety than conventional lithium-ion batteries. We target applications that effectively utilize the key attributes of our technology, and these applications can be found primarily in the electric grid, transportation (commercial vehicles), and industrial market segments.

 

Since 2012, we have focused on transitioning our operations from the United States to China. As of December 31, 2016, we have in place a phase three nLTO production lines for an annual production capacity of 6,650 metric tons. We do not currently manufacture our batteries, but our Original Equipment Manufacturer (“OEM”) cell producer’s capacity can reach 70,000 Altair format cells per year. Sometime in the future, we expect to validate another OEM cell producer to reduce dependency on one supplier, which we expect will provide competition between suppliers and reduce our costs. We also have in place two operational battery module production lines with a total capacity of approximately 6,000 modules per year. In the first quarter of 2016, we transferred the U.S. module production line to China which will become operational as demand increases. The three battery module production lines will be able to reach a total capacity of 9,000 modules per year. As of the date of this Report, we manufacture all of our products in China and sell all of our products from China.  

 

By building manufacturing and assembly facilities in Wu’an, China for our nLTO material, modules, and soon our energy storage systems, we have centered the whole supply chain in China. In adopting this strategy, we expect to achieve:

 

 

Reduction of production costs

 

Better quality control

 

Decreased shipping costs due to all production facilities being located in one central location

 

Centralized management control and internal communications, and

 

Centralized sales management

 

Critical Accounting Policies

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to inventories, financial guaranty, long term payable, refundable security deposit, income taxes, accounts receivable allowance, fair value of derivatives, stock based compensation and reserve for warranty claims. We base our estimates on historical experience, performance metrics and on various other assumptions that we believe 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 will differ from these estimates under different assumptions or conditions.

  

Our significant accounting policies are discussed in Note 3, Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements included elsewhere in this Form10-K Report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the audit committee of our board of directors.

 

Foreign Currency Translation and Transactions 

 

The consolidated financial statements are presented in U.S. Dollars. The functional currency for the subsidiaries in China is the Chinese Yuan or RMB. Assets and liabilities are translated to the reporting currency at exchange rates on the balance sheet dates, revenue and expenses are translated at average exchange rates during the period, and equity accounts are translated at historical exchange rates except for the change in retained earnings during the year which is the result of the income. The cumulative translation adjustments are recorded in accumulated other comprehensive income (loss) in the accompanying consolidated statements of stockholders' deficit. Gains or losses on transactions denominated in a currency other than the subsidiaries’ functional currency which arise as a result of changes in foreign exchange rates are recorded as foreign currency transaction gain or loss in the statements of operations.

 

 
28

 

 

Inventory

 

The Company values its inventories generally at the lower of cost or market price. Market price is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.

 

For the U.S. operations, the cost of raw materials and finished goods is determined on a first-in, first-out method and finished goods is comprised of direct materials, direct labor and an appropriate proportion of overhead.

 

For the China operations, the cost of nLTO materials is determined on a weighted average method and finished goods is comprised of direct materials, direct labor and an appropriate proportion of overhead.

 

The allocation of fixed and variable overhead is reviewed every three months and are recorded to inventory based on normal capacity.

 

Inventory reserves are provided to cover risks arising from slow-moving items. The Company writes down the inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. Any idle facility costs or excessive spoilage are recorded as current period charges.

  

Long-Lived Assets and Impairment

 

The Company evaluates the carrying value of its long-lived assets whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable.  The carrying value of long-lived assets are considered impaired when the total projected undiscounted cash flows expected to be generated by the asset are less than the carrying value.  The Company’s estimates of cash flows are based on the information available at the time including the following:  internal budgets; sales forecasts; customer trends; anticipated production volumes; and market conditions over an estimate of the remaining useful life of the asset which may range from 3 to 10 years for most equipment and up to 30 years for building and related building improvements.  If impairment is indicated, the asset value is written down to its estimated fair value. Events or circumstances that could indicate the existence of a possible impairment include obsolescence of the technology, an absence of market demand for the product or the assets used to produce it, a history of operating or cash flow losses and/or the partial or complete lapse of technology rights protection.

 

During the year ended December 31, 2016, the Company recognized impairment loss of $0.13 million for the two EV buses delivered to Wu’an government as the application for their operating license was unsuccessful. During the year ended December 31, 2015, the Company incurred an impairment loss of $0.65 million related to the write-down to fair market value for an asset that was leased to a customer under an operating lease. The impairment was to reflect the anticipated loss on the sale of the leased asset incurred in the subsequent period.

 

Property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the following estimated useful lives: 

 

Building and improvements (years)

 20

-

30

Machinery and equipment (years)

5

-

10

Furniture, office equipment and others (years)

3

-

7

Leased asset (years)

  

10

 

 

Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. Construction in progress is related to the construction or development of property (including land) and equipment that have not yet been placed in service for our intended use. Depreciation for equipment commences once it is placed in service and depreciation for buildings and leasehold improvements commences once they are ready for our intended use. Land is not depreciated. Construction in progress represents capital expenditures for direct costs of construction or acquisition and design fees incurred, and the interest expenses directly related to the construction. Capitalization of these costs ceases and the construction in progress is transferred to the appropriate category of property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. Construction in progress is not depreciated.

 

Patents

 

 
29

 

 

Patents are related to the Company’s nanoparticle production technology and stated at cost less accumulated amortization. Amortization is recorded using the straight-line method. The patents have been fully amortized as of December 31, 2016.

 

Land use rights

 

Land use rights are stated at cost less accumulated amortization.  Amortization is recorded using the straight-line method over their 50 year useful lives. All land in China is owned by the Chinese government. The government in China, according to law, may sell the right to use the land for a specified period of time. Thus, all of the Company’s land purchases in China are considered to be leasehold land under lease and are stated at cost less accumulated amortization.

 

Revenue Recognition 

 

The Company generates its revenues primarily from four sources: (1) nLTO related product sales, (2) Energy storage systems (referred to as “ESS” or by our brand name “ALTI-ESS”), (3) Collaborations and (4) License fees. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or service has been performed, the fee is fixed and determinable, and collectability is reasonably assured.

 

Revenue from nLTO related product sales is recognized upon delivery of the product, unless specific contractual terms dictate otherwise.

 

Revenue from commercial collaborations and license fees is recognized based on various performance measures, such as stipulated milestones.  As these milestones are achieved, revenue is recognized.

 

Revenue from ESS projects is recognized using the Completion Method under the long-term contract accounting. The Company recognizes the full amount of revenue from long-term contracts, defined as contracts longer than twelve months, upon completion, delivery and written acceptance received from the customer. All contract costs incurred are included in the balance sheet as deferred costs until the related revenue is recognized. At each reporting date, the Company reviews its long-term contracts to determine if revenue from contracts are expected to exceed the related estimated total costs. In the cases where estimated costs will exceed revenues, the Company recognizes as an expense in cost of goods sold the full amount of the estimated costs above the contract revenue value. Cash received in advance relating to the future performance of services, deliveries of products and/or long term contracts are deferred until the performance of the service is completed, the product is shipped, and/or the contract is completed and accepted by the customer.

 

Grant Incentives

 

Grant incentives were obtained from the Wu’an China Government to be used for construction, purchases of equipment and other expenditures for the nLTO manufacturing facility. The amount received is included in the balance sheet as deferred income and is recognized in the statement of operations as other income over the useful life of the related assets upon placing such assets into service. In all cases, grants are recognized as other income when there is a reasonable assurance that the Company has complied with the conditions attaching to them.

 

Comprehensive Loss

 

Recognized revenue, expenses, gains and losses are included in net income or loss. Although certain changes in assets and liabilities are reported as separate components of the equity section of the consolidated balance sheet, such items, along with net income or loss, are components of comprehensive income or loss. The components of other comprehensive income or loss are consisted solely of foreign currency translation adjustments.

 

Net Loss per Common Share

 

Basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common stockholders by the weighted average number of common and potentially dilutive shares outstanding during the period.  Potentially dilutive shares consist of the incremental shares of common stock issuable upon the exercise of stock options and warrants.  Potentially dilutive shares are excluded from the computation if their effect is anti-dilutive. The Company had a net loss for all periods presented herein; therefore, none of the stock options and warrants outstanding during each of the periods presented were included in the computation of diluted loss per share as they were anti-dilutive. Stock options and warrants can exercise a total amount of common stock for 20,484 and 441,864 shares as of December 31, 2016 and 2015, respectively, were excluded from the calculations of diluted loss per share.

  

 
30

 

 

Income Taxes 

 

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.

 

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and the Company’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance.

 

Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitation has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.

 

Litigation Matters 

 

For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, but not probable, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.

 

Accrued Warranty Expense

 

The Company’s U.S operation provides a three-year limited warranty for battery packs and energy storage systems sold. While the Company’s China operation offers a limited one-year warranty on energy storage systems. A liability is recorded for estimated warranty obligations at the date products are sold.  The estimated cost of warranty coverage is based on historical experience with cell and module life cycle testing.  As additional actual historical data is collected on the new product, the estimated cost of warranty coverage will be adjusted accordingly.  The liability for estimated warranty obligations may also be adjusted based on specific warranty issues identified.  

 

 
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Results of Operations

 

The following summarizes our revenue, operating expenses, and net loss for all periods presented below The Company develops, produces, sells battery systems and nLTO materials. 

 

The table below sets forth line items from the Company’s audited consolidated Statements of Operations (In thousands of dollars):

 

   

Years ended December 31,

                 
   

2016

   

2015

   

Increase, (Decrease)

   

Percentage

Increase, (Decrease)

 
                                 

Revenues

  $ 54,687     $ 14,278     $ 40,409       283

%

                                 

Cost of goods sold

    37,561       14,034       23,527       168

%

                                 

Gross profit

    17,126       244       16,882       6,919

%

                                 

Operating expenses

                               

Research and development

    3,163       808       2,355       291

%

Sales and marketing

    291       862       (571 )     (66

)%

General and administrative

    15,655       11,709       3,946       34

%

Depreciation and amortization

    1,093       1,560       (467 )     (30

)%

(Gain) loss on disposal of assets

    (29 )     142       (171 )     (120

)%

Impairment expense

    129       652       (523 )     (80

)%

Total operating expenses

    20,302       15,733       4,569       29

%

Loss from operations

    (3,176 )     (15,489 )     12,313       (79

)%

                                 

Other (expense) income

                               

Interest (expense), net

    (3,708 )     (2,533 )     (1,175 )     46

%

Gain on foreign exchange

    -       1       (1 )     (100

)%

Other income-buses

    21       11,419       (11,398 )     (100

)%

Other expenses-buses

    -       (13,548 )     13,548       (100

)%

Other income

    3,222       644       2,578       400

%

Total other (expense) income

    (465 )     (4,017 )     3,552       (88

)%

                                 

Net loss

  $ (3,641 )   $ (19,506 )   $ 15,865       (81

)%

 

 

Year Ended December 31, 2016 compared with Year Ended December 31, 2015

 

Revenues: The consolidated revenues for the year ended December 31, 2016 were $54.69 million, an increase of $40.41 million or 283% from $14.28 million for the year ended December 31, 2015. The increase was primarily related to the China operations which is caused by a significant increase in sales of nLTO materials to related parties. The U.S. operations revenue increased minimally by $0.92 million due to recognition of two long term projects, offset by lower sales of nLTO modules and related product sales.

 

Cost of goods sold: The consolidated costs of goods sold for the year ended December 31, 2016 was $37.56 million, an increase of $23.53 million or 168% from $14.03 million for the year ended December 31, 2015. The increase was primarily related to $22.93 million significant increase in China operations due to the increased sales of nLTO materials to related parties. The cost of goods sold in the U.S. operations increased by $0.6 million mainly due to the recognition of deferred costs associated with the completion of two long term projects, offset by lower cost of goods sold for nLTO modules and related product sales, write-down of inventory sold at lower than cost and scrapped inventory.

 

Gross Profit: The gross profit for the year ended December 31, 2016 was $17.13 million, an increase of $16.88 million or 6,919% from $0.24 million for the year ended December 31, 2015. The increase was primarily related to $14.88 million significant increase in China operations due to the increased sales of nLTO materials to related parties and the production of nLTO products reached economic scale.

 

 
32

 

 

Research and development: The consolidated research and development costs increased by $2.36 million, or 291%, to $3.16 million for the year ended December 31, 2016 from $0.81 million for the year ended December 31, 2015. The substantial increase was due to $2.47 million increase in China for the research and development of storage energy vehicles. The increase was offset by slight decrease of $0.11 million due to lower salaries and benefits expense due to lower headcount at our U.S. facilities.

 Sales and marketing: The consolidated sales and marketing expenses decreased by $0.57 million, or 66%, to $0.29 million for the year ended December 31, 2016 from 0.86 million for the year ended December 31, 2015. The decrease was mainly attributable to lower China operations sales and marketing expenses in advertising and marketing activities.

 

General and administrative: The consolidated general and administrative expenses increased $3.95 million, or 34%, to $15.66 million for the year ended December 31, 2016 from $11.71 million for the year ended December 31, 2015. The increase was attributable to the China operations where general and administrative expenses increased due to increased headcount in China and increased professional fees to handle the SEC investigation and to prepare the SEC required filings. The general and administrative expense in the U.S. operations decreased due to the net effect of lower operating expenses as we shifted our operation focus to China.

 

Depreciation and amortization: The consolidated depreciation and amortization decreased by $0.47 million, or 30%, to $1.09 million for the year ended December 31, 2016 from $1.56 million for the year ended December 31, 2015. The decrease was primarily related to the portion of fixed assets that were fully depreciated and selling the leased fixed asset in January 2016.

 

(Gain) loss on disposal of fixed assets: The 2016 consolidated $0.03 million gain on the disposal of fixed assets was due to an auction held in the first half of 2016, compared to a loss on disposal of fixed assets of $0.14 million, or 120% for the year ended December 31, 2015. This was primarily due to relatively more proceeds received on the fixed assets sold in the U.S. during the year ended December 31, 2016, compared to the year ended December 31, 2015.

 

Impairment: The Company incurred an impairment expense of $0.13 million during the year ended December 31, 2016 for the two EV buses to be delivered to Wu’an Bus Company because the application for their operation licenses was unsuccessful. The Company incurred a $0.65 million impairment expense related to the write-down to fair market value for an asset during the year ended December 31, 2015 that was leased to a customer under an operating lease in January 2016.

 

Interest (expense), net: The consolidated interest expense, net increased to $3.71 million for the year ended December 31, 2016 from $2.53 million, an increase of $1.17 million or 46%, for the year ended December 31, 2015. The increase was mainly attributable to the China operations where interest expense increased due to interest charge on new long term loans obtained during the year ended December 31, 2016. The interest expense in the U.S. operations decreased slightly by $0.1 million due to lower loan balances.

 

Change in fair value of warrants: The value of warrants that were previously issued were re-measured at the end of every reporting period with the change in fair value recognized as a gain or loss in our statement of operations. During the years ended December 31, 2016 and 2015, the Company recorded a gain of $1 thousand and $5 thousand, respectively, due to the change in the fair value of the warrants. All the warrants expired in September 2016.

 

Gain (loss) on foreign exchange: Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency were $nil and $1 thousand during the years ended December 31, 2016 and 2015, respectively.

 

Other income - buses: Other income - buses decreased to $0.02 million for the year ended December 31, 2016 from $11.42 million for the year ended December 31, 2015, a decrease of $11.40 million or 100%. The decrease was mainly due to no bus sales incurred during the year ended December 31, 2016, while 75 buses were sold during the year ended December 31, 2015.

 

Other expenses - buses: Other expenses - buses decreased to $nil for the year ended December 31, 2016 from $13.55 million for the year ended December 31, 2015, a decrease of $13.55 million or 100%. The decrease is attributed to no buses were sold in 2016 as compared to the bus costs and other expenses related to the 75 buses sold in 2015.

 

Other income: Other income increased to $3.22 million for the year ended December 31, 2016 compared to $0.64 million for the year ended December 31, 2015, respectively, an increase of $2.58 million or 404%. The increase was mainly due to grant incentives, which amounting to $2.80 million and was recognized as other income in 2016.

 

 
33

 

 

Net loss: Net loss decreased by $15.87 million, or 81%, to $3.64 million for the year ended December 31, 2016 from net loss of $19.51 million for the year ended December 31, 2015. The decrease in net loss was driven by an increase of $16.88 million in total gross profit and offset by an increase in total operating expenses of $4.57 million during the year ended December 31, 2016 as compared to the year ended December 31, 2015.

 

 

Liquidity and Capital Resources

 

Our working deficit is as follows (In thousands of dollars):

 

   

As of

December 31,

2016

   

As of

December 31,

2015

 

Current Assets

  $ 60,383     $ 63,102  

Current Liabilities

    (113,805

)

    (110,948

)

Net Working Deficit

  $ (53,422

)

  $ (47,846

)

 

 

On December 31, 2016, we had a working capital deficit of $ (53.42) million compared to a working capital deficit of ($47.85) million on December 31, 2015. The increase was primarily related to a decrease in current assets of $2.72 million and an increase of $2.86 million in current liabilities on December 31, 2016 compared to 2015. The decrease in current assets is attributable mainly to an increase of $2.13 million in related party receivable, an increase of $17.62 million in inventory, and a $8.15 million increase in prepaid expenses and other current assets, offset by a $25.41 million decrease in short-term investment, $1.29 million decrease in cash and cash equivalents and a decrease of $3.45 million in deferred contract costs. The increase in current liabilities of $2.86 million was primarily related to $56.78 million increase in amounts due to related parties and $9.62 million increase in trade payables offset by $44.22 million and $18.59 million decrease in short term notes payables and current portion of long term notes payables respectively and further $3.33 million decrease in deferred revenues.

  

 

 A summary of our cash flow activities is as follows (In thousands of dollars):

 

 

   

For the Years Ended December 31,

 
   

2016

   

2015

 

Net cash provided by Operating Activities

  $ 4,279     $ 15,111  

Net cash used in Investing Activities

    (16,587 )     (32,840

)

Net cash provided by Financing Activities

    11,325       21,501  

Effect of exchange rate changes on cash and cash equivalents

    (304 )     (2,685

)

Increase (Decrease) in Cash during the period

    (1,287 )     1,087  

Cash, Beginning of Period

    2,088       1,001  

Cash, End of Period

  $ 801     $ 2,088  

 

 

Year Ended December 31, 2016 as Compared to Year Ended December 31, 2015

 

Net cash provided by operating activities was $4.28 million for the year ended December 31, 2016 as compared to a net cash provided of $15.11 million for the year ended December 31, 2015. The net decrease in cash from operations resulted primarily from purchases of inventory and prepaid expenses and other current assets offset by amount due to related party.

  

Net cash used in investing was ($16.59) million for the year ended December 31, 2016 as compared to ($32.84) million for the year ended December 31, 2015. Cash used in investing activities was driven by our purchases of production equipment and loan to related party offset by the maturing of the term deposit in China.

 

Net cash provided by financing activities was $11.33 million for the year ended December 31, 2016 as compared to net cash provided by financing activities of $21.50 million for the year ending December 31, 2015. The decrease in cash from financing activities primarily related to higher payments of outstanding notes payable offset by higher loan from related party.

 

 
34

 

 

Going Concern

 

As of December 31, 2016, the Company had a working capital deficiency of $53.4 million and a stockholders’ deficiency of $16.4 million. During the years ended December 31, 2016, the Company incurred a net loss of $3.64 million. In addition, the Company has $8.06 million of debt coming due in the next 12 months. The Company had capital commitments of $25.47 million as of December 31, 2016, of which $22.93 million is within one year. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going concern within the next twelve months from the filing of this report.

 

The Company’s primary source of operating funds has been debt financing and cash flow from operations. The Company anticipates continuing to have positive cash flows from operations as it ramps up production at their new manufacturing facilities. The management is taking actions to pay off loans when due, refinance existing loans if needed, obtain additional loans collateralized by the land use rights and Machinery and equipment, related party guarantees, third party guarantees and other assets. However, there is no assurance that additional grant funds to cover our capital needs will be available to us and that we will be able to refinance existing loans, obtain additional loans, or raise additional funds through other sources such as through an equity offering. Even if we are able to obtain additional financing, it may contain undue restrictions, be on terms that are not satisfactory to us, or contain covenants on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of convertible debt and equity financing. We may not be able to raise sufficient equity capital to finance our operations due to our operating results, the lack of a market for our common stock and similar factors.

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. 

  

Off-Balance Sheet Arrangements

 

As of December 31, 2016, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation S-K.

 

Capital Commitments Equipment

 

The Company has contractual obligations related to future capital expenditures for equipment as of December 31, 2016. The Company's commitment for minimum payment under these contractual obligations as of December 31, 2016 is $25.47 million.

 

Capital Commitment - Construction 

 

As discussed further in Note 9, in conjunction with the Land Use Rights obtained by Northern Altair, the Company agreed to make fixed asset investments on the land of approximately $314.85 million, subject to loan guarantees and other incentives from Wu’an, China, over an unspecified period of time up to the 50-year life of the land use rights, with initial construction occurring in 2013.

 

Debt 

 

As of December 31, 2016, we were required to pay principal amounts of $8.06 million payable in 2017.with the remainder of $37.95 million payable in and after 2018.

 

Lease

 

On January 27, 2015, we entered into a Client NNN Lease (the “Lease”) with Flagship Enterprise Center, Inc.  Under the Lease, the Company will continue to lease the 70,000 square feet of space it currently occupies in Anderson, Indiana. The lease amended on January 27, 2015 will expire on June 30, 2017. Any lease renewal options will be negotiated no less than six (6) months prior to the expiration of this lease. Annual rent under the lease is $0.26 million plus IT fees, utilities and maintenance. The majority of the space was used for the production of prototype batteries and battery systems until December 31, 2015. The rest of the space is used for office space to provide technical engineering and support services, primarily to our China entities.  Effective May 1, 2016, we agreed to pay $0.14 million as a payment to terminate this lease effective by the end of May 2016. We have been granted use of the office space from the termination date, at no additional charge, until the landlord finds a new tenant. The landlord will give the Company thirty days’ notice at their discretion to vacate the premises. The Company expects to find new office space for the current employees in the general Anderson, Indiana area at a reduced rate and space requirement by the end of the second quarter of 2017. 

 

 
35

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 7A.

 

 
36

 

  

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

INDEX TO CONSOLIDATED FINANCIAL STATMEMENTS

 

 

Page

   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 38

 

 

Consolidated Balance Sheets as of December 31, 2016 and 2015

40

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2016 and 2015

41

 

 

Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2016 and 2015

42

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015

43

 

 

Notes to Consolidated Financial Statements

44-74

 

 
37

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

 

 

To the Audit Committee of the

 

Board of Directors and Stockholders

 

of Altair Nanotechnologies, Inc.

 

 

 

We have audited the accompanying consolidated balance sheet of Altair Nanotechnologies, Inc. and Subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit 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 Company’s 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 financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Altair Nanotechnologies, Inc. and Subsidiaries, as of December 31, 2016, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Marcum Bernstein & Pinchuk LLP

 

 

 

Marcum Bernstein & Pinchuk LLP

 

Guangzhou, China

 

May 1, 2017

 

 
38

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Audit Committee of the

Board of Directors and Shareholders

of Altair Nanotechnologies, Inc. 

 

 

We have audited the accompanying consolidated balance sheet of Altair Nanotechnologies, Inc. and its Subsidiaries (the “Company”) as of December 31, 2015, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit and cash flow for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit 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 Company’s 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 financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Altair Nanotechnologies, Inc. and its Subsidiaries, as of December 31, 2015, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/Marcum llp

 

Marcum llp

New York, NY 
November 15, 2016

 

 
39

 

 

ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Expressed in thousands of United States Dollars, except shares)

 

   

As of December 31,

 
   

2016

   

2015

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 801     $ 2,088  

Restricted cash

    216       231  

Short-term investment

    -       25,410  

Accounts receivable, net

    137       523  

Amounts due from related parties

    18,062       15,923  

Notes receivable

    -       74  

Inventories

    25,290       7,671  

Prepaid expenses and other current assets

    15,877       7,728  

Deferred contract costs

    -       3,454  

Total current assets

    60,383       63,102  

Prepaid expenses, non-current

    855       3,792  

Property, plant and equipment, net

    74,143       36,395  

Land use right, net

    24,422       26,685  

Patents, net

    -       47  

Long term receivable, net of current portion

    3,136       4,138  

Total assets

  $ 162,939     $ 134,159  

LIABILITIES AND EQUITYLIABILITIES AND STOCKHOLDERS’DEFICIT

               

Current Liabilities

               

Trade accounts payable

  $ 16,723     $ 7,107  

Amounts due to related parties

    82,239       25,459  

Deferred revenues and customer deposit

    443       3,776  

Deferred income - grant incentives, current

    536       551  

Current portion of long term notes payable

    6,974       25,564  

Accrued expenses and current liabilities

    5,801       3,518  

Notes payable

    750       44,973  

Capital lease obligation, current portion

    339       -  

Total current liabilities

    113,805       110,948  

Long term notes payable, net of current portion

    29,148       6,622  

Other non-current liabilities

    3,062       3,565  

Deferred income - grant incentives, non-current

    24,536       26,192  

Capital lease obligation, less current portion

    8,804       -  

Total liabilities

    179,355       147,327  

Commitments and contingencies

    -       -  

Stockholders' deficit:

               

Common stock, $0.001 par value, 200,000,000 shares authorized; 11,606,735 shares issued and outstanding at December 31, 2016 and 2015

    12       12  

Additional paid in capital

    259,912       259,102  

Accumulated deficit

    (276,136 )     (272,495 )

Accumulated other comprehensive (loss) income

    (204 )     213  

Total stockholders’ deficit

    (16,416 )     (13,168 )

Total liabilities and stockholders’ deficit

  $ 162,939     $ 134,159  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
40

 

 

ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Expressed in thousands of United States Dollars, except share and per share amounts)

 

   

Years Ended December 31,

 
   

2016

   

2015

 

Revenue:

               

Product sales

  $ 8,348     $ 5,883  

Product sales – related parties

    45,856       7,919  

License fees

    400       332  

Commercial collaborations

    83       144  

Total revenues

    54,687       14,278  

Cost of goods sold:

               

Product costs

    6,981       5,159  

Cost to related party sales

    30,580       7,523  

Inventory write down

    -       1,352  

Total cost of goods sold

    37,561       14,034  
                 

Gross profit

    17,126       244  

Operating expenses:

               

Research and development

    3,163       808  

Sales and marketing

    291       862  

General and administrative

    15,655       11,709  

Impairment loss

    129       652  

Depreciation and amortization

    1,093       1,560  

(Gain) loss on disposal of assets

    (29 )     142  

Total operating expenses

    20,302       15,733  

Loss from operations

    (3,176 )     (15,489 )

Other income (expense):

               

Interest expense, net

    (3,708 )     (2,533 )

Gain on foreign currency transactions

    -       1  

Other income - electric bus sales

    21       11,419  

Other expense – electric bus sales

    -       (13,548 )

Other income

    3,222       644  

Total other expense

    (465 )     (4,017 )

Net loss

  $ (3,641 )   $ (19,506 )

Other comprehensive loss:

               

Foreign currency translation adjustments

    (417 )     (492 )

Comprehensive loss

  $ (4,058 )   $ (19,998 )

Loss per common share - basic and diluted

  $ (0.31 )   $ (1.68 )

Weighted average shares - basic and diluted

    11,606,735       11,606,735  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
41

 

 

ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

(Expressed in thousands of United States Dollars, except shares) 

 

                                   

Accumulated

         
                                   

Other

         
   

Common Stock

   

Additional Paid

   

Accumulated

   

Comprehensive

         
   

Shares

   

Amount

   

In Capital

   

Deficit

   

Income (Loss)

   

Total

 

Balance, December 31, 2014

    11,606,735     $ 12     $ 259,091     $ (252,989 )   $ 705     $ 6,819  

Net loss

    -       -       -       (19,506 )     -       (19,506 )

Currency translation adjustment

    -       -       -       -       (492 )     (492 )

Stock-based compensation

    -       -       11       -       -       11  

Balance, December 31, 2015

    11,606,735       12       259,102       (272,495 )     213       (13,168 )

Waiver of payable by a related party

    -       -       810       -       -       810  

Net loss

    -       -       -       (3,641 )     -       (3,641 )

Currency translation adjustment

    -       -       -       -       (417 )     (417 )

Balance, December 31, 2016

    11,606,735     $ 12     $ 259,912     $ (276,136 )   $ (204 )   $ (16,416 )

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
42

 

 

ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in thousands of United States Dollars)

 

   

Years Ended December 31

 
   

2016

   

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net loss

  $ (3,641 )   $ (19,506 )

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    3,626       1,560  

Inventory reserve

    281       1,352  

Accretion of other non-current liabilities

    317       255  

Accretion of long term receivables

    (155 )     (424 )

Accretion of long term notes payable

    431       -  

Accretion of capital lease obligation

    175       -  

Share-based compensation

    -       11  

Bad debt expense

    -       (6,287 )

Impairment loss

    129       652  

Changes in operating assets and liabilities:

               

Accounts receivable

    385       52  

Note receivables

    73       -  

Inventories

    (19,170 )     (2,109 )

Prepaid expenses and other current assets

    (9,159 )     25,511  

Deferred contract costs

    3,454       (1,022 )

Trade accounts payable

    1,803       (1,885 )

Long term receivable

    1,808       (3,324 )

Accrued expenses and current liabilities

    2,574       922  

Deferred revenue and customer deposit

    (3,308 )     (2,952 )

Deferred income - grant incentives

    70       1,238  

Other non-current liabilities

    (594 )     3,217  

Amounts due from related parties

    (617 )     17,740  

Amounts due to related parties

    25,797       110  

Net cash provided by operating activities

    4,279       15,111  

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Maturity (placement) of term deposit

    24,834       (19,726 )

Purchase of property, plant and equipment

    (25,961 )     (12,421 )

Sale of property, plant and equipment

    565       -  

Purchase of land use right

    -       (1,435 )

Payment from (loan to) related parties

    (16,025 )     742  

Net cash used in investing activities

    (16,587 )     (32,840 )

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Change in restricted cash

    -       4,673  

Proceeds from trade acceptance

    678       10,236  

Repayment of trade acceptance

    (5,022 )     (5,610 )

Proceeds from notes payable

    36,416       39,538  

Repayment of notes payable

    (70,179 )     (26,402 )

Loan from (repayment to) related party

    49,432       (934 )

Net cash provided by financing activities

    11,325       21,501  

Effect of exchange rate changes on cash and cash equivalents

    (304 )     (2,685 )

Net change in cash and cash equivalents

    (1,287 )     1,087  

Cash and cash equivalents at beginning of year

    2,088       1,001  

Cash and cash equivalents at end of year

  $ 801     $ 2,088  
                 

SUPPLEMENTAL CASH FLOW INFORMATION

               

Cash paid during the years for:

               

Income taxes

  $ -     $ -  

Interest expense

  $ 4,328     $ 5,467  

NONCASH INVESTING AND FINANCING ACTIVITIES

               

Equipment acquired through capital lease

  $ 9,382     $ -  

Related parties debt settlement

  $ 13,323     $ -  

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

 
43

 

 

ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

 

NOTE 1 – NATURE OF THE BUSINESS AND BASIS OF PRESENTATION

 

Description of the Company and Business

 

Altair Nanotechnologies Inc., (the “Company”) is a Delaware corporation that develops, manufactures and sells nano lithium titanate batteries and energy storage systems. The Company’s nano lithium titanate battery systems offer higher power density, longer cycle life, rapid charge and discharge capabilities, a wider operating temperature range and higher levels of safety than conventional lithium-ion batteries. The Company targets applications that utilize the key attributes of its technology with product applications mainly found in the electric grid, transportation (commercial vehicles), and industrial market segments.

 

In January 2014, the Company approved plans to consolidate all manufacturing operations in the United States of America (“U.S.A.”) and to move them to Wu’an, China.  The Company will continue to retain engineering, research and development, sales and marketing, and support capabilities in the U.S.A. Starting in early 2016, the Company’s principal assets and operations were located in China. Management believed that moving manufacturing operations to China represented a strategic shift such that the change had a major effect on the Company’s operations.

 

 

NOTE 2 – GOING CONCERN AND MANAGEMENT’S PLANS

 

As of December 31, 2016, the Company had a working capital deficiency of $53.4 million and a stockholders’ deficiency of $16.4 million. During the years ended December 31, 2016, the Company incurred a net loss of $3.64 million. In addition, the Company has $8.06 million of debt coming due in the next 12 months. The Company has capital commitments of $25.47 million as of December 31, 2016, of which $22.93 million is within one year. These conditions raise substantial doubt about the ability of the Company to continue as a going concern within one year from the date of this report.

 

The Company’s primary source of operating funds has been debt financing and cash flow from operations. The Company anticipates continuing to have positive cash flows from operations as it ramps up production at their new manufacturing facilities. The management is taking actions to pay off loans when due, refinance existing loans if needed, obtain additional loans collateralized by the land use rights and Machinery and equipment, related party guarantees, third party guarantees and other assets. However, there is no assurance that additional grant funds to cover our capital needs will be available to us and that we will be able to refinance existing loans, obtain additional loans, or raise additional funds through other sources such as through an equity offering. Even if we are able to obtain additional financing, it may contain undue restrictions, be on terms that are not satisfactory to us, or contain covenants on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of convertible debt and equity financing. We may not be able to raise sufficient equity capital to finance our operations due to our operating results, the lack of a market for our common stock and similar factors.

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. 

 

 
44

 

 

ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries which include (1) Altair U.S. Holdings, (2) Altairnano, Inc., (3) Altair Nanotechnologies (China) Co., Ltd., and (4) Northern Altair Nanotechnologies Co., Ltd. All of the subsidiaries are either incorporated in the United States of America or China. Inter-company transactions and balances have been eliminated in consolidation.

 

Reclassification

 

The Company has reclassified certain comparative balances in the consolidated balance sheet for December 31, 2015 to conform to the current period’s presentation. The reclassification is related to the aggregation of the balances of certain accruals and other liability accounts; accrued salaries and benefits, accrued warranty, accrued liabilities, warrant liabilities, into the other payables and current liabilities account. The reclassification did not have an impact on the reported total assets, liabilities and stockholders’ equity.

 

Foreign Currency Translation and Transactions

 

The consolidated financial statements are presented in thousands of U.S. Dollars. The functional currency for the subsidiaries in China is the Chinese Yuan or RMB. Assets and liabilities are translated to the reporting currency at exchange rates on the balance sheet dates, revenue and expenses are translated at average exchange rates during the period, and equity accounts are translated at historical exchange rates except for the change in retained earnings during the year which is the result of the income. The cumulative translation adjustments are recorded in accumulated other comprehensive income (loss) in the accompanying consolidated statements of stockholders' deficit. Gains or losses on transactions denominated in a currency other than the subsidiaries’ functional currency which arise as a result of changes in foreign exchange rates are recorded as foreign currency transaction gain or loss in the statements of operations.

 

Use of Estimates

 

Financial statements prepared in accordance with U.S. GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management estimates include the assumptions used to calculate deferred revenue, inventory reserve, allowance for bad debt, warranty, impairment, financial guaranty, long term payable, refundable security deposit, deferred income taxes, contingencies, and equity instruments issued for financing and compensation. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist principally of bank deposits and institutional money market funds.  Short-term investments that are highly liquid have insignificant interest rate risk and original maturities of 90 days or less, when purchased are classified as cash and cash equivalents. Cash and cash equivalent accounts maintained in financial institutions in the U.S.A. are insured up to $250,000 for each “depositor” by the Federal Deposit Insurance Corporation (“FDIC”).  In the event of bank failure, there is no rule or regulation for obligatory insurance regarding to cash deposit accounts maintained within China. However, the Company has not experienced any losses in such accounts.

 

Restricted Cash

 

The Company’s restricted cash represents cash restricted as performance guarantee for China State Grid Project.

 

 
45

 

  

ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Short-term investment

 

Short-term investments consist primarily of investments in certificate of deposit with maturities between three months and one year.

 

Accounts Receivable

 

Accounts receivable consists of amounts due from customers for services and product sales, net of an allowance for doubtful accounts. The Company determines the allowance for doubtful accounts by reviewing each customer account and specifically identifying any potential for loss. As of December 31, 2016 and 2015, an allowance for doubtful accounts amounted to $nil and $30,000, respectively, was provided.

 

Inventory

 

The Company values its inventories generally at the lower of cost or market price. Market price is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.

 

For the U.S. operations, the cost of raw materials and finished goods is determined on a first-in, first-out method and finished goods is comprised of direct materials, direct labor and an appropriate proportion of overhead.

 

For the China operations, the cost of nLTO materials is determined on a weighted average method and finished goods is comprised of direct materials, direct labor and an appropriate proportion of overhead.

 

The allocation of fixed and variable overhead is reviewed every three months and is recorded to inventory based on normal capacity.

 

Inventory reserves are provided to cover risks arising from slow-moving items. The Company writes down the inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. Any idle facility costs or excessive spoilage are recorded as current period charges.

 

Prepaid expenses

 

Prepaid expenses represent cash paid in advance to suppliers for purchases of raw materials. Advances paid to suppliers for purchases of equipment and construction are classified as long term prepaid expenses.  

 

Research and Development Expenditures

 

Research and development expenditures include salaries, wages and other costs of personnel engaged in research and development, costs of services performed by others for research and development on our behalf are expensed when incurred. 

 

Stock-Based Compensation

 

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which employee services are provided in exchange for the award, known as the requisite service period.

 

 
46

 

 

 ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Defined contribution plan

 

Full-time employees of the Company in the People Republic China (“PRC”) participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that PRC operating entities make contributions to the government for these benefits based on certain percentages of the employees’ salaries. Except for required contributions mentioned above, the Company has no legal obligation for the benefits.

 

The total contributions paid were $2.02 million and $0.32 million for the years ended December 31, 2016 and 2015, respectively.

 

Long-Lived Assets

 

The Company evaluates the carrying value of its long-lived assets whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable.  The carrying value of long-lived assets are considered impaired when the total projected undiscounted cash flows expected to be generated by the asset are less than the carrying value.  The Company’s estimates of cash flows are based on the information available at the time including the following:  internal budgets; sales forecasts; customer trends; anticipated production volumes; and market conditions over an estimate of the remaining useful life of the asset which may range from 3 to 10 years for most equipment and up to 30 years for building and related building improvements.  If impairment is indicated, the asset value is written down to its estimated fair value. Events or circumstances that could indicate the existence of a possible impairment include obsolescence of the technology, an absence of market demand for the product or the assets used to produce it, a history of operating or cash flow losses and/or the partial or complete lapse of technology rights protection.

 

During the year ended December 31, 2016, the Company recognized impairment loss of $0.13 million for the two EV buses delivered to Wu’an government as the application for their operating licenses was unsuccessful. During the year ended December 31, 2015, the Company incurred an impairment loss of $0.65 million related to the write-down to fair market value for an asset that was leased to a customer under an operating lease. The impairment was to reflect the anticipated loss on the sale of the leased assets incurred in the subsequent period.

 

Property, plant and equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the following estimated useful lives: 

 

Building and improvements (years)

 20

-

30

Machinery and equipment (years)

5

-

10

Furniture, office equipment and others (years)

3

-

7

Leased asset (years)

  

10

 

 

Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. Construction in progress is related to the construction or development of property (including land) and equipment that have not yet been placed in service for our intended use. Depreciation for equipment commences once it is placed in service and depreciation for buildings and leasehold improvements commences once they are ready for our intended use. Land is not depreciated. Construction in progress represents capital expenditures for direct costs of construction or acquisition and design fees incurred, and the interest expenses directly related to the construction. Capitalization of these costs ceases and the construction in progress is transferred to the appropriate category of property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. The leased assets are depreciated over the useful lives of the assets. Construction in progress is not depreciated.

 

 
47

 

 

 ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Patents

 

Patents are related to the Company’s nanoparticle production technology and stated at cost less accumulated amortization. Amortization is recorded using the straight-line method. The patents have been fully amortized as of December 31, 2016.

 

Land use rights

 

Land use rights are stated at cost less accumulated amortization.  Amortization is recorded using the straight-line method over their 50 year useful lives. All land in China is owned by the Chinese government. The government in China, according to law, may sell the right to use the land for a specified period of time. Thus, all of the Company’s land purchases in China are considered to be leasehold land under lease and are stated at cost less accumulated amortization.

 

Revenue Recognition 

 

The Company generates its revenues primarily from four sources; (1) nLTO related product sales, (2) Energy storage systems (referred to as “ESS” or by our brand name “ALTI-ESS”), (3) Collaborations and (4) License fees. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or service has been performed, the fee is fixed and determinable, and collectability is reasonably assured.

 

Revenue from nLTO related product sales is recognized upon delivery of the product, unless specific contractual terms dictate otherwise.

 

Revenue from commercial collaborations and license fees is recognized based on various performance measures, such as stipulated milestones.  As these milestones are achieved, revenue is recognized.

 

Revenue from ESS projects is recognized using the Completion Method under the long-term contract accounting. The Company recognizes the full amount of revenue from long-term contracts, defined as contracts longer than twelve months, upon completion, delivery and written acceptance received from the customer. All contract costs incurred are included in the balance sheet as deferred costs until the related revenue is recognized. At each reporting date, the Company reviews its long-term contracts to determine if revenue from contracts are expected to exceed the related estimated total costs. In the cases where estimated costs will exceed revenues, the Company recognizes as an expense in cost of goods sold the full amount of the estimated costs above the contract revenue value. Cash received in advance relating to the future performance of services, deliveries of products and/or long term contracts are deferred until the performance of the service is completed, the product is shipped, and/or the contract is completed and accepted by the customer.

 

Grant Incentive

 

Grant incentives were obtained from the Wu’an China Government to be used for construction, purchases of equipment and other expenditures for the nLTO manufacturing facility. The amount received is included in the balance sheet as deferred income and is recognized in the statement of operations as other income over the useful life of the related assets upon placing such assets into service. In all cases, grants are recognized as other income when there is a reasonable assurance that the Company has complied with the conditions attaching to them.

 

Accrued Warranty 

 

The Company’s U.S operation provides a three-year limited warranty for battery packs and energy storage systems sold, while the Company’s China operation offers a limited one-year warranty on energy storage systems. A liability is recorded for estimated warranty obligations at the date products are sold.  The estimated cost of warranty coverage is based on historical experience with cell and module life cycle testing.  As additional actual historical data is collected on the new product, the estimated cost of warranty coverage will be adjusted accordingly.  The liability for estimated warranty obligations may also be adjusted based on specific warranty issues identified.  

 

 
48

 

 

 ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Overhead Allocation 

 

Facilities overhead and production employee’s fringe benefit costs are allocated to research and development and inventories based on relative labor costs. Production equipment depreciation expense is recorded to cost of goods sold as the equipment is used to produce product sold to customers.

 

Comprehensive Loss

 

Recognized revenue, expenses, gains and losses are included as net income or loss. Although certain changes in assets and liabilities are reported as separate components of the equity section of the consolidated balance sheet, such items, along with net income or loss, are components of comprehensive income or loss. The components of other comprehensive income or loss consist solely of foreign currency translation adjustments.

 

Net Loss per Common Share

 

Basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common stockholders by the weighted average number of common and potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of the incremental shares of common stock issuable upon the exercise of stock options and warrants.  Potentially dilutive shares are excluded from the computation if their effect is anti-dilutive. The Company had a net loss for all periods presented herein; therefore, none of the stock options and warrants outstanding during each of the periods presented were included in the computation of diluted loss per share as they were anti-dilutive. Stock options and warrants can exercise a total amount of common stock for 20,484 and 441,864 shares as of December 31, 2016 and 2015, respectively, were excluded from the calculations of diluted loss per share.

 

Advertising, Sales and Marketing Costs

 

Advertising, sales and marketing costs are expensed as incurred and are included in sales and marketing expenses in the Company’s consolidated statement of operations. Advertising, sales and marketing costs were approximately $0.29 and $0.87 million, respectively, for the years ending December 31, 2016 and 2015.

 

Income Taxes 

 

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.

 

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and the Company’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance.

 

 
49

 

 

 ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

 

 NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Income Taxes (continued)

 

Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitation has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.

 

 Geographic Information and Concentration

 

Geographic operating information is consistent with how the Chief Executive Officer and Interim Chief Financial Officer reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. The Power and Energy Group (PEG) is the Company’s current and future focus for corporate development. The PEG group develops, produces, and sells nLTO battery modules and larger utility-scale energy storage system projects. Resource allocation and performance assessment is concentrated as one operating level and the Company manages its current business primarily on a geographic basis.

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of December 31, 2016 and 2015, the Company’s consolidated balance sheets included the fair value of a warrant liability of $nil and $nil, respectively (see Note 5 and Note 15).

 

Recently Issued Accounting Guidance

 

In November 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-18, “Statement of Cash Flows-Restricted Cash”. ASU 2016-18 modifies the requirement on the statement of cash flow to explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flow. ASU No. 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is in the process of evaluating the impact of ASU 2016-18 on the Company’s financial statements and disclosures.

 

 
50

 

 

 ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

 

 NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Recently Issued Accounting Guidance (continued)

 

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases”. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 

In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred taxes by requiring that deferred tax assets and liabilities be presented as noncurrent on the balance sheet. ASU 2015-17 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. The Company early adopted this guidance, prospectively, as of January 1, 2016. The adoption of this guidance had no impact on the Company’s consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory." Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. ASU 2015-11 requires an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016 (January 1, 2017 for the Company). The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which was subsequently modified in August 2015 by ASU No. 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year. As a result, the ASU No. 2014-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The core principle of ASU No. 2014-09 is that companies should recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). The Company plans to adopt this standard on January 1, 2018. As of December 31, 2016, the majority of the Company’s revenue is generated from product sales. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and disclosures. .The Company is still evaluating the impact on its results of operations or cash flows. The Company expects to complete its assessment of the effect of adopting ASU No. 2014-09 by the end of 2017, as well as the selection of a transition approach. 

 

 

NOTE 4 – ELECTRIC BUS SALES

 

On April 19, 2012, the Company entered into an Agreement (the “Agreement") with Wu’an Municipal People's Government ("Wu'an") and Handan Municipal People's Government ("Handan Government") regarding the establishment by Altair China of a manufacturing facility in the City of Wu'an, in Hebei Province in China. The Agreement also indicates the purchase by Wu'an and Handan of EV Buses beginning in late 2012 and continuing over five years, and the future purchase of electric taxis and energy storage systems.

 

 
51

 

 

 ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

 NOTE 4 – ELECTRIC BUS SALES (CONTINUED)

 

Pursuant to the Agreement, on January 6, 2013, the Company, through its wholly-owned subsidiary, Northern Altair, entered into an EV Buses sale agreement with Wu’an Transport Bureau, the total contract price, with VAT included was $25.1 million for 165 EV Buses equipped with high efficiency lithium battery. No EV Buses were delivered during the year ended December 31, 2013.

 

Pursuant to the Agreement, on May 13, 2014, the Company, through its wholly-owned subsidiary, Northern Altair, entered into an EV Buses sale agreement with Handan City Public Transportation (“Handan”), the total contract price, with VAT included was $44.5 million for 200 EV Buses.

 

During the year ended December 31, 2014, the Company delivered 153 EV Buses to Handan and recognized other income of $28.4 million net of the fair value of the financial guarantee provided for Handan.

 

During the year ended December 31, 2015, the Company delivered 28 EV Buses to Wu’an and 47 EV Buses to Handan and recognized other income of $11.3 million net of the fair value of the financial guarantee provided for Handan. The unearned financial guaranty premium will be amortized using straight-line amortization method over 10 years.

 

During the year ended December 31, 2016, the Company did not deliver any buses to Wu’an.

 

In connection with the bus sales to Handan, the Company agreed to provide to a third-party leasing entity a security deposit equals to 20% of the contract price. The security deposit is refundable over a ten-year period when Handan completes its obligations to the third-party leasing entity. The difference between the present value of the refundable security deposit and the gross amount was recorded as current period expense and unearned interest income to the security deposit. The unearned interest income is being amortized straight line over the refund period of 10 years.

 

In addition, the Company agreed to pay an initial 8% of the contract price for rebates and to make subsequent quarterly payments, for a ten-year period, to a third-party leasing company as an incentive. The net present value of the quarterly payments is recorded as current period expense. The difference between the present value of subsequent quarterly payments and the gross amount was recorded as unrecognized interest expense and then amortized over ten-year period.

 

 

In thousands except for bus delivered quantities:

   

Years Ended December 31,

 
   

2016

   

2015

 

Buses delivered

    -       75  

Other income- buses, gross

  $ -     $ 11,473  

Financial guarantee premium

    21       (54 )

Other income- buses, net

    21       11,419  

 

Other cost of buses purchased from related parties (Note 18)

 

      -       11,409  

Security deposit expense

    -       727  

Rebates expense

    -       1,412  

Other expenses- buses

  $ -     $ 13,548  

 

 
52

 

 

 ALTAIR NANOTECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of United States Dollars, except shares)

 

NOTE 5 – FAIR VALUE MEASUREMENTS AND OTHER FINANCIAL MEASUREMENTS

 

The Company’s financial instruments are accounted for at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels of the fair value hierarchy are described below:

 

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.

 

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and short-term notes receivable. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. The estimated fair values of the Company's debt approximately carrying values as the interest rates under the loan agreements either approximately current market rates or there were not significant fluctuations in current market rates to change the fair values of the underlying instruments. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.

 

NOTE 6 –INVENTORIES

 

Inventory relates to the production of battery systems and nLTO related products targeted at the electric grid, transportation, and industrial markets, which consisted of the following: (In thousands of dollars):

 

   

December 31,

 
   

2016

   

2015

 

Raw materials