UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

 

or

 

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

 

For the transition period from ___________ to ___________

 

Commission file number 001-38078

 

ADOMANI, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware	46-0774222
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

4740 Green River Road, Suite 106

Corona, CA 92880

(Address of principal executive offices, including zip code)

 

(951) 407-9860

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐

 

Indicate by check mark whether the Registrant (1) 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 ý No ☐

 

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.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	ý (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	ý

 

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 13(a) of the Exchange Act. ý

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

 

The number of shares outstanding of the Registrant’s only class of common stock as of November 10, 2017 was 68,070,930.

 

 

 

 

ADOMANI, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

 

Note About Forward-Looking Statements

 

Part I. FINANCIAL INFORMATION

 

		PAGE
Item 1. Financial Statements:
	Unaudited Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	1
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016	2
	Unaudited Consolidated Statement of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2017	3
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosure about Market Risk		21
Item 4. Controls and Procedures		21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		22
Item 1A. Risk Factors		22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		23
Item 4. Mine Safety Disclosures		23
Item 5. Other Information		23
Item 6. Exhibits		23
Signatures		24

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, or Quarterly Report, contains “forward-looking statements” that involve substantial risks and uncertainties. Forward-looking statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.

 

You should not place undue reliance on forward-looking statements. The cautionary statements set forth in this Quarterly Report, including in “Risk Factors” and elsewhere, identify important factors which you should consider in evaluating our forward-looking statements. These factors include, among other things:

 

·

Our ability to generate demand for our zero-emission or hybrid drivetrains and conversion kits in order to generate revenue;

 

·

Our dependence upon external sources for the financing of our operations, particularly given that our independent registered accounting firm’s report on our consolidated financial statements for the year ended December 31, 2016 contains a statement concerning our ability to continue as a going concern;

 

·

Our ability to effectively execute our business plan;

 

·

Our ability to scale our assembling and converting processes effectively and quickly from low volume production to high volume production;

 

·

Our ability to manage our expansion, growth and operating expenses and reduce and adequately control the costs and expenses associated with operating our business;

 

·

Our ability to obtain, retain and grow our customers;

 

·

Our ability to enter into, sustain and renew strategic relationships on favorable terms;

 

·

Our ability to achieve and sustain profitability;

 

·

Our ability to evaluate and measure our current business and future prospects;

 

·

Our ability to compete and succeed in a highly competitive and evolving industry;

 

·

Our ability to respond and adapt to changes in electric or hybrid drivetrain technology; and

 

·

Our ability to protect our intellectual property and to develop, maintain and enhance a strong brand.

 

You should read this Quarterly Report and the documents that we reference elsewhere in this Quarterly Report completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. In light of the significant risks and uncertainties to which our forward-looking statements are subject, you should not place undue reliance on or regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe, or at all. We discuss many of these risks and uncertainties in greater detail in this Quarterly Report, particularly in Part II. Item 1A. “Risk Factors.” These forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report regardless of the time of delivery of this Quarterly Report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report.

 

Unless expressly indicated or the context requires otherwise, references in this Quarterly Report on Form 10-Q to “ADOMANI,” “Company,” “we,” “our,” and “us” refer to ADOMANI, Inc. and our subsidiaries, unless the context indicates otherwise.

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ADOMANI, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

         

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

ADOMANI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)

                 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

ADOMANI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

(in thousands, except per share data)

(unaudited)

                   

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

ADOMANI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

           

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

ADOMANI, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017, the outstanding options have an intrinsic value of approximately $183.7 million.

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The following discussion of our financial condition and the results of operations should be read in conjunction with the “Unaudited Consolidated Financial Statements” and notes thereto included elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report. This discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under the “Cautionary Statement Regarding Forward-Looking Statements” above, and elsewhere in this Quarterly Report, particularly in Part II. Item 1A. “Risk Factors,” below.

 

Overview of ADOMANI

 

We are a provider of advanced zero-emission electric and hybrid vehicles and replacement drivetrains that is focused on reducing the total cost of vehicle ownership. Our drivetrain systems are designed to help fleet operators unlock the benefits of green technology and address the challenges of traditional fuel price cost instability and local, state and federal environmental regulatory compliance.

 

We design advanced zero-emission electric and hybrid drivetrain systems for integration in new school buses and medium to heavy-duty commercial fleet vehicles. We also design patented conversion kits to replace conventional drivetrain systems for combustion powered vehicles with zero-emission electric or hybrid drivetrain systems. The hybrid drivetrain systems are available in both an assistive hybrid format and a full-traction format for use in private and commercial fleet vehicles of all sizes. We seek to expand our product offerings to include the sale of zero-emission systems in vehicles manufactured by outside original equipment manufacturer, or OEM, partners, but to be marketed, sold, warrantied and serviced through our developing distribution and service network.

 

Our drivetrain systems can be built with options for remote monitoring, electric power-export and various levels of grid-connectivity. Our zero-emission systems may also grow to include automated charging infrastructure and “intelligent” stationary energy storage that enables fast vehicle charging, emergency back-up facility power, and access to the developing, grid-connected opportunities for the aggregate power available from groups of large battery packs.

 

We generated virtually no revenue from inception through September 30, 2017. For the years ended December 31, 2016 and 2015, our net losses were $10.7 million and $6.0 million, respectively. For the nine months ended September 30, 2017 and 2016, our net losses were $21.6 million and $9.2 million, respectively; and for the three months ended September 30, 2017 and 2016, our net losses were $12.0 million and $6.3 million, respectively.

 

 

Factors Affecting Our Performance

 

We believe that the growth and future success of our business depend on various opportunities, challenges and other factors, including the following:

 

New Customers. We are competing with other companies and technologies to help fleet managers and their districts/companies more efficiently and cost-effectively manage their fleet operations. Once these fleet managers have decided they want to buy from us, we still face challenges helping them obtain financing options to reduce the cost barriers to purchasing. We may also encounter customers with inadequate electrical services at their facilities that may delay their ability to purchase from us.

 

Investment in Growth. We plan to continue to invest for long-term growth. We anticipate that our operating expenses will increase in the foreseeable future as we invest in research and development to enhance our zero-emission systems; design, develop and manufacture our drivetrains and their components; increase our sales and marketing to acquire new customers; and increase our general and administrative functions to support our growing operations. We believe that these investments will contribute to our long-term growth, although they will adversely affect our results of operations in the near term. In addition, the timing of these investments can result in fluctuations in our annual and quarterly operating results.

 

Zero-emission electric and hybrid drivetrain experience. Our dealer and service network is not currently established, although we do have certain agreements in place. One issue they may have, and we may encounter, is finding appropriately trained technicians with zero-emission electric and hybrid drivetrain experience. Our performance will depend on having a robust dealer and service network, which will require appropriately trained technicians to be successful. Because our vehicles are based on a different technology platform than traditional internal combustion engines, individuals with sufficient training in zero-emission electric and hybrid vehicles may not be available to hire, and we may need to expend significant time and expense training the employees we do hire. If we are not able to attract, assimilate, train or retain additional highly qualified personnel in the future, or do so cost-effectively, our performance would be significantly and adversely affected.

 

Market Growth. We believe the market for all-electric and hybrid solutions for alternative fuel technology, specifically all-electric and hybrid vehicles will continue to grow as more purchases of new zero emission vehicles and as more conversions of existing fleet vehicles to zero-emission vehicles are made. However, unless the costs to produce such vehicles decrease dramatically, purchases of our products will continue to depend in large part on financing subsidies from government agencies. We cannot be assured of the continued availability or the amounts of such assistance to our customers.

 

Revenue Growth from Additional Products. We seek to add to our product offerings additional zero-emission vehicles of all sizes manufactured by outside OEM partners, to be marketed, sold, warrantied and serviced through our developing distribution and service network, as well as add other ancillary products discussed elsewhere in this report.

 

Revenue Growth from Additional Geographic Markets. We believe that growth opportunities for our products exist internationally in addition to domestically, and through our wholly-owned subsidiary Adomani (Nantong) Automotive Technology Co. Ltd., or ADOMANI China, we will be pursuing international growth as well. Our future performance will depend in part upon the growth of these additional markets. Accordingly, our business and operating results will be significantly affected by our ability to timely enter and effectively address these emerging markets and the speed with which and extent to which demand for our products in these markets grows.

 

Components of Our Results of Operations

 

Revenue

 

Revenue is recognized from the sales of advanced zero-emission electric and hybrid drivetrain systems for fleet vehicles and from the sale of new, purpose-built zero-emission electric or hybrid vehicles. Revenue is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and title has passed, (iii) the price is fixed or determinable and (iv) collectability is reasonably assured.

 

 

Cost of Sales

 

Cost of sales includes those costs related to the development, manufacture, and distribution of our products. Specifically, we include in cost of sales each of the following: material costs (including commodity costs); freight costs; labor and other costs related to the development and manufacture of our products; and other associated costs.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative costs include all corporate and administrative functions that support our company. These costs also include stock-based compensation expense; warranty, including product recall and customer satisfaction program costs; consulting costs; and other costs that cannot be included in cost of sales.

 

Consulting and Research and Development Costs

 

These costs are substantially related to our research and development activity.

 

Other Income/Expenses, Net

 

Other income/expenses include non-operating income and expenses, including interest expense.

 

Provision for Income Taxes

 

We account for income taxes in accordance with FASB ASC 740 “Income Taxes,” which requires the recognition of deferred income tax assets and liabilities for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations. Because we have incurred only losses to this point, no provision for income taxes has been made.

 

 

Results of Operations

 

The following table compares operating data for the three and nine months ended September 30, 2017 and 2016:

 

ADOMANI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)

                 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Net sales		$	-			$	-			$	-			$	68
Cost of sales			-				-				-				50
Gross profit			-				-				-				18
Operating expenses:
General and administrative [1]			11,716				5,872				18,363				8,107
Consulting			49				-				2,213				95
Research and development			38				112				557				128
Total operating expenses, net			11,803				5,984				21,133				8,330
Loss from operations			(11,803	)			(5,984	)			(21,133	)			(8,312	)
Other income (expense):
Interest expense, net			(47	)			(274	)			(362	)			(833	)
Other income (expense)			(116	)			(11	)			(113	)			(9	)
Total other income (expense)			(163	)			(285	)			(475	)			(842	)
Loss before income taxes			(11,966	)			(6,269	)			(21,608	)			(9,154	)
Income tax expense			(1	)			-				(3	)			-
Net loss		$	(11,967	)		$	(6,269	)		$	(21,611	)		$	(9,154	)
Net loss per share to common shareholders:
Basic and diluted		$	(0.18	)		$	(0.11	)		$	(0.33	)		$	(0.13	)
Weighted shares used in the computation of net loss per share:
Basic and diluted			68,070,930				57,163,882				66,020,773				69,286,226

 

[1]   Includes stock-based compensation expense as follows:

               

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
General and administrative expenses			10,609				5,645				15,653				6,920
Total stock-based compensation expense			10,609				5,645				15,653				6,920

 

 

Revenue

 

Revenue for each of the three and nine months ended September 30, 2017 was $0, as compared to revenue of $0 and $68,000 for the three and nine months ended September 30, 2016, respectively. We expect to begin generating revenues in the fourth quarter of 2017.

 

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of the following:

 

•        personnel-related expenses, including stock-based compensation costs;

•        costs related to investor relations activities;

•        sales and marketing-related expenses; and

•        other expenses relating to the operations of the Company.

 

General and administrative expenses increased by $5.8 million and $10.3 million for the three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods. The increases are primarily due to increases in stock-based compensation expense of $5.0 million and $8.7 million for the three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods, due to the additional options granted in March 2017 (see “Options to Purchase Common Stock” below and Note 7 to the unaudited consolidated financial statements included in this report) and also to the requirement to remeasure non-employee stock options, as required by ASC 718 and ASC 505. We anticipate stock-based compensation expense to continue to increase as we expand our infrastructure in order to begin generating revenue.

 

Other increases in the current-year periods over the prior-year periods include payroll, rent, sales and marketing, travel, investor relations expenses, and other general and administrative expenses, which increased by $920,305 and $1.6 million, offset by a decrease in legal and professional fees of $183,124 and $122,906 for the three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods, due to the Company’s need to expand its sales and marketing infrastructure, as well as the incurrence of certain costs associated with its status as a public company.

 

Consulting Expenses

 

Consulting expenses increased by $49,153 and $2.1 million for the three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods.

 

The increase for the three months ended September 30, 2017 as compared to the prior period is due to required payments to various consultants for this period.

 

The increase for the nine months ended September 30, 2017 as compared to the prior period is primarily due to the issuance of a warrant to purchase 350,000 shares of Common Stock as part of a settlement agreement, which was valued at $1.2 million, and a payment of $800,000 required under the same agreement. Additionally, $75,000 previously paid to the party involved in the settlement agreement, and originally classified as deferred offering costs, was reclassified as consulting expense. See Note 5 of the unaudited consolidated financial statements contained in this report.

 

Research and Development Expenses

 

Research and development expenses decreased by $74,213 and increased by $428,516 for the three and nine months ended September 30, 2017, respectively, as compared to the prior-year periods.

 

The decrease for the three months ended September 30, 2017 as compared to the prior period is due to lower expenditures for research and development activity.

 

The increase for the nine months ended September 30, 2017 as compared to the prior period is primarily due to $420,000 incurred in the second quarter of 2017 to build and install our drivetrain system on a chassis of a Type D school bus, on a promotional basis, for a potential customer. The project also enabled us to evaluate a third party firm that performed the work.

 

Liquidity and Capital Resources

 

From our incorporation in 2012 until the completion of our offering of Common Stock under Regulation A in June 2017, we financed our operations and capital expenditures through issuing equity capital, convertible notes and notes payable. A significant portion of this funding has been provided by affiliated stockholders, although significant equity capital was also raised in late 2015, and the majority of the convertible notes outstanding was also raised in 2015 from non-affiliated third parties, as discussed below and in Note 4 to the unaudited consolidated financial statements.

 

 

As of September 30, 2017, we had cash and cash equivalents of $4.5 million. We believe that our existing cash and cash equivalents will be sufficient to fund our operations at least through the end of calendar year 2018. However, there can be no assurance that we will successfully execute our business plan, and if we do not, we may need additional capital to continue our operations. While we have not generated any material revenues to date and do not expect to be able to satisfy our cash requirements solely through product sales in the near future, we have received several purchase orders for zero-emission electric school buses in the second half of 2017 and we expect to begin generating revenue in the fourth quarter of 2017. The sale of additional equity securities in the future could result in additional dilution to our stockholders and those securities may have rights senior to those of our Common Stock. The incurrence of additional indebtedness in the future would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. Such capital, if required, may not be available on terms that are favorable to us or at all. We are currently incurring operating deficits that are expected to continue for the foreseeable future, and as we begin to execute our marketing plan, we expect our operating deficit will continue to grow until we begin to generate a sufficient level of revenue from our sales and marketing efforts.

 

Debt

 

As of December 31, 2016, the Company had borrowed $645,000 from Acaccia Family Trust, formerly a related party, and other parties by issuing notes convertible into Common Stock at prices ranging from $0.10 per share to $0.50 per share. On January 30, 2017, the notes plus accrued interest, a total of $725,584, converted into 6,868,578 shares of Common Stock. As of December 31, 2016, we also had outstanding a total of $4,255,325 of secured promissory notes, net of $884,700 principal amount of these secured notes that were exchanged for 884,700 shares of Common Stock on September 1, 2016. In November 2016, we borrowed $500,000 from an unaffiliated stockholder for working capital needs and, in March 2017, borrowed an additional $500,000 from the same stockholder for additional working capital required due to delays in completing our offering under Regulation A. In December 2016, we borrowed $500,000 from a third party pursuant to a secured promissory note, and immediately made a $500,000 loan to another third party who operates in the zero-emissions drivetrain technology industry. All notes referenced in this paragraph were scheduled to mature in 2017. In connection with the initial closing of our offering under Regulation A, on May 12, 2017, we repaid the $1,500,000 outstanding under the three unsecured notes payable. See Note 4 to the unaudited consolidated financial statements contained in this report.

 

Equity Financings

 

In a series of closings during the fiscal years ended 2012, 2013, 2014, 2015 and 2016, the Company sold an aggregate of 58,542,350 shares of Common Stock to certain of its officers, directors and other related parties for an aggregate purchase price of $5,270,860.

 

Regulation A Offering

 

On June 9, 2017, we completed an offering of Common Stock under Regulation A. We sold 2,852,275 shares of Common Stock for gross proceeds of $14,261,375, of which $1,711,365 was paid to the selling stockholders for 342,273 shares they sold in the offering.

 

Options to Purchase Common Stock

 

As of September 30, 2017, we had granted options to purchase 30,375,000 shares of Common Stock. 22,567,619 shares of Common Stock are issuable upon the exercise of options vested as of September 30, 2017, at an exercise price of $0.10 per share, and 670,073 shares of Common Stock are issuable upon the exercise of options vested as of September 30, 2017, at an exercise price of $10.49 per share. If all vested options to purchase Common Stock were exercised, we would receive proceeds of $9,285,828 and we would be required to issue 23,237,692 shares of Common Stock. There can be no assurance, however, that any such options will be exercised.

 

 

In March 2017, a co-founder of the Company (including family members and trusts) relinquished voting and investment power over all securities of the Company they owned. The co-founder surrendered his options to purchase 7,000,000 shares of Common Stock for forfeiture and cancellation, and sold the shares owned by his IRA.

 

2015 Note Financing and Warrants to Purchase Common Stock

 

During 2015, the Company issued two-year secured promissory notes to third party lenders in an aggregate principal amount of $5,147,525, or the Note Financing. As of September 30, 2017, the Company had repaid $1,060,000 of principal outstanding under such notes. The secured promissory notes are due on various dates between January 31 and November 30, 2017. Prior to the maturity dates of the notes, the Company exercised its option to extend the maturity dates six months pursuant to the provisions of such notes. Any subsequent extension requires the consent of the noteholders. The notes bear interest at an annual rate of 9%, payable monthly in arrears. The note obligations are secured by a lien on all assets of the Company. On September 1, 2016, holders of $884,700 of principal amount of the notes exchanged their notes for 884,700 shares of Common Stock, thereby reducing the principal amount outstanding under the notes to $3,195,325.

 

In connection with the Note Financing, in 2015, the Company agreed to issue a warrant to a third party to purchase 1,250,000 shares of Common Stock at $4.00 per share, exercisable through September 1, 2021. On September 1, 2016, the Company issued the warrant.

 

Credit Facilities

 

We do not have any credit facilities or other access to bank credit. If, however, we elect to repay the secured promissory notes at maturity, or believe that making an acquisition is appropriate, or see that sales of product are more rapidly using working capital than anticipated, we may seek to obtain a credit facility to address these issues.

 

Capital Expenditures

 

We do not have any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment necessary to conduct our operations on an as needed basis.

 

Going Concern

 

As of September 30, 2017, we had working capital of $2.6 million and stockholders’ equity of approximately $3.2 million. During the nine months ended September 30, 2017, we incurred a net loss attributable to holders of our Common Stock of approximately $21.6 million. Of the $21.6 million loss incurred for the nine months ended September 30, 2017, approximately $15.7 million is attributable to non-cash stock-based compensation expense, and another $1.2 million is related to non-cash consulting expense discussed above. The foregoing non-cash expenses had no impact on our cash flows during the nine months ended September 30, 2017. Stock-based compensation expense represents the amortization of the fair market value of stock options granted over their respective vesting period. The fair market value for both items is determined using the Black-Scholes model. Because some of these stock options were granted to non-employees, ASC 505 also require that we remeasure the fair market value of each of these options for each interim vesting period based on the market value of our stock on the interim vesting date. Therefore, the expense associated with these options is sensitive to changes in our stock price.

 

We have not generated any material revenues and have incurred net losses since inception. Our recurring operating losses and our need for additional sources of capital to fund our ongoing operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our audited consolidated financial statements as of December 31, 2016 and 2015 and for the years then ended with respect to this uncertainty. However, on June 9, 2017, we completed our offering under Regulation A. We sold 2,852,275 shares of Common Stock for gross proceeds of $14,261,375, of which $1,711,365 was paid to the selling stockholders for 342,273 shares they sold in the offering. Based on our management’s plans and the significant capital raised, that substantial doubt has been alleviated.

 

 

Cash Flows

 

The following table summarizes our cash flows from operating, investing, and financing activities for the nine months ended September 30, 2017 and 2016.

 

		Nine Months Ended September 30,
		2017				2016
Consolidated Statements of Cash Flow Data:
Cash flows used in operating activities		$	(4,656	)		$	(2,107	)
Cash flows used in investing activities			(474	)			(369	)
Cash flows provided by (used in) financing activities			8,787				(324	)
Increase (decrease) in cash and cash equivalents		$	3,657			$	(2,800	)

 

Operating Activities

 

Cash used in operating activities is primarily the result of our operating losses, reduced by the impact of the non-cash stock-based compensation and warrant amounts. These numbers are further impacted by adjustments for non-cash interest expense.

 

Net cash used in operating activities during the nine months ended September 30, 2017 was $4.7 million, as a result of a net loss of $21.6 million, stock-based compensation of $15.7 million, other non-cash charges of $1.4 million, and changes in operating assets and liabilities that used $152,241 in cash. Inventory increased by $390,000, accrued liabilities increased by $226,225, accounts payable increased by $75,716, other current assets increased by $59,202, and other non-current assets increased by $4,980.

 

Net cash used in operating activities during the nine months ended September 30, 2016 was $2.1 million, as a result of a net loss of $9.2 million, stock-based compensation of $6.9 million, other non-cash charges of $463,248, and changes in operating assets and liabilities that used $336,797 in cash.

 

We expect cash used in operating activities to fluctuate significantly in future periods as a result of a number of factors, some of which are outside of our control, including, among others: the success we achieve in generating revenue; the success we have in helping our customers obtain financing to subsidize their purchases of our products; our ability to efficiently develop our dealer and service network; the costs of batteries and other materials utilized to make our products; the extent to which we need to invest additional funds in research and development; and the amount of expense we incur to satisfy future warranty claims.

 

Investing Activities

 

Net cash used in investing activities during the nine months ended September 30, 2017 was $593,573. This was due to the acquisition of property and equipment relating to the lease of our new office facility, and issuing a note to a third party. See Notes 4 and 8 to the unaudited consolidated financial statements contained in this report.

 

Net cash used in investing activities during the nine months ended September 30, 2016 was $368,939. This was primarily due to the acquisition of $358,939 of property and equipment and a $10,000 investment in Silicon Turbine Solutions.

 

Financing Activities

 

Net cash provided by financing activities during the nine months ended September 30, 2017 was $8.8 million. This is due to net proceeds of $12.6 million received from the closing of our offering under Regulation A, a $2.6 million repayment of notes payable principal and related accrued and unpaid interest, and net notes payable proceeds of $500,000. This is reduced by payments for costs related to our offering under Regulation A of $1.7 million. See Note 5 to the unaudited consolidated financial statements contained in this report.

 

Net cash used by financing activities during the nine months ended September 30, 2016 was $324,219. This is due to net proceeds of $187,827 from sales of capital stock, $54,000 paid for a stock rescission, notes payable proceeds of $42,160, and to a $7,500 repayment of notes payable principal, reduced by payments for costs related to our offering under Regulation A of $492,706.

 

 

Contractual Obligations

 

Except as set forth below, during the nine months ended September 30, 2017, there were no material changes in our contractual obligations and commitments.

 

During the three months ended September 30, 2017, we entered into a lease for our corporate office space in Corona, California, to serve as our corporate headquarters. The lease is for a period of 65 months, terminating February 28, 2023. The base rent for the term of the lease is $568,912. The total amount due monthly is $7,600 at commencement and will escalate to $10,560 by its conclusion. Additionally, the lease includes five months in which no rent payment is due.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

 

Jumpstart Our Business Startups Act of 2012 (JOBS Act)

 

We are an “emerging growth company,” or an EGC, as defined in the JOBS Act. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for EGCs. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. We have chosen to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an EGC we are not required to, among other things, (i) being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure, (ii) not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting, (iii) not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, (iv) reduced disclosure obligations regarding executive compensation or (v) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

We will retain our EGC status until the first to occur of: (i) the end of the fiscal year in which the fifth anniversary of the completion of our initial public offering occurs, (ii) the end of the fiscal year in which our annual revenues exceed $1 billion, (iii) the date on which we issue more than $1 billion in non-convertible debt during any three-year period or (iv) the date on which we qualify as a “large accelerated filer.”

 

Critical Accounting Policies Judgments and Estimates

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

 

We believe that the assumptions and estimates associated with the preparation of the financial statement information presented in this Quarterly Report are not significant because we have not generated any appreciable revenue. Therefore, we have not had to make assumptions or estimates related to a reserve for bad debt expense, or for future warranty costs to be incurred, two items that will have the greatest potential impact on our consolidated financial statements in the future. We also have no significant current litigation on which we have to provide reserves or estimate accruals and our investment to date in property, plant and equipment has not been significant. We therefore have not had to rely on estimates related to impairment. We have not generated any taxable income to date, so have not had to make any decisions about future profitability that would impact recording income tax expense. Assuming we are able to generate future profits by executing our business plan, these areas, among others, will most likely be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see Note 2 to our unaudited consolidated financial statements.

 

There have been no material changes to the critical accounting policies disclosed in the Company’s Form 1-A, which was declared qualified by the Securities and Exchange Commission, or SEC, on April 25, 2017.

 

 

Recent Accounting Pronouncements

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): “Scope of Modification Accounting.” The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including any interim period, for reporting periods for which financial statements have not been issued. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company’s financial statements and disclosures.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

We are exposed to market risks in the ordinary course of our business. We do not currently face material market risks such as interest rate fluctuation risk and foreign currency exchange risk. Our cash and cash equivalents include cash in readily available checking and money market accounts. These investments are not dependent on interest rate fluctuations that may cause the principal amount of these investments to fluctuate, and we do not expect such fluctuation will have a material impact on our financial conditions. If we issue additional debt in the future, we will be subject to interest rate risk. The majority of our expenses are denominated in the U.S. dollar.

 

As we continue our commercialization efforts internationally, we may generate revenue and incur expenses denominated in currencies other than the U.S. dollar, a majority of which we expect to be denominated in Chinese Yuan. As a result, as operations of ADOMANI China expand in the future, our revenue may be significantly impacted by fluctuations in foreign currency exchange rates. We may face risks associated with the costs of raw materials, primarily batteries, as we go into production. To the extent these and other risks materialize, they could have a material effect on our operating results or financial condition. We currently anticipate that our international selling, marketing and administrative costs related to foreign sales will be largely denominated in the same foreign currency, which may mitigate our foreign currency exchange risk exposure.

 

ITEM 4. CONTROLS AND PROCEDURES

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2017 due to the material weaknesses in internal control over financial reporting which existed since December 31, 2016. Specifically, these material weaknesses are as follows: (1) limited segregation of duties; (2) lack of system in place to keep appropriate records for expenses incurred, specifically for operations in China; and (3) need for training and expertise to account for complex equity transactions, which may result in a greater than normal risk that material errors may occur in the financial statements and not be detected timely. The Company has not conducted an evaluation of the effectiveness of internal control over financial reporting. We will be required to assess internal control over financial reporting for the year ending December 31, 2018, and report any material weaknesses in such internal control, but we intend to address this issue prior to such date.

 

Effective June 9, 2017, we added three independent directors to our Board to replace three employee directors. We created concurrently three committees of the Board, including an audit committee, on which the three independent directors serve. There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2017.

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We know of no material, existing or pending, legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.

 

ITEM 1A. RISK FACTORS

 

Except as set forth below, there were no material changes from the risk factors previously disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017, as filed with the SEC on June 19, 2017.

 

We may face risks associated with our international business.

 

We plan to develop our business internationally, including the pursuit of certain opportunities in China through our wholly-owned subsidiary, ADOMANI China. The sale and shipment of our products across international borders, as well as the purchase of components and products from international sources, would subject us to extensive United States, European Economic Area and other foreign governmental trade, import and export and customs regulations and laws. Compliance with these regulations and laws would be costly and may expose us to penalties for non-compliance. If we are successful in developing our international activities, we expect that such operations would be subject to a variety of risks, including:

 

·

difficulties in staffing and managing foreign and geographically dispersed operations;

 

·

having to comply with various United States and international laws, including export control laws and the U.S. Foreign Corrupt Practices Act of 1977 and anti-money laundering laws;

 

·

differing regulatory requirements for obtaining clearances or approvals to market our products;

 

·

changes in, or uncertainties relating to, foreign rules and regulations that may impact our ability to sell our products, perform services or repatriate profits to the United States;

 

·

tariffs and trade barriers, export regulations and other regulatory and contractual limitations on our ability to sell our products in certain foreign markets;

 

·

fluctuations in foreign currency exchange rates;

 

·

imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;

 

·

imposition of differing labor laws and standards;

 

·

economic, political or social instability in foreign countries and regions;

 

·

an inability, or reduced ability, to protect our intellectual property, including our patented zero-emission drivetrain design, including any effect of compulsory licensing imposed by government action; and

 

·

availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us.

 

While we plan to expand into other markets in the future, our expansion plans may not be realized, or if realized, may not be successful. We expect each market to have particular regulatory and funding hurdles to overcome and future developments in these markets, including the uncertainty relating to governmental policies and regulations, could harm our business. If we expend significant time and resources on expansion plans that fail or are delayed, our reputation, business and financial condition may be harmed.

 

 

If we are unable to implement and maintain effective internal control over financial reporting and effective disclosure controls and procedures, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Common Stock may be negatively affected.

 

As a public company, we will not be required to comply with the requirements to assess and report on internal control over financial reporting until the filing of our annual report for the year ending December 31, 2018. Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our annual report for the fiscal year ending December 31, 2018, provide a management report on the internal control over financial reporting. Once we are no longer either an “emerging growth company” or a smaller reporting company, such report must be attested to by our independent registered public accounting firm. While we have not conducted an evaluation of our the effectiveness of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, in connection with its audit of our financial statements for the fiscal year ended December 31, 2016, our independent registered public accounting firm identified material weaknesses in our internal controls that are standard for companies of our size, including limited segregation of duties and lack of systems in place to keep appropriate records for expenses incurred, specifically regarding operations in China. The Sarbanes-Oxley Act also requires that our principal executive officer and principal financial officer conclude as to the effectiveness of our disclosure controls and procedures on a quarterly basis. As of September 30, 2017, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were ineffective due to the presence of such material weaknesses in our internal controls. Due to our size, we rely heavily on key management for day-to-day operations and internal controls, and our size and correspondingly limited resources give rise to additional internal control weaknesses, including our disclosure controls.

 

If we fail to remediate our material weaknesses or find additional material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal control over financial reporting required to comply with this obligation, which process may be time consuming, costly, and complicated. While we have taken steps to remediate our material weaknesses, if we fail to remediate our material weaknesses or find additional material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, if we are unable to assert that our internal control over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, if and when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Common Stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

 

	ADOMANI, INC.
Date: November 13, 2017	By:	/s/ James L. Reynolds
		James L. Reynolds President and Chief Executive Officer (Principal Executive Officer)
Date: November 13, 2017	By:	/s/ Michael K. Menerey
		Michael K. Menerey Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

Exhibit Index

 

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed Herewith

10.1

Office Lease, dated July 11, 2017, by and between HGN Corona Partners, LLC and the Company

S-1

333-220983

10.14

10/16/2017

31.1

Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer

X

31.2

Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer

X

32.1#

18 U.S.C. Section 1350 Certification of Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

32.2#

18 U.S.C. Section 1350 Certification of Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

101.INS

XBRL Instance Document*

X

101.SCH

XBRL Taxonomy Extension Schema Document*

X

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

X

101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

X

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

X

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document*

X

 

#       The information in Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act (including this report), unless the Registrant specifically incorporates the foregoing information into those documents by reference.

 

*       In accordance with Rule 402 of Regulation S-T, this interactive data file is deemed not filed or part of this Quarterly Report for purposes of Sections 11 or 12 of the Securities Act or Section 18 of the Exchange Act and otherwise is not subject to liability under these sections.

 

 

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