|EX-32.1 - CERTIFICATION - Arcimoto Inc||f10q0318ex32-1_arcimotoinc.htm|
|EX-31.2 - CERTIFICATION - Arcimoto Inc||f10q0318ex31-2_arcimotoinc.htm|
|EX-31.1 - CERTIFICATION - Arcimoto Inc||f10q0318ex31-1_arcimotoinc.htm|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2018
☐ 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 001-38213
(Exact name of registrant as specified in its charter)
or other jurisdiction of
incorporation or organization)
2034 West 2nd Avenue, Eugene, OR 97402
(Address of principal executive offices and zip code)
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 filed such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ☒ 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 ☐ (Do not check if smaller reporting company)||Smaller reporting company ☒|
|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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
of May 8, 2018, there were approximately 15,919,215 shares of the registrant’s common stock issued and outstanding.
For the Quarterly Period Ended March 31, 2018
TABLE OF CONTENTS
|PART I.||FINANCIAL INFORMATION||1|
|Item 1.||Financial Statements (Unaudited)||1|
|Condensed Balance Sheets as of March 31, 2018 and December 31, 2017||1|
|Condensed Statements of Operations for the three months ended March 31, 2018 and 2017||2|
|Condensed Statements of Cash Flows for the three months ended March 31, 2018 and 2017||3|
|Condensed Notes to Financial Statements||4|
|Item 2.||Management’s Discussion and Analysis of Financial Condition and Results of Operations||12|
|Item 3.||Quantitative and Qualitative Disclosures about Market Risk||15|
|Item 4.||Controls and Procedures||15|
|PART II.||OTHER INFORMATION||16|
|Item 1.||Legal Proceedings||16|
|Item 1A.||Risk Factors||16|
|Item 2.||Unregistered Sales of Equity Securities and Use of Proceeds||16|
|Item 3.||Defaults Upon Senior Securities||16|
|Item 4.||Mine Safety Disclosures||16|
|Item 5.||Other Information||16|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
CONDENSED BALANCE SHEETS
|Cash and cash equivalents||$||1,425,288||$||7,824,109|
|Certificates of deposit||9,746,490||6,246,850|
|Other current assets||666,201||401,160|
|Total current assets||12,455,133||14,667,144|
|Property and equipment, net||3,407,427||2,434,026|
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Current portion of capital lease obligations||149,956||-|
|Total current liabilities||1,211,852||1,319,498|
|Capital lease obligations, net of current portion||774,254||-|
|Commitments and contingencies (Note 9)|
|Series A-1 preferred stock, no par value, 1,500,000 authorized, none issued and outstanding as of March 31, 2018 and December 31, 2017, respectively.||-||-|
|Common stock, no par value, 20,000,000 authorized, 15,919,215 and 15,872,001 issued and outstanding as of March 31, 2018 and December 31, 2017, respectively.||27,264,248||27,177,790|
|Additional paid-in capital||575,736||519,340|
|Total stockholders’ equity||13,876,454||15,781,672|
|Total liabilities and stockholders’ equity||$||15,862,560||$||17,101,170|
See accompanying notes to financial statements.
CONDENSED STATEMENTS OF OPERATIONS
|Three Months Ended|
|Product sales – related party||625||-|
|Research and development||1,047,799||268,104|
|Sales and marketing||355,515||84,995|
|General and administrative||642,147||186,961|
|Total operating expenses||2,045,461||540,060|
|Loss from operations||(2,044,805||)||(499,480||)|
|Other income and expense|
|Other income, net||334||12|
|Weighted-average common shares outstanding - basic and diluted||15,896,575||12,369,017|
|Net loss per common share - basic and diluted||$||(0.13||)||$||(0.04||)|
See accompanying notes to financial statements.
CONDENSED STATEMENTS OF CASH FLOWS
|Three Months Ended|
|Adjustments to reconcile net loss to net cash used in operating activities:|
|Depreciation and amortization||73,524||669|
|Loss on disposal of property and equipment||19,000||-|
|Changes in operating assets and liabilities:|
|Other current assets||(264,679||)||4,261|
|Net cash used in operating activities||(2,787,637||)||(449,789||)|
|Purchases of certificates of deposit||(5,000,000||)||-|
|Redemption of certificates of deposit||1,500,000||-|
|Proceeds from sale of property and equipment||250||-|
|Purchases of property and equipment||(65,271||)||-|
|Net cash used in investing activities||(3,565,021||)||-|
|Proceeds from sale of stock||-||437,000|
|Proceeds from the exercise of stock options||29,259||-|
|Payment of offering costs||-||(2,924||)|
|Proceeds from convertible notes payable to related parties||-||100,000|
|Proceeds from convertible notes payable||-||100,000|
|Payment of capital lease obligations||(75,422||)||-|
|Repayment of notes payable||-||(1,207||)|
|Net cash provided by (used in) financing activities||(46,163||)||632,869|
|Net cash increase (decrease) for period||(6,398,821||)||183,080|
|Cash at beginning of period||7,824,109||414,405|
|Cash at end of period||$||1,425,288||$||597,485|
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:|
|Cash paid during the period for interest||$||3,601||$||3,127|
|Cash paid during the period for income taxes||$||-||$||-|
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:|
|Portion of equipment acquired through capital leases||$||999,632||$||-|
|Fixed asset purchases in accounts payable||$||1,273||$||-|
See accompanying notes to financial statements.
CONDENSED NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Arcimoto, Inc. (the “Company”) was originally formed on November 21, 2007 as WTP Incorporated, an Oregon Corporation, and later changed its name to Arcimoto, Inc. The Company was founded in order to build products that catalyze the shift to a sustainable transportation system. The first step in this shift has been developing an affordable, daily utility, pure electric vehicle. Over the past ten years, the Company has developed a revolutionary new vehicle platform designed around the needs of everyday drivers. Its main product is the Fun Utility Vehicle® (“FUV”), the first real affordable, fossil-free alternative for the vast majority of daily trips. Compared to the average car, the FUV has dropped 3/4 of the weight and 2/3 of the footprint in order to bring the joy of ultra-efficient, pure electric driving to the masses.
Risks and Uncertainties
The Company has commenced revenue-generating activities, having delivered two FUVs to customers in December 2017, one of which was to a related party. That said, the Company currently has limited production and distribution capabilities and is still in process setting up facilities to manufacture vehicles on a larger scale. We also do not have a history of higher-scale production and may encounter delays, flaws, or inefficiencies in the manufacturing process, which may prevent or delay us from achieving higher-scale production within the timeline we anticipate. We believe that small scale Retail Series production will commence in the second half of 2018; however, delays in receiving machinery, availability of inventory, and machinery customization could delay such estimates.
The Company has limited experience in developing, training and managing a sales force, and will incur substantial additional expenses marketing of our current and future products and services. Developing a full marketing and sales force is also time consuming and could delay launch of our future products and services. In addition, the Company will compete with companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against these companies.
Further, the Company's business and operations are sensitive to general governmental policy, business and economic conditions in the U.S. and worldwide. A host of factors beyond the Company's control could cause fluctuations in these conditions. Other developments, including but not limited to economic recessions, trends in vehicle manufacturing, consumer taste, availability of inventory, and changes in government policy related to cars and motorcycles, could have a material adverse effect on the Company's financial condition and the results of its operations.
The Company’s industry is characterized by rapid changes in technology and customer demands. As a result, the Company’s products and services may quickly become obsolete and unmarketable. The Company’s future success will depend on its ability to adapt to technological advances, anticipate customer demands, develop new products and services and enhance our current products and services on a timely and cost-effective basis. Further, the Company’s products and services must remain competitive with those of other companies with substantially greater resources. The Company may experience technical or other difficulties that could delay or prevent the development, introduction or marketing of new products and services or enhanced versions of existing products and services. Also, the Company may not be able to adapt new or enhanced products and services to emerging industry standards, and the Company’s new products and services may not be favorably received. In addition, we may not have the capital resources to further the development of existing and/or new products.
NOTE 2: GOING CONCERN
The accompanying financial statements have been prepared on a basis that the Company is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced recurring operating losses and negative operating cash flows since inception.
The Company generated revenues from product sales for the first time in November 2017. The Company has not achieved positive earnings and operating cash flows to enable the Company to finance its operations internally. Funding for the business to date has come primarily through the issuance of equity securities. We may require additional funding in the future to continue to operate in the normal course of business. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.
Although the Company’s objective is to increase its revenues from the sales of its products within the next few years sufficient to generate positive operating and cash flow levels, there can be no assurance that the Company will be successful in this regard. The Company may also need to raise additional capital in order to fund its operations, which it intends to obtain through debt and/or equity offerings. Funds on hand and any follow-on capital, if needed, will be used to invest in its business to expand sales and marketing efforts, enhance its current product by continuing research and development to bring the FUV to retail production, to continue to build out its production facility, and fund operations until positive cash flow is achieved. The need for additional capital may be adversely impacted by uncertain market conditions or approval by regulatory bodies.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and pursuant to the instructions to Form 10-Q promulgated by the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all information and disclosures required by GAAP for complete financial statement presentation. In the opinion of management, the accompanying condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position as of March 31, 2018, and the results of its operations and its cash flows for the three months ended March 31, 2018 and 2017. Results for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2018.
Basis of Presentation
The accounting and reporting policies of the Company conform with GAAP.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value Measurements
The Company’s financial instruments consist primarily of cash, certificates of deposits, and notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market exchange or from future earnings or cash flows. The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
The three-level hierarchy for fair value measurements is defined as follows:
● Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
● Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly including inputs in markets that are not considered to be active; and
● Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The carrying amounts reported in the accompanying financial statements for current assets and current liabilities approximate the fair value because of the immediate or short-term maturities of the financial instruments. As of March 31, 2018 and December 31, 2017, the Company did not have any level 2 or level 3 instruments.
Cash and Cash Equivalents
The Company considers deposits that can be redeemed on demand and investments that have original maturities of less than three months, when purchased, to be cash equivalents. As of March 31, 2018 and December 31, 2017, approximately $1,425,000 and $7,824,000 of the Company’s cash and cash equivalents were deposited in one financial institution, which exceed the federally insured limits, respectively.
Inventory is stated at the lower of cost (using the first-in, first-out method “FIFO”) or market. Inventories consist of purchased electric motors, electrical storage and transmission equipment and component parts. Inventories consist almost entirely of raw materials and component parts as of March 31, 2018 and December 31, 2017. Work-in-progress as of March 31, 2018 and December 31, 2017 was not significant, and there were no finished goods.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes.
The estimated useful lives for significant property and equipment categories are as follows:
|Computer Equipment & Software||1 – 3 years|
|Furniture and Fixtures||2 – 7 years|
|Machinery and Equipment||5 – 10 years|
|Leasehold Improvements||Shorter of useful or lease life|
Customer deposits are generally held in a separate deposit account. Revenue is not recognized on customer deposits until the vehicle is shipped to the customer.
The Company recognizes revenue when the earnings process is complete on vehicle sales. This generally occurs when products are shipped to the customer in accordance with the sales agreement or purchase order, ownership and risk of loss pass to the customer, collectability is reasonably assured, and pricing is fixed or determinable. The Company’s shipping terms are generally F.O.B. shipping point, where title is transferred and revenue is recognized when the products are shipped to customers. As of March 31, 2018, the Company determined that the adoption of the new revenue recognition standard ASC 606 had no material impact to the Company’s financial statements.
The Company accounts for stock-based compensation in accordance with FASB ASC 718, Compensation - Stock Compensation. Under the fair value recognition provisions of FASB ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, which is generally the option or warrant vesting period. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and common stock warrants.
The Company measures compensation expense for its non-employee stock-based compensation under FASB ASC 505-50, Equity-Based Payments to Non-Employees. The fair value of the award issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock and/or the calculated value based on the inputs to the Black-Scholes model on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity award is charged directly to stock-based compensation expense and credited to additional paid-in capital.
Research and Development
Expenses relating to research and development are expensed as incurred. For the three months ended March 31, 2018 and 2017, vehicle and battery research and development consisted of $1,047,799 and $268,104, respectively.
Net Earnings or Loss per Share
The Company’s computation of earnings (loss) per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to common shareholders divided by the weighted average number of common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., common stock warrants and common stock options) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted loss per common share is the same for all periods presented because all common stock warrants and common stock options outstanding were anti-dilutive.
At March 31, 2018 and 2017, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to ultimately acquire shares of common stock, from its calculation of earnings per share, as their effect would have been anti-dilutive.
|March 31, |
|March 31, 2017|
|Warrants to purchase common stock||958,004||980,004|
|Stock options to purchase common stock||970,000||742,700|
|Warrants issued to vendors outside of employee plans||47,000||-|
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)”, which significantly changes the accounting for operating leases by lessees. The accounting applied by lessors is largely unchanged from that applied under previous guidance. The new guidance requires lessees to recognize lease assets and lease liabilities in the balance sheet, initially measured at the present value of the lease payments, for leases which were classified as operating leases under previous guidance. Lease cost included in the statement of income will be calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. Lessees may make an accounting policy election to exclude leases with a term of 12 months or less from the requirement to record related assets and liabilities. The new standard is effective for public companies for fiscal years beginning after December 15, 2018. The Company plans to adopt the new standard effective for periods after December 31, 2018. The Company does not expect the adoption of this standard to have a material impact on its results of operations or cash flows; however, the Company has not determined the impact the adoption of this new standard will have on its financial position.
Management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s financial statement presentation or disclosures.
NOTE 4: PROPERTY AND EQUIPMENT
As of March 31, 2018 and December 31, 2017, our property and equipment consisted of the following:
|March 31, |
|Computer equipment and software||$||34,862||$||60,696|
|Furniture and fixtures||46,839||50,996|
|Machinery and equipment||1,934,459||1,658,976|
|Fixed assets in process||1,165,320||462,531|
|Less: accumulated depreciation||(97,891||)||(96,198||)|
Fixed assets in process is comprised primarily of tooling and equipment related to the manufacturing of our vehicles. The total purchase commitments for fixed assets in process as of March 31, 2018 and December 31, 2017 was $1,446,577 and $573,095, respectively. Completed assets are transferred to their respective asset class and depreciation begins when the asset is ready for its intended use.
Depreciation expense during the three months ended March 31, 2018 and 2017 was $73,524 and $669, respectively.
NOTE 5: CAPITAL LEASE OBLIGATIONS
The Company has financed a total of approximately $1,000,000 of its capital equipment purchases with monthly payments ranging from $437 to $6,897 and repayment terms ranging from 48 to 60 months. These lease obligations are secured by approximately $1,235,000 in underlying assets which have $5,026 in accumulated depreciation as of March 31, 2018. The balance of its capital lease obligations was $924,210 and $0 as of March 31, 2018 and December 31, 2017, respectively.
NOTE 6: STOCKHOLDERS’ EQUITY
The Company is authorized to issue 5,000,000 shares of preferred stock, no par value, of which 1,500,000 shares were designated as Series A-1 Preferred Stock. As of March 31, 2018 and December 31, 2017, there were no shares of Series A-1 Preferred Stock issued and outstanding.
The Series A-1 Preferred Stock is convertible at any time after issuance at the option of the holder into shares of common stock at the original issue price of the Series A-1 Preferred Stock. The Series A-1 Preferred Stock is also subject to mandatory conversion provisions in certain circumstances and is not redeemable. To prevent dilution, the conversion price of the Series A-1 Preferred Stock is to be adjusted for any issuance of securities, excluding exempt securities, which change the number of shares of common stock outstanding. The Series A-1 Preferred Stockholders are entitled to equal voting rights to common stockholders on an as-converted basis and receive preference to the common stockholders upon liquidation.
The Company is authorized to issue 20,000,000 shares of common stock, no par value, as of March 31, 2018 and December 31, 2017.
The Company has reserved a total of 2,000,000 shares of its common stock pursuant to the equity incentive plans (see Note 7). The Company has 1,928,004 and 1,957,204 stock options and warrants outstanding under these plans as of March 31, 2018 and December 31, 2017, respectively.
During the quarterly period ended March 31, 2018, the Company issued 20,000 common shares with a fair value of $57,200 based on the closing price of the Company’s common stock on the Nasdaq exchange on February 22, 2018.
NOTE 7: STOCK-BASED PAYMENTS
The Company grants stock options and warrants pursuant to the Amended and Restated 2015 Stock Incentive Plan (“2015 Plan”) and the Second Amended and Restated 2012 Employee Stock Benefit Plan (“2012 Plan”).
The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award. Grants to non-employees are expensed at the earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached and (ii) the date at which the counterparty’s performance is complete
Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for stock options, the expected life of the option, and expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.
The Company uses the following inputs when valuating stock-based awards. The expected life of employee stock options was estimated using the “simplified method,” as the Company has no historical information to develop reasonable expectations about future exercise patterns and employment duration for its stock option grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant. The expected life of awards that vest immediately use the contractual maturity since they are vested when issued. For stock price volatility, the Company uses public company compatibles as a basis for its expected volatility to calculate the fair value of option grants. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option at the grant-date. The Company recognizes stock option forfeitures as they occur as there is insufficient historical data to accurately determine future forfeiture rates.
Stock-based compensation, including stock-options, warrants and stock issued for compensation is included in the statement of operations as follows:
|March 31,||March 31,|
|Research and development||$||31,015||$||-|
|Sales and marketing||64,851||-|
|General and administrative||17,730||42,280|
2015 Stock Incentive Plan
The 2015 Plan was approved by the Board of Directors and the written consent of the then holders of a majority of the Company’s outstanding common stock. The 2015 Plan provides the Company the ability to grant to any employee, director, consultant or advisor who provides services to the Company the opportunity to acquire shares of Common Stock of the Company through the grant of options that are incentive stock options or nonqualified stock options (NQSOs) and/or the grant of restricted stock, provided that only employees are entitled to receive incentive stock options in accordance with IRS guidelines. The Company reserved 1,000,000 shares of common stock for delivery under the 2015 Plan. Awards that are forfeited generally become available for grant under the 2015 Plan.
There were no options issued during the quarter ended March 31, 2018. See below for the weighted average variables used in assessing the fair value at the grant date for the options issued during the quarter ended March 31, 2017:
|March 31, |
|Annual dividend yield||-|
|Expected life (years)||6.0-10.0|
|Risk-free interest rate||2.14-2.46||%|
|Total grant date fair value||$||312,485|
Employee stock-based compensation expense included in operating expenses for the three months ended March 31, 2018 and 2017 was $51,171 and $19,835, respectively.
For the NQSOs issued for the three months ended March 31, 2018 and 2017, vesting was completed on the date of issue. The fair value of these non-employee awards was $0 and $22,445 for the three months ended March 31, 2018 and 2017, respectively.
Total compensation cost related to non-vested awards not yet recognized as of March 31, 2018 was $378,232 and will be recognized on a straight-line basis through the end of the vesting periods or December 31, 2020. The amount of future stock option compensation expense could be affected by any future option grants or by any forfeitures.
On January 31, 2018, 14,200 employee options were exercised at a price per share of $2.0605 for total proceeds to the Company of $29,259. These shares are restricted from trading.
As of March 31, 2018, 15,800 options are still issuable under the 2015 Plan.
2012 Employee Stock Benefit Plan
The 2012 Plan was approved by the Board of Directors and the written consent of the then holders of a majority of the Company’s outstanding common stock. The 2012 Plan provides the Company the ability to grant to any officer, director, or employee of the Company, or any consultant, advisor or independent contractor who provides services to the Company, the opportunity to acquire shares of Common Stock of the Company through the grant of warrants and/or the grant of common stock. The Company reserved 1,000,000 shares of common stock for delivery under the 2012 Plan. Warrants issued and outstanding as of March 31, 2018 and 2017 were 958,004 and 980,004. Warrants expire 10 to 15 years from the grant date and were vested when issued.
On January 29, 2018, 15,000 employee warrants with an exercise price of $0.50 per share were exercised in a cashless transaction at a market price of $3.77756 per share, which was based on the average of the Company’s daily closing prices from January 19-25, 2018 amounting to 13,014 shares. These shares meet the requirements for not being restricted from trading.
As of March 31, 2018, 11,996 warrants are still issuable under the 2012 Plan. There were no warrants issued during the three months ended March 31, 2018 and 2017.
NOTE 8: CUSTOMER DEPOSITS
The Company has received customer deposits ranging from $100 to $10,100 per vehicle for Retail Series production vehicles and $42,000 per vehicle for Signature Series vehicles for purposes of securing a vehicle production slot. As of March 31, 2018 and December 31, 2017, the Company’s balance of deposits received was approximately $432,000 and $400,000, respectively. As of March 31, 2018 and December 31, 2017, $263,864 and $231,967, respectively, of these deposits were refundable upon demand. Deposits are included in current liabilities in the accompanying balance sheets. When a customer’s order is ready to enter the production process, the customer is notified that if they would like to proceed with the purchase of a vehicle, their deposit will no longer be refundable and any additional deposit required must be paid prior to the start of the manufacturing process. Customer deposits from related parties total $1,700 as of March 31, 2018 and December 31, 2017.
NOTE 9: COMMITMENTS AND CONTINGENCIES
On March 11, 2018, the Company was served with a lawsuit entitled John R Switzer vs W.R. Hambrecht & Co. LLC et al., case number: CGC-18-564904, filed in San Francisco County Superior Court in the State of California. In this action, the Company has been named as defendants along with our directors and certain executive officers at the time of the completion of its Regulation A offering on September 21, 2017. The action purports to be a class action on behalf of all those who purchased the Company’s common stock in its Regulation A offering alleging violations of Section 12(a)(2) and Section 15 of the Securities Act of 1933, as amended. The plaintiff is seeking damages in an unspecified amount to be proven at trial. In addition, on March 28, 2018, the Company was served with another lawsuit entitled Jay Mendelson v. Arcimoto, Inc. et al., case number CGC-18-565324, filed in San Francisco County Superior Court in the State of California. In this action the Company has also been named as a defendant along with its directors and certain executive officers at the time of the completion of our Regulation A offering on September 21, 2017. The factual allegations and alleged violations are substantially similar to the Switzer action and the plaintiff is also seeking damages in an unspecified amount to be proven at trial. The Company believes these lawsuits are without merit and the Company intends to vigorously defend these actions in court.
NOTE 10: SUBSEQUENT EVENTS
The Company is seeking financing for its capital equipment purchases. Subsequent to March 31, 2018, the Company has financed an additional $332,600 with monthly payments ranging from $2,085 to $4,748 and a period of 60 months. The company has also received a verbal approval on an additional approximately $705,000 in financing for 60 months.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors discussed from time to time in this report and in other documents which we file with the SEC. In addition, such statements could be affected by risks and uncertainties related to:
|●||overall strength and stability of general economic conditions and of the automotive industry more specifically, both in the United States and globally;|
|●||our ability to effectively execute our business plan and growth strategy;|
|●||unforeseen or recurring operational problems at our facility, or a catastrophic loss of our manufacturing facility;|
|●||our dependence on our suppliers;|
|●||the volatility of our stock price;|
|●||changes in consumer demand for, and acceptance of, our products;|
|●||changes in the competitive environment, including adoption of technologies and products that compete with our products;|
|●||our ability to generate consistent revenues;|
|●||our ability to design, produce and market our vehicles;|
|●||our reliance on key personnel;|
|●||changes in the price of oil and electricity;|
|●||changes in laws or regulations governing our business and operations;|
|●||our ability to maintain adequate liquidity and financing sources and an appropriate level of debt, if any, on terms favorable to our company;|
|●||the number of reservations and cancellations for our vehicles and our ability to deliver on those reservations;|
|●||our ability to maintain quality control over our vehicles and avoid material vehicle recalls;|
|●||our ability to manage the distribution channels for our products, including our ability to successfully implement our direct to consumer distribution strategy and any additional distribution strategies we may deem appropriate;|
|●||our ability to obtain and protect our existing intellectual property protections including patents;|
|●||changes in accounting principles, or their application or interpretation, and our ability to make estimates and the assumptions underlying the estimates, which could have an effect on earnings;|
|●||interest rates and the credit markets;|
|●||our ability to maintain our NASDAQ Capital Market listing; and|
|●||costs and risks associated with litigation; and|
|●||other risks described from time to time in periodic and current reports that we file with the SEC.|
The foregoing list does not contain all of the risks and uncertainties. Any forward-looking statements speak only as of the date on which they are made, and except as may be required under applicable securities laws; we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the filing date of this report.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2018 should be read together with our unaudited condensed financial statements and related notes included elsewhere in this report and in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2018. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see “Cautionary Note Regarding Forward-Looking Statements.”
We design, develop, manufacture, and sell ultra-efficient fully electric vehicles. We achieved limited production and delivered our first Signature Series vehicles at the end of 2017, with continued Signature Series vehicle limited production and delivery planned for the first half of 2018. We anticipate that Beta, Pilot and Retail Series small scale production will follow later in the year.
Management Opportunities, Challenges and Risks
Demand, Production and Capital
Demand for the Retail Series Arcimoto FUV continued to increase throughout 2017. As of March 31, 2018, we had 2,461 FUV pre-orders with small refundable deposits, representing an increase of 1,180, or approximately 92%, from the 1,281 pre-orders as of March 31, 2017. As of May 8, 2018, we had 2,660 pre-orders.
Although we initially contemplated producing approximately 2,000 vehicles in the eighteen months following the closing of our Regulation A offering, management decided to slow the rollout of FUVs post-offering by reducing the total number of vehicles that we anticipate producing in 2018. Our decision was based, in part, on the following factors that became apparent to us in the fourth quarter of 2017:
|1.||The substantial public support we received in our Regulation A offering in September and October 2017 allowed us to begin significant portions of the Phase 2 production preparations which we originally contemplated would not commence until twelve months after the closing of our Regulation A offering. The Phase 2 manufacturing process requires additional up-front time to build out the manufacturing facility and redesign the FUV’s upper frame for robotic mass production. Because we anticipate profitability will only be achieved with the margins and volumes possible utilizing the Phase 2 automated manufacturing processes, limiting the number of vehicles built prior to these Phase 2 processes coming online keeps us true to our commitment to capital efficiency.|
|2.||We experienced a delay in receiving key, single-source component parts from our suppliers of motors, motor controllers, and batteries that were expected in the fourth quarter 2017. Some of these materials were not received until the end of first quarter 2018.|
|3.||The manufacture of the first two Signature Series vehicles took longer than anticipated, due primarily to the fitting of body panel parts. We are currently using the knowledge we glean from the initial manufacturing processes used in the production of our first Signature Series vehicles to optimize and finalize the design and manufacturing processes for the Beta and Pilot Series FUVs. As a venture that embraces continuous improvement, we will always strive to improving our designs and manufacturing processes.|
We anticipate that the procedure to achieve full Phase 2 Retail Series production involves orchestrating many moving parts: scale production supply chain, vehicle design finalization, and key component robotic manufacture. We believe that the adjustments we have made to our plan to scale production more closely aligns each of these objectives and will enhance our chances to achieve profitability sooner than if we had stayed with the sequencing we originally contemplated.
Trends in Cash Flow, Capital Expenditures and Operating Expenses
We anticipate initiating Retail Series production beginning in the second half of 2018. Given this plan, our capital expenditure needs include capital costs for the tooling, production equipment and construction of the FUV Arcimoto production line.
Operating expenses grew by approximately 279% for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. This increase was driven by the beginning of the transformation of Arcimoto from a research and development (“R&D”) operation into a manufacturing company. The number of employees increased by approximately 188%, from 16 as of March 31, 2017 to 46 employees as of March 31, 2018. We moved into a new 30,000 square foot facility, which is approximately 500% larger than our previous 5,000 square foot facility, and, as a result, incurred all of the cost associated with equipping the employees, implementing systems, and running the larger facility. R&D costs increased as we redesigned the FUV for automated production processes, and sales and marketing costs increased due to investor relations expenses associated with being a publicly traded company.
New Accounting Pronouncements
See Note 3 “Summary of Significant Accounting Policies” to our Financial Statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q which includes a discussion of recent accounting pronouncements that may impact us.
Disclosure About Off-Balance Sheet Arrangements
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe are reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
For a description of our critical accounting policies and estimates, please refer to the “Summary of Significant Accounting Policies” in Note 3 to our Financial Statements under Part I, Item 1 of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2018.
Results of Operations
Three months ended March 31, 2018 versus three months ended March 31, 2017
We had no revenue from the sales of our vehicles during the quarterly periods ended March 31, 2018 or 2017. We did recognize grant revenue during the three months ended March 31, 2017 amounting to approximately $41,000. Revenues from grants are recognized in the period during which the conditions under the grant have been met and the Company has made payment for the related expense. We believe the loss of such grant revenues will not have a material effect on the Company’s operations.
Research and Development Expenses
R&D expenses consist primarily of personnel costs for our engineering and research teams, and prototyping materials expense. R&D expenses for the three months ended March 31, 2018 and 2017 were approximately $1,048,000 and $268,000, respectively. The primary reason for the increase in R&D expenses of $780,000, or 291%, resulted from an increase in engineering salaries and benefits of approximately $384,000 and an increase in R&D materials expense of approximately $279,000.
Sales and Marketing Expenses
Sales and marketing expenses for the three months ended March 31, 2018 and 2017 were approximately $356,000 and $85,000, respectively. The primary reasons for the increase in sales and marketing expenses during the three months ended March 31, 2018 of approximately $271,000, or 318%, as compared to the prior period was a $186,000 increase in public relations, marketing, and travel expenses associated with public company investor relations, a $32,000 increase in salary and benefits expenses, and a $45,000 increase in lobbying expense.
General and Administrative Expenses
General and administrative expenses (“G&A”) consist primarily of personnel and facilities costs related to executive, finance, human resources, information technology and legal organizations, as well as legal fees for professional and contract services. G&A expenses for the three months ended March 31, 2018 were approximately $642,000 as compared to approximately $187,000 for the same period last year, representing an increase of approximately $455,000, or 243%. The primary reason for the increase in the current period was due to a $214,000 increase in expenses associated with being a public company (investor relations, insurance, and professional fees), a $32,000 increase in salary and benefits expenses, a $57,000 increase in rent and utilities associated with the new facility, a $12,000 increase in facilities maintenance expense, a $67,000 increase in computer expenses associated with new hiring and moving into the new facility, and a $73,000 increase in depreciation expense.
Interest expense for the three months ended March 31, 2018 was approximately $4,000 as compared to $10,000 during the three months ended March 31, 2017. The decrease in interest expense was due to higher balances of outstanding debt during the prior period.
Liquidity and Capital Resources
As of March 31, 2018, we had approximately $1,425,000 in cash and cash equivalents and another $9,746,000 in certificates of deposits with maturities between three and nine months representing a decrease in cash and cash equivalents and certificate of deposits of approximately $2,899,000 from December 31, 2017. Sources of cash are predominantly from the sale of equity. We anticipate that our current sources of liquidity, including cash and cash equivalents, together with our current projections of cash flow from operating activities, may provide us with adequate liquidity in the event we are able to achieve the product cost reductions in our current plans. We may raise funds in the future, including with potential equity or debt offerings, subject to market conditions and recognizing that we cannot be certain that additional funds would be available to us on favorable terms or at all. The amount and timing of funds that we may raise is undetermined and would vary based on a number of factors, including our liquidity needs as well as access to current and future sources of liquidity.
Our estimates for tooling and manufacturing capital expenditures for our current FUV production facility will require approximately $5,800,000, of which approximately $3,100,000 has been expended to date. We anticipate utilizing the remaining $2,700,000 by mid-2018.
Cash Flows from Operating Activities
Our cash flows from operating activities are significantly affected by our cash outflows to support the growth of our business in areas such as R&D, sales and marketing and G&A expenses. Our operating cash flows are also affected by our working capital needs to support personnel related expenditures, accounts payable and other current assets and liabilities.
During the three months ended March 31, 2018, cash used in operating activities was approximately $2,788,000, which was primarily the result of our net loss incurred of approximately $2,048,000, an increase in other current assets of $265,000, a decrease in accounts payable of approximately $290,000 and an increase in inventories of approximately $422,000 related to materials for our electric vehicles. These increases in cash outflows were partially offset by an increase in stock-based compensation of $114,000.
Cash Flows from Investing Activities
Cash flows from investing activities primarily relates to the purchases and redemptions of certificates of deposits and capital expenditures to support our growth in operations, including investments in manufacturing equipment and tooling. During the three months ended March 31, 2018, the Company purchased and redeemed $5,000,000 and $1,500,000 of certificates of deposits, respectively, and paid approximately $65,000, net of financing, for manufacturing equipment and tooling. The Company had no such purchases or redemptions of certificates of deposits or capital expenditures during the three months ended March 31, 2017.
Cash Flows from Financing Activities
During the three months ended March 31, 2018, net cash used in financing activities was approximately $46,000 compared to net cash provided of $633,000 during the three months ended March 31, 2017. Cash flows used in financing activities during the three months ended March 31, 2018 mainly comprised of payments on capital lease obligations amounting to approximately $75,000, and proceeds from the issuance of our common stock through the exercise of employee stock options of approximately $29,000. Cash flows provided by financing activities during the three months ended March 31, 2017 consisted primarily of $437,000 in gross proceeds from our Regulation D offering of 87,400 shares of Series A Preferred Stock as well as proceeds from the issuance of convertible debt of $200,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including Mark Frohnmayer, our President and Chief Executive Officer, and Douglas M. Campoli, our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure 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 its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2018, our disclosure controls and procedures were designed to, and were effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures as of March 31, 2018.
(b) Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of any changes in our internal controls over financial reporting (as such terms are defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act that occurred during the quarter ended March 31, 2018. Based on that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that there has not been any material change in our internal control over financial reporting occurred during the period ended March 31, 2018, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we might become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements and other matters arising in the ordinary course of our business. The section “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 30, 2018, includes a discussion of our current material legal proceedings. There have been no material developments described in those disclosures as of the date of this filing.
Item 1A. Risk Factors.
For information concerning risks associated with our business and industry and risks associated with an investment in our Common Stock, please refer to the “Risk Factors” section in our Annual Report on Form 10-K filed with the SEC on March 30, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended March 31, 2018, we issued 20,000 shares of restricted common stock in connection with retaining an investor relations firm as a portion of its fees for investor relations services. We issued these shares pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
Incorporated by Reference
(Unless Otherwise Indicated)
|Number||Exhibit Description||Form||File No.||Exhibit||Filing Date|
|31.1||Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.||—||—||—||Filed herewith|
|31.2||Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.||—||—||—||Filed herewith|
|32.1||Certification of President and Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.||—||—||—||Filed herewith|
|101.INS||XBRL Instance Document.||—||—||—||Filed herewith|
|101.SCH||XBRL Taxonomy Extension Schema Document.||—||—||—||Filed herewith|
|101.CAL||XBRL Taxonomy Extension Calculation Linkbase Document.||—||—||—||Filed herewith|
|101.DEF||XBRL Taxonomy Extension Definition Linkbase Document.||—||—||—||Filed herewith|
|101.LAB||XBRL Taxonomy Extension Label Linkbase Document.||—||—||—||Filed herewith|
|101.PRE||XBRL Taxonomy Extension Presentation Linkbase Document.||—||—||—||Filed herewith|
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.
|Date: May 14, 2018||By:||/s/ Mark Frohnmayer|
|President and Chief Executive Officer|