10-Q 1 f10q_081417p.htm FORM 10-Q

 

 

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 JUNE 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.)

 

620 Newport Center Drive, Suite 1100

Newport Beach, CA 92660

(Address of principal executive offices, including zip code)

 

(949) 200-4613

(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 ¨ No ý

 

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 August 7, 2017 was 68,070,930.

 

 

 

 

 

 

ADOMANI, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

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

 

Note About Forward-Looking Statements

 

Part I. FINANCIAL INFORMATION

 

    PAGE
Item 1. Financial Statements :  
     
  Unaudited Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 1
     
  Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016 2
     
  Unaudited Consolidated Statement of Stockholders’ Equity (Deficit) for the Six Months Ended June 30, 2017 3
     
  Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 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 11
     
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 22
     
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 manufacturing, 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)

 

   June 30,
2017
  December 31,
2016
ASSETS          
Current assets:          
Cash and cash equivalents  $6,868   $938 
Notes receivable, net   1,000    454 
Inventory   434    314 
Other current assets   203    1,039 
Total current assets   8,505    2,745 
Property, plant and equipment, net   446    417 
Other investments   120    120 
Other non-current assets   122    124 
Total assets  $9,193   $3,406 
           
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
Current liabilities:          
Accounts payable  $179   $107 
Accrued liabilities   165    236 
Notes payable, net   4,245    5,177 
Convertible debt, net   -    593 
Total current liabilities   4,589    6,113 
Total liabilities   4,589    6,113 
           
Commitments and contingencies          
           
Stockholders' equity (deficit):          
Preferred stock, 100,000,000 authorized $0.00001 par value none issued and outstanding, respectively   -    - 
Common stock, 2,000,000,000 authorized $0.00001 par value, 68,070,930 and 58,542,350 issued and outstanding, respectively   1    1 
Additional paid-in capital   35,321    18,366 
Accumulated deficit   (30,718)   (21,074)
Total stockholders' equity (deficit)   4,604    (2,707)
Total liabilities and stockholders' equity (deficit)  $9,193   $3,406 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements. 

 

1

 

ADOMANI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

                   

 

   Three Months Ended  Six Months Ended
   June 30, 2017  June 30, 2016  June 30, 2017  June 30, 2016
       
Net sales  $-   $68   $-   $68 
Cost of sales   -    50    -    50 
Gross profit   -    18    -    18 
Operating expenses:                    
Payroll expense   528    181    912    424 
Other general and administrative   4,822    772    5,735    1,668 
Consulting   2,143    124    2,163    238 
Research and development   460    -    519    16 
Total operating expenses   7,953    1,077    9,329    2,346 
Loss from operations   (7,953)   (1,059)   (9,329)   (2,328)
                     
Other income (expense):                    
Interest expense   (147)   (285)   (362)   (557)
Other income   22    -    49    1 
Total other income (expense)   (125)   (285)   (313)   (556)
                     
Loss before income taxes   (8,078)   (1,344)   (9,642)   (2,884)
Income tax expense   -    -    (2)   - 
Net loss  $(8,078)  $(1,344)  $(9,644)  $(2,884)
                     
Net loss per share to common shareholders:                    
Basic and diluted  $(0.12)  $(0.02)  $(0.15)  $(0.04)
                     
Weighted shares used in the computation of net loss per share:                    
Basic and diluted   66,815,898    66,551,134    64,978,905    73,276,408 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

2

 

ADOMANI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

(in thousands, except per share data)

(unaudited)

                   

 

         Additional      
   Common Stock  Paid-In  Accumulated  Stockholders'
   Shares  Amount  Capital  Deficit  Equity (Deficit)
Balance, December 31, 2016   58,542,350   $1   $18,366   $(21,074)  $(2,707)
                          
Common stock issued due to debt conversion   6,868,578    -    726    -    726 
Common stock issued for cash   2,510,002    -    12,550    -    12,550 
Offering costs netted against proceeds from common stock issued for cash   -    -    (4,437)   -    (4,437)
Common stock issued for prepaid services cancelled   (100,000)   -    (100)   -    (100)
Common stock issued as offering costs   250,000    -    1,250         1,250 
Warrants issued for services   -    -    1,241         1,241 
Warrants issued as offering costs   -    -    681         681 
Stock based compensation   -    -    5,044    -    5,044 
Net loss   -    -    -    (9,644)   (9,644)
Balance, June 30, 2017   68,070,930   $1   $35,321   $(30,718)  $4,604 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

 

 

3

 

ADOMANI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

           

 

   Six Months Ended
   June 30, 2017  June 30, 2016
Cash flows from operating activities:          
Net loss   (9,644)   (2,884)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   6    8 
Accretion of discount on note receivable   (46)   - 
Amortization of debt discount   130    211 
Stock based compensation expense   5,044    1,278 
Warrant issued for services   1,241    87 
Gain on disposal of property and equipment   (1)   - 
Changes in assets and liabilities:          
Inventory   (120)   - 
Other current assets   (103)   (46)
Other non-current assets   3    2 
Accounts payable   73    78 
Accrued liabilities   9    (322)
Deferred revenue   -    (68)
Net cash used in operating activities   (3,408)   (1,656)
           
Cash flows from investing activities:          
Purchases of property, plant and equipment, net   (34)   (46)
Investment in note receivable, net   (500)   - 
Other Investments   -    (10)
Net cash used in investing activities   (534)   (56)
           
Cash flows from financing activities:          
Proceeds from issuance of common stock   12,550    184 
Payments for stock rescission   -    (64)
Proceeds from issuance of debt, net of issuance costs   500    - 
Principal repayments of debt   (1,510)   (8)
Payments for deferred offering costs   (1,668)   (354)
Net cash provided (used) by financing activities   9,872    (242)
           
Net change in cash and cash equivalents   5,930    (1,954)
Cash and cash equivalents at the beginning of the year   938    4,537 
           
Cash and cash equivalents at the end of the year  $6,868   $2,583 
           
Non-cash transactions:          
Common stock issued due to debt conversion  $726   $- 
Deferred offering costs reclassifed to equity  $838   $- 
Common stock issued for prepaid services rescinded  $100   $- 
Common stock issued as offering costs  $1,250   $- 
Warrants issued as offering costs  $681      
           
Supplemental cash flow disclosures:          
Cash paid for interest expense  $207   $214 
Cash paid for income taxes  $-   $- 

 

 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 

4

 

ADOMANI, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.Organization and operations

 

ADOMANI, Inc. (“we”, “us”, “our”, the “Company) was incorporated in Florida in August 2012 and was reincorporated in Delaware in November 2016. The Company is a provider of new purpose-built zero-emission electric and hybrid vehicles and replacement drivetrains and as a result is focused on reducing the total cost of vehicle ownership for fleet operators. The Company also provides gas/diesel to all-electric and gas/electric to plug-in hybrid vehicle conversions to school bus and medium to heavy-duty fleet operators. ADOMANI, Inc. is the parent company of its wholly-owned subsidiaries, ADOMANI California, Inc. and ADOMANI China. The Company is headquartered in Newport Beach, CA.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation—The consolidated financial statements and related disclosures as of June 30, 2017 and for the six months ended June 30, 2017 and 2016, are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, these unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods. These unaudited financial statements should be read in conjunction with our audited financial statements for the years ended December 31, 2016 and 2015 included in our Form 253(g)(2) filed with the SEC on June 19, 2017.  The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year.

 

The Company has incurred losses for the past several years while developing infrastructure and planning an initial public offering (“IPO”). The Company incurred net losses of $9.6 million and $2.9 million during the six months ended June 30, 2017 and 2016, respectively. The Company completed its IPO on June 9, 2017, as discussed in Note 5 below.

 

 

The Company’s independent registered public accounting firm expressed in its report on the Company’s financial statements for the year ended December 31, 2016 disclosed substantial doubt about the Company’s ability to continue as a going concern. Based on management’s plans and the significant capital raised during the six months ended June 30, 2017, that substantial doubt has been alleviated.

 

Principles of Consolidation—The accompanying financial statements reflect the consolidation of the individual financial statements of ADOMANI, Inc., ADOMANI California, Inc. and ADOMANI China. All significant intercompany accounts and transactions have been eliminated.

 

Revenue Recognition—The Company recognizes revenue from the sales of advanced zero-emission electric drivetrain systems for fleet 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.

 

Stock-Based Compensation—The Company accounts for employee stock-based compensation in accordance with the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation—Stock Compensation, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.  The fair value of the equity instrument is charged directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered.

 

The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees.  In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital over the period during which services are rendered.

 

5

 

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.

 

Reclassification

 

Certain amounts in the 2016 financial statements have been reclassified to conform to the 2017 financial presentation. These reclassifications have no impact on net loss.

 

3.Notes Receivable

 

On June 29, 2017, the Company loaned $500,000 to an unaffiliated third party with engineering expertise in the electric bus technology industry, with whom the Company may seek an alliance at some future date, in order to provide it with working capital. The stated interest rate is 9% per annum, with interest payments due monthly beginning July 31, 2017. The note is secured by the assets of the borrower and matures on December 31, 2017. The Company loaned an additional $500,000 to another third party in December 2016 (see Note 4).

 

4.Debt

 

During 2016, 2015 and 2014, the Company issued convertible notes for total proceeds of $42,160, $20,275 and $207,465, respectively, to Acaccia Family Trust (“Acaccia”), formerly a related party. As of December 31, 2016, the outstanding balance of such convertible notes was $359,000. During 2014, the Company issued convertible notes for total proceeds of $286,000 to various third parties. As of December 31, 2016, the aggregate face value of the convertible notes issued to third and related parties was $645,000. All notes had a three-year maturity and bore interest at rates of 3% or 5% per annum. The terms of such loans permitted conversion of all outstanding principal and accrued interest into shares of common stock, with loans totaling $45,000 convertible at a rate of $0.50 per share and loans totaling $600,000, including the convertible notes issued to Acaccia, convertible at $0.10 per share. During 2016, the Company’s CFO purchased $25,000 of the $645,000 convertible notes outstanding from Acaccia. Effective January 30, 2017, all holders of such convertible debt converted their debt, which totaled $725,584, consisting of the outstanding principal amount and accrued and unpaid interest as of the date of conversion, into 6,868,578 shares of common stock (“Common Stock”) in anticipation of our IPO. As of June 30, 2017, all such convertible notes have been converted and no balance remains outstanding thereunder. No gain or loss resulted from the conversion of this debt to equity.

 

As these notes had an effective conversion price that was less than the fair market value of the Common Stock, these notes gave rise to a beneficial conversion feature totaling $42,160 and $20,275 during 2016 and 2015, respectively, which was recognized as an increase to paid-in capital and a corresponding debt discount. The debt discount was being amortized to interest expense on an effective interest basis over the maturity of the notes. For the six months ended June 30, 2017 and 2016, debt discount amortization associated with these notes was $51,935 and $50,532, respectively, which was recognized as interest expense in the accompanying consolidated statement of operations. The unamortized discount of these convertible notes was $0 and $51,935 at June 30, 2017 and December 31, 2016, respectively.

 

During 2015, the Company issued two-year secured promissory notes with an aggregate face value of $5,147,525 to third-party lenders for cash. The notes are secured by all the assets of the Company, mature between January and November 2017 and bear interest at 9%. The Company has notified all holders of the 9% secured notes payable with maturities in January through August 2017 that it was exercising its option to extend the maturity dates six months pursuant to the provisions of the notes. In connection with these notes, the Company incurred debt issuance costs of $514,753, which are being recognized as a debt discount and amortized over the life of the notes. During the six months ended June 30, 2017 and 2016, the debt discount amortization associated with these notes was $29,006 and $160,688, respectively, which was recognized as interest expense in the accompanying unaudited consolidated statements of operations. As of June 30, 2017, the debt issuance costs associated with these notes have been fully amortized. A $7,500 repayment of principal was issued to a lender in January 2016 and another $10,000 repayment was issued to a different lender in March 2017. In September 2016, the Company authorized the exchange of $884,700 principal amount of these notes for 884,700 shares of Common Stock. There was no gain or loss that resulted from the conversion of the notes to equity.

 

6

 

On November 18, 2016, the Company issued a promissory note with a principal amount of $500,000 to a stockholder in order to insure adequate working capital through the close of its IPO. The loan evidenced by the note is for a period of one year, at an interest rate of 5% per annum, with the principal and any unpaid interest due and payable in cash at maturity. On March 17, 2017, due to unforeseen delays in the closing of the IPO, the Company issued a second promissory note with a principal amount of $500,000 to the same stockholder in order to address additional liquidity concerns. The second note also bears interest at a rate of 5% per annum, with the principal and any unpaid interest due and payable in cash at maturity. The loans mature on November 15, 2017, unless previously repaid in accordance with the terms thereof. On May 12, 2017, the Company repaid both notes, plus accrued and unpaid interest of $15,685, from the proceeds of the initial closing of the IPO.

 

In December 2016, the Company borrowed $500,000 from an unaffiliated third party. The loan matured on June 15, 2017. It contains no stipulated interest rate, but the Company was obligated to pay loan fees of $50,000 to the lender. The proceeds of the loan were immediately used to loan $500,000 to a company in the zero-emissions technology industry that specializes in drivetrain solutions for zero emission and hybrid vehicles. The loan, carried as a note receivable on the balance sheet, contains the same provisions, including the loan fees payable to the Company, as the note payable discussed above in this paragraph, and also matured on June 15, 2017. The Company repaid the loan to the unaffiliated third party on May 12, 2017 from the proceeds of the initial closing of the IPO. The maturity date for the note receivable has been extended to December 31, 2017. During the six months ended June 30, 2017, the related amortization expense recognized on this loan amounted to $45,833.

 

In January 2015, in connection with the 2015 9% secured notes payable financing discussed above, the Company agreed to issue a warrant exercisable for 1,250,000 shares of Common Stock of the Company at an exercise price of $4.00 per share. The warrant, actually issued in September 2016, was valued using the Black Scholes valuation model and the resulting fair market value of $349,042 was recorded in 2015 as debt discount and is being amortized over the term of the notes. Interest expense relating to the amortization of this discount was $3,347 and $87,022 for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, the fair market value of the warrant was fully amortized.

 

 

7

 

Details of notes payable at June 30, 2017 and December 31, 2016 are as follows:

 

   As of June 30,
2017
  As of December 31,
2016
Convertible Debt          
Principal amount outstanding  $-   $645,000 
Cumulative discount for notes with beneficial conversion feature   -    (349,560)
Cumulative amortization of debt discount   -    297,625 
Subtotal of convertible notes @ $0.10 or $.50/share   -    593,065 
           
Notes Payable          
Principal amount outstanding   4,245,325    5,255,325 
Cumulative discount for finance charges incurred   (514,753)   (514,753)
Cumulative discount for warrant   (349,042)   (349,042)
Cumulative discount for 9% notes   (50,000)   (50,000)
Cumulative amortization of finance charges   514,753    485,747 
Cumulative amortization of warrant expense   349,042    345,695 
Cumulative amortization of 9% notes   50,000    4,167 
Subtotal of notes payable   4,245,325    5,177,139 
Total of debt  $4,245,325   $5,770,204 

 

5.Common Stock

 

Effective January 30, 2017, all holders of the $645,000 original principal amount of convertible debt converted their debt, which totaled $725,584, consisting of the outstanding principal amount and accrued and unpaid interest as of the date of conversion, into 6,868,578 shares of Common Stock.(see Note 4).

 

In March 2017, Dennis Di Ricco, who formerly served as the trustee of Acaccia, along with his family members and trusts) relinquished voting and investment power over all securities of the Company they owned, which constituted approximately 22% of the outstanding Common Stock of the Company. Mr. Di Ricco also surrendered his options to purchase up to 7,000,000 shares of common stock for forfeiture and cancellation, and sold (in a private transaction to which the Company was not a party) all 2,500,000 shares of Common Stock held as of record by his IRA. In connection with the foregoing, the Company and Mr. Di Ricco also terminated their consulting relationship. See Note 6.

 

In March 2016, the Company entered into a consulting agreement with Redwood Group International Limited (“Redwood”). In exchange for its services, Redwood received $5,000 per month in retainer payments and was eligible to receive other fees and warrants, as set forth in the consulting agreement. The initial term of the consulting agreement was 12 months, ending on February 28, 2017, although the term would automatically extend for an additional 12 months unless terminated by either party. On September 29, 2016, the Company executed a letter agreement with Redwood, pursuant to which it issued to Redwood an additional 100,000 shares of Common Stock, subject to Redwood satisfying certain performance thresholds. If Redwood failed to meet such performance thresholds, the agreement provided the Company with an exclusive option to reacquire all or a portion of the shares of Common Stock at $0.00001 per share. On November 15, 2016, the Company and Redwood agreed to terminate the original consulting agreement and entered into it a new consulting agreement that was set to expires upon thirty days’ written notice by either party following the successful completion of the Company’s IPO. The new consulting agreement was substantially similar to the prior agreement with respect to fees and warrants due to Redwood, and provided that the Company would pay Redwood a sum of $800,000 and issue Redwood a warrant to acquire 350,000 shares of Common Stock. In May 2017, the Company and Redwood mutually agreed to terminate this agreement. On June 8, 2017, the Company paid a fee of $800,000 to Redwood and issued Redwood a warrant to purchase 350,000 shares of Common Stock, in connection with which the Company cancelled the 100,000 shares of Common Stock it had previously issued pursuant to the September 2016 letter agreement. The warrant to purchase 350,000 shares of Common Stock was valued using the Black Scholes method resulting in a fair market value of $1.24 million. The assumptions used in the valuation included the term of 5 years, the exercise price of $5.00 per share, volatility of 92% and a risk free interest rate of 1.75%. The fair value of the warrant was recorded as consulting expense during the three months ended June 30, 2017.

 

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On June 9, 2017, the Company consummated the final closing of the IPO, as discussed in Note 2 above. The Company sold an aggregate of 2,852,275 shares of Common Stock, of which 342,273 shares were sold on behalf of certain stockholders of the Company who elected to participate in the IPO, for aggregate gross proceeds of $14,261,375. Net proceeds received after deducting commissions, expenses and fees of approximately $2.5 million and the $1,711,365, amounted to approximately $10.0 million. The Company remitted the $1,711,365 in aggregate gross proceeds resulting from the sale of shares on behalf of the selling stockholders to such stockholders. As such, the Company issued and sold an aggregate of 2,510,002 shares of Common Stock in connection with the IPO, excluding the shares sold by the selling stockholders. In connection with the final closing of the IPO on June 9, 2017, the Company issued an additional 250,000 shares of Common Stock, valued at $1,250,000, under the terms of a consulting agreement. Under the terms of the underwriting agreement executed in connection with the IPO, the Company issued to Boustead Securities, LLC a warrant to purchase 199,659 shares of Common Stock. The warrant to purchase 199,659 shares of Common Stock was valued using the Black Scholes method resulting in a fair market value of $680,543. The assumptions used in the valuation included the term of 5 years, the exercise price of $6.00 per share, volatility of 92% and a risk free interest rate of 1.75%. The fair value of the warrant was recorded as offering costs and netted against additional paid in capital during the three months ended June 30, 2017.

 

6.Stock-Based Compensation

 

In March 2017, Dennis Di Ricco surrendered his options to purchase up to 7,000,000 shares of Common Stock for forfeiture or cancellation (see Note 5).

 

In March 2017, the board of directors of the Company (the “Board”) consented to the grant of options to purchase an aggregate of 3,600,000 shares of Common Stock to 13 people (employees and current and prospective Board members). The options will vest over a three-year period, and the exercise price was determined based on the average of the trading price of the Company’s Common Stock on the Nasdaq Capital Market for the first ten days following the close of its IPO, which was $10.49. The options were valued using the Black Scholes method, resulting in a fair market value of $37.6 million  The assumptions used in the valuation included an expected term of 4.75 years; volatility of 86% and a riskfree interest rate of 2.02%.

 

Stock option activity for the six months ended June 30, 2017 is as follows:

 

   Number of
Shares
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual Life
(years)
Outstanding at December 31, 2016   33,775,000   $0.10      
Granted   3,600,000    10.49      
Forfeited   (7,000,000)          
Outstanding at June 30, 2017   30,375,000   $3.56    4.5 
                
Exercisable at June 30, 2017   21,586,495   $3.56    3.9 

 

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Stock-based compensation expense was $5.0 million and $1.3 million for the six months ended June 30, 2017 and 2016, respectively, and is included in general and administrative expense in the accompanying unaudited consolidated statements of operations. As of June 30, 2017, the Company expects to recognize $38.1 million of stock-based compensation for the non-vested outstanding options over a weighted-average period of 2.62 years.

 

7. Commitments

 

Employment Agreements—Effective September 1, 2014, the Company executed an employment agreement with James Reynolds, its Chief Executive Officer. The term of the employment agreement is 5 years, and the agreement provides for an annual base salary of $240,000 and entitles Mr. Reynolds to receive a bonus of five percent of the Company’s net profits on an annual basis.

 

Effective September 1, 2014, the Company executed an employment agreement with Edward Monfort, its Chief Technology Officer. The term of the employment agreement was 5 years, and the agreement provided for an annual base salary of $240,000 and entitled Mr. Monfort to receive a bonus of five percent of the Company’s net profits. In June 2016, Mr. Monfort entered into a new employment agreement with a two-year term, which superseded the 2014 employment agreement, pursuant to which his salary was reduced to $120,000 per annum Additionally, the Company pays up to $7,000 per month to ELO, LLC, an entity owned by Mr. Monfort, for invoiced expenses relating to research and development pursuant to a consulting relationship.

 

Effective January 1, 2017, the Company entered into an employment agreement with Michael Menerey, its Chief Financial Officer. The term of the employment agreement is five years and the agreement provides for an annual base salary of $200,000.

 

Operating Leases—In 2015, the Company signed an office and warehouse lease agreement for a facility in Orange, California, to serve as its primary facility for research and development activity. The initial term of the lease expired on February 29, 2016, at which time the Company extended the lease for two additional years, until February 28, 2018. The total amount due annually under the lease is $44,856. The Company signed a one-year office lease for office space in Newport Beach, California, to serve as office space for its headquarters. The initial term of the lease expired on December 31, 2016, at which time the Company extended the lease on a month-to-month basis. The total amount due monthly is approximately $3,400. In 2016, the Company also signed a lease for office space in Los Altos, California, to serve as office space for its Northern California operations. The lease expired February 28, 2017 and the Company executed a new one-year lease in February 2017. The total amount due under the lease is $5,200 and the lease period is from March 1, 2017 through February 28, 2018.

 

Other Agreements—In 2015, the Company entered into a contract with THINKP3 to provide services with the goal of securing federal grant assistance for development of the Company’s zero-emission and hybrid transportation solutions for school bus, commercial, government and utility fleets. The initial term of this contract was December 1, 2015 through November 30, 2016. On November 21, 2016, the parties renewed the agreement through November 30, 2017. Fees for these services are $8,000 per month. The contract can be terminated by either party with 30-days advance notice.

 

In March 2015, the Company signed a licensing option agreement with Silicon Turbines Systems, Inc. for use of its patent in manufacturing. The option calls for a payment of $10,000 per month, beginning March 1, 2015, up to a full investment amount of $3,000,000. The agreement provided that the original option would terminate on August 31, 2015, but the parties agreed verbally to both extend the date of termination of the option and delay the Company’s obligation to make any monthly payments under the option agreement while both companies evaluate the relationship. As such, no payments have been made in 2017. For the year ended December 31, 2016, the Company made one $10,000 payments. This amount appears as Other Investments on the unaudited consolidated balance sheets.

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In 2016, the Company signed an advisor agreement with Dennis Di Ricco, formerly a related party and stockholder, pursuant to which Mr. Di Ricco would provide consulting services to the Company. In March 2017, we terminated this agreement (see Note 5).

 

The following table summarizes our future minimum payments under contractual commitments, excluding debt, as of June 30, 2017:

 

   Payments due by period
   Total  Less than
one year
  1 - 3 years  3 - 5 years  More than
5 years
Operating lease obligations   33,688    33,688    -    -    - 
Employment contracts   1,640,000    660,000    680,000    300,000    - 
Total   1,673,688    693,688    680,000    300,000    - 

 

8. Subsequent Events

 

During July and August 2017, the Company repaid principal of $739,500, plus accrued interest of $1,877, to holders of two-year 9% secured promissory notes whose original maturity dates were in January and February 2017, before the Company exercised its option to extend for six months (see Note 4).

 

On July 28, 2017, the Company repaid principal of $60,000, less $6,000 withheld for finance charges, for a net payment of $54,000 to another secured promissory note holder (see Note 4).

 

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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 “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. We 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, manufacture and install advanced zero-emission electric and hybrid drivetrain systems for use in new school buses and medium to heavy-duty commercial fleet vehicles. We also design, manufacture and install unique and patented conversion kits to replace conventional drivetrain systems for diesel and gasoline powered vehicles 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 vehicles manufactured by 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 June 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 six months ended June 30, 2017 and 2016, our net losses were $9.6 million and $2.9 million, respectively, and for the three months ended June 30, 2017 and 2016, our net losses were $8.1 million and $1.3 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. We believe the completion of our initial public offering (the “IPO”) has provided us with the necessary working capital to move forward with our business plan.

 

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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, is very large today, and 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 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.

 

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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.

 

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Results of Operations

 

The following table compares operating data for the three and six months ended  June 30, 2017 to June 30,2016:

 

ADOMANI, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)

 

   Three Months Ended  Six Months Ended
   June 30, 2017  June 30, 2016  June 30, 2017  June 30, 2016
             
Net sales  $-   $68   $-   $68 
Cost of sales   -    50    -    50 
Gross profit   -    18    -    18 
Operating expenses:                    
General and administrative [1]   5,350    953    6,647    2,092 
Consulting   2,143    124    2,163    238 
Research and development   460    -    519    16 
Total operating expenses, net   7,953    1,077    9,329    2,346 
Loss from operations   (7,953)   (1,059)   (9,329)   (2,328)
                     
Other income (expense):                    
Interest expense   (147)   (285)   (362)   (557)
Other income (expense)   22    -    49    1 
Total other income (expense)   (125)   (285)   (313)   (556)
                     
Loss before income taxes   (8,078)   (1,344)   (9,642)   (2,884)
Income tax expense   -    -    (2)   - 
Net loss  $(8,078)  $(1,344)  $(9,644)  $(2,884)
                     
Net loss per share to common shareholders:                    
Basic and diluted  $(0.12)  $(0.02)  $(0.15)  $(0.04)
                     
Weighted shares used in the computation of net loss per share:                    
Basic and diluted   66,815,898     66,551,134    64,978,905    73,276,408 

 

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

   Three Months Ended  Six Months Ended
   June 30, 2017  June 30, 2016  June 30, 2017  June 30, 2016
General and administrative expenses   4,438    638    5,044    1,275 
Total stock-based compensation expense   4,438    638    5,044    1,275 

 

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Revenues

 

Revenue for each of the three and six months ended June 30, 2017 was $0, as compared to revenue of $68,000 for each of the three and six months ended June 30, 2016. 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 raising capital and becoming a public reporting company; and

                business development-related expenses.

 

General and administrative expenses increased by $4.4 million and $4.6 million for the three and six months ended June 30, 2017, respectively, as compared to the prior-year periods. The increases are primarily due to increases in stock-based compensation expense of $3.80 million and $3.82 million for the three and six months ended June 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 6 to the unaudited consolidated financial statements included in this report). 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, sales and marketing, and investor relations expenses, which increased by $421,723 and $604,277 for the three and six months ended June 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 $2.0 million and $1.9 million for the three and six months ended June 30, 2017, respectively, as compared to the prior-year periods. The increases are 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 increased by $460,068  and $512,577  for the three and six months ended June 30, 2017, respectively, as compared to the prior-year periods. This increase 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

 

Our principal source of cash is our existing cash and cash equivalents balance, sourced primarily from the net proceeds from the IPO. As of June 30, 2017, we had cash and cash equivalents of $6.9 million. On May 12, 2017, we repaid the three unsecured promissory notes discussed in Note 4 to the unaudited consolidated financial statements included in this report and in “Debt” below with funds from the initial closing of our IPO. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part II. Item 1A. “Risk Factors.” See the discussion below under “Going Concern” regarding the closing of the IPO.

 

We believe that our existing cash and cash equivalents, including the net proceeds from the IPO of approximately $10 million, 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. We do not expect to be able to satisfy our cash requirements solely through product sales in the near future, therefore we expect to rely on the net proceeds from our IPO to fund our operations. 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. We cannot assure that such capital, if required, will 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 initially until we begin to generate a sufficient level of revenue from our sales and marketing efforts.

 

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From our initial incorporation in 2012 as a Florida corporation and until the IPO, 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 3 to the unaudited consolidated financial statements contained in this report.

 

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, were 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 IPO. 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 IPO, 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. See also the discussion below under “Going Concern” regarding the closing of the IPO.

 

Initial Public Offering

 

On June 9, 2017, we completed the IPO. For more information about the IPO, see Note 5 to our unaudited consolidated financial statements.

 

Options to Purchase Common Stock

 

As of June 30, 2017, we had granted options to purchase 30,375,000 shares of Common Stock. 21,218,612 shares of Common Stock are issuable upon the exercise of options vested as of June 30, 2017, at an exercise price of $0.10 per share, and 367,883 shares of Common Stock are issuable upon the exercise of options vested as of June 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 $5,980,956 and we would be required to issue 21,586,495 shares of Common Stock. There can be no assurance, however, that any such options will be exercised. See Note 6 to the unaudited consolidated financial statements contained in this report.

 

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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 (the “Note Financing”). In January 2016, we repaid $7,500 of the aggregate principal amount outstanding under the notes, and in March 2017, we repaid another $10,000 of such outstanding amount. The secured promissory notes are due on various dates between January 31 and November 30, 2017, unless extended by the Company at its option for an additional six months. 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 $4,245,325.

 

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.

 

The Company may repay its secured promissory notes from proceeds from the IPO or from any cash exercise of the warrant prior to maturity of the secured promissory notes. The Company may also elect to extend the maturity of the notes for 6 months without approval by the noteholders. Any subsequent extension requires the consent of the noteholders. As of June 30, 2017, the Company has extended the maturity dates for those notes maturing in January through August 2017. See Note 4 to the unaudited consolidated financial statements contained in this report.

 

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 June 30, 2017, we had working capital of $3.9 million and stockholders’ equity of approximately $4.6 million. During the six months ended June 30, 2017, we incurred a net loss attributable to holders of our Common Stock of approximately $9.6 million. 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 IPO. 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, as discussed in Note 5 to the unaudited consolidated financial statements, for 342,273 shares they sold in the offering. Based on our management’s plans and the significant capital raised in the IPO, we believe the substantial doubt about our ability to continue as a going concern has been alleviated.

 

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Cash Flows

 

The following table summarizes our cash flows used in operating, investing, and financing activities for the six months ended June 30, 2017 and 2016.

 

   Six Months Ended
   June 30, 2017  June 30, 2016
Consolidated Statements of Cash Flow Data:      
Cash flows used in operating activities  $(3,408)  $(1,656)
Cash flows used in investing activities   (534)   (56)
Cash flows provided by (used in) financing activities   9,872    (242)
           
Increase (decrease) in cash and cash equivalents  $5,930   $(1,954)

 

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 amounts. These numbers are further impacted by adjustments for non-cash interest expense.

 

Net cash used in operating activities during the six months ended June 30, 2017 was $3.4 million, as a result of a net loss of $9.6 million, stock-based compensation of $5.0 million, other non-cash charges of $1.3 million, and changes in operating assets and liabilities that used $138,293 in cash. Other current assets increased by $103,114, inventory increased by $120,000, accounts payable increased by $72,634, accrued liabilities increased by $9,279, and other non-current assets decreased by $2,908.

 

Net cash used in operating activities during the six months ended June 30, 2016 was $1.7 million, as a result of a net loss of $2.9 million, stock-based compensation of $1.3 million, other non-cash charges of $306,179  , and changes in operating assets and liabilities that used $356,781 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 six months ended June 30, 2017 was $533,652. This was due to the acquisition of property and equipment and issuing a note to a third party. See Note 2 to the unaudited consolidated financial statements contained in this report.

 

Net cash used in investing activities during the six months ended June 30, 2016 was $55,990 This was due to the acquisition of $45,990 of property and equipment and a $10,000 investment in Silicon Turbine Solutions.

 

Financing Activities

 

Net cash provided by financing activities during the six months ended June 30, 2017 was $9.9 million. This is due to net proceeds of $12.6 million received from the closing of our IPO, a $1.5 million repayment of notes payable principal and related accrued and unpaid interest, and net notes payable proceeds of $500,000. This is offset by payments for costs related to our IPO 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 six months ended June 30, 2016 was $241,445 This is due to net proceeds of $184,900  from sales of capital stock, $64,000 paid for a stock rescission, and to a $7,500 repayment of notes payable principal, offset by payments for costs related to our IPO of $354,845.

 

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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 IPO occurred, (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, or GAAP. 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 (the “SEC”) on April 25, 2017.

 

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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 June 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.

 

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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. Except as noted above, there were no other 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 June 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

 

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.

 

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

 

(a)       Recent Sales of Unregistered Securities

 

In March 2017, the Board consented to the grant of options to purchase an aggregate of 3,600,000 shares of Common Stock to 13 people (employees and current and prospective Board members). The options will vest over a three-year period and the exercise price per share is $10.49, which was determined on the basis of the average of the trading price of the Company’s Common Stock on the Nasdaq Capital Market for the first ten days following the close of the IPO.

 

On May 12, 2017, the Company issued a warrant to purchase 199,659 shares of Common Stock, subject to stock splits or other similar changes in our capital structure, to Boustead Securities, LLC for services rendered in connection with the closing of our IPO. The warrant has an exercise price of $6.00 per share, becomes exercisable on October 22, 2017, and expires on April 25, 2022. See Note 5 to the unaudited consolidated financial statements contained in this report.

 

On June 19, 2017, the Company issued a warrant to purchase 350,000 shares of Common Stock, subject to stock splits or other similar changes in our capital structure, to Redwood Group International Limited under the terms of a settlement agreement. The warrant has an exercise price of $5.00 per share, becomes exercisable on December 16, 2017, and expires on June 19, 2022. See Note 5 to the unaudited consolidated financial statements contained in this report.

 

The issuances described above were made pursuant to written compensatory plans or agreements in reliance on the exemption provided by Rule 701 promulgated under Section 3(b) of the Securities Act or in reliance on Section 4(a)(2) and Regulation D promulgated under the Securities Act as transactions by an issuer not involving a public offering, to the extent an exemption from such registration was required. Except as set forth above, no underwriters were involved in the foregoing sales of securities.

 

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(b)       Use of Proceeds

 

Not applicable.

 

(c)        Issuer Purchases of Equity Securities

 

Not applicable.

 

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.

 

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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: August 14, 2017 By: /s/ James L. Reynolds  
    James L. Reynolds  
    Chief Executive Officer  
    (Principal Executive Officer)  
       
Date: August 14, 2017 By: /s/ Michael K. Menerey  
    Michael K. Menerey  
    Chief Financial Officer  
    (Principal Financial and Accounting Officer)  
       

 

 

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Exhibit Index

 

    Incorporated by Reference  

Exhibit

Number

Exhibit Description Form File No. Exhibit

Filing

Date

Filed

Herewith

             
4.1 Form of Common Stock Purchase Warrant, dated June 26, 2017, issued to Boustead Securities, LLC         X
             
4.2 Form of Common Stock Purchase Warrant, dated June 19, 2017, issued to Redwood Group International Limited         X
             
31.1 Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer         *
             
31.2 Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer         *
             
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         *
             
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         *
             
101.INS XBRL Instance Document*          
             
101.SCH XBRL Taxonomy Extension Schema Document*          
             
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document*          
             
101.LAB XBRL Taxonomy Extension Label Linkbase Document*          
             
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document*          
             
101.DEF XBRL Taxonomy Extension Definitions Linkbase Document*          

 

#       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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