UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

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

 

For the fiscal year ended December 31, 2019

 

OR

 

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

 

For the transition period from _______________ to _______________

 

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report _______________

 

Commission file number 000-55859

 

ELECTRAMECCANICA VEHICLES CORP.

(Exact name of Registrant specified in its charter)

 

Not Applicable

(Translation of Registrant’s name into English)

 

British Columbia, Canada

(Jurisdiction of incorporation or organization)

 

102 East 1st Avenue

Vancouver, British Columbia, Canada, V5T 1A4

(Address of principal executive offices)

 

Bal Bhullar; (604) 428-7656; bal@electrameccanica.com

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of Each Class Trading Symbol(s) Name of each exchange on which registered
Common Shares SOLO The Nasdaq Stock Market LLC
Warrants, each to purchase one Common Share SOLOW The Nasdaq Stock Market LLC

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

  

Common Shares Without Par Value

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

Common Shares Without Par Value

(Title of Class)

 

Number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of business of the period covered by the annual report.

 

37,049,374 Common Shares Without Par Value

 

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

 

Yes ¨ No x

 

If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Yes ¨ No x

 

Indicate by check mark whether 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 

 

Yes x No ¨

 

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

 

Large Accelerated Filer ¨ Accelerated Filer ¨
Non Accelerated Filer x Emerging Growth Company x

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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 pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ¨ International Financial Reporting Standards as issued Other ¨
  by the International Accounting Standards Board x  

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:   Item 17 ¨ Item 18 ¨

If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act):

 

Yes ¨ No x

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

Not applicable.

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
PART I 3
   
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 3
ITEM 3. KEY INFORMATION 3
ITEM 4. INFORMATION ON THE COMPANY 18
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 33
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 47
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 69
ITEM 8. FINANCIAL INFORMATION 76
ITEM 9. THE OFFER AND LISTING 76
ITEM 10. ADDITIONAL INFORMATION 77
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 86
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 89
   
PART II 90
   
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 90
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 90
ITEM 15. CONTROLS AND PROCEDURES 90
ITEM 16. [RESERVED] 92
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 92
ITEM 16B. CODE OF ETHICS 92
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 92
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 93
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 93
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 93
ITEM 16G. CORPORATE GOVERNANCE 93
ITEM 16H. MINE SAFETY DISCLOSURE 93
   
PART III 94
   
ITEM 17. FINANCIAL STATEMENTS 94
ITEM 18. FINANCIAL STATEMENTS 94
ITEM 19. EXHIBITS 119

 

 

 

 

FORWARD LOOKING STATEMENTS

 

This Annual Report on Form 20-F contains statements that constitute “forward-looking statements”. Any statements that are not statements of historical facts may be deemed to be forward-looking statements. These statements appear in a number of different places in this Annual Report and, in some cases, can be identified by words such as “anticipates”, “estimates”, “projects”, “expects”, “contemplates”, “intends”, “believes”, “plans”, “may”, “will” or their negatives or other comparable words, although not all forward-looking statements contain these identifying words. Forward-looking statements in this Annual Report may include, but are not limited to, statements and/or information related to: strategy, future operations, the size and value of the order book and the number of orders, the number and timing of building pre-production vehicles, the projection of timing and delivery of SOLOs or Tofinos in the future, projected costs, expected production capacity, expectations regarding demand and acceptance of our products, estimated costs of machinery to equip a new production facility, trends in the market in which we operate, plans and objectives of management.

 

Forward-looking statements are based on the reasonable assumptions, estimates, analysis and opinions made in light of our experience and our perception of trends, current conditions and expected developments, as well as other factors that we believe to be relevant and reasonable in the circumstances at the date that such statements are made, but which may prove to be incorrect. Management believes that the assumption and expectations reflected in such forward-looking statements are reasonable. Assumptions have been made regarding, among other things: the Company’s ability to build pre-production SOLOs and to begin production deliveries within certain timelines; the Company’s expected production capacity; prices for machinery to equip a new production facility, labor costs and material costs remaining consistent with the Company’s current expectations; production of SOLOs and Tofinos meeting expectations and being consistent with estimates; equipment operating as anticipated; there being no material variations in the current regulatory environment; and the Company’s ability to obtain financing as and when required and on reasonable terms. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which may have been used.

 

Such risks are discussed in Item 3.D “Risk Factors”. In particular, without limiting the generality of the foregoing disclosure, the statements contained in Item 4.B. – “Business Overview”, Item 5 – “Operating and Financial Review and Prospects” and Item 11 – “Quantitative and Qualitative Disclosures About Market Risk” are inherently subject to a variety of risks and uncertainties that could cause actual results, performance or achievements to differ significantly. Such risks, uncertainties and other factors include but are not limited to:

 

  · general economic and business conditions, including changes in interest rates;

 

  · prices of other electric vehicles, costs associated with manufacturing electric vehicles and other economic conditions;

 

  · natural phenomena (including the current COVID-19 pandemic);

 

  · actions by government authorities, including changes in government regulation;

 

  · uncertainties associated with legal proceedings;

 

  · changes in the electric vehicle market;

 

  · future decisions by management in response to changing conditions;

 

  · the Company’s ability to execute prospective business plans;

 

  · misjudgments in the course of preparing forward-looking statements;

 

  · the Company’s ability to raise sufficient funds to carry out its proposed business plan;

 

  · consumers’ willingness to adopt three-wheeled single seat electric vehicles;

 

- 1 -

 

 

  · declines in the range of the Company’s electric vehicles on a single charge over time may negatively influence potential customers’ decisions to purchase such vehicles;

 

  · developments in alternative technologies or improvements in the internal combustion engine;

 

  · inability to keep up with advances in electric vehicle technology;

 

  · inability to design, develop, market and sell new electric vehicles and services that address additional market opportunities;

 

  · dependency on certain key personnel and any inability to retain and attract qualified personnel;

 

  · inexperience in mass-producing electric vehicles;

 

  · inability to reduce and adequately control operating costs;

 

  · failure of the Company’s vehicles to perform as expected;

 

  · inexperience in servicing electric vehicles;

 

  · inability to succeed in establishing, maintaining and strengthening the ElectraMeccanica brand;

 

  · disruption of supply or shortage of raw materials;

 

  · the unavailability, reduction or elimination of government and economic incentives;

 

  · failure to manage future growth effectively; and

 

  · labor and employment risks.

 

Although management has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There is no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such forward-looking statements. Accordingly, readers should not place undue reliance on forward-looking statements. These cautionary remarks expressly qualify, in their entirety, all forward-looking statements attributable to our Company or persons acting on our Company’s behalf. We do not undertake to update any forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such statements, except as, and to the extent required by, applicable securities laws. You should carefully review the cautionary statements and risk factors contained in this Annual Report and other documents that the Company may file from time to time with the securities regulators.

 

- 2 -

 

 

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected financial data

 

The selected historical consolidated financial information set forth below has been derived from our financial statements for the fiscal years ended December 31, 2019, 2018, 2017, 2016 and 2015.

 

Consolidated Statement of Net  Loss  
    Year ended
December 31,
2019
    Year ended
December 31,
2018
    Year ended
December 31,
2017
    Year ended
December 31,
2016
    Period ended
December 31,
2015
 
Revenues   $ 775,821     $ 777,302     $ 109,173       -       -  
Gross Profit   $ 129,380     $ 202,130     $ 45,223       -       -  
Net Loss   $ 30,742,311     $ 10,038,145     $ 11,366,372     $ 8,973,347       995,833  
Loss per Share – Basic and Diluted   $ (0.85 )   $ (0.38 )   $ (0.26 )   $ (0.27 )     (0.04 )

 

 

Consolidated Statements of Financial Position  
    December 31, 2019     December 31,
2018
    December 31,
2017
    December 31,
2016
    December 31,
2015
 
Cash and cash equivalents   $ 11,095,848     $ 18,926,933     $ 8,610,996     $ 3,916,283     $ 106,357  
Current Assets   $ 18,867,905     $ 22,807,135     $ 10,007,684     $ 4,437,152     $ 197,309  
Total Assets   $ 30,281,892     $ 29,480,731     $ 12,661,381     $ 4,787,766     $ 213,118  
Current Liabilities   $ 3,388,987     $ 1,821,668     $ 3,354,675     $ 881,176     $ 346,416  
Total Liabilities   $ 11,319,911     $ 6,574,543     $ 7,010,365     $ 881,176     $ 346,416  
Shareholders’ Equity (Deficit)   $ 18,961,981     $ 22,906,188     $ 5,651,016     $ 3,906,590     $ (133,298 )

 

B. Capitalization and Indebtedness

 

Not applicable.

 

C. Reasons for the offer and use of proceeds

 

Not applicable.

 

D. Risk Factors

 

An investment in our shares carries a significant degree of risk. You should carefully consider the following risks, as well as the other information contained in this Annual Report, including our financial statements and related notes included elsewhere in this Annual Report, before you decide to purchase our shares. Any one of these risks and uncertainties has the potential to cause material adverse effects on our business, prospects, financial condition and operating results which could cause actual results to differ materially from any forward-looking statements expressed by us and a significant decrease in the value of our common shares. Refer to “Forward-Looking Statements”.

 

- 3 -

 

 

We may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause. These potential risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional risks and uncertainties that we are presently unaware of, or presently consider immaterial, that may become material in the future and have a material adverse effect on us. You could lose all or a significant portion of your investment due to any of these risks and uncertainties.  

 

Risks Related to our Business and Industry

 

We have a limited operating history and have generated minimal revenues.

 

Our limited operating history makes evaluating our business and future prospects difficult. We were formed in February 2015, and we have not yet begun mass production or the commercial delivery of our first electric vehicle. To date, we have no revenues from the sale of electric vehicles as any amounts received from the sale of our pre-production electric vehicles were netted off against research and development costs as cost recovery and have had minimal revenue from the sale of non-electric custom cars. We intend to derive revenues from the sales of our SOLO vehicle, our Tofino vehicle and other intended electric vehicles (“EV”s). The Tofino is still in the early design development stage, and the first commercially-produced SOLOs are scheduled to be delivered to our customers during 2020. Our vehicles require significant investment prior to commercial introduction and may never be successfully developed or commercially successful.

 

We have a history of operating losses and we expect our operating losses to accelerate and materially increase for the foreseeable future.

 

For the fiscal year ended December 31, 2019, we generated a net loss of $30,742,311, bringing our accumulated deficit to $62,116,008. We anticipate generating a significant loss for the current fiscal year. The report of independent registered public accounting firm on our audited financial statements includes an explanatory paragraph relating to our ability to continue as a going concern.

 

We have minimal revenue and expect significant increases in costs and expenses to forestall profits for the foreseeable future, even if we generate revenues in the near term. We have not begun the commercial mass production or sale of our flagship vehicle, the SOLO, and we expect to incur significant additional costs and expenses through the launch of the vehicle. Even if we are able to successfully launch the SOLO into commercial mass production, and to launch the Tofino or other intended EVs, they might not become commercially successful. If we are to ever achieve profitability, we must have a successful commercial introduction and acceptance of our vehicles, which may not occur. We expect that our operating losses will increase substantially in 2020 and thereafter, and we also expect to continue to incur operating losses and to experience negative cash flows for the next several years.

 

We expect the rate at which we will incur losses to increase significantly in future periods from current levels as we:

 

  · design, develop and manufacture our vehicles and their components;

 

  · develop and equip our manufacturing facility;

 

  · build up inventories of parts and components for the SOLO, the Tofino and other intended EVs;

 

  · open ElectraMeccanica stores;

 

  · expand our design, development, maintenance and repair capabilities;

 

  · develop and increase our sales and marketing activities; and

 

  · develop and increase our general and administrative functions to support our growing operations.

 

- 4 -

 

 

Because we will incur the costs and expenses from these efforts before we receive any revenues with respect thereto, our losses in future periods will be significantly greater than the losses we would incur if we developed the business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in profits or even revenues, which would further increase our losses.

 

Our ability to achieve profitability will depend, in part, on our ability to materially reduce the bill of materials and per unit manufacturing cost of our products.

 

We anticipate that the gross profit generated from the sale of the SOLO will not be sufficient to cover our operating expenses. To achieve our operating and strategic goals while remaining competitive, we will, among other things, need to reduce the bill of materials and the per-unit manufacturing cost of the SOLO. We expect the primary factors to contribute to a reduced bill of materials and per unit manufacturing cost to include:

 

· continued product development to make the SOLO easier and cheaper to mass produce commercially;

 

· our ability to utilize less expensive suppliers and components that meet the requirements for the SOLO;

 

· increasing the volume of components that we purchase in order to take advantage of volume-based pricing discounts;

 

· improving assembly efficiency;

 

· enhancing the automation of our strategic manufacturing partner’s facility to increase volume and reduce labor costs; and

 

· increasing our volume to leverage manufacturing overhead costs.

 

Continued product development is subject to feasibility and engineering risks. Any increase in manufacturing volumes is dependent upon a corresponding increase in sales. The occurrence of one or more factors that negatively impact the manufacturing or sales of the SOLO, or reduce our manufacturing efficiency, may prevent us from achieving our desired reduction in manufacturing costs, which would negatively affect our operating results and may prevent us from attaining profitability.

 

We currently have negative operating cash flows, and if we are unable to generate positive operating cash flows in the future our viability as an operating business will be adversely affected.

 

We have made significant up-front investments in research and development, sales and marketing and general and administrative expenses to rapidly develop and expand our business. We are currently incurring expenditures related to our operations that have generated a negative operating cash flow. Operating cash flow may decline in certain circumstances, many of which are beyond our control. We might not generate sufficient revenues in the near future. Because we continue to incur such significant future expenditures for research and development, sales and marketing and general and administrative expenses, we may continue to experience negative cash flow until we reach a sufficient level of sales with positive gross margins to cover operating expenses. An inability to generate positive cash flow until we reach a sufficient level of sales with positive gross margins to cover operating expenses or raise additional capital on reasonable terms will adversely affect our viability as an operating business.

 

To carry out our proposed business plan to develop, manufacture, sell and service electric vehicles, we will require a significant amount of capital.

 

To carry out our proposed business plan for the next 12 months, we estimate that we will need approximately $25 million. If cash on hand, revenue from the sale of our cars, if any, and cash received upon the exercise of outstanding warrants, if any are exercised, are not sufficient to cover our cash requirements, we will need to raise additional funds through the sale of our equity securities, in either private placements or registered offerings, and shareholder loans. If we are unsuccessful in raising enough funds through such capital-raising efforts, we may review other financing possibilities such as bank loans. Financing might not be available to us or, if available, only on terms that are not acceptable to us.

 

- 5 -

 

 

Our ability to obtain the necessary financing to carry out our business plan is subject to a number of factors, including general market conditions and investor acceptance of our business plan. These factors may make the timing, amount, terms and conditions of such financing unattractive or unavailable to us. If we are unable to raise sufficient funds, we will have to significantly reduce our spending, delay or cancel our planned activities or substantially change our current corporate structure. We might not be able to obtain any funding, and we might not have sufficient resources to conduct our business as projected, both of which could mean that we would be forced to curtail or discontinue our operations.

 

Terms of future financings may adversely impact your investment.

 

We may have to engage in common equity, debt or preferred stock financing in the future. Your rights and the value of your investment in our securities could be reduced. Interest on debt securities could increase costs and negatively impacts operating results. Preferred stock could be issued in series from time to time with such designation, rights, preferences and limitations as needed to raise capital. The terms of preferred stock could be more advantageous to those investors than to the holders of common shares. In addition, if we need to raise equity capital from the sale of common shares, institutional or other investors may negotiate terms at least as, and possibly more, favorable than the terms of your investment. Common shares which we sell could be sold into any market which develops, which could adversely affect the market price.

 

Our future growth depends upon consumers’ willingness to adopt three-wheeled single-seat electric vehicles.

 

Our growth highly depends upon the adoption by consumers of, and we are subject to an elevated risk of, any reduced demand for alternative fuel vehicles in general and electric vehicles in particular. If the market for three-wheeled single seat electric vehicles does not develop as we expect, or develops more slowly than we expect, our business, prospects, financial condition and operating results will be negatively impacted. The market for alternative fuel vehicles is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing consumer demands and behaviors. Factors that may influence the adoption of alternative fuel vehicles, and specifically electric vehicles, include:

 

  · perceptions about electric vehicle quality, safety (in particular with respect to lithium-ion battery packs), design, performance and cost, especially if adverse events or accidents occur that are linked to the quality or safety of electric vehicles;

 

  · perceptions about vehicle safety in general and, in particular, safety issues that may be attributed to the use of advanced technology, including vehicle electronics and braking systems;

 

  · the limited range over which electric vehicles may be driven on a single battery charge;

 

  · the decline of an electric vehicle’s range resulting from deterioration over time in the battery’s ability to hold a charge;

 

  · concerns about electric grid capacity and reliability, which could derail our efforts to promote electric vehicles as a practical solution to vehicles which require gasoline;

 

  · the availability of alternative fuel vehicles, including plug-in hybrid electric vehicles;

 

  · improvements in the fuel economy of the internal combustion engine;

 

  · the availability of service for electric vehicles;

 

  · the environmental consciousness of consumers;

 

  · volatility in the cost of oil and gasoline;

 

- 6 -

 

 

  · government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;

 

  · access to charging stations, standardization of electric vehicle charging systems and consumers’ perceptions about convenience and cost to charge an electric vehicle;

 

  · the availability of tax and other governmental incentives to purchase and operate electric vehicles or future regulation requiring increased use of nonpolluting vehicles; and

 

  · perceptions about and the actual cost of alternative fuel.

 

The influence of any of the factors described above may cause current or potential customers not to purchase our electric vehicles, which would materially adversely affect our business, operating results, financial condition and prospects.

 

The range of our electric vehicles on a single charge declines over time which may negatively influence potential customers’ decisions whether to purchase our vehicles.

 

The range of our electric vehicles on a single charge declines principally as a function of usage, time and charging patterns. For example, a customer’s use of their vehicle as well as the frequency with which they charge the battery of their vehicle can result in additional deterioration of the battery’s ability to hold a charge. We currently expect that our battery pack will retain approximately 85% of its ability to hold its initial charge after approximately 3,000 charge cycles and eight years, which will result in a decrease to the vehicle’s initial range. Such battery deterioration and the related decrease in range may negatively influence potential customer decisions whether to purchase our vehicles, which may harm our ability to market and sell our vehicles.

 

Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for our electric vehicles.

 

Significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways we do not currently anticipate. For example, fuel which is abundant and relatively inexpensive in North America, such as compressed natural gas, may emerge as consumers’ preferred alternative to petroleum-based propulsion. Any failure by us to develop new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay our development and introduction of new and enhanced electric vehicles, which could result in the loss of competitiveness of our vehicles, decreased revenue and a loss of market share to competitors.

 

If we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.

 

We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position. Any failure to keep up with advances in electric vehicle technology would result in a decline in our competitive position which would materially and adversely affect our business, prospects, operating results and financial condition. Our research and development efforts may not be sufficient to adapt to changes in electric vehicle technology. As technologies change, we plan to upgrade or adapt our vehicles and introduce new models to continue to provide vehicles with the latest technology, in particular battery cell technology. However, our vehicles may not compete effectively with alternative vehicles if we are not able to source and integrate the latest technology into our vehicles. For example, we do not manufacture battery cells which makes us depend upon other suppliers of battery cell technology for our battery packs.

 

If we are unable to design, develop, market and sell new electric vehicles and services that address additional market opportunities, our business, prospects and operating results will suffer.

 

We may not be able to successfully develop new electric vehicles and services, address new market segments or develop a significantly broader customer base. To date, we have focused our business on the sale of the SOLO, a three-wheeled single seat electric vehicle, and have targeted mainly urban residents of modest means and fleets. We will need to address additional markets and expand our customer demographic to further grow our business. Our failure to address additional market opportunities would harm our business, financial condition, operating results and prospects.

 

- 7 -

 

 

Demand in the vehicle industry is highly volatile.

 

Volatility of demand in the vehicle industry may materially and adversely affect our business, prospects, operating results and financial condition. The markets in which we will be competing have been subject to considerable volatility in demand in recent periods. Demand for automobile sales depends to a large extent on general, economic, political and social conditions in a given market and the introduction of new vehicles and technologies. As a new start-up manufacturer, we will have fewer financial resources than more established vehicle manufacturers to withstand changes in the market and disruptions in demand.

 

We depend on a third-party for our near-term manufacturing needs.

 

In October 2017, we entered into a manufacturing agreement with Zongshen, a wholly-owned subsidiary of Zongshen Industrial Group Co. Ltd., an affiliate of Zongshen Power Machinery Co., Ltd., located in Chongqing, China. Under the agreement, Zongshen has begun the process of establishing tooling and has contracted to produce 75,000 SOLO vehicles in the three full years from the commencement of production. The delivery of SOLO vehicles to our future customers and the revenue derived therefrom depends on Zongshen’s ability to fulfill its obligations under that manufacturing agreement. Zongshen’s ability to fulfill its obligations is outside of our control and depends on a variety of factors, including Zongshen’s operations, Zongshen’s financial condition and geopolitical and economic risks that could affect China. Our manufacturing agreement with Zongshen provides that non-performance by either us or Zongshen shall be excused to the extent that such performance is rendered impossible by strike, fire, flood, earthquake or governmental acts, orders or restrictions; provided that either we or Zongshen, as applicable, uses commercially reasonable efforts to mitigate the impact of such non-performance. Notwithstanding any such efforts, any such non-performance by either us or Zongshen shall be cause for termination of the manufacturing agreement by the other party if the non-performance continues for more than six months. The novel coronavirus (COVID-19) pandemic or measures taken by the Chinese government relating thereto may result in non- performance by Zongshen under our manufacturing agreement. If Zongshen is unable to fulfill its obligations or is only able to partially fulfill its obligations under our existing manufacturing agreement with them, or if Zongshen either voluntarily or is forced to terminate our agreement with them, either as a result of the coronavirus outbreak, the Chinese government’s measures relating thereto or otherwise, we will not be able to produce or sell our SOLO vehicle in the volumes anticipated and on the timetable that we anticipate, if at all.

 

The impact of the novel coronavirus (COVID-19) pandemic on the global economy and our operations remains uncertain, which could have a material adverse impact on our business, results of operations and financial condition and on the market price of our common shares.

 

In December 2019, a strain of novel coronavirus (now commonly known as COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread rapidly throughout many countries, and, on March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. [Although our manufacturing partner, Zongshen, reports that its operations have not been materially affected at this point], significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our and Zongshen’s operations (including, without limitation, staffing levels), supply chains for parts and sales channels for our products, and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty in recent weeks. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common shares.

 

We do not currently have all arrangements in place that are required to allow us to fully execute our business plan.

 

To sell our vehicles as envisioned, we will need to enter into certain additional agreements and arrangements that are not currently in place. These include entering into agreements with distributors, arranging for the transportation of the mass-produced SOLOs to be delivered pursuant to our manufacturing agreement with Zongshen, obtaining battery and other essential supplies in the quantities that we require. If we are unable to enter into such agreements, or are only able to do so on terms that are unfavorable to us, we may not be able to fully carry out our business plans.

 

We depend on certain key personnel, and our success will depend on our continued ability to retain and attract such qualified personnel.

 

Our success depends on the efforts, abilities and continued service of Michael Paul Rivera, our Chief Executive Officer, Bal Bhullar, our Chief Financial Officer, Henry Reisner, our President and Chief Operating Officer, and Isaac Moss, our Chief Administrative Officer. A number of these key employees and consultants have significant experience in the automobile manufacturing and technology industries. A loss of service from any one of these individuals may adversely affect our operations, and we may have difficulty or may not be able to locate and hire suitable replacements. We are currently in the process of obtaining “key person” insurance on certain key personnel.

 

- 8 -

 

 

Since we have little experience in mass-producing electric vehicles, any delays or difficulties in transitioning from producing custom vehicles to mass-producing vehicles may have a material adverse effect on our business, prospects and operating results.

 

Our management team has experience in producing custom designed vehicles and is now switching focus to mass producing electric vehicles in a rapidly evolving and competitive market. If we are unable to implement our business plans in the timeframe estimated by management and successfully transition into a mass-producing electric vehicle manufacturing business, then our business, prospects, operating results and financial condition will be negatively impacted and our ability to grow our business will be harmed.

 

We are subject to numerous environmental and health and safety laws and any breach of such laws may have a material adverse effect on our business and operating results.

 

We are subject to numerous environmental and health and safety laws, including statutes, regulations, bylaws and other legal requirements. These laws relate to the generation, use, handling, storage, transportation and disposal of regulated substances, including hazardous substances (such as batteries), dangerous goods and waste, emissions or discharges into soil, water and air, including noise and odors (which could result in remediation obligations), and occupational health and safety matters, including indoor air quality. These legal requirements vary by location and can arise under federal, provincial, state or municipal laws. Any breach of such laws and/or requirements would have a material adverse effect on our Company and its operating results.

 

Our vehicles are subject to motor vehicle standards and the failure to satisfy such mandated safety standards would have a material adverse effect on our business and operating results.

 

All vehicles sold must comply with federal, state and provincial motor vehicle safety standards. In both Canada and the United States vehicles that meet or exceed all federally mandated safety standards are certified under the federal regulations. In this regard, Canadian and U.S. motor vehicle safety standards are substantially the same. Rigorous testing and the use of approved materials and equipment are among the requirements for achieving federal certification. Failure by us to have the SOLO, the Tofino or any future model EV satisfy motor vehicle standards would have a material adverse effect on our business and operating results.

 

If we are unable to reduce and adequately control the costs associated with operating our business, including our costs of manufacturing, sales and materials, our business, financial condition, operating results and prospects will suffer.

 

If we are unable to reduce and/or maintain a sufficiently low level of costs for designing, manufacturing, marketing, selling and distributing and servicing our electric vehicles relative to their selling prices, our operating results, gross margins, business and prospects could be materially and adversely impacted.

 

If our vehicles fail to perform as expected, our ability to develop, market and sell our electric vehicles could be harmed.

 

Our vehicles may contain defects in design and manufacture that may cause them not to perform as expected or that may require repair. For example, our vehicles use a substantial amount of software code to operate. Software products are inherently complex and often contain defects and errors when first introduced. While we have performed extensive internal testing, we currently have a very limited frame of reference by which to evaluate the performance of our SOLO in the hands of our customers and currently have no frame of reference by which to evaluate the performance of our vehicles after several years of customer driving. With the Tofino we are still in early design development phase, whereby the similar evaluations are further behind.

 

We have very limited experience servicing our vehicles. If we are unable to address the service and warranty requirements of our future customers our business will be materially and adversely affected.

 

If we are unable to successfully address the service requirements of our future customers our business and prospects will be materially and adversely affected. In addition, we anticipate the level and quality of the service we will provide our customers will have a direct impact on the success of our future vehicles. If we are unable to satisfactorily service our customers, our ability to generate customer loyalty, grow our business and sell additional vehicles could be impaired.

 

- 9 -

 

 

We have very limited experience servicing our vehicles. We plan for mass production to begin for SOLO vehicles for deliveries during 2020. The total number of SOLOs that we have produced as pre-production as of December 31, 2019 is approximately 114 (64 from Canada and 50 from Zongshen). Throughout its history, our subsidiary, InterMeccanica, has produced approximately 2,500 cars, which include providing after sales support and servicing. We only have limited experience servicing the SOLO as a limited number of SOLOs have been produced. Servicing electric vehicles on a mass scale is different than servicing electric vehicles and vehicles with internal combustion engines and requires specialized skills, including high voltage training and servicing techniques on a mass scale

 

In addition, we presently expect that our warranty covering the SOLO will cover 24 months, however, the final details on such coverage have not yet been completed. Furthermore, the SOLO battery pack is expected to have a 60-month warranty period, however, the final details on the exact warranty specifications is still being determined and is being developed in conjunction with our battery pack and cell suppliers.

 

We may not succeed in establishing, maintaining and strengthening the ElectraMeccanica brand, which would materially and adversely affect customer acceptance of our vehicles and components and our business, revenues and prospects.

 

Our business and prospects heavily depend on our ability to develop, maintain and strengthen the ElectraMeccanica brand. Any failure to develop, maintain and strengthen our brand may materially and adversely affect our ability to sell our planned electric vehicles. If we are not able to establish, maintain and strengthen our brand, we may lose the opportunity to build a critical mass of customers. Promoting and positioning our brand will likely depend significantly on our ability to provide high quality electric cars and maintenance and repair services, and we have very limited experience in these areas. In addition, we expect that our ability to develop, maintain and strengthen the ElectraMeccanica brand will also depend heavily on the success of our marketing efforts. To date, we have limited experience with marketing activities as we have relied primarily on the internet, word of mouth and attendance at industry trade shows to promote our brand. To further promote our brand, we may be required to change our marketing practices, which could result in substantially increased advertising expenses, including the need to use traditional media such as television, radio and print. The automobile industry is intensely competitive, and we may not be successful in building, maintaining and strengthening our brand. Many of our current and potential competitors, particularly automobile manufacturers headquartered in Detroit, Japan and the European Union, have greater name recognition, broader customer relationships and substantially greater marketing resources than we do. If we do not develop and maintain a strong brand, our business, prospects, financial condition and operating results will be materially and adversely impacted.

 

Increases in costs, disruption of supply or shortage of raw materials, in particular lithium-ion cells, could harm our business.

 

We may experience increases in the cost or a sustained interruption in the supply or shortage of raw materials. Any such increase or supply interruption could materially negatively impact our business, prospects, financial condition and operating results. We use various raw materials in our business including aluminum, steel, carbon fiber and non-ferrous metals such as copper and cobalt. The prices for these raw materials fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. For instance, we are exposed to multiple risks relating to price fluctuations for lithium-ion cells. These risks include:

 

  · the inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells required to support the growth of the electric or plug-in hybrid vehicle industry as demand for such cells increases;

 

  · disruption in the supply of cells due to quality issues or recalls by the battery cell manufacturers; and

 

  · an increase in the cost of raw materials, such as cobalt, used in lithium-ion cells.

 

- 10 -

 

 

Our business depends on the continued supply of battery cells for our vehicles. We do not currently have any agreements for the supply of batteries and depend upon the open market for their procurement. Any disruption in the supply of battery cells from our supplier could temporarily disrupt the planned production of our vehicles until such time as a different supplier is fully qualified. Moreover, battery cell manufacturers may choose to refuse to supply electric vehicle manufacturers to the extent they determine that the vehicles are not sufficiently safe. Furthermore, current fluctuations or shortages in petroleum and other economic conditions may cause us to experience significant increases in freight charges and raw material costs. Substantial increases in the prices for our raw materials would increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased electric vehicle prices. We might not be able to recoup increasing costs of raw materials by increasing vehicle prices. We have also already announced an estimated price for the base model of our SOLO, and the Tofino. However, any attempts to increase the announced or expected prices in response to increased raw material costs could be viewed negatively by our potential customers, result in cancellations of SOLO and Tofino reservations and could materially adversely affect our brand, image, business, prospects and operating results.

 

The unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on our business, financial condition, operating results and prospects.

 

Any reduction, elimination or discriminatory application of government subsidies and economic incentives that are offered to purchasers of EVs or persons installing home charging stations, the reduced need for such subsidies and incentives due to the perceived success of the electric vehicle, fiscal tightening or other reasons may result in the diminished competitiveness of the alternative fuel vehicle industry generally or our electric vehicles in particular. This could materially and adversely affect the growth of the alternative fuel automobile markets and our business, prospects, financial condition and operating results.

 

If we fail to manage future growth effectively, we may not be able to market and sell our vehicles successfully.

 

Any failure to manage our growth effectively could materially and adversely affect our business, prospects, operating results and financial condition. We plan to expand our operations in the near future in connection with the planned production of our vehicles. Our future operating results depend to a large extent on our ability to manage this expansion and growth successfully. Risks that we face in undertaking this expansion include:

 

  · training new personnel;

 

  · forecasting production and revenue;

 

  · controlling expenses and investments in anticipation of expanded operations;

 

  · establishing or expanding design, manufacturing, sales and service facilities;

 

  · implementing and enhancing administrative infrastructure, systems and processes;

 

  · addressing new markets; and

 

  · establishing international operations.

 

We intend to continue to hire a number of additional personnel, including design and manufacturing personnel and service technicians, for our electric vehicles. Competition for individuals with experience in designing, manufacturing and servicing electric vehicles is intense, and we may not be able to attract, assimilate, train or retain additional highly qualified personnel in the future. The failure to attract, integrate, train, motivate and retain these additional employees could seriously harm our business and prospects.

 

- 11 -

 

 

Our business may be adversely affected by labor and union activities.

 

Although none of our employees are currently represented by a labor union, it is common throughout the automobile industry generally for many employees at automobile companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages. We have a manufacturing agreement with Zongshen to produce 75,000 SOLO vehicles in the first three full years from the commencement of production. Zongshen’s workforce is not currently unionized, though they may become so in the future or industrial stoppages could occur in the absence of a union. We also directly and indirectly depend upon other companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs within our business, or that of Zongshen or our key suppliers, it could delay the manufacture and sale of our electric vehicles and have a material adverse effect on our business, prospects, operating results or financial condition. Additionally, if we expand our business to include full in-house manufacturing of our vehicles, our employees might join or form a labor union and we may be required to become a union signatory.

 

We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.

 

We may become subject to product liability claims, which could harm our business, prospects, operating results and financial condition. The automobile industry experiences significant product liability claims and we face inherent risk of exposure to claims in the event our vehicles do not perform as expected or malfunction resulting in personal injury or death. Our risks in this area are particularly pronounced given we have limited field experience of our vehicles. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our vehicles and business and inhibit or prevent commercialization of other future vehicle candidates which would have a material adverse effect on our brand, business, prospects and operating results. We plan to maintain product liability insurance for all our vehicles with annual limits of approximately $30 million on a claims-made basis, but any such insurance might not be sufficient to cover all potential product liability claims. Any lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our reputation, business and financial condition. We may not be able to secure additional product liability insurance coverage on commercially acceptable terms or at reasonable costs when needed, particularly if we do face liability for our products and are forced to make a claim under our policy.

 

Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from interfering with our commercialization of our products.

 

The registration and enforcement of patents involves complex legal and factual questions and the breadth and effectiveness of patented claims is uncertain. We cannot be certain that we are the first to file patent applications on these inventions, nor can we be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford sufficient protection against someone creating competing products, or as a defensive portfolio against a competitor who claims that we are infringing its patents. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications, if any, will result in issued patents in those foreign jurisdictions or that such patents can be effectively enforced, even if they relate to patents issued in the United States.

 

We may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and would cause us to incur substantial costs.

 

Companies, organizations or individuals, including our competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with our ability to make, use, develop, sell or market our vehicles or components, which could make it more difficult for us to operate our business. From time to time, we may receive communications from third parties that allege our products are covered by their patents or trademarks or other intellectual property rights. Companies holding patents or other intellectual property rights may bring suits alleging infringement of such rights or otherwise assert their rights. If we are determined to have infringed upon a third party’s intellectual property rights, we may be required to do things that include one or more of the following:

 

  · cease making, using, selling or offering to sell processes, goods or services that incorporate or use the third-party intellectual property;

 

  · pay substantial damages;

 

- 12 -

 

 

  · seek a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all;

 

  · redesign our vehicles or other goods or services to avoid infringing the third-party intellectual property; or

 

  · establish and maintain alternative branding for our products and services.

 

In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology or other intellectual property right, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs, negative publicity and diversion of resources and management attention.

 

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under the laws of the Province of British Columbia, a substantial portion of our assets are in Canada and all of our executive officers and most of our directors reside outside the United States

 

We are organized pursuant to the laws of the Province of British Columbia under the Business Corporations Act (British Columbia) (the “Business Corporations Act”) and our executive offices are located outside of the United States in Vancouver, British Columbia. Three of our four officers, our auditor and all but four of our directors reside outside the United States. In addition, a substantial portion of their assets and our assets are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside of the United States, judgments you may obtain in U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. Federal or state securities laws. Furthermore, there is substantial doubt as to the enforceability in Canada against us or against any of our directors, officers and the expert named in this Annual Report who are not residents of the United States, in original actions or in actions for enforcement of judgments of U.S. courts, of liabilities based solely upon the civil liability provisions of the U.S. federal securities laws. In addition, shareholders in British Columbia companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.

 

As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

Global economic conditions could materially adversely impact demand for our products and services.

 

Our operations and performance depend significantly on economic conditions. Uncertainty about global economic conditions could result in customers postponing purchases of our products and services in response to tighter credit, unemployment, negative financial news and/or declines in income or asset values and other macroeconomic factors, which could have a material negative effect on demand for our products and services and, accordingly, on our business, results of operations or financial condition.

 

We are vulnerable to a growing trade dispute between the United States and China

 

A growing trade dispute between the United States and China could increase the proposed sales price of our products or decrease our profits, if any. In June 2018, the current U.S. administration has imposed tariffs on $34 billion of Chinese exports, including a 25% duty on cars built in China and shipped to the United States. Following the imposition of these tariffs, China has imposed additional tariffs on U.S. goods manufactured in the United States and exported to China. Subsequently, the U.S. administration indicated that it may impose tariffs on up to US$500 billion of goods manufactured in China and imported into the United States. These tariffs may escalate a nascent trade war between China and the United States. This trade conflict could affect our business because we intend to mass produce the SOLO in China and our intended principal market is the West Coast of North America. If a trade war were to escalate or if tariffs were imposed on any of our products, we could be forced to increase the proposed sales price of such products or reduce the margins, if any, on such products.

 

- 13 -

 

 

Recently, U.S. Customs and Border Protection ruled that the SOLO has a classification under the Harmonized Tariff Schedule of the United States that applies to passenger vehicles for less than 10 people with only electric motors. The total applicable duty for this classification was recently raised to 27.5% (2.5% is a “most-favored-nation” tariff for this classification and 25% derives from this classification being on the China 301 List 1). We envision that the suggested retail purchase price for our SOLO will be USD$18,500. As the landscape for tariffs involving imports to the United States from the People’s Republic of China has been changing over the past year and may change again, we have not determined how to adjust the purchase price in the United States in response to the recent tariff increase.

 

On January 15, 2020, the United States and the People’s Republic of China (the “PRC”) signed “Phase One” of an Economic and Trade Agreement (the “Phase One Agreement”), which entered into force on February 14, 2020. Notwithstanding the coming into force of the Phase One Agreement, the United States will maintain its tariffs on cars built in China and shipped to the United States.

 

Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.

 

The legal system in the PRC is based on written statutes. Unlike common law systems, it is a system in which legal cases have limited value as precedents. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly increased the protections afforded to various production services in the PRC. Zongshen, our manufacturing partner, is subject to various PRC laws and regulations generally applicable to companies in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties.

 

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights or Zongshen may have to resort to administrative and court proceedings to fulfill its obligations under the manufacturing agreement. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we or Zongshen may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China, could materially and adversely affect our business and impede our ability to continue our operations.

 

Risks Related to Our Common Shares

 

Our executive officers and directors beneficially own approximately 43.8% of our common shares.

 

As of March 25, 2020, our executive officers and directors beneficially own, in the aggregate, 43.8% of our common shares, which includes shares that our executive officers and directors have the right to acquire pursuant to warrants and stock options which have vested. As a result, they are able to exercise a significant level of control over all matters requiring shareholder approval, including the election of directors, amendments to our Articles and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our Company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these shareholders.

 

- 14 -

 

 

The continued sale of our equity securities will dilute the ownership percentage of our existing shareholders and may decrease the market price for our common shares.

 

Our Notice of Articles authorize the issuance of an unlimited number of common shares and the issuance of preferred shares. The Board of Directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and designate the rights of the preferred shares, which may include voting, dividend, distribution or other rights that are preferential to those held by the common shareholders. The issuance of any such common or preferred shares may result in a reduction of the book value or market price, if one exists at the time, of our outstanding common shares. Given our lack of revenues, we will likely have to issue additional equity securities to obtain working capital we require for the next 12 months. Our efforts to fund our intended business plans will therefore result in dilution to our existing shareholders. If we do issue any such additional common shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other shareholders. As a result of such dilution, if you acquire common shares your proportionate ownership interest and voting power could be decreased. Furthermore, any such issuances could result in a change of control or a reduction in the market price for our common shares.

 

Additionally, we had 12,888,417 options and 20,603,396 warrants outstanding as of March 25, 2020. The exercise price of some of these options and warrants is below our current market price, and you could purchase shares in the market at a price in excess of the exercise price of our outstanding warrants or options. If the holders of these options and warrants elect to exercise them, your ownership position will be diluted and the per share value of the common shares you have or acquire could be diluted as well. As a result, the market value of our common shares could significantly decrease as well.

 

Issuances of our preferred stock may adversely affect the rights of the holders of our common shares and reduce the value of our common shares.

 

Our Notice of Articles authorize the issuance of an unlimited number of shares of preferred stock. Our Board of Directors has the authority to create one or more series of preferred stock and, without shareholder approval, issue shares of preferred stock with rights superior to the rights of the holders of common shares. As a result, shares of preferred stock could be issued quickly and easily, adversely affecting the rights of holder of common shares and could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult. Although we currently have no plans to create any series of preferred stock and have no present plans to issue any shares of preferred stock, any creation and issuance of preferred stock in the future could adversely affect the rights of the holders of common shares and reduce the value of our common shares.

 

The market price of our common shares may be volatile and may fluctuate in a way that is disproportionate to our operating performance.

 

Our common shares began trading on the Nasdaq Capital Market in August 2018, and before that it had been trading on the OTCQB since September 2017. The historical volume of trading has been low (within the past year, the fewest number of our shares that were traded on the Nasdaq Capital Market was 3,100 shares daily), and the share price has fluctuated significantly (since trading began on the Nasdaq Capital Market, our closing price has been as low as US$0.95 and as high as US$4.81). The share price for our common shares could decline due to the impact of any of the following factors:

 

  · sales or potential sales of substantial amounts of our common shares;

 

  · announcements about us or about our competitors;

 

  · litigation and other developments relating to our patents or other proprietary rights or those of our competitors;

 

  · conditions in the automobile industry;

 

  · governmental regulation and legislation;

 

  · variations in our anticipated or actual operating results;

 

  · change in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations;

 

  · change in general economic trends; and

 

  · investor perception of our industry or our prospects.

 

- 15 -

 

 

Many of these factors are beyond our control. The stock markets in general, and the market for automobile companies in particular, have historically experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors could reduce the market price of our common shares regardless of our actual operating performance.

 

We do not intend to pay dividends and there will thus be fewer ways in which you are able to make a gain on your investment.

 

We have never paid any cash or stock dividends and we do not intend to pay any dividends for the foreseeable future. To the extent that we require additional funding currently not provided for in our financing plan, our funding sources may prohibit the payment of any dividends. Because we do not intend to declare dividends, any gain on your investment will need to result from an appreciation in the price of our common shares. There will therefore be fewer ways in which you are able to make a gain on your investment.

 

FINRA sales practice requirements may limit your ability to buy and sell our common shares, which could depress the price of our shares.

 

Financial Industry Regulation Authority (“FINRA”) rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements may make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability to buy and sell our common shares, have an adverse effect on the market for our common shares and, thereby, depress their market prices.

 

Our common shares have been thinly traded, and you may be unable to sell at or near ask prices or at all if you need to sell your common shares to raise money or otherwise desire to liquidate your shares.

 

From October 2017 until August 2018, our common shares were quoted on the OTCQB where they were “thinly-traded”, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time was relatively small or non-existent. Since we listed on the Nasdaq Capital Market in August 2018, the volume of our common shares traded has increased, but that volume could decrease until we are thinly-traded again. That could occur due to a number of factors, including that we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our common shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our common shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Broad or active public trading market for our common shares may not develop or be sustained.

 

Volatility in our common shares or warrant price may subject us to securities litigation.

 

The market for our common shares may have, when compared to seasoned issuers, significant price volatility, and we expect that our share or warrant prices may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

 

- 16 -

 

 

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

 

We are a foreign private issuer within the meaning of the rules under the Exchange Act. As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:

 

  we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;

 

  for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;

 

  we are not required to provide the same level of disclosure on certain issues, such as executive compensation;

 

  we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;

 

  we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and

 

  we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.

 

Our shareholders may not have access to certain information they may deem important and are accustomed to receive from U.S. reporting companies.

 

As an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced disclosure may make our common shares less attractive to investors.

 

For as long as we remain an “emerging growth company”, as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” and including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports, exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Because of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders of more mature companies. If some investors find our common shares less attractive as a result, there may be a less active trading market for such securities and their market prices may be more volatile.

 

We incur significant costs as a result of being a public company, which costs will grow after we cease to qualify as an “emerging growth company.”

 

We incur significant legal, accounting and other expenses as a public company that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and Nasdaq Capital Market, impose various requirements on the corporate governance practices of public companies. We are an “emerging growth company”, as defined in the JOBS Act, and will remain an emerging growth company until the earlier of : (1) the last day of the fiscal year (a) following May 23, 2022, (b) in which we have total annual gross revenue of at least US$1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common shares that is held by non-affiliates exceeds US$700 million as of the prior June 30th; and (2) the date on which we have issued more than US$1.0 billion in non-convertible debt during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

 

Compliance with these rules and regulations increases our legal and financial compliance costs and makes some corporate activities more time-consuming and costlier. After we are no longer an emerging growth company, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 and the other rules and regulations of the SEC. For example, as a public company, we have been required to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We have incurred additional costs in obtaining director and officer liability insurance. In addition, we incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

- 17 -

 

 

ITEM 4. INFORMATION ON THE COMPANY

 

Summary

 

We were incorporated on February 16, 2015, under the laws of the Province of British Columbia, Canada, and our principal activity is the development and manufacturing of electric vehicles (EVs).

 

Our head office is located at, and our principal address is, 102 East 1st Avenue, Vancouver, British Columbia, Canada, V5T 1A4.

 

Additional information related us is available on SEDAR at www.sedar.com and www.electrameccanica.com. We do not incorporate the contents of our website or of sedar.com into this Annual Report. Information on our website does not constitute part of this Annual Report.

 

Our registered and records office is located at Suite 1500, 1055 West Georgia Street, P.O. Box 11117, Vancouver, British Columbia, Canada, V6E 4N7.

 

A. History and development of the Company

 

We are a development-stage electric vehicle, or EV, manufacturing company which was incorporated on February 16, 2015 under the laws of British Columbia, Canada. The concept for our Company was developed by Jerry Kroll, our founder and a director, after years of research and development on advanced EVs.

 

Upon returning to Vancouver in 2011, Mr. Kroll decided that new electric drive systems could revolutionize car assembly, and the concept for our Company’s flagship EV, the “SOLO”, was born. With the help of long-time automotive expert and friend, Henry Reisner, President of InterMeccanica, and now the President and a director of our Company, together with InterMeccanica’s vast experience in automotive craftsmanship, our Company’s first prototype was finished in September of 2016. To solidify our presence and branding in the EV market, Mr. Kroll incorporated our Company. For the past 10 years Mr. Kroll has been researching and developing technologies for autonomous drive systems and dynamic induction charging. We have plans for ongoing refinements to performance, style, value and efficiency as drive systems, computerization and materials are developed.

 

We currently have modern furnished showrooms near the downtown core of Vancouver, British Columbia, and in Los Angeles, California, together with a store in Los Angeles and more in mind, where interested consumers may receive more information on the SOLO, review its specifications and technical design, and even test-drive a prototype.

 

We have been funding operations to date through equity financings by our founder and initial subscribing shareholders by way of private placements and through registered direct offerings completed with numerous investors. Our management maintains substantial control of our company. As of March 25, 2020, our directors and executive officers beneficially owned 43.8% of our outstanding common shares, including common shares that our executive officers and directors have the right to acquire within the next 60 days pursuant to warrants and stock options which have vested.

 

We have four subsidiaries: InterMeccanica, a British Columbia, Canada, corporation; EMV Automotive USA Inc., a Nevada corporation; SOLO EV LLC, a Michigan corporation; and EMV Automotive Technology (Chongqing) Inc., a PRC corporation.

 

- 18 -

 

 

B. Business Overview

 

General

 

We are a development-stage electric vehicle, or EV, designer and manufacturer company located in Vancouver, British Columbia, Canada. Our initial product line targets urban residents seeking to commute in an efficient, cost-effective and environmentally friendly manner.

 

Our first flagship EV is the SOLO, a single seat vehicle, of which we have built 64 prototype vehicles in-house as of March 25, 2020, and approximately 50 pre-production vehicles with our manufacturing partner, Zongshen. We have used some of these pre-production vehicles as prototypes and for certification purposes, have delivered some to customers and have used others as test drive models in our showrooms. We believe our schedule to mass produce EVs over the near term, combined with our subsidiary, InterMeccanica’s, 61-year history of automotive design, manufacturing and deliveries of motor vehicles to customers, significantly differentiates us from other early and development stage EV companies.

 

To support our near-term production, we have entered into a manufacturing agreement with Zongshen, a wholly-owned subsidiary of Zongshen Industrial Group Co. Ltd., an affiliate of Zongshen Power Machinery Co., Ltd., a large-scale scientific and technical enterprise, which designs, develops, manufactures and sells a diverse range of motorcycles and motorcycle engines in China. Zongshen has previously purchased common shares and warrants to purchase common shares from us and beneficially owns approximately 7.3% of our common shares

 

We have two other EV candidates in early design development stage, the Super SOLO, a sports car model of the SOLO, and the Tofino, an all-electric, two-seater roadster.

 

We have devoted substantial resources to create an affordable EV which brings significant performance and value to our customers. To this end, we envision the SOLO carrying a manufacturer’s suggested retail purchase price of USD $18,500, prior to any surcharge to cover tariffs, and being powered by a high-performance electric rear drive motor which enables the SOLO to achieve:

 

  a top speed of 80 mph and an attainable cruise speed of 68 mph resulting from its lightweight aerospace composite chassis; and

 

  acceleration from 0 mph to 60 mph in approximately eight seconds.

 

Unique to Canada, the SOLO is, and the Super SOLO, if developed, will be under the three-wheeled vehicle category and are subject to the safety standards listed in Schedule III of the Canadian Motor Vehicle Safety Regulations. (See “Government Regulation” below.)

 

For sale into the United States, we and our vehicles must meet the applicable parts of the U.S. Code of Federal Regulations Title 49 —Transportation. Since the U.S. regulations do not have a specific class for three-wheeled “autocycles”, the SOLO and the Super SOLO fall under the definition of a motorcycle pursuant to Sec. 571.3 of 49 CFR Part 571. However, currently a motorcycle license is not required to drive them in all but the States of Alaska, Florida, New York and Massachusetts. Motorcycle helmets must be worn while operating in the States of New York and Massachusetts. Helmets are also required if the driver is under 18 years old in the States of Alaska, Montana, Colorado and New Hampshire. (See “Government Regulation” below.)

 

Pre-orders and expressions of interest

 

As at March 25, 2020, we maintained certain deposits from various individuals for SOLOs, Tofinos and Super SOLOs. As part of our “Match My Deposit” program, we offer customers who have placed deposits for other electric vehicles a credit of up to $1,000 towards the purchase of a SOLO, which is initially credited towards the buyer’s deposit.  In addition, we also maintain certain expressions of interest arising from non-binding letters of interest, including certain deposits associated with the same, from certain proposed dealers and/or distributors for our vehicles representing their collective expressions of interest (should we choose to contract with them) for the purchase from or the sale on our behalf of SOLOs and Tofinos.

 

- 19 -

 

 

Marketing Plan

 

We recognize that marketing efforts must be focused on customer education and establishing brand presence and visibility which is expected to allow our vehicles to gain traction and subsequently gain increases in orders. Our marketing and promotional efforts emphasize the SOLO’s image as an efficient, clean and affordable EV for the masses to commute on a daily basis. If we can successfully promote the SOLO on these points, we expect growth in sales and customer base to occur rapidly.

 

A key point to the marketing plan is to target metropolitan cities with high population density, expensive real estate, high commuter traffic load and pollution levels which are becoming an enormous concern. Accordingly, we have opened stores in Vancouver and Los Angeles, our management has identified additional states in the United States that fit the aforementioned criteria and we have plans to seek out suitable locations for additional stores in California, Washington, Oregon and Southern Florida.

 

We plan to develop a marketing strategy that will generate interest and media buzz based on the SOLO’s selling points. Key aspects of our marketing plan include:

 

Digital marketing - organic engagement and paid digital marketing media with engaging posts aimed to educate the public about EVs and develop interest in our SOLO, which to date has had positive traction;

 

Earned media—we have already received press coverage from several traditional media sources and expect these features and news stories to continue as we embark on our commercial launch;

 

Investor Relations/Press Releases — our in-house investor relations team will provide media releases/kits for updates and news on our progress;

 

Industry shows and events—we displayed the SOLO at the Vancouver International Autoshow in March 2017, the Consumer Electronics Show in Las Vegas in January 2018 and the Vancouver International Autoshow in March 2018 and 2019. Promotional merchandise giveaways are expected to enhance and further solidify our branding in consumer minds. Computer stations and payment processing software will be readily on hand at to accept SOLO reservations; and

 

First-hand experience —Test-drives and public viewings are available at our existing stores in the Vancouver downtown core and in Los Angeles.

 

We anticipate that our marketing strategy and tactics will evolve over time as our SOLO gains momentum and we identify appropriate channels and media that align with our long-term objectives. In all of our efforts we plan to focus on the features that differentiate our SOLO from the existing EVs on the market.

 

Reservation system

 

We cannot guarantee that a significant number of the pre-orders and expressions of interest, if any, will become binding or result in sales.  We have an online reservation system which allows a potential customer to reserve a SOLO by paying a refundable $250 deposit and a Tofino by paying a refundable $1,000 deposit.  Once reserved, the potential customer is allocated a reservation number and the reservation will be fulfilled as the respective vehicles are produced. We have achieved ours pre-order book through an online “direct sales to customers and corporate sales” platform as well as a store and show room at our headquarters in Vancouver.  We plan on expanding this model and will be opening similar stores in key urban areas.  We have recently opened our first U.S. corporate store located in Los Angeles.

 

We will earn revenue once a vehicle has been delivered to the customer who has pre-ordered their vehicle.  Each order is placed in line as received and fulfilled once the vehicle becomes available.  The customer may, at any time prior to delivery, for any reason, cancel their order and have their deposit returned.  We do not consider any order as being secured until the vehicle has been delivered and full receipt of the remaining balance of the vehicle purchase price has been received.

 

- 20 -

 

 

Sales strategy

 

Our near-term goal is to commence and expand sales of the SOLO. We intend to achieve this goal by:

 

expanding the commercial production of the SOLO - we anticipate that Zongshen, our manufacturing partner, will begin producing the SOLO for deliveries to customers in 2020;

 

by increasing the pre-orders and expressions of interest for our EVs;

 

by having sales and services supported by local corporate stores - we will monitor all cars in real time via telematics which provides early warning of potential maintenance issues; and

 

by expanding our product offering - in parallel with the production and sale of the SOLO, we aim to continue the development of our other proposed products, including the Tofino, a two-seater sports car in the expected price range of $50,000 to $60,000.

 

We are currently developing a turn key sales program beginning first from our Los Angeles store.

 

Service model

 

We sell our vehicles online via our website (www.electrameccanica.com) while we develop our planned corporate owned stores in key markets. As each store is established, any vehicles sold within such store’s designated territory will be delivered to such store to fulfill online orders as well as such store’s orders.

 

We have not yet identified where we hope to establish corporate owned stores or other distribution arrangements. The establishment of stores will depend on regional demand, available candidates and local regulations. We are currently accepting expressions of interest and applications for stores from individuals, and do not have any franchise or dealer agreements. Our vehicles will initially be available directly from us.

 

We plan to only establish and operate corporate owned stores in those states in the United States that do not restrict or prohibit certain retail sales models by vehicle manufacturers.

 

We are a development-stage EV company focusing on the market demand for EVs that are efficient, cost-effective and environmentally friendly methods for urban residents to commute and fleets. We believe that our flagship EV called the SOLO is the answer to such market demand. In addition, we have two other EV candidates in early design development stage, the Super SOLO and the Tofino.

 

- 21 -

 

 

SOLO

 

 

 

We created the SOLO’s first prototype in September of 2016. Since the completion of the prototype, our engineers and designers have devoted efforts to provide the SOLO with an appealing design, and have engaged in proprietary research and development leading to a high-performance electric rear drive motor. 

 

The SOLO features a lightweight aerospace composite chassis to allow for a top speed of 80/mph, an attainable cruise speed of 68/mph and is able to go from 0/mph to 60/mph in approximately eight seconds. Our SOLO features a lithium ion battery system that requires only up to four hours of charging time on a 220-volt charging station or up to 8 hours from a 110-volt outlet. The lithium battery system utilizes approximately 8.64 kW/h for up to 160 km in range. We also offer a comprehensive warranty package for two years of unlimited mileage which is included in the price of the SOLO. Standard equipment in the SOLO includes, but is not limited to the following:

 

  LCD Digital Instrument Cluster;

 

  Power Windows, Power Steering and Power Brakes;

 

  AM/FM stereo with Bluetooth/CD/USB;
 
 

Rear view backup camera;

     
  Air conditioning;
     
  Heated seats;

 

  Heater and defogger; and

 

  Keyless remote entry.

 

Our first flagship EV is the SOLO, a single seat vehicle, of which we have built 64 prototype vehicles in-house as of March 25, 2020 and approximately 50 pre-production vehicles with our manufacturing partner Zongshen. We have used some of these pre-production vehicles as prototypes and for certification purposes, have delivered some to customers and have used others as test drive models in our showroom. We believe our schedule to mass produce EVs over the near term, combined with our subsidiary, InterMeccanica’s, 61-year history of automotive design, manufacturing and deliveries of motor vehicles to customers, significantly differentiates us from other early and development stage EV companies. To support our near-term production, we have entered into a manufacturing agreement with Zongshen, a wholly-owned subsidiary of Zongshen Industrial Group Co. Ltd., an affiliate of Zongshen Power Machinery Co., Ltd., a large-scale scientific and technical enterprise, which designs, develops, manufactures and sells a diverse range of motorcycles and motorcycle engines in China.

 

- 22 -

 

 

Super SOLO

 

 

 

An early design concept, the Super SOLO is envisaged a high-performance sports car model within our EV product line. The Super SOLO is intended to boast a longer range and a higher top speed, with sleek, aerodynamic design and features that are contemplated to rival existing super sports cars.

 

Refundable deposits have been accepted for the planned Super SOLO and such deposits are able to be returned at any time. The Super SOLO is in the early design development stage, and no set date for its launch has been declared at this time.

 

The Tofino

 

 

 

We announced on March 28, 2017, at the Vancouver International Auto Show, that we intend to build the Tofino, an all-electric, two-seater roadster representing an evolution of the InterMeccanica Roadster. We are designing the Tofino to be equipped with a high-performance, all-electric motor. The Tofino is still in early design stage development.

 

- 23 -

 

 

Sources and Availability of Raw Materials

 

We continue to source duplicate suppliers for all of our components and, in particular, we are currently sourcing our lithium batteries from Panasonic, Samsung and LT Chem. Lithium is subject to commodity price volatility which is not under our control and could have a significant impact on the price of lithium batteries.

 

At present we are subject to the supply of our chassis from one supplier for the production of the SOLO. We are exploring additional suppliers of the chassis to mitigate the risk of depending on only one supplier.

 

Patents and Licenses

 

We have filed patent and design applications for inventions and designs that our legal counsel deems necessary to protect our products. We do not rely on any licenses from third-party vendors at this time.

 

Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patent and design applications and registrations, trade secrets, including know-how, employee and third-party non-disclosure agreements, copyright, trademarks and other contractual rights to establish and protect our proprietary rights in our technology and other intellectual property. As at March 25, 2020, we have ten issued design registrations, two pending design applications and 16 pending invention patent applications internationally and in specific countries which we consider core to our business in a broad range of areas related to the design of the SOLO and its powertrain. As at March 25, 2020, and pursuant to a Manufacturing Agreement between the Company and Chongqing Zongshen Automobile Industry Co., Ltd., an agreement is being negotiated and finalized in order to transfer legal title in 18 pending Chinese design applications and six granted Chinese design registrations from Chongqing Zongshen Institute of Innovation and Technology Co., Ltd. to EMV Automotive Technology (Chongqing) Inc., our wholly owned subsidiary. We intend to continue to file additional patent and design applications with respect to our technology and designs. Examination is proceeding with our pending patent applications, but it is not yet clear whether these applications will result in the issuance of patents or whether the examination process will require us to narrow our claims such that, even if patents are granted, they might not provide us with adequate protection.

 

Trademarks

 

We primarily operate under the trademark “ELECTRA MECCANICA SOLO”, which is registered in Canada, China, the European Union and Japan and is the subject of pending applications in the United States. We have also registered the trademark “ELECTRA MECCANICA TOFINO” in Canada, Japan, the European Union and China, and we have applied to register the trademark in the United States.

 

We have additional trademark registrations and pending applications for trademarks (other than those noted above) in Canada, China, Japan, the United States and the European Union. As of March 25, 2020, there are three pending applications in Canada, nine pending applications in China and six pending applications in the United States. There is also an additional registration in each of the European Union, China and Japan for the trademark “MONSTERRA.” We also own six registrations in each of the European Union and Japan and we own 35 registrations in China.

 

This Annual Report contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Annual Report may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

Potential Impact of the COVID-19 Pandemic

 

In December 2019, a strain of novel coronavirus (now commonly known as COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread rapidly throughout many countries, and, on March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19.

 

Our manufacturing partner, Zongshen, reports that its operations have not been materially affected at this point, and we anticipate that Zongshen remains on track to begin producing the SOLO for deliveries to customers during 2020. However, significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our and Zongshen’s operations, and on the global economy as a whole. Government-imposed restrictions on travel and other “social-distancing” measures such as restrictions on assembly of groups of persons, have to potential to disrupt supply chains for parts and sales channels for our products, and may result in labor shortages.

 

It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We will continue to monitor the COVID-19 situation closely, and intend to follow health and safety guidelines as they evolve.

 

- 24 -

 

 

Potential Impact of Tariffs

 

A growing trade dispute between the United States and China could increase the proposed sales price of our products or decrease our profits, if any. In June 2018, the current U.S. administration has imposed tariffs on $34 billion of Chinese exports, including a 25% duty on cars built in China and shipped to the United States. Following the imposition of these tariffs, China has imposed additional tariffs on U.S. goods manufactured in the United States and exported to China. Subsequently, the U.S. administration indicated that it may impose tariffs on up to US$500 billion of goods manufactured in China and imported into the United States. These tariffs may escalate a nascent trade war between China and the United States. This trade conflict could affect our business because we intend to mass produce the SOLO in China and our intended principal market is the West Coast of North America. If a trade war were to escalate or if tariffs were imposed on any of our products, we could be forced to increase the proposed sales price of such products or reduce the margins, if any, on such products.

 

Recently, U.S. Customs and Border Protection ruled that the SOLO has a classification under the Harmonized Tariff Schedule of the United States that applies to passenger vehicles for less than 10 people with only electric motors. The total applicable duty for this classification was recently raised to 27.5% (2.5% is a “most-favored-nation” tariff for this classification and 25% derives from this classification being on the China 301 List 1). We envision that the SOLO manufacturer’s suggested retail price will be USD$18,500. As the landscape for tariffs involving imports to the United States from the People’s Republic of China has been changing over the past year and may change again, we have not determined how to adjust the purchase price in the United States in response to the recent tariff increase.

 

On January 15, 2020, the United States and the PRC signed an Economic and Trade Agreement commonly referred to as the “Phase 1 Trade Agreement”, which entered into force on February 14, 2020. Notwithstanding the coming into force of the Phase 1 Trade Agreement, the United States will maintain its tariffs on cars built in China and shipped to the United States.

 

Industry Overview

 

Investment in clean technology has been trending upwards for several years as nations, governments, and societies overall become more aware of the damaging effects that pollution and greenhouse gas emissions have on the environment. In an attempt to prevent and/or slow-down these damaging effects and create a more sustainable environment, consumers have taken to exploring and purchasing clean technology while nations and government agencies have undertaken programs to reduce greenhouse gas emissions, contribute funding into research and development in clean technology and offer incentives/rebates for clean technology investments by businesses and consumers. EVs are a growing segment of this clean technology movement.

 

EV is a broad term for vehicles that do not solely operate on gas or diesel. Within this alternative vehicle group there are sub-categories of alternative vehicles that utilize different innovative technologies such as: (i) battery electric vehicles (“BEV”); (ii) fuel-cell electric vehicles (“FCV”); and (iii) plug-in hybrid electric vehicles (“PHEV”).

 

BEVs draw on power from battery management systems to power electric motors instead of from an internal combustion engine, a fuel cell or a fuel tank. The Nissan Leaf, Tesla Model S and our vehicles are BEVs.

 

FCVs typically utilize a hydrogen fuel cell that, along with oxygen from the air, converts chemical energy into electricity which powers the vehicle’s motor. Emissions from FCVs are water and heat, hence making FCVs true zero-emission vehicles. The Honda Clarity, Hyundai Tucson and Toyota Mirai are examples of FCVs.

 

PHEVs are the hybrid vehicles that have both an electric motor and an internal combustion engine. A PHEV can alternate between using electricity while in its all-electric range and relying on its gas-powered engine. The Chevrolet Volt and the Toyota Prius are examples of PHEVs.

 

The popularity of EVs have also been met with difficulties in charging convenience. There are far more gas stations available than public EV charging stations. The convenience and availability of public EV charging stations may prove to be an obstacle of mass adoption of EVs.

 

- 25 -

 

 

Consumers may be afraid that their EVs may run out of charge while they are out on the road and this fear is recognized by the public and has been popularized with the term “range anxiety”. Despite this fear, the distance travelled by most urban commuters is a lot lower than the typical range of an EV. Data from Statistics Canada’s National Household Survey in 2011 reported the average Canadian takes 25 minutes to commute to work.

 

There currently exists different categories of charging stations depending on the voltage they provide. EV owners can often charge at home on a regular 110-volt outlet which may take between 10 hours to 20 hours depending on the model and make of the EV. This type of outlet and charging is termed level 1 charging. Level 2 charging means the voltage at the charging station is typically around 240 volts and this type of outlet is usually available at public charging stations, shopping malls and big box retailer parking lots, and even located in certain residential hi-rises. Charging at a level 2 station typically cuts down the level 1 charge time in half and may require a small fee for the service which may vary depending on the provider and the location. The following table shows approximate charge information of Level 1 and Level 2 charging stations as reported in 2018:

 

    Level 1 Charging   Level 2 Charging
Electric and Power Specifications   120 Volt, 20 Amp circuit
1.4 kW
  208 – 240 Volt, 40 Amp circuit*
6.2 – 7.6 kW**
Time to Fully Charge an EV with a 100-mile Battery   17 – 25 hours   4 – 5 hours
Drivers Served per Station per Day   1   3 – 4 or more

 

Global EV Market

 

EVs have been around for over 100 years but have only recently gained widespread adoption and public interest due to open discussions of greenhouse gas emission levels, government and international policies on climate change and pollution, increased literature on EVs, fluctuating fuel costs and improved battery management systems and EV range. In addition, the market for electric vehicles has experienced significant growth in recent years due to consumer demand for vehicles that achieve greater fuel efficiency and lower environmental emissions without sacrificing performance.

 

Traditional automotive manufacturers have entered into the EV market to capitalize on its growth. The majority of growth in the EV market has been led by the following EV models: the Nissan Leaf, the Honda Clarity (PHEV), the Toyota Prius (PHEV), the Tesla Model 3 and the Mitsubishi Outlander (PHEV). Four of the five models above are made by traditional automotive manufacturers, and the fifth is made by Tesla Motors, one of several manufacturers that are solely devoted to the manufacturing of EVs.

 

The global stock of EVs has increased significantly over the past few years. According to the International Energy Agency (“IEA”), the global stock of electric cars first crossed the one million vehicle threshold in 2015, crossed the two million vehicle threshold in 2016 and then surpassed 5.1 million in 2018 vehicles up 2 million from 2017.

 

 

 

Likewise, the IEA has reported that the global stock of BEVs, the type of vehicles we will be mass producing, increased on a worldwide basis from about 746,000 in 2015 to approximately 5.2 million in 2018, an increase of approximately 63% over 2017.

 

- 26 -

 

 

 

 

We anticipate that the trend of increasing EV sales will continue in the near future. The IEA believes that there is a good possibility that the global electric car stock will range between 9 million and 20 million by 2020 and between 125 million and 225 million by 2030.

 

 

 

North American EV Market

 

We anticipate that our primary target market shall initially be North America, with a focus on the west coast. Sales of EVs in North America have mirrored the global increase in sales of EVs. According to the IEA, the sale of BEVs in the United States increased by 81% between 2017 and 2018 and by 30% in Canada during the same period.

 

According to data compiled by EVAdoption.com, in 2019 sales of EVs in six U.S. states and the District of Columbia comprised 2.31% or more of total auto sales in those jurisdictions. At 8.97% for the year, California had more than triple the next highest EV purchase rate in any U.S. state.

 

In addition, and according to data compiled by EVAdoption.com, California consumers purchased 12% of autos in the United States, but bought more than 46% of all EVs in the United States. In essence, Californians are buying at four times the national rate while Oregon and Washington buy at a bit more than two times the national rate. The amount BEVs sold in California as a percentage of all EVs sold there has steadily increased from 1.3% in 2013 to 4.8% in the first quarter of 2018.

 

The following table sets out data on PHEV and BEV sales in the United States in 2016, 2017 and August 2018 as broken out for select states.

 

- 27 -

 

 

State   EV Sales
2016
    EV Sales
2017
   

% Year-

On-Year

Increase

    2017 EV 
Market Share
Within State
    Aug 2018 EV 
Market Share
Within State
 
California     73,854       94,873       28.50 %     5.02 %     9.96 %
New York     6,043       10,090       67.00 %     1.03 %     1.30 %
Washington     5,363       7,068       31.80 %     2.51 %     3.54 %
Florida     6,255       6,573       5.10 %     0.52 %     1.36 %
Texas     4,510       5,419       20.20 %     0.39 %     0.95 %
New Jersey     3,980       5,033       26.50 %     0.91 %     1.53 %
Massachusetts     2,905       4,632       59.40 %     1.35 %     2.19 %
Colorado     2,711       4,156       53.30 %     1.57 %     2.46 %
Oregon     3,486       3,988       14.40 %     2.36 %     4.12 %
Illinois     2,688       3,812       41.80 %     0.62 %     0.89 %
Pennsylvania     2,998       3,346       11.60 %     0.55 %     0.84 %
Maryland     2,185       3,244       48.50 %     1.05 %     2.18 %

 

Data Sources: Alliance of Automobile Manufacturers; National Automobile Dealers Association; Chart:   EVAdoption.com

 

Fleet and Urban Driving market

 

We designed the SOLO with a view to redefining SOLO mobility for fleets in terms of car share, deliveries and other mobility purposes; and for urban drivers who use a personal vehicle by cutting their commuting costs and reducing their environmental footprint. We believe that a substantial number of fleets and urban drivers will find the capacity of our EVs attractive in comparison to cars designed to carry more people. As cars designed to carry between four and eight people generally weigh substantially more than those that carry one or two people, they require more fuel or energy to operate. This significant mismatch between capacity and utilization leads to a significant excess of traffic and pollution and higher operating costs.

 

Although consumers may be afraid that their EVs may run out of charge while they are out on the road, the average U.S. commute was only 27 minutes in 2018. The 100-mile range of our SOLO on a full charge would more than cover such a round-trip commute.

 

Government Support

 

There has been a growing trend for governments as a matter of public policy to favor EVs. This has taken the form of initiatives aimed at improving transit, financial incentives for the purchase of EVs and financial incentives for the manufacture of EVs.

 

Initiatives to Improve Transit

 

Many localities try to reduce or regulate traffic, particularly in places where there is high population density, chronic congestion, narrow roads and limited urban space. While these initiatives might be onerous to owners of traditional internal combustion engine vehicles, they often exempt or partially exclude EVs. These initiatives include various forms of congestion charging (which often exempt or provide discounts for EVs), priority lanes for high-occupancy vehicles and EVs, restrictions on new registrations of vehicles (excluding EVs) and subsidies for the installation of public charging stations for EVs.

 

Going further than restrictions on cars fueled by petrol or diesel, several European countries and cities are formulating programs that would actually ban them. Norway’s Minister for the Environment expects to implement a ban on the sale of cars that are not EVs by 2025. President Macron of France has vowed to eliminate the sale of cars with internal combustion engines in France by 2040, and city hall in Paris has called for a ban on all cars with traditional combustion engines from its streets by 2030. In the United Kingdom, the government has announced a strategy that calls for sales of new gas and diesel cars and vans to end by 2040.

 

- 28 -

 

 

Purchaser Incentives

 

To promote the purchase of EVs, many state and local governments offer financial incentives to purchasers. These incentives can take the form of rebates, tax credits or the elimination or reduction of sales tax. Financial incentives available in selected North American jurisdictions for the purchase of EVs are set out in the following table:

 

    U.S.
Federal
    California     New York     British
Columbia
    Ontario     Quebec  
Tax credit   US $ 7,500                            
Rebate       US $ 2,500     US $ 2,000     $ 5,000     $ 14,000     $ 8,000  

 

Although these financial incentives may not continue at this level or at all, we believe that our SOLO would currently qualify for these tax credits and rebates in the States of California and Oregon. As of March 12, 2020, we have passed the CARB test for the State of California, and are currently waiting for the $750 rebate to be posted on the Clean Vehicle Rebate Project (“CVRP”) website and a $2,500 rebate from the State of Oregon.

 

Several jurisdictions offer similar financial incentives for the purchase and installation of home charging stations for EVs.

 

Manufacturing Incentives

 

To promote the manufacture and development of EVs, many federal, state and local governments provide financial incentives to EV companies. These incentives can take the form of tax credits or grants. In 2019, we received $1,056,193 in a Scientific Research and Experimental Development grant (“SR&ED”). In 2018, we received $734,229 in governmental grants consisting of $725,599 in a SR&ED grant and $8,630 in government grants related to Canada’s Industrial Research Assistance Program administered by the National Research Council. In 2017, we received $193,534 in government grants related to Canada’s Industrial Research Assistance Program administered by the National Research Council and $111,380 in a SR&ED grant. We will continue to apply for grants where we believe warranted.

 

Competitive Advantages & Operational Strengths

 

The EV market is evolving and companies within it must be able to adapt without jeopardizing the timing, quality or quantity of their products. Other manufacturers have entered the electric vehicle market and we expect additional competitors to enter this market within the next several years. As they do, we expect that we will experience significant competition. With respect to the SOLO, we also face strong competition from established automobile manufacturers, including manufacturers of EVs such as the Tesla Model S, the Chevrolet Volt and the Nissan Leaf.

 

We believe the primary competitive factors in our market include but are not limited to:

 

  technological innovation;

 

  product quality and safety;

 

  service options;

 

  product performance;

 

  design and styling;

 

  brand perception;

 

  product price; and

 

  manufacturing efficiency.

 

- 29 -

 

 

 

Most of our current and potential competitors have significantly greater financial, technical, manufacturing, marketing and other resources than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. Virtually all of our competitors have more extensive customer bases and broader customer and industry relationships than we do. In addition, almost all of these companies have longer operating histories and greater name recognition than we do. Our competitors may be in a stronger position to respond quickly to new technologies and may be able to design, develop, market and sell their products more effectively.

 

Furthermore, certain large manufacturers offer financing and leasing options on their vehicles and also have the ability to market vehicles at a substantial discount, provided that the vehicles are financed through their affiliated financing company. We do not currently offer any form of direct financing on our vehicles. The lack of our direct financing options and the absence of customary vehicle discounts could put us at a competitive disadvantage.

 

We expect competition in our industry to intensify in the future in light of increased demand for alternative fuel vehicles, continuing globalization and consolidation in the worldwide automotive industry. Our ability to successfully compete in our industry will be fundamental to our future success in the EV market and our market share. We might not be able to compete successfully in our market. If our competitors introduce new cars or services that compete with or surpass the quality, price or performance of our vehicles or services, we may be unable to satisfy existing customers or attract new customers at the prices and levels that would allow us to generate attractive rates of return on our investment. Increased competition could result in price reductions and revenue shortfalls, loss of customers and loss of market share, which could harm our business, prospects, financial condition and operating results.

 

We believe that our experience, production capability, product offering and management give us the ability to successfully operate in the EV market in a way that our competitors cannot. In particular, we believe that we have a number of competitive advantages:

 

  · Extensive in-house development capabilities - our acquisition of InterMeccanica enables us to leverage InterMeccanica’s extensive 60 years of experience in vehicle design, manufacture, sales and customer support. InterMeccanica’s former owner is our Chief Operating Officer and one of our directors and, together with his family, is the second largest shareholder in our company. We have integrated InterMeccanica’s staff with the research and development team that we had prior to the acquisition to develop and enhance current and future model offerings;

 

  · In-house production capabilities - we have the ability to manufacture our own products on a non-commercial scale. As of March 25, 2020, we have produced approximately 64 prototype SOLOs at our facilities in Vancouver, British Columbia, and our manufacturing partner has completed 50 pre-production SOLOs;

 

  · Commercial production of the SOLO is anticipated to during 2020 - we have an agreement with Zongshen whereby they have agreed to produce a total of 75,000 SOLOs over a three-year period once we have started full scale production;

 

  · Favorable comparable to our competitors - we believe that consumers will find that the performance and price of the SOLO compares favorably to those of competing EVs as set out in the table below:

 

- 30 -

 

 

                       
    Electra
Meccanica 
SOLO
  Smart
Electric
  Tesla Model
3
  Chevrolet
Bolt
  Nissan Leaf  
Price   US$18,500*   US$24,550   Up to US$56,500   US$41,780+   US$37,445  
                       
Electric only miles   Up to 100 miles   Up to 63 miles   Up to 310 miles   Up to 238 miles   Up to 226 miles  
Price per Mile   US$155/mile   US$389/mile   US$182/mile   US$176/mile   US$166/mile  
Top Speed   80/mph   83/mph   130/mph   100/mph   93/mph  
Full charge Time   3 hours on a 240 volt outlet   6 hours on a 240 volt outlet   13.85 hours on a 240 volt outlet   4.5 hours on a 240 volt outlet   4 hours on a 7kW charging point  
Vehicle Class   SOLO Mobility   Sub-compact   Compact   Compact   Compact  

 

* Base price prior to any adjustments for tariffs; and

 

  · Management expertise - we have selected our management with an eye towards providing us with the business and technical expertise needed to be successful. They include Michael Paul Rivera, our Chief Executive Officer, Bal Bhullar, our Chief Financial Officer, Henry Reisner, our President and Chief Operating Officer, and Isaac Moss, our Chief Administrative Officer. A number of these key employees and consultants have significant experience in the automobile manufacturing and technology industries. We have supplemented additional expertise by adding consultants and directors with corporate, accounting, legal and other strengths.

 

Government Regulation

 

As a vehicle manufacturer, we are required to ensure that all vehicle production meets applicable safety and environmental standards. Issuance of the National Safety Mark (the “NSM”) by the Minister of Transport for Canada will be our authorization to manufacture vehicles in Canada for the Canadian Market. Receipt of the NSM is contingent on us demonstrating that our vehicles are designed and manufactured to meet or exceed the applicable sections of the Canadian Motor Vehicle Safety Act (C.R.C. Chapter 1038) and that appropriate records are maintained. Unique to Canada, the SOLO and the Super SOLO are under the three-wheeled vehicle category and are subject to the safety standards listed in Schedule III of the Canadian Motor Vehicle Safety Regulations (“CMVSR”), which can be found at (http://laws-lois.justice.gc.ca/eng/regulations/C.R.C.,c.1038/section-sched3.html). For sale into the United States, we and our vehicles must meet the applicable parts of the U.S. Code of Federal Regulations (“CFR”) Title 49 — Transportation. This includes providing Manufacture Identification information (49 CFR Part 566), VIN-deciphering information (49 CFR Part 565, and certifying that our vehicles meet or exceeds the applicable sections of the Federal Motor Vehicle Safety Standards (40 CFR Part 571) and Environmental Protection Agency noise emission standards (40 CFR 205). Since the U.S. regulations do not have a specific class for three-wheeled “autocycles”, the SOLO and the Super SOLO fall under the definition of a motorcycle pursuant to Sec. 571.3 of 49 CFR Part 571.

 

We certified the SOLO for compliance with the applicable US requirements in the first quarter of 2018. Results from third party vehicle testing at a facility in Quebec, Canada, were used for this certification. We continue to use third party facilities for certification testing to ensure that any changes to the SOLO’s design continue to meet safety requirements. Compliance certification of the SOLO for Canada began in 2018.

 

Within the three-wheel vehicle classification in Canada, CMVSR Standard 305 sets out the regulation for prevention of injury to the occupant during and after a crash as related to the vehicle’s batteries. Under this standard, the security and integrity of electric drive system components and their isolation from the occupant are evaluated in the course of a frontal barrier crash test in accordance with Technical Standard Document No. 305. The equivalent U.S standard, FMVSS No. 305, is not applicable to the motorcycle category under the U.S. regulations.

 

- 31 -

 

 

We and our vehicles must meet the applicable parts of the U.S. Code of Federal Regulations Title 49 —Transportation. Since the U.S. regulations do not have a specific class for three-wheeled “autocycles”, the SOLO and the Super SOLO fall under the definition of a motorcycle pursuant to Sec. 571.3 of 49 CFR Part 571. However, currently a motorcycle license is not required to drive them in all but the States of Alaska, Florida, New York and Massachusetts. Motorcycle helmets must be worn while operating in the States of New York and Massachusetts. Helmets are also required if the driver is under 18 years old in the States of Alaska, Montana, Colorado and New Hampshire.

 

Research and Development

 

We have allocated substantial resources in developing our first vehicles. We expended $ 9,514,520 during the fiscal year ended December 31, 2019, and $5,566,036 during the fiscal year ended December 31, 2018, on research and development costs which include labor and materials.

 

InterMeccanica Business

 

In October 2017, we acquired InterMeccanica. In addition to the manufacturing and design experience that the acquisition provided us, we acquired a business of custom car manufacturing. InterMeccanica, throughout its operating history, has built approximately 2,500 vehicles. We intend to continue the legacy business of InterMeccanica, but we do not envision that it will be central to our operations, or represent a material portion of our revenue if we develop our business as planned, or account for a material portion of our expenses.

 

Legal Proceedings

 

We are not involved in, or aware of, any legal or administrative proceedings contemplated or threatened by any governmental authority or any other party that is likely to have a material adverse effect on our business. As of the date of this Annual Report, no director, officer or affiliate is a party adverse to us in any legal proceeding or has an adverse interest to us in any legal proceeding.

 

C. Organizational structure

 

We have four subsidiaries: InterMeccanica, a British Columbia, Canada, corporation; EMV Automotive USA Inc., a Nevada corporation; SOLO EV LLC, a Michigan corporation; and EMV Automotive Technology (Chongqing) Inc., a PRC corporation. We own 100% of the voting and dispositive control over all of our subsidiaries.

 

D. Property, plant and equipment

 

We operate from our head office located in Vancouver, Canada. We do not own any real property. We have leased the following properties:

 

Location   Area
(In square feet)
    2019 Gross Monthly
Rent
    Lease Expiration
Date
    Use  
Vancouver BC, Canada     7,235     $ 9,174        CAD     October 31, 2020     Head office  
New Westminster BC, Canada     10,803     $ 10,467        CAD     July 31, 2022     Development office  
New Westminster BC, Canada     10,911     $ 10,412        CAD     July 31, 2020     Development office  
Studio City, CA, USA     9,600     $ 29,870        USD     August 31, 2021     Sales office  

 

We believe that our current facilities are adequate to meet our ongoing needs and that, if we require additional space, we will be able to obtain additional facilities on commercially reasonable terms.

 

- 32 -

 

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

General

 

This Annual Report should be read in conjunction with the accompanying financial statements and related notes. The discussion and analysis of the financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as adopted by the International Accounting Standards Board (“IASB”).

 

The preparation of financial statements in conformity with these accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis we review our estimates and assumptions. The estimates were based on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates or other forward-looking statements under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Our actual results may differ materially as a result of many factors, including those set forth under the headings entitled “Forward-Looking Statements” and “Risk Factors” herein.

 

Critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below under the heading “Critical Accounting Policies and Estimates”, and have not changed significantly since our founding.

 

Overview

 

We were incorporated on February 16, 2015, under the laws of the Province of British Columbia, Canada, and our principal activity is the development and manufacturing of single occupancy electric vehicles. Our head office and principal address is located at 102 East 1st Avenue, Vancouver, British Columbia, Canada, V5T 1A4.

 

Additional information related to the Company is available on www.electrameccanica.com. Information on our website does not constitute part of this Annual Report.

 

Going Concern

 

Our principal activity is the development and manufacture of electric vehicles, and we are still in the development stage. We also manufacture high-end custom-built vehicles.

 

Our 2019 financial statements have been prepared on the assumption that we will continue as a going concern, meaning we will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations. As at December 31, 2019, we had not commenced commercial production of the SOLO single seat electric vehicle and are not able to finance day-to-day activities through operations. Our continuation as a going concern depends upon the successful results from our electric vehicles manufacturing activities and our ability to attain profitable operations and generate funds there from and/or raise equity capital or borrowings sufficient to meet current and future obligations.

 

We are yet to begin mass production or the commercial delivery of our first electric vehicle. As at December 31, 2019, there have been no revenues from the sale of electric vehicles as any amounts received from the sale of pre-production electric vehicles were netted off against research and development costs as cost recovery. We had had minimal revenue from the sale of custom cars.

 

We intend to derive revenues from the sale of our SOLO, Tofino and other intended EVs vehicles. The Tofino is still in early design development stage, and the first commercially-produced SOLOs will be delivered to customers during 2020.

 

- 33 -

 

 

We have incurred an accumulated deficit of $62,116,008 as of December 31, 2019 (2018 - $31,373,697). For the year ended December 31, 2019, we had incurred a net loss of $30,742,311 (2018 - $10,038,145) and used net cash in operating activities of $22,501,917 (2018 - $15,583,590).

 

These factors indicate the existence of a material uncertainty that casts substantial doubt about our ability to continue as a going concern.

 

Management intends to finance our operations over the next 12 months through private placement and/or public offerings of equity capital, strategic investments and revenues to be derived from the sale of electric vehicles and high-end custom vehicles.

 

Management does not intend to liquidate the entity or to cease operations and is operating in a highly competitive industry.

 

Events and conditions that may affect the going concern assumption

 

Financing

 

Our ability to continue as a going concern will depend on our continued ability to raise capital on acceptable terms. We incurred losses of $30,742,311 in 2019, $10,038,145 in 2018, $11,366,372 in 2017, and anticipate incurring losses in our 2020 fiscal year. We had negative operating cash flows of $22,501,917 for the year ended December 31, 2019 and anticipate negative operating cash flows during our current fiscal year. Although we had net current assets of $15,478,918, including cash and cash equivalents of $11,095,848 at December 31, 2019, and anticipate deriving revenue this fiscal year from the sale of EVs and high-end custom cars, we believe that we will need additional financing to continue as a going concern. If we are unable to continue to access private and public capital on terms that are acceptable to us, we may be forced to curtail or cease operations.

 

Market conditions, trends or events

 

Our ability to continue as a going concern also depends on market conditions outside of our control. Significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects. Failure to keep up with advances in electric vehicle technology would result in a decline in the Company’s competitive position which may materially and adversely affect our business, prospects, operating results and financial condition.

 

A. Operating Results

 

Results of Operations for the Year ended December 31, 2019 as Compared to the Year Ended December 31, 2018

 

Revenues

 

Revenue for the year ended December 31, 2019 was $775,821 (2018: $777,302). The cost of revenue was $646,441 (2018: $575,172) providing a gross profit of $129,380 (2018: $ 202,130) or 16.7% (2018: 26%).

 

The Company operates in two reportable business segments in Canada.

 

The two reportable business segments offer different products, require different production processes, and are based on how the financial information is produced internally for the purposes of making operating decisions. The following summary describes the operations of each of the Company’s reportable business segments:

 

  · Electric Vehicles – development and manufacture of electric vehicles for mass markets, and

 

  · Custom build vehicles – development and manufacture of high-end custom built vehicles.

 

- 34 -

 

 

Sales between segments are accounted for at prices that approximate fair value. No business segments have been aggregated to form the above reportable business segments. (Financial statement note 16 for the year ended December 31, 2019).

 

Revenue for custom build vehicles is recognized when the Company has transferred control to the customer which generally occurs upon shipment. No revenue from sales of electric vehicles is recognized because the vehicle has not been commercialized. Proceeds from these sales are incidental revenue and are not being made with expectation of profit. The following table indicates the number of vehicles produced for either delivery to customers, testing or marketing purposes.

 

    Production
Twelve Months Ended
    Customer Deliveries
Twelve Months Ended
 
Vehicle Type   Dec. 31, 2019     Dec. 31, 2018     Dec. 31, 2019     Dec. 31, 2018  
Custom build vehicles     8       7       7       6  
Electric vehicles     22       25       21       8  

 

Operating Expenses

 

During the year ended December 31, 2019, the Company incurred a net loss of $30,742,311 compared to a $10,038,145 loss for the corresponding period in 2018. The increase in net loss between the two years resulted from an increase in an operating loss to $27,314,471 for the year ended December 31, 2019, from $16,858,405 for the prior year, and an increase in the loss from other items, principally changes in fair value of warrant derivative of $2,926,392 for the year ended December 31, 2019 from a gain of $7,707,051 for the prior year. The largest expense items in net comprehensive loss are described below.

 

General and administrative expenses. For the year ended December 31, 2019, general and administrative expenses were $8,088,529 compared to $5,490,938 for the year ended December 31, 2018. The following items are included in such expenses:

 

  · Rent decreased to $425,450 for the year ended December 31, 2019, from $488,273 for the year ended December 31, 2018.  The decrease was caused by some rent expense being reclassified as interest and depreciation expense under IFRS 16, offset by the increase of rent expense related to the opening of our Los Angeles showroom;

 

  · Office expenses increased to $1,581,266 for the year ended December 31, 2019, from $944,771 for the corresponding year ended December 31, 2018. The increase was caused by increases in insurance costs for directors’ and officers’ liability and vehicle insurance, travel costs related to investor meetings and travel to the Company’s China electric vehicle production facility and additional office costs associated with the opening of our showroom in Los Angeles;

 

  · Legal and professional expenses were $1,846,695 for the year ended December 31, 2019, from $1,491,818 for the corresponding year ended December 31, 2018. The increase in legal and professional expenses relate to the increases in accounting fees and recruiting fees;

 

  · Consulting expenses were $2,004,616 for the year ended December 31, 2019, compared to $1,191,593 for the corresponding year ended December 31, 2018. The increase in fees related to the use of additional consultants for investor relations and executive advisory services, and directors’ fees;

 

  · Investor relations expenses, not including consultant fees above, decreased to $330,524 for the year ended December 31, 2019, from $614,803 for the corresponding year ended December 31, 2018. The decrease is related to a reduction in filing fees and investor meetings and conference expenses; and

 

  · Salaries increased to $1,899,978 for the year ended December 31, 2019, compared to $759,680 for the corresponding year ended December 31, 2018. The increase is related to addition of new employees, performance increases to certain salaried employees, as well as severance and bonus costs.

 

- 35 -

 

 

 

Research and development expenses. Research and development expenses increased to $9,514,520 for the year ended December 31, 2019, from $5,566,036 for the corresponding year ended December 31, 2018. Research and development costs relate to the electric vehicle segment as the Company continues to develop its first electric vehicle, the SOLO. All costs related to pre-production vehicles are being expensed to research and development and SR&ED funds are being booked to reduce the research and development expenses. During the year ended December 31, 2019, the Company received $1,056,193 (2018: $725,599) in SR&ED funds under the program administered by the Canada Revenue Agency. In addition, the Company received $Nil (2018: $8,630) in government grants due from the Industrial Research Assistance Program Co-op program administered by the National Research Council. We also accrued $249,111 (2018: $675,000) in SR&ED credits which is the estimated amount we will receive after filing 2018 SR&ED claims.

 

Sales and marketing expenses. Sales and marketing expenses increased to $1,743,855 for the year ended December 31, 2019, from $1,386,901 for the corresponding year ended December 31, 2018. The Company has increased its sales and marketing efforts by attending trade shows, re-establishing its social media presence and increasing its staff in its Los Angeles showroom.

 

Stock-based compensation expense. For the year ended December 31, 2019, stock-based compensation expense was $6,816,321 (2018: $3,228,508). The Company issued 8,755,000 stock options with exercise prices between US$1.80 and US$3.40 per share during the year ended December 31, 2019. In addition, the stock-based compensation charges relate to stock options issued during previous quarters wherein charges are recognized over the stock option vesting period. The Company uses the Black-Scholes method of calculating the stock-based compensation expense under the graded method.

 

Share-based payment expense. For the year ended December 31, 2019, share-based payment expense was $213,720, (2018: $1,109,531). These charges relate to shares issued to consultants as compensation for services performed and are valued at the market price of the Company’s share price at the time of issuance.

 

Other Items

 

Share issue costs allocated to derivative liability. The Company did not incur share issue costs related to derivative liability for the year ended December 31, 2019 (2018: $1,493,554).

 

Changes in fair values of warrant derivative. The Company incurred a loss relating to changes in the fair value of warrant derivatives of $2,926,392 (2018: gain of $7,707,051) caused by warrants priced in US dollars while the Company’s functional currency is in Canadian dollars. As a result of this difference in currencies, the proceeds that will be received by the Company are not fixed and will vary based on foreign exchange rates, hence the warrants are a derivative under IFRS and are required to be recognized and measured at fair value at each reporting period. Any changes in fair value from period to period are recorded as a non-cash gain or loss in our consolidated statement of net loss and comprehensive loss.

 

Foreign exchange loss. This totaled $795,172 on net working capital in the year ended December 31, 2019 (2018: gain of $605,096) as caused by fluctuations between the US and Canadian dollar.

 

Net Loss

 

As a result of the above factors, we reported a net loss for the year ended December 31, 2019 of $30,742,311, compared to a $10,038,145 loss for the corresponding period in 2018.

 

Results of Operations for the year ended December 31, 2018 as Compared to the Year Ended December 31, 2017

 

Revenues

 

Revenue for the year ended December 31, 2018 was $777,302 (2017: $109,173), caused by the acquisition of InterMeccanica. The cost of revenue was $575,172 (2017: $63,950) providing a gross profit of $202,130 (2017: $45,223) or 26%.

 

The Company operates in two reportable business segments in Canada.

 

- 36 -

 

 

The two reportable business segments offer different products, require different production processes, and are based on how the financial information is produced internally for the purposes of making operating decisions. The following summary describes the operations of each of the Company’s reportable business segments:

 

  Electric Vehicles – development and manufacture of electric vehicles for mass markets, and

 

  Custom build vehicles – development and manufacture of high-end custom built vehicles.

 

Sales between segments are accounted for at prices that approximate fair value. No business segments have been aggregated to form the above reportable business segments. (Financial statement note 16 for the year ended December 31, 2018).

 

Revenue recognition for custom build vehicles is based on the percentage completion method. No revenue from sales of electric vehicles is recognized because the vehicle has not been commercialized. Proceeds from these sales are incidental revenue and are not being made with expectation of profit. The following table indicates the number of vehicles produced for either delivery to customers, testing or marketing purposes.

 

    Production
Twelve Months Ended
    Customer Deliveries
Twelve Months Ended
 
Vehicle Type   Dec. 31, 2018     Dec. 31, 2017     Dec. 31, 2018     Dec. 31, 2017  
Custom build vehicles     7       8       6       8  
Electric vehicles     25       11       8       3  

 

Operating Expenses

 

During the year ended December 31, 2018, the Company incurred a net loss of $10,038,145 compared to a $11,366,372 loss for the corresponding period in 2017. The decrease in net loss between the two years resulted from an increase in an operating loss to $16,858,405 for the year ended December 31, 2018 from $9,489,156 for the prior year offset by a decrease in the loss from other items, principally changes in fair value of warrant derivative to a gain of $7,707,051 for the year ended December 31, 2018 from $186,269 for the prior year. The largest expense items in net comprehensive loss are described below.

 

General and administrative expenses. For the year ended December 31, 2018 general and administrative expenses were $5,490,938 compared to $2,373,251 for the year ended December 31, 2017. The following items are included in such expenses:

 

  ·  Rent increased to $488,273 for the year ended December 31, 2018, from $269,716 for the year ended December 31, 2017. The increase was caused by full year effect of the acquisition of InterMeccanica and the opening of our showroom in Los Angeles in 2018;

 

  ·  Office expenses increased to $944,771 for the year ended December 31, 2018, from $345,986 for the corresponding year ended December 31, 2017. The increase was caused by increases in insurance costs for directors’ and officers’ liability and vehicle insurance; travel costs related to investor meetings and travel to the Company’s off-shore electric vehicle production facility and additional office costs associated with the acquisition of InterMeccanica and the opening of our dealership in Los Angeles;

 

  ·  Legal and professional expenses were $1,491,818, for the year ended December 31, 2018, from $912,347 for the corresponding year ended December 31, 2017. The increase in legal and professional expenses relate to the increases in accounting fees and legal fees related to the Company’s patent and trademark filings and legal costs associated with the Company’s Nasdaq listing application and patent applications;

 

  ·  Consulting fees were $1,191,593, for the year ended December 31, 2018, compared to $405,176 for the corresponding year ended December 31, 2017. The increase in fees related to the use of additional consultants for investor relations and executive advisory services, and directors’ fees;

 

  ·  Investor relations expenses, not including consultant fees above, increased to $614,803 for the year ended December 31, 2018, from $113,256 for the corresponding year ended December 31, 2017. The costs relate to Nasdaq and SEC filing fees and attending investor conferences, outreach program and media relation promotions; and

 

  ·  Salaries increased to $759,680 for the year ended December 31, 2018, compared to $326,770 for the corresponding year ended December 31, 2017. The increase is related to performance increases to certain salaried employees, the addition of new employees and the full year effect of the additional employees from the purchase of InterMeccanica.

 

- 37 -

 

 

Research and development expenses. Research and development expenses increased to $5,566,036 for the year ended December 31, 2018, from $4,430,386 for the corresponding year ended December 31, 2017. Research and development costs relate to the electric vehicle segment as the Company continues to develop its first electric vehicle, the SOLO. All costs related to pre-production vehicles are being expensed to research and development. During the year ended December 31, 2018, the Company received $8,630 (2017: $193,534) in government grants due from the Industrial Research Assistance Program Co-op program administered by the National Research Council of Canada. In addition, the Company received $725,599 (2017: $111,380) in SR&ED funds under the program administered by the Canada Revenue Agency. We also accrued $675,000 (2017: Nil) in SR&ED credits which is the estimated amount we will receive after filing 2017 and 2018 SR&ED claims.

 

Sales and marketing expenses. Sales and marketing expenses increased to $1,386,901 for the year ended December 31, 2018, from $631,381 for the corresponding year ended December 31, 2017. The Company has increased its sales and marketing efforts by attending trade shows, re-establishing its social media presence and increasing its staff in its Los Angeles showroom.

 

Stock-based compensation expense. For the year ended December 31, 2018, stock-based compensation expense was $3,228,508 (2017: $889,511). The Company issued 1,307,424 stock options with exercise prices between US$1.53 and US$9.60 per share during the year ended December 31, 2018. In addition, the stock-based compensation charges relate to stock options issued during previous quarters wherein charges are recognized over the stock option vesting period. The Company uses the Black-Scholes method of calculating the stock-based compensation expense under the graded method.

 

Share-based payment expense. For the year ended December 31, 2018, share-based payment expense was $1,109,531, (2017: $1,085,716). These charges relate to shares issued to a consultant as compensation for services performed and are valued at the market price of the Company’s share price at the time of issuance.

 

Other Items

 

Interest accretion expense. The Company did not incur an interest accretion expense for the year ended December 31, 2018 (2017: $69,562) relating to a convertible loan. The Company did not incur any finder’s fee expense associated with a convertible loan for the year ended December 31, 2018 (2017: $258,542).

 

Share issue costs allocated to derivative liability. These totaled $1,493,554 for the year ended December 31, 2018 (2017: $Nil).

 

Changes in fair values of warrant derivative. The Company incurred changes in the fair values of warrant derivatives of $(7,707,051) (2017: $186,269) caused by warrants priced in US dollars while the Company’s functional currency is in Canadian dollars. As a result of this difference in currencies, the proceeds that will be received by the Company are not fixed and will vary based on foreign exchange rates, hence the warrants are a derivative under IFRS and are required to be recognized and measured at fair value at each reporting period. Any changes in fair value from period to period are recorded as a non-cash gain or loss in our consolidated statement of net loss and comprehensive loss.

 

Foreign exchange gain. This totaled $605,096 on net working capital in the year ended December 31, 2018 (2017: $20,049) as caused by fluctuations between the US and Canadian dollar.

 

Net Loss

 

As a result of the above factors, we reported a net loss for the year ended December 31, 2018 of $10,038,145, compared to a $11,366,372 loss for the corresponding period in 2017.

 

- 38 -

 

 

B. Liquidity and Capital Resources

 

Liquidity

 

The Company’s operations consist of the designing, developing and manufacturing of electric vehicles. The Company’s financial success depends upon its ability to market and sell its electric vehicles and to raise sufficient working capital to enable the Company to execute its business plan. The Company’s historical capital needs have been met by the sale of the Company’s stock. Equity funding might not be possible at the times required by the Company. If no funds can be raised and sales of its electric vehicles do not produce sufficient net cash flow, then the Company may require a significant curtailing of operations to ensure its survival or may be required to cease operations.

 

The financial statements have been prepared on a going concern basis which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company incurred a net loss of $30,742,311 during the year ended December 31, 2019, and had a cash and cash equivalents balance and a working capital surplus of $11,095,848 and $15,478,918, respectively, as at December 31, 2019. The Company’s ability to meet its obligations as they fall due and to continue to operate as a going concern depends on the continued financial support of the creditors and the shareholders. In the past, the Company has relied on sales of its equity securities to meet its cash requirements. Funding from this or other sources might not be sufficient in the future to continue its operations. Even if the Company is able to obtain new financing, it may not be on commercially reasonable terms or terms that are acceptable to it. Failure to obtain such financing on a timely basis could cause the Company to reduce or terminate its operations. The above indicates the existence of a material uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern.

 

As of December 31, 2019, the Company had 37,049,374 issued and outstanding shares and 70,561,085 shares on a fully-diluted basis. The Company began trading on Nasdaq on August 9, 2018.

 

The Company had $15,478,918 of working capital surplus as at December 31, 2019 compared to $20,985,467 of working capital surplus as at December 31, 2018. The decrease in working capital resulted from cash used in operations of $22,501,917 (2018: $15,583,590) and cash used in investing activities of $3,721,453 (2018: $4,291,449) related to the additions to property, plant and equipment and an increase in restricted cash, offset by cash generated from financing activities of $18,326,075 (2018:$ 30,217,649), due to the issuance of 3,333,334 common shares for net cash proceeds of $14,699,097 (2018: $21,175,610).

 

Capital Resources

 

As at December 31, 2019, the Company had cash and cash equivalents of $11,095,848 (2018: $18,926,933). The Company continues to pursue additional equity financing although there can be no guarantees given that the Company will be successful in such endeavors.

 

As of the date of this Annual Report, the Company has no outstanding commitments, other than $0.9 million payable to the Company’s manufacturing partner, Zongshen, for the production of the SOLO (see financial statement note 5 December 31, 2019). On October 16, 2017, Jerry Kroll, a director, entered into a Share Pledge Agreement with Zongshen to guarantee the Company’s payment for the cost of the prototype tooling and molds estimated to be $1.8 million through the pledge of 400,000 of our common shares at a deemed price of US$4.00. Apart from our agreement to reimburse Mr. Kroll for liabilities under his Share Pledge Agreement, we have not pledged any of our assets as security for loans, or otherwise, and are not subject to any debt covenants.

 

Off-Balance Sheet Arrangements

 

The Company has no off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

The preparation of the Company’s financial statements requires management to use estimates and assumptions that affect the reported amounts of assets and liabilities as well as revenue and expenses.

 

Research costs are expensed when incurred and are stated net of government grants. Development costs including direct material, direct labor and contract service costs are capitalized as intangible assets when the Company can demonstrate that the technical feasibility of the project has been established; the Company intends to complete the asset for use or sale and has the ability to do so; the asset can generate probable future economic benefits; the technical and financial resources are available to complete the development; and the Company can reliably measure the expenditure attributable to the intangible asset during its development.

 

- 39 -

 

 

The Company accounts for all stock-based payments and awards using the fair value-based method. Under the fair value-based method, stock-based payments to non-employees are measured at the fair value of the consideration received, or the fair value of the equity estimates issued, or liabilities incurred, whichever is more reliably measurable.

 

From time to time, the company must make accounting estimates. These are based on the best information available at the time, utilizing generally accepted industry standards

 

Our accounting policies are disclosed in note 2 of Notes to our financial statements. During the fiscal year ended December 31, 2019 there were no material changes to these policies. Our more critical accounting policies are noted below:

 

Statement of compliance with International Financial Reporting Standards

 

The consolidated financial statements were prepared using the same accounting policies and methods as those used in the Company’s consolidated financial statements for the year ended December 31, 2018, with the exception of new accounting policies that were adopted on January 1, 2019 as described in the Notes to the financial statements.

 

Basis of preparation

 

The financial statements of the Company have been prepared on an accrual basis and are based on historical costs, modified where applicable. The Company’s functional and presentation currency is Canadian dollars.

 

Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, EMV Automotive USA Inc., InterMeccanica, from the date of its acquisition on October 18, 2017, EMV Automotive Technology (Chongqing) Inc., from the date of its incorporation on October 15, 2019, and SOLO EV, LLC, from the date of its incorporation on November 22, 2019. Inter-company balances and transactions, including unrealized income and expenses arising from inter-company transactions, are eliminated on consolidation.

 

Significant estimates and assumptions

 

The preparation of financial statements in accordance with IFRS requires the Company to make estimates and assumptions concerning the future. The Company’s management reviews these estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to estimates are adjusted for prospectively in the period in which the estimates are revised.

 

Estimates and assumptions where there is significant risk of material adjustments to assets and liabilities in future accounting periods include the estimated recoverable amount of goodwill, intangible assets and other long-lived assets, the useful lives of plant and equipment the estimated amount of SR&ED tax credits, fair value measurements for financial instruments and share-based payments, and the recoverability and measurement of deferred tax assets.

 

Significant judgements

 

The preparation of financial statements in accordance with IFRS requires the Company to make judgements, apart from those involving estimates, in applying accounting policies. The most significant judgements in applying the Company’s financial statements include:

 

  ·  the assessment of the Company’s ability to continue as a going concern and whether there are events or conditions that may give rise to significant uncertainty;

 

  ·  the classification of financial instruments; and

 

  ·  the calculation of income taxes require judgement in interpreting tax rules and regulations.

 

- 40 -

 

 

Financial Instruments

 

The Company classifies its financial instruments in the following categories: at fair value through profit or loss (“FVTPL”) or at amortized cost. The Company determines the classification of financial assets at initial recognition. The classification of financial assets is driven by the Company’s business model for managing the financial assets and their contractual cash flow characteristics. Equity instruments that are held for trading are classified as FVTPL. For other equity instruments, on the day of acquisition the Company can make an irrevocable election (on an instrument-by-instrument basis) to designate them as at fair value through other comprehensive income (loss) (“FVTOCI”). Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (such as instruments held for trading or derivatives) or if the Company has opted to measure them at FVTPL.

 

The following table shows the classification of the Company’s financial assets and liabilities:

 

Financial assets/liabilities

 

Cash and cash equivalents Amortized cost
Receivables Amortized cost
Trade payables and accrued liabilities Amortized cost
Shareholder loan Amortized cost
Derivative liability FVTPL

 

The Company completed a detailed assessment of its financial assets and liabilities as at January 1, 2018. The following table shows the original classification under IAS 39 and the new classification under IFRS 9:

 

Financial assets/liabilities   Original classification IAS 39   New classification IFRS 9
Cash and cash equivalents   Loans and Receivables   Amortized cost
Receivables   Loans and Receivables   Amortized cost
Trade payable and accrued liabilities   Other financial liabilities   Amortized cost
Shareholder loan   Other financial liabilities   Amortized cost
Bank overdraft and demand loan   Other financial liabilities   Amortized cost
Derivative liability   FVTPL   FVTPL

 

Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment.

 

Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the consolidated statements of comprehensive loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in the consolidated statements of comprehensive loss in the period in which they arise.

 

The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date, the Company measures the loss allowance for the financial asset at an amount equal to the lifetime expected credit losses if the financial risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the Company measures the loss allowance for the financial asset at an amount equal to the twelve month expected credit losses. The Company shall recognize in the consolidated statements of comprehensive loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized.

 

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are generally recognized in the consolidated statements of comprehensive loss.

 

- 41 -

 

 

Revenue from contracts with customers

 

Revenue is recognized to the extent that the amount of revenue can be measured reliably and collection is probable.

 

Part sales

 

Sales of parts are recognized when the Company has transferred control to the customer which generally occurs upon shipment.

 

Services, repairs and support services

 

Services, repairs and support services are recognized in the accounting period when the services are rendered.

 

Sales of custom build vehicles

 

The Company manufactures and sells custom built vehicles typically on fixed fee arrangements with its customers. Revenue is recognized when the Company has transferred control to the customer which generally occurs upon shipment.

 

Sales of electric vehicles

 

The Company will be manufacturing and selling electric powered one-seat vehicles (“SOLO”) which has not yet been commercialized. At this time proceeds of these sales are considered to be incidental revenue and are not being made with the expectation of profit. These are sold to ‘beta’ customers who provide real-world testing and feedback on the vehicles. The revenue generated from sales are recorded against research and development expenses.

 

Cash and cash equivalents

 

Cash and cash equivalents include cash and short-term investments with original maturities of less than 90 days and are presented at cost, which approximates market value.

 

Customer deposits

 

Customer deposits consist primarily of advance payments from customers who order the SOLO vehicles. The deposit will be recognized as revenue when the Company starts commercial production and transfers control to the customer which generally occurs upon delivery.

 

Construction contract liabilities

 

Construction contract liabilities consist primarily of advance payments from customers who order custom built vehicles. The deposit is recognized as revenue when the Company has transferred control to the customer which generally occurs upon shipment.

 

Inventory

 

Inventory consists of parts held for resale or for use in fixed fee contracts and is valued at the lower of cost and net realizable value. Cost is determined on the first-in, first-out basis.

 

Trademarks and patents

 

The Company expenses legal fees and filing costs associated with the development of its trademarks and patents.

 

Plant and equipment

 

Plant and equipment is stated at historical cost less accumulated depreciation and accumulated impairment losses.

 

- 42 -

 

 

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced asset is derecognized. All other repairs and maintenance are charged to the statement of comprehensive loss during the financial period in which they are incurred.

 

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized in the statements of comprehensive loss.

 

Amortization is calculated on a straight-line method to write off the cost of the assets to their residual values over their estimated useful lives. The amortization rates applicable to each category of plant and equipment are as follows:

 

Class of plant and equipment   Amortization rate  
Furniture and equipment     20 %
Computer equipment     33 %
Computer software     50 %
Vehicles     33 %
Leasehold improvements     over term of lease  
Right of use assets      over term of lease  
Production tooling and molds     per unit produced  

 

Share-based payments

 

Share-based payments to employees are measured at the fair value of the instruments issued and amortized over the vesting periods. Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. The corresponding amounts are recorded to the option reserve. The fair value of options is determined using a Black–Scholes pricing model. The number of options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest.

 

Loss per share

 

Basic loss per share is calculated by dividing the loss attributable to common shareholders by the weighted average number of common shares outstanding in the period. For all periods presented, the loss attributable to common shareholders equals the reported loss attributable to owners of the Company. Fully diluted loss per share is calculated by the treasury stock method. Under the treasury stock method, the weighted average number of common shares outstanding for the calculation of fully diluted loss per share assumes that the proceeds to be received on the exercise of dilutive share options and warrants are used to repurchase common shares at the average market price during the period.

 

Research and development expenses

 

Research costs are expensed when incurred and are stated net of government grants. Development costs, including direct material, direct labor and contract service costs, are capitalized as intangible assets when the Company can demonstrate that the technical feasibility of the project has been established. The Company intends to complete the asset for use or sale and has the ability to do so; as the asset can generate probable future economic benefits; the technical and financial resources are available to complete the development; and the Company can reliably measure the expenditure attributable to the intangible asset during its development. After initial recognition, internally generated intangible assets are recorded at cost less accumulated amortization and accumulated impairment losses. These costs are amortized on a straight-line basis over the estimated useful life. To date the Company did not have any development costs that met the capitalization criteria.

 

- 43 -

 

 

Derivative Liability

 

The Company accounts for its warrants as either equity or liabilities based upon the characteristics and provisions of each instrument. Warrants classified as equity are recorded at fair value as of the date of issuance on the Company’s consolidated balance sheets and no further adjustments to their valuation are made. Warrants classified as derivative liabilities that require separate accounting as liabilities are recorded on the Company’s consolidated balance sheets at their fair value on the date of issuance and will be revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. Management estimates the fair value of these liabilities using option pricing models and assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for future financings, expected volatility, expected life, yield and risk-free interest rate.

 

Change in accounting policy - Leases

 

In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”), which replaced IAS 17 Leases (“IAS 17”) and related interpretations. IFRS 16 introduces a single lessee accounting model eliminating the previous distinction between finance and operating leases. IFRS 16 requires the recognition of lease-related assets and liabilities on the balance sheet, except for short-term leases and leases of low value underlying assets. Lessor accounting remained substantially unchanged.

 

The Company adopted IFRS 16 on January 1, 2019. The Company transitioned to IFRS 16 in accordance with the modified retrospective approach. The comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease. In calculating the lease liability at this date, the Company has chosen to apply practical expedients in IFRS 16, which include:

 

(i) recognition exemption of short-term leases;
     
  (ii) recognition exemption of low-value leases;
     
(iii) application of a single discount rate to a portfolio of leases with similar characteristics on transition;
     
(iv) exclusion of initial direct costs from the measurement of the right-of-use assets upon transition;
     
(v) application of hindsight in determining the applicable lease term at the date of transition; and
     
(vi) election to not separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component.

 

The adoption of IFRS 16 resulted in an increase of $2.1 million in total assets and total liabilities each for recognition of right-of-use assets and lease liabilities, respectively, and had no impact to opening retained earnings as at January 1, 2019. The majority of our property leases, which were previously treated as operating leases, were impacted by IFRS 16. The adoption of IFRS 16 has resulted in:

 

(i) higher non-current assets related to the initial recognition of the present value of our unavoidable future lease payments as right-of-use assets under property, plant and equipment, adjusted by the amount of any prepaid or accrued lease payments relating to the lease recognized in the balance sheet as at January 1, 2019;
     
(ii) higher current and non-current liabilities related to the concurrent recognition of lease liabilities, which are measured at the present value of the remaining fixed lease payments, discounted by our weighted average incremental borrowing rate of 5% - 10% as of January 1, 2019;
     
(iii) replacement of rent expense previously recorded in operating expenses with depreciation expense of these right-of-use assets and higher finance costs related to the accretion and interest expense of the corresponding lease liabilities; and
     
(iv) variable lease payments and non-lease components are expensed as incurred.

 

The new standard does not change the amount of cash transferred between the lessor and lessee but impacts the presentation of the operating and financing cash flows presented on the Company’s consolidated statement of cash flows by decreasing operating cash flows and increasing financing cash flows.

 

When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate at January 1, 2019 of 5%-10%.

 

- 44 -

 

 

Operating lease commitment at December 31, 2018 as disclosed in the Company’s consolidated financial statement   $ 2,148,834  
Discounting effect using the incremental borrowing rate at January 1, 2019     379,371  
      1,769,463  
Extension options reasonably certain to be exercised     349,078  
Lease liabilities recognized at January 1, 2019   $ 2,118,541  

 

Impairment of assets

 

The carrying amount of the Company’s long-lived assets with finite useful lives (which include plant and equipment and intangible assets) is reviewed at each reporting date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. An impairment loss is recognized whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognized in the statement of comprehensive loss.

 

The recoverable amount of assets is the greater of an asset’s fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

 

An impairment loss is only reversed if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount. Any reversal of impairment cannot increase the carrying value of the asset to an amount higher than the carrying amount that would have been determined had no impairment loss been recognized in previous years.

 

Goodwill and other intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment, or more frequently if indicators of impairment exist.

 

Income taxes

 

Current income tax

 

Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the countries where the Company operates and generates taxable income. Current income tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

 

Tax Credits

 

The Company earns SR&ED tax credits with respect to its research and development expenses. The benefit of these SR&ED tax credits is recorded as a reduction of research and development expenses when their recoverability is reasonably expected. The SR&ED tax credits earned while the Company was a Canadian Controlled Private Corporation are refundable to the Company and are recorded as a receivable, while the tax credits earned now that the Company is a reporting/public company (as defined under Canadian tax laws) can be used to reduce future Canadian income taxes payable.

 

Deferred income tax:

 

Deferred income tax is recognized, using the asset and liability method, on temporary differences at the reporting date arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and recognized only to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred income tax assets and deferred income tax liabilities are offset, if deferred income taxes relate to the same taxable entity and the same taxation authority.

 

- 45 -

 

 

C. Research and Development, Patents and Licenses, etc.

 

Research costs are expensed when incurred. Development costs, including direct material, direct labor and contract service costs, are capitalized as intangible assets when: we can demonstrate that the technical feasibility of a project has been established; when we intend to complete the asset for use or sale and have the ability to do so; when the asset can generate probable future economic benefits; when the technical and financial resources are available to complete the development; and when we can reliably measure the expenditure attributable to the intangible asset during its development. After initial recognition, internally- generated intangible assets are recorded at cost less accumulated amortization and accumulated impairment losses. These costs are amortized on a straight-line basis over the estimated useful life. To date, we have not met the criteria to capitalize development costs.

 

The following table specifies the amounts spent on research and development for the fiscal years ended December 31, 2019, 2018 and 2017:

 

    Fiscal year
ended
December 31,
2019
    Fiscal year
ended
December 31,
2018
    Fiscal year
ended
December 31,
2017
 
Labor   $ 5,834,938     $ 3,581,970     $ 1,971,945  
Materials     4,311,686       3,393,295       2,763,355  
Government grants     (632,104 )     (1,409,229 )     (304,914 )
Total   $ 9,514,520     $ 5,566,036     $ 4,430,386  

 

D. Trend Information

 

Due to our short operating history, except as noted below, we are not aware of any trends that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Potential Impact of the COVID-19 Pandemic

 

In December 2019, a strain of novel coronavirus (now commonly known as COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread rapidly throughout many countries, and, on March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. Our manufacturing partner, Zongshen, reports that its operations have not been materially affected at this point, and we anticipate that Zongshen remains on track to begin producing the SOLO for deliveries to customers during 2020. However, significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our and Zongshen’s operations, and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations, however, we will continue to monitor the COVID-19 situation closely, and intend to follow health and safety guidelines as they evolve.

 

E. Off-Balance Sheet Arrangements

 

As of December 31, 2019, we did not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources or significant components of revenue or expenses.

 

F. Tabular Disclosure of Contractual Obligations

 

The Company adopted IFRS 16 on January 1, 2019 resulting in an increase of $2.1 million in total assets and total liabilities each for recognition of right-of-use assets and lease liabilities respectively, therefore, the contractual obligation as at December 31, 2019 is $1,463,676 (2018: $2,148,834).

 

G. Safe Harbor

 

Not applicable.

 

- 46 -

 

 

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Senior Management

 

Name, Province/State and Country of Residence   Age   Position   Director/Officer Since
Michael Paul Rivera, Arizona, U.S.   52   Chief Executive Officer and a director   August 12, 2019
Henry Reisner(1), British Columbia, Canada   56   President, Chief Operating Officer and a director   February 16, 2015
Bal Bhullar(2), British Columbia, Canada   50   Chief Financial Officer, Secretary and a director   November 19, 2018
Steven Sanders(3)(5), New York, U.S.   73   Chairman and a director   March 16, 2018
Jerry Kroll(4), British Columbia, Canada   60   Director   February 16, 2015
Luisa Ingargiola(5), Florida, U.S.   51   Director   March 16, 2018
Jack Austin(5), British Columbia, Canada   86   Director   November 20, 2018

Joanne Yan(5), British Columbia, Canada

Peter Savagian, California, U.S.

 

61

59

 

Director 

Director

 

March 6, 2019 

October 17, 2019

Isaac Moss, British Columbia, Canada 

  67   Chief Administrative Officer   May 15, 2018

 

(1) Mr. Reisner was appointed as President and Chief Operating Officer of our Company on May 15, 2018.

 

(2) Ms. Bhullar was appointed as Chief Financial Officer of our Company on November 19, 2018 and as a director of our Company on December 6, 2019.

 

(3) Mr. Sanders was appointed Chairman of our Company on October 20, 2018.

 

(4) Mr. Kroll was appointed President, Chief Executive Officer and a director of our Company effective February 16, 2015. Mr. Kroll resigned from his position as President on May 15, 2018 and as Chairman on October 20, 2018.  Mr. Kroll resigned as Chief Executive Officer on August 12, 2019.

 

(5) Members of the Company’s Audit Committee, the Nominating Committee, the Corporate Governance and Human Resources Committee, the Compensation Committee, the Enterprise Risk Oversight Committee and the Social Media Committee.

 

Business Experience

 

The following summarizes the occupation and business experience during the past five years or more for our directors and executive officers as of the date of this Annual Report:

 

Michael Paul Rivera, Chief Executive Officer and a director

 

Michael Paul Rivera joined ElectraMeccanica as Chief Executive Officer in August 2019. Before joining ElectraMeccanica, Mr. Rivera most recently served as President of Ricardo, USA, a division of Ricardo, PLC (LON: RCDO), a 100-year-old global engineering, strategic and environmental consultancy business with a value chain that includes the design, engineering, testing and product launch, of vehicle systems, as well as the niche manufacture of high performance products.

 

Previous to that, as Executive VP of Hybrid & Electric Systems at Ricardo, Mr. Rivera led the company’s evolution towards an efficient and sustainable low carbon future. Ricardo's engineering and design solutions have had a significant impact on technical developments throughout the auto sector, providing innovative solutions across engines, drivelines and hybrid systems, as well as supporting the development of emerging technologies such as autonomous and connected vehicles.

 

- 47 -

 

 

Mr. Rivera brings more than two decades of experience in technical consulting, engineering services, general management and global business development together with a deep understanding of engineering in the automotive, transport and energy industries to ElectraMeccanica.  

 

Henry Reisner, President, Chief Operating Officer and a director

 

Mr. Reisner is the current President of InterMeccanica, a subsidiary of our Company, which is an automobile manufacturer, and has held this position since 2001. He is experienced in the automotive industry and has a background in manufacturing.

 

Mr. Reisner holds a Bachelor of Arts degree in political science from the University of British Columbia from 1989.

 

Bal Bhullar, Chief Financial Officer. Secretary and a director

 

Bal Bhullar brings over 25 years of diversified business, financial and risk management experience as an executive in both private and public companies, in the industries of technology, manufacturing, block chain, e-commerce, resource, marine, energy, transportation and health/wellness.

 

Among some of the areas of experience, Ms. Bhullar brings expertise in financial and strategic planning, operational and risk management, regulatory compliance reporting, business expansion, product development and marketing, start-up operations, financial modeling, program development, corporate financing and corporate governance/internal controls.

 

Previously, Ms. Bhullar has held various positions including President of the BC Risk Management Association of BC, and has held positions as director and CFO of several private and public companies including the following:: CFO and a director of ElectraMeccanica; CEO/Founder of KISMET Nutrients/American e-Commerce Solutions LLC; CEO/Founder of BKB Management Ltd.; and an Advisory Board member of Enertopia Corp. CSE:TOP OTCQX:ENRT. Formerly, Ms. Bhullar held positions as CFO and a director of each of Lexaria Corp CSE:LXX OTCQX:LXRP, and . Enertopia Corp. CSE:TOP OTCQX:ENRT.

 

Ms. Bhullar is a Chartered Professional Accountant and Certified General Accountant and as well holds a CRM designation from Simon Fraser University and a diploma in Financial Management from British Columbia Institute of Technology.

 

Steven Sanders, Chairman and a director

 

Since January 2017, Steven Sanders has been Of Counsel to the law firm of Ortoli Rosenstadt LLP. From July 2007 until January 2017, Mr. Sanders was a Senior Partner of Ortoli Rosenstadt LLP. From January 1, 2004 until June 30, 2007, he was Of Counsel to the law firm of Rubin, Bailin, Ortoli, LLP. From January 1, 2001 to December 31, 2003, Mr. Sanders was counsel to the law firm of Spitzer & Feldman PC. Mr. Sanders also serves as a director of Helijet International, Inc. Additionally, Mr. Sanders has been a director at the American Academy of Dramatic Arts since October 2013 and has been a director of the Bay Street Theater since February 2015. Mr. Sanders received his JD from Cornell University and his BBA from The City College of New York.

 

Jerry Kroll, a director

 

Mr. Kroll has an extensive background working in small businesses and start-ups. Mr. Kroll’s career began when he managed the production, strategic planning and sales operations of Kroll Greenhouses, his family business. From there, Mr. Kroll served in other management roles in the floral and food services industries, overseeing the import/export of floral products, managing employees, managing food franchises and establishing supplier/distributor relationships.

 

In 1996 Mr. Kroll became involved in air racing as the owner of Vancouver International Air Races and Airshow, which featured large scale events attracting over 15,000 spectators and 31 corporate sponsors. From then on Mr. Kroll became increasingly involved in air racing and motor races. He eventually became the President and CEO of Corbin Motors Vancouver Inc. in 2001 where he organized the sales of the firm’s three-wheeled commuter vehicle in Canada.

 

- 48 -

 

 

In 2007 Mr. Kroll founded KleenSpeed Technologies, a firm focused on stationary energy storage products. Mr. Kroll began researching and developing an EV for the everyday commuter. As an entrepreneur, Mr. Kroll also founded Ascend Sportmanagement Inc., a sports property and technology management firm.

 

Mr. Kroll’s experience and skillset in innovative technology and start-ups, coupled with his passion for clean technology developments, allows Mr. Kroll to coordinate, manage and execute strategies for our Company.

 

Mr. Kroll is also actively involved in the Vancouver venture capital community and has been a member of the Vancouver Angel Technology Network, an investing and mentoring network for new technology start-ups, since 2003. From February 2013 to February 2015, Mr. Kroll was the President and CEO of Ascend Sports Management Inc.

 

Luisa Ingargiola, a director

 

Since 2017, Luisa Ingargiola has been the Chief Financial Officer of Avalon GloboCare, a leading biotech health care company that is developing cell based therapeutic technologies for cancer and neuromuscular disease. Ms. Ingargiola also serves as a director and Audit Chair of FTE Networks, a leading international network infrastructure solutions and cyber security company. Ms. Ingargiola was the Chief Financial Officer of MagneGas Corporation, from 2007 to 2016, and is a current board member. In addition, Ms. Ingargiola has served as Audit Chair for several public companies in the technology, environmental and energy industries. Ms. Ingargiola received her Bachelor’s degree in Finance from Boston University and a Masters of Health Administration from the University of Florida. 

 

Jack Austin, a director

 

Jack Austin brings a distinguished career of more than 50 years, including the teaching and practice of business law, experience as a corporate executive, and extensive experience in public policy. Mr. Austin served as a Deputy Minister, Principal Secretary to Prime Minister Pierre Elliot Trudeau, as a Senator representing British Columbia, and as a Cabinet Minister in the Governments of Prime Minister Pierre Trudeau and Prime Minister Paul Martin. Mr. Austin served as President of the Canada China Business Council from 1993 to 2000, and for the following three years as Vice-Chairman.

 

Mr. Austin retired from the Canadian Senate in 2007 and resumed his activity in the private sector, during which time he served on the advisory council of several leading academic institutions, including the Universities of British Columbia and Simon Fraser.

 

Joanne Yan, a director

 

Joanne Yan has 25 years of experience in advising and managing both publicly traded and private companies. Ms. Yan serves as the President of Joyco Consulting Services, which she founded in 1994 to provide consulting services in the areas of corporate structuring, business development and strategic planning initiatives. Ms. Yan recently established Alphaco Venture Corp., a capital pool company listed on the TSX Venture Exchange, and she acts as CEO and CFO of that company. Ms. Yan recently led a transaction that enabled an affiliate of Zongshen Industrial Group to acquire a 49% interest in Harbour Air, the largest sea plane operator in North America.

 

Ms. Yan has served on the Board of Directors of several public and private companies, including: (i) Zongshen, our strategic manufacturing partner, and three of its subsidiaries; and (ii) the Toronto Stock Exchange-listed Hanwei Energy Services Corp., which manufactures and sells high pressure fiberglass reinforced plastic pipes for international oil and gas and infrastructure industries in addition to producing oil & gas in Canada.

 

- 49 -

 

 

Peter Savagian, a director

 

Peter Savagian is a pioneer in automotive electrification, with a broad spectrum of expertise in the technology, development, launch and production of electric vehicles. In 1990 Mr. Savagian began work on the General Motors EV1, the first modern electric vehicle, and was named Chief Engineer of Electric Propulsion Systems in 1998. Later, as General Director of Electrified Propulsion, Mr. Savagian built and led multiple teams to innovate, engineer and execute the full range of electrified vehicle propulsion systems. Mr. Savagian’s accomplishments at General Motors include 13 electrified autos brought to production. Notably, these include the first modern Electric Vehicle, the GM EV1, the first plug-in hybrid, the Chevy Volt, and the industry’s first long-range value EV, the Chevy Bolt.

 

Mr. Savagian is presently Senior VP of Engineering at Ampaire, an electric aircraft startup company where he directs innovation, design, development and certification of electric propulsion systems and their integration into short-haul, fixed-wing electric aircrafts. Mr. Savagian holds 44 patents and has authored 17 technical publications in the field of electrification. Mr. Savagian holds a BS in Mechanical Engineering from the University of Wisconsin, an MS in Operations Research Engineering from the University of Southern California and an MBA from Duke University.

 

Isaac Moss, Chief Administrative Officer

 

Isaac Moss has 27 years of international multi-jurisdictional business, investment banking and corporate finance experience ranging across diverse industry sectors from media, forests products, hospitality, telecommunications, bio technology and green energy. Mr. Moss is experienced in scaling and managing businesses from start up through operations phase. He has held senior executive positions including President of a European specialty chemical company, CFO of a green energy company, COO of a software company and senior vice president of a mining company. Mr. Moss has been semi-retired since 2012 pursuing private business interests. He is a graduate of the University of Cape Town with a Bachelor of Social Science and Masters Degree in Public Administration. Mr. Moss also studied music, is an accomplished pianist and serves as an ambassador for the University of British Columbia’s School of Music.

 

Family Relationships

 

There are no family relationships among any of our directors and executive officers.

 

Term of Office

 

Each director of our company is to serve for a term of one year ending on the date of the subsequent annual meeting of stockholders following the annual meeting at which such director was elected. Notwithstanding the foregoing, each director is to serve until his successor is elected and qualified or until his death, resignation or removal. Our Board of Directors appoints our officers and each officer is to serve until his successor is appointed and qualified or until his or her death, resignation or removal.

 

Involvement in Certain Legal Proceedings

 

During the past ten years, none of our directors or executive officers have been the subject of the following events:

 

  1. a petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

 

  2. convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

  3. the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

 

  i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

 

- 50 -

 

 

  ii) engaging in any type of business practice; or

 

  iii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

 

  4. the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph 3.i in the preceding paragraph or to be associated with persons engaged in any such activity;

 

  5. was found by a court of competent jurisdiction in a civil action or by the SEC to have violated any Federal or State securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated;

 

  6. was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;

 

  7. was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

 

  i) any Federal or State securities or commodities law or regulation;

 

  ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or

 

  iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

  8. was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Director Independence

 

Our Board of Directors has determined that the following directors are “independent” as such directors do not have a direct or indirect material relationship with our Company. A material relationship is a relationship which could, in the view of our Board of Directors, be reasonably expected to interfere with the exercise of a director’s independent judgment.

 

  Steven Sanders;

 

  Luisa Ingargiola;

 

  Jack Austin;

 

  Joanne Yan; and

 

  Peter Savagian.

 

- 51 -

 

 

Code of Business Conduct and Ethics

 

On December 22, 2017, we adopted a Code of Conduct and Ethics that applies to our directors, officers and other employees.

 

B. Compensation

 

Compensation Discussion and Analysis

 

This section sets out the objectives of our Company’s executive compensation arrangements, our Company’s executive compensation philosophy and the application of this philosophy to our Company’s executive compensation arrangements. It also provides an analysis of the compensation design, and the decisions that the Board of Directors made in fiscal 2019 with respect to its Named Executive Officers (as herein defined). When determining the compensation arrangements for the Named Executive Officers, our Compensation Committee considers the objectives of: (i) retaining an executive critical to the success of the Company and the enhancement of shareholder value; (ii) providing fair and competitive compensation; (iii) balancing the interests of management and our Company’s shareholders; and (iv) rewarding performance, both on an individual basis and with respect to the business in general.

 

Benchmarking

 

Our Board of Directors established a Compensation Committee in March 2018. Prior to that, our Board of Directors acted as the Compensation Committee.

 

The Compensation Committee will consider a variety of factors when designing and establishing, reviewing and making recommendations for executive compensation arrangements for all our executive officers. The Compensation Committee does not intend to position executive pay to reflect a single percentile within the industry for each executive. Rather, in determining the compensation level for each executive, the Compensation Committee will look at factors such as the relative complexity of the executive’s role within the organization, the executive’s performance and potential for future advancement and pay equity considerations.

 

Elements of Compensation

 

The compensation paid to Named Executive Officers in any year consists of two primary components:

 

  (a) base salary; and
     
  (b) long-term incentives in the form of stock options granted under our Stock Option Plan (as herein defined).

 

The key features of these two primary components of compensation are discussed below:

 

Base Salary

 

Base salary recognizes the value of an individual to our Company based on his or her role, skill, performance, contributions, leadership and potential. It is critical in attracting and retaining executive talent in the markets in which the Company competes for talent. Base salaries for the Named Executive Officers are intended to be reviewed annually. Any change in base salary of a Named Executive Officer is generally determined by an assessment of such executive’s performance, a consideration of competitive compensation levels in companies similar to the Company (in particular, companies in the EV industry) and a review of the performance of the Company as a whole and the role such executive officer played in such corporate performance.

 

- 52 -

 

 

Stock Option Awards

 

The Company provides long-term incentives to Named Executive Officers in the form of stock options as part of its overall executive compensation strategy. Our Compensation Committee believes that stock option grants serve the Company’s executive compensation philosophy in several ways: firstly, it helps attract, retain, and motivate talent; secondly, it aligns the interests of the Named Executive Officers with those of the shareholders by linking a specific portion of the officer’s total pay opportunity to the share price; and finally, it provides long-term accountability for Named Executive Officers.

 

Risks Associated with Compensation Policies and Practices

 

The oversight and administration of the Company’s executive compensation program requires the Compensation Committee to consider risks associated with the Company’s compensation policies and practices. Potential risks associated with compensation policies and compensation awards are considered at annual reviews and also throughout the year whenever it is deemed necessary by the Compensation Committee.

 

The Company’s executive compensation policies and practices are intended to align management incentives with the long-term interests of the Corporation and its shareholders. In each case, the Corporation seeks an appropriate balance of risk and reward. Practices that are designed to avoid inappropriate or excessive risks include (i) financial controls that provide limits and authorities in areas such as capital and operating expenditures to mitigate risk taking that could affect compensation, (ii) balancing base salary and variable compensation elements and (iii) spreading compensation across short and long-term programs.

 

Compensation Committee

 

Our Compensation Committee consists of Steven Sanders, Luisa Ingargiola, Jack Austin and Joanne Yan and is chaired by Luisa Ingargiola. Each of the Compensation Committee members satisfies the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of Nasdaq. Our Compensation Committee will assist the Board of Directors in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. No officer may be present at any committee meeting during which such officer’s compensation is deliberated upon.

 

The Compensation Committee’s responsibility is to formulate and make recommendations to our directors in respect of compensation issues relating to our directors and executive officers. Without limiting the generality of the foregoing, the Compensation Committee has the following duties:

 

  (a) to review the compensation philosophy and remuneration policy for our executive officers and to recommend to our directors changes to improve our ability to recruit, retain and motivate executive officers;

 

  (b) to review and recommend to the Board of Directors the retainer and fees, if any, to be paid to our directors;

 

  (c) to review and approve corporate goals and objectives relevant to the compensation of the Chief Executive Officer (the “CEO”), evaluate the CEO’s performance in light of those corporate goals and objectives, and determine (or make recommendations to our directors with respect to) the CEO’s compensation level based on such evaluation;

 

  (d) to recommend to our directors with respect to non-CEO officer and director compensation including reviewing management’s recommendations for proposed stock options and other incentive-compensation plans and equity-based plans, if any, for non-CEO officer and director compensation and make recommendations in respect thereof to our directors;

 

  (e) to administer the Stock Option Plan approved by our directors in accordance with its terms including the recommendation to our directors of the grant of stock options in accordance with the terms thereof; and

 

  (f) to determine and recommend for the approval of our directors’ bonuses to be paid to our executive officers and employees and to establish targets or criteria for the payment of such bonuses, if appropriate. Pursuant to the mandate and terms of reference of the Compensation Committee, meetings of the Compensation Committee are to take place at least once per year and at such other times as the Chair of the Compensation Committee may determine.

 

- 53 -

 

 

 

Summary Compensation Table

 

The following table sets forth all annual and long-term compensation for services in all capacities to the Company during the fiscal periods indicated in respect of the executive officers set out below (the “Named Executive Officers”) and includes amounts paid to affiliates of the Named Executive Officers for services provided by the Named Executive Officers:

 

Named
Executive
Officer and
Principal 
Position
  Year    

Salary 

($)

   

Share-
based
awards 

($)

   

Option-
based
awards 

($)(1)

   

Annual
Incentive
Plan 

($)

   

Long-
term
Incentive
Plan 

($)

   

Pension
Value 

($)

    All Other
Compensation
($)
    Total
Compensation
($)
 
Michael Paul Rivera(2),     2019       156,018       Nil       3,740,145       51,353       Nil       Nil       Nil       3,947,516  
Chief Executive Officer     2018       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a  
      2017       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a  
Jerry Kroll(3),     2019       300,000       Nil       Nil       Nil       Nil       Nil       Nil       300,000  
former President and Chief Executive Officer     2018       140,000       Nil       123,726       Nil       Nil       Nil       Nil       263,726  
      2017       60,000       Nil       358,045       Nil        Nil       Nil       Nil       418,694  
Bal Bhullar(4),     2019       196,667       Nil       2,289,225       36,000       Nil       Nil       3,600       2,252,492  
Chief Financial Officer and Secretary     2018       20,000       Nil       Nil       Nil       Nil       Nil       450       20,450  
      2017       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a  
Isaac Moss(5),     2019       233,336       Nil       1,391,404       25,000       Nil       Nil       Nil       1,649,740  
Chief Administrative Officer     2018       94,664       Nil       Nil       Nil       Nil       Nil       Nil       94,664  
      2017       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a  
Henry Reisner(6),     2019       180,000       Nil       Nil       Nil       Nil       Nil       Nil       180,000  
President and Chief Operating Officer     2018       126,700       Nil       39,430       Nil       Nil       Nil       Nil       166,130  
      2017       60,000       Nil       69,757       Nil       Nil       Nil       Nil       130,450  
Iain Ball(7),     2019       90,000       Nil       380,519       Nil       Nil       Nil       Nil       470,519  
former Vice-President, Finance     2018       70,000       Nil       29,936       Nil       Nil       Nil       Nil       99,936  
      2017       60,000       Nil       37,23       Nil       Nil       Nil       Nil       97,883  
Ed Theobald(8),     2019       32,000       Nil       Nil       Nil       Nil       Nil       Nil       32,000  
former General Manager Sales and Dealerships     2018       96,000       Nil       29,936       Nil       Nil       Nil       Nil       125,936  
      2017       60,000       Nil       37,235       Nil       Nil       Nil       Nil       97,235  
Lorenzo Caprilli(9),     2019       87,567       Nil       Nil       Nil       Nil       Nil       Nil       87,567  
former Executive Vice-President Sales and Marketing     2018       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a  
      2017       n/a       n/a       n/a       n/a       n/a       n/a       n/a       n/a  

 

- 54 -

 

 

 (1) Option-based awards represent the fair value of stock options granted in the year under our Stock Option Plan. The fair value of stock options granted is calculated as of the grant date using the Black-Scholes option pricing model. For discussion of the assumptions made in the valuation, refer to Note 11 to our financial statements for the fiscal year ended December 31, 2019.
   
(2)  Mr. Rivera was appointed CEO and a director of our Company on August 12, 2019.
   
(3) Mr. Kroll was appointed the President and CEO of our Company on February 16, 2015 and served as the Secretary of our Company from June 11, 2015 to August 8, 2016. On May 15, 2018, Mr. Kroll resigned from his position as President of our Company and on August 12, 2019 he resigned as CEO.
   
(4) Ms. Bhullar was appointed CFO and Secretary of our Company on November 19, 2018 and as a director on December 6, 2019.
   
(5) Mr. Moss was appointed Chief Administrative Officer of our Company on May 15, 2018.
   
(6) Mr. Ball was appointed Vice-President, Finance of our Company on June 27, 2016 and resigned effective on June 30, 2019.
   
(7) Mr. Reisner was appointed Chief Operating Officer of our Company on February 16, 2015 and on May 15, 2018 he was appointed as President of our Company.
   
(8) Mr. Theobald was appointed General Manager of our Company on February 16, 2015 and resigned effect on June 30, 2019.
   
(9) Lorenzo Caprilli was appointed Executive Vice-President Sales and Marketing of our Company on May 1, 2019 and resigned effect on November 30, 2019.

 

Executive Compensation Agreements

 

Michael Paul Rivera

 

On May 17, 2019, the Company entered into an employment agreement with Michael Paul Rivera (the “Rivera Agreement”), which is dated for reference effective August 12, 2019. Effective on January 1, 2020 (the “Effective Date” therein), with an execution date of February 26, 2020, Mr. Rivera and the Company entered into an amending agreement to the Rivera Agreement (the “Amended Rivera Agreement”).

 

In accordance with the Amended Rivera Agreement, the Rivera Agreement commenced on the Effective Date and continues until the third anniversary of the Effective Date, unless terminated earlier, provided that upon the third anniversary date the Rivera Agreement shall be deemed to be automatically extended upon the same terms and conditions. Either party may provide 60 days prior written notice of its intention not to extend the term. Pursuant to the terms of the Rivera Agreement, Mr. Rivera will be employed as the Chief Executive Officer and report to the Board of Directors of the Company (the “Board of Directors”), and shall have the duties, authority and responsibilities as shall be determined by the Board of Directors from time to time. Mr. Rivera will devote substantially all of his business time and attention to the performance of his duties under the Rivera Agreement and will not engage in any business, profession or occupation for compensation or otherwise which would conflict or interfere with the performance of such services either directly or indirectly without consent of the majority of the Board of Directors. During the term of his employment Mr. Rivera will not engage in any Prohibited Activity (as defined in the Rivera Agreement), provided, however, that Mr. Rivera shall be permitted to purchase and own less than 5% of the publicly traded securities of any corporation if such ownership represents a passive investment and Mr. Rivera is not a controlling person of, or a member of a group that controls, such corporation.

 

- 55 -

 

 

Under the Rivera Agreement the Company will pay Mr. Rivera an annual base salary of USD$300,000.00 (the “Base Salary”) in periodic installments in accordance with the Company’s customary payroll practices. Mr. Rivera’s Base Salary is subject to increase based on periodic reviews at the discretion of the Board of Directors. Mr. Rivera shall be eligible to receive an annual bonus of not less than USD$150,000 for fiscal 2020, which will paid by at the sole and absolute discretion of the Compensation Committee. Mr. Rivera will be entitled to participate in all benefit plans, practices and programs maintained by the Company, as in effect from time to time, and including, but not limited to, the following: (a) reimbursements for payments to participate in one U.S. health insurance plan and one U.S. dental plan; and (b) no less than 25 paid vacation during each full fiscal year of Mr. Rivera’s employment (pro-rated for any partial year of employment).

 

The Rivera Agreement may be terminated upon either party’s failure to renew the Rivera Agreement, by the Company for Cause (as defined therein) or by the Employee without Good Reason (as defined therein). Following any such termination, the Company will have no further obligations under the Rivera Agreement other than the Company’s obligations to, within two weeks following a termination date, provide Mr. Rivera with: (a) any accrued but unpaid Base Salary and accrued but unused vacation; (b) reimbursements for unreimbursed business expenses that are reimbursable in accordance with the Company’s expense reimbursement policy; and (c) employee benefits, if any, to which Mr. Rivera may be entitled to under the Company’s employee benefit plans as of the date of termination.

 

The Company also has the right to terminate the Rivera Agreement without Cause and Mr. Rivera has the right to terminate the Rivera Agreement for Good Reason. In the event of such termination, Mr. Rivera shall be entitled to receive: (a) all Accrued Amounts (as defined therein); (b) severance pay in equal installments, which are in the aggregate equal to the sum of Mr. Rivera’s Base Salary and Target Bonus (as defined therein) for two years from the date of termination of the Rivera Agreement; (c) the Company shall reimburse Mr. Rivera for up to USD$1,800.00 of the monthly U.S. health insurance premium paid by Mr. Rivera; and (d) the Company shall pay Mr. Rivera an amount equal to the greater of (i) the average STIP (as defined therein) paid to Mr. Rivera for the previous two years and (ii) 80% of Mr. Rivera’s target annual STIP for the current fiscal year of the Company if Mr. Rivera has been employed by the Company for less than two years at the date of termination.

 

The Rivera Agreement will automatically terminate upon the death of Mr. Rivera and the Company may terminate the Rivera Agreement on account of Mr. Rivera’s Disability (as therein defined). In the event of such termination, Mr. Rivera (or his estate or beneficiaries, as the case may be) shall be entitled to receive the Accrued Amounts. Notwithstanding any provision of the Rivera Agreement, all payments made in connection with Mr. Rivera’s Disability will be provided in a manner consistent with state and federal law.

 

Effective on January 1, 2020, Mr. Rivera and the Company agreed to amend the Rivera Agreement and entered into the Amended Rivera Agreement. Pursuant to the Amended Rivera Agreement, Mr. Rivera will be eligible to participate in any STIP or LTIP (each as defined therein) introduced by the Company from time to time and the terms of such participation shall be determined by the Board of Directors. Mr. Rivera will also be entitled to five weeks’ paid vacation per calendar year (pro-rated for partial years) in accordance with the Company’s vacation policies as in effect from time to time.

 

The Amended Rivera Agreement also provides that Mr. Rivera may provide notice to the Company of any Change In Control of the Company (as defined therein) by providing not less than 45 calendar days’ notice in writing to the Company after the Change In Control has been effected; provided, however, that the Company will be entitled to carefully review and object to any said Change In Control designation by the Executive within 15 calendar days of said notice; the final determination of which, upon dispute, if any, to be determined by arbitration under California law in Los Angeles, California. Unless otherwise determined by mutual agreement of the parties or by arbitration as provided for therein, within 60 days of the completion of the Change In Control the Company shall be obligated to pay Mr. Rivera a one-time fee in cash in the amount of USD$3,000,000 whether the Rivera Agreement is otherwise terminated or otherwise at the time of the completion of the Change In Control.

 

- 56 -

 

 

Henry Reisner

 

On January 15, 2019, our Board of Directors approved the entering into of an executive employment agreement with Henry Reisner, which is dated for reference effective on January 1, 2019, and which then superseded our Company’s prior agreement with Mr. Reisner, dated July 1, 2016, which had been amended in August of 2018. On January 1, 2020 (the “Effective Date” therein), the Company entered into a new executive employment agreement with Henry Reisner (the “Reisner Agreement”) which superseded the January 15, 2019 executive employment agreement with Mr. Reisner.

 

The Reisner Agreement commenced as of its Effective Date and will continue for a period of three years unless terminated in accordance with its terms. The Company may notify Mr. Reisner in writing at least 30 calendar days prior to the end of the term of its intent to renew the Reisner Agreement, any such renewal being on the same terms and conditions as provided in the Reisner Agreement. Pursuant to the terms of the Reisner Agreement, Mr. Reisner will continue to be employed as our Chief Operating Officer and President and will: (a) devote reasonable efforts and attentions to the business and affairs of the Company; (b) perform the Services (as defined in the Reisner Agreement) in a competent and efficient manner and in manner consistent with his obligations to the Company and in compliance with all the Company policies; and (c) promote the interests and goodwill of the Company. Mr. Reisner will not, directly or indirectly, anywhere in Canada or the United States, either individually or in partnership, jointly or in conjunction with any person, firm, association, syndicate, company, whether as agent, shareholder, employee, consultant, or in any manner whatsoever, engage in any business the same or similar to or in competition with that of the Company’s Business (as defined therein). However, Mr. Reisner may hold or become beneficially interest in up to 1% of any class of securities in any company provided that such class of securities are listed on a recognized stock exchange in Canada or the United States.

 

The Company will pay Mr. Reisner a monthly base salary from the Effective Date of CAD$18,333.34 (the “Monthly Salary”). The Monthly Salary is subject to increase based on periodic reviews at the discretion of the Company. The Board of Directors, in its sole discretion, may consider the payment of a reasonable industry standard bonus to Mr. Reisner based upon the performance of the Company and upon the achievement by Mr. Reisner of reasonable management objectives. Mr. Reisner will be eligible to receive a one-time lump sum payment of CAD$25,000.00 by delivering on the Company’s objective of having the Generation 3 SOLO begin production by May 15, 2020. Mr. Reisner will be eligible to participate in benefits, perquisites and allowances, as such plans and policies may be amended from time to time, and including, but not limited to: (a) group insurance coverage for dental, health, and life insurance; and (b) no less than five weeks paid vacation per calendar year (the “Vacation”), such Vacation to extend for such periods and to be taken at such intervals as shall be appropriate and consistent with the proper performance of Mr. Reisner’s duties.

 

The Company may grant Mr. Reisner stock options under its Stock Option Plan (as defined therein) from time to time in its absolute discretion. Any stock options granted will be in accordance with provisions, and including, but not limited to, the following: (a) the exercise of stock options shall be subject to, at all times, to such vesting and resale provisions as may then be contained in the Company’s Stock Option Plan as may be finally determined by the Board of Directors acting reasonably; (b) Mr. Reisner in no event make any disposition of all or any portion of stock options unless the requirements as provided in the Reisner Agreement have been satisfied; and (c) the Company shall have an independent committee of the Board approve each grant of stock options and, if required, by the applicable regulatory authorities and the shareholders of the Company.

 

The Company has the right to and may terminate the Reisner Agreement at any time for Just Cause (as defined therein). Following any such termination, the Company shall pay to Mr. Reisner an amount equal to the Monthly Salary and Vacation pay earned and payable to Mr. Reisner up to the date of termination, and Mr. Reisner shall have no entitlement to any further notice of termination, payment in lieu of notice of termination, severance, continuation of benefits or any damages whatsoever.

 

- 57 -

 

 

The Company also has the right to terminate the Reisner Agreement without Just Cause and for any reason or no reason whatsoever by providing written notice to Mr. Reisner specifying the effective date of termination. Mr. Reisner may terminate the Reisner Agreement at any time in connection with a Change of Control (as defined therein) of the Company by providing not less than 90 calendar days’ notice in writing of said date of termination to the Company after the Change of Control has been effected. In the event that the Reisner Agreement is terminated by the Company without Just Cause, or by Mr. Reisner as a result of a Change of Control, the Company will have the obligation to: (a) pay Mr. Reisner an amount equal to the Monthly Salary and Vacation payable to Mr. Reisner up to the date of termination, together with any Vacation pay required to comply with applicable employment standards legislation; (b) pay Mr. Reisner his annual performance Bonus entitlements (as defined therein) calculated pro rata for the period up to the date of termination based on the achievement of the objectives to such date; (c) pay severance equal to 12 months’ Monthly Salary plus an additional one month’s Monthly Salary for each completed full year of employment with the Company; and (d) subject to the Company’s Stock Option Plan and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Mr. Reisner to exercise any unexercised and fully vested stock options at any time during three months from the date of termination.

 

Mr. Reisner may terminate the Reisner Agreement at any time by providing written notice of resignation to the Board of Directors specifying the date of termination (such date being not less than three months after the date of notice). In the event the Reisner Agreement is terminated by Mr. Reisner’s resignation, the Company shall pay to Mr. Reisner an amount equal to the Monthly Salary and Vacation pay earned and payable to Mr. Reisner up to the date of termination, and Mr. Reisner shall have no entitlement to any further notice of termination, payment in lieu of notice of termination, severance, continuation of benefits or any damages whatsoever.

 

The Reisner Agreement will automatically terminate upon the death of Mr. Reisner and, upon such termination, the Company’s obligations under the Reisner Agreement will immediately terminate other than the Company’s obligations to: (a) pay Mr. Reisner’s estate an amount equal to the Monthly Salary and Vacation payable to Mr. Reisner up to the date of termination; (b) pay Mr. Reisner’s estate his annual performance Bonus (entitlements) calculated pro rata for the period up to the date of termination based on the achievement of the objectives to such date; and (c) subject to the Company’s Stock Option Plan and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Mr. Reisner’s estate to exercise any unexercised and fully vested stock options at any time during three months from the date of termination.

 

The Company may terminate the Reisner Agreement at any time as a result of Total Disability (as defined therein) by providing 30 calendar days’ written notice. In the event of such termination, the Company’s obligations under the Reisner Agreement will immediately terminate other than the Company’s obligations to (a) pay Mr. Reisner’s an amount equal to the Monthly Salary and Vacation payable to Mr. Reisner up to the date of termination; (b) pay Mr. Reisner his annual performance Bonus entitlements calculated pro rata for the period up to the date of termination based on the achievement of the objectives to such date; (c) subject to provisions of any Company plans and arrangements under which Benefits (as defined therein) are being provided to Mr. Reisner, continue each of Mr. Reisner’s Benefits in full force and effect for a period of six months from the date of termination; and (d) subject to the Company’s Stock Option Plan and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Mr. Reisner to exercise any unexercised and fully vested stock options at any time during three months from the date of termination.

 

Bal Bhullar

 

On January 15, 2019, our Board of Directors approved the entering into of a consulting agreement with BKB Management Ltd., a company under the control and direction of Bal Bhullar, our Chief Executive Officer (the “Consulting Agreement”), which is dated for reference effective on January 1, 2019, and which superseded our Company’s prior offer letter with Ms. Bhullar, dated October 19, 2018. On December 19, 2019, the Company entered into a new executive employment agreement with Ms. Bhullar (the “Bhullar Agreement”) which is effective January 1, 2020 (the “Effective Date” therein), and which superseded the Consulting Agreement.

 

The Bhullar Agreement commenced as of its Effective Date and will continue for a period of three years unless terminated in accordance with its terms. The Bhullar Agreement shall renew automatically if not specifically terminated by the Company notifying Ms. Bhullar in writing at least 90 calendar days prior to the end of the term of its intent to not renew the Bhullar Agreement.

 

- 58 -

 

 

Pursuant to the terms of the Bhullar Agreement, Ms. Bhullar will continue to be employed as our Chief Financial Officer and will: (a) devote reasonable efforts and attentions to the business and affairs of the Company; (b) perform the Services (as defined in the Bhullar Agreement) in a competent and efficient manner and in manner consistent with her obligations to the Company and in compliance with all the Company policies; and (c) promote the interests and goodwill of the Company. Ms. Bhullar will not, directly or indirectly, anywhere in North America, either individually or in partnership, jointly or in conjunction with any person, firm, association, syndicate, company, whether as agent, shareholder, employee, consultant, or in any manner whatsoever, engage in any business the same or similar to or in competition with that of the Company’s Business (as defined therein). However, Ms. Bhullar may hold or become beneficially interest in up to 1% of any class of securities in any company provided that such class of securities are listed on a recognized stock exchange in Canada or the United States.

 

The Company will pay Ms. Bhullar a monthly base salary from the Effective Date of CAD$23,333.33 (the “Monthly Salary”). The Monthly Salary is subject to increase based on periodic reviews at the discretion of the Company. The Board of Directors, in its sole discretion, may consider the payment of a reasonable industry standard bonus to Ms. Bhullar based upon the performance of the Company and upon the achievement by Ms. Bhullar of reasonable management objectives. Ms. Bhullar will be eligible to participate in benefits, perquisites and allowances, as such plans and policies may be amended from time to time, and including, but not limited to: (a) group insurance coverage for dental, health and life insurance; (b) an automobile expense allowance of CAD$300.00 per month; (c) professional dues necessary to maintain Ms. Bhullar’s professional designation; and (d) no less than five weeks paid vacation per calendar year (the “Vacation”), such Vacation to extend for such periods and to be taken at such intervals as shall be appropriate and consistent with the proper performance of Ms. Bhullar’s duties.

 

The Company may grant Ms. Bhullar stock options under its Stock Option Plan (as defined therein) from time to time in its absolute discretion. Any stock options granted will be in accordance with provisions, and including, but not limited to, the following: (a) the exercise of stock options shall be subject to, at all times, to such vesting and resale provisions as may then be contained in the Company’s Stock Option Plan as may be finally determined by the Board of Directors acting reasonably; (b) Ms. Bhullar in no event make any disposition of all or any portion of stock options unless the requirements as provided in the Bhullar Agreement have been satisfied; and (c) the Company shall have an independent committee of the Board of Directors approve each grant of stock options and, if required, by the applicable regulatory authorities and the shareholders of the Company.

 

The Company has the right to and may terminate the Bhullar Agreement at any time for Just Cause (as defined therein). Following any such termination, the Company shall pay to Ms. Bhullar an amount equal to the Monthly Salary and Vacation pay earned and payable to Ms. Bhullar up to the date of termination, and Ms. Bhullar shall have no entitlement to any further notice of termination, payment in lieu of notice of termination, severance, continuation of benefits or any damages whatsoever.

 

The Company also has the right to terminate the Bhullar Agreement without Just Cause and for any reason or no reason whatsoever by providing written notice to Ms. Bhullar specifying the effective date of termination. Ms. Bhullar may terminate the Bhullar Agreement at any time in connection with a Change of Control (as defined therein) of the Company by providing not less than 90 calendar days’ notice in writing of said date of termination to the Company after the Change of Control has been effected. In the event that the Bhullar Agreement is terminated by the Company without Just Cause, or by Ms. Bhullar as a result of a Change of Control, the Company will have the obligation to: (a) pay Ms. Bhullar an amount equal to the Monthly Salary and Vacation payable to Ms. Bhullar up to the date of termination, together with any Vacation pay required to comply with applicable employment standards legislation; (b) pay Ms. Bhullar her annual performance Bonus entitlements (as defined therein) calculated pro rata for the period up to the date of termination based on the achievement of the objectives to such date; (c) severance equal to 24 months’ Monthly Salary for each completed year of employment with the Company; (d) subject to provisions of any Company plans and arrangements under which Benefits (as defined therein) are being provided to Ms. Bhullar, continue each of Ms. Bhullar’s Benefits in full force and effect for a period of 12 months from the date of termination; (e) the Company shall pay Ms. Bhullar an amount equal to the greater of (i) the average STIP (as defined therein) paid to Ms. Bhullar for the previous two years and (ii) 80% of Ms. Bhullar’s target annual STIP for the current fiscal year of the Company if Ms. Bhullar has been employed by the Company for less than two years at the date of termination; and (f) subject to the Company’s Stock Option Plan and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Ms. Bhullar to exercise any unexercised and fully vested stock options at any time during the Termination Option Exercise Period (as defined therein).

 

- 59 -

 

 

The Company may terminate the Bhullar Agreement by notifying Ms. Bhullar in writing at least 90 calendar days prior to the end of the term of its intent to not renew the Bhullar Agreement. In the event of such termination, the Company will be obligated to provide Ms. Bhullar with (a) through (f) noted immediately above, however, the Company will only pay Ms. Bhullar severance equal to four months of Monthly Salary for each completed full year of employment with the Company.

 

Ms. Bhullar may terminate the Bhullar Agreement at any time by providing written notice of resignation to the Board of Directors specifying the date of termination (such date being not less than three months after the date of notice). In the event the Bhullar Agreement is terminated by Ms. Bhullar’s resignation, the Company shall pay to Ms. Bhullar an amount equal to the Monthly Salary and Vacation pay earned and payable to Ms. Bhullar up to the date of termination, and Ms. Bhullar shall have no entitlement to any further notice of termination, payment in lieu of notice of termination, severance, continuation of benefits or any damages whatsoever.

 

The Bhullar Agreement will automatically terminate upon the death of Ms. Bhullar and, upon such termination, the Company’s obligations under the Bhullar Agreement will immediately terminate other than the Company’s obligations to: (a) pay Ms. Bhullar’s estate an amount equal to the Monthly Salary and Vacation payable to Ms. Bhullar up to the date of termination; (b) pay Ms. Bhullar’s estate her annual performance Bonus entitlements calculated pro rata for the period up to the date of termination based on the achievement of the objectives to such date; and (c) subject to the Company’s Stock Option Plan and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Ms. Bhullar’s estate to exercise any unexercised and fully vested stock options at any time during the Termination Option Exercise Period from the date of termination.

 

The Company may terminate the Bhullar Agreement at any time because of Total Disability (as defined therein) by providing 30 calendar days’ written notice. In the event of such termination, the Company’s obligations under the Bhullar Agreement will immediately terminate other than the Company’s obligations to (a) pay Ms. Bhullar an amount equal to the Monthly Salary and Vacation payable to Ms. Bhullar up to the date of termination; (b) pay Ms. Bhullar her annual performance Bonus entitlements calculated pro rata for the period up to the Date of Termination based on the achievement of the objectives to such date; (c) subject to provisions of any Company plans and arrangements under which Benefits are being provided to Ms. Bhullar, continue each of Ms. Bhullar’s Benefits in full force and effect for a period of 12 months from the date of termination; and (d) subject to the Company’s Stock Option Plan and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Ms. Bhullar to exercise any unexercised and fully vested stock options at any time during the Termination Option Exercise Period from the date of termination.

 

Jerry Kroll

 

On January 15, 2019, our Board of Directors approved the entering into of an executive employment agreement with Jerry Kroll (the “Kroll Agreement”), which is dated for reference effective on January 1, 2019, and which superseded the Company’s prior agreement with Mr. Kroll, dated July 1, 2016, which had been amended in August of 2018. On August 16, 2019 the Company entered into a continuing relationship agreement with Jerry Kroll (the “Continuing Relationship Agreement”), which superseded the Kroll Agreement.

 

Pursuant to the terms of the Continuing Relationship Agreement, the Company has no further obligations under the Kroll Agreement other than to: (a) pay Mr. Kroll’s Executive Base Salary (as defined in the Kroll Agreement) accrued to August 16, 2019; (b) pay Mr. Kroll any accrued and unused vacation; (c) reimburse Mr. Kroll for expenses incurred up to August 16, 2019 that are reimbursable pursuant to the Kroll Agreement; and (d) pay Mr. Kroll an amount equal to the Base Salary (as defined in the Kroll Agreement) for a one year period payable in 12 installments.

 

Pursuant to the terms of the Continuing Relationship Agreement, Mr. Kroll will continue to conceptualize new concepts for products and business with the consent, and under the direction of, the Company’s Chief Executive Officer and/or the Company’s Board of Directors. Mr. Kroll will not have the authority to bind the Company nor will Mr. Kroll make any agreements or representations on behalf of the Company without the Company’s prior written consent. Mr. Kroll may be engaged or employed in any other business, trade, profession, or activity, which does not (i) involve electric vehicles or their components, including their manufacturing, distribution, marketing, or sale, or (ii) place him in a conflict of interest with the Company. During the term of the Continuing Relationship Agreement and for a period of 12 months following expiration or termination, Mr. Kroll will not make any solicitation to employ the personnel of the Company (including its subsidiaries) without prior written consent of the Company.

 

- 60 -

 

 

Mr. Kroll will not be eligible to participate in any vacation, group medical or life insurance, disability, profit sharing, or retirement benefits, or any other fringe benefits or benefit plans offered by the Company to its employees. Though Mr. Kroll will not be an employee of the Company, Mr. Kroll will agree to adhere to the Company’s policies governing media and social media activities and the Company’s Code of Ethics.

 

Pursuant to the Continuing Relationship Agreement, the Company will grant Mr. Kroll 1,250,000 stock options to acquire common shares of the Company which shall (i) be exercisable at a price of USD$2.45 per option and (ii) vest in 12 equal installments. The 18,966 stock options previously granted to Mr. Kroll that had not vested as of August 16, 2019, will be deemed to be fully vested and remain exercisable by Mr. Kroll.

 

The Continuing Relationship Agreement will terminate upon its one-year anniversary unless terminated earlier. The Continuing Relationship Agreement may be extended with the mutual consent of the Company and Mr. Kroll. The Continuing Relationship Agreement may be terminated by the Company and Mr. Kroll, effective immediately upon 60 days’ written notice, if the other party breaches the Continuing Relationship Agreement. Upon expiration or termination of the Continuing Relationship Agreement, Mr. Kroll will have five calendar days following expiration or termination to: (a) deliver to the Company all hardware, software, tools, equipment, or other materials provided by the Company; (b) deliver to the Company all tangible documents and materials containing, reflecting, incorporating or based on Confidential Information (as defined in the Continuing Relationship Agreement); (c) permanently erase all Confidential Information (as defined therein) from his computer systems; and (d) certify to the Company that he has complied with the requirements noted above.

 

Isaac Moss

 

On January 15, 2019, our Board of Directors approved the entering into of a new independent contractor agreement with Isaac Moss (the “Moss Agreement”), which is dated for reference effective on January 1, 2019 (the “Effective Date”), and which superseded our Company’s prior agreement with Mr. Moss, dated December 1, 2017, which had been amended in August of 2018.

 

The term of the Moss Agreement commenced on its Effective Date and continues for a period of two years unless terminated as therein provided. The Moss Agreement automatically renews for a further term of one year unless either party provides written notice of intent not to renew 30 days prior to expiration of the Moss Agreement.

 

Under the Moss Agreement the Company has agreed to pay Mr. Moss an annual fee of $200,000 (the “Fee”), and the Fee is payable in equal monthly instalments by no later than the 30th day of each month. Effective May 1, 2019, Mr. Moss annual fee was amended to $250,000.

 

The Company has the right to and may terminate the Moss Agreement for Cause (as defined in the Moss Agreement) immediately upon written notice to Mr. Moss. Following any such termination for Cause (as defined therein), the Company will have no further obligations to Mr. Moss under the Moss Agreement other than to: (a) pay Mr. Moss all unpaid Fees and applicable taxes thereon due to Mr. Moss at time of termination; and (b) reimburse Mr. Moss for any expenses incurred through the termination date.

 

The Company will have the right to and may terminate the Moss Agreement at any time, for any reason or for no reason without Cause, immediately upon notice to Mr. Moss. Following any such termination of the Moss Agreement without Cause, the Company will have no further obligation to Mr. Moss under the Moss Agreement other than the Company’s obligations to: (a) pay Mr. Moss all remaining unpaid Fees and applicable taxes thereon due to the termination date of the Moss Agreement; and (b) to reimburse Mr. Moss for any expenses incurred through the termination date. In addition, any stock options granted to Mr. Moss will accelerate and vest at the date of termination.

 

- 61 -

 

 

 

If at any time during the term of the Moss Agreement there is a Change of Control (as defined therein) and, within 12 months of such Change of Control: (i) there is a material reduction in Mr. Moss’s title or a material reduction in his duties or responsibilities such that Mr. Moss gives notice of his intention to terminate the Moss Agreement as a result thereof; (ii) there is a material adverse change in Mr. Moss’s Fees such that Mr. Moss gives notice of his intention to terminate the Moss Agreement as a result thereof; or (iii) Mr. Moss’s engagement is terminated by the Company unless such termination is as a result of Mr. Moss’s material breach of the Moss Agreement; then Mr. Moss will be entitled to receive from the Company: (a) a cash amount equal to two years of the Fees as in effect at the termination of the Moss Agreement; and (b) all stock options previously granted by the Company to Mr. Moss which have not vested shall be deemed to vest and all stock options held by Mr. Moss shall remain exercisable until the earlier of their expiration date or 90 days from the termination date.

 

Stock Option Plans and Stock Options

 

The following table sets forth, as at December 31, 2019, the equity compensation plans pursuant to which equity securities of the Company may be issued:

 

Plan Category   Number of
securities to be
issued upon
exercise of
outstanding
options
(a)
    Weighted-
average
exercise price
of outstanding
options ($) (b)
    Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a)) (c)
 
Equity compensation plans approved by securityholders     -       -       -  
Equity compensation plans not approved by securityholders     12,908,315     $ 2.07       17,091,685  
Total     12,908,315     $ 2.07       17,091,685  

 

2015 Stock Option Plan

 

On June 11, 2015, our Board of Directors adopted our 2015 Stock Option Plan (the “Stock Option Plan”) under which an aggregate of 30,000,000 common shares may be issued, subject to adjustment as described in the Stock Option Plan. As at December 31, 2019, there were 12,908,315 outstanding stock options under the Stock Option Plan leaving an additional 17,091,685 options to acquire common shares that may be granted under the Stock Option Plan.

 

The purpose of the Stock Option Plan is to retain the services of valued key employees, directors and consultants of the Company and such other persons as the plan administrator, which is currently the Board of Directors, shall select in accordance with the eligibility requirements of the Stock Option Plan, and to encourage such persons to acquire a greater proprietary interest in the Company, thereby strengthening their incentive to achieve the objectives of the shareholders of the Company, and to serve as an aid and inducement in the hiring of new employees and to provide an equity incentive to consultants and other persons selected by the plan administrator. The Stock Option Plan shall be administered initially by the Board of Directors of the Company, except that the Board of Directors may, in its discretion, establish a committee composed of two or more members of the Board of Directors to administer the Stock Option Plan, which committee may be an executive, compensation or other committee, including a separate committee especially created for this purpose.

 

Unless accelerated in accordance with the Stock Option Plan, unvested options shall terminate immediately upon the optionee resigning from or the Company terminating the optionee’s employment or contractual relationship with the Company or any related company for any reason whatsoever, including death or disability. Options that have vested shall terminate, to the extent not previously exercised, upon the occurrence of the first of the following events: (i) the expiration of the option as designated by the plan administrator; (ii) the date of an optionee’s termination of employment or contractual relationship with the Company or any related company for cause (as determined in the sole discretion of the plan administrator); (iii) the expiration of three months from the date of an optionee’s termination of employment or contractual relationship with the Company or any related company for any reason whatsoever other than cause, death or disability; or (iv) the expiration of three months from termination of an optionee’s employment or contractual relationship by reason of death or disability. Upon the death of an optionee, any vested options held by the optionee shall be exercisable only by the person or persons to whom such optionee’s rights under such option shall pass by the optionee’s will or by the laws of descent and distribution of the optionee’s domicile at the time of death and only until such options terminate as provided above. For purposes of the Stock Option Plan, unless otherwise defined in the stock option agreement between the Company and the optionee, “disability” shall mean medically determinable physical or mental impairment which has lasted or can be expected to last for a continuous period of not less than six months or that can be expected to result in death. The plan administrator shall determine whether an optionee has incurred a disability on the basis of medical evidence acceptable to the plan administrator. Upon making a determination of disability, the plan administrator shall, for purposes of the Stock Option Plan, determine the date of an optionee’s termination of employment or contractual relationship.

 

The foregoing summary of the Stock Option Plan is not complete and is qualified in its entirety by reference to the Stock Option Plan, which is filed as Exhibit 99.1 to our registration statement on Form F-1 under the Securities Act, as filed with the SEC on October 11, 2016 and is incorporated by reference herein. 

 

- 62 -

 

 

Incentive Plan Awards

 

The following table sets out information on the incentive plan awards held by Named Executive Officers and/or directors as at December 31, 2019.

 

    Option–based Awards  
Named Executive Officer
or Director
  Number of securities underlying
unexercised options (#)
    Option exercise
price
    Option expiration
date
 
Michael Paul Rivera, Chief Executive Officer and a director     700,000       $ 2.62 USD     Jun 25, 2022  
      2,300,000       $ 1.91 USD     Dec 6, 2026  
                         
Jerry Kroll, a director     2,045,455       $ 0.30 CAD     June 11, 2022  
      227,273       $ 0.80 CAD     Dec. 9, 2022  
      5,000       $ 2.00 CAD     Feb. 17, 2024  
      5,000       $ 9.60 USD     Jan 5, 2025  
      1,250,000       $ 2.45 USD     Aug 4, 2026  
                         
Bal Bhullar, Chief Financial Officer, Secretary and a director     400,000       $ 3.40 USD     Mar 19, 2026  
    1,100,000       $ 1.91 USD     Dec 6, 2026  
                         
Henry Reisner, Chief Operating Officer, President and a director     56,818       $ 0.30 CAD     Aug. 13, 2022  
      56,818       $ 0.80 CAD     Dec. 9, 2022  
      5,000       $ 2.00 CAD     Feb. 17, 2024  
      5,000       $ 9.60 USD     Jan 5, 2025  
                         
Isaac Moss, Chief Administrative Officer     250,000       $ 3.40 USD     Mar 19, 2026  
      750,000       $ 1.91 USD     Dec 6, 2026  
                         
Steven Sanders, Chairman and a director     120,000       $ 3.40 USD     Mar 19, 2026  
      225,000       $ 1.91 USD     Dec 6, 2026  
                         
Luisa Ingargiola, a director     120,000       $ 3.40 USD     Mar 19, 2026  
      225,000       $ 1.91 USD     Dec 6, 2026  
                         
Jack Austin, a director     120,000       $ 1.53 USD     Nov 19, 2023  
      225,000       $ 1.91 USD     Dec 6, 2026  
                         
Joanne Yan, a director     2,500       $ 2.00 CAD     Feb 17, 2024  
      2,500       $ 9.60 USD     Jan 5, 2025  
      120,000       $ 3.40 USD     Mar 19, 2026  
      225,000       $ 1.91 USD     Dec 6, 2026  
                         
Peter Savagian, a director     120,000       $ 1.80 USD     Oct 17, 2026  
      225,000       $ 1.91 USD     Dec 6, 2026  
                         
Iain Ball, former Vice-President, Finance(1)     34,091       $ 0.80 CAD     Dec 9, 2022  
      3,642       $ 2.00 CAD     Feb. 17, 2024  
      2,498       $ 9.60 USD     Jan. 5, 2025  
      183,182       $ 3.40 USD     Mar 19, 2026  
                         
Ed Theobald, former General Manager(2)     22,727       $ 0.30 CAD     Aug. 13, 2022  
      34,091       $ 0.80 CAD     Dec. 9, 2022  
      5,000       $ 2.00 CAD     Feb. 17, 2024  
      5,000       $ 9.60 USD     Jan 5, 2025  
      56,818       $ 2.53 USD     Aug 9, 2026  
                         
Lorenzo Caprilli, former Executive Vice-President Sales and Marketing(5)     25,000       $ 0.30 CAD     Aug. 13, 2022  
    50,000       $ 0.80 CAD     Dec. 9, 2022  
      3,434       $ 2.00 CAD     Feb. 17, 2024  
      2,394       $ 9.60 USD     Jan 5, 2025  
                         
Shaun Greffard, a former director(3)     25,000       $ 0.30 CAD     Aug. 13, 2022  
      12,500       $ 0.80 CAD     Dec. 9, 2022  
      125,000       $ 2.00 CAD     Feb. 17, 2024  
      5,000       $ 9.60 USD     Jan 5, 2025  
                         
Robert Tarzwell, a former director(4)     12,500       $ 0.30 CAD     Aug. 13, 2022  
      2,500       $ 2.00 CAD     Feb. 17, 2024  
      5,000       $ 9.60 USD     Jan 5, 2025  

 

- 63 -

 

 

(1) Mr. Ball resigned as an officer on June 30, 2019.
   
(2) Mr. Theobald resigned as an officer on June 30, 2019.
   
(3) Mr. Greffard resigned as a director on December 6, 2019.
   
(4) Dr. Tarzwell resigned as a director on March 6, 2019.
   
(5) Mr. Caprilli resigned as an officer on November 30, 2019.

 

The following table provides information concerning the incentive award grants of the Company with respect to each Named Executive Officer during the fiscal year ended December 31, 2019. The only incentive award grants of the Company during such fiscal year was under the Stock Option Plan:

 

Named Executive Officer
and Director
  Option-based
Awards –
Value Vested
During the
Year ($)(1)
    Non-Equity
Incentive Plan
Compensation –
Value
Vested During the
Year ($)
Michael Paul Rivera, Chief Executive Officer   $ Nil     Nil
Jerry Kroll, former President and Chief Executive Officer   $ 800,379     Nil
Bal Bhullar, Chief Financial Officer and Secretary   $ Nil     Nil
Isaac Moss, Chief Administrative Officer   $ 6,652     Nil
Iain Ball, former Vice-President, Finance   $ 38,345     Nil
Henry Reisner, Chief Operating Officer and President   $ 66,159     Nil
Ed Theobald, former General Manager   $ 23,249     Nil
Lorenzo Caprilli, former Executive Vice-President Sales and Marketing   $ 43,982     Nil

 

  (1) The amount represents the aggregate dollar value that would have been realized if the options had been exercised on the vesting date, based on the difference between the closing price of our shares on the Nasdaq on vesting date, and the exercise price of the options, multiplied by the number of options that have vested.

 

- 64 -

 

 

Director Compensation for Fiscal 2019

 

The following table sets forth all compensation for services as a director to the Company during the fiscal year ended December 31, 2019 in respect of the directors set out below, which for those directors who are Named Executive Officers excludes compensation for services provided as a Named Executive Officer.

 

Director   Year   Salary ($)     Share-based
awards ($)
    Option-based
awards ($) (1)
    All Other
Compensation ($)
    Total
Compensation ($)
 
Michael Paul Rivera   2019     Nil       Nil       Nil       Nil       Nil  
Jerry Kroll   2019     Nil       Nil       Nil       Nil       Nil  
Bal Bhullar   2019     Nil       Nil       Nil       Nil       Nil  
Henry Reisner   2019     Nil       Nil       Nil       Nil       Nil  
Shaun Greffard   2019     60,000       Nil       Nil       Nil       60,000  
Luisa Ingargiola   2019     105,727       Nil       511,049       Nil       616,776  
Steven Sanders   2019     156,948       Nil       511,049       Nil       667,997  
Robert Tarzwell   2019     Nil        Nil       Nil       Nil       Nil  
Jack Austin   2019     67,500       Nil       261,777       Nil       329,277  
Joanne Yan   2019     15,000       Nil       522,846       Nil       537,846  
Peter Savagian   2019     Nil       Nil       395,524       Nil       395,524  

 

(1) Option-based awards represent the fair value of stock options granted in the year under the Stock Option Plan. The fair value of stock options granted is calculated as of the grant date using the Black-Scholes option pricing model. For a discussion of the assumptions made in the valuation, refer to Note 11 to our financial statements for the fiscal year ended December 31, 2019.

 

We reimburse out-of-pocket costs that are incurred by the directors.

 

In March of 2018 our Board of Directors appointed a Compensation Committee to assess the appropriate level of remuneration for our directors and officers.

 

Pension Benefits

 

We do not have any defined benefit pension plans or any other plans providing for retirement payments or benefits.

 

Termination of Employment and Change of Control Benefits

 

Details with respect to termination of employment and change of control benefits for our directors and executive officers is reported above under the section titled “Executive Compensation Agreements.”

 

- 65 -

 

 

C. Board Practices

 

Board of Directors

 

Our Notice of Articles and Articles were filed as an exhibit to our registration statement on Form F-1 as filed with the SEC on October 12, 2016 and incorporated herein by reference. The Articles of the Company provide that the number of directors is set at:

 

  (a) subject to paragraphs (b) and (c), the number of directors that is equal to the number of our first directors;

 

  (b) if we are a public company, the greater of three and the number most recently elected by ordinary resolution (whether or not previous notice of the resolution was given); and

 

  (c) if we are not a public company, the number most recently elected by ordinary resolution (whether or not previous notice of the resolution was given).

 

Our Board of Directors currently consists of nine directors. Our directors are elected annually at each annual meeting of our Company’s shareholders. The Board of Directors assesses potential Board candidates to fill perceived needs on the Board of Directors for required skills, expertise, independence and other factors.

 

Our Board of Directors is responsible for appointing our Company’s officers.

 

Board of Director Committees

 

Our Board of Directors currently has six committees, the Audit Committee, the Nominating Committee, the Corporate Governance and Human Resources Committee, the Compensation Committee, the Enterprise Risk Oversight Committee and the Social Media Committee.

 

Audit Committee

 

Our Audit Committee consists of Luisa Ingargiola, Steven Sanders, Joanne Yan and Peter Savagian and is chaired by Luisa Ingargiola. Each member of the Audit Committee satisfies the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq and meets the independence standards under Rule 10A-3 under the Exchange Act. Our Audit Committee consists solely of independent directors that satisfy the Nasdaq and SEC requirements. Our Board of Directors believes that Louisa Ingargiola qualifies as an audit committee financial expert pursuant to Items 16A(b) and (c) of Form 20-F. The Audit Committee oversees our accounting and financial reporting processes and the audits of the financial statements of our Company. The Audit Committee is responsible for, among other things:

 

  ·  selecting our independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by our independent registered public accounting firm;

 

  ·  reviewing with our independent registered public accounting firm any audit problems or difficulties and management’s response and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K;

 

  ·  discussing the annual audited financial statements with management and our independent registered public accounting firm;

 

  ·  annually reviewing and reassessing the adequacy of our Audit Committee Charter;

 

  ·  meeting separately and periodically with the management and our internal auditor and our independent registered public accounting firm;

 

  ·  reporting regularly to the full Board of Directors;

 

  ·  reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposure; and

 

  ·  such other matters that are specifically delegated to our Audit Committee by our Board of Directors from time to time.

 

- 66 -

 

 

Nominating Committee

 

Our Nominating Committee consists of Steven Sanders, Luisa Ingargiola, Peter Savagian and Joanne Yan and is chaired by Steven Sanders. The Nominating Committee is responsible for overseeing the selection of persons to be nominated to serve on our Board of Directors. The Nominating Committee considers persons identified by its members, management, shareholders, investment bankers and others.

 

Corporate Governance and Human Resources Committee

 

Our Corporate Governance and Human Resources Committee consists of Steven Sanders, Luisa Ingargiola, Jack Austin and Joanne Yan and is chaired by Steven Sanders. The Corporate Governance and Human Resources Committee shall be responsible for: developing our approach to the Board of Directors and corporate governance issues; helping to maintain an effective working relationship between the Board of Directors and management; exercising, within the limits imposed by our by-laws, by applicable laws, and by the Board of Directors, the powers of the Board of Directors for the management and direction of our affairs during the intervals between meetings of the Board of Directors; reviewing and making recommendations to the Board of Directors for the appointment of our senior executives and for considering their terms of employment; reviewing succession planning and matters of compensation; recommending awards under our long term and short term incentive plans; assuming the role of administrator, whether by delegation or by statute, for the corporate-sponsored registered pension plans and our Supplementary Executive Retirement Plan and its wholly-owned subsidiaries and any future, additional or replacement plans relating to the plans; and monitoring the investment performance of the trust funds for the plans and compliance with applicable legislation and investment policies.

 

Our Corporate Governance and Human Resources Committee shall also review any “red flags” or issues that may arise out of the Compensation Committee compensation and award recommendations and report them to the Board of Directors. The Compensation Committee and the Corporate Governance and Human Resources Committee, at times, may be collaborative but will not coordinate as the process is intended to be a “checks and balance” approach. It is set up as an internal control mechanism that would safeguard against fraud and errors due to omission. 

 

Compensation Committee

 

Our Compensation Committee consists of Luisa Ingargiola, Steven Sanders, Joanne Yan, Peter Savagian and Jack Austin and is chaired by Luisa Ingargiola. Each of the Compensation Committee members satisfies the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market. Our Compensation Committee will assist the Board of Directors in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. No officer may be present at any committee meeting during which such officer’s compensation is deliberated upon. The Compensation Committee will be responsible for, among other things:

 

  ·  reviewing and recommending to the Board of Directors for approval with respect to the total compensation package for our most senior executive officers;

 

  ·  approving and overseeing the total compensation package for our executives other than the most senior executive officers;

 

  ·  reviewing and recommending to the Board of Directors with respect to the compensation of our directors;

 

  ·  reviewing periodically and approving any long-term incentive compensation or equity plans;

 

  ·  selecting compensation consultants, legal counsel or other advisors after taking into consideration all factors relevant to that person’s independence from management; and

 

  ·  programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

 

- 67 -

 

 

Enterprise Risk Oversight Committee

 

Our Enterprise Risk Oversight Committee consists of Steven Sanders, Luisa Ingargiola and Peter Savagian and is chaired by Steven Sanders. The Enterprise Risk Oversight Committee shall oversee the effectiveness of risk management policies, procedures and practices implemented by management of the Company with respect to strategic, operational, environmental, health and safety, human resources, legal and compliance and other risks faced by the Company. The Enterprise Risk Oversight Committee shall:

 

  ·  review executive management’s assessment of our material risk exposures and our actions to identify, monitor and mitigate such exposures,

 

  ·  review executive management’s implementation of systems and controls designed to promote compliance with applicable legal and regulatory requirements and

 

  ·  report to the Board of Directors on an annual basis with respect to the committee’s review of our material risks and measures in place to mitigate them, and at least annually in respect of the committee’s other activities.

 

Social Media Committee

 

Our Social Media Committee consists of Luisa Ingargiola, Steven Sanders and Joanne Yan and is chaired by Luisa Ingargiola. The Social Media Committee shall oversee our social media strategy initiatives pursuant to Regulation FD. The Social Media Committee shall:

 

  ·  provide compliant Regulation FD strategic leadership for social media through the alignment of social media strategies and activities with enterprise strategic objectives and processes;

 

  ·  establish and maintain corporate policies with respect to use of social media for both process-driven social engagements, as well as for use of social media by employees for participating in social conversations (e.g. blogging and Tweeting by subject matter experts);

 

  ·  prioritize social media initiatives and deliver final approvals and recommendations on proceeding with proposed social media projects, including process, technology and organizational projects; and

 

  ·  ensure open communication between the social media department and our other functional units so as to promote collaborative strategies, planning, and implementation.

 

D. Employees

 

As of March 25, 2020, we employed a total of 63 full-time and no part-time people. None of our employees are covered by a collective bargaining agreement. 

 

The breakdown of employees by main category of activity is as follows:

 

Activity   Number of
Employees
 
Engineering/R&D     37  
Sales & Marketing     10  
General & Administration     12  
Executives     4  

 

- 68 -

 

 

E. Share Ownership

 

Shares

 

The shareholdings of our officers and directors are set out in Item 7 below.

 

Options

 

The stock options, exercisable into common shares of the Company, held by our officers and directors are set out in Item 6 B above.

 

Warrants

 

Warrants, exercisable into common shares of the Company, held by our officers and directors are set forth below as of March 25, 2020.

 

Name   Position   Allotment date   Expiration date   Exercise price     Total  
Joanne Yan   Director   Nov. 21, 2016   Nov. 21, 2021   $ 4.00       50,000  

 

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A. Major Shareholders

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth certain information regarding the beneficial ownership of our common share as of March 25, 2020 by (a) each stockholder who is known to us to own beneficially 5% or more of our outstanding common share; (b) all directors; (c) our executive officers, and (d) all executive officers and directors as a group. Except as otherwise indicated, all persons listed below have (i) sole voting power and investment power with respect to their common shares, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their common shares.

 

- 69 -

 

 

Name   Common
Shares of the
Company
Beneficially
Owned (1)  
    Percentage of
Common
Shares
Beneficially
Owned (2)  
 
Directors and Executive Officers:                
                 
Michael Paul Rivera(3), Chief Executive Officer and a director     418,182       1.1 %
                 
Henry Reisner(4), Chief Operating Officer, President and a director     3,145,816       8.5 %
                 
Bal Bhullar(5), Chief Financial Officer, Secretary and a director     587,235       1.6  
                 
Steven Sanders(6), Chairman and a director     176,250       *  
                 
Jerry Kroll(7), a director     11,574,395       28.6 %
                 
Joanne Yan(8), a director     254,840       *  
                 
Jack Austin(9), a director     176,250       *  
                 
Luisa Ingargiola(10), a director     176,250       *  
                 
Peter Savagian(11), a director     126,250       *  
                 
Isaac Moss(12), Chief Administrative Officer     596,152       1.6  
                 
Directors and Executive Officers as a Group (Eleven Persons)     17,231,620       43.8 %
                 
Other 5% or more Shareholders:                
                 
Megan Martin(13)     2,700,000       7.2 %
                 
Yuan Sheng Zhang(14)     2,700,000       7.2 %
                 
Shang Wen Yang(15)     3,762,972       9.9 %
                 
Unison International Holdings Ltd.(16)     3,200,000       8.2 %
                 
Zongshen (Canada) Environtech Ltd.(17)     2,800,000       7.3 %

 

  * Less than 1%.

 

- 70 -

 

 

  (1) Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or common shares: (i) voting power, which includes the power to vote, or to direct the voting of common shares; and (ii) investment power, which includes the power to dispose or direct the disposition of common shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the common shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of common shares actually outstanding on March 25, 2020.

 

  (2) The percentage is calculated based on 37,049,374 common shares that were outstanding as of March 25, 2020.

 

  (3) Shares beneficially owned consists of (i) stock options to purchase 278,788 of our common shares which have vested and (ii) 139,394 shares of our common stock which will vest within 60 days of March 25, 2020.

 

  (4) Shares beneficially owned consists of  (i) 2,375,000 common shares registered directly to Henry Reisner, (ii) 525,000 common shares held of record by Mr. Reisner’s wife, (iii) 125,000 common shares held of record by Mr. Reisner’s daughter, (iv) stock options to purchase 120,400 shares of our common stock which have vested and (v) stock options to purchase 416 shares of our common stock which will vest within 60 days of March 25, 2020.

 

  (5) Shares beneficially owned consists of (i) 3,900 common shares registered directly to Bal Bhullar, (ii) stock options to purchase 522,224 shares of our common stock which have vested and (iii) stock options to purchase 61,111 shares of our common stock which will vest within 60 days of March 25, 2020.

 

  (6) Shares beneficially owned consists of stock options to purchase 176,250 shares of our common share which have vested.

 

  (7) Shares beneficially owned consists of  (i) 3,612,500 common shares held by Jerry Kroll, (ii) 5,000,000 common shares registered to Ascend Sportmanagement Inc. (over which Mr. Kroll has discretionary voting and investment authority), (iii) 62,500 common shares issuable upon the exercise of warrants registered directly to Mr. Kroll, (iv) stock options to purchase 3,116,062 shares of our common stock which have vested and (v) stock options to purchase 208,333 shares of our common stock which will vest within 60 days of March 25, 2020.

 

  (8) Shares beneficially owned consists of  (i) 25,000 common shares registered directly to Joanne Yan, (ii) 50,000 common shares issuable upon the exercise of warrants registered directly to Ms. Yan, (iii) stock options to purchase 179,632 shares of our common stock which have vested and (iv) stock options to purchase 208 shares of our common stock which will vest within 60 days of March 25, 2020.

 

  (9) Shares beneficially owned consists of stock options to purchase 176,250 shares of our common share which have vested.

 

  (10) Shares beneficially owned consists of stock options to purchase 176,250 shares of our common share which have vested.

 

  (11) Shares beneficially owned consists of (i) stock options to purchase 106,250 shares of our common stock which have vested and (ii) stock options to purchase 20,000 shares of our common stock which will vest within 60 days of March 25, 2020.

 

  (12) Shares beneficially owned consists of (i) stock options to purchase 480,768 shares of our common stock which have vested and (ii) stock options to purchase 115,384 shares of our common stock which will vest within 60 days of March 25, 2020.

 

  (13) Shares beneficially owned consists of  (i) 625,000 common shares held by to Megan Martin, (ii) 625,000 common shares held by Ms. Martin’s husband, Yuan Sheng Zhang, (iii) 100,000 common shares held by Ms. Martin’s son, Bo Hong Zhang, (iv) 625,000 common shares issuable upon the exercise of warrants registered directly to Ms. Martin, (v) 625,000 common shares issuable upon the exercise of warrant registered directly to Ms. Martin’s husband and (vi) 100,000 common shares issuable upon the exercise of warrants registered directly to Ms. Martin’s son.

 

  (14) Shares beneficially owned consists of  (i) 625,000 common shares held by Yuan Sheng Zhang, (ii) 625,000 common shares held by Mr. Zhang’s wife, Megan Martin, (iii) 100,000 common shares held by Mr. Zhang’s son, Bo Hong Zhang, (iv) 625,000 common shares issuable upon the exercise of warrants registered directly to Mr. Zhang, (v) 625,000 common shares issuable upon the exercise of warrants registered directly to Mr. Zhang’s wife and (vi) 100,000 common shares issuable upon the exercise of warrants registered directly to Mr. Zhang’s son.

 

  (15) Shares beneficially owned consists of (i) 1,029,688 common shares registered directly to Shang Wen Yang (ii) 500,017 common shares held by Mr. Yang’s mother, Cheng Quan Sang, (iii) 320,080 common shares held by Canada Jia-Qiao Group Investment Ltd. (over which Mr. Yang’s mother has discretionary voting and investment authority), (iv) stock options held by Shang Wen Yang to purchase 57,090 shares of our common stock which have vested, (v) 1,000,000 common shares issuable upon the exercise of warrants registered directly to Shang Wen Yang, (vi) 500,017 common shares issuable upon the exercise of warrants registered directly to Mr. Yang’s mother and (vii) 320,080 common shares issuable upon the exercise of warrants registered directly to Canada Jia-Qiao Group Investment Ltd.

 

  (16) Shares beneficially owned consists of  (i) 1,200,000 common shares registered directly to Unison International Holdings Ltd. and (ii) 2,000,000 common shares issuable upon the exercise of warrants registered directly to Unison International Holdings Ltd. (over which Mr. Ping Hui Lu has discretionary voting and investment authority).

 

  (17) Shares beneficially owned consists of  (i) 1,400,000 common shares registered directly to Zongshen (Canada) Environtech Ltd. and (ii) 1,400,000 common shares issuable upon the exercise of warrants registered directly to Zongshen (Canada) Environtech Ltd. (over which Mr. Daxue Zhang has discretionary voting and investment authority).

 

The information as to shares beneficially owned, not being within our knowledge, has been furnished by the officers and directors.

 

As at March 25, 2020, there were 85 holders of record of our common shares.

 

- 71 -

 

 

 

Transfer Agent

 

Our shares of common stock are recorded in registered form on the books of our transfer agent, VStock Transfer, LLC, located 18 Lafayette Place, Woodmere, New York 11598.

 

B. Related Party Transactions

 

Michael Paul Rivera

 

On June 24, 2019, we granted 700,000 stock options to Mr. Rivera having an exercise price of USD$2.62 per common share and being exercisable until June 24, 2022. On December 6, 2019, we granted 2,300,000 stock options to Mr. Rivera having an exercise price of USD$1.91 per common share and being exercisable until December 6, 2022.

 

On May 17, 2019, the Company entered into the Rivera Agreement with Mr Rivera. Effective on January 1, 2020, Mr. Rivera and the Company entered into the Amended Rivera Agreement to the Rivera Agreement. Mr. Rivera has a base salary annual salary of USD$300,000 with a guaranteed bonus of USD$150,000. Mr. Rivera had a bonus of USD$38,904 for 2019.

 

Henry Reisner

 

On October 18, 2017, we entered into a Share Purchase Agreement (the “SPA”) to acquire InterMeccanica with Mr. Reisner and two members of his family, which replaced a prior Joint Operating Agreement, dated July 15, 2015, as amended on September 19, 2016, which was comprised of three underlying agreements. Under the SPA, we agreed to purchase all the shares of InterMeccanica for $2,500,000; $300,000 of which had been previously paid under the Joint Operating Agreement. At closing we paid the sellers $700,000 and issued a promissory note (the “Note”) for the balance of $1,500,000. On January 28, 2018, we paid off all of the principal and interest due on the Note for $1,520,548.

 

On February 16, 2015, Mr. Reisner acquired 2,375,000 common shares at a price of $0.0004 per common share pursuant to a private placement. Mr. Reisner’s wife and daughter acquired 525,000 common shares and 125,000 common shares, respectively, at a price of $0.0004 per common share pursuant to a private placement.

 

On August 13, 2015, we granted 625,000 stock options to Mr. Reisner having an exercise price of $0.30 per common share and being exercisable until August 13, 2022. On July 20, 2018, Mr. Reisner agreed to forfeit an aggregate of 568,182 of those stock options. As of the date hereof, Mr. Reisner holds 56,818 of those stock options. In addition, on December 9, 2015, we granted 625,000 stock options to Mr. Reisner having an exercise price of $0.80 per common share and being exercisable until December 9, 2022. On July 20, 2018, Mr. Reisner agreed to forfeit an aggregate of 568,182 of those stock options. As of the date hereof, Mr. Reisner holds 56,818 of those stock options. On February 17, 2017, we granted 5,000 stock options to Mr. Reisner having an exercise price of $2.00 per common share and being exercisable until February 17, 2024. Furthermore, on January 5, 2018, we granted 5,000 stock options to Mr. Reisner having an exercise price of USD$9.60 per common share and being exercisable until January 5, 2025.

 

On January 15, 2019, we entered into an executive employment agreement with Mr. Reisner pursuant to which he receives a base salary in the amount of $180,000 per year. On January 15, 2020, we replaced that agreement with the Reisner Agreement pursuant to which Mr. Reisner receives a base salary in the amount of $225,000 per year and subject to an additional $25,000 bonus.

 

- 72 -

 

 

Bal Bhullar

 

On February 19, 2019, Ms. Bhullar bought 3,800 common shares at price of USD$4.59 and 100 shares at a price of USD$4.57. On March 19, 2019, we granted 400,000 stock options to Ms. Bhullar having an exercise price of USD$3.40 per common share and being exercisable until March 19, 2026. On December 6, 2019, we granted 1,100,000 stock options to Ms. Bhullar having an exercise price of USD$1.91 per common share and being exercisable until December 6, 2026.

 

On January 15, 2019, we entered into a Consulting Agreement with BKB Management Ltd., a company under the control and direction of Ms. Bhullar, and which superseded our Company’s prior offer letter with Ms. Bhullar, dated October 19, 2018. Bonus of $36,000 was paid at the end of 2019. On January 1, 2020, we entered into the Bhullar Agreement with Ms. Bhullar, and which superseded the Consulting Agreement, and pursuant to which Ms. Bhullar receives $280,000 per year.

 

Steven Sanders

 

On May 5, 2018, we issued a stock option to purchase 75,000 of our common shares at USD$9.00 to Steven Sanders in exchange for his services as a director of our Company. The stock option vested in equal quarters every three months with the first quarter vesting on the date the options were granted, and they have now been cancelled. On March 19, 2019, we granted 120,000 stock options to Mr. Sanders having an exercise price of USD$3.40 per common share and being exercisable until March 19, 2026. On December 6, 2019, we granted 225,000 stock options to Mr. Sanders having an exercise price of USD$1.91per common share and being exercisable until December 6, 2026. Mr. Sanders now receives directors’ fees of USD$125,000 annually.

 

Jerry Kroll

 

On October 16, 2017, Jerry Kroll, our then CEO, entered into a Share Pledge Agreement with Zongshen to guarantee our payment for the cost of the prototype tooling and molds estimated to be $1.8 million through the pledge of 400,000 of our common shares at a deemed price of USD$4.00. We have agreed to reimburse Mr. Kroll on a one-for-one basis for any pledged shares realized by Zongshen at a deemed issue price of USD$4.00 per common share.

 

From February 16, 2015 to November 13, 2015, Mr. Kroll provided us with a loan in the aggregate amount of $185,000. These loans were unsecured, non-interest bearing and due on demand. No formal written agreements regarding these loans were signed, however, they are documented in our accounting records. On January 20, 2016, we repaid $135,000 of these loans and $50,000 was repaid through the issuance of 62,500 post-subdivision units of our Company at a price of $0.80 per unit.

 

On February 16, 2015, Mr. Kroll acquired 3,500,000 common shares of our Company and Ascend Sportmanagement Inc., a corporation under the control and direction of Mr. Kroll, acquired 5,000,000 common shares at a price of $0.0004 per common share pursuant to a private placement. In addition, on June 15, 2015, Mr. Kroll acquired 25,000 units of our Company at a price of $0.40 per unit pursuant to a private placement. Each unit consisted of one common share and one common share purchase warrant. Each warrant is exercisable for one additional common share at a price of $0.80 per common share and is exercisable until June 15, 2020. Furthermore, on January 22, 2016, Mr. Kroll acquired 62,500 units of our Company at a price of $0.80 per unit pursuant to a private placement. Each unit consisted of one common share and one common share purchase warrant. Each warrant is exercisable for one additional common share at a price of $2.00 per common share and is exercisable until January 22, 2021.

 

On June 11, 2015, we granted 22,500,000 stock options to Mr. Kroll having an exercise price of $0.30 per common share and being exercisable until June 11, 2022. On July 20, 2018, Mr. Kroll agreed to forfeit an aggregate of 20,454,545 of those stock options. As of the date hereof, Mr. Kroll holds 2,045,455 of those stock options. In addition, on December 9, 2015, we granted 2,500,000 stock options to Mr. Kroll having an exercise price of $0.80 per common share and being exercisable until December 9, 2022. On July 20, 2018, Mr. Kroll agreed to forfeit an aggregate of 2,272,777 of those stock options. As of the date hereof, Mr. Kroll holds 227,273 of those stock options. On February 17, 2017, we granted 5,000 stock options to Mr. Kroll having an exercise price of $2.00 per common share and being exercisable until February 17, 2024. Furthermore, on January 5, 2018 we granted 5,000 stock options to Mr. Kroll having an exercise price of USD$9.60 per common share and being exercisable until January 5, 2025. On August 4, 2019, Mr. Kroll was granted 1,250,000 stock options with an exercise price of USD$2.45 per common share and is exercisable until August 4, 2026.

 

On January 15, 2019, we entered into the Kroll Agreement with Mr. Kroll, which superseded our Company’s prior agreement with Mr. Kroll, dated July 1, 2016, which had been amended in August of 2018. On August 16, 2019, we entered into the Continuing Relationship Agreement with Mr. Kroll, which superseded the Kroll Agreement, and pursuant to which Mr. Kroll receives a fee of $300,000 over a period of 12 months.

 

- 73 -

 

 

Luisa Ingargiola

 

On May 5, 2018, we issued stock options to purchase 75,000 of our common shares at USD$9.00 to Luisa Ingargiola in exchange for her services as a director of our Company. These options vested in equal quarters every three months with the first quarter vesting on the date the options were granted and they have now been cancelled. On March 19, 2019, we granted 120,000 stock options to Ms. Ingargiola having an exercise price of USD$3.40 per common share and being exercisable until March 19, 2026. On December 6, 2019, we granted 225,000 stock options to Ms. Ingargiola having an exercise price of USD$1.91per common share and being exercisable until December 6, 2026. Ms. Ingargiola receives directors’ fees of USD$80,000 annually.

 

Jack Austin

 

On November 20, 2018 we appointed the Honorable Jack Austin to our Board of Directors. In conjunction with such appointment Mr. Austin was granted 120,000 stock options with an exercise price of USD$1.53, and being exercisable until November 20, 2023, and directors’ fees of $60,000 annually. On December 6, 2019, we granted 225,000 stock options to Mr. Austin having an exercise price of USD$1.91per common share and being exercisable until December 6, 2026.

 

Joanne Yan

 

On November 7, 2016, Joanne Yan acquired 50,000 units of our Company at a price of $0.3634 per unit. Ms. Yan has only 25,000 common shares left. Each unit consisted of one common share and one common share purchase warrant. Each warrant is exercisable for one additional common share at a price of $4.00 per common share and is exercisable until November 7, 2021.

 

On February 17, 2017, we granted 2,500 stock options to Ms. Yan having an exercise price of $2.00 per common share and being exercisable until February 17, 2024. On January 5, 2018, we granted 2,500 stock options to Ms. Yan having an exercise price of US$9.60 per common share and being exercisable until January 5, 2025. On March 19, 2019, we granted 120,000 stock options to Ms. Yan having an exercise price of USD$3.40 per common share and being exercisable until March 19, 2026. On December 6, 2019, we granted 225,000 stock options to Ms. Yan having an exercise price of USD$1.91per common share and being exercisable until December 6, 2026. Ms. Yan receives directors’ fees of $60,000 annually.

 

Peter Savagian

 

On October 16, 2019 we appointed Peter Savagian to our Board of Directors. In conjunction with such appointment Mr. Savagian was granted 120,000 stock options with an exercise price of USD$1.80 per common share, and being exercisable until October 16, 2026, and directors’ fees of USD$60,000 annually. On December 6, 2019, we granted 225,000 stock options to Mr. Savagian having an exercise price of USD$1.91 per common share and being exercisable until December 6, 2026.

 

Shaun Greffard

 

On August 13, 2015, we granted 25,000 stock options to Shaun Greffard having an exercise price of $0.30 per common share and being exercisable until August 13, 2022. In addition, on December 9, 2015, we granted 12,500 stock options to Mr. Greffard having an exercise price of $0.80 per common share and being exercisable until December 9, 2022. On February 17, 2017, we granted 125,000 stock options to Mr. Greffard having an exercise price of $2.00 per common share and being exercisable until February 17, 2024. Furthermore, on January 5, 2018, we granted 5,000 stock options to Mr. Greffard having an exercise price of USD$9.60 per common share and being exercisable until January 5, 2025. Mr. Greffard was paid a directors’ fee of $60,000 for fiscal 2019 and resigned on December 6, 2019.

 

- 74 -

 

 

Isaac Moss

 

On January 5, 2018 we granted 125,000 stock options to Mr. Moss having an exercise price of USD$9.60 per common share and being exercisable until January 5, 2025, and these stock options have now been cancelled. On March 19, 2019, we granted 250,000 stock options to Mr. Moss having an exercise price of USD$3.40 per common share and being exercisable until March 19, 2026. On December 6, 2019, we granted 750,000 stock options to Mr. Moss having an exercise price of USD$1.91 per common share and being exercisable until December 6, 2026.

 

In December of 2017 Mr. Moss entered into the Moss Agreement with our Company which was amended in each of August of 2018 and January of 2019. A bonus of $25,000 for 2019 was paid in 2020. As at May 1, 2019the Company pays a monthly fee of $20,833 to Mr. Moss under the Moss Agreement.

 

Ian Ball

 

On August 13, 2015, we granted 250,000 stock option to Iain Ball having an exercise price of $0.30 per common share and being exercisable until August 13, 2022. On July 20, 2018, Mr. Ball agreed to forfeit an aggregate of 227,273 of those stock options. As of the date hereof, Mr. Ball holds 22,727 of those stock options. In addition, on December 9, 2015, we granted 375,000 stock options to Mr. Ball having an exercise price of $0.80 per common share and being exercisable until December 9, 2022. On July 20, 2018, Mr. Ball agreed to forfeit an aggregate of 340,909 of those stock options. On February 17, 2017, we granted 5,000 stock options to Mr. Ball having an exercise price of $2.00 per common share and being exercisable until February 17, 2024. Furthermore, on January 5, 2018, we granted 5,000 stock options to Mr. Ball having an exercise price of USD$9.60 per common share and being exercisable until January 5, 2025. On March 19, 2019, we granted 183,182 stock options to Mr. Ball having an exercise price of USD$3.40 per common share and being exercisable until March 19, 2026. Mr. Ball resigned as an executive officer of our Company on June 30, 2019.

 

On August 19, 2015, Mr. Iain Ball acquired 31,250 units of our Company at a price of $0.80 per unit. Each unit consisted of one common share and one common share purchase warrant, and each warrant is exercisable for one additional common share at a price of $2.00 per common share and is exercisable until August 19, 2020.

 

Ed Theobald

 

On February 16, 2015, Ed Theobald acquired 250,000 common shares of our Company at a price of $0.0004 per common share pursuant to a private placement.

 

On August 13, 2015, we granted 250,000 stock options to Mr. Theobald having an exercise price of $0.30 per common share and being exercisable until August 13, 2022. On July 20, 2018, Mr. Theobald agreed to forfeit an aggregate of 227,273 of those stock options. In addition, on December 9, 2015, we granted 375,000 stock options to Mr. Theobald having an exercise price of $0.80 per common share until December 9, 2022. On July 20, 2018, Mr. Theobald agreed to forfeit an aggregate of 340,909 of those stock options. On February 17, 2017, we granted 5,000 stock options to Mr. Theobald having an exercise price of $2.00 per common share and being exercisable until February 17, 2024. Furthermore, on January 5, 2018, we granted 5,000 stock options to Mr. Theobald having an exercise price of USD$9.60 per common share and being exercisable until January 5, 2025. Mr. Theobald resigned as an executive officer of our Company on June 30, 2019. 

 

Zongshen (Canada) Environtech Ltd.

 

On October 2, 2017, we announced a manufacturing agreement with Zongshen to produce 75,000 SOLO all-electric vehicles, which we expect to occur in the three full years from the commencement of production. Zongshen is an entity under common control with Zongshen (Canada) Environtech Ltd., which is the beneficial owner of approximately 7.3% of our common shares. The production plan in the manufacturing agreement is 75,000 SOLOs over a period of three years once mass scale production has begun. We anticipate to start production in 2020. Under the agreement we agreed to reimburse Zongshen for the actual cost of the prototype tooling and molds in amount of $1.8 million and the mass production tooling and molds estimated to be $6.9 million, which shall be payable 50% when Zongshen commences manufacturing the tooling and molds. At December 31, 2019, the Company had paid 90% of prototype tooling and molds and 89% of the mass production tooling and molds. Depreciation on the production tooling and molds is charged on a per unit produced basis and during the period no units had been produced using the production tooling and molds

 

- 75 -

 

 

C. Interests of Experts and Counsel

 

Not Applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

A. Consolidated Statements and Other Financial Information

 

Financial Statements

 

The financial statements of the Company for the years ended December 31, 2019, 2018 and 2017 have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board, or IASB, and are included under Item 18 of this Annual Report. The financial statements including related notes are accompanied by the report of the Company’s independent registered public accounting firm, KPMG LLP, and by the report of the Company’s prior independent registered public accounting firm, Dale Matheson Carr-Hilton Labonte LLP.

 

Legal Proceedings

 

As of the date of this Annual Report, in the opinion of our management, we are not currently a party to any litigation or legal proceedings which are material, either individually or in the aggregate, and, to our knowledge, no legal proceedings of a material nature involving us currently are contemplated by any individuals, entities or governmental authorities.

 

Dividends

 

We have not paid any dividends on our common shares since incorporation. Our management anticipates that we will retain all future earnings and other cash resources for the future operation and development of our business. We do not intend to declare or pay any cash dividends in the foreseeable future. Payment of any future dividends will be at the Board of Directors’ discretion, subject to applicable law, after taking into account many factors including our operating results, financial condition and current and anticipated cash needs.

 

B. Significant Changes

 

We have not experienced any significant changes since the date of the financial statements included with this Annual Report except as disclosed in this Annual Report.

 

ITEM 9. THE OFFER AND LISTING

 

A. Offer and Listing

 

Our common shares are traded on Nasdaq under the symbol “SOLO”.

 

B. Plan of Distribution

 

Not applicable.

 

C. Markets

 

Please see Item 9.A above.

 

- 76 -

 

 

D. Selling Shareholders

 

Not applicable.

 

E. Dilution

 

Not applicable.

 

F. Expenses of the Issue

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

A. Share Capital

 

Not applicable.

 

B. Memorandum and Articles of Association

 

The following is a summary of our Notice of Articles and Articles. You should read those documents for a complete understanding of the rights and limitations set out therein. Our corporation number, as assigned by the British Columbia Registry Services, is BC1027632.

 

Remuneration of Directors

 

Our directors are entitled to the remuneration, if any, for acting as directors as the directors may from time to time determine. If the directors so decide, the remuneration of the directors will be determined by the shareholders. That remuneration may be in addition to any salary or other remuneration paid to a director in such director’s capacity as an officer or employee of ours.

 

Number of Directors

 

According to Article 11.1 of our Articles, the number of directors, excluding additional directors appointed under Article 12.7 is set at:

 

  (a) subject to paragraphs (b) and (c), the number of directors that is equal to the number of our first directors;

 

  (b) if we are a public company, the greater of three and the number most recently elected by ordinary resolution (whether or not previous notice of the resolution was given); and

 

  (c) if we are not a public company, the number most recently elected by ordinary resolution (whether or not previous notice of the resolution was given).

 

Directors

 

Our directors are elected annually at each annual meeting of our Company’s shareholders. Our Articles provide that the Board of Directors may, between annual meetings, appoint one or more additional directors to serve until the next annual meeting, but the number of additional directors must not at any time exceed:

 

  (a) one-third of the number of first directors, if, at the time of the appointments, one or more of the first directors have not yet completed their first term of office; or

 

  (b) in any other case, one-third of the number of the current directors who were elected or appointed as directors at the expiration of the last annual meeting of our Company’s shareholders.

 

- 77 -

 

 

Our Articles provide that our directors may from time to time, on behalf of our Company, without shareholder approval:

 

  create one or more classes or series of shares or, if none of the shares of a class or series of shares are allotted or issued, eliminate that class or series of shares;

 

  increase, reduce or eliminate the maximum number of shares that we are authorized to issue out of any class or series of shares or establish a maximum number of shares that we are authorized to issue out of any class or series of shares for which no maximum is established;

 

  if we are authorized to issue shares of a class of shares with par value;

 

  decrease the par value of those shares;

 

  if none of the shares of that class of shares are allotted or issued, increase the par value of those shares;

 

  subdivide all or any of its unissued or fully paid issued shares with par value into shares of smaller par value;

 

  consolidate all or any of its unissued or fully paid issued shares with par value into share of larger par value;

 

  subdivide all or any of its unissued or fully paid issued shares without par value;

 

  change all or any of its unissued or fully paid issued shares with par value into shares without par value or all or any of its unissued shares without par value into shares with par value;

 

  alter the identifying name of any of its shares;

 

  consolidate all or any of its unissued or fully paid issued shares without par value;

 

  otherwise alter it shares or authorized share structure when required or permitted to do so by the Business Corporations Act;

 

  borrow money in the manner and amount, on the security, from the sources and on the terms and conditions that they consider appropriate;

 

  issue bonds, debentures and other debt obligations either outright or as security for any liability or obligation of the Company or any other person, and at any discount or premium and on such terms as they consider appropriate;

 

  guarantee the repayment of money by any other person or the performance of any obligation of any other person; and

 

  mortgage or charge, whether by way of specific or floating charge, or give other security on the whole or any part of the present and future assets and undertaking of the Company.

 

Our Articles also provide that we may by resolution of the directors authorize an alteration to our Notice of Articles to change our name or adopt or change any translation of that name.

 

Our Articles provide that the directors may meet together for the conduct of business, adjourn and otherwise regulate their meetings as they think fit, and meetings of the Board of Directors held at regular intervals may be held at the place and at the time that the Board of Directors may by resolution from time to time determine. Questions arising at any meeting of directors are to be decided by a majority of votes and, in the case of an equality of votes, the chair of the meeting does not have a second or casting vote. A director may participate in a meeting of the directors or of any committee of the directors in person, or by telephone or other communications medium, if all directors participating in the meeting are able to communicate with each other. A director may participate in a meeting of the directors or of any committee of the directors by a communication medium other than telephone if all directors participating in the meeting, whether in person or by telephone or other communications medium, are able to communicate with each other and if all directors who wish to participate in the meeting agree to such participation. A director who participates in a meeting in a manner contemplated by such provisions of our Articles is deemed for all purposes of the Business Corporations Act and our Articles to be present at the meeting and to have agreed to participate in that manner.

 

- 78 -

 

 

Our Articles provide that the quorum necessary for the transaction of the business of the directors may be set by the directors and, if not so set, is a majority of the directors.

 

Our Articles do not restrict: (i) a director’s power to vote on a proposal, arrangement or contract in which the director is materially interested (although the Business Corporations Act generally requires a director who is materially interested in a material contract or material transaction to disclose his or her interest to the Board of Directors and to abstain from voting on any resolution to approve the contract or transaction, failing which the British Columbia Supreme Court may, on application of our Company or any of our shareholders, set aside the material contract or material transaction on any terms that it thinks fit, or require the director to account to us for any profit or gain realized on it, or both); or (ii) our directors’ power, in the absence of an independent quorum, to vote compensation to themselves or any members of their body.

 

Our Articles do not set out a mandatory retirement age for our directors. Our directors are not required to own securities of our Company to serve as directors.

 

Authorized Capital

 

Our Notice of Articles provide that our authorized capital consists of an unlimited number of common shares, without par value, and an unlimited number of preferred shares, without par value, which have special rights or restrictions.

 

Rights, Preferences and Restrictions Attaching to Our Shares

 

The Business Corporations Act provides the following rights, privileges, restrictions and conditions attaching to our common shares:

 

  to vote at meetings of shareholders, except meetings at which only holders of a specified class of shares are entitled to vote;

 

  subject to the rights, privileges, restrictions and conditions attaching to any other class of shares of our company, to share equally in the remaining property of our company on liquidation, dissolution or winding-up of our company; and

 

  subject to the rights of the preferred shares, the common shares are entitled to receive dividends if, as and when declared by the Board of Directors.

 

Our preferred shares may include one or more series and, subject to the Business Corporations Act, the directors may, by resolution, if none of the shares of that particular series are issued, alter our Articles and authorize the alteration of our Notice of Articles, as the case may be, to do one or more of the following:

 

  (a) determine the maximum number of shares of that series that we are authorized to issue and determine that there is no such maximum number or alter any such determination;

 

  (b) create an identifying name for the shares of that series, or alter any such identifying name; and

 

  (c) attach special rights or restrictions to the shares of that series, or alter any such special rights or restrictions.

 

- 79 -

 

 

The provisions in our Articles attaching to our common shares and our preferred shares may be altered, amended, repealed, suspended or changed by the affirmative vote of the holders of not less than two-thirds of the outstanding common shares and two-thirds of the preferred shares, as applicable.

 

With the exception of special resolutions (i.e., resolutions in respect of fundamental changes to our Company, including the sale of all or substantially all of our assets, a merger or other arrangement or an alteration to our authorized capital that is not allowed by resolution of the directors) that require the approval of holders of two-thirds of the outstanding common shares entitled to vote at a meeting, either in person or by proxy, resolutions to approve matters brought before a meeting of our shareholders require approval by a simple majority of the votes cast by shareholders entitled to vote at a meeting, either in person or by proxy.

 

Shareholder Meetings

 

The Business Corporations Act provides that: (i) a general meetings of shareholders must be held in British Columbia, or may be held at a location outside British Columbia since our Articles do not restrict our Company from approving a location outside of British Columbia for the holding of the general meeting and the location for the meeting is approved by ordinary resolution, or the location for the meeting is approving in writing by the British Columbia Registrar of Companies before the meeting is held; (ii) directors must call an annual meeting of shareholders not later than 15 months after the last preceding annual meeting; (iii) for the purpose of determining shareholders entitled to receive notice of or vote at meetings of shareholders, the directors may fix in advance a date as the record date for that determination, provided that such date shall not precede by more than two months or by less than 21 days the date on which the meeting is to be held; (iv) the holders of not less than 5% of the issued shares entitled to vote at a meeting may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition; (v) only shareholders entitled to vote at the meeting, our directors and our auditor are entitled to be present at a meeting of shareholders; and (vi) upon the application of a director or shareholder entitled to vote at the meeting, the British Columbia Supreme Court may order a meeting to be called, held and conducted in a manner that the Court directs.

 

Pursuant to Article 8.20 of our Articles, a shareholder or proxy holder who is entitled to participate in a meeting of shareholders may do so in person, or by telephone or other communications medium, if all shareholders and proxy holders participating in the meeting are able to communicate with each other; provided, however, that nothing in Article 8.20 of our Articles shall obligate us to take any action or provide any facility to permit or facilitate the use of any communications medium at a meeting of shareholders. If one or more shareholders or proxy holders participate in a meeting of shareholders in a matter contemplated by Article 8.20 of our Articles:

 

  (a) each such shareholder or proxy holder shall be deemed to be present at the meeting; and

 

  (b) the meeting shall be deemed to be help at the location specified in the notice of the meeting.

 

Pursuant to our Articles, the quorum for the transaction of business at a meeting of our shareholders is one or more persons, present in person or by proxy.

 

Limitations on Rights of Non-Canadians

 

Our Company is incorporated pursuant to the laws of the Province of British Columbia, Canada. There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of common shares, other than withholding tax requirements. Any such remittances to United States residents are generally subject to withholding tax, however, no such remittances are likely in the foreseeable future. See “Canadian Federal Income Tax Considerations For United States Residents” below.

 

There is no limitation imposed by Canadian law or by our Articles or other constituent documents of our Company on the right of a non-resident to hold or vote common shares of our Company. However, the Investment Canada Act (Canada) (the “Investment Act”) has rules regarding certain acquisitions of shares by non-residents, along with other requirements under that legislation.

 

- 80 -

 

 

The following discussion summarizes the principal features of the Investment Act for a non-resident who proposes to acquire common shares of our Company. The discussion is general only; it is not a substitute for independent legal advice from an investor’s own advisor; and it does not anticipate statutory or regulatory amendments.

 

The Investment Act is a federal statute of broad application regulating the establishment and acquisition of Canadian businesses by non-Canadians, including individuals, governments or agencies thereof, corporations, partnerships, trusts or joint ventures (each an “entity”). Investments by non-Canadians to acquire control over existing Canadian businesses or to establish new ones are either reviewable or notifiable under the Investment Act. If an investment by a non-Canadian to acquire control over an existing Canadian business is reviewable under the Investment Act, the Investment Act generally prohibits implementation of the investment unless, after review, the Minister of Industry is satisfied that the investment is likely to be of net benefit to Canada.

 

A non-Canadian would acquire control of our Company for the purposes of the Investment Act through the acquisition of common shares if the non-Canadian acquired a majority of the common shares of our Company.

 

Further, the acquisition of less than a majority but one-third or more of the common shares of our Company would be presumed to be an acquisition of control of our Company unless it could be established that, on the acquisition, our Company was not controlled in fact by the acquirer through the ownership of common shares.

 

For a direct acquisition that would result in an acquisition of control of our Company, subject to the exception for “WTO-investors” that are controlled by persons who are nationals or permanent residents of World Trade Organization (“WTO”) member nations, a proposed investment generally would be reviewable where the value of the acquired assets is $5 million or more.

 

For a proposed indirect acquisition by an investor other than a so-called WTO investor that would result in an acquisition of control of our Company through the acquisition of a non-Canadian parent entity, the investment generally would be reviewable where the value of the assets of the entity carrying on the Canadian business, and of all other entities in Canada, the control of which is acquired, directly or indirectly, is $50 million or more.

 

In the case of a direct acquisition by a WTO investor, the threshold is significantly higher. An investment in common shares of our Company by a WTO investor would be reviewable only if it was an investment to acquire control of the Company and the enterprise value of the assets of the Company was equal to or greater than a specified amount, which is published by the Minister of Industry after its determination for any particular year. For 2020, this amount is $1.075 billion (unless the investor is controlled by persons who are nationals or permanent residents of countries that are party to one of a list of certain free trade agreements, in which case the amount is $1.613 billion); each January 1 both thresholds are adjusted by a GDP (Gross Domestic Product) based index.

 

The higher WTO threshold for direct investments and the exemption for indirect investments do not apply where the relevant Canadian business is carrying on a “cultural business”. The acquisition of a Canadian business that is a cultural business is subject to lower review thresholds under the Investment Act because of the perceived sensitivity of the cultural sector.

 

In 2009, amendments were enacted to the Investment Act concerning investments that may be considered injurious to national security. If the Minister of Industry has reasonable grounds to believe that an investment by a non-Canadian “could be injurious to national security”, the Minister of Industry may send the non-Canadian a notice indicating that an order for review of the investment may be made. The review of an investment on the grounds of national security may occur whether or not an investment is otherwise subject to review on the basis of net benefit to Canada or otherwise subject to notification under the Investment Act. To date, there is neither legislation nor guidelines published, or anticipated to be published, on the meaning of injurious to national security. Discussions with government officials suggest that very few investment proposals will cause a review under these new sections.

 

- 81 -

 

 

Certain transactions, except those to which the national security provisions of the Investment Act may apply, relating to common shares of our Company are exempt from the Investment Act, including:

 

  (a) the acquisition of our common shares by a person in the ordinary course of that person’s business as a trader or dealer in securities;

 

  (b) the acquisition of control of our Company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions on the Investment Act; and

 

  (c) the acquisition of control of our Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of our Company, through the ownership of common shares, remained unchanged.

 

C. Material Contracts

 

The following summary of our material agreements, all of which have been previously filed with the SEC, does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of those agreements. There are no material contracts, other than those contracts entered into in the ordinary course of business, currently in place or to which we or any member of our group is a party, from the two years immediately preceding the publication of this Annual Report, except as follows:

 

SOLO Manufacturing Agreement

 

On October 2, 2017, we announced a manufacturing agreement with Zongshen to produce 75,000 SOLO all-electric vehicles. We anticipate the production will commence in 2020 and that the 75,000 SOLOs under the agreement will be completed in the three years from the commencement of production. Under the agreement we agreed to reimburse Zongshen for: (i) the cost of the prototype tooling and molds estimated to be $1.8 million, which was due on or before March 18, 2018 and which has been postponed we anticipate until the second quarter of 2019 due to Zongshen not then completing the prototype of the tooling and molds; and (ii) the mass production tooling and molds estimated to be $7.8 million, which shall be payable 50% when Zongshen commences manufacturing the tooling and molds, 40% when Zongshen completes manufacturing the tooling and molds and 10% upon delivery to the Company of the first production vehicle. At December 31, 2019, the Company has completed the prototype tooling and molds with an actual cost of $1.9 million, as assessed by the Company, the prototype tooling and molds will be used for the mass production and the mass production tooling and molds cost is estimated to be $6.9 million. The Company had paid 90% of prototype tooling and molds and 89% of the mass production tooling and molds.

 

Share Pledge Agreement

 

In connection with the manufacturing agreement with Zongshen, on October 16, 2017, Jerry Kroll, our then CEO, entered into a Share Pledge Agreement to guarantee the payment by us for the cost of the prototype tooling and molds estimated to be $1.8 million to Zongshen through the pledge of 400,000 of our common shares at a deemed price of USD$4.00 per share. We have agreed to reimburse Mr. Kroll on a one-for-one basis for any pledged shares realized by Zongshen under the Share Pledge Agreement.

 

Share Purchase Agreement

 

On October 18, 2017 we entered into the SPA to acquire InterMeccanica, which replaced our then Joint Operating Agreement with the same. Under the SPA, we agreed to purchase all the shares of InterMeccanica for $2,500,000. In addition to an initial payment of $100,000 in 2016, during the nine months ended September 30, 2017, an additional $200,000 was paid. On October 18, 2017, we paid $700,000, and entered into a Note for the balance of $1,500,000 of the purchase price. On January 28, 2018, we paid off all of the principal and interest due on the Note for $1,520,548.

 

D. Exchange Controls

 

We are incorporated pursuant to the laws of the Province of British Columbia, Canada. There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of common shares, other than withholding tax requirements. Any such remittances to United States residents are generally subject to withholding tax, however no such remittances are likely in the foreseeable future. See “Certain Canadian Federal Income Tax Information For United States Residents” below.

 

- 82 -

 

 

There is no limitation imposed by Canadian law or by the charter or other constituent documents of our Company on the right of a non-resident to hold or vote common shares of our Company. However, the Investment Canada Act (Canada) (the “Investment Act”) has rules regarding certain acquisitions of shares by non-residents, along with other requirements under that legislation.

 

The following discussion summarizes the principal features of the Investment Act for a nonresident who proposes to acquire common shares of our Company. The discussion is general only; it is not a substitute for independent legal advice from an investor’s own advisor; and it does not anticipate statutory or regulatory amendments.

 

The Investment Act is a federal statute of broad application regulating the establishment and acquisition of Canadian businesses by non-Canadians, including individuals, governments or agencies thereof, corporations, partnerships, trusts or joint ventures (each an “entity”). Investments by non-Canadians to acquire control over existing Canadian businesses or to establish new ones are either reviewable or notifiable under the Investment Act. If an investment by a non-Canadian to acquire control over an existing Canadian business is reviewable under the Investment Act, the Investment Act generally prohibits implementation of the investment unless, after review, the Minister of Industry, is satisfied that the investment is likely to be of net benefit to Canada.

 

A non-Canadian would acquire control of our Company for the purposes of the Investment Act through the acquisition of common shares if the non-Canadian acquired a majority of the common shares of our Company.

 

Further, the acquisition of less than a majority but one-third or more of the common shares of our Company would be presumed to be an acquisition of control of our Company unless it could be established that, on the acquisition, our Company was not controlled in fact by the acquirer through the ownership of common shares.

 

For a direct acquisition that would result in an acquisition of control of our Company, subject to the exception for “WTO-investors” that are controlled by persons who are resident in World Trade Organization (“WTO”) member nations, a proposed investment would be reviewable where the value of the acquired assets is $5 million or more, or if an order for review was made by the federal cabinet on the grounds that the investment related to Canada’s cultural heritage or national identity, where the value of the acquired assets is less than $5 million.

 

For a proposed indirect acquisition that is not a so-called WTO transaction and that would result in an acquisition of control of our Company through the acquisition of a non-Canadian parent entity, the investment would be reviewable where (a) the value of the Canadian assets acquired in the transaction is $50 million or more, or (b) the value of the Canadian assets is greater than 50% of the value of all of the assets acquired in the transaction and the value of the Canadian assets is $5 million or more.

 

In the case of a direct acquisition by or from a “WTO investor”, the threshold is significantly higher. The 2016 threshold is $600 million, which threshold will be increased to $800 million in April 2017 for a two-year period. Other than the exception noted below, an indirect acquisition involving a WTO investor is not reviewable under the Investment Act.

 

The higher WTO threshold for direct investments and the exemption for indirect investments do not apply where the relevant Canadian business is carrying on a “cultural business”. The acquisition of a Canadian business that is a “cultural business” is subject to lower review thresholds under the Investment Act because of the perceived sensitivity of the cultural sector.

 

In 2009, amendments were enacted to the Investment Act concerning investments that may be considered injurious to national security. If the Industry Minister has reasonable grounds to believe that an investment by a non-Canadian “could be injurious to national security,” the Industry Minister may send the non-Canadian a notice indicating that an order for review of the investment may be made. The review of an investment on the grounds of national security may occur whether or not an investment is otherwise subject to review on the basis of net benefit to Canada or otherwise subject to notification under the Investment Canada Act. To date, there is neither legislation nor guidelines published, or anticipated to be published, on the meaning of “injurious to national security.” Discussions with government officials suggest that very few investment proposals will cause a review under these new sections.

 

- 83 -

 

 

Certain transactions, except those to which the national security provisions of the Investment Act may apply, relating to common shares of our Company are exempt from the Investment Act, including:

 

  (a) acquisition of common shares of the Company by a person in the ordinary course of that person’s business as a trader or dealer in securities,

 

  (b) acquisition of control of our Company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions on the Investment Act, and

 

  (c) acquisition of control of our Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of our Company, through the ownership of common shares, remained unchanged.

 

E. Taxation

 

Certain Canadian Federal Income Tax Considerations For United States Residents

 

The following is a summary of certain Canadian federal income tax considerations generally applicable to the holding and disposition of our securities acquired by a holder who, at all relevant times, (a) for the purposes of the Income Tax Act (Canada) (the “Tax Act”) (i) is not resident, or deemed to be resident, in Canada, (ii) deals at arm’s length with us and underwriters that we have recently used, and is not affiliated with us or the underwriters that we have recently used, (iii) holds our common shares as capital property, (iv) does not use or hold the common shares in the course of carrying on, or otherwise in connection with, a business carried on or deemed to be carried on in Canada and (v) is not a “registered non-resident insurer” or “authorized foreign bank” (each as defined in the Tax Act), or other holder of special status, and (b) for the purposes of the Canada-U.S. Tax Convention (the “Tax Treaty”), is a resident of the United States, has never been a resident of Canada, does not have and has not had, at any time, a permanent establishment or fixed base in Canada, and who otherwise qualifies for the full benefits of the Tax Treaty. Holders who meet all the criteria in clauses (a) and (b) above are referred to herein as “U.S. Holders”, and this summary only addresses such U.S. Holders.

 

This summary does not deal with special situations, such as the particular circumstances of traders or dealers, tax exempt entities, insurers or financial institutions, or other holders of special status or in special circumstances. Such holders, and all other holders who do not meet the criteria in clauses (a) and (b) above, should consult their own tax advisors.

 

This summary is based on the current provisions of the Tax Act, the regulations thereunder in force at the date hereof  (the “Regulations”), the current provisions of the Tax Treaty, and our understanding of the administrative and assessing practices of the Canada Revenue Agency published in writing prior to the date hereof. This summary takes into account all specific proposals to amend the Tax Act and Regulations publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Proposed Amendments”) and assumes that such Proposed Amendments will be enacted in the form proposed. However, such Proposed Amendments might not be enacted in the form proposed, or at all. This summary does not otherwise take into account or anticipate any changes in law or administrative or assessing practices, whether by legislative, governmental or judicial decision or action, nor does it take into account tax laws of any province or territory of Canada or of any other jurisdiction outside Canada, which may differ significantly from those discussed in this summary.

 

For the purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of our securities must generally be expressed in Canadian dollars. Amounts denominated in United States currency generally must be converted into Canadian dollars using the rate of exchange that is acceptable to the Canada Revenue Agency.

 

This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular U.S. Holder, and no representation with respect to the Canadian federal income tax consequences to any particular U.S. Holder or prospective U.S. Holder is made. This summary is not exhaustive of all Canadian federal income tax considerations. Accordingly, all prospective purchasers (including U.S. Holders as defined above) should consult with their own tax advisors for advice with respect to their own particular circumstances.

 

- 84 -

 

 

Withholding Tax on Dividends

 

Amounts paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in satisfaction of, dividends on our common shares to a U.S. Holder will be subject to Canadian withholding tax. Under the Tax Treaty, the rate of Canadian withholding tax on dividends paid or credited by us to a U.S. Holder that beneficially owns such dividends and substantiates eligibility for the benefits of the Tax Treaty is generally 15% (unless the beneficial owner is a company that owns at least 10% of our voting stock at that time, in which case the rate of Canadian withholding tax is generally reduced to 5%)

 

Dispositions

 

A U.S. Holder will not be subject to tax under the Tax Act on a capital gain realized on a disposition or deemed disposition of a security, unless the security is “taxable Canadian property” to the U.S. Holder for purposes of the Tax Act and the U.S. Holder is not entitled to relief under the Tax Treaty.

 

Generally, the common shares will not constitute “taxable Canadian property” to a U.S. Holder at a particular time unless, at any time during the 60 month period immediately preceding the disposition, more than 50% of the fair market value of such security was derived, directly or indirectly, from one or any combination of: (i) real or immoveable property situated in Canada, (ii) “Canadian resource properties” (as defined in the Tax Act), (iii) “timber resource properties” (as defined in the Tax Act), and (iv) options in respect of, or interests in, or for civil law rights in, property described in any of the foregoing whether or not the property exists. Notwithstanding the foregoing, in certain other circumstances set out in the Tax Act, common shares could also be deemed to be “taxable Canadian property”.

 

If the common shares become listed on a “designated stock exchange” as defined in the Tax Act and are so listed at the time of disposition, the common shares generally will not constitute “taxable Canadian property” of a U.S. Holder at that time unless, at any time during the 60 month period immediately preceding the disposition, the following two conditions are met: (i) the U.S. Holder, persons with whom the U.S. Holder did not deal at arm’s length, partnerships in which the U.S. Holder or such non-arm’s length person holds a membership interest (either directly or indirectly through one or more partnerships), or the U.S. Holder together with all such persons, owned 25% or more of the issued shares of any class or series of shares of our company; and (ii) more than 50% of the fair market value of the shares of the company was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, Canadian resource properties (as defined in the Tax Act), timber resource properties (as defined in the Tax Act) or options in respect of, or interests in, or for civil law rights in, property described in any of the foregoing whether or not the property exists. Notwithstanding the foregoing, in certain other circumstances set out in the Tax Act, common shares could also be deemed to be “taxable Canadian property”.

 

U.S. Holders who may hold common shares as “taxable Canadian property” should consult their own tax advisors with respect to the application of Canadian capital gains taxation, any potential relief under the Tax Treaty, and special compliance procedures under the Tax Act, none of which is described in this summary.

 

F. Dividends and Paying Agents

 

Not Applicable.

 

G. Statements by Experts

 

Not Applicable.

 

H. Documents on Display

 

The documents concerning us which are referred to in this Annual Report may be inspected at our offices located at 102 East 1st Avenue, Vancouver, British Columbia, Canada, V5T 1A4.

 

In addition, we have filed with the SEC a registration statement on Form F-1 under the Securities Act and the documents referred to in this Annual Report have been filed as exhibits to such Form F-1 with the SEC and may be inspected and copied at the public reference facility maintained by the SEC at 100F. Street NW, Washington, D.C. 20549. In addition, the SEC maintains a website at www.sec.gov that contains copies of documents that w