NOTE
2: MANAGEMENT’S PLANS
The
accompanying financial statements have been prepared on a basis that the Company is a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. However, the Company has experienced recurring operating
losses and negative operating cash flows since inception.
To
date, the Company has not generated revenues from product sales to achieve positive earnings and operating cash flows to enable
the Company to finance its operations internally. Funding for the business to date has come primarily through the issuance of
equity securities.
Although
the Company’s objective is to increase its revenues from the sales of its products within the next few years sufficient
to generate positive operating and cash flow levels, there can be no assurance that the Company will be successful in this regard.
The Company estimates it will need to raise approximately $10 million in additional capital in order to fund its operations, which
it intends to obtain through debt and/or equity offerings. The Company intends to use the proceeds from any such offerings, including
its Regulation A Offering (see Note 8) to fund the Company through the end of 2018. Funds on hand and any follow-on capital, if
needed, will be used to invest in its business to expand sales and marketing efforts, enhance its current product by continuing
research and development to bring the SRK to retail production, to build out a leased production facility, and fund operations
until positive cash flow is achieved. The need for additional capital may be adversely impacted by uncertain market conditions
or approval by regulatory bodies.
NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited
Interim Financial Information
The
accompanying unaudited financial statements have been prepared by the Company in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information, and pursuant to the instructions
to Form 10-Q promulgated by the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not
include all information and disclosures required by GAAP for complete financial statement presentation. In the opinion of management,
the accompanying condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary
to present fairly the Company's financial position as of September 30, 2017, and the results of its operations and its cash flows
for the nine-months ended September 30, 2017 and 2016. Results for the nine-months ended September 30, 2017 are not necessarily
indicative of the results to be expected for the year ending December 31, 2017. The information included in this Quarterly Report
on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31,
2016 included in the Company’s Post-Qualification Offering Statement on Form 1-A (File No. 024-10710), filed with the SEC
on September 18, 2017, as amended (“Form 1-A”).
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Fair
Value Measurements
The
Company’s financial instruments consist primarily of cash and notes payable. The carrying amounts of such financial instruments
approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these
instruments. The estimated fair value is not necessarily indicative of the amounts the Company would realize in a current market
exchange or from future earnings or cash flows. The Company adopted Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 820-10,
Fair Value Measurements and Disclosures
, which defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides
a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date.
The
standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information
and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an
asset or liability as of the measurement date.
The
three-level hierarchy for fair value measurements is defined as follows:
|
●
|
Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active
markets;
|
|
●
|
Level
2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly including
inputs in markets that are not considered to be active; and
|
|
●
|
Level
3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
Categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The
carrying amounts reported in the accompanying financial statements for current assets and current liabilities approximate the
fair value because of the immediate or short-term maturities of the financial instruments. As of September 30, 2017 and December
31, 2016, the Company did not have any level 2 or level 3 instruments.
Risks
and Uncertainties
The
Company expects to commence revenue generating activities later this year, with its first delivery of the SRK Fun Utility Vehicle
(“FUV
®
”) expected in November 2017. The Company’s business and operations are sensitive
to general business and economic conditions in the United States and worldwide along with governmental policy decisions. Several
factors beyond the Company’s control could cause fluctuations in these conditions. Adverse developments may also include:
economic recessions, trends in car manufacturing, consumer taste, availability of inventory, and changes in government policy
related to cars and motorcycles could have a material adverse effect on the Company’s financial condition and the results
of its operations.
The
Company currently has limited sales and marketing and/or distribution capabilities. The Company has limited experience in developing,
training or managing a sales force and will incur substantial additional expenses when it begins marketing of its products and
services. Developing a marketing and sales force is also time consuming and could delay launch of the Company’s products
and services. In addition, the Company will compete with companies that currently have extensive and well-funded marketing and
sales operations. Our marketing and sales efforts may be unable to compete successfully against these companies.
The
Company's industry is characterized by rapid changes in technology and customer demands. As a result, the Company's products and
services may quickly become obsolete and unmarketable. The Company's future success will depend on its ability to adapt to technological
advances, anticipate customer demands, develop new products and services and enhance our current products and services on a timely
and cost-effective basis. Further, the Company's products and services must remain competitive with those of other companies with
substantially greater resources. The Company may experience technical or other difficulties that could delay or prevent the development,
introduction or marketing of new products and services or enhanced versions of existing products and services. Also, the Company
may not be able to adapt new or enhanced products and services to emerging industry standards, and the Company's new products
and services may not be favorably received. In addition, we may not have the capital resources to further the development of existing
and/or new ones.
Cash
and Cash Equivalents
The
Company considers deposits that can be redeemed on demand and investments that have original maturities of less than three months,
when purchased, to be cash equivalents. As of September 30, 2017, Company’s cash and cash equivalents were deposited in
two financial institutions and as of December 31, 2016, the Company’s cash and cash equivalents were deposited in one financial
institution, which at times during both periods exceeded the federally insured limits.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
Customer
Deposits
Customer
deposits are generally held in a separate deposit account. Revenue is not recognized on customer deposits until the vehicle is
shipped to the customer.
Offering
Costs
The
Company accounts for offering costs in accordance with FASB ASC 340, “Other Assets and Costs.” Prior to the completion
of an equity offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering
costs will be charged to stockholders’ equity (deficit) upon the completion of an equity offering or to expense if the offering
is not completed. As of December 31, 2016, $40,000 offering costs were capitalized. As of September 30, 2017, all deferred offering
costs were charged to stockholders’ equity upon the initial close of the Regulation A offering (see Note 5). As of September
30, 2017, offering costs charged to stockholders’ equity were $1,299,021 which includes the offering cost for the Regulation
A Offering through the nine-months ended September 30, 2017.
Grant
Revenue
Revenue
from grant revenue is recognized in the period during which the conditions under the grant have been met and the Company has made
payment for the related expense. Grant revenue of $0 and $40,580 for the three and nine-month periods ended September 30, 2017,
respectively, and $0 for the three and nine-month periods ended September 30, 2016, are recorded as grant revenue in the accompanying
financial statements. Grant revenue makes up 100% of revenue in each period. Management believes the loss of such revenues will
not have a material effect on the Company’s operations.
Inventories
Inventories
are stated at the lower of cost (using the first-in, first-out method, “FIFO”) or market. Inventories consist of purchased
electric motors, electrical storage and transmission equipment and component parts. Inventories consist almost entirely of raw
materials and component parts as of September 30, 2017 and December 31, 2016. Work-in-progress as of September 30, 2017 was not
significant.
Net
Earnings or Loss per Share
The
Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as
the income (loss) available to common shareholders divided by the weighted average number of common shares outstanding for the
period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., Series
A-1 Preferred Stock, common stock warrants and common stock options) as if they had been converted at the beginning of the periods
presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income
per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during
the respective periods. Basic and diluted loss per common share is the same for all periods presented because all Series A-1 Preferred
Stock, common stock warrants and common stock options outstanding were anti-dilutive.
As
of the periods ended September 30, 2017 and 2016, the Company excluded the outstanding securities summarized below, which entitle
the holders thereof to ultimately acquire shares of common stock, from its calculation of earnings per share, as their effect
would have been anti-dilutive.
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
Warrants to purchase common stock
|
|
|
973,004
|
|
|
|
980,004
|
|
|
Stock options to purchase common stock
|
|
|
742,700
|
|
|
|
267,700
|
|
|
Total
|
|
|
1,715,704
|
|
|
|
1,247,704
|
|
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
Recent
Accounting Pronouncements
In
July 2017, the FASB issued ASU-No. 2017-11, I “Accounting for Certain Financial Instruments With Down Round Features”
and II “Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities
and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception.” The amendments in Part I of this Update
change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.
As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for
as a derivative liability at fair value as a result of the existence of a down round feature. The amendments in Part II of this
Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in
the Codification, to a scope exception. Those amendments do not have an accounting effect. The ASU is effective for public business
entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is
permitted. The Company is currently evaluating the impact of adopting this standard on the financial statements and disclosures.
In
May 2017, FASB issued ASU-2017-09, “Compensation-Stock Compensation (Topic 718)–Modification Accounting” to
provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718,
Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this
ASU are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December
15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU-2017-09 on the Company’s
financial statements.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
NOTE
4: NOTES PAYABLE
Notes
payable and accrued interest as of September 30, 2017 and December 31, 2016 are as follows:
|
|
|
Principal
|
|
|
Accrued Interest
|
|
|
|
|
September 30,
2017
|
|
|
December 31, 2016
|
|
|
September 30,
2017
|
|
|
December 31, 2016
|
|
|
Business Development Loan
|
|
$
|
-
|
|
|
$
|
250,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Convertible Notes Payable
|
|
|
-
|
|
|
|
275,000
|
|
|
|
-
|
|
|
|
3,322
|
|
|
Convertible Notes Payable to Related Parties
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
384
|
|
|
Note Payable to Related Party
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
5,000
|
|
|
$
|
575,000
|
|
|
$
|
-
|
|
|
$
|
3,706
|
|
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
On
December 4, 2015, the Company entered into a $250,000 loan agreement with the City of Eugene Business Development Fund; however,
the funds for the loan were not received until April 1, 2016, and accordingly no debt was owed as of December 31, 2015. This loan
was secured by substantially all assets of the Company and had an interest rate of 5% per annum. Interest only payments were due
monthly from the date of disbursement. The entire unpaid principal balance of the loan, plus accrued interest, was due and payable
upon the earlier of closing of a Regulation A offering or October 1, 2017. The note was repaid on September 21, 2017 in full,
after the initial closing of the Regulation A Offering.
Through
September 30, 2017 and the year ended December 31, 2016, the Company issued a series of convertible notes with original principal
balances of $200,000 and $325,000, respectively, all with the same terms as disclosed below. Of these notes $100,000 and $50,000,
respectively, were issued to related parties. The notes and all accrued interest were due on March 31, 2018. The notes were secured
by substantially all assets of the Company and had a stated interest rate of 6% per annum. The notes were convertible on demand
at the greater of $5.00 per share or 90% of the active selling price of the Series A-1 Preferred Stock at the time of conversion.
Notes totaling $450,000, of which $150,000 were to related parties, with accrued interest thereon of approximately $23,000 were
converted to 80,832 shares of common stock on August 31, 2017, at a price of $5.85 per share, which represented 90% of the $6.50
per share price in the Regulation A Offering. Notes totaling $75,000 were repaid in cash along with accrued interest thereon of
$354, during the nine-months ended September 30, 2017.
During
September 2017, the Company issued two convertible notes to related parties in the total principal amount of $70,000. The notes
and all accrued interest were due on March 31, 2018. These notes were secured by substantially all assets of the Company and had
a stated interest rate of 6% per annum. The notes were convertible on demand at the greater of $6.50 per share of common stock
or 90% of the active selling price of the common stock at the time of conversion. The notes principal balance of $70,000 and accrued
interest of $232 was repaid in cash on September 29, 2017.
On
September 11, 2017, the Company borrowed $5,000 from a related party. No security was issued for the loan. The loan was meant
to be a short-term advance and due on demand. The loan was repaid on October 26, 2017 and there is no interest associated with
this advance.
None
of the above convertible notes contained a beneficial conversion feature due to the conversion price of the notes being at or
above the fair value of the Series A-1 Preferred Stock or common stock, as applicable, on the issuance date.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
NOTE
5: STOCKHOLDERS’ EQUITY (DEFICIT)
Stock-Split
On
July 21, 2017, the Company’s board of directors and a majority of its common stockholders voted to enact a two-for-one common
stock split and increase the authorized common shares to 20,000,000. On July 25, 2017, a majority of the Series A-1 Preferred
stockholders voted to convert all shares of 1,434,891 Series A-1 Preferred Stock to 2,869,782 common shares. The July 21, 2017,
two-for-one common stock split resulted in a conversion rate of two shares of common stock for each share of Series A-1 Preferred
Stock. In accordance with SEC reporting guidelines, the retrospective application of the stock split has been applied to historical
financial information, and the Series A-1 Preferred to common stock conversion was reflected in the accompanying financial statements
as if it occurred as of December 31, 2016.
Preferred
Stock
The
Company is authorized to issue 5,000,000 shares of preferred stock, no par value, of which 1,500,000 shares were designated as
Series A-1 Preferred Stock. As of September 30, 2017 and December 31, 2016, there were no shares of Series A-1 Preferred Stock
issued and outstanding.
The
Series A-1 Preferred Stock is convertible at any time after issuance at the option of the holder into shares of common stock at
the original issue price of the Series A-1 Preferred Stock. The Series A-1 Preferred Stock is also subject to mandatory conversion
provisions upon an initial public offering raising $15 million or more and is not redeemable. To prevent dilution, the conversion
price of the Series A-1 Preferred Stock is to be adjusted for any issuance of securities, excluding exempt securities, which change
the number of shares of common stock outstanding. The Series A-1 Preferred Stockholders are entitled to equal voting rights to
common stockholders on an as-converted basis and receive preference to the common stockholders upon liquidation. During the first
two quarters of 2017, 245,100 shares of Series A-1 Preferred Stock were sold for cash proceeds of $1,225,500 in a Regulation D
offering. Of these shares, 12,000 were issued to a related party. The Series A-1 Preferred Stock was converted to common stock
as noted above.
Common
Stock
The
Company is authorized to issue 20,000,000 shares of common stock, no par value, as of September 30, 2017 and December 31, 2016.
During
September 2017, the Company issued 2,936,757 shares of common stock in the Regulation A Offering at a public offering price of
$6.50 per share. The Company received net proceeds of $18,031,525 in this closing after deducting underwriter commissions of $1,049,395
and escrow closing fees of $8,000. See Note 8 for fees paid to the underwriter in the Regulation A Offering.
The
Company has reserved a total of 2,000,000 shares of its common stock pursuant to equity incentive plans (see Note 6). The Company
has 1,715,704 and 1,247,704 stock options and warrants outstanding as of September 30, 2017 and December 31, 2016, respectively.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
NOTE
6: SHARE-BASED PAYMENTS
2015
Stock Incentive Plan
On
March 1, 2017, pursuant to the Company’s Amended and Restated 2015 Stock Incentive Plan, the Compensation Committee of the
Company’s board of directors authorized the grant of 430,000 employee incentive stock options (“ESOPs”) at a
strike price of $2.50 per share, 20,000 employee stock options at a strike price of $2.75 per share and 25,000 non-qualified stock
options (“NQSOs”) at a strike price of $2.50 per share.
The
Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line
basis over the vesting period of the award.
Determining
the appropriate fair value of stock-based awards requires the input of subjective assumptions, including the fair value of the
Company’s common stock, and for stock options, the expected life of the option, and expected stock price volatility. The
Company used the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the
fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation
expense could be materially different for future awards. See below for the weighted average variables used in assessing the fair
value at the grant date of March 1, 2017:
|
|
|
March 1,
2017
|
|
|
Annual dividend yield
|
|
|
-
|
|
|
Expected life (years)
|
|
|
6.21
|
|
|
Risk-free interest rate
|
|
|
2.16
|
%
|
|
Expected volatility
|
|
|
21.33
|
%
|
The
total grant date fair value of employee incentive stock options issued during the nine-month period ended September 30, 2017 was
$290,040. Employee stock-based compensation expense related to stock options included in general and administrative expenses for
the three and nine-month periods ended September 30 was $36,294 and $94,487 in 2017 and $12,160 and $36,215 in 2016, respectively.
As
of September 30, 2017, 138,573 employee stock options were vested and 7,500 stock options previously issued to employees were
forfeited.
Grants
to non-employees are expensed at the earlier of (i) the date at which a commitment for performance by the counterparty to earn
the equity instrument is reached and (ii) the date at which the counterparty’s performance is complete. For the NQSOs issued
in 2017, performance was completed on the date of issue. The fair value of non-employee awards was $0, and $22,445 for the three
and nine-month periods ended September 30, 2017, respectively and $0 for the three and nine-months ended September 30, 2016, which
is included in general and administrative expenses in the accompanying statements of operations.
2012
Employee Stock Benefit Plan
On
May 1, 2017, the Company issued 8,000 warrants to a lobbying contractor with a strike price of $2.50 per share and a five-year
life. The Black-Scholes variables used in assessing the fair value at the grant date were an expected life of 5 years, risk free
interest rate of 1.84% and expected volatility of 21.34% resulting in a value of $0.57 per warrant. The total value of $4,550
was recorded as lobbying expense. On September 20, 2017, 15,000 warrants issued to employees under the Company’s Second
Amended and Restated Stock Benefit Plan were exercised in a cashless transaction resulting in the issuance of 13,846 shares of
Company common stock. As of September 30, 2017, the Company had warrants outstanding under its Seconded Amended and Restated 2012
Employee Stock Benefit Plan, exercisable immediately, for approximately 973,000 shares of Company common stock.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
(Unaudited)
NOTE
7: CUSTOMER DEPOSITS
The
Company has received customer deposits ranging from $100 to $10,100 per order for retail production vehicles and $42,000 per order
for signature series vehicles for purposes of securing their vehicle production slot. As of September 30, 2017 and December 31,
2016, the Company’s balance of refundable deposits received was $451,767 and $386,035, respectively, which are refundable
upon demand. Refundable deposits are included in current liabilities in the accompanying balance sheets. Production of retail
vehicles is expected to begin in the first half of 2018; production of signature series vehicles has begun and the first delivery
is scheduled for November 2017. When a customer's order is ready to enter the production process, the customer is notified that
if they would like to proceed with the purchase of a vehicle, their deposit will no longer be refundable and any additional deposit
required must be paid prior to the start of the manufacturing process. If the customer elects to proceed with their order,
their deposit becomes no longer refundable. Customer deposits from related parties total $43,700 as of September 30, 2017 and
December 31, 2016.
NOTE
8: COMMITMENTS AND CONTINGENCIES
On
September 3, 2017, the Company entered into a Triple Net Lease for an approximately 30,000 square foot commercial industrial office
and manufacturing space in Eugene, Oregon. The lease began on October 1, 2017 and will terminate on March 31, 2021. Rent was $25,000
for the first month, then is $12,500 per month for months two through forty-one, and one dollar for month forty-two. See the following
table for future minimum rent payments by year.
Years
ending December 31:
|
2017
|
|
$
|
50,000
|
|
|
2018
|
|
$
|
150,000
|
|
|
2019
|
|
$
|
150,000
|
|
|
2020
|
|
$
|
150,000
|
|
|
2021
|
|
$
|
25,001
|
|
|
Total
|
|
$
|
525,001
|
|
Total
rent expense for the nine-month periods ended September 30, 2017 and 2016, was $50,678 and $44,805, respectively.
Underwriter
Agreement
In
connection with its offering of common stock under Regulation A of the Securities Act (the “Regulation A Offering”),
the Company agreed to issue the underwriter in the Regulation A Offering warrants, to purchase a number of shares of the common
stock equal to 5.0% of the total shares of common stock sold in any closing of the Regulation A Offering, excluding shares purchased
by investors sourced via alternative funding platforms (the “Underwriter Warrants”). The Underwriter Warrants are
exercisable commencing on the Qualification Date (as such term is defined in the Underwriter Warrants) and have a term of five
years. The Underwriter Warrants are not redeemable by the Company. The exercise price for the Underwriter Warrants will be the
amount that is 15% greater than the offering price, or $7.475. In the fourth quarter of 2017, the Company granted 122,238 Underwriter
Warrants earned in connection with the Regulation A Offering.
Litigation
The
Company is involved in claims and litigation from time to time in the normal course of business. At September 30, 2017, Company
management believes there are no pending matters that are expected to have a material adverse effect on the business of the Company,
their financial condition, results of operations or cash flows.
NOTE
9: SUBSEQUENT EVENTS
Common
Stock
On
October 4, 2017, the Company issued 4,000 shares of common stock to a vendor in payment of video production services.
On
October 17, 2017, the Company issued 8,900 shares of common stock in a subsequent close of the Regulation A offering at a public
offering price of $6.50 per share. The Company received net proceeds of $56,115 in this closing after deducting underwriting commissions
of $1,735. See Note 8 for fees paid to the underwriter in the Regulation A Offering.
See
also Note 8 for additional subsequent events.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements include, but are not
limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating
to our future activities or other future events or conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results
may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous
factors discussed from time to time in this report and in other documents which we file with the SEC. In addition, such statements
could be affected by risks and uncertainties related to:
|
●
|
overall strength
and stability of general economic conditions and of the automotive industry more specifically, both in the United States and
globally;
|
|
●
|
changes in consumer demand for, and acceptance
of, our products;
|
|
●
|
changes in the competitive
environment, including adoption of technologies and products that compete with our products;
|
|
●
|
our ability to generate consistent revenues;
|
|
●
|
our ability to effectively execute our business
plan;
|
|
●
|
changes in the price of oil and electricity;
|
|
●
|
changes in laws or regulations governing our
business and operations;
|
|
●
|
our ability to maintain
adequate liquidity and financing sources and an appropriate level of debt on terms favorable to our company;
|
|
●
|
our ability to design, produce and market future
vehicle models;
|
|
●
|
the number of reservations and cancellations
for the SRK and our ability to deliver on those reservations;
|
|
●
|
our ability to maintain quality control over
our vehicles and avoid material vehicle recalls;
|
|
●
|
our ability to manage
the distribution channels for our products, including our ability to successfully implement our direct to consumer distribution
strategy;
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costs and risks associated with litigation;
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our ability to obtain and protect our existing
intellectual property protections including patents;
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changes in accounting
principles, or their application or interpretation, and our ability to make estimates and the assumptions underlying the estimates,
which could have an effect on earnings;
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interest rates and the credit markets;
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our ability to maintain our Nasdaq listing;
and
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other risks described from time to time in periodic
and current reports that we file with the SEC.
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The
foregoing list does not contain all of the risks and uncertainties. Any forward-looking statements speak only as of the date on
which they are made, and except as may be required under applicable securities laws; we do not undertake any obligation to update
any forward-looking statement to reflect events or circumstances after the filing date of this report.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion and analysis of our financial condition and results of operations for the three and nine months ended September
30, 2017 should be read together with our unaudited consolidated financial statements and related notes included elsewhere in
this report and in conjunction with the audited financial statements of the Company included in our Form 1-A. The following discussion
contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance.
Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as
a result of a number of factors. We caution that assumptions, expectations, projections, intentions or beliefs about future events
may, and often do, vary from actual results and the differences can be material. Please see “Cautionary Note Regarding Forward-Looking
Statements.”
Overview
We
design, develop, manufacture, and sell high-performance fully electric vehicles. Our goal is to devise new technologies and patterns
of mobility that raise the bar for environmental efficiency, footprint and affordability. We plan to achieve our mission by replacing
the global urban and suburban use of approximately 4,000 lb. internal combustion engine vehicles for regular daily trips with
the SRK, a pure electric solution that is approximately a quarter of the weight, a third the cost to purchase and far more efficient
than the U.S. fleet average passenger car. We continue to enhance our vehicle offerings with the Beta design which we expect to
complete later this year and then deliver our first signature series vehicle with serial pilot production expected to begin in
early 2018. We continue to increase our pre-orders in preparation for serial production of an estimated 2,000 units in 2018. As
of September 30, 2017, we had 1,834 pre-orders representing an increase of 813, or approximately 80%, from the 1,021 pre-orders
as of September 30, 2016. As of November 13, 2017, we had 2,008 pre-orders.
On
July 21, 2017, we effected a two-for-one common stock split and increased our authorized common shares to 20,000,000. On July
25, 2017, a majority of the Series A-1 Preferred stockholders voted to convert all 1,434,891 shares of Series A-1 Preferred Stock
to 2,869,782 common shares. The July 21, 2017, two-for-one common stock split resulted in a conversion rate of two shares of common
stock for each share of Series A-1 Preferred Stock. In accordance with SEC reporting guidelines, the retrospective application
of the stock split has been applied to historical financial information, and the Series A-1 Preferred to common stock conversion
was reflected in the accompanying financial statements as if it occurred as of December 31, 2016.
During
the nine-months ended September 30, 2017, we issued 245,100 shares of Series A-1 Preferred Stock for aggregate gross proceeds
of approximately $1,226,000 from our Regulation D offering and also received proceeds from the issuance of an aggregate of $275,000
of convertible debt.
During
September 2017, we sold 2,936,757 shares of common stock in the initial closing of our Regulation A offering at a public offering
price of $6.50 per share. We received net proceeds of approximately $18,032,000 in this closing after deducting underwriter commissions
of approximately $1,049,000 and escrow closing fees of $8,000.
On
October 17, 2017, in a subsequent closing of our Regulation A offering, we issued 8,900 common shares in exchange for gross proceeds
of $58,000. Net proceeds to us were approximately $56,000 after deducting underwriting commissions of approximately $2,000.
On
September 3, 2017, Arcimoto, Inc. entered into a Triple Net Lease for 30,000 square feet of commercial industrial office and manufacturing
space in Eugene, Oregon. The lease began on October 1, 2017 and will terminate on March 31, 2021. Rent was $25,000 for the first
month, then is $12,500 per month for months two through forty-one, and one dollar for month forty-two.
Management
Opportunities, Challenges and Risks
Demand,
Production and Capital
We
are currently taking the knowledge we learned from the Alpha SRK vehicles to finalize the design of the Beta SRK Fun Utility Vehicle
(“FUV”). We believe we have broadened the appeal of our electric vehicles by improving range, performance and
value, and we expect to introduce additional vehicle versions and functionality over time. Overall, we expect that demand
for our vehicles will continue to increase as more people drive and become aware of our vehicles, and as we strive to grow our
customer sales and potentially offer less expensive vehicles than other electric vehicles in the market, and we continue to further
develop our vehicle design.
We
continue to make progress toward vehicle production and started to outfit a facility to support vehicle production beginning in
2018.
Trends
in Cash Flow, Capital Expenditures and Operating Expenses
We
plan to initiate serial production of our vehicles beginning in 2018. Given this plan, our capital expenditure needs include
capital costs for the tooling, production equipment and construction of the SRK Arcimoto production line.
We
currently expect operating expenses to grow by approximately 30% in 2017 as compared to 2016. This increase is driven by
increased hiring for manufacturing engineering and production operations expected to begin later this year, and marketing and
other non-capitalizable expenses associated with our Regulation A offering. Although we continue to remain on track
with our progress toward vehicle manufacturing, given the size and complexity of this undertaking, it is possible that future
events could result in the cost of building and operating the production facility exceeding our current expectations and taking
longer to bring online than we currently anticipate.
New
Accounting Pronouncements
See Note
3 “Summary of Significant Accounting Policies” to our Financial Statements included under Part I, Item 1
of this Quarterly Report on Form 10-Q which includes a discussion of recent accounting pronouncements that may impact us.
Disclosure
About Off-Balance Sheet Arrangements
None.
Critical
Accounting Policies and Estimates
Our
financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures.
We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe are reasonable
under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly,
actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions
on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future
financial statement presentation, financial condition, results of operations and cash flows will be affected.
For
a description of our critical accounting policies and estimates, please refer to the “Summary of Significant Accounting
Policies” in Note 3 to our Financial Statements in the Company’s Form 1-A and this Quarterly Report on Form 10-Q.
Results
of Operations
Three
months ended September 30, 2017 versus three months ended September 30, 2016
Revenues
We
had no revenue from the sale of our vehicles during the three-months ended September 30, 2017 and 2016.
Operating
Expenses
Research
and Development Expenses
Research
and development (“R&D”) expenses consist primarily of personnel costs for our engineering and research teams,
and prototyping materials expense. R&D expenses for the three months ended September 30, 2017 and 2016 were approximately
$288,000 and $293,000, respectively. The primary reasons for the decrease in R&D expenses of $5,000, or 2%, are a decrease
in contract labor of $25,000, a decrease in training and related travel expenses of $8,000 and a decrease in materials expense
of $26,000 as we allocate resources to our Signature Series inventory, offset by the increase in engineering salaries and wages
of approximately $54,000.
Sales
and Marketing Expenses
Sales
and marketing expenses consist primarily of costs associated with marketing the Regulation A offering and booking pre-orders and
selling our high-performance fully electric vehicles. Sales and marketing expenses for the three months ended September 30, 2017
and 2016 were approximately $243,000 and $110,000, respectively. The primary reason for the increase in sales and marketing expenses
of $133,000, or 121%, during the current quarter was due to a $103,000 increase in public relations, marketing and travel expenses
in preparation for our Regulation A offering, a $16,000 increase is salary and labor expenses, and a $14,000 increase in lobbying
expenses.
General
and Administrative Expenses
General
and administrative (“G&A”) expenses consist primarily of personnel and facilities costs related to executive,
finance, human resources, information technology and legal matters, as well as litigation settlements and fees for professional
and contract services. G&A expenses for the three months ended September 30, 2017 were approximately $156,000 as compared
to $161,000 for the same period last year representing a decrease of approximately $5,000, or 3%. The primary reason for the decrease
in the current period was due to a $47,000 decrease in accrued vacation expense, a $28,000 decrease in legal and other professional
fees, a $4,000 decrease in property taxes, and a $9,000 decrease in insurance expense offset by a $69,000 increase in salary and
wages and a $24,000 increase in non-cash compensation expense for the granting of employee stock options.
Interest
Expense
Interest
expense for the three months ended September 30, 2017 was approximately $9,000 as compared to $3,000 during the three months ended
September 30, 2016. The increase in interest expense was due to higher balances of outstanding debt during the current period.
Nine
months ended September 30, 2017 versus nine months ended September 30, 2016
Revenues
We
had no revenue from the sale of our vehicles during the nine months ended September 30, 2017 and 2016. We did recognize grant
revenue during the nine months ended September 30, 2017 amounting to approximately $41,000. Revenues from grants are recognized
in the period during which the conditions under the grant have been met and the Company has made payment for the related expense.
There was no such grant revenue during the same period in the prior year. We believe the loss of such grant revenues will not
have a material effect on the Company’s operations.
Operating
Expenses
Research
and Development Expenses
R&D
expenses consist primarily of personnel costs for our engineering and research teams, and prototyping materials expense. R&D
expenses for the nine months ended September 30, 2017 and 2016 were approximately $820,000 and $740,000, respectively. The primary
reason for the increase in R&D expenses of $80,000, or 11%, is the increase in engineering salaries and wages of approximately
$191,000 offset by a decrease in contract labor of $38,000 and a reduction in R&D materials of approximately $70,000.
Sales
and Marketing Expenses
Sales
and marketing expenses consist primarily of costs associated with marketing our Regulation A offering and booking pre-orders and
selling our high-performance fully electric vehicles. Sales and marketing expenses for the nine months ended September 30, 2017
and 2016 were approximately $478,000 and $383,000, respectively. The primary reason for the increase in sales and marketing expenses
during the nine months ended September 30, 2017 of $95,000, or 25%, as compared to the prior period is a $41,000 increase in public
relations, marketing, and travel expenses in preparation for our Regulation A offering, a $33,000 increase is salary and labor
expenses, and a $23,000 increase in lobbying expense.
General
and Administrative Expenses
G&A
expenses consist primarily of personnel and facilities costs related to executive, finance, human resources, information technology
and legal organizations, as well as litigation settlements and fees for professional and contract services. G&A expenses for
the nine months ended September 30, 2017 were approximately $503,000 as compared to $368,000 for the same period last year representing
an increase of approximately $135,000, or 37%. The primary reason for the increase in the current period was due to a $81,000
increase in non-cash compensation expense for the granting of employee stock options, a $50,000 increase in salary and wages expenses,
and a $6,000 increase in rent expense.
Interest
Expense
Interest
expense for the nine months ended September 30, 2017 was approximately $31,000 as compared to a $7,000 during the nine months
ended September 30, 2016. The increase in interest expense was due to higher balances of outstanding debt during the current
period.
Liquidity
and Capital Resources
As
of September 30, 2017, we had approximately $17,603,000 in cash and cash equivalents representing an increase of approximately
$17,189,000 from December 31, 2016. Sources of cash are predominately from the sale of equity. We anticipate that our current
sources of liquidity, including cash and cash equivalents, together with our current projections of cash flow from operating activities,
may provide us with adequate liquidity based on our current plans. We may raise funds in the future, including potential equity
or debt offerings, subject to market conditions and recognizing that we cannot be certain that additional funds would be available
to us on favorable terms or at all. The amount and timing of funds that we may raise is undetermined and would vary based on a
number of factors, including our liquidity needs as well as access to current and future sources of liquidity.
Our
estimates for tooling and manufacturing capital expenditures for our planned SRK production facility will require approximately
$10 million, which we expect to raise in future equity and/or debt offerings. We are currently in the process of evaluating our
capital expenditure needs for the remainder of 2017.
For
the nine months ended September 30, 2017, we issued 245,100 shares of Series A-1 Preferred Stock for aggregate gross proceeds
of approximately $1,226,000 in a Regulation D offering, of which 12,000 shares were sold to a related party. In addition, during
September 2017, we sold 2,936,757 shares of common stock in an initial closing of our Regulation A offering at a public offering
price of $6.50 per share. We received net proceeds of approximately $18,032,000 in this closing after deducting underwriter commissions
of approximately $1,049,000 and escrow closing fees of $8,000.
On
October 17, 2017, in a subsequent close of our Regulation A offering, we issued 8,900 common shares in exchange for gross proceeds
of $58,000. Net proceeds to us were approximately $56,000 after deducting underwriting commissions of approximately $2,000.
Cash
Flows from Operating Activities
Our
cash flows from operating activities are significantly affected by our cash investments to support the growth of our business
in areas such as research and development, sales and marketing and general and administrative expenses. Our operating cash flows
are also affected by our working capital needs to support personnel related expenditures, accounts payable and other current assets
and liabilities.
During
the nine months ended September 30, 2017, cash used in operating activities was approximately $1,717,000, which was primarily
the result of our net loss incurred of approximately $1,790,000, an increase in other current assets of $99,000 and an increase
in inventories of $174,000 for materials for our electric vehicles partially offset by stock-based compensation of $121,000, an
increase in accrued liabilities of $39,000 mainly for payroll related liabilities, an increase in accounts payable of $118,000,
and an increase in customer deposits of $66,000 resulting from SRK reservations.
Cash
Flows from Investing Activities
Cash
flows from investing activities primarily relate to capital expenditures to support our growth in operations, including investments
in manufacturing equipment and tooling. No cash was used in investing activities for the nine months ended September
30, 2017 and 2016. The Company’s plan is to implement the manufacturing capital expenditures after future equity and/or
debt financings.
Cash
Flows from Financing Activities
During
the nine months ended September 30, 2017, net cash provided by financing activities was approximately $18,905,000 compared to
$540,000 during the nine months ended September 30, 2016. Cash flows from financing activities during the nine months ended September
30, 2017 consisted primarily of $19,088,000 in gross proceeds from our Regulation A offering of 2,936,757 share of Common Stock,
$1,226,000 in gross proceeds from our Regulation D offering in that period of 245,100 shares of Series A-1 Preferred Stock as
well as proceeds from the issuance of convertible debt of $275,000. These proceeds were slightly offset by approximately $1,289,000
in offering costs and $395,000 in repayments of notes payable. Cash flows from financing activities during the nine months ended
September 30, 2016 consisted primarily of the issuance of $250,000 in debt from the City of Eugene Business Development fund and
approximately $300,000 in gross proceeds from our Regulation D offering of 60,200 shares of preferred stock offset by $10,000
in legal costs associated with the preparation of our Regulation A offering.