NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations
ADOMANI, Inc. (“we”, “us”, “our” or the “Company”) designs and causes to be designed advanced zero-emission electric and hybrid drivetrain systems for integration in new school buses and medium to heavy-duty commercial fleet vehicles. The Company also designs and causes to be designed re-power conversion kits to replace conventional drivetrain systems for combustion powered vehicles with zero-emission electric or hybrid drivetrain systems. The Company is also a provider of new zero-emission electric and hybrid vehicles focused on total cost of ownership. The Company’s drivetrain systems and vehicles are designed to help fleet operators unlock the benefits of green technology and address the challenges of local, state and federal regulatory compliance and traditional-fuel price cost instability.
2. Summary of Significant Accounting Policies
Basis of Presentation
—The consolidated financial statements and related disclosures as of March 31, 2019 and for the three months ended March 31, 2019 and 2018 are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In our opinion, these unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the results for the interim periods. These unaudited financial statements should be read in conjunction with our audited financial statements for the years ended December 31, 2018 and 2017 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year.
Principles of Consolidation
—The accompanying financial statements reflect the consolidation of the individual financial statements of ADOMANI, Inc., ADOMANI California, Inc., Adomani (Nantong) Automotive Technology Co. Ltd., School Bus Sales of California, Inc., and Zero Emission Truck and Bus Sales of Arizona, Inc. All significant intercompany accounts and transactions have been eliminated.
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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
—The carrying values of our financial instruments, including cash, notes receivable and accounts payable approximate their fair value due to the short-term nature of these financial instruments. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 820, “Fair Value Measurement” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. It also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs that are supported by little or no market data and that require the reporting entity to develop its own assumptions.
The Company does not have any assets or liabilities that are required to be measured and recorded at fair value on a recurring basis.
5
Revenue Recognition
—The
Company recognizes revenue from the sales of advanced zero-emission electric drivetrain systems for fleet vehicles and from contracting to provide related engineering services. In May 2014, the FASB issued new accounting guidance, ASC Topic 606, “Revenue f
rom Contracts with Customers”, to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP. The amendments in this guidance state that an entity should recognize revenue to depict the transfer of promised goods or se
rvices to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new guidance requires enhanced disclosures to help users of financial statements better understand the
nature, amount, timing, and uncertainty of revenue that is recognized.
In applying ASC Topic 606, the Company is required to (1) identify any contracts with customers, (2) determine if multiple performance obligations exist, (3) determine the transaction price, (4) allocate the transaction price to the respective obligation, and (5) recognize the revenue as the obligation is satisfied. Our existing contracts, under our Blue Bird supply agreement, and work performed for Blue Bird Corporation under
a U.S. Department of Energy (“DOE”) grant awarded to Blue Bird Corporation for which we were selected to provide products and services
, are single-performance obligations and, therefore, require no allocation of the transaction price. The Company recognizes revenue when product is shipped or is billed by its third-party supplier for work performed under the DOE grant. Additionally, t
he Company records revenue for these sales at gross, rather than net, as the Company is the principal obligor to Blue Bird Corporation for both the supply agreement and the statement of work for the DOE grant, and assumes the risk for non-performance, or non-compliance, related to any work performed by its subcontractor.
Cash and Cash Equivalents
— The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less to be cash equivalents.
Marketable Securities
—The Company invests in short-term, highly liquid, marketable securities, such as U.S. Treasury notes, U.S. Treasury bonds, and other government-backed securities. The Company classifies these marketable securities as held-to-maturity, as the intent is not to liquidate them prior to the respective stated maturity date.
Accounts Receivable and Allowance for Doubtful Accounts
—The Company establishes an allowance for bad debts through a review of several factors including historical collection experience, current aging status of the customer accounts, and financial condition of its customers. The Company does not generally require collateral for its accounts receivable. The Company had trade accounts receivable of $382,732 and $996,621 as of March 31, 2019 and December 31, 2018, respectively. As the entire trade accounts receivable balance relates to one customer, which the Company believes to be credit-worthy and, consequently, there is very little chance of default, no allowance has been recorded relative to the trade receivable balance as of March 31, 2019. The Company also had other receivables of $109,045 and $143,734 as of March 31, 2019 and December 31, 2018, respectively. The Company provided an allowance for other receivables of $20,000 and $70,000 as of March 31, 2019 and December 31, 2018, respectively. $50,000 of other receivables was written off against the allowance for the three months ended March 31, 2019, as it was determined to be uncollectable.
Inventory Deposits―
The Company records all inventory deposits as prepaid assets. Upon completion of production, and acceptance by the Company, deposits are reclassified to either inventory or cost of goods, depending on whether a sale of the product has occurred. The Company had inventory deposits of $872,661 and $882,050 as of March 31, 2019 and December 31, 2018, respectively.
Net Loss Per Share
—Basic net loss per share is calculated by dividing the Company’s net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is calculated by dividing the Company’s net loss applicable to common stockholders by the diluted weighted average number of shares of common stock outstanding during the period. The diluted weighted average number of shares of common stock outstanding is the basic weighted number of shares of common stock adjusted for any potentially dilutive debt or equity securities.
Concentration of Credit Risk
—The Company has credit risks related to cash and cash equivalents on deposit with a federally insured bank, as at times it exceeds the $250,000 maximum amount insured by the Federal Deposit Insurance Corporation.
6
Impairment of Long-Lived Assets
—Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates these assets to determine potential im
pairment by comparing the carrying amount to the undiscounted estimated future cash flows of the related assets. If the estimated undiscounted cash flows are less than the carrying value of the assets, the assets are written down to their fair value. There
was no impairment of long-lived assets, or property and equipment, as of March 31, 2019 and December 31, 2018, respectively.
Research and Development
—Costs incurred in connection with the development of new products and manufacturing methods are charged to operating expenses as incurred. During the three months ended March 31, 2019 and 2018, $45,000 and $155,933, respectively, were expensed as research and development costs.
Stock-Based Compensation
—The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, “Compensation-Stock Compensation”, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered. Additionally, in June 2018 the FASB issued Accounting Standards Update (“ASU”) No. 2018-07, which simplified several aspects of accounting for nonemployee share-based payment transactions by expanding the scope of ASC Topic 718. The guidance is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. The Company has implemented this change beginning in 2019, although it has minimal impact on its financial statements.
Property and Equipment
— Property and equipment are stated at cost, less accumulated depreciation and amortization. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets, which range from three to five years, except leasehold improvements, which are being amortized over the life of the lease term. Property and equipment qualify for capitalization if the purchase price exceeds $2,000. Major repairs and replacements, which extend the useful lives of equipment, are capitalized and depreciated over the estimated useful lives of the property. All other maintenance and repairs are expensed as incurred.
Recent Accounting Pronouncements
—
Management has considered all recent accounting pronouncements issued, but not effective, and does not believe that they will have a significant impact on the Company’s financial statements.
3. Property and Equipment, Net
Components of property and equipment, net, consist of the following as of March 31, 2019 and December 31, 2018:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Furniture and fixtures
|
|
$
|
41,799
|
|
|
$
|
41,799
|
|
Leasehold improvements
|
|
|
23,338
|
|
|
|
23,338
|
|
Computers
|
|
|
53,704
|
|
|
|
53,704
|
|
Vehicles
|
|
|
67,299
|
|
|
|
67,299
|
|
Test/Demo vehicles
|
|
|
38,332
|
|
|
|
31,728
|
|
Total property and equipment
|
|
$
|
224,472
|
|
|
$
|
217,868
|
|
Less accumulated depreciation
|
|
|
(79,453
|
)
|
|
|
(67,777
|
)
|
Net property and equipment
|
|
$
|
145,019
|
|
|
$
|
150,091
|
|
Depreciation expense was $11,676 and $8,237 for the three months ended March 31, 2019 and 2018, respectively.
7
4
. Notes
Receivable
On June 29, 2017, the Company loaned $500,000 to an unaffiliated third party with engineering expertise in the electric bus technology industry, with whom the Company, at that time, expected it might seek an alliance at some future date, in order to provide it with working capital. The stated interest rate is 9% per annum, with interest payments due monthly beginning on July 31, 2017. The note is secured by the assets of the borrower and was scheduled to mature on December 31, 2017. In February 2018, the parties agreed to extend the maturity date of the note to June 30, 2018, and in June 2018, the parties agreed to further extend the maturity date of the note until September 30, 2018. The note, as amended, is subject to an extension fee of $35,000 due no later than the September 30, 2018 maturity date. Per the terms of the note, as amended, the borrower was obligated to make past due interest payments in the aggregate amount of $18,750 on or before July 6, 2018. The Company received such past due interest payments on July 6, 2018. All subsequent interest payments prior to the September 30, 2018 maturity were made. The borrower failed to pay the $500,000 principal, along with unpaid and accrued extension fees of $35,000, by the September 30, 2018 maturity date, and the Company considers the note to be in default. The Company notified the borrower in writing of such default on October 1, 2018. The Company recorded a $200,000 allowance as bad debt expense against the note based on preliminary determination of recoverability from the assets owned by the unaffiliated third party. In October 2018, the Company accrued an additional fee of $15,000 and late fees on the extension fee of $1,750, and is currently accruing interest at the default rate, which is the stated rate of interest plus 2%, in accordance with the note, until resolution occurs. Total interest accrued for the three months ended March 31, 2019 was $13,749.
The Company loaned $200,000 pursuant to a secured promissory note to an unaffiliated third party in the energy storage technology industry in September 2018. The stated interest rate under the note is 9% per annum and any unpaid interest will become part of the principal balance after one year and will compound accordingly. The amount outstanding under the note will automatically convert into preferred stock of the borrower in connection with a financing that results in aggregate gross proceeds to the borrower of at least $500,000. Additionally, the Company may optionally convert into preferred stock of the borrower any or all of the amount outstanding under the note at any time. The note is secured by substantially all of the assets of the borrower and is scheduled to mature on December 31, 2020 unless conversion of the note occurs prior to that date. The note is reported as an other non-current asset on the consolidated balance sheet as of March 31, 2019.
5. Debt
Effective May 2, 2018, the Company secured a line of credit from Morgan Stanley Private Bank, National Association (“Morgan Stanley”). Borrowings under the line of credit bear interest at 30-day LIBOR plus 2.0%. There is no maturity date for the line, but Morgan Stanley may at any time, in its sole discretion and without cause, demand the Company immediately repay any and all outstanding obligations under the line of credit in whole or in part. The line is secured by the cash and cash equivalents maintained by the Company in its Morgan Stanley accounts, which was approximately $7.6 million as of March 31, 2019, of which $2.3 million is classified on our balance sheet as cash and cash equivalents, and $5.3 million as marketable securities as of March 31, 2019. Borrowings under the line may not exceed 95% of such cash, cash equivalents, and marketable securities balances, subject to a maximum of $7 million. Such borrowing threshold, however, is subject to change at Morgan Stanley’s discretion and depends upon the holdings in the Company’s accounts, the maturity dates of the securities in the accounts and the credit quality of the underlying insurers. As of March 31, 2019, the principal amount outstanding under this line of credit was approximately $2.5 million, and the undrawn borrowing availability was $4.5 million.
8
6. Common Stock
On January 9, 2018, the Company consummated the closing of a follow-on offering of units, each consisting of one share of common stock and a warrant to purchase 1.5 shares of common stock at an exercise price of $4.50. The Company sold an aggregate of 3,666,667 units for aggregate gross proceeds of approximately $11.0 million. Net proceeds received after deducting commissions, expenses and fees of approximately $1.2 million amounted to approximately $9.8 million. Under the terms of the underwriting agreement executed in connection with the follow-on offering, the Company issued to Boustead Securities, LLC and Roth Capital Partners, LLC warrants to purchase an aggregate of 256,667 shares of common stock. The warrants to purchase 256,667 shares of common stock were valued using the Black-Scholes option-pricing model, resulting in a fair market value of $598,737. The assumptions used in the valuation of the warrants issued to Boustead Securities, LLC and Roth Capital Partners, LLC included the term of five years, the exercise price of $3.75 per share, volatility of 92.20% and a risk-free interest rate of 2.13%. The fair value of these warrants was recorded as offering costs and netted against additional paid-in capital during the three months ended March 31, 2018.
During January and February 2019, certain non-employees exercised options to purchase an aggregate of 71,084 shares of common stock, for which the Company received aggregate gross proceeds of $7,108 (see Note 8).
Effective February 1, 2019, the Company hired a consultant to provide sales and marketing expertise. The consultant is to be paid $7,500 per month, consisting of $2,500 in cash and $5,000 of common stock. The number of shares of common stock to be issued is determined by the Company’s closing stock price on the last market day of the respective preceding month. As of March 31, 2019, the Company had issued 30,161 shares of common stock to the consultant.
7. Stock Warrants
As of March 31, 2019, the Company has issued warrants to purchase an aggregate of 7,556,323 shares of common stock. The Company’s stock warrant activity for the three months ended March 31, 2019 is summarized as follows:
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Shares
|
|
|
Price
|
|
|
Contractual Life (years)
|
|
Outstanding at December 31, 2018
|
|
|
7,556,323
|
|
|
$
|
4.45
|
|
|
|
3.8
|
|
Granted
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
7,556,323
|
|
|
$
|
4.45
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
|
|
7,556,323
|
|
|
$
|
4.45
|
|
|
|
3.5
|
|
As of March 31, 2019, the outstanding warrants have no intrinsic value.
8. Stock-Based Compensation
On March 6, 2018, Edward R. Monfort ceased serving as the Company’s Chief Technology Officer. Upon Mr. Monfort’s separation from service, the Company’s board of directors suspended Mr. Monfort’s outstanding options. Although such options remain outstanding, they were unexercisable as of March 31, 2019 and through the date of this Quarterly Report. As of March 31, 2019, outstanding options to purchase an aggregate of 14,297,902 shares of common stock are attributable to Mr. Monfort.
During January and February 2019, certain non-employees exercised options to purchase an aggregate of 71,084 shares of common stock, for which the Company received aggregate gross proceeds of $7,108 (see Note 6).
Effective February 1, 2019, the Company engaged a consultant to provide sales and marketing expertise. The Company agreed to pay such consultant $7,500 per month, consisting of $2,500 in cash and $5,000 of common stock. As of March 31, 2019, the Company had issued 30,161 shares of common stock to the consultant (see Note 6).
9
Stock option activity for the
three
months ended
March 31
, 201
9
is as follows:
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Shares
|
|
|
Price
|
|
|
Contractual Life
(years)
|
|
Outstanding at December 31, 2018
|
|
|
24,728,422
|
|
|
$
|
0.15
|
|
|
|
2.6
|
|
Granted
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
|
(71,084
|
)
|
|
$
|
0.10
|
|
|
|
|
|
Canceled/Forfeited
|
|
|
(135,000
|
)
|
|
$
|
1.31
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
24,522,338
|
|
|
$
|
0.15
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
|
|
9,277,057
|
|
|
$
|
0.10
|
|
|
|
2.7
|
|
Stock-based compensation expense was approximately $252,896 and $3.0 million for the three months ended March 31, 2019 and 2018 respectively. and is included in general and administrative expense in the accompanying unaudited consolidated statements of operations. As of March 31, 2019, the Company expects to recognize approximately $534,619 of stock-based compensation expense for the non-vested portion of outstanding options over a weighted-average period of 0.8 years.
As of March 31, 2019, the Company’s outstanding options have an intrinsic value of approximately $6.9 million, which includes the suspended options to purchase an aggregate of 14,297,902 shares of common stock that are attributable to Mr. Monfort. Intrinsic value is approximately $2.8 million if the options to purchase shares of common stock attributable to Mr. Monfort are excluded from the calculation.
9. Commitments
Operating Leases
—
In 2016, the Company signed a lease for office space in Los Altos, California, to serve as office space for its Northern California operations. The lease expired on February 28, 2018 and the Company executed a new 10-month lease in March 2018. The total amount due under the lease was $4,730 and the lease period was from March 1, 2018 through December 31, 2018. The Company has signed a one-year lease renewal, expiring on December 31, 2019. The total amount due under the renewal is $5,676.
In February 2017, the Company signed a lease for storage space in Stockton, California to serve as a location to store vehicles and other equipment utilized for marketing and trade-show purposes. The lease is on a month-to-month basis and can be terminated by either party with 30-days’ notice. The total amount due monthly is $1,000.
In October 2017, the Company signed a non-cancellable lease for its corporate office space in Corona, California, to serve as its corporate headquarters. The lease is for a period of 65 months, terminating February 28, 2023. The base rent for the term of the lease is $568,912. The total amount due monthly is $7,600 at commencement and will escalate to $10,560 by its conclusion. Additionally, the lease includes five months in which no rent payment is due.
Other Agreements
—
In 2015, the Company entered into a contract with THINKP3 to provide services with the goal of securing federal grant assistance for development of the Company’s zero-emission and hybrid transportation solutions for school bus, commercial, government and utility fleets. The initial term of this contract was December 1, 2015 through November 30, 2016. On November 21, 2016, the parties renewed the agreement through November 30, 2017. On November 7, 2017, the Company renewed the agreement through November 30, 2018. On November 30, 2018, the Company renewed the agreement through November 30, 2019. Fees for these services are $8,000 per month. The contract can be terminated by either party with 30-days’ advance notice.
10
The following table summarizes the Company’s future minimum payments under contractual commitments, excluding debt, as of
March 31
, 201
9
:
|
|
Payments due by period
|
|
|
|
Total
|
|
|
Less than
one year
|
|
|
1 - 3 years
|
|
|
4 - 5 years
|
|
|
More than 5
years
|
|
Operating lease obligations
|
|
$
|
475,209
|
|
|
$
|
121,161
|
|
|
$
|
239,616
|
|
|
$
|
114,432
|
|
|
$
|
—
|
|
Employment contracts
|
|
|
665,000
|
|
|
|
315,000
|
|
|
|
350,000
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,140,209
|
|
|
$
|
436,161
|
|
|
$
|
589,616
|
|
|
$
|
114,432
|
|
|
$
|
—
|
|
10. Contingencies
On August 2, 2018, Edward R. Monfort, our former Chief Technology Officer and former director, filed a complaint, captioned Edward R. Monfort v. ADOMANI, Inc., et al., Case No.: 18CV332757, in the Superior Court of the State of California for the County of Santa Clara, against us and certain of our executive officers, alleging that we and the other defendants (i) breached the terms of certain common stock subscription agreements to which Mr. Monfort is a party, (ii) fraudulently deprived Mr. Monfort of certain purported equity in the Company and (iii) fraudulently induced Mr. Monfort to execute a release of claims in connection with his June 2016 employment agreement. Mr. Monfort seeks unspecified monetary damages, declaratory relief regarding the extent of his equity ownership in the Company and other relief. On August 24, 2018, we filed a notice of removal pursuant to which we removed the case to the United States District Court for the Northern District of California. On September 24, 2018, Mr. Monfort filed a motion for remand, seeking to remand the proceeding from the United States District Court for the Northern District of California back to the Superior Court of the State of California for the County of Santa Clara. On January 8, 2019, the United States District Court for the Northern District of California denied the motion for remand. On February 7, 2019, we answered Mr. Monfort’s complaint and filed counterclaims against Mr. Monfort alleging counterclaims for: (i) breach of contract; (ii) declaratory judgment; (iii) breach of fiduciary duty; (iv) wrongful dilution; and (v) conversion. On March 26, 2019, Mr. Monfort filed an amended complaint, which was substantially similar but which added as an additional defendant Dennis R. Di Ricco and corrected certain non-substantive typographical errors. We filed a substantially similar answer with the same counterclaims. We believe that Mr. Monfort’s lawsuit is without merit and intend to vigorously defend the action.
On August 23, 2018, a purported class action lawsuit captioned M.D. Ariful Mollik v. ADOMANI, Inc. et al., Case No. RIC 1817493, was filed in the Superior Court of the State of California for the County of Riverside against us, certain of our executive officers, and the two underwriters of our offering of common stock under Regulation A in June 2017. This complaint alleges that documents related to our offering of common stock under Regulation A in June 2017 contained materially false and misleading statements and that all defendants violated Section 12(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and that we and the individual defendants violated Section 15 of the Securities Act, in connection therewith. The plaintiff seeks on behalf of himself and all class members: (i) certification of a class under California substantive law and procedure; (ii) compensatory damages and interest in an amount to be proven at trial; (iii) reasonable costs and expenses incurred in this action, including counsel fees and expert fees; (iv) awarding of rescission or rescissionary damages; and (v) equitable relief at the discretion of the Court. On November 9, 2018, in response to a demurrer filed by defendant Network 1 Financial Securities, Plaintiff filed a first amended complaint, which was substantially similar to the original complaint but refined certain allegations regarding the alleged material omissions that form the basis of the complaint. Defendants demurred to the first amended complaint. The court heard defendants’ demurrers to the first amended complaint on January 30, 2019. At this hearing the court granted plaintiff leave to file a second amended complaint. Plaintiff filed a second amended complaint on January 31, 2019. The second amended complaint attempts to substitute in two putative class plaintiffs. Defendants jointly demurred to the second amended complaint on March 4, 2019. This demurrer is set for hearing on May 7, 2019. We believe that the purported class action lawsuit is without merit and intend to vigorously defend the action.
11