NOTES
TO FINANCIAL STATEMENTS
NOTE
1: NATURE OF OPERATIONS
Arcimoto, Inc. (the “Company”) was
incorporated in the State of Oregon on November 21, 2007. The Company’s mission is to catalyze the global shift to a sustainable
transportation system. Over the past 14 years, the Company has developed a new vehicle platform designed around the needs of everyday
drivers. Having approximately one-third the weight and one-third of the footprint of the average car, the Arcimoto platform’s purpose
is to bring the joy of ultra-efficient, pure electric driving to the masses. To date, the Company has introduced five vehicle products
built on this platform that target specific niches in the vehicle market: its flagship product, the Fun Utility Vehicle® (“FUV®”),
for everyday consumer trips; the Deliverator® for last-mile delivery and general fleet utility; the Rapid Responder™ for emergency
services and security; the Cameo™ for film, sports and influencers; and the Arcimoto Roadster, an unparalleled pure-electric on-road
thrill machine.
Risks
and Uncertainties
In
the future, the Company may not have the capital resources necessary to further the development of existing and/or new products.
The Company’s current cost structure, along
with other factors including market penetration in the states the Company is currently doing business, does not allow it to achieve profitability.
Although the Company is constantly trying to improve its cost structure and market penetration, the Company may not succeed to the point
where it can achieve profitability consistently. Also, Arcimoto may not be able to reduce costs to the level necessary to unlock the market
potential for its products.
In the event that a supplier discontinues a part
that is integral to the Company’s production, it may incur additional engineering costs to use the next generation part. Currently,
the Company is dependent on a single supplier for its battery cells. During the third quarter of 2021, the Company received two types
of battery cells, one of which has been discontinued. In order to use these cells, the Company’s engineering team is currently developing
a module that will enable the utilization of these battery cell types. Upon development, regulatory testing will be conducted in order
to comply with government safety standards. The Company expects these cells to be utilized in its FUVs by the end of April 2022. Until
the batteries are able to be used in its FUVs, the Company may have to temporarily cease production of its FUVs sometime in the first
and second quarters of 2022 due to the shortage of new battery cells.
The Company may, from time to time, be subject
to recalls due to, among other things, software glitches and/or faulty parts which may require it to provide additional warranties to
its customers. These additional warranties may have a negative impact on its financial resources, which may in turn, negatively impact
its financial results.
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going
Concern
The accompanying financial statements have been
prepared on the basis that the Company is a going concern, which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. The Company has incurred significant losses since inception and management expects losses to continue
for the foreseeable future. On January 14, 2022 the Company entered into an agreement with Canaccord Genuity LLC to raise the at-the-market
(“ATM”) offering amount to $100,000,000. The Company had approximately $7,204,000 in cash as of March 30, 2022, which,
along with its standing ability to generate additional funds through its ATM offering of up to approximately $100,000,000, is in excess
of expected cash needed for the next twelve months. In the event that additional funding is needed to sustain the business, the Company
anticipates being able to obtain such funds through the capital markets and/or by re-financing its long-lived assets as well as initiating
certain cost cutting measures across the Company.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
Basis
of Presentation
The
accounting and reporting policies of the Company conform with generally accepted accounting principles in the United States (“GAAP”).
Reclassifications
Certain
prior year amounts have been reclassified for consistency with the current year presentation and had no effect on the Company’s net loss,
stockholders’ equity or cash flows.
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, debt, and capital lease obligations. 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; |
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
| ● | Level
2 – inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability
other than quoted prices, either directly or indirectly, including inputs in markets that
are not considered to be active; and |
| ● | Level
3 – inputs to the valuation methodology are unobservable and significant to the fair
value measurement. |
Categorization within the valuation hierarchy
is based upon the lowest level of input that is significant to the fair value measurement. The carrying amounts reported in the accompanying
financial statements for current assets and current liabilities approximate the fair value because of the immediate or short-term maturities
of the financial instruments. As of December 31, 2021 and 2020, the Company did not have any level 2 or level 3 instruments measured
at fair value on a recurring basis.
Business
Combinations
The
Company accounts for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 805 “Business Combinations” using the acquisition method of accounting, and accordingly, the assets and
liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over
the estimated fair value of the net assets acquired is recorded as goodwill. All acquisition costs are expensed as incurred. Upon acquisition,
the acquired assets and liabilities and results of operations are included in the financial statements beginning at the acquisition date.
See Note 3 - TMW Acquisition for additional information related to the Company’s acquisition that concluded in the first quarter
of 2021.
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 December 31, 2021 and 2020, the Company held its balance of cash and cash equivalents in
financial institutions, which, at times, exceeded the federally insured limits.
Accounts
Receivable
Accounts receivable are reported net of allowance
for probable losses. It represents the amount management expects to collect from outstanding balances. Differences between the amount
due and the amount management expects to collect are charged to operations in the year in which those differences are determined, with
an offsetting entry to a reserve allowance. As of December 31, 2021, and 2020, the Company had accounts receivable of $127,860 and
$17,117, respectively, net of a reserve allowance of $2,500 and $0 as of December 31, 2021 and 2020, respectively.
Inventory
Inventory is stated at the lower of cost (using
the first-in, first-out method (“FIFO”)) or net realizable value. Inventories consist mainly of purchased electric motors,
electrical storage and transmission equipment, and component parts.
| | |
December 31,
2021 | | |
December 31,
2020 | |
| Raw materials | |
$ | 7,089,033 | | |
$ | 4,667,780 | |
| Work in progress | |
| 70,243 | | |
| 65,210 | |
| Finished goods | |
| 696,829 | | |
| 371,078 | |
| Total | |
$ | 7,856,105 | | |
$ | 5,104,068 | |
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
The Company is required to remit partial prepayments
for some purchases of its inventories acquired from overseas vendors which are included in prepaid inventory. The Company is currently
selling vehicles below the base cost of a finished unit. Accordingly, the Company expensed all labor and overhead as period costs and
recorded an allowance to reduce inventories to net realizable value of approximately $826,000 and $550,000 as of December 31, 2021
and 2020, respectively.
During the third quarter of 2021, the Company
prepaid $720,000 for a certain type of battery cell that was intended to be used in production. It was discovered that such battery cells
cannot be utilized without incurring additional significant costs to develop a new battery module in its production process in order to
accommodate these battery cells that had a different set of specifications than the ones currently in use. As a result, the Company recorded
a $115,000 charge to cost of goods sold based on management’s estimates of the costs required to bring the batteries to the required
standards.
Also,
the Company had purchased approximately $670,000 and will continue to purchase another type of battery cell that is different than the
one it uses currently in its production process. In order to use this new battery cell, Arcimoto will develop a new battery module for
use in its production process. These development costs may be significant and may cause a temporary shutdown of its production facility,
which in turn will cause a delay in production of its vehicles.
Property
and Equipment
Property and equipment are recorded at cost, less
accumulated depreciation. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs
are charged to expense as incurred. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation
is provided over the estimated useful lives of the related assets using the straight-line method for financial statement purposes. Land
is not depreciated.
The
estimated useful lives for significant property and equipment categories are as follows:
| Computer
Equipment and Software |
1 - 3 years |
| FUV Fleet and FUV Rental Fleet |
3 years |
| Furniture
and Fixtures |
2 - 7 years |
| Machinery
and Equipment |
5 - 10 years |
| Leasehold
Improvements |
Shorter of useful life or lease life |
Intangible
Assets
Intangible
assets primarily consist of trade names/trademarks, proprietary technology, and customer relationships. They are amortized using the
straight-line method over a period of 10 to 14 years. The Company assesses the recoverability of its finite-lived intangible assets when
there are indications of potential impairment. Indefinite-lived intangible assets are evaluated for impairment annually.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
Goodwill
The
Company tests goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that
the Company may not be able to recover the carrying amount of the net assets of the reporting unit. In evaluating goodwill for impairment,
the Company may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that
the fair value of a reporting unit is less than its carrying amount. If the Company bypasses the qualitative assessment, or if the Company
concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs
a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount.
The Company calculates the estimated fair value
of a reporting unit using a weighting of the income and market approaches. For the income approach, the Company uses internally developed
discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related cash
flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount
rates. For the market approach, the Company uses internal analyses based primarily on market comparables. The Company bases these assumptions
on its historical data and experience, third party appraisals, industry projections, micro and macro general economic condition projections,
and its expectations. These fair value estimates of the reporting unit are a non-recurring level 3 fair value measure. For further discussions,
refer to Note 7.
Impairment
of Long-Lived Assets
The
Company follows FASB ASC 360, Accounting for Impairment or Disposal of Long-Lived Assets. The Standard requires that if events or changes
in circumstances indicate that the carrying value of long-lived assets or asset groups may be impaired, an evaluation of recoverability
would be performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset’s carrying
value to determine if a write-down to market value would be required. Long-lived assets or asset groups that meet the criteria in ASC
360 as being held for sale are reflected at the lower of their carrying amount or fair market value, less costs to sell.
Offering
Costs
The Company accounts for offering costs in accordance
with FASB ASC 340, Other Assets and Deferred Costs. Prior to the completion of an offering, offering costs will be capitalized as deferred
offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity or as a reduction of additional
paid in capital upon the completion of an offering or to expense if the offering is not completed. As of December 31, 2021 and 2020,
deferred offering costs recorded as assets totaled approximately $24,000 and $0, respectively. For the years ended December 31, 2021
and 2020, offering costs totaling approximately $1,132,000 and $3,804,000, respectively, were recorded as a reduction of the equity offering
proceeds.
Customer
Deposits
Non-refundable
customer deposits are comingled with operating funds. Refundable customer deposits are generally held in a separate deposit account.
Revenue is not recognized on customer deposits until the deposit is applied to a non-refundable vehicle order, the vehicle manufacturing
process is completed, the vehicle is picked up by or delivered to the customer and the appropriate revenue recognition criteria have
been met per the Company’s policy below.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
Warranties
The Company began recording warranty reserves
with the commencement of Retail Series production of the FUV. The Company provides a warranty on vehicle and production powertrain components
as well as battery packs, and the Company accrues warranty reserves at the time a vehicle or production powertrain component is delivered
to the customer. Warranty reserves include management’s best estimate of the projected cost to repair or to replace any items under
warranty, based on actual warranty experience as it becomes available and other known factors that may impact the Company’s evaluation
of historical data. The Company will review its reserves at least quarterly to ensure that its accruals are adequate in meeting expected
future warranty obligations, and the Company will adjust its estimates as needed. Warranty expense is recorded as a component of cost
of revenues in the statement of operations. The portion of the warranty provision which is expected to be incurred within 12 months from
the balance sheet date is classified as current, while the remaining amount is classified as long-term liabilities.
Deferred
Revenue
Deferred
revenues represent cash collected in advance of the revenues being earned for deliverables to FUV customers, distributor licensing arrangements
and franchise fees.
Revenue
Recognition
The Company recognizes revenue in accordance with
ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 requires that an entity recognize
revenue to depict the transfer of promised goods or services to customers (including rental revenue) in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. The Company recognizes revenue when performance obligations
are satisfied. This generally occurs when products are picked up by the customer or a common carrier or, when the FUV is shipped in a
company owned vehicle and when delivery is completed, in accordance with the sales agreement or purchase order, which is when control
of the vehicle passes to the customer. Revenues related to distributor licensing arrangements are generally recognized over the term of
the agreement, except for specific products and services specified as part of the agreement, for which revenue may be accelerated based
on when performance obligations are satisfied.
Distributor and Franchise fee revenue is recognized
over the term of the agreements which is generally ten years for franchises and four years for distributors. The Company has determined
that any services provided to its franchise partners are not distinct from the franchise rights granted in the franchise agreement and
they are combined into a single performance obligation.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with FASB ASC 718, Compensation - Stock Compensation. Under the fair value
recognition provisions of FASB ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award
and is recognized as expense ratably over the requisite service period, which is generally the option or warrant vesting period. The
Company uses the Black-Scholes option pricing model to determine the fair value of stock options and common stock warrants.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
Advertising
Costs
Advertising costs are recorded as an expense in
the period in which the Company incurs the costs or the first time the advertising takes place. Advertising costs expensed were approximately
$337,000 and $72,000 for the years ended December 31, 2021 and 2020, respectively.
Research
and Development
Costs
relating to research and development are expensed as incurred. Costs primarily relate to engineering salaries and related benefits and
material and equipment costs related to testing, product design and development.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach for financial accounting and reporting for income taxes. Accordingly,
the Company recognizes deferred tax assets and liabilities for the expected impact of differences between the financial statements and
the tax basis of assets and liabilities.
The Company records a valuation allowance to reduce
its deferred tax assets to the amount that is more likely than not to be realized. In the event the Company was to determine that it would
be able to realize its deferred tax assets in the future in excess of its recorded amount, an adjustment to the deferred tax assets would
be credited to income tax expense in the period such determination was made. Likewise, should the Company determine that it would not
be able to realize all or part of its deferred tax assets in the future, an adjustment to the deferred tax assets would be changed to
income tax expense in the period such determination was made. The Company has incurred losses for tax purposes since inception and has
significant tax losses and tax credit carry forwards. These amounts are subject to valuation allowances as it is uncertain that they will
be realized before they expire.
Net
Earnings or Loss per Share
The
Company’s computation of earnings (loss) per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as
the income (loss) available to common shareholders divided by the weighted average number of common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., common stock
warrants and common stock options) as if they had been converted at the beginning of the periods presented, or issuance date, if later.
Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are
excluded from the calculation of diluted EPS.
Loss
per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the respective
periods. Basic and diluted loss per common share is the same for all periods presented because all common stock warrants and common stock
options outstanding were anti-dilutive.
At
December 31, 2021 and 2020, the Company excluded the outstanding Employee Equity Plans (“EEP”) and other securities summarized
below using the Treasury Stock Method, which entitled 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.
| | |
Year ended December 31, | |
| | |
2021 | | |
2020 | |
| Options and other instruments under the 2012, 2015, and 2018 Plans to purchase common stock | |
| 2,325,671 | | |
| 1,438,485 | |
| Underwriters and investors warrants issued outside of an EEP | |
| 55,919 | | |
| — | |
| Total | |
| 2,381,590 | | |
| 1,438,485 | |
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
Accounting
Pronouncements Recently Adopted
In December 2019, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying
the Accounting for Income Taxes (“ASU 2019-12”), as part of its simplification initiative to reduce the cost and complexity
in accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation, the methodology
for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. ASU
2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective
for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company adopted this ASU on January
1, 2021, and it did not have a material impact on its financial statements.
Accounting
Pronouncements Not Yet Adopted
The
Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting
pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change
to its financial statements and assures that there are proper controls in place to ascertain that the Company’s financial statements
properly reflect the change.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments (“ASU 2016-13”) which replaces the current incurred loss methodology with an expected loss methodology
which is referred to as the current expected loss (“CECL”) methodology. The measurement of credit losses under the CECL methodology
is applicable to financial assets measured at amortized cost, including loans receivables and trace accounts receivables and held-to-maturity
debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters
of credit, financial guarantees and other similar instruments) and net investment in leases recognized by a lessor in accordance with
Accounting Standards Codification (“ASC”) Topic 842 – Leases. ASU 2016-13 also made changes to the accounting for available-for-sale
debt securities and requires credit losses to be presented as an allowance rather than as a write-down on such securities management
does not intend to sell or believes that it is more likely than not they will be required to sell. The Company is required to adopt ASU
2016-13 on January 1, 2023 and has not completed its assessment of ASU 2016-13’s impact on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
“Leases (Topic 842)” (“ASU 2016-02”) which supersedes ASC Topic 840, Leases. ASU 2016-02 requires lessees to recognize
a right-of-use asset and a lease liability on their balance sheets for all the leases with terms greater than 12 months. Based on certain
criteria, leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition
in the income statement. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class
of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense
for such leases generally on a straight-line basis over the lease term. In November 2019, the FASB delayed the effective date for Topic
842 to fiscal years beginning after December 15, 2020 for private companies and emerging growth companies, and interim periods within
those years, with early adoption permitted. In June 2020, the FASB issued ASU No 2020-05 that further delayed the effective date of Topic
842 to fiscal years beginning after December 15, 2021. The Company will adopt this new standard on January 1, 2022. In transition, lessees
and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective
approach. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” that allows entities
to apply the provisions of the new standard at the effective date, as opposed to the earliest period presented under the modified retrospective
transition approach and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
The modified retrospective approach includes a number of optional practical expedients primarily focused on leases that commenced before
the effective date of Topic 842, including continuing to account for leases that commence before the effective date in accordance with
previous guidance, unless the lease is modified. Most of the Company’s operating lease commitments
were subjected to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption of Topic 842, which
increased the total assets and total liabilities that the Company reports relative to such amounts prior to adoption. The adoption
of ASU 2016-02 resulted in the Company recording approximately $1,800,000 of right-of-use assets and an operating lease liability of $1,900,000
to its Balance Sheet on January 1, 2022.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
3: TMW ACQUISITION
On January 23, 2021, the Company entered into
an Asset Purchase Agreement (the “Agreement”) with Tilting Motor Works, Inc. (“TMW”), a Washington corporation
(the “Seller”) and its owner. TMW engages in the design, production, sales, and installation of a bolt on kit that converts
a two wheeled motorcycle into a tilting three wheeled motorcycle. TMW was acquired to utilize the tilting technology in new electric three
wheeled micro-mobility vehicle platforms.
Pursuant to the terms and conditions of the Agreement,
the Company paid cash of $1,754,083 and issued 436,339 shares of Company common stock and assumed certain liabilities as consideration
for substantially all of TMW’s assets. The common shares issued were unregistered and subject to sales restrictions under the Securities
Act of 1933. The Company valued the shares issued in the transaction at the average of opening and closing price on the date of acquisition
with a 12.5% discount for lack of marketability. The acquisition closed on February 4, 2021 and was recorded as a business combination
as the set of assets and activities acquired met the definition of a business.
The
purchase price allocation was finalized in the first quarter of 2021 and is as follows:
| Cash | |
$ | 1,754,083 | |
| Add: Fair value of shares issued | |
| 13,038,355 | |
| Total consideration | |
$ | 14,792,438 | |
| Description | |
Fair value | |
| Assets acquired: | |
| |
| Inventory | |
$ | 342,394 | |
| Prepaid expenses and other current assets | |
| 4,083 | |
| Property, plant, and equipment | |
| 4,349 | |
| Trade name | |
| 2,052,000 | |
| Proprietary technology | |
| 7,010,000 | |
| Customer relationships | |
| 1,586,000 | |
| Goodwill | |
| 6,824,209 | |
| Total assets acquired | |
$ | 17,823,035 | |
| | |
| | |
| Liabilities assumed: | |
| | |
| Customer deposits | |
$ | 91,749 | |
| Deferred tax liability | |
| 2,938,848 | |
| Total liabilities assumed | |
| 3,030,597 | |
| Estimated fair value of net assets acquired | |
$ | 14,792,438 | |
Refer to Note 7 for further discussion.
The following unaudited pro forma financial information
presents the results of operations of the Company and TMW for the years ended December 31, 2021 and 2020, as if the acquisition had occurred
as of the beginning of the first period presented instead of on February 4, 2021. The pro forma information does not necessarily reflect
the results of operations that would have occurred had the entities been a single company during those periods.
The unaudited pro forma financial information
for the Company and TMW is as follows:
| | |
For the Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Revenues | |
$ | 4,396,201 | | |
$ | 2,794,788 | |
| Net loss attributable to common stockholders | |
$ | (47,823,000 | ) | |
$ | (19,097,582 | ) |
| Net loss per basic and diluted common share | |
$ | (1.29 | ) | |
$ | (0.66 | ) |
| Weighted average common shares outstanding: | |
| | | |
| | |
| Basic and diluted | |
| 37,140,042 | | |
| 29,011,068 | |
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
The pro forma financial information
for all periods presented above has been calculated after adjusting the results of the Company and TMW to reflect the business combination
accounting effects resulting from this acquisition, including the amortization expense from acquired intangible assets and interest expense
included in the pro forma financial information presented above. The Company’s historical financial statements have been adjusted
in the pro forma combined financial statements to give effect to pro forma events that are directly attributable to the business combination
and factually supportable. The pro forma financial information may not be indicative of the results of operations that would have been
achieved if the acquisition had taken place at the beginning of the periods presented.
NOTE
4: CONCENTRATIONS
Payables
As of December 31, 2021 and 2020, the Company
had three and one significant vendors in each period that accounted for more than 10% of the Company’s payables balances, respectively.
The loss of these vendors would not have a significant impact on the Company’s operations.
Purchases/Inventory
As of December 31, 2021, the Company had two significant vendors
that accounted for more than 10% of the Company’s purchases. As of December 31, 2021, these vendors accounted for 14% and 12%
of the Company’s purchases. The loss of these vendors would have a significant impact on the Company’s operations.
As of December 31, 2020, there was one significant
vendor that accounted for more than 10% of the Company’s purchases. As of December 31, 2020, this vendor accounted for 25%
of the Company’s purchases. The loss of this vendor would have a significant impact on the Company’s operations.
NOTE
5: PROPERTY AND EQUIPMENT
As
of December 31, 2021 and 2020, the Company’s property and equipment consisted of the following:
| | |
December 31,
2021 | | |
December 31,
2020 | |
| Land | |
$ | 4,743,526 | | |
$ | — | |
| Buildings | |
| 8,006,474 | | |
| — | |
| Machinery and equipment | |
| 7,282,960 | | |
| 5,245,534 | |
| Fixed assets in process | |
| 3,269,532 | | |
| 1,993,760 | |
| Leasehold improvements | |
| 1,165,231 | | |
| 983,522 | |
| FUV fleet | |
| 1,471,534 | | |
| 336,730 | |
| FUV rental fleet | |
| 1,315,980 | | |
| — | |
| Computer equipment and software | |
| 258,309 | | |
| 94,384 | |
| Vehicles | |
| 419,661 | | |
| — | |
| Furniture and fixtures | |
| 52,007 | | |
| 52,007 | |
| Total property and equipment | |
| 27,985,214 | | |
| 8,705,937 | |
| Less: Accumulated depreciation | |
| (3,646,307 | ) | |
| (2,060,707 | ) |
| Total | |
$ | 24,338,907 | | |
$ | 6,645,230 | |
Fixed assets in process are primarily tooling
and equipment related to the manufacturing of the Company’s vehicles. Completed assets are transferred to their respective asset
class and depreciation begins when the asset is placed in service. FUV fleet consists of marketing and other non-revenue generating vehicles.
FUV rental fleet consists of rental revenue generating vehicles.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
On December 23, 2020, the Company entered into
an agreement to purchase certain buildings totaling approximately 187,000 square feet, and approximately 6.6 acres of real estate located
within the City of Eugene, Oregon. The Company agreed to purchase the properties commonly known as 311 Chambers Street and 1480 West 3rd
Avenue, from RLA Holdings, LLC for the total purchase price of $10,250,000. The Company pledged $80,000 as earnest money for the transaction.
During the first quarter of 2021, an additional 4.1 acres and 33,000 square feet of buildings to the south commonly known as 1593 W. 5th
Ave. Eugene, Oregon was added to the purchase agreement totaling $2,500,000. The total sales price was increased to $12,750,000. The purchase
was contingent upon the Company’s complete and unconditional approval of: (i) the property and its physical condition, zoning and
land use restrictions, and all systems, utilities, and access rights pertaining to the property; (ii) the seller’s documents; (iii)
securing financing; (iv) a Phase I environmental assessment and all appropriate inquiries investigation so as to protect the Company under
CERCLA; and (v) anything else the Company deemed necessary. On March 15, 2021, the due diligence was completed and the Company paid the
$80,000 earnest money. On April 19, 2021, the Company closed and completed the purchase of the properties described above. RLA Holdings,
LLC will be permitted to rent back the 311 Chambers St property after closing for up to six (6) months at a rate of $50,000 per month
plus all utilities, taxes, insurance, and maintenance expenses. $25,000 was deducted from the purchase price at the closing to cover the
tenant’s security deposit. $1,250,000 was deducted at the closing and will be paid one year from the closing date. This sum is secured
by a zero interest note. The Company intends to utilize these properties to improve its production capabilities. The new facility is expected
to be operational by the end of 2022. The purchases described above are allocated to property and equipment as land and buildings.
Depreciation expense was approximately $1,594,000
and $930,000 during the years ended December 31, 2021 and 2020, respectively.
NOTE
6: INTANGIBLE ASSETS
The
following table summarizes the Company’s intangible assets:
| | |
| |
December 31, 2021 | |
| | |
Estimated Useful Life (Years) | |
Gross Carrying Amount at December 31,
2020 | | |
Assets Acquired Pursuant to Business Combination(1) | | |
Accumulated Amortization | | |
Net Book Value | |
| Tradename and trademarks | |
14 years | |
$ | — | | |
$ | 2,052,000 | | |
$ | (130,950 | ) | |
$ | 1,921,050 | |
| Proprietary technology | |
13 years | |
| — | | |
| 7,010,000 | | |
| (487,875 | ) | |
| 6,522,125 | |
| Customer relationships | |
10 years | |
| — | | |
| 1,586,000 | | |
| (143,495 | ) | |
| 1,442,505 | |
| | |
| |
$ | — | | |
$ | 10,648,000 | | |
$ | (762,320 | ) | |
$ | 9,885,680 | |
| (1) | On February 4, 2021, the Company acquired various assets of Tilting
Motor Works, Inc. (See Note 3 – TMW Acquisition) |
Amortization
expense was approximately $762,000 and $0 during the years ended December 31, 2021 and 2020, respectively.
As
of December 31, 2021, the estimated future amortization expense associated with the Company’s finite-lived intangible assets
for each of the five succeeding fiscal years is as follows:
| Years Ended December 31, |
|
Amortization Expense |
|
| 2022 |
|
$ |
844,402 |
|
| 2023 |
|
|
844,402 |
|
| 2024 |
|
|
844,402 |
|
| 2025 |
|
|
844,402 |
|
| 2026 |
|
|
846,066 |
|
| Thereafter |
|
|
5,662,006 |
|
| Total |
|
$ |
9,885,680 |
|
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
NOTE
7: GOODWILL
The Company performed its annual goodwill impairment
testing during the fourth quarter. The Company’s revised forecast for the TMW reporting unit indicated that it was more likely than
not that the fair value of the reporting unit was less than the carrying amount of the reporting unit. This was primarily due to the unexpected
continuation of the COVID-19 pandemic which caused further and unexpected disruptions within the Company’s supply chain, a re-tooling
of the Company’s TRiO product line which delayed production, and a change in strategy toward electric tricycles that required the
Company to change its forecasted net cash flows and the timing of these cash flows as the Company enters into new markets. In accordance
with ASC 350, the Company then performed a quantitative assessment to determine if goodwill was impaired. The estimated fair value of
the reporting unit was determined by the Company using a weighted estimate of the income and market value approaches to measuring fair
values. Based on the results of the test performed, it was determined that the fair value of the Company’s reporting unit did not
exceed its carrying value. The excess of carrying value over the estimated fair value of the reporting unit was recorded as a non-cash
impairment loss of approximately $6,824,000 during the fourth quarter of 2021.
The change in the carrying amount of goodwill
for the year ended December 31, 2021 is as follows:
| | |
Goodwill | |
| Balance at December 31, 2020 | |
$ | — | |
| Add: TMW Acquisition | |
| 6,824,209 | |
| Less: Loss on impairment of goodwill | |
| (6,824,209 | ) |
| Balance at December 31, 2021 | |
$ | — | |
Refer
to Note 3 for more information regarding the goodwill acquired as a part of the TMW acquisition.
NOTE
8: CUSTOMER DEPOSITS
The Company has received customer deposits ranging
from $100 to $500 per vehicle for Retail Series production vehicles for purposes of securing a vehicle production slot. As of December 31,
2021 and 2020, the Company’s balance of deposits received was approximately $817,000 and $606,000, respectively. As of December 31,
2021 and 2020, $424,300 and $403,624, respectively, of these deposits were refundable upon demand. Deposits are included in current liabilities
in the accompanying balance sheets. When a customer’s order is ready to enter the production process, the customer is notified that
if they would like to proceed with the purchase of a vehicle, their deposit will no longer be refundable and any additional deposit required
must be paid prior to the start of the manufacturing process. The Company has customer deposits from its employees. However, the balances
of these deposits at December 31, 2021 and December 31, 2020 are not material.
NOTE
9: CAPITAL LEASE OBLIGATIONS
As
of December 31, 2021, the Company has financed through lease agreements approximately $1,956,000 of its capital equipment fixed
assets with monthly payments ranging from $600 to $9,000, repayment terms ranging from 48 to 60 months, and effective interest rates
ranging from 3.87% to 9.52%. Total monthly capital lease payments as of December 31, 2021 are approximately $39,000. These lease
obligations mature ranging from February 2022 through November 2026 and are secured by approximately $2,326,000 in underlying assets
which have approximately $737,000 in accumulated depreciation as of December 31, 2021. The balance of capital lease obligations
was approximately $1,065,000 and approximately $781,000 as of December 31, 2021 and 2020, respectively.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
Future annual minimum payments under capital
leases as of December 31, 2021 are as follows:
| Years ending December 31: |
|
|
|
| 2022 |
|
$ |
437,441 |
|
| 2023 |
|
|
312,058 |
|
| 2024 |
|
|
165,241 |
|
| 2025 |
|
|
165,241 |
|
| 2026 |
|
|
93,185 |
|
| Total payments including interest |
|
|
1,173,166 |
|
| Less amounts representing interest |
|
|
(108,361 |
) |
| Total of future payments on principal balances |
|
|
1,064,805 |
|
| Less short-term capital lease obligations |
|
|
(352,294 |
) |
| Total long-term capital lease obligations |
|
$ |
712,511 |
|
NOTE
10: NOTES PAYABLE
On December 27, 2018, the Company entered into
a subscription agreement with FOD Capital, LLC, a Florida limited liability company (the “Investor”), pursuant to which the
Company issued to the Investor (i) 500,000 shares of its common stock, no par value per share at a purchase price of $3.00 per share,
(ii) a warrant to purchase up to 942,857 shares of common stock at $3.50 per share (the “Warrant”), and (iii) a senior secured
note in the principal amount of $3,000,000 (the “Note”) due December 27, 2019. The Company recorded the relative fair value
of the warrant and a discount of approximately $107,040. The Company incurred offering costs of $385,000 of which $322,924 was allocated
to the note. On September 12, 2019, the Company issued an additional $500,000 note (“additional Note”) to the Investor, net
of a $15,000 discount, due September 12, 2020. The additional Note principal plus accrued interest was convertible into the Company’s
common stock at a conversion price per share of $4.25. On December 27, 2019, the Company entered into a six-month extension in exchange
for $300,000, which was recorded as an additional discount to the Note. Accrued interest expense
excluding the discount amortization for the year ended December 31, 2020 was approximately
$165,000. The discount amortized for the year ended December 31, 2020 was approximately
$311,000. On June 15, 2020, both notes were repaid in cash, principal in the amount of $3,500,000 and accrued interest of approximately
$480,000 for a total payment of $3,980,000.
On
August 14, 2019, multiple convertible promissory notes were issued for a total of $648,972. Between August 14, 2019 and September 27,
2019, the Company issued additional notes in the original principal amount of $850,000. The notes were due in July 2020. The notes were
payable in cash or convertible into common stock at $4.25 per share at the option of the holder. On June 25, 2020, certain Notes were
converted in accordance with the Subscription Agreement. As a result, principal amounts of approximately $1,311,000, of which approximately
$963,000 was to related parties and unpaid accrued interest of approximately $108,000, of which approximately $72,000 was to related
parties, were converted into 333,924 shares of common stock at a conversion price of $4.25 per share. The Company also paid an aggregate
of approximately $688,000 of cash to settle principal, of which approximately $188,000 was to related parties, and approximately $81,000
of accrued interest, of which approximately $42,000 was to related parties, to settle the remaining convertible notes. Interest expense
was approximately $53,000 for the year ended December 31, 2020.
On May 5, 2020, the Company received a Paycheck
Protection Program (“PPP”) loan in the amount of approximately $1,069,000, referred to on the balance sheet as Note payable
to bank. The loan had an interest rate of 1% and monthly payments of approximately $60,000 for 18 months beginning December 5, 2020. This
loan was eligible for the limited loan forgiveness provisions of Section 1102 of the CARES Act, and the SBA Interim Final Rule dated April
2, 2020. On April 27, 2021, all of the outstanding principal and interest of approximately $1,069,000 and approximately $10,000, respectively,
were forgiven and as of December 31, 2021, there was no balance on the loan.
ARCIMOTO,
INC.
NOTES
TO FINANCIAL STATEMENTS
As of December 31, 2021, the Company has
financed a total of approximately $2,597,000 of its capital equipment purchases with notes payable with monthly payments ranging from
approximately $400 to $12,000, repayment terms ranging from 60 to 72 months, and effective interest rates ranging from 1.99% to 9.90%.
Total monthly payments as of December 31, 2021 are approximately $50,000. These equipment notes payable mature ranging from January
2023 through October 2026. The balance of equipment financing notes payable was approximately $1,678,000 and $1,590,000 as of December 31,
2021 and 2020, respectively. Future annual minimum principal payments as of December 31, 2021 are as follows:
| Years ending December 31: | |
| |
| 2022 | |
$ | 493,160 | |
| 2023 | |
| 359,593 | |
| 2024 | |
| 317,439 | |
| 2025 | |
| 313,661 | |
| 2026 | |
| 154,227 | |
| Thereafter | |
| 40,141 | |
| Total payments | |
| 1,678,220 | |
| Less short-term equipment note obligations | |
| (493,160 | ) |
| Total long-term equipment note obligations | |
$ | 1,185,060 | |
NOTE 11: STOCKHOLDERS’ EQUITY
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 and 2,000,000 are designated
as Class C Preferred Stock.
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 was 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.
Except as otherwise required by law or expressly
provided in the Company’s Second Amended and Restated Articles of Incorporation, as amended, each share of Class C Preferred Stock
has one vote for the election of directors and on all matters submitted to a vote of shareholders of the Company. The Company is not obligated
to redeem or repurchase any shares of Class C Preferred Stock. Shares of Class C Preferred Stock are not otherwise entitled to any redemption
rights, or mandatory sinking fund or analogous fund provisions.
As of December 31, 2021 and 2020, there were
no shares issued or outstanding.
Common Stock
The Company has reserved a total of 6,262,478
shares of its common stock pursuant to the equity incentive plans (see Note 12 – Stock-Based Payments). The Company has 3,973,629
and 4,058,791 stock units, options and warrants outstanding under these plans as of December 31, 2021 and December 31, 2020,
respectively.
The Company has 122,238 and 593,667 shares of
its common stock reserved for warrants issued outside of the equity incentive plans as of December 31, 2021 and December 31,
2020, respectively.
Common Stock Issued for Accounts Payable
The Company issued 17,421 common shares for services
or materials with a fair value of approximately $221,000 during the year ended December 31, 2021. During the year ended December 31, 2020,
the Company issued 60,591 common shares for services with a fair value of approximately $181,000. The shares were valued based on the
stock price at the time of the grant when the performance commitment was complete. The shares issued during the year ended December 31,
2021 and 2020 were to settle existing accounts payable.
Exercise of Stock Options and Warrants
A total of 522,666 and 17,272 employee options,
with exercise prices ranging from $1.71 to $5.61 per share were exercised for total proceeds to the Company of approximately $1,707,000
and approximately $70,000 during the years ended December 31, 2021 and 2020, respectively.
During the year ended December 31, 2020 a total
of 271,813 employee options with exercise prices ranging from $2.06 to $4.52 per share were exercised in cashless transactions at market
prices ranging from $6.32 to $15.53 per share, which was based on the Company’s daily closing prices surrounding the transaction
dates. The transactions resulted in the issuance of 160,344 shares of common stock issued for qualified options to employees during the
year ended December 31, 2020. No such cashless exercises were completed for employee options during the year ended December 31, 2021.
A total of 155,000 employee warrants, with an
exercise price of $0.50 per share were exercised for total proceeds to the Company of approximately $78,000 during the year ended December 31,
2021. A total of 20,000 employee warrants, with an exercise price of $0.50 per share were exercised for total proceeds to the Company
of $10,000 during the year ended December 31, 2020.
During the year ended December 31, 2020 a total
of 90,004 employee warrants with an exercise price of $0.50 per share were exercised in cashless transactions at market prices ranging
from $7.48 to $15.04 per share, which was based on the average of the Company’s daily closing prices surrounding the transaction
dates. The transaction resulted in the issuance of a total of 84,553 shares of the Company’s common stock during the year ended
December 31, 2020. No such cashless exercises were completed for employee warrants during the year ended December 31, 2021.
A total of 1,044,444 warrants issued to investors
with an exercise price of $2.83 per share were exercised in cashless transactions at market prices ranging from $8.86 to $20.20 per share,
which was based on the bid price of the Company’s common stock on the Nasdaq Stock Market as reported by Bloomberg L.P. as of the
time of the holder’s execution of the applicable notice of exercise. The transaction resulted in the issuance of a total of 728,766
shares of the Company’s common stock during the year ended December 31, 2020. The grant date fair value for these warrants of $0.11120
was determined using the Black-Scholes options valuation model. The Company used the relative FV to record to equity. See Note 12 –
Stock-Based Payments. No such cashless exercises were completed for investor warrants during the year ended December 31, 2021.
A total of 471,429 and 471,428 warrants were issued
to an investor with an exercise price of $3.50 per share and were exercised for total proceeds to the Company of $1,650,000 and $1,650,000
during the years ended December 31, 2021 and 2020, respectively. The grant date fair value for these warrants of $0.1181 was determined
using the Black-Scholes options valuation model. The Company used the relative FV to record to equity. See Note 12 – Stock-Based
Payments.
Director Deferred Units
No director deferred units were converted to common
shares during the year ended December 31, 2021. During the year ended December 31, 2020, 5,546 director deferred stock units were converted
to common shares.
Offerings of Common Stock
On January 25, 2021, the Company entered into
an Equity Distribution Agreement with Canaccord Genuity LLC (“Canaccord”) under which the Company may offer and sell shares
of its common stock in connection with its at-the-market (“ATM”) offering in an aggregate amount of up to $80,000,000 from
time to time through Canaccord, acting exclusively as the Company’s sales agent (the “Offering”).
The Company issued and sold 1,853,181 shares of
common stock during the during the year ended December 31, 2021, in connection with the ATM at per share prices between $12.36 and $32.87,
resulting in net proceeds to the Company of approximately $33,106,000 net of offering costs.
NOTE 12: STOCK-BASED PAYMENTS
The Company
has common stock, common stock units, and common stock purchase options and warrants reserved pursuant to the 2018 Omnibus Stock Incentive
Plan (“2018 Plan”), Amended and Restated 2015 Stock Incentive Plan (“2015 Plan”) and the Second Amended and Restated
2012 Employee Stock Benefit Plan (“2012 Plan”).
The Company measures employee stock-based awards
at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award. Grants
to non-employees are expensed at the earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity
instrument is reached and (ii) the date at which the counterparty’s performance is complete. The Company recognizes stock option
forfeitures as they occur as there is insufficient historical data to accurately determine future forfeiture rates.
Determining the appropriate fair value of stock-based
awards requires the input of subjective assumptions, including the fair value of the Company’s common stock, and for stock options,
the expected life of the option, and expected stock price volatility. The Company uses the Black-Scholes option pricing model to value
its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates
and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses
different assumptions, stock-based compensation expense could be materially different for future awards.
The Company uses the following inputs when valuing
stock-based awards. The expected life of employee stock options was estimated using the “simplified method,” as the Company
has insufficient historical information to develop reasonable expectations about future exercise patterns and employment duration for
its stock option grants. The simplified method is based on the average of the vesting tranches and the contractual life of each grant.
The expected life of awards that vest immediately use the contractual maturity since they are vested when issued. For stock price volatility,
the Company uses its historical volatility for its expected volatility to calculate the fair value of option grants for the year ended
December 31, 2021 and public company comparables for the year ended December 31, 2020. The risk-free interest rate is based on U.S. Treasury
notes with a term approximating the expected life of the option at the grant-date.
Stock-based compensation, including stock options,
warrants and stock issued for compensation and services is included in the statements of operations as follows:
| | |
Years ended December 31, | |
| | |
2021 | | |
2020 | |
| Research and development | |
$ | 764,473 | | |
$ | 274,850 | |
| Sales and marketing | |
| 697,137 | | |
| 138,976 | |
| General and administrative | |
| 1,067,769 | | |
| 1,142,232 | |
| Cost of goods sold | |
| 1,098,693 | | |
| 360,714 | |
| Total | |
$ | 3,628,072 | | |
$ | 1,916,772 | |
2018 Omnibus Stock Incentive Plan
The 2018 Plan authorizing 1,000,000 shares was
approved by the Board of Directors and the Company’s shareholders at the Company’s 2018 annual meeting of shareholders held
on June 9, 2018. At the 2019 Annual Meeting, the shareholders approved an additional 1,000,000 shares of common stock to be issued under
the 2018 Plan. On April 20, 2020, the board of directors approved an increase from 2,000,000 to 4,000,000 shares; at the annual shareholder
meeting on June 20, 2020, the increase was approved by a majority of the shareholders. At the annual shareholder meeting on June 11, 2021,
a majority of the shareholders approved an increase from 4,000,000 to 6,000,000 shares.
The 2018 Plan provides the Company the ability
to grant to employees, directors, consultants or advisors shares of common stock of the Company through the grant of equity awards, including,
but not limited to, options that are incentive stock options or NQSOs and restricted stock, provided that only employees are entitled
to receive incentive stock options in accordance with IRS guidelines. As of December 31, 2021, the Company had a remaining reserve
of 2,278,570 shares of common stock under the 2018 Plan. Awards that are forfeited generally become available for grant under the 2018
Plan.
See below for the range of variables used in assessing
the fair value at the grant date for the options issued during the years ended December 31, 2021 and 2020 under the 2018 Plan:
| | |
| 2021 | | |
| 2020 | |
| Annual dividend yield | |
| — | | |
| — | |
| Expected life (years) | |
| 6.0 - 6.3 | | |
| 5.5 - 6.0 | |
| Risk-free interest rate | |
| 0.9% - 1.2 | % | |
| 0.36% - 2.36 | % |
| Expected volatility | |
| 91.9% - 96.8 | % | |
| 40.3% - 74.9 | % |
Employee stock-based compensation expense under
the 2018 Plan included in operating expenses for the years ended December 31, 2021 and 2020 was approximately $3,547,000
and approximately $1,803,000, respectively.
During the
year ended December 31, 2021, qualified options to purchase 812,250 shares of common
stock were granted to employees under the 2018 Plan with a grant date fair value of approximately $6,904,206. The options were valued
using the Black-Scholes option pricing model with approximately a 6.29 year expected term, risk free interest rate of 1.02%, a dividend
yield of 0%, and an annualized standard deviation of stock price volatility of 92.5%. These options vest over three years. During
the year ended December 31, 2020, qualified options to purchase 1,092,000 shares of common stock were granted to employees under the 2018
Plan with grant date fair values ranging from $2.19 to $12.06. The options were valued using the Black-Scholes option pricing model with
a six-year expected term, risk free interest rates ranging from 0.36% to 0.50%, and an annualized standard deviation of stock price volatility
of 69.4% to 77.4%, with a weighted average exercise price of $6.30.
On January 6, 2020, the board of directors approved
a director deferred compensation plan under the 2018 Plan. The deferred compensation plan calls for stock units to be held on account
for each director and issued 90 days after separation from service as a director. If cash reserves are estimated to be less than the amount
needed for five months of operations, the Directors are required to take their compensation in Deferred Stock Units under the 2018 Plan;
otherwise, Directors have the option of taking compensation in any combination of cash or Deferred Stock Units.
For the year ended December 31, 2021, a total
of 28,075 stock units with a value of $342,000, based on the closing price on the last day of each quarter, were reserved and expensed.
7,318 of the stock units were valued with a price per share of $13.23 based on the closing stock price on the last trading day of the
first quarter of 2021, and were recorded as a $96,816 expense on March 31, 2021. 5,633 of the stock units were valued with a price per
share of $17.19 based on the closing stock price on the last trading day of the second quarter of 2021, and were recorded as a $96,831
expense on June 30, 2021. 8,473 of the stock units were valued with a price per share of $11.43 based on the closing stock price on the
last trading day of the third quarter of 2021, and were recorded as a $96,846 expense on September 30, 2021. 6,651 of the stock units
were valued with a price per share of $7.78 based on the closing stock price on the last trading day of the fourth quarter of 2021, and
were recorded as a $51,745 expense on December 31, 2021.
28,673 of the stock units were valued with a price per share
of $1.61 based on the closing stock price on the last trading day of the fourth quarter of 2019, and were recorded as a $46,163 expense
on January 6, 2020 because the plan was adopted by the Board of Directors retroactively to the fourth quarter of 2019. The 46,584 of the
stock units were valued with a price per share of $1.15 based on the closing stock price on the last trading day of the first quarter
of 2020, and were recorded as a $53,572 expense on March 31, 2020. 33,486 of the stock units were valued with a price per share of $5.32
based on the closing stock price on the last trading day of the second quarter of 2020, and were recorded as a $178,146 expense on June
30, 2020. 34,901 of the stock units were valued with a price per share of $6.58 based on the closing stock price on the last trading day
of the third quarter of 2020, and were recorded as a $229,649 expense on September 30, 2020. 16,978 of the stock units were valued with
a price per share of $13.89 based on the closing stock price on the last trading day of the fourth quarter of 2020, and were recorded
as a $235,824 expense on December 31, 2020.
On April 27 and June 18, 2020, non-qualified options
to purchase 29,666 and 5,000 shares of common stock were issued to a consultant under the 2018 Plan with grant date fair values of $45,000
and $13,000, respectively. The exercise price of the options were $2.54 and $3.57, respectively. These options vested on issuance and
were exercised on August 20, 2020 in a cashless transaction at a market price of $7.638 per share resulting in the issuance of 22,463
shares.
On September 11, 2020, non-qualified options to
purchase 41,000 shares of common stock were issued to consultants under the 2018 Plan with grant date fair value of $140,000. The exercise
price of the options is $5.41. 20,000 of these options have a two-year vesting period and 21,000 of the options have a one-year vesting
period.
On December 14, 2020, non-qualified options to
purchase 21,000 shares of common stock were issued to consultants under the 2018 Plan with grant date fair value of $165,000. The exercise
price of the options is $12.06. 11,000 of these options have a three-year vesting period and 10,000 of the options have a one-year vesting
period.
A summary of activity under the 2018 Plan for
the years ended December 31, 2021 and 2020 is presented below:
| | |
Number of Options | | |
Weighted Average
Exercise Price | | |
Weighted Average
Remaining
Contractual Life
(in Years) | |
| Awards outstanding at January 1, 2020 | |
| 1,820,188 | | |
$ | 3.01 | | |
| 9.47 | |
| Granted | |
| 1,378,172 | | |
| 6.27 | | |
| 9.40 | |
| Exercised | |
| (150,210 | ) | |
| 3.37 | | |
| 5.06 | |
| Forfeited or expired | |
| (152,641 | ) | |
| 3.25 | | |
| 8.87 | |
| Awards outstanding at December 31, 2020 | |
| 2,895,509 | | |
| 4.36 | | |
| 8.98 | |
| Granted | |
| 857,746 | | |
| 11.22 | | |
| 6.29 | |
| Exercised | |
| (463,724 | ) | |
| 3.31 | | |
| — | |
| Forfeited or expired | |
| (242,987 | ) | |
| 6.06 | | |
| — | |
| Awards outstanding at December 31, 2021 | |
| 3,046,544 | | |
$ | 6.32 | | |
| 8.41 | |
The number of awards exercisable on December 31, 2021 is 1,253,748.
The weighted average exercise price for these awards exercisable is $4.24 and the weighted average remaining contractual life is 7.77
years.
Total compensation cost related to non-vested
awards issued under the 2018 Plan not yet recognized as of December 31, 2021 was approximately $7,758,426 and will be recognized
on a straight-line basis through 2.23 years based on the respective vesting periods. The amount of future stock option compensation expense
could be affected by any future option grants or forfeitures.
Consulting Agreement with Common Stock Compensation
During the year ended December 31, 2021 and 2020,
the Company issued approximately 17,421 and 60,591 common shares for accounts payable with a fair value of approximately $221,000 and
$181,000, respectively. The shares were valued based on the stock price at the time of the grant. Of these shares, approximately 6,421
and 32,749 were for the August 3 annual renewal of an investor relations consulting contract. The terms of the contract call for the issuance
of approximately $100,000 worth of common shares issued at each annual renewal based on the market price at the time of the renewal. In
addition to the payment in common shares, this consultant receives cash payments of approximately $7,500 per month and payments for additional
services as needed. During the years ended December 31, 2021 and 2020, the Company paid this investor relations consultant approximately
$90,000 and $365,200, respectively.
2015 Stock Incentive Plan
The 2015 Plan provides the Company the ability
to grant to employees, directors, consultants or advisors shares of common stock of the Company through the grant of options that are
incentive stock options or NQSOs and/or the grant of restricted stock, provided that only employees are entitled to receive incentive
stock options in accordance with IRS guidelines. One million shares of common stock were authorized for issuance under the 2015 Plan.
Awards that are forfeited generally become available for grant under the 2015 Plan. As of December 31, 2021, 533,773 shares of common
stock were reserved for issuance pursuant to stock options that are outstanding, and 10,278 shares remain available for issuance pursuant
to future awards that might be made under the 2015 Plan.
During the year ended December 31, 2020, 13,000
options were granted under the 2015 Plan with a grant date fair value of approximately $17,000.
| | |
2020 | |
| Annual dividend yield | |
$ | 0.00 | |
| Expected life (years) | |
| 6.0 | |
| Risk-free interest rate | |
| 0.45 | % |
| Expected volatility | |
| 69.4 | % |
Employee stock-based compensation expense included
in operating expenses for the years ended December 31, 2021 and 2020 related to the 2015 Plan was approximately $81,000 and $114,000,
respectively.
Total compensation cost related to non-vested
awards not yet recognized as of December 31, 2021 was $20,000 and will be recognized on a straight-line basis through 0.54 years
based on the respective vesting periods. The amount of future stock option compensation expense could be affected by any future option
grants or forfeitures.
A summary of activity under the 2015 Plan for
the years ended December 31, 2021 and 2020 is presented below:
| | |
Number of Shares | | |
Weighted Average
Exercise Price | | |
Weighted Average
Remaining
Contractual Life
(in Years) | |
| Awards outstanding at January 1, 2020 | |
| 814,631 | | |
$ | 2.89 | | |
| 8.07 | |
| Granted | |
| 13,000 | | |
| 2.19 | | |
| 9.35 | |
| Exercised | |
| (194,305 | ) | |
| 2.6 | | |
| — | |
| Forfeited or expired | |
| (18,356 | ) | |
| 3.89 | | |
| 8.03 | |
| Awards outstanding at December 31, 2020 | |
| 614,970 | | |
| 2.94 | | |
| 6.31 | |
| Granted | |
| — | | |
| — | | |
| — | |
| Exercised | |
| (76,363 | ) | |
| 3.01 | | |
| — | |
| Forfeited or expired | |
| (4,834 | ) | |
| 4.52 | | |
| — | |
| Awards outstanding at December 31, 2021 | |
| 533,773 | | |
$ | 2.92 | | |
| 5.51 | |
The number of awards exercisable on December 31,
2021 is 516,304. The weighted average exercise price for these awards exercisable is $2.89 and the weighted average remaining contractual
life is 5.44 years.
2012 Employee Stock Benefit Plan
The 2012 Plan provides the Company the ability
to grant to directors, employees, consultants, advisors or independent contractors shares of common stock of the Company through the grant
of warrants and/or the grant of common stock. The Company originally reserved 1,000,000 shares of common stock for issuance under the
2012 Plan. Awards that are forfeited generally become available for grant under the 2012 Plan. As of December 31, 2021, 393,312 shares
of common stock were reserved for issuance pursuant to warrants that are issued and outstanding under the 2012 Plan and one share remains
available for issuance pursuant to future awards that might be made under the 2012 Plan. Warrants expire 5 to 15 years from the grant
date. The warrants were fully expensed prior to 2020.
A summary of activity under the 2012 Plan for
the years ended December 31, 2021 and 2020 is presented below:
| | |
Number of Shares | | |
Weighted Average
Exercise Price | | |
Weighted
Average
Remaining
Contractual Life
(in Years) | |
| Warrants outstanding at January 1, 2020 | |
| 658,316 | | |
$ | 0.57 | | |
| 6.45 | |
| Granted | |
| — | | |
| — | | |
| — | |
| Exercised | |
| (110,004 | ) | |
| 0.50 | | |
| 2.00 | |
| Forfeited or expired | |
| — | | |
| — | | |
| — | |
| Warrants outstanding at December 31, 2020 | |
| 548,312 | | |
$ | 0.58 | | |
| 4.41 | |
| Granted | |
| — | | |
| — | | |
| — | |
| Exercised | |
| (155,000 | ) | |
| 0.50 | | |
| — | |
| Forfeited or expired | |
| — | | |
| — | | |
| — | |
| Warrants outstanding at December 31, 2021 | |
| 393,312 | | |
$ | 0.62 | | |
| 4.32 | |
All awards were vested on December 31, 2021. The
weighted average exercise price for these awards and weighted average remaining contractual life are $0.62 and 4.32 years, respectively.
NOTE 13: COMMITMENTS AND CONTINGENCIES
On December
6, 2019, the Company entered into a lease for a property approximately six blocks east of the AMP, located in Eugene, Oregon, that contains
two buildings. The initial term of the lease is 25 months and began on December 6, 2019. There is an option for a three-year extension.
The main building is 6,508 square feet of office and warehouse space and the auxiliary building is 4,318 square feet of warehouse space.
The office space is being used by marketing and sales. The warehouse is being used for R&D and battery module manufacturing. On March
3, 2020, the Company amended the lease to include the adjacent building which has 10,752 square feet of office and warehouse space on
the ground floor plus second floor office and storage space. This location is being used for service will be used for further expansion.
Rent is $12,000 per month and subject to a 3% increase per year.
On October
15, 2018, the Company re-negotiated a lease previously entered into as a month-to-month lease during June 2018, for a 5,291 square foot
commercial industrial office space in Eugene, Oregon. The term of the lease is 60 months which began on October 15, 2018. Rent is $4,500
per month and subject to a 3% increase per year. The space is being used for TMW office and manufacturing.
On October
18, 2018, the Company entered into a lease for a 4,491 square foot space in San Diego, California. The term of the lease is 60 months
which began on November 1, 2018. Base rent is $8,982 per month. The space is being used for Arcimoto’s California dealer showroom,
rental and service operations.
On September
30, 2021, the Company occupied 1,700 square feet of office area, 32,000 square feet of warehouse space and 125,000 square feet of asphalt
paving and undeveloped greenfield. The original lease expiring in 2021 has been extended until 2024. Base rent is $12,948 per month.
On November
18, 2020, the Company entered into a lease for a 106 square foot space in Orlando Florida. The term of the lease is month to month which
began on December 1, 2020 and auto renews each month unless one months’ notice of cancellation is given. Total rent is approximately
$2,000 per month. The space is being used for Arcimoto’s Florida dealer showroom.
On February
8, 2021, the Company entered into a lease for a 15,124 square foot office space on the second floor of 155 Blair Boulevard, Eugene, Oregon
97402 that will be used for office and general use and warehouse space located at 135 Blair Boulevard, Eugene, Oregon 97402 that will
be used for a dealer and rental location. The term of the lease is 60 months which began on March 1, 2021. There is an option for two
successive five-year extension periods. Rent is approximately $18,000 per month and subject to a 2.5% increase per year.
On May 3,
2021, the Company entered into a lease for an executive office space in Arlington, Virginia. The space will be used by an executive for
office and general use. The term of the lease is one year which began on June 1, 2021 and automatically renews each month after the first
year unless two months’ notice of cancellation is given. Total rent is approximately $1,815 per month and will increase automatically
by 10% after the first year unless the lease is canceled pursuant to the terms discussed above.
On June
30, 2021, the Company entered into a lease for a commercial facility located at 2110 West Second Avenue, Eugene, Oregon. The term of the
lease is month to month which began on approximately May 1, 2021 and automatically renews each month unless 30 days’ notice of cancellation
is given. Total rent is approximately $4,500 per month. The space is being used for office and general purposes.
Future annual minimum payments
under operating leases as of December 31, 2021 are as follows:
| 2022 | |
$ | 550,506 | |
| 2023 | |
| 517,945 | |
| 2024 | |
| 340,840 | |
| 2025 | |
| 229,916 | |
| 2026 | |
| 77,267 | |
Rent expense
is recognized on a straight-line basis. Total rent expense for the years ended December 31, 2021 and
2020 was approximately $839,000 and $363,000, respectively.
In February
2021, a statement of work for approximately $3,750,000 was signed with Munro and Associates (“Munro”) for development activities
through the end of the year to develop the FUV high volume production platform. Munro’s research and development expenses invoiced in
2021 was approximately $2,375,000.
Litigation
On March
6, 2020, the Company filed a complaint (“the Complaint”) against Ayro, Inc. (“Ayro”), accusing Ayro of patent
infringement in Federal District Court for the Western District of Texas, Waco Division (Case No. 6:20-cv-00176-ADA) (“the Ayro
Litigation”). In the Complaint, Arcimoto alleged that Ayro’s 311 two-seater electric vehicles infringe U.S. Patent 8,985,255
(the “255 Patent”). The Complaint asked for monetary damages and enhanced damages due to willful infringement of the 255 Patent
by Ayro. On March 27, 2020, Ayro answered the Complaint, denying liability and asserting counterclaims of noninfringement and patent invalidity.
During the first quarter of 2021, the parties reached a settlement and submitted a request to the court to dismiss the case.
The Company,
Mark Frohnmayer and Douglas Campoli have been sued in two putative class actions in the United States District Court for the Eastern District
of New York, Barnette v. Arcimoto, Inc. et al. (Case No. 21-cv-02143 filed on April 19, 2021) and Gibson v. Arcimoto, Inc. et al. (Case
No. 21-cv-02870 filed on May 20, 2021). The putative class actions purported to be on behalf of all those who purchased the Company’s
common stock between February 14, 2018 and March 22, 2021. The allegations in the actions are based on the research report dated March
23, 2021 produced by Bonitas Research, LLC, a short seller of the Company’s common stock. The Barnette and Gibson actions were consolidated
as In re Arcimoto, Inc. Securities Litigation (Case No. 21-cv-02143) on July 14, 2021, and a consolidated amended complaint was filed
on September 20, 2021. Briefing on the defendants’ motion to dismiss the consolidated amended complaint was completed on
March 11, 2022. No motion to certify a class has been filed at this time. The company believes it
has substantial defenses to the claims asserted in this lawsuit and intends to vigorously defend this action.
The Company
is also a nominal defendant in two shareholder derivative lawsuits filed in the United States District Court for the Eastern District
of New York, Liu v. Frohnmayer et al. (Case No. 21-cv-03702 filed on June 30, 2021) and Carranza v. Frohnmayer et al. (Case No. 21-cv-03888
filed on July 9, 2021), and a shareholder derivative lawsuit filed in the United States District Court for the District of Oregon, Laguerre
v. Frohnmayer et al. (Case No. 21-cv-00982 filed on June 30, 2021). Mark Frohnmayer, Douglas Campoli, Terry Becker, Nancy Calderon, Joshua
Scherer, and Jesse Eisler are named as defendants in all three shareholder derivative suits. Jeff Curl is named as a defendant in Laguerre
and Liu. The allegations in the shareholder derivative lawsuits largely arise from the Bonitas report referenced above. The Liu and Carranza
actions were consolidated on August 4, 2021 as In re Arcimoto, Inc. Derivative Litigation (Lead Case No. 21-cv-03702). These derivative
actions are currently stayed. The Company believes it has substantial defenses to the claims asserted
and intends to vigorously defend the actions.
The Company possesses insurance
coverage to cover the litigation expenses with a deductible of $1,500,000. As a result, Arcimoto has accrued this amount at December 31,
2021.
Additionally,
from time to time, the Company might become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating
to intellectual property, commercial arrangements and other matters arising in the ordinary course of its business.
NOTE 14: RELATED PARTY TRANSACTIONS
During the second quarter of 2021, Arcimoto recorded
a sale of a pre-owned, depreciated marketing FUV to an officer of the Company. The sale was completed at an arm’s length transaction and
was paid for in cash for approximately $12,500.
During the third quarter of 2021, Arcimoto recorded
a sale of a pre-owned Roadster to the Chief Executive Officer. The sale was completed at an arm’s length transaction and was paid
for in cash for approximately $23,900.
During 2021, the Company purchased $43,000 of
various materials from an entity owned by the Chief Operating Officer. The balance owed for these purchases at December 31, 2021 was zero.
Arcimoto may, from time to time, sell to its management
and employees at a discounted price. Sales to such parties for the year ended December 31, 2021 were not material.
NOTE 15: INCOME TAXES
The components of the provision for income taxes
are as follows:
| | |
For the Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Current expense (benefit) | |
| | |
| |
| Federal | |
$ | — | | |
$ | — | |
| State | |
| 4,793 | | |
| — | |
| Total current expense (benefit) | |
| 4,793 | | |
| — | |
| | |
| | | |
| | |
| Deferred expense (benefit) | |
| | | |
| | |
| Federal | |
| (2,236,080 | ) | |
| — | |
| State | |
| (702,768 | ) | |
| — | |
| Total deferred expense (benefit) | |
| (2,938,848 | ) | |
| — | |
| | |
| | | |
| | |
| Total income tax expense (benefit): | |
$ | (2,934,055 | ) | |
$ | — | |
The income tax benefit is primarily driven by
the release of valuation allowance due to the deferred tax liabilities from the Tilting Motor Works acquisition.
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2021
and 2020 are summarized below:
| | |
For the Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Deferred tax assets: | |
| | |
| |
| Share-based compensation expense | |
$ | 324,985 | | |
$ | 929,448 | |
| Inventory reserve | |
| 225,615 | | |
| 151,814 | |
| Net operating loss carry forward | |
| 27,145,356 | | |
| 13,607,361 | |
| Federal research and development credit | |
| 646,971 | | |
| 434,503 | |
| Oregon research and development credit | |
| 46,663 | | |
| 215,598 | |
| Other | |
| 302,129 | | |
| — | |
| Deferred tax liabilities: | |
| | | |
| | |
| Depreciation and amortization | |
| (3,144,318 | ) | |
| (307,103 | ) |
| Total deferred tax asset | |
| 25,547,401 | | |
| 15,031,621 | |
| Valuation allowance | |
| (25,547,401 | ) | |
| (15,031,621 | ) |
| Net deferred tax asset | |
$ | — | | |
$ | — | |
In assessing the potential realization of these
deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will
be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the
periods in which those temporary differences become deductible. As of December 31, 2021 and 2020, management was unable to determine
if it is more likely than not that the Company’s deferred tax assets will be realized and has therefore recorded an appropriate
valuation allowance against deferred tax assets at such dates. The valuation allowance for deferred tax assets increased $10,515,780 and
$5,019,000 during the years ended December 31, 2021 and 2020, respectively.
No federal tax provision has been provided for
the years ended December 31, 2021 and 2020 due to the losses incurred during such periods. The Company’s effective tax rate
is different from the federal statutory rate due primarily to operating losses that receive no tax benefit as a result of a valuation
allowance recorded for such losses.
| | |
For the Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Statutory U.S. Federal tax rate | |
| 21.0 | % | |
| 21.0 | % |
| State and local income taxes - net of Federal benefit | |
| 5.5 | % | |
| 6.6 | % |
| Goodwill impairment | |
| (2.8 | )% | |
| — | % |
| Non-deductible expenses and other | |
| 0.8 | % | |
| 0.1 | % |
| PPP loan forgiveness | |
| 0.5 | % | |
| — | % |
| Valuation allowance | |
| (19.1 | )% | |
| (27.7 | )% |
| Effective rate tax | |
| 5.9 | % | |
| — | % |
As of December 31, 2021, the Company had
net operating loss carry forwards of approximately $100,000,000. Approximately $10,700,000 of the net operating loss carryforwards will
expire by 2037. The remainder of the net operating loss carryforwards generated in 2018 and later have indefinite carryforward periods.
The Federal R&D tax credits will expire at various dates from 2034 through 2042, and the Oregon R&D tax credits will expire in
2022.
The Company has evaluated its income tax positions
and has determined that it does not have any uncertain tax positions. The Company policy is to record interest and penalties on uncertain
tax positions as income tax expense. The Company may in the future become subject to federal, state and local income taxation though it
has not been since its inception. The Company is not presently subject to any income tax audit in any taxing jurisdiction.
The Company has identified the United States Federal
and Oregon State tax returns as its “major” tax jurisdiction. The United States Federal and Oregon State return years 2017 through
2020 are still subject to tax examination by the United State Internal Revenue Service; however, the Company does not currently have any
ongoing tax examination.
NOTE 16: SUBSEQUENT EVENTS
The Company evaluates subsequent events that have
occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized,
or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates
inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions
that did not exist at the date of the balance sheet but arose subsequent to that date.
On January 14, 2022, the Company entered into
an Equity Distribution Agreement (the “Sales Agreement”) with Canaccord Genuity LLC (the “Agent”), pursuant to
which the Company may offer and sell, from time to time, through or to the Agent, as sales agent up to $100,000,000 of shares (“Shares”)
of its common stock. Any Shares offered and sold in the Offering will be issued pursuant to the Company’s Registration Statement
on Form S-3 (File No. 333-261955) filed with the SEC on December 30, 2021 (the “Form S-3”) and declared effective on January
13, 2022, and the 424(b) prospectus supplement relating to the Offering dated January 14, 2022. Arcimoto has raised $3,942,414 by issuing
560,291 common shares through March 31, 2022.
In accordance with the terms of the Sales Agreement,
the Company may offer and sell the Shares at any time and from time to time through or to the Agent, as sales agent. Sales of Shares pursuant
to the Sales Agreement, if any, will be made in sales deemed to be “at the market” equity offerings as defined in Rule 415
promulgated under the Securities Act of 1933, as amended (the “Securities Act”), including sales made directly on or through
The Nasdaq Global Market, the existing trading market for the Company’s common stock, sales made to or through a market maker other
than on an exchange or otherwise, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such
prevailing market prices, and/or any other method permitted by law, including in privately negotiated transactions.
The Company has no obligation to sell any of the
Shares, and may at any time suspend offers under the Sales Agreement. The Offering will terminate upon the earlier of (a) the sale of
all of the Shares, or (b) the termination by written notice from the Company or by written notice from the Agent to the Company.
Under the terms of the Sales Agreement, the Agent
will be entitled to a commission at a fixed rate of 3.0% of the gross sales price of Shares sold through the Agent under the Sales Agreement.
The Company will also reimburse the Agent for certain expenses incurred in connection with the Sales Agreement, and agreed to provide
indemnification and contribution to the Agent with respect to certain liabilities, including liabilities under the Securities Act and
the Securities Exchange Act of 1934, as amended.
