Financings
During
the three months ended March 31, 2018, the Company issued the
following shares;
|
Issuance of Shares
|
Number of Shares Issued
|
Cash Proceeds
|
|
Private
Placements
|
757,138
|
$
3,534,397
|
|
Finder’s
Fee
|
2,286
|
$
Nil
|
|
Shares
issued for exercise of stock options
|
6,198
|
$
12,395
|
|
Share
issued costs
|
Nil
|
$
(337,787)
|
Incentive Stock Options
During
the three months ended March 31, 2018, the Company granted 347,500
additional stock options with an exercise price of US$9.60 per
share, which options will expire on January 6, 2025. The following
table represents the number of stock options that are outstanding
as at March 31, 2018.
|
Date of Grant
|
Number of Options
|
Price Per Option
|
Expiry Date
|
|
June
11, 2015
|
22,500,000
|
$0.30
|
June
11, 2022
|
|
August
13, 2015
|
1,331,250
|
$0.30
|
August
13, 2022
|
|
December
9, 2015
|
4,200,000
|
$0.80
|
December
9, 2022
|
|
March
7, 2016
|
12,500
|
$0.80
|
March
7, 2023
|
|
June
21, 2016
|
12,500
|
$2.00
|
June
21, 2023
|
|
February
17, 2017
|
470,000
|
$2.00
|
February
17, 2024
|
|
August
8, 2017
|
50,000
|
$2.00
|
August
8, 2023
|
|
January
5, 2018
|
347,500
|
USD$9.60
|
January
6, 2025
|
1.2
Selected
Annual Financial Information
|
|
Year Ended December 31, 2017
|
Year Ended December 31, 2016
|
|
|
$
|
$
|
|
Revenue
|
109,173
|
-
|
|
Gross
Profit
|
45,223
|
-
|
|
|
|
|
|
Operations:
|
|
|
|
Amortisation
|
124,133
|
22,567
|
|
General
& Administration Exp.
|
2,373,251
|
1,205,835
|
|
Research
& Development Exp.
|
4,430,386
|
2,778,295
|
|
Sales
& Marketing Exp.
|
631,381
|
209,455
|
|
Stock-based
compensation Exp.
|
889,511
|
1,461,189
|
|
Share-based
payment Exp.
|
1,085,716
|
3,264,681
|
|
Subtotal
|
(9,489,156)
|
(8,942,022)
|
|
Accretion
Interest Exp.
|
69,562
|
25,908
|
|
|
|
|
|
Changes
in fair value of derivative liability
|
186,269
|
-
|
|
Finders
fee on convertible loan
|
258,542
|
-
|
|
Impairment
of Goodwill
|
1,342,794
|
-
|
|
Foreign
exchange loss
|
20,048
|
5,417
|
|
Loss
for the Period
|
(11,366,372)
|
(8,973,347)
|
|
Basic
& Diluted Loss per Share
|
(0.35)
|
(0.27)
|
|
|
|
|
|
Balance Sheet
|
|
|
|
Working
Capital
|
6,653,009
|
3,555,976
|
|
Total
Assets
|
12,661,381
|
4,787,766
|
|
Total
Long Term Liabilities
|
3,655,690
|
Nil
|
1.3
Results
of Operations
Three months ended March 31, 2018
Revenue
for the three months ended March 31, 2018 was $166,133 (2017:
$nil), caused by the acquisition of Intermeccanica International
Inc. (“IMI”). The cost of revenue was $102,668
providing a gross profit of $63,465 or 38%. Revenue recognition for
IMI is based on a percentage completion method, and currently, IMI
has 8 Roadsters/Speedsters in various stages of production. The
following table indicates the number of vehicles produced for
either delivery to customers, testing or marketing
purposes.
|
Vehicle Type
|
Production
Three Months Ended
|
Customer Deliveries
Three Months Ended
|
|
|
31
March 2018
|
31
March 2017
|
31
March 2018
|
31
March 2017
|
|
Roadster/Speedster
|
Nil
|
Nil
|
Nil
|
Nil
|
|
SOLO
|
6
|
2
|
Nil
|
1
|
During
the three months ended March 31, 2018, the Company incurred a
comprehensive loss of $2,403,974 compared to $2,189,569 loss for
the corresponding period in 2017. The largest expense items that
resulted in a decrease in net comprehensive loss for the three
months ended March 31, 2018 were;
General
and administrative expenses for the three months ended March 31,
2018 were $975,217 compared to $482,809 for the three months ended
March 31, 2017. The following items are included in office and
general expenses;
●
Rent increased to
$87,122, for the three months ended March 31, 2018, from $58,285
for the three months ended March 31, 2017. The increase was caused
by the acquisition of Intermeccanica International Inc.,
(“IMI”) and an increase in the Company’s
production premises as it expands its production capabilities to
produce the SOLO and an increase in its retail
presence.
●
Office expenses
increased to $236,950, for the three months ended March 31, 2018,
from $32,050 for the corresponding quarter ended March 31, 2017.
The increase was caused by travel by the Company’s staff to
China and USA for strategic alliances and an increases in insurance
costs.
●
Legal &
Professional were $264,969, for the three months ended March 31,
2018, from $176,852 for the corresponding quarter ended March 31,
2017. The increase in legal and professional expenses relate to the
increases in accounting fees and legal fees related to the
Company’s patent filings.
●
Consulting fees
were $143,265, for the three months ended March 31, 2018, compared
to $93,344 for the corresponding quarter ended March 31, 2017. The
increase in fees related to the use of additional consultants for
investor relations and executive advisory services. Consulting fees
relate to services provided for accounting, finance and corporate
advisory services.
●
Investor relations
expenses, not including consultant fees above, increased to $90,058
for the three months ended March 31, 2018, from $22,223 for the
corresponding quarter ended March 31, 2017. The Company has
increased its investor relations activities by attending an
investor conference as it transitions to a public
company.
●
Salaries increased
to $152,854 for the three months ended March 31, 2018, compared to
$100,055 for the corresponding quarter ended March 31, 2017. The
increase is related to performance increases to certain salaried
employees, the addition of new employees and the additional
employees from the purchase of IMI.
Research
and development expenses increased to $1,560,177 for the three
months ended March 31, 2018 from $1,283.729 for the corresponding
quarter ended March 31, 2017. The Company continues to develop its
first electric vehicle, the SOLO. All costs related to
pre-production vehicles are being expensed to research and
development. During the three months ended March 31, 2018, the
Company received $5,565 (2017: $103,534) in government grants due
from the Industrial Research Assistance Program (“IRAP) Co-op
program administered by the National Research Council.
Sales
and marketing expenses increased to $279,630 for the three months
ended March 31, 2018 from $124,266 for the corresponding quarter
ended March 31, 2017. The Company has increased its sales and
marketing efforts by attending trade shows, re-establishing its
social media presence and increasing its staff as its first
electric vehicle, the SOLO, nears production.
Stock-based
compensation charges for the three months ended March 31, 2018 were
$790,234 (2017: $247,656). The Company issued 347,500 stock options
at an exercise price of US$9.60 per share during the three months
ended March 31, 2018. In addition, the stock-based compensation
charges relate to stock options issued during previous quarters
where charges are recognised over the stock option vesting period.
The Company uses the Black-Scholes method of calculating the
stock-based compensation expense under the graded
method.
The
operating expenses for the three months ended March 31, 2018
increased to $3,656,287 (2017: $2,163,370); the increase in
operating loss was caused by the aforementioned expenses for the
quarter.
The
Company incurred an interest accretion expense of $nil for the
three months ended March 31, 2018 (2017: $20,277), relating to a
convertible loan.
The
Company incurred changes in fair values of warrant derivative of
$(1,166,027) (2017: $Nil), caused by warrants priced in US dollars,
while the Company’s functional currency is in Canadian
dollars. As a result of this difference in currencies, the proceeds
that will be received by the Company are not fixed and will vary
based on foreign exchange rates, hence the warrants are a
derivative under IFRS, and are required to be recognized and
measured at fair value at each reporting period. Any changes in
fair value from period to period are recorded as non-cash gain or
loss in the consolidated statement of net loss and comprehensive
loss.
The
Company also had a foreign exchange gain of $22,821 (2017:
$5,922).
Net
loss and comprehensive loss of the three months ended March 31,
2018 was $2,403,974 (2017: $2,189,569).
1.5 Summary of Quarterly Results
The
following table sets forth selected financial information of the
Company for each of the last eight quarters:
|
Quarter Ending
|
Note
|
Expenses
$
|
Net Loss
$
|
Basic and diluted net loss per share
$ (6)
|
|
March
31, 2018
|
5
|
(3,656,287)
|
(2,403,974)
|
(0.10)
|
|
December
31, 2017
|
3,4
|
(3,655,385)
|
(4,617,104)
|
(0.10)
|
|
September
30, 2017
|
2
|
(2,163,168)
|
(2,984,732)
|
(0.07)
|
|
June
30, 2017
|
|
(1,552,456)
|
(1,574,967)
|
(0.04)
|
|
March
31, 2017
|
|
(2,163,370)
|
(2,189,569)
|
(0.05)
|
|
December
31, 2016
|
1
|
(5,880,650)
|
(5,437,308)
|
(0.14)
|
|
September
30, 2016
|
|
(1,453,885)
|
(1,453,885)
|
(0.05)
|
|
June
30, 2016
|
|
(961,071)
|
(961,071)
|
(0.03)
|
Note 1– The Company incurred a share-based payment charge of
$3,264,681.
Note 2 – The Company incurred a Finder’s fee expense of
$258,542 on a convertible loan related to the fair value of shares
issued on the conversion of the convertible loan to
equity.
Note 3 – The Company incurred an impairment of goodwill
arising from the acquisition of Intermeccanica International Inc.,
of $1,342,794
Note 4 – The Company incurred a change in value of warrants
of $186,269.
Note 5 – The Company incurred a change in value of warrants
of $(1,166,027)
Note 6 – Basic and diluted net loss per share reflects a 1
for 2 share consolidation, which has been retroactively applied to
the most recent quarter only.
1.6 Liquidity and Capital Resources
The
Company’s operations consist of the designing, developing and
manufacturing of electric vehicles. The Company’s financial
success is dependent upon its ability to market and sell its
electric vehicles; and to raise sufficient working capital to
enable the Company to execute its business plan. The
Company’s historical capital needs have been met by the sale
of the Company’s stock. There is no assurance that equity
funding will be possible at the times required by the Company. If
no funds can be raised and sales of its electric vehicles do not
produce sufficient net cash flow, then the Company may require a
significant curtailing of operations to ensure its
survival.
The
financial statements have been prepared on a going concern basis
which assumes that the Company will be able to realize its assets
and discharge its liabilities in the normal course of business for
the foreseeable future. The Company incurred a net loss and
comprehensive loss of $2,403,974 during the three months ended
March 31, 2018 and has a cash balance and a working capital surplus
of $5,861,327 and $5,123,147, respectively, as at March 31,
2018
.
The
Company’s ability to meet its obligations as they fall due
and to continue to operate as a going concern is dependent on the
continued financial support of the creditors and the shareholders.
In the past, the Company has relied on sales of its equity
securities to meet its cash requirements. There can be no assurance
that funding from this or other sources will be sufficient in the
future to continue its operations. Even if the Company is able to
obtain new financing, it may not be on commercially reasonable
terms or terms that are acceptable to it. Failure to obtain such
financing on a timely basis could cause the Company to reduce or
terminate its operations. The above indicates the existence of a
material uncertainty that may cast significant doubt on the
Company’s ability to continue as a going
concern.
As of
March 31, 2018, the Company had 24,559,728 issued and outstanding
shares and 65,540,336 shares on a fully diluted basis. The Company
began trading on the over the counter market on September 1,
2017.
The
Company had $5,123,147, of working capital surplus as at March 31,
2017 compared to $6,653,009 working capital surplus as at December
31, 2017. The decrease in working capital resulted from the cash
used in operations of $2,300,191, (2017: $1,854,147); cash used in
investing activities of $1,283,805 (2017: $241,259) resulting from
the additions to property, plant and equipment and an increase in
restricted cash; which was offset by financing activities
generating cash of $834,328, (2017: $380,957), due to the issuance
of 763,336 common shares for net cash proceeds of $2,459,005 (2017:
$380,957); the repayment of a promissory note of $1,500,000 (2017:
$nil) due to the purchase of Intermeccanica International Inc., and
the repayment of a bank loan acquired on the purchase of
Intermeccanica International Inc.
1.7 Capital Resources
As at
March 31, 2018, the Company had cash and cash equivalents of
$5,861,327 (2017: $2,201,834). The Company is aggressively pursuing
equity financing and there can be no guarantees that the Company
will be successful in its endeavors.
As of
the date of this MD&A, the Company has no outstanding
commitments, other than rent and lease commitments and $7.8 million
payable to the Company’s manufacturing partner for the
production of the SOLO (Financial statement note 6 & 9 for the
three months ended March 31, 2018). The Company delayed its payment
of $1.8 million due to manufacturing partner’s inability to
meet their stated time lines. The Company anticipates that the
manufacturing partner will resumes its stated timelines for the
production of the SOLO in the next 60 days. On October 16, 2017,
Jerry Kroll, CEO, entered into a Share Pledge Agreement with
Zongshen to guarantee the Company’s payment for the cost of
the prototype tooling and molds estimated to be $1.8 million
through the pledge of 400,000 of our common shares at a deemed
price of US$4.00. Apart from our agreement to reimburse Mr. Kroll
for liabilities under his Share Pledge Agreement,
Apart from our agreement to reimburse Mr. Kroll
for liabilities under his Share Pledge Agreement, we have not
pledged any of our assets as security for loans, or otherwise and
are not subject to any debt covenants.
1.8 Off-Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements.
1.9 Transactions with Related Parties
Related party balances
The
following amounts are due to related parties
|
|
|
|
|
Shareholder
loan
|
$
9,344
|
$
10,383
|
|
Due to related
parties (Note 8)
|
60,855
|
16,814
|
|
|
$
70,199
|
$
27,197
|
These
amounts are unsecured, non-interest bearing and have no fixed terms
of repayment.
Key management personnel compensation
|
|
|
|
|
|
|
|
Consulting
fees
|
$
60,000
|
$
45,000
|
|
Salary
|
88,000
|
51.000
|
|
Deferred salary for
CEO
|
-
|
15.000
|
|
Stock-based
compensation
|
121,562
|
202,637
|
|
|
$
269,562
|
$
313,637
|
1.10 Critical Accounting Estimates.
The
preparation of the Company’s financial statements requires
management to use estimates and assumptions that affect the
reported amounts of assets and liabilities as well as revenue and
expenses.
Research
costs are expensed when incurred and are stated net of government
grants. Development costs including direct material, direct labour
and contract service costs are capitalized as intangible assets
when the Company can demonstrate that the technical feasibility of
the project has been established; the Company intends to complete
the asset for use or sale and has the ability to do so; the asset
can generate probable future economic benefits; the technical and
financial resources are available to complete the development; and
the Company can reliably measure the expenditure attributable to
the intangible asset during its development.
The
Company accounts for all stock-based payments and awards using the
fair value based method. Under the fair value based method,
stock-based payments to non-employees are measured at the fair
value of the consideration received, or the fair value of the
equity estimates issued, or liabilities incurred, whichever is more
reliably measurable.
From
time to time, the company must make accounting estimates. These are
based on the best information available at the time, utilizing
generally accepted industry standards.
.
1.11 Changes in Accounting Policies including Initial
Adoption
See
Note 1 of the Company's financial statements for the year ended
December 31, 2017.
Going concern issue
These
financial statements have been prepared on the assumption that the
Company will continue as a going concern, meaning it will continue
in operation for the foreseeable future and will be able to realize
assets and discharge liabilities in the ordinary course of
operations. As at December 31, 2017, the Company had not commenced
commercial production and is not able to finance day to day
activities through operations. The Company’s continuation as
a going concern is dependent upon the successful results from its
electric vehicles manufacturing activities and its ability to
attain profitable operations and generate funds there from and/or
raise equity capital or borrowings sufficient to meet current and
future obligations. These factors indicate the existence of a
material uncertainty that may cast significant doubt about the
Company’s ability to continue as a going concern. Management
intends to finance its operations over the next twelve months
through private placement and/or public offerings of equity
capital. Should the Company be unable to continue as a going
concern, the net realizable value of its assets may be materially
less than the amounts on its statement of financial
position.
Internal control over financial reporting and disclosure controls
and procedures
Management
is responsible for the design and maintenance of both internal
control systems over financial reporting and disclosure controls
and procedures. Disclosure controls and procedures are designed to
provide reasonable assurance that relevant information is gathered
and reported to senior management on a timely basis so that
appropriate decisions can be made regarding public
disclosure.
Current
disclosure controls include meetings with the CEO, chief financial
officer and members of the Board of Directors and audit committee
through e-mails, on telephone conferences and informal meetings to
review public disclosure. All public disclosures are reviewed by
certain members of senior management and the board of directors and
audit committee of the Board of Directors has delegated the duties
to the chief executive officer who is primarily responsible for
financial and disclosure controls.
Management
and the board of directors continue to work to mitigate the risk of
material misstatement.
Risk and uncertainties
We have a limited operating history and have not yet generated any
revenues.
Our
limited operating history makes evaluating our business and future
prospects difficult. We were formed in February 2015 and we have
not yet begun producing or delivering our first production SOLO. To
date, we have no revenues from our electric vehicles. We intend in
the longer term to derive substantial revenues from the sales of
our SOLO vehicle and other intended electric vehicles. The SOLO is
in development, and we have started to deliver the SOLO to our
customers. However, the SOLO vehicle requires significant
investment prior to commercial production and may not be
successfully developed or commercially successful.
It is anticipated that we will experience an increase in losses
prior to the launch of the SOLO.
For the
three months ended March 31, 2018, we generated a loss of
$2,403,974, bringing our accumulated deficit to $23,739,526. We
anticipate generating a significant loss for the current fiscal
year. The independent auditor’s report on our financial
statements includes an explanatory paragraph relating to our
ability to continue as a going concern.
We have
no revenues, other than that generated from our subsidiary
Intermeccanica International Inc., are currently in debt and expect
significant increases in costs and expenses to forestall revenues
for the foreseeable future. Even if we are able to successfully
develop the SOLO, there can be no assurance that we will be
commercially successful. If we are to achieve profitability, we
must have a successful commercial introduction and acceptance of
the SOLO, which may not occur.
We expect the rate at which we will incur losses to increase
significantly in future periods from current levels as
we:
●
design, develop and
manufacture the SOLO and its components;
●
design and develop
the Tofino and its components for a launch in 2019;
●
develop and equip
our manufacturing facility;
●
build up
inventories of parts and components for the SOLO;
●
open
Electrameccanica stores;
●
expand our design,
development, maintenance and repair capabilities;
●
develop and
increase our sales and marketing activities; and
●
develop and
increase our general and administrative functions to support our
growing operations.
Since
we will incur the costs and expenses from these efforts before we
receive any revenues with respect thereto, our losses in future
periods will be significantly greater than the losses we would
incur if we developed the business more slowly. In addition, we may
find that these efforts are more expensive than we currently
anticipate or that these efforts may not result in increases in our
revenues, which would further increase our losses.
We currently have negative operating cash flows, and if we are
unable to generate positive operating cash flows in the future, our
viability as an operating business will be adversely
affected.
We have
made significant up-front investments in research and development,
sales and marketing, and general and administrative expenses in
order to rapidly develop and expand our business. We are currently
incurring expenditures related to our operations that have
generated a negative operating cash flow. Operating cash flow may
decline in certain circumstances, many of which are beyond our
control. There is no assurance that sufficient revenues will be
generated in the near future. Because we continue to incur such
significant future expenditures for research and development, sales
and marketing, and general and administrative expenses, we may
continue to experience negative cash flow until we reach a
sufficient level of sales with positive gross margins to cover
operating expenses. An inability to generate positive cash flow
until we reach a sufficient level of sales with positive gross
margins to cover operating expenses or raise additional capital on
reasonable terms will adversely affect our viability as an
operating business.
We will
need a significant amount of capital to carry out our proposed
business plan, and unless we are able to raise sufficient funds we
may be forced to discontinue our operations
.
In order to carry out our proposed business plan to develop,
manufacture, sell and service electric vehicles, we will require a
significant amount of capital.
We
intend to meet our cash requirements for the next 12 months through
the sale of our equity securities in private placements, through
shareholder loans or possibly through a registered public offering
(either self-underwritten or through a broker-dealer). If we are
unsuccessful in raising enough funds through such capital-raising
efforts, we may review other financing possibilities such as bank
loans. There is no assurance that any financing will be available
to us or if available, on terms that will be acceptable to us. We
intend to negotiate with our management and consultants to pay
parts of their salaries and fees with stock and stock options
instead of cash.
Our
ability to obtain the necessary financing to carry out our business
plan is subject to a number of factors, including general market
conditions and investor acceptance of our business plan. These
factors may make the timing, amount, terms and conditions of such
financing unattractive or unavailable to us. If we are unable to
raise sufficient funds, we will have to significantly reduce our
spending, delay or cancel our planned activities or substantially
change our current corporate structure. There is no guarantee that
we will be able to obtain any funding or that we will have
sufficient resources to conduct our business as projected, any of
which could mean that we will be forced to discontinue our
operations.
Terms of subsequent financings may adversely impact current
investment.
We may
have to engage in common equity, debt, or preferred stock financing
in the future. The rights and the value of investment in our common
stock could be reduced. Interest on debt securities could increase
costs and negatively impacts operating results. In addition, if we
need to raise more equity capital from the sale of common stock,
institutional or other investors may negotiate terms at least as,
and possibly more, favorable than the terms of our current
shareholders. Shares of common stock which we sell could be sold
into any market which develops, which could adversely affect the
market price.
Our future growth is dependent upon consumers’ willingness to
adopt three-wheeled single passenger electric
vehicles.
Our
growth is highly dependent upon the adoption by consumers of, and
we are subject to an elevated risk of any reduced demand for,
alternative fuel vehicles in general and electric vehicles in
particular. If the market for three-wheeled single passenger
electric vehicles does not develop as we expect or develops more
slowly than we expect, our business, prospects, financial condition
and operating results will be harmed. The market for alternative
fuel vehicles is relatively new, rapidly evolving, characterized by
rapidly changing technologies, price competition, additional
competitors, evolving government regulation and industry standards,
frequent new vehicle announcements and changing consumer demands
and behaviors. Factors that may influence the adoption of
alternative fuel vehicles, and specifically electric vehicles,
include:
●
perceptions about
electric vehicle quality, safety (in particular with respect to
lithium-ion battery packs), design, performance and cost,
especially if adverse events or accidents occur that are linked to
the quality or safety of electric vehicles;
●
perceptions about
vehicle safety in general, in particular safety issues that may be
attributed to the use of advanced technology, including vehicle
electronics and braking systems;
●
the limited range
over which electric vehicles may be driven on a single battery
charge;
●
the decline of an
electric vehicle’s range resulting from deterioration over
time in the battery’s ability to hold a charge;
●
concerns about
electric grid capacity and reliability, which could derail our
efforts to promote electric vehicles as a practical solution to
vehicles which require gasoline;
●
the availability of
alternative fuel vehicles, including plug-in hybrid electric
vehicles;
●
improvements in the
fuel economy of the internal combustion engine;
●
the availability of
service for electric vehicles;
●
the environmental
consciousness of consumers;
●
volatility in the
cost of oil and gasoline;
●
government
regulations and economic incentives promoting fuel efficiency and
alternate forms of energy;
●
access to charging
stations, standardization of electric vehicle charging systems and
consumers’ perceptions about convenience and cost to charge
an electric vehicle;
●
the availability of
tax and other governmental incentives to purchase and operate
electric vehicles or future regulation requiring increased use of
nonpolluting vehicles; and
●
perceptions about
and the actual cost of alternative fuel.
The
influence of any of the factors described above may cause current
or potential customers not to purchase our electric vehicles, which
would materially adversely affect our business, operating results,
financial condition and prospects.
The range of our electric vehicles on a single charge declines over
time which may negatively influence potential customers’
decisions whether to purchase our vehicles.
The
range of our electric vehicles on a single charge declines
principally as a function of usage, time and charging patterns. For
example, a customer’s use of their SOLO vehicle as well as
the frequency with which they charge the battery of their SOLO
vehicle can result in additional deterioration of the
battery’s ability to hold a charge. We currently expect that
our battery pack will retain approximately 85% of its ability to
hold its initial charge after approximately 3,000 charge cycles and
8 years, which will result in a decrease to the vehicle’s
initial range. Such battery deterioration and the related decrease
in range may negatively influence potential customer decisions
whether to purchase our vehicles, which may harm our ability to
market and sell our vehicles.
Developments in alternative technologies or improvements in the
internal combustion engine may materially adversely affect the
demand for our electric vehicles.
Significant
developments in alternative technologies, such as advanced diesel,
ethanol, fuel cells or compressed natural gas, or improvements in
the fuel economy of the internal combustion engine, may materially
and adversely affect our business and prospects in ways we do not
currently anticipate. For example, fuel which is abundant and
relatively inexpensive in North America, such as compressed natural
gas, may emerge as consumers’ preferred alternative to
petroleum based propulsion. Any failure by us to develop new or
enhanced technologies or processes, or to react to changes in
existing technologies, could materially delay our development and
introduction of new and enhanced electric vehicles, which could
result in the loss of competitiveness of our vehicles, decreased
revenue and a loss of market share to competitors.
If we are unable to keep up with advances in electric vehicle
technology, we may suffer a decline in our competitive
position.
We may
be unable to keep up with changes in electric vehicle technology
and, as a result, may suffer a decline in our competitive position.
Any failure to keep up with advances in electric vehicle technology
would result in a decline in our competitive position which would
materially and adversely affect our business, prospects, operating
results and financial condition. Our research and development
efforts may not be sufficient to adapt to changes in electric
vehicle technology. As technologies change we plan to upgrade or
adapt our vehicles and introduce new models in order to continue to
provide vehicles with the latest technology, in particular battery
cell technology. However, our vehicles may not compete effectively
with alternative vehicles if we are not able to source and
integrate the latest technology into our vehicles. For example, we
do not manufacture battery cells which makes us dependent upon
other suppliers of battery cell technology for our battery
packs.
If we are unable to design, develop, market and sell new electric
vehicles and services that address additional market opportunities,
our business, prospects and operating results will
suffer.
We may
not be able to successfully develop new electric vehicles and
services, address new market segments or develop a significantly
broader customer base. To date, we have focused our business on the
sale of the SOLO, a three-wheeled single passenger electric vehicle
and have targeted mainly urban residents of modest means. We will
need to address additional markets and expand our customer
demographic in order to further grow our business. Our failure to
address additional market opportunities would harm our business,
financial condition, operating results and prospects.
Demand in the vehicle industry is highly volatile.
Volatility
of demand in the vehicle industry may materially and adversely
affect our business prospects, operating results and financial
condition. The markets in which we will be competing have been
subject to considerable volatility in demand in recent periods.
Demand for automobile sales depends to a large extent on general,
economic, political and social conditions in a given market and the
introduction of new vehicles and technologies. As a new start-up
manufacturer, we will have fewer financial resources than more
established vehicle manufacturers to withstand changes in the
market and disruptions in demand.
We depend on certain key personnel, and our success will depend on
our continued ability to retain and attract such qualified
personnel.
Our
success is dependent on the efforts, abilities and continued
service of Jerry Kroll - Chief Executive Officer, Henry Reisner -
Chief Operating Officer, Kulwant Sandher - Chief Financial Officer,
and Ed Theobald – General Manager. A number of these key
employees and consultants have significant experience in the
automobile manufacturing industry. A loss of service from any one
of these individuals may adversely affect our operations, and we
may have difficulty or may not be able to locate and hire a
suitable replacement. We have not obtained any “key
man” insurance on certain key personnel.
Since we have little experience in mass-producing electric
vehicles, any delays or difficulties in transitioning from
producing custom vehicles to mass-producing vehicles may have a
material adverse effect on our business, prospects and operating
results.
Our
management team has experience in producing custom designed
vehicles and is now switching focus to mass producing electric
vehicles in a rapidly evolving and competitive market. If we are
unable to implement our business plans in the timeframes estimated
by management and successfully transition into a mass-producing
electric vehicle manufacturing business, then our business,
prospects, operating results and financial condition will be
negatively impacted and our ability to grow our business will be
harmed.
We are subject to numerous environmental and health and safety laws
and any breach of such laws may have a material adverse effect on
our business and operating results.
We are
subject to numerous environmental and health and safety laws,
including statutes, regulations, bylaws and legal requirements
contained in approvals or that arise under common law. These laws
relate to the generation, use, handling, storage, transportation
and disposal of regulated substances, including hazardous
substances, dangerous goods and waste, emissions or discharges into
soil, water and air, including noise and odours (which could result
in remediation obligations), and occupational health and safety
matters, including indoor air quality. These legal requirements
vary by location and can arise under federal, provincial, state or
municipal laws. Any breach of such laws and/or requirements would
have a material adverse effect on our Company and its operating
results.
Our vehicles are subject to motor vehicle standards and the failure
to satisfy such mandated safety standards would have a material
adverse effect on our business and operating results.
All
vehicles sold must comply with federal, state and provincial motor
vehicle safety standards. In both Canada and the United States
vehicles that meet or exceed all federally mandated safety
standards are certified under the federal regulations. In this
regard, Canadian and U.S. motor vehicle safety standards are
substantially the same. Rigorous testing and the use of approved
materials and equipment are among the requirements for achieving
federal certification. Failure by us to have the SOLO or any future
model electric vehicle satisfy motor vehicle standards would have a
material adverse effect on our business and operating
results.
If we are unable to reduce and adequately control the costs
associated with operating our business, including our costs of
manufacturing, sales and materials, our business, financial
condition, operating results and prospects will
suffer.
If we
are unable to reduce and/or maintain a sufficiently low level of
costs for designing, manufacturing, marketing, selling and
distributing and servicing our electric vehicles relative to their
selling prices, our operating results, gross margins, business and
prospects could be materially and adversely impacted.
If our vehicles fail to perform as expected, our ability to
develop, market and sell our electric vehicles could be
harmed.
Our
vehicles may contain defects in design and manufacture that may
cause them not to perform as expected or that may require repair.
For example, our vehicles use a substantial amount of software code
to operate. Software products are inherently complex and often
contain defects and errors when first introduced. While we have
performed extensive internal testing, we currently have a very
limited frame of reference by which to evaluate the performance of
our SOLO in the hands of our customers and currently have no frame
of reference by which to evaluate the performance of our SOLO after
several years of customer driving.
We have very limited experience servicing our vehicles. If we are
unable to address the service requirements of our future customers
our business will be materially and adversely
affected.
If we
are unable to successfully address the service requirements of our
future customers our business and prospects will be materially and
adversely affected. In addition, we anticipate the level and
quality of the service we will provide our SOLO customers will have
a direct impact on the success of our future vehicles. If we are
unable to satisfactorily service our SOLO customers, our ability to
generate customer loyalty, grow our business and sell additional
SOLOs as well as our future intended vehicles could be
impaired.
We have
very limited experience servicing our vehicles. As of December 31,
2017 we had not sold any SOLOs as we do not plan to begin
production of any SOLO vehicles until early third quarter of 2018,
and do not have any experience servicing these cars as they do not
exist currently. Servicing electric vehicles is different than
servicing vehicles with internal combustion engines and requires
specialized skills, including high voltage training and servicing
techniques.
Increases in costs, disruption of supply or shortage of raw
materials, in particular lithium-ion cells, could harm our
business.
We may
experience increases in the cost or a sustained interruption in the
supply or shortage of raw materials. Any such an increase or supply
interruption could materially negatively impact our business,
prospects, financial condition and operating results. We use
various raw materials in our business including aluminum, steel,
carbon fiber, non-ferrous metals such as copper, as well as cobalt.
The prices for these raw materials fluctuate depending on market
conditions and global demand for these materials and could
adversely affect our business and operating results. For instance,
we are exposed to multiple risks relating to price fluctuations for
lithium-ion cells. These risks include:
●
the inability or
unwillingness of current battery manufacturers to build or operate
battery cell manufacturing plants to supply the numbers of
lithium-ion cells required to support the growth of the electric or
plug-in hybrid vehicle industry as demand for such cells
increases;
●
disruption in the
supply of cells due to quality issues or recalls by the battery
cell manufacturers; and
●
an increase in the
cost of raw materials, such as cobalt, used in lithium-ion
cells.
Our
business is dependent on the continued supply of battery cells for
our vehicles. Any disruption in the supply of battery cells from
our supplier could temporarily disrupt the planned production of
the SOLO until such time as a different supplier is fully
qualified. Moreover, battery cell manufacturers may choose to
refuse to supply electric vehicle manufacturers to the extent they
determine that the vehicles are not sufficiently safe. Furthermore,
current fluctuations or shortages in petroleum and other economic
conditions may cause us to experience significant increases in
freight charges and raw material costs. Substantial increases in
the prices for our raw materials would increase our operating
costs, and could reduce our margins if we cannot recoup the
increased costs through increased electric vehicle prices. There
can be no assurance that we will be able to recoup increasing costs
of raw materials by increasing vehicle prices. We have also already
announced an estimated price for the base model of our planned
SOLO. However, any attempts to increase the announced or expected
prices in response to increased raw material costs could be viewed
negatively by our potential customers, result in cancellations of
SOLO reservations and could materially adversely affect our brand,
image, business, prospects and operating results.
The unavailability, reduction or elimination of government and
economic incentives could have a material adverse effect on our
business, financial condition, operating results and
prospects.
Any
reduction, elimination or discriminatory application of government
subsidies and economic incentives because of policy changes, the
reduced need for such subsidies and incentives due to the perceived
success of the electric vehicle, fiscal tightening or other reasons
may result in the diminished competitiveness of the alternative
fuel vehicle industry generally or our electric vehicles in
particular. This could materially and adversely affect the growth
of the alternative fuel automobile markets and our business,
prospects, financial condition and operating results.
If we fail to manage future growth effectively, we may not be able
to market and sell our vehicles successfully.
Any
failure to manage our growth effectively could materially and
adversely affect our business, prospects, operating results and
financial condition. We plan to expand our operations in the near
future in connection with the planned production of the SOLO. Our
future operating results depend to a large extent on our ability to
manage this expansion and growth successfully. Risks that we face
in undertaking this expansion include:
●
training new
personnel;
●
forecasting
production and revenue;
●
controlling
expenses and investments in anticipation of expanded
operations;
●
establishing or
expanding design, manufacturing, sales and service
facilities;
●
implementing and
enhancing administrative infrastructure, systems and
processes;
●
addressing new
markets; and
●
establishing
international operations.
We
intend to continue to hire a number of additional personnel,
including design and manufacturing personnel and service
technicians for our electric vehicles. Competition for individuals
with experience designing, manufacturing and servicing electric
vehicles is intense, and we may not be able to attract, assimilate,
train or retain additional highly qualified personnel in the
future. The failure to attract, integrate, train, motivate and
retain these additional employees could seriously harm our business
and prospects.
Our business may be adversely affected by union
activities.
Although
none of our employees are currently represented by a labor union,
it is common throughout the automobile industry generally for many
employees at automobile companies to belong to a union, which can
result in higher employee costs and increased risk of work
stoppages. As we expand our business to include full in-house
manufacturing of our SOLO vehicle, there can be no assurances that
our employees will not join or form a labor union or that we will
not be required to become a union signatory. We are also directly
or indirectly dependent upon companies with unionized work forces,
such as parts suppliers and trucking and freight companies, and
work stoppages or strikes organized by such unions could have a
material adverse impact on our business, financial condition or
operating results. If a work stoppage occurs, it could delay the
manufacture and sale of our electric vehicles and have a material
adverse effect on our business, prospects, operating results or
financial condition.
We may become subject to product liability claims, which could harm
our financial condition and liquidity if we are not able to
successfully defend or insure against such claims.
We may
become subject to product liability claims, which could harm our
business, prospects, operating results and financial condition. The
automobile industry experiences significant product liability
claims and we face inherent risk of exposure to claims in the event
our vehicles do not perform as expected or malfunction resulting in
personal injury or death. Our risks in this area are particularly
pronounced given we have not delivered any SOLO vehicles to date
and limited field experience of those vehicles. A successful
product liability claim against us could require us to pay a
substantial monetary award. Moreover, a product liability claim
could generate substantial negative publicity about our vehicles
and business and inhibit or prevent commercialization of other
future vehicle candidates which would have material adverse effect
on our brand, business, prospects and operating results. We plan to
maintain product liability insurance for all our vehicles with
annual limits of approximately $5 million on a claims made basis,
but we cannot assure that our insurance will be sufficient to cover
all potential product liability claims. Any lawsuit seeking
significant monetary damages either in excess of our coverage, or
outside of our coverage, may have a material adverse effect on our
reputation, business and financial condition. We may not be able to
secure additional product liability insurance coverage on
commercially acceptable terms or at reasonable costs when needed,
particularly if we do face liability for our products and are
forced to make a claim under our policy.
Our patent applications may not result in issued patents, which may
have a material adverse effect on our ability to prevent others
from interfering with our commercialization of our
products.
The
status of patents involves complex legal and factual questions and
the breadth and effectiveness of patented claims is uncertain. We
cannot be certain that we are the first creator of inventions
covered by pending patent applications or the first to file patent
applications on these inventions, nor can we be certain that our
pending patent applications will result in issued patents or that
any of our issued patents will afford sufficient protection against
someone creating a knockoff of our products, or as a defensive
portfolio against a competitor who claims that we are infringing
its patents. In addition, patent applications filed in foreign
countries are subject to laws, rules and procedures that differ
from those of the United States, and thus we cannot be certain that
foreign patent applications, if any, will result in issued patents
in those foreign jurisdictions or that such patents can be
effectively enforced, even if they relate to patents issued in the
U.S. In addition, others may obtain patents that we need to take a
license to or design around, either of which would increase costs
and may adversely affect our business, prospects, financial
condition and operating results.
We may need to defend ourselves against patent or trademark
infringement claims, which may be time-consuming and would cause us
to incur substantial costs.
Companies,
organizations or individuals, including our competitors, may hold
or obtain patents, trademarks or other proprietary rights that
would prevent, limit or interfere with our ability to make, use,
develop, sell or market our vehicles or components, which could
make it more difficult for us to operate our business. From time to
time, we may receive communications from holders of patents or
trademarks regarding their proprietary rights. Companies holding
patents or other intellectual property rights may bring suits
alleging infringement of such rights or otherwise assert their
rights and urge us to take licenses. In addition, if we are
determined to have infringed upon a third party’s
intellectual property rights, we may be required to do one or more
of the following:
●
cease selling,
incorporating certain components into, or using vehicles or
offering goods or services that incorporate or use the challenged
intellectual property;
●
pay substantial
damages;
●
seek a license from
the holder of the infringed intellectual property right, which
license may not be available on reasonable terms or at
all;
●
redesign our
vehicles or other goods or services; or
●
establish and
maintain alternative branding for our products and
services.
In the
event of a successful claim of infringement against us and our
failure or inability to obtain a license to the infringed
technology or other intellectual property right, our business,
prospects, operating results and financial condition could be
materially adversely affected. In addition, any litigation or
claims, whether or not valid, could result in substantial costs,
negative publicity and diversion of resources and management
attention.
1.14 Financial Instruments and Other Instruments
See
Note 18 to the Company's financial statements for the three months
ended March 31, 2018
.
1.15 Additional Information
|
HEAD OFFICE
|
CAPITALIZATION
(as at
May 29, 2018)
Shares
Authorized: Unlimited
Shares
Issued: 24,559,728
|
|
102
East 1
st
Avenue
|
|
Vancouver,
BC
|
|
V5T
1A4
|
|
Tel:
(604) 428 - 7656
|
|
Email:
info@electrameccanica.com
|
|
|
OFFICERS & DIRECTORS
|
REGISTRAR TRANSFER AGENT
|
|
Jerry
Kroll,
CEO and
Director
Henry
Reisner
President, COO and Director
|
Computershare
11 -
100 University AvenueToronto, ON, MJ5 2Y1
|
|
Kulwant
Sandher, CPA, CA, BSc (Eng.)
Chief Financial Officer
|
AUDITORS
DMCL
LLP
1500 -
1140 West Pender Street, Vancouver, BC
LEGAL COUNSEL
Ortoli
Rosenstadt LLP
14
th
Floor – 501 Madison Avenue
New
York, NY, 10022 - 5616
McMillan
LLP
Royal
Centre, 1500 - 1055 W. Georgia Street
Vancouver,
BC V6E 4N7
|
|
Shaun
Greffard
Director
Robert
Tarzwell
Director
Steven Sanders
Director
Luisa Ingargiola
Director
|