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TTTM > SEC Filings for TTTM > Form 10-Q on 19-Nov-2012All Recent SEC Filings

Show all filings for T3 MOTION, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for T3 MOTION, INC.


19-Nov-2012

Quarterly Report


Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.

This quarterly report on Form 10-Q contains certain statements that may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this report are forward-looking statements. When used in this report, the words "may," "will," "should," "would," "anticipate," "estimate," "expect," "plan," "project," "continuing," "ongoing," "could," "believe," "predict," "potential," "intend," and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, changes in sales or industry trends, competition, retention of senior management and other key personnel, availability of materials or components, ability to make continued product innovations, casualty or work stoppages at the Company's facilities, adverse results of lawsuits against the Company and currency exchange rates. Forward-looking statements are based on assumptions and assessments made by the Company's management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, as there can be no assurance that these forward-looking statements will prove to be accurate. Management undertakes no obligation to update any forward-looking statements. This cautionary statement is applicable to all forward-looking statements contained in this report. Readers should carefully review the risks described in other documents we file from time to time with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

T3 Motion, Inc. was incorporated on March 16, 2006 under the laws of the state of Delaware. T3 Motion and its wholly-owned subsidiaries R3 Motion, Inc. and T3 Motion, Ltd. (U.K.) (collectively, the "Company") develop and manufacture personal mobility vehicles powered by electric motors. The Company's initial product, the T3 Series, is an electric, three-wheel stand-up vehicle ("ESV") that is directly targeted to the law enforcement and private security markets. Substantially all of the Company's revenues to date have been derived from sales of the T3 Series ESVs and related accessories.

Management Change

In January 2012, Kelly Anderson, the Company's Chief Financial Officer resigned to pursue other interests, effective February 15, 2012 and Ki Nam, the Chief Executive Officer assumed the role of acting Chief Financial Officer. In April, 2012, the Company announced a management change whereby Mr. Nam, the Company's Founder, Chairman of the Board of Directors and Chief Executive Officer would step aside as Chief Executive Officer and acting Chief Financial Officer, retain the role of Chairman of the Board, and continue to participate in the day to day operations as Chief Technology Officer. Concurrently, the Company announced the appointment of Rod Keller Jr. as Chief Executive Officer and Domonic J. Carney as Chief Financial Officer.

Prior to joining T3 Motion, Mr. Keller served in a senior management capacity for high growth technology companies including DirecTV, Siemens, Cisco/Linksys, and Toshiba. Vice President In these roles, Mr. Keller was responsible for sales, marketing, finance, operations, and product planning and played a key role in the substantial growth in revenues and market share for each business including the launch of new products. Mr. Keller has substantial experience establishing sales strategies and channels for both Domestic and International markets. Mr. Carney served in a senior finance capacity managing the back office for high growth startup and publicly traded companies in technology, renewable energy, and manufacturing environments.

On July 17, 2012, Ki Nam, founder of T3 Motion, assumed the role of Chief Executive Officer of R3 Motion Inc. ("R3 Motion"), a wholly owned subsidiary of T3 Motion Inc., that will focus on launching the R3 Motion consumer vehicle. The Company and Ki Nam entered into a binding term sheet (the "Term Sheet) setting forth the understandings of the parties with respect to R3 Motion, including Mr. Nam's role with this entity. Pursuant to the Term Sheet, Mr. Nam agreed to resign from his position as an officer, employee and Chairman of the Board of Directors of the Company and become the Chief Executive Officer of R3 Motion.

On October 26, 2012, Domonic J. Carney, the Company's Chief Financial Officer notified the Board of Directors that he was leaving the Company to pursue other interests. Mr. Carney has advised that he will continue to work with the Company in order to assist with the transition as the Company seeks to retain his replacement and would be available on an as needed basis through the end of December 2012. Rod Keller Jr., Chief Executive Officer of the Company, will assume the role of interim principal financial officer.

Change to the Company's Board of Directors

On August 6, 2012, the Company's Board of Directors approved a change in the Company's bylaws allowing an increase in the number of Directors from five to seven.

On August 6, 2012, after the approval of the increase of Directors under the bylaws, the Company's Board of Directors appointed Rod Keller Jr., the Company's Chief Executive Officer, as a Director of the Company. Under the terms of Mr. Keller's employment agreement, the Company was required to appoint Mr. Keller as a Director within 120 days of the beginning of his employment. Mr. Keller will receive no additional compensation as a result of this appointment and has not been appointed to any of the Board of Directors' committees.

JMJ Financial Convertible Note Payable

On July 10, 2012, the Company entered into a Securities Purchase Agreement ("July 10, 2012 Purchase Agreement") with JMJ Financial ("JMJ"). In connection with the July 10, 2012 Purchase Agreement, the Company and JMJ also entered into a Secured Promissory Note Agreement (the "July 10, 2012 Note") and a Security Agreement. Under these agreements, JMJ provided a senior secured bridge loan to the Company in the aggregate principal amount of $275,000 and JMJ delivered net proceeds to the Company in the amount of $250,000 resulting in an initial debt discount of $25,000 which was charged to interest expense during the quarter ended September 30, 2012. Outstanding borrowings on the July 10, 2012 Note were added into the JMJ Convertible Note described below. In connection with the JMJ Convertible Note, a new conversion feature was added to the terms of the original $275,000 in borrowings advanced to the Company under the July 10, 2012 Note. The conversion feature allows for the conversion of the borrowings into shares of the Company's common stock (see below). The modification of the terms of the July 10, 2012 Note was accounted for as a debt extinguishment resulting in no gain or loss.

On August 10, 2012, the Company entered into a second Securities Purchase Agreement (the "New Purchase Agreement") with JMJ. In connection with the New Purchase Agreement, the Company and JMJ also entered into a Secured Convertible Note Agreement (the "JMJ Convertible Note"), a Security Agreement, and a Warrant Agreement. Pursuant to the terms and subject to the conditions set forth in the New Purchase Agreement, JMJ provided a senior secured bridge loan to the Company in the aggregate principal amount of up to $1,000,000 (the "Loan") with an initial draw of $525,000, consisting of the $275,000 due under the July 10, 2012 Note (see above) and an additional $235,000 cash proceeds consisting of a $250,000 draw net of $15,000 of financing fees. Pursuant to the terms of the Security Agreement, the Loan is secured by all assets of the Company. The JMJ Convertible Note is due the earlier of December 31, 2012 or upon the successful raise of at least $3,000,000 of invested capital and bears interest at a 10% annual rate with a guaranteed minimum interest rate of 3% for funds advanced. In addition, the Company is required to pay an origination fee of $26,250 payable in shares of restricted common stock of the Company, which was recorded as a debt discount and will be amortized to interest expense over the term of the JMJ Convertible Note. Additional draws of up to $475,000 are available under the JMJ Convertible Note at the discretion of the lender. For the initial $525,000 draw, the borrowings are convertible into shares of the Company's common stock at $1.31 per share, subject to adjustment. Under the terms of the JMJ Convertible Note, JMJ has the right to convert outstanding borrowings into shares of the Company's common stock at an initial conversion price of $1.31 per share. The conversion feature in the JMJ Convertible Note requires an adjustment to the conversion price if the Company issues any common stock or common stock equivalents in the future at a price less than the conversion price then in effect for the JMJ Convertible Note. The Company has determined that this embedded conversion feature qualifies as a derivative liability, and accordingly, recorded the fair value of the conversion feature amounting to $21,041 on August 10, 2012 as a debt discount and a corresponding derivative liability. The debt discount will be amortized to interest expense over the term of the JMJ Convertible Note. The conversion prices for any future principal draws are subject to change and limitations based on future market conditions. The Company recorded deferred financing fees of $19,013 including $15,000 noted above for legal expenses related to the JMJ Convertible Note on August 10, 2012, which will be amortized to interest expense over the term of the JMJ Convertible Note.

Under the terms of the Warrant Agreement, the Company is obligated to issue up to 1,025,000 warrants with an exercise price of $0.60 per warrant, subject to adjustment, with an expiration date of four years after issuance. The initial warrant issuance was 550,000 warrants with additional warrants issuable at a rate of one warrant for each $1 of principal advanced. As discussed in Note 6, the warrants issued in connection with the JMJ Convertible Note have certain nonstandard anti-dilution protection provisions. The Company has determined that these nonstandard anti-dilution protection provisions qualify as derivative liabilities, and accordingly, recorded the fair value of the warrants amounting to $365,544 on August 10, 2012 as a debt discount and a corresponding derivative liability. The debt discount will be amortized to interest expense over the term of the JMJ Convertible Note.

Interest expense related to the face rate of interest amounted to $7,292 for the three and nine months ended September 30, 2012 and is included in accrued expenses as of September 30, 2012. Interest expense related to the amortization of the debt discounts amounted to $148,272 for the three and nine months ended September 30, 2012.

Trebatch Note Payable

On September 13, 2012, the Company entered into a Securities Purchase Agreement with Perry Trebatch ("Trebatch"). In connection with the September 13, 2012 Purchase Agreement, the Company and Trebatch also entered into a Secured Promissory Note Agreement (the "September, 2012 Note") and a Security Agreement. Under these agreements, Trebatch provided a senior secured bridge loan to the Company in the aggregate principal amount of $250,000. Trebatch delivered net proceeds to the Company in the amount of $250,000. The Note was originally due on September 27, 2012 but has been extended on several instances through November 19, 2012 with interest payable at $1,000 per week and is expected to convert into a future financing. On October 23, 2012, Mr. Trebatch loaned an additional $150,000 to the Company pursuant to terms identical (except for the principal amount) to the September 2012 note.

Going Concern and NYSE MKT Notification

On June 1, 2012, the Company was notified by NYSE MKT, LLC ("NYSE MKT", or the "Exchange") that its review of the Company's publicly-available information indicated that the Company was not in compliance with Section 1003(a)(i) of the NYSE MKT Company Guide (the "Company Guide") in that it has sustained losses which are so substantial in relation to its overall operations or its existing financial resources, or its financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether it will be able to continue operations and/or meet its obligations as they mature. The Company has therefore become subject to the procedures and requirements of
Section 1009 of the Company Guide.

In order to maintain its NYSE MKT listing, the Company submitted a plan to NYSE MKT on July 2, 2012 addressing how it intends to regain compliance with Section 1003(a)(iv) of the Company Guide by November 20, 2012 (the "Plan"). On August 10, 2012, the Exchange notified the Company that it accepted the Company's plan of compliance and granted the Company an extension until November 20, 2012 to regain compliance with the continued listing standards.

On October 26, 2012, the Company received notice from the NYSE MKT indicating that the Company failed to make progress consistent with the plan and is not in compliance with certain of the NYSE MKT continued listing standards. Specifically, the letter from the Exchange stated that the Company is not in compliance with Section 1003(a)(iv) in that it has sustained losses which are so substantial in relation to its overall operations or its existing financial resources or its financial condition has become so impaired that it appears questionable, in the opinion of the Exchange, as to whether the Company will be able to continue operations and/or meet its obligations as they mature. The Company was further notified that, unless an appeal was filed by November 2, 2012 that the NYSE MKT would initiate delisting proceedings.

The Company informed the Exchange of its intention to pursue the right of appeal in a timely manner and requested a hearing pursuant to Sections 1203 and 1009(d) of the Company Guide. There can be no assurance, however, that the Company's request for continued listing will be granted at this hearing. In the event that the Company's appeal is unsuccessful, the Company expects that its common stock will trade on the OTC-BB no later than any official delisting from the Exchange. The Company's appeal hearing with the NYSE MKT will be in January 2013.

Until the Company is deemed to be in compliance with the listing standards, the Company will be subject to periodic review by Exchange staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from the Exchange.

The Company expects to continue to incur additional operating losses from costs related to the continuation of product and technology development and administrative activities. The Company believes that its working capital deficit at September 30, 2012 of approximately ($826,000), together with the revenues from the sale of its products, is not sufficient to sustain its planned operations through the fourth quarter of 2012, and the Company will require additional debt or equity financing in the future to maintain operations. The Company cannot make any assurances that additional financings will be completed on a timely basis, on acceptable terms or at all. If the Company is unable to complete a debt or equity offering, or otherwise obtain sufficient financing when and if needed, it would negatively impact our business and operations, which could cause the price of our common stock to decline. It could also lead to the reduction or suspension of our operations and ultimately force us to go out of business.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A summary of these policies can be found in the Management's Discussion and Analysis section of the Company's Annual Report on Form 10-K for the year ended December 31, 2011 or as updated in Note 1 to the condensed consolidated financial statements included elsewhere herein.

Business activity for the quarter and nine months ended September 30, 2012

The three and nine months ended September 2012 was the continuation of a transition period for T3 Motion. Beginning in late 2011, the Company began looking for new management to focus on improving the Company's sales and marketing efforts and which culminated in the hiring of Rod Keller as CEO in March 2012. The Company also began to reduce its focus on building new products, which consumed resources in 2011, in favor of investing in sales and marketing efforts. New management has created a three pronged strategy and intends to focus the Company towards profitability. The strategy consists of: i) increase revenues through new sales channels, ii) improve profit margins through supply chain efficiencies and production assembly improvements, and iii) restructure and optimize operating expenses.

To help implement and manage this strategy, in July 2012 we hired Ms. Monique Apter, formerly VP of North American sales for Segway, Inc. Ms. Apter brings 11 years of experience building and managing similar sales strategies at Segway. We have also reorganized our North American sales force away from the previous direct sales strategy and towards the indirect sales channel. In October 2012 we hired Wayne Mitchell, formerly the Chief Executive Officer of Segway, Inc. to lead our Europe, Middle East, and Africa commercial efforts.

New sales channel:

Beginning in June and continuing into the quarter ended September 2012, the Company implemented a revitalization and expansion of its indirect sales channel in North America. New management believes that the addition of new indirect sales partners will drive significant top line revenue growth; allow for improvement in gross profit margins through improvements in production and supply chain efficiency, and improve the end-user experience with T3 Motion products through improved retail customer access and service.

In June, 2012, we announced changes to our indirect sales channel including marketing incentives in order to add new dealers and recertification of existing dealers such as dealer floor plan financing options, exclusive sales districts, and marketing co-op funds in exchange for minimum non-returnable unit order minimums from new and existing dealers. Within two weeks of this announcement, we received orders from two new dealers located in Southern California and Ohio for a total of thirty T3 units. Through July 31, 2012 our new dealer program resulted in additional orders of $1.83 million for T3 units and parts, representing 208 units ordered. Further, effective August 2012, we changed our pricing to better align with our costs of doing business and which included a 5% increase to the wholesale unit price as well as changes to our service, accessories and parts pricing.

Moving forward, we will require each dealer-reseller to provide service for new and existing T3 units and to purchase a minimum number of T3 units each quarter in order to retain exclusive territories and the other dealer perks. For the rest of 2012, we intend to pursue partnerships into the top 50 North American markets with those dealers who currently sell similar motorized and electric vehicles such as motorcycles, ATVs, golf carts, snow machines, and other personal electric vehicles.

Despite the efforts of our new sales team and the short term success in the September 2012 quarter, our revenues for the quarter ended September 30, 2012 were limited by our working capital shortfalls. Our working capital position at the end of September 2012 was only marginally improved by the receipt of $500,000 from JMJ Financial and $250,000 from Trebatch in the September 2012 quarter and was not sufficient to adequately finance the Company's growth strategy. We were unable to source sufficient materials to build the new orders and as a result we were only able to complete and ship 62 units for a quarterly revenue figure of $885,000.

Manufacturing assembly and production strategy

Product volumes for the quarter ended September 30, 2012 were reduced due to supply constraints compared to those in the prior quarters. However, as our dealer volume increases, we will be required to make changes to our production assembly. In September 2012, coinciding with the new go-to-market strategy, and our pricing increase, we simplified our indirect sales channel product offering by selling a more consistent base T3 unit and packages of parts and accessories. In the past, many of our T3 unit sales were "built to order" which required additional assembly costs and inefficient production practices. With the dealer network, our customers can still receive the same customized T3 units, but most of the add-ons will be completed at the dealer site, as opposed to our production facility. We believe that this change, in addition to future efficiencies in assembly and improved supply chain economies of scale, will improve our gross profit margins. The changes implemented between June and September 2012 were responsible for improving our unit sales margins from 8.1% of revenues in the March 2012 quarter to 23.3% of revenues in the September 2012 quarter.

Restructure and revise operating expense structure

We continue to focus on tight cost containment in order to implement a revised and profitable business model. Net of a large impairment charge of approximately $800,000 in the December 2011 quarter that we do not expect to incur in the future, the equivalent quarterly operating expense, excluding non-cash stock compensation comparison was approximately $2.0 million in operating expenses in the December 2011 quarter, $1.75 million in the September quarter and reduced to approximately $1.3 million in the September 2012 quarter, a decrease of approximately $0.2 million from the June 2012 quarter and which included approximately $0.1 million in non-recurring transition operating expenses. We expect to continue to focus on our operating expense structure for the remainder of 2012 and into 2013.

Results of Operations



The following table sets forth the results of our operations for the three and
nine months ended September 30, 2012 and 2011 (unaudited):



                                           Three Months Ended September 30,          Nine Months Ended September 30,
                                               2012                  2011                2012                 2011
Net revenues                             $         884,924       $   1,884,321     $      3,746,243       $   4,211,849
Cost of net revenues                               678,617           1,498,810            3,159,464           3,634,606
Gross profit                                       206,307             385,511              586,779             577,243

Operating Expenses:
Sales and marketing                                472,890             527,689            1,453,056           1,171,698
Research and development                           179,694             350,332              645,498             810,891
General and administrative                         864,696           1,071,832            2,730,220           2,818,712
Total operating expenses                         1,517,280           1,949,853            4,828,774           4,801,301

Loss from operations                            (1,310,973 )        (1,564,342 )         (4,241,995 )        (4,224,058 )

Other income (expense):
Interest income                                          7               2,737                  817               4,558
Other income, net                                 (351,565 )           402,656             (396,717 )         2,225,837
Interest expense                                  (226,007 )           (47,695 )           (346,228 )          (521,147 )
Total other income (expense), net                 (577,565 )           357,698             (742,128 )         1,709,248

Loss before provision for income tax            (1,888,538 )        (1,206,644 )         (4,984,123 )        (2,514,810 )
Provision for income tax                                 -                 750                3,150               1,550

Net loss                                        (1,888,538 )        (1,207,394 )         (4,987,273 )        (2,516,360 )
Deemed dividend to preferred
stockholders                                             -                   -                    -          (4,263,069 )

Net loss attributable to common
stockholders                             $      (1,888,538 )     $  (1,207,394 )   $     (4,987,273 )     $  (6,779,429 )

Other comprehensive income:
Foreign currency translation income                      -                   -                    -                   -
Comprehensive loss                       $      (1,888,538 )     $  (1,207,394 )   $     (4,987,273 )     $  (2,516,360 )

Net revenues Net revenues are primarily from sales of the T3 Series, T3iSeries, power modules, chargers, related accessories and service for T3 units out of warranty. Net revenues decreased $999,397, or 53%, to $884,924 for the three months ended September 30, 2012 compared to the same period of the prior year. The decrease was primarily due to lower unit sales of the T3 series from 163 units shipped in the September 2011 quarter to 62 units shipped in the 2012 quarter. Unit sales decline was caused by the Company's inability to purchase sufficient inventory due to working capital constraints.

Net revenues decreased $465,606, or 11.1% to $3,746,243 for the nine months ended September 30, 2012 compared to the same period of the prior year. The decrease was due to fewer units shipped, primarily in the September, 2012 quarter.

Cost of net revenues and gross profit. Cost of net revenues consisted of materials, labor to produce vehicles and accessories, warranty and service costs, and applicable overhead allocations. Cost of net revenues decreased $820,193, or 54.7%, to $678,617 for the three months ended September 30, 2012 and by $475,142, or 13.1% to $3,159,464 for the nine months ended September 30, 2012 compared to the corresponding periods of 2011. The decrease in cost of net revenues for the three months ended September 30, 2012 was primarily due to fewer units being shipped in that quarter. Gross profit margin decreased $179,204 to $206,307 for the three months ended September 30, 2012 over the September 30, 2011 quarter and increased $9,536 to $586,779 for the nine months ended September 30, 2012 over the corresponding 2011 period. The decrease in gross profit margin for the three months ended September 30, 2012 was primarily due to fewer units shipped in that quarter. Gross profit margin was 23.3% and 20.5% of net revenues, respectively, for the three months ended September 30, 2012 and 2011, respectively and was 15.7% and 13.7% of net revenues for the nine months ended September 30, 2012 and 2011 respectively. The improvement in the . . .

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