UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X]	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE YEAR ENDED DECEMBER 31, 2015

 

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

ALTAIR NANOTECHNOLOGIES INC.

 

(Exact Name of Registrant as Specified in Charter)

 

Delaware	1-12497	33-1084375
(State or Other Jurisdiction of Incorporation or Organization)	(Commission File No.)	(I.R.S. Employer Identification No.)
204 Edison Way Reno, Nevada 89502-2306	Registrant’s telephone number, including area code: 775-856-2500	92882
(Address of Principal Executive Offices)		(Zip Code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ]  No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes [  ]  No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ ]  No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes []  No [X]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer	[  ]		Accelerated Filer	[  ]
Non-accelerated Filer	[  ]	(Do not check if smaller reporting company)	Smaller Reporting Company	[X]

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes [  ]  No [X]

 

  

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the quarter ended June 30, 2013, 2014 and 2015, was approximately $12.0 million, $18.6 million and $4.9 million.

 

As of November 15, 2016, there were 11,606,735 shares of the registrant’s common stock, $0.001 par value per share, outstanding.

 

 

ALTAIR NANOTECHNOLOGIES INC.

 

FORM 10-K

 

For The Year Ended December 31, 2015

INDEX

 

 

		Page
PART I
ITEM 1.	Business	5
ITEM 1A.	Risk Factors	17
ITEM 1B.	Unresolved Staff Comments	30
ITEM 2.	Properties	30
ITEM 3.	Legal Proceedings	30
ITEM 4.	Mine Safety Disclosures	31
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
ITEM 6.	Selected Financial Data	33
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	66
ITEM 8.	Financial Statements and Supplementary Data	67
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	149
ITEM 9A.	Controls and Procedures	149
ITEM 9B.	Other Information	150
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	150
ITEM 11.	Executive Compensation	157
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	166
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	169
ITEM 14.	Principal Accounting Fees and Services	171
PART IV
ITEM 15.	Exhibits, Financial Statements Schedules	173

 

 

Explanatory Note

 

Altair Nanotechnologies Inc. is filing this comprehensive Annual Report on Form 10-K for the fiscal years ended December 31, 2015, 2014 and 2013 and the quarterly periods ended March 31, 2015 and 2014, June 30, 2015 and 2014, and September 30, 2015 and 2014 (the “Comprehensive Report”) as part of its efforts to become current in its filing obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Comprehensive Report also includes audited annual financial statements for the year ended December 31, 2012 and unaudited quarterly financial statements for the periods ended March 31, 2013 and 2012, June 30, 2013 and 2012 as well as September 30, 2012, which has been previously filed.

 

This Comprehensive Report does not include financial statements as of, and for the period ending, September 30, 2013; due to the notice of non-reliance filed for the third quarter of 2013. Although we have regularly made filings through current reports on Form 8-K when deemed appropriate, this Comprehensive Report is our first periodic filing with the Securities and Exchange Commission (the “SEC”) since the filing of our quarterly report on Form 10-Q for the quarter ended September 30, 2013.

 

 

Note About Forward-Looking Statements

 

This Comprehensive Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act that involve risks and uncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in Item 1—“Business” and Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may also appear in other areas of this Comprehensive Report. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements regarding or assuming our ability to continue as a going concern; any statements regarding development of customers in China or elsewhere; statements concerning our customers and diversification of our customer base; statements concerning new products or services; statements related to change of control transactions and how any transaction may affect our business or financial situation; statements related to future economic conditions or performance; statements as to industry trends; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” or “plan,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed under Part I, Item 1.A. “Risk Factors” in this Comprehensive Report, and such forward looking statements are qualified in their entirety by reference to such risk factors. Furthermore, such forward-looking statements speak only as of the date of this Comprehensive Report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. New factors emerge from time to time, and their emergence is impossible for us to predict. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

 

PART I

 

 

Unless the context requires otherwise, all references to “Altair,” “we,” “Altair Nanotechnologies Inc,” or the “Company” in this Report refer to Altair Nanotechnologies Inc. and all of its consolidated subsidiaries. Altair currently has one wholly owned subsidiary, Altair U.S. Holdings, Inc. Altair U.S. Holdings, Inc. directly or indirectly wholly owns Altairnano, Inc. Altairnano, Inc. directly wholly owns Altair Nanotechnologies (China) Co., Ltd., a Wholly Foreign Owned Enterprise (“WOFE”) in China (“Altair China”) and Altair China directly wholly owns Northern Altair Nanotechnologies Co., Ltd., a domestic company in China (“Northern Altair”).

 

We have registered the following trademarks: Altair Nanotechnologies Inc^® and Altairnano^®. Any other trademarks and service marks used in this Report are the property of their respective holders.

 

 

ITEM 1: BUSINESS

 

We are a Delaware corporation that develops, manufactures and sells nano lithium titanate materials, batteries and energy storage systems (referred to as “ESS” or by our brand name “ALTI-ESS”). Our nano lithium titanate battery systems offer higher power density, longer cycle life, rapid charge and discharge capabilities, a wider operating temperature range and higher levels of safety than conventional lithium-ion batteries. We target applications that effectively utilize the key attributes of our technology, and these applications can be found primarily in the electric grid, transportation (commercial vehicles), and industrial market segments.

 

             Since 2012, we have focused on launching our operations in China. Starting in late 2016, we sell our products primarily from China, and all products originate from China. We formed Altair China in China, which in turn formed a wholly owned subsidiary, Northern Altair, to serve as our China-based operating entity. We rely on our key advantage in the market, our proprietary nano lithium titanate (“nLTO”). By increasing manufacturing output and selling nLTO material and battery modules made with our nLTO, we expect the Company’s revenue to increase. In July 2013 we entered into a supply purchase agreement for two thousand tons of generation 2 nLTO with Hebei Yinlong New Energy Co., Ltd. (“Hebei Yinlong”), an affiliate of the majority shareholder of the Company, and have delivered nLTO according to this agreement for the past few years.

 

In 2013, we transferred the production of our nLTO material to the New Energy Industrial Park in Wu’an city, Hebei province, China. We built, installed and further improved the manufacturing of our nLTO. In 2013, a 150 metric ton per year manufacturing line was completed and put into production as our phase one nLTO production line. In the same year, to meet the high demand of Lithium batteries in the China market, we completed the business process of sourcing the equipment to be procured for the phase two nLTO production line, under the joint efforts of the Altair U.S. and Altair China teams. This nLTO line was put into production in fourth quarter of 2015 and has reached an annual production capacity of 2,250 metric tons during 2016, with an expected annual capacity of 3,000 metric tons. We built a phase three nLTO production line and it was completed and installed in the fourth quarter of 2016 with an annual production capacity of 3,500 metric tons.

 

On January 6, 2013, Northern Altair entered into an agreement (the “2013 Wu’an Agreement”) with Wu’an Municipal People’s Government (“Wu’an”) with respect to the purchase and sale of 165 Electric Buses (“EV Buses”). In 2015, we delivered 28 EV Buses to the Wu’an government.

 

In January 2014, our Board of Directors approved plans to consolidate all US manufacturing operations and transition manufacturing to Wu’an, China. In the U.S., we are maintaining some of our core R&D personnel, who provide technical transfer and services to our China entities in the areas of core R&D, engineering operational capabilities and technologies that influence our manufacturing in Wu’an, China. Effective in early 2016, the majority of our principal assets and operations are now located in China.

 

On May 13, 2014, Northern Altair and Handan City Public Transportation, a state owned enterprise, entered into an EV Bus sale agreement for 200 EV Buses equipped with high efficiency lithium batteries which have been manufactured with Altair’s nLTO materials.

 

In 2014 and 2015, we delivered the contracted 200 EV Buses to Handan City Public Transportation. In 2014 and 2015, we have reported EV Buses income and costs in other income and expense for EV Buses sold to the China local governments.

 

In 2014, in order to further cut the cost of our products, improve product chain management efficiencies, and effectively serve the large market in China, we built two battery module production lines with a total capacity of approximately 6,000 modules per year. In the first quarter of 2016, we transferred the U.S. module production line to China. We are expecting the three battery module production lines to reach a total capacity of 9,000 modules per year during the fourth quarter of 2016.

 

We have completed the technology and production validation of our Gen 4 modules with China produced nLTO and China made module parts. The Gen 2 modules will still be available in 2016. Both Gen 2 and Gen 4 products have passed the United Nations (“UN”), International Standards Organization (“ISO”), SAE International (“SAE”) and International Electrochemical Commission (“IEC”) testing and reports are being generated by TÜV SÜD (“TUV”). TUV, a German based company, has a test facility in China and results are generally accepted by the UN and U.S. In December 2015, our battery module production line in the U.S. was discontinued. We were able to maintain a very stable period of time overlapping production while transferring the battery module production from the U.S. to China, without any impact on customer order delivery. Our battery modules have been generally used in EV Buses, trolley buses and hoisting equipment in the Europe and the U.S markets. Our OEM cell producer’s capacity can reach 70,000 Altair format cells per year. Sometime in the near future, we expect to validate another OEM cell producer to reduce dependency on one supplier, which will provide competition between suppliers and reduce costs for Altair.

 

 

We plan on building and validating ALTI-ESS (Energy Storage System) production capabilities in China and exporting them to Europe, the U.S. and to other countries of the world.

 

We now have a battery management system (“BMS”) distribution center in Europe to provide improved efficiency and timely delivery of our supply of the BMS units to our European customers. Our BMS supplier has a production base in China, which we believe will meet the demand of the China market.

 

By building manufacturing and assembly facilities in Wu’an, China for our nLTO material, battery cells and modules, and soon our energy storage systems, we have centered the whole supply chain in China. In adopting this strategy, we expect to significantly reduce costs, shorten lead times, reduce cash flow pressures, improve the quality and production management efficiency and increase our profit.

 

 

Primary Market Areas

 

China Market

 

In September 2014, management reviewed its operations and strategies and concluded the focus was to continue to maintain and promote the Power and Electric Group. The Company may explore the EV Bus industry.

 

We sell our nLTO to our affiliated company Hebei Yinlong, which uses our nLTO in their EV Buses, which we have purchased, and then sold, in 2014 and 2015 to the Wu’an City and Handan City.

 

Meanwhile, in the electric grid market, Northern Altair won a bid for a nLTO battery module rack system designed specifically for a China State grid 2MW Solar-wind ESS demonstration project. Total value is approximately $2.4 million and this project represents our first bid won in the China grid market. The project is expected to be completed in 2016.China has announced their “Energy Saving and New Energy Auto Industry Development Plan (2012-2020)" issued in 2012 which provides: by 2020, China aims to achieve manufacturing capacity of pure electric car and plug-in hybrid car for 2 million sets, and the accumulative output and sale of these cars exceeds 5 million sets. The development of fuel cell car and automotive hydrogen energy industry will be in sync with the international society. China announced their “Energy Development Strategic Action Plan (2014-2020)” in 2014. By 2020, China aims to control its primary energy consumption under 4.8 billion tons standard coal to limit greenhouse gas emissions, increase the share of non-fossil fuels to at least 15% of primary energy consumption, natural gas to more than 10%, and restrict coal to beneath 62%. China is investing huge amounts of money to support new energy projects, aims to achieve installed wind power capacity of 0.2 billion KW, installed photovoltaic capacity of about 0.1 billion KW, and geothermal energy usage for 50 million tons standard coal by 2020. We plan to develop further our China market.

 

European Market

 

●

EV Bus: Hybricon in Sweden, a Swedish public company, produces a high standard EV Bus incorporated with our nLTO battery modules. In their EV Buses, our modules operate in -30+°C winter environment in Sweden. In addition, there are some traditional EV Bus conversion companies also using our batteries.

 

●

Trolley bus: We sell nLTO battery modules in three Middle Europe countries: Czech Republic, Slovakia and Poland. We provide nLTO battery modules to Skoda, Ekowa Electric and Solaris Bus & Coach S.A. Since 2014, our nLTO battery modules have been successfully operating in transportation vehicles, all produced by middle European producers: 6 Trolley buses in Castellón; 2 Trolley buses in Cagliari; 12 Trams in Konya; 1 Tram in Beijing; 1 tram and 1 pure EV Bus in Pearson; and 2 trolley buses in Zlin.

 

●

Port container handling machine: Cargotec in Finland, is a subsidiary company of Kalmar the world leader of port handling solutions. Our batteries have been successfully used in their hybrid systems and machines, which are used in the development of their pure electric power systems. Cargotec signed long term purchase agreement with Altair in 2013, for a period of 3 years and thereafter for 1 year at a time under the terms and termination provisions of the agreement.

 

 

The EU announced a “2020 Energy Strategy” in 2010. By 2020, the EU aims to reduce its greenhouse gas emissions by at least 20%, increase the share of renewable energy to at least 20% of consumption, and achieve energy savings of 20% or more. All EU countries must also achieve a 10% share of renewable energy in their transport sector. The EU is investing huge amounts of money to support new energy projects in EU countries. Many new energy companies or research institutes will get funding from the strategy. The amount of capital available to companies in the industry has increased and is helping to lead the new energy industrialization. The European market has 98% of Altair’s nLTO battery module market share. We plan to develop further our ESS market in Europe.

 

Marketing

 

We do not advertise our products or have an in-house sales force. We market our product primarily through the reputation of our products, providing samples and relationships we have generated over time. As capital becomes available, we may commence a more active marketing campaign.

 

Global Trends Driving Growth in Our Markets

 

	Driver			Impact			Solution
	Energy Security			Smart Grid			Batteries manage frequency regulation, reducing inefficient thermal generation
	Emissions Reduction / Global Warming			Growth of Renewable Energy			Batteries manage ramping and smoothing
	Variable Costs of Fossil Fuels			Electric and Hybrid Vehicles			High power batteries enable cost effective PHEV and EV with fast charging
	Sustainability			Reducing dependency on lead-acid technology			Environmentally-friendly relative to lead acid

 

 

Certain Achievements Since 2012

 

Since 2012, we have reached the following milestones:

 

■

We completed phase one of our facilities which were constructed in Wu’an, China in 2013. They include our nLTO material plant, energy storage systems and modules manufacturing plant and an office building. We built and completed a phase two nLTO production line construction in the fourth quarter of 2015 and phase three was completed in the fourth quarter of 2016. The expected annual production capacity from the three phases is 6,650 metric tons.

 

■

We currently have two battery module production lines in Wu’an, China with a third one expected to be completed by the end of the fourth quarter of 2016. The expected annual production capacity from the three production lines is 9,000 modules.

 

■

From 2013 until late 2015, we delivered six grid-scale ALTI-ESS (energy storage systems) for six customers, who included the Hawaii Natural Energy Institute (“HNEI”) and Hawaiian Electric Light Company (“HELCO”), Vestas in Denmark, TSK Solar in Spain and Nextera, a U.S. utility company in the U.S.A based on the East Coast, HNEI/Hawaii Electric Company (“HECO”) and HNEI/Molokai Electric Company (“MECO”). All six of these systems are to be used for integration of renewable energy in addition to providing frequency regulation services.

 

 

■

In 2013, we signed a long term supply agreement with Cargotec, a Finnish subsidiary company of Kalmar, the world leading port handling solution provider.

 

■

In 2014, we successfully completed the design of our Gen 4 nLTO cells. From May 2015 to July 2016 our Gen 4 battery cell and module validation occurred. The Gen 4 technology offers significant improvements over the Gen 2 technology; module capacity increase of 15%, module impedance decrease of 20% which decreases heat generation during charge/discharge and improves safety, specific energy (Wh/kg) increase of 10%, cycle life extended by 56%, and operating temperature range increased by 10°C.

 

■

On January 6, 2013, the Company, through its wholly-owned subsidiary, Northern Altair, entered into the 2013 Wu’an Agreement with Wu’an, the total contract amount was $25.1 million for 165 EV Buses equipped with high efficiency lithium battery. No EV Buses were delivered during the year ended December 31, 2013.

 

■

On May 13, 2014, the Company, through its wholly-owned subsidiary, Northern Altair, entered into the 2014 Handan Agreement, the total contract amount was $44.5 million for 200 EV Buses equipped with high efficiency lithium battery.

 

■

During the year ended December 31, 2014, the Company delivered 153 EV Buses to Handan and recognized revenue of $28.4 million net of the fair value of the financial guarantee provided for Handan.

 

■

During the year ended December 31, 2015, the Company delivered 28 EV Buses to Wu’an and 47 EV Buses to Handan and recognized revenue of $11.3 million net of the fair value of the financial guarantee provided for Handan.

 

 

Strategic plan

 

In 2014 and 2015, we stabilized and enlarged our nLTO, OEM cell and module production to expand our market share in 2016. We also are working towards improving and developing our opportunities in the ESS market. We are seeking to expand our footprint in the European EV Bus, equipment handling machines and ESS markets.

 

From late 2016 and into 2017, Altair U.S. will continue to emphasize technical support for research and development and Northern Altair, China will become the main production base for nLTO, battery modules and ESS systems. We, alone or with affiliated entities, intend to create a complete circular industrial supply chain for nLTO products.

 

From phase one, the capacity for nLTO production is 150 metric tons per year. For the second phase, we increased our 150 metric tons per year, up to approximately 3,000 metric tons per year in one of the facilities we have built. For the third phase, we built and completed in the fourth quarter of 2016 an additional facility fully equipped to produce an annual capacity of 3,500 metric tons. The expected annual production capacity from these three phases is 6,650 metric tons. Currently, we are building a phase four facility to produce an additional 3,500 metric tons per year.

 

Meanwhile, we have expanded our battery module production to three lines for a capacity of up to 9,000 modules per year and we are expecting to develop ESS system assembly lines with greater capacities than previously provided in the U.S.A. It is a strategic product supply change with all of the production facilities in Wu’an, China. The potential advantages of this transformation are:

 

●

Reduction of production costs

●

Better quality control

●

Decreased shipping costs due to all production facilities being located in one central location

●

Centralized management control and internal communications

●

Centralized sales management

 

 

In late 2016 and into 2017, we will focus on developing the energy storage market for China, as well as focusing on the European and American market.

 

 

Primary Products and Target Energy Markets

 

Primary Products

 

We have developed, and continue to develop, through our primary materials science research, a lithium-ion battery chemistry using nanotechnologies to create materials offering unique electrochemistry properties for rechargeable batteries. We refer to this material as nano lithium titanate, or nLTO, and it is applied to the battery anode. Our nLTO battery cells offer 5 to 11 times greater cycle life than conventional lithium-ion technologies, an ability to rapidly discharge and charge, an ability to operate in extremely cold and hot temperatures, and a greater margin of safety than conventional lithium-ion technologies. Our Gen 4 products have improved on these aspects. Our nLTO batteries are designed to focus on high power applications, and are ideally suited for fast response applications in the electric grid segment for grid stability, hybrid and all-electric vehicles, and industrial applications.

 

We manufacture a range of cells, modules, packs and turn-key energy storage systems for our target customers. We produce modules in 24V, 36V, and 48V sizes industrial and transportation systems, including with a configurable industrial PowerRack system.

 

 

Target Energy Related Markets

 

Transportation (Commercial Vehicles)

 

Large cities, counties and transit authorities are increasingly turning to electric and hybrid EV Buses to reduce pollution and reliance on diesel fuel for their transportation systems, especially in markets like China where there are significant levels of pollution. Commercial vehicle manufacturers, including medium-duty and heavy-duty trucks, are likewise evaluating hybrid systems to improve fuel economy and in some instances run battery-only systems at low speeds. At this stage of the market development, electric and hybrid electric vehicles generally cost more than their conventional counterparts, although the upfront cost may be offset by lower operating costs and a potentially longer operating life. Proterra, a U.S based EV Bus manufacturer had one of its all-EV Buses using our batteries tested at the Altoona Test Track by Penn State University and demonstrated a 17.5 to 29.5 miles per gallon (mpg) fuel equivalent vs. a normal diesel bus that achieved under 4 mpg. This difference translates into a fuel savings of about $350,000 over the life of the bus assuming a fuel cost of $3.50 per gallon. This is in addition to the savings in maintenance costs over the life of the bus, as a result of fewer mechanical systems and moving parts to maintain. We believe that cities, counties and commercial vehicle operators are willing to accept the higher upfront costs in order to benefit from the expected savings in long-term operating costs and potentially longer operating life, as well as the environmental benefits.

 

Electric and hybrid-electric commercial vehicles require a significant amount of power, operate throughout the day, have a long expected life and run in extreme temperature ranges. The relative strengths of our nLTO batteries, including the high levels of power, rapid charge and discharge rates, long cycle life and ability to function at temperature extremes, are particularly well suited for electric and hybrid commercial vehicles, giving us what we believe is a compelling competitive advantage in this market.

 

With the growing concern regarding the release of pollutants associated with burning fossil fuels, the attractiveness of all electric and hybrid EV Buses is rapidly growing. We are attempting to establish our nLTO batteries as the power source of choice in this emerging market. Given the projected growth of EV Buses in the Asia Pacific region, we view China as one of our largest market opportunities within the transportation segment.

 

 

Electric Grid

 

Globally, electric utilities and power generation companies seek to maintain high levels of grid stability while seeking cost effective ways to accurately match electricity generation with demand. Essentially, there is no inventory of electricity; demand and generation must match. While the industry is capable of doing this from hour to hour, variations in load and demand from minute to minute cannot be accurately forecasted. When imbalances occur, the frequency (60 Hz in the U.S) can vary and must be balanced within very tight tolerances. Maintaining these tolerances is typically achieved through the use of auxiliary generators. If the load is either higher or lower than the power being generated, an auxiliary generator is either started or stopped. However, it takes these generators from generally five to 15 minutes to ramp up to full efficient operation or to shut down. During that period, the load may change directions and the grid operator then must direct another auxiliary generator to shut down or ramp up. This is a very inefficient process with the grid operators constantly chasing a variable load. The process of managing these very short-term changes in energy demand is referred to as “frequency regulation.” The chart below depicts what a typical workday in the PJM Regional Transmission Organization that manages the electric grid in the Mid-Atlantic States region looks like and how our battery can help smooth out the fluctuations.

 

 

 

 

Electricity demand on a typical workday in the PJM electric grid covering the Mid-Atlantic States and District of Columbia

 

Utilities can address frequency regulation issues by maintaining on-line generating capacity at a level that is always higher than expected peak demand; however this can be an expensive solution, particularly where natural gas, diesel and other alternative fuels are not affordable alternatives. Most U.S. utilities are required to maintain between 1% - 1.5% of their peak load capacity to provide frequency regulation. As an example, for the PJM Regional Transmission Organization, this requirement translates into a 900 megawatt daily requirement. In many foreign countries where the electric grid is not as well developed as it is in the U.S., utilities need to reserve up to 5% or more of their capacity strictly to provide frequency regulation.

 

To reduce the costs of providing frequency regulation, utilities and grid operators are seeking “fast response” energy storage systems, and battery-based systems can offer significant advantages over slower response sources of conventional generation. When supply exceeds demand for a short period, fast response storage systems deliver electric energy back to the grid for a short period to give operators time to reroute energy from another power generator or power-up a new power source. Our large-scale nLTO battery systems can react in milliseconds and meet this need.

 

The need for a fast response energy storage technology, like our large-scale nLTO battery, is increased by the accelerated use of renewable energy sources. Photo Voltaic (PV) solar and wind power generation by nature are intermittent and unpredictable sources of energy that can fluctuate widely in a very short period of time. For example, it is not uncommon for a PV array to fluctuate +/- 50% in less than 90 seconds. With a small rooftop array, it isn’t an issue, because the size of the generator is too small to matter. However, with a 50+ megawatt array, problems arise as the electric grid isn’t currently built to handle this kind of a fluctuation. According to the Federal Energy Regulatory Commission, as of December 2013, twenty nine states and the District of Columbia require the integration of renewable energy sources into the power grid through legislated renewable portfolio standards as shown in the following table.

 

 

Many of these states have established targets requiring the integration of renewable generation sources equal to or exceeding 25% of total generation within the next decade. California is a good case in point. California has a mandate to generate 33% of its electricity from renewable energy sources by 2020. The mandated adoption of these renewable energy sources is likely to increase the need for effective, efficient, clean energy storage technologies to provide frequency regulation services and maintain the reliability and stability of the associated electric grid systems. For example, California Assembly Bill 2514 enacted in 2010, requires the California Public Utilities Commission (CPUC) to establish energy storage procurement targets for California load serving entities in 2015 and 2020, if cost effective and commercially viable by October 2013. Implementation of AB 2514 is underway, and in February, 2013, CPUC approved a long term procurement decision and ordered Southern California Edison (SCE) to procure between 1,400 and 1,800 megawatts of energy resource capacity in the Los Angeles basin to meet long term local capacity requirements by 2021. Of this amount, CPUC required SCE to procure at least 50 megawatts from energy storage resources, as well as up to an additional 600 megawatts of capacity from preferred resources, which include energy efficiency, demand response and distributed generation, along with additional energy storage resources.

 

In our view, the key to addressing this market is to continually improve the performance of our energy storage systems, while reducing their cost (or the perception of their higher cost) to the end user. One key advantage that our nLTO batteries have is their projected higher cycle life, which can be four to six times higher than that of certain competing lithium battery technologies, such as lithium iron phosphate. Accordingly, we seek to market our products not on an initial cost of acquisition basis or even on a watt-hours per kilogram basis, but rather on the total cost of ownership over time. In addition, we seek to market the fast response capabilities of our battery, the value of which cannot be captured on a simple watt-hours per kilogram basis. The importance of fast response resources is beginning to gain considerable traction, as evidenced by the Federal Energy Regulatory Commission’s (FERC) Order 755, whose “pay for performance” rules not only value the capacity of frequency regulation services, but also its speed and accuracy. We believe that these pay for performance rules will help mitigate the impact that low natural gas prices have had on the U.S. energy storage market for the electric grid.

 

Industrial

 

The industrial market segment encompasses a broad range of applications, ranging from the use of battery systems on cargo cranes to the use of battery systems with heavy industrial equipment. We believe that our high power batteries can play an important role within this market segment. For example, our battery modules have been successfully integrated into the power system of Cargotec’s port handling machine. The company is a subsidiary of Kalmar who is the world leader of port handling solution provider.

 

Key Features of Our nLTO Batteries

 

One of the principal advantages of our nLTO battery is its rapid charge and discharge rate. The charge rate is the rate at which a battery’s energy is replenished, and the discharge rate is the rate at which the energy stored in a battery is transferred (or, in the case of self-discharge, leaked) out. Through the optimization of materials used in our nLTO battery cells, our current cells are capable of recharge times of 10 minutes to 95% or more of initial battery capacity. This rapid charge capability is important in our target markets.

 

Our nLTO batteries have both a longer cycle life and calendar life than commercially available rechargeable battery technologies such as conventional lithium ion, nickel-metal hydride (NiMH) batteries and nickel cadmium (NiCd) batteries. The ability of any rechargeable battery to store energy will diminish as a result of repeated charge/discharge cycles. A battery’s “cycle life” is the number of times it can be charged and discharged without a significant reduction in its energy storage capacity. Our nLTO is termed a zero strain material, meaning that the material essentially does not change shape upon the entry and exit of a lithium ion in the material. Graphite, the most common material in conventional lithium ion batteries, will expand and contract as much as 8% with each charge/discharge cycle. This constant change in volume rapidly breaks down the battery resulting in significantly shorter calendar and cycle life than with our nLTO anodes. Our current generation of cells can achieve 16,000 cycles, which represents a significant improvement over conventional lithium batteries, which typically retain that level of charge capacity only through 2,500 to 4,000 deep charge/discharge cycles. Depending on the actual duty cycles and temperature, those figures can drop even lower.

 

 

Our nLTO also represents a breakthrough in low and high-temperature performance. Nearly 90% of room temperature charge retention is realized at -30°C from our nLTO battery cells. In contrast, common lithium ion technology possesses virtually no charging capabilities at this low temperature, and the other rechargeable battery types such as lead acid, NiMH and NiCd take 10 to 20 times longer to charge at this low temperature.

 

We also believe that relative safety is one of the strengths of our nLTO batteries. Any battery cell or large battery unit with lithium ion cell technology must take into account safety considerations, the most important of which is thermal runaway.  Thermal runaway is the temperature at which the battery chemistry will break down causing the battery to overheat and potentially explode or catch fire. This temperature is often referred to as the critical temperature.  Critical temperature for lithium ion battery cells using conventional graphite anodes is around 130° C, a direct result of chemical reaction between the graphite and the electrolyte.  With our current nLTO anode in place of graphite and an appropriate cathode material, that critical temperature will be close to 200° C, an increase in safety margin of approximately 70° C.  Materials we are using in our lab operate at 250oC before the critical temperature is reached. The batteries we and our partners are developing for high power applications often consist of dozens or even thousands of battery cells working together as part of a single modular battery unit. When a large number of cells are aggregated into a single battery unit, the likelihood of, and risks associated with, thermal runaway increases.  In this context, we believe that the additional temperature margin our individual battery cells experience before reaching the critical temperature makes our battery cells better suited than competing lithium ion batteries for the high-power applications we are targeting. 

 

The current generation of batteries made with our nLTO exhibit lower energy density at room temperatures than conventional lithium ion systems, although we are developing newer generations of nLTO batteries, which will increase our energy density. Energy density is normally described as watt-hours per kilogram or watt-hours per liter and refers to the available energy per unit weight or per unit volume. A battery with high energy density will deliver more energy per unit weight or volume than a battery with lower energy density. Our batteries made with our nLTO have energy densities, watt-hours per kilogram, that are better than lead acid, NiCd and NiMH batteries and approximately 50-70% of conventional lithium ion batteries when operated at room temperature. However, this energy density disadvantage is significantly less compared to conventional lithium ion batteries as the operating temperature moves away from room temperature, particularly to colder environments, and less significant in environments such as large vehicles and utilities in which battery volume is not a significant issue. When the end use of the battery requires constant performance across a wide range of temperatures, such as the need for a hybrid bus to function comparably in both winter and summer, our nLTO cells may be the preferred solution. Also, conventional lithium ion batteries prefer to cycle between approximately 30% and 80% state of charge to achieve optimum cycle life. As a result, they only use about 50% of their nominal available energy. Our nLTO batteries, on the other hand, are not so limited and as a result can use approximately 90% of their nominal available energy. Given this, we believe that comparisons of battery technologies on a watt-hours per kilogram basis can be misleading, as nLTO batteries offer a greater range of actual usable energy, along with four-to-six times the cycle life across a wider range of operating conditions.

 

Sources of Supply and Raw Materials

 

An important consideration, as we begin to grow our revenue stream, is to ensure that we have access to the various components and raw materials we need to manufacture and assemble our various products. As we anticipate larger orders, establishing multiple sources for key components is becoming much more important to us. Moreover, a key focus of our new business plan is to aggregate our supply chain not only to reduce cost, but also to accelerate our ability to deliver products on a timely basis to our customers.

 

The basic building block for our battery cell’s anode is nLTO powder. We use compounds of lithium and of titanium to manufacture our nLTO. We currently source our lithium compound from the largest producers in China and do not foresee any problems in scaling up our purchases as our volume of business increases. Meanwhile we are developing and qualifying more suppliers in U.S., Australia and China. From end of 2015, Lithium material price has been rising rapidly, and our company has to be ready for solutions. We currently source our titanium compound from a supplier who is a global leader in the field and a Chinese domestic supplier, and we are in the process of identifying and qualifying additional sources for this key material. The supply of our cathode material of our cells supply is from a single supplier; therefore, we are planning to test materials from another Japanese supplier. At this point we are not anticipating any problems or disruptions to our supply of these raw material compounds.

 

 

As of the date hereof, we have only one source for the contract manufacturing of our nLTO battery cells, which are the building blocks of our battery modules and energy storage systems. This supplier has passed our rigorous technical requirements to be as our qualified supplier. Currently we are planning to qualify more OEM suppliers to reduce our dependency on one single supplier and meanwhile create competition between suppliers and eventually reduce cost.

 

Many of the other components and materials used in the manufacture of our nLTO battery products are readily available from multiple suppliers.

 

Competition

 

Electric Grid: A number of advanced energy storage and power electronic component producers have entered into the frequency regulation market. They include A123 Systems (which was acquired by Wanxiang), BYD, GS Yuasa, LG Chem, Mitsubishi, Saft, Microvast, Toshiba, Enerdel and XtremePower. As we or others continue to demonstrate traction in this market we expect to see increasing levels of competition from other suppliers and systems integrators, especially as the market rules in the U.S. and other markets move towards the acceptance of battery-based energy storage for frequency regulation. Favorable signs emerged in 2012, such as California Independent System Operator’s (CAISO) decision to adopt market changes which would reward frequency regulation resources for fast performance. CAISO now joins PJM Interconnection as the first to propose new rules which seek to comply with FERC’s Order 755, which requires pay for performance, especially for fast response resources that provide frequency regulation services. We believe that these changes are favorable for battery-based energy storage systems in general and for our nLTO battery technologies specifically, due to our unique fast response capabilities.

 

Our products typically compete with existing methods for providing frequency regulation and renewable integration rather than competing battery manufacturers. Today, most utilities and regional transmission organizations use existing coal, gas and diesel generating sources to provide frequency regulation. While these sources are inefficient and can be highly polluting (coal and diesel), they are known quantities and accepted by the various regulators and utilities. In many instances, particularly in the U.S., we are attempting to displace this accepted way of doing things. Consequently, the typical sales cycle for selling an energy storage system for frequency regulation can be quite lengthy.

 

Another challenge is the cost of natural gas in the U.S. Much of the existing frequency regulation in the U.S. is provided by natural gas powered generators, and the price of natural gas pricing has been at historic lows. As a result, there is less of a financial incentive for utilities to implement our solution. This cost environment, however, is not expected to be sustainable. Natural gas prices are volatile and may rise over time, and batteries, like all technologies, will eventually see their prices drop as efficiencies are gained and as production volumes increase. As a result, we see greater opportunities for our frequency regulation products emerging over time in the U.S., especially with the introduction of new market mechanisms that place greater emphasis on fast response services. Moreover, we expect to see growing demand outside of the U.S., where fuel costs are significantly higher. Once this new energy storage capability starts to get market traction, we expect the rate of acceptance to accelerate. Until then, however, we are experiencing a long sales cycle and don’t expect that to materially change in the near future. We believe that once we demonstrate revenue traction and demonstrate that the market does exist and is very large, other larger suppliers may also target this market.

 

In the Transportation (Commercial Vehicles), automotive passenger car markets, there are a large number of battery manufacturers and systems integrators currently serving the market. Many of them are larger companies with substantially stronger financial resources than we have. We believe the passenger car market will be driven by low margins and volume. As a result we believe that only larger, well-capitalized companies will ultimately be successful in this market. We believe that commercial vehicles, including buses, medium- and heavy-duty trucks, on the other hand, present a different set of dynamics. The characteristics of our batteries are an excellent fit to satisfy the requirements of this market, and the needs here are different than in the general passenger car automotive market. We believe that we can be a successful competitor in this segment of the overall transportation market.

 

With respect to the electric and hybrid electric commercial vehicle markets, we are not aware of any commercially available products that have similar performance attributes as our nLTO batteries, although we suspect that similar batteries exist. Nonetheless, competitors have announced advanced lithium ion batteries and battery products aimed at these markets. Some may have greater energy density than our nLTO batteries.

 

 

Currently, NiMH batteries dominate the hybrid electric vehicle market, although major hybrid manufacturers are beginning to switch to lithium ion batteries. NiMH batteries improve upon the energy capacity and power capabilities of older alternatives, such as NiCd (for the same size cell) by 30% to 40%. Since they contain fewer toxins than NiCd batteries, NiMH batteries are more environmentally friendly than NiCd batteries, although they are not as environmentally friendly as our nLTO battery. Like NiCd batteries, NiMH batteries can be charged in about 3 hours. Charging rates must be reduced by a factor of 5 to 10 at temperatures below 0°C (32°F) and above 40°C (104°F). NiMH batteries suffer from poor deep cycle ability (i.e. the ability to be discharged to 10% or less of their capacity), possessing a recharge capability following deep discharge on the order of 200 to 300 cycles. While NiMH batteries are capable of high power discharge, dedicated usage in high power applications limits cycle life even further. NiMH batteries also possess high self-discharge rates, which is unintentional leaking of a battery’s charge. NiMH batteries are intolerant to elevated temperature and, as a result, performance and capacity degrade sharply above room temperature. The most serious issue with NiMH, though, involves safety accompanying recharge. The temperature and internal pressure of a NiMH battery cell rises sharply as the cell nears 100% state of charge, necessitating the inclusion of complex cell monitoring electronics and sophisticated charging algorithms in order to prevent thermal runaway, and ultimately fire. A potential limiting factor for the widespread use of NiMH batteries may be the supply of nickel, potentially rendering the technology economically infeasible for these applications as demand continues to rise.

 

Producers of electric and hybrid electric vehicles are seeking to replace NiMH batteries with lithium ion batteries for several reasons. The demand for these vehicles is placing pressures on the limited supply of nickel, potentially rendering the technology economically infeasible for these applications as the demand continues to rise. Compared to NiMH batteries, lithium ion batteries are stable, charge more rapidly (in hours), exhibit low self-discharge, and require very little maintenance. Except as explained below, the safety, cycle life, calendar life, environmental impact and power of lithium ion batteries is comparable to those of NiMH and NiCd batteries.

 

Lithium ion batteries are the batteries of choice in small electronics, such as cell phones and portable computers, where high energy density and light weight are important. These same attributes are desired for electric vehicle, hybrid electric vehicle, fast energy storage and other markets. However, these applications are principally high power demand applications and/or pose other demands on usage, such as extremes of temperature, need for extremely short recharge times, and even longer extended lifetimes. Because of safety concerns related principally to the presence of graphite in conventional lithium ion batteries, conventional graphite-based lithium ion batteries sufficiently large for such power uses may raise safety concerns. In addition, current lithium ion technology is only capable of about 2,500 to 4,000 cycles. Conventional lithium ion batteries also do not function well at extremely hot or cold temperatures. Our batteries - which are safer, have a longer cycle life, rapid charge and discharge rates and function well at extreme temperatures - are designed to address the power market by providing many of the key benefits of lithium ion batteries without the shortcomings relative to the power market. As noted above, our competitors are developing high power, and temperature resilient non-conventional lithium ion batteries. We do not know the exact attributes of the evolving batteries.

 

Research and Development Expenses

 

Research and development (“R&D”) expenditures include salaries, wages and other costs of personnel engaged in R&D, costs of services performed by others for R&D on our behalf are expensed as R&D costs when incurred. 

 

Our total R&D expenses were $0.8 million, $1.1 million, $3.9 million and $6.4 million for the years ended December 31, 2015, 2014, 2013 and 2012; respectively, while R&D costs funded by customers were $1,920, $2,040, $1,200 and $23,000 for the years ended December 31, 2015, 2014, 2013 and 2012, respectively. Included in the R&D expenses are engineering, development and internal product innovation costs not billed to customers. From 2014 to 2015, we concentrated on stabilizing and expanding production in Wu’an, China and from 2016 and into 2017 we plan to put a large investment again into R&D in China with the support from our U.S. team.

 

 

Dependence on Significant Customers

 

For the year ended December 31, 2015, Hebei Yinlong (a related entity) and TSK, were our two largest customers accounting for 49% and 12% of our total recognized revenues; for the year ended December 31, 2014, Hebei Yinlong (a related entity), Proterra LLC and Nanopower a.s. were our three largest customers accounting for 30%, 19% and 16% of our total recognized revenues; and for year ending December 31, 2013, we had three major customers (1) Proterra LLC accounted for 32% of our total recognized revenues (2) Hawaiian Electric Light Company accounted for 25% of our total recognized revenues and (3) Vestas accounted for 16% of our total recognized revenues. During the year ended December 31, 2012, we recorded revenues from three major customers who accounted for 16% and 14% and 13% of our total recognized revenues; they were Alsher Titania LLC, Gen-X and Emrol; respectively.

 

Open contracts include the China State Grid Project and an agreement to sell up to 2,000 tons of nLTO to our affiliate Hebei Yinlong.

 

 

U.S. Government Regulation

 

Most of our current and proposed activities in the U.S. are subject to numerous federal, state, and local laws and regulations concerning machine and chemical safety and environmental protection. Such laws include, without limitation, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response Compensation Liability Act. We are also subject to laws governing the packaging and shipment of some of our products, including our nLTO batteries. Such laws require that we take steps to, among other things, maintain air and water quality standards, protect threatened, endangered and other species of wildlife and vegetation, preserve certain cultural resources, reclaim processing sites and package potentially flammable materials in appropriate ways and pass stringent government mandated testing standards before shipping our battery products.

 

China Government Regulation

 

Our manufacturing activities and most of the business activities are now in China, we are supposed to comply with the stipulations of PRC environmental laws and regulations, including but not limited to those on air emissions, waste water discharge, solid waste disposal and noise control.  The main environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.  We are also subject to laws supervising the packaging and shipment of some of our products, including our nLTO batteries, flammable and dangerous articles. Such laws and regulations define that we take steps to, among other measures, maintain air, water and soil quality standards, as well as ensure the safety of people concerned during the production, packaging, shipment, installation and use of the products. Strict government required testing standards must pass before the shipment of our products. 

 

Compliance with federal, state, or local laws or regulations represents a small part of our present budget. If we fail to comply with any such laws or regulations, however, a government entity may levy a fine on us or require us to take costly measures to ensure compliance. Any such fine or expenditure may adversely affect our development.

 

Environmental Regulation and Liability  

 

Any proposed processing and manufacturing operations in the United States will be subject to federal, state, and local environmental laws. Under such laws, we may be jointly and severally liable with prior property owners for the treatment, cleanup, remediation, and/or removal of substances discovered at any other property used by us; to the extent the substances are deemed by the federal and/or state government to be toxic or hazardous. Courts or government agencies may impose liability for, among other things, the improper release, discharge, storage, use, disposal, or transportation of hazardous substances. We use hazardous substances in our testing and operations and, although we employ reasonable practicable safeguards to prevent any liability under applicable laws relating to hazardous substances, companies engaged in materials production are inherently subject to substantial risk that environmental remediation will be required.

 

 

As we conduct our manufacturing activities in China, we are subject to the requirements of PRC environmental laws and regulations on air emission, waste water discharge, solid waste and noise. The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. We aim to comply with environmental laws and regulations and have been pushing ahead with the authentication of ISO 14001 for environmental practices. We have already passed the first step of the ISO 14001 appraisal and the second step of the appraisal is in process. Passing the second step of the appraisal will give us ISO 14001 certification.  We have built environmental treatment facilities concurrently with construction of our manufacturing facilities, where waste air, waste water and waste solids we generate can be treated in accordance with the relevant requirements. We also outsource disposal of solid waste we generate to a third party contractor. Certain key materials used in manufacturing, such as cobalt dioxide, electrolyte and separators, have proven innocuous to worker’s health and safety as well as the environment. We are not subject to any admonitions, penalties, investigations or inquiries imposed by the environmental regulators, nor are we subject to any claims or legal proceedings to which we are named as defendant for violation of any environmental law or regulation. We do not have any reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations.

 

Financial Information about Segments and Foreign Sales

 

Information with respect to assets, net sales, loss from operations and depreciation and amortization for the Power and Energy Group and the All Other Division is presented in Note 13, Business Segment Information, of Notes to Consolidated Financial Statements in Part IV.

 

Information with respect to foreign and domestic sales and related information is also presented in Note 13, Business Segment Information, of Notes to Consolidated Financial Statements in Part IV.

 

Subsidiaries

 

Altair U.S. Holdings, Inc. was incorporated by Altair in December 2003 for the purpose of facilitating a corporate restructuring and consolidation of all U.S. subsidiaries under a U.S. holding company. Altair U.S. Holdings owns the capital stock of Mineral Recovery Systems, Inc., which currently has no operations, and Altairnano, Inc.

 

Altairnano, Inc. (f/k/a Altair Nanomaterials Inc.) holds all of our interest in our nanomaterials and titanium dioxide pigment technology and related assets. Altairnano, Inc. also owns Altair China, a WFOE in China, and Altair China owns Northern Altair, a domestic company in China.

 

Corporate History

 

Altair Nanotechnologies Inc. was incorporated under the laws of the Province of Ontario, Canada in April 1973 for the purpose of acquiring and exploring mineral properties. At that time, its name was Diversified Mines Limited, which was subsequently changed to Tex-U.S. Oil & Gas Inc. in February 1981, then to Orex Resources Ltd. in November 1986, then to Carlin Gold Company Inc. in July 1988, then to Altair International Gold Inc. in March 1994, then to Altair International Inc. in November 1996 and then to Altair Nanotechnologies Inc. in July 2002. In July 2002, Altair Nanotechnologies Inc. domesticated from the Ontario Business Corporations Act to Canada’s federal corporate statute, the Canada Business Corporations Act. On May 15, 2012, Altair Nanotechnologies Inc. domesticated from Canada to the State of Delaware under the Delaware General Corporation Law.

 

During the period from inception through 1994, we acquired and explored multiple mineral properties. In each case, sub-economic mineralization was encountered and the exploration was abandoned. Beginning in 1996, we entered into leases for mineral property near Camden, Tennessee and owned the rights to the Altair jig. Subsequently, we have terminated our leases on all of the Tennessee mineral properties and during 2009 disposed of the remaining centrifugal jigs and abandoned the applicable patents since we were unable to identify an interested party to purchase them.

 

In November 1999, we acquired all the rights of BHP Minerals International, Inc., or BHP, in the nanomaterials and titanium dioxide pigment technologies and the nanomaterials and titanium dioxide pigment assets from BHP. We are employing the nanomaterials technology as a platform for the production and sale of metal oxide nanoparticles in our nLTO batteries.

 

 

 

In July 2011, Energy Storage (China) (“EST China”), an indirect subsidiary of Canon Investment Holding Ltd, acquired 6,172,801 shares of common stock, representing 53% of the outstanding shares of common stock of Altair Nanotechnologies Inc.

 

In December 2012, we completed a 1-for-6 reverse stock split. All share and per share amounts included in this filing have been restated for the effects of this reverse stock split.

 

Employees

 

Our business is currently managed by Mr. Guohua Sun, Chief Executive Officer, and Ms. Karen Werner, Interim Chief Financial Officer. For the years ended December 31, 2015, 2014 and 2013; our U.S. operations had 31, 30 and 42 employees; respectively. As of December 31, 2015, 2014 and 2013, our China operations had 598, 254 and 240 employees; respectively. During 2016, we anticipate hiring additional employees in China primarily in operations, engineering, research & development and sales & marketing. This is dependent upon business volume growth and demand for our products.

 

As of January 2016, the module production was transferred from Anderson, Indiana to our manufacturing location in Wu’an, China. In the U.S., we are maintaining some of our core R&D personnel, who provide technical transfer and services to our China entities in the areas of core R&D, engineering operational capabilities and technologies that influence our manufacturing in Wu’an, China.

 

Available Information

 

We file annual, quarterly and current reports and other information with the SEC. These materials can be inspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of these materials may also be obtained by mail at prescribed rates from the SEC’s Public Reference Room at the above address. Information about the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC’s Internet site is www.sec.gov. In addition, we provide electronic or paper copies of our filings free of charge upon request.

  

 

ITEM 1A. RISK FACTORS

 

An investment in our shares of common stock and related derivative securities involves significant risks. You should carefully consider the risks described in this Comprehensive Report before making an investment decision. Any of these risks could materially and adversely affect our business, financial condition or results of operations. In such case, you may lose all or part of your investment. Some factors in this section are forward-looking statements.

 

We may continue to experience significant losses from operations.

 

We have experienced a net loss in every fiscal year since our inception. Our loss from operations was $15.5 million for the twelve months ended December 31, 2015. We may, or may not, be profitable in the future. Even if we are profitable in one or more future years, subsequent developments in the economy, our industry, customer base, business or cost structure, or an event such as significant litigation or a significant transaction, may cause us to again experience losses.

 

We may not be able to raise sufficient equity capital to finance our operations due to our operating results, market conditions and similar factors.

 

As of December 31, 2015, we had approximately $2.1 million in cash and cash equivalents, $0.2 million in restricted cash and approximately $70.5 million in debt coming due during 2016. Restricted cash and Term Deposit of approximately $25.6 million serves as collateral for short-term loans and trade acceptance bills. We expect that in the future we will again need to raise capital.  With respect to any such capital raise, we may be unable to raise the amount of capital needed and may be forced to pay an extremely high price for capital.  Factors affecting the availability and price of capital may include the following:

 

●

market factors affecting the availability and cost of capital generally, including increases or decreases in major stock market indexes, the stability of the banking and investment banking systems and general economic stability or instability;

 

 

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the price, volatility and trading volume of our shares of common stock;

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our financial results, particularly the amount of revenue we are generating from product sales;

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the market's perception of our ability to execute our business plan and any specific projects identified as uses of proceeds;

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our ownership structure and recent or anticipated dilution;

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the amount of our capital needs;

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our project investment requirements in China;

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the amount of our outstanding debt;

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the extent to which we are subject to material legal or regulatory proceeding or restrictions arising from such proceedings;

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the influence of EST China and its appointees on the Board of Directors which, among other things, may cause the Company to seek indebtedness as a source of capital, as opposed to the sale of capital stock, in order to permit EST China to maintain control;

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volume limitations on the use of our shelf registration statement;

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the market's perception of our company and companies in our line of business; and

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the economics of projects being pursued.

 

If we are unable to raise required capital, we may be forced to discontinue operations.

 

The significant amount of debt we owe creates a material risk of default and insolvency.

 

As of December 31, 2015, we had approximately $70.5 million in debt that will come due in the next twelve months. This debt is secured by restricted cash, short-term investments, land use rights in China, third party guarantee, related party guarantee, note receivable from a related party, and our building in Reno, Nevada. We do not have sufficient capital to repay such debt. If we are unable to refinance this debt, or otherwise raise sufficient capital to repay this debt, we will default. If we are in default, our creditors have a broad range of remedies, including taking action against the collateral. A default on our indebtedness, particularly that secured by our land use rights in China, would likely lead to our insolvency and a bankruptcy or similar event. In such a context, it is unlikely that there will be any amount available for distribution to its shareholders.

 

We have entered into contractual provisions that may significantly limit our ability to raise capital.

 

In conjunction with the closing of the purchase by EST China, an affiliate of Canon Investment Holdings Ltd. of shares representing over 50% of our outstanding shares in 2011, we granted certain rights to EST China, including the right to proportional representation on our Board of Directors, certain registration rights, and an option to purchase a sufficient number of our equity securities at market price to maintain their percentage of ownership should we offer, sell or issue new securities. These rights may dissuade potential investors from purchasing our capital or may require us to accept less than favorable terms in future financings.

 

The ultimate parent of EST China has announced its intention to sell its business and holdings to Gree Electric Appliances Inc., or Gree, a major Chinese air conditioner manufacturer. We have no basis for knowing how and to the extent Gree will exercise influence over our company and our Board of Directors.

 

We are subject to various regulatory regimes, and may be adversely affected by inquiries, investigations and allegations that we have not complied with governing rules and laws.

 

In light of our status as a public company and our lines of business, we are subject to a variety of laws and regulatory regimes in addition to those applicable to all businesses generally.  For example, we are subject to the reporting requirements applicable to United States reporting issuers, such as the Sarbanes-Oxley Act of 2002 and certain other securities laws. We are also subject to Delaware corporate laws and state and federal environmental, health, safety and similar laws. Such laws and rules change frequently and are often complex.  In connection with such laws, we are subject to periodic audits, inquiries and investigations.  Any such audits, inquiries and investigations may divert considerable financial and human resources and adversely affect the execution of our business plan. 

 

 

Through such audits, inquiries and investigations, we or a regulator may determine that we are out of compliance with one or more governing rules or laws.  Remedying such non-compliance would divert additional financial and human resources.  In addition, in the future, we may be subject to a formal charge or determination that we have materially violated a governing law, rule or regulation. We may also be subject to lawsuits as a result of alleged violation of the securities laws or governing corporate laws.  Any charge or allegation, and particularly any determination, that we had materially violated a governing law would harm our ability to enter into business relationships, recruit qualified officers and employees and raise capital.

 

Without limiting the generality of the foregoing, as described in Item 3 of the Comprehensive Report, as a result of issues with our internal controls and our related failure to file reports required under the Exchange Act, we were delisted from the Nasdaq Stock Market and have been subject to direct, derivative, regulatory and other investigations and lawsuits. This has harmed the price of our common stock, our ability to raise capital, our ability to sign agreements with customers and suppliers, our ability to retain key employees and hire replacement employees and other aspects of our business.

 

 

Laws governing repatriation of investments in a China WFOE may contribute to a need to obtain capital to finance our non-China operations in the near future.

 

We have established a Wholly Foreign Owned Enterprise, or WFOE, in China through which we directly or indirectly conduct our Chinese operations. When establishing a WFOE, we have been required to designate a minimum registered capital amount and contribute at least such amount to the WFOE. Chinese law severely limits the ability of a WFOE to repatriate money to its non-Chinese parent. In general, any distributions to the non-Chinese parent must derive from profits, as determined in accordance with Chinese accounting standards and regulations. Our WFOE will also be required to set aside at least 10% of its after-tax profit based on Chinese accounting standards each year to a statutory surplus reserve fund until the accumulative amount of such reserve reaches 50% of registered capital. These reserves are not distributable as dividends.

 

In addition, our WFOE may be required to allocate a portion of its after-tax profit to a staff welfare and bonus fund. Moreover, if our WFOE incurs debt on its own behalf in the future, the instruments governing the debt may restrict our WFOEs’ ability to pay dividends or make other distributions to us. Any limitation on the ability of our WFOE to distribute dividends and other distributions to us could materially and adversely limit our ability to make investments or enter into joint ventures that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

U.S. news sources report that the Chinese government has placed, or began enforcing, limitations on lending by Chinese banks, which limits may affect our ability to borrow capital for our Chinese capital investment projects, for operations and to refinance existing debt.

 

Many U.S. news sources recently reported that, due to an increase in bad loans and other reasons, the Chinese government has imposed, or began enforcing, limitations on lending by Chinese banks and other lending entities. Northern Altair has been seeking loans from Chinese banks and other lending entities for its proposed capital investments and operations. This increased regulation and scrutiny may decrease the likelihood that Northern Altair can qualify for debt financing to fund proposed projects and to refinance existing indebtedness. Even if Northern Altair does qualify, terms of financing may be more onerous than anticipated. Any inability to finance our Chinese operations through debt would likely slow our growth in China and may prevent us from completing all aspects of our proposed nLTO and energy storage system manufacturing facility in China. Any failure to refinance existing indebtedness may lead to a default and insolvency.

 

 

We may become subject to international economic and political risks over which we have little or no control and may be unable to alter our business practice in time to avoid the possibility of reduced revenues.

 

We conduct substantially all our business outside the United States and plan to significantly increase our presence in China. Doing business outside the United States subjects us to various risks, including changing economic and political conditions, major work stoppages, exchange controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. We have no control over most of these risks and may be unable to anticipate or adapt to changes in international economic and political conditions. This may lead to sudden and unexpected revenue reductions or expense increases.

 

China’s economic policies, laws and regulations could affect our business.

 

While China’s economy has experienced significant growth in the past twenty years, such growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall economy of China, but they may also have a negative effect on us. For example, operating results and financial conditions may be adversely affected by the government control over capital investments or changes in tax regulations. The economy of China has been transitioning from a planned economy to a more market-oriented economy. In recent years, the PRC government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets, and the establishment of corporate governance in business enterprises; however, a substantial portion of productive assets in China are still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, the control of payment of foreign currency-denominated obligations, the setting of monetary policy and the provision of preferential treatment to particular industries or companies. Any adverse change in the economic conditions or government policies in China could directly harm our business or harm overall economic growth in China, which in either case could increase our expenses and decrease expected revenues.

 

 

We may have difficulty establishing adequate management, legal and financial controls internationally.

 

We are a small company with operation in multiple countries, particularly the United States and China. As a result of differences in management, accounting, legal, language and cultural norms, we may experience difficulty in establishing and enforcing management, legal and financial controls. We may also experience difficulty collecting financial data and preparing financial statements, books of account and corporate records and instituting standard business practices for our international projects as well as in our China-based operations. In fact, such difficulty is the principal reason that we have failed to file required periodic reports since late 2013. As a result of issues with our internal controls and our related failure to file reports required under the Exchange Act, we were delisted from the Nasdaq Stock Market and have been subject to direct, derivative, regulatory and other investigations and lawsuits. This has harmed the price of our common stock, our ability to raise capital, our ability to sign agreements with customers and suppliers, our ability to retain key employees and hire replacement employees and other aspects of our business.

 

Such difficulties may continue in the future. Any failure to maintain controls, institute business practices or accurately collect information may have an effect on the efficiency of our business and could lead to a restatement, a regulatory action (including delisting from an exchange or trading market) or a legal action, in addition to our inability to gain the trust of customers and suppliers. In addition, our international efforts may divert management attention and consume a significant amount of capital without anticipated results.

 

If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease.

 

At various times during recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our common stock.

 

 

China could change its policies toward private enterprise or even nationalize or expropriate private enterprises.

 

Our business is expected to be subject to significant political and economic uncertainties and may be affected by political, economic and social developments in China. Over the past several years, the PRC government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The PRC government may not continue to pursue these policies or may significantly alter them to our detriment from time to time with little, if any, prior notice.

 

Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to shareholders, or devaluations of currency could cause a decline in the price of our common stock.

 

The nature and application of many laws of China create an uncertain environment for business operations and they could have a negative effect on us.

 

The legal system in China is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. The promulgation of new laws, changes of existing laws and the abrogation of local regulations by national laws could harm our business operations and financial condition. In addition, as these laws, regulations and legal requirements are relatively recent, their interpretation and enforcement involve significant uncertainty. Furthermore, the political, governmental and judicial systems in China are sometimes impacted by corruption. There is no assurance that we will be able to obtain recourse in any legal disputes with suppliers, customers or other parties with whom we conduct business.

 

We may not be able to sell the land use rights in China we have acquired, and expect to acquire, at appraised value or at all, in part due to applicable restrictions.

 

In October 2012, we acquired a 50-year land use right in China related to 66 acres of commercial land north of Dongzhuchang Village in Wu'an City, China. In May 2013, we acquired a 50-year land use right for an adjoining 40 acre parcel. Our land use rights are subject to certain requirements and limitations. In May, 2014 and in August, 2015 we purchased three more pieces of land. The requirements on the existing five land use rights, totaling 138.3 acres, include an obligation, over the life of the land use rights, to invest approximately $314.85 million in the combined projects. The limitations include a prohibition on the transfer of the land use right prior to our investment of at least 25% of our committed investment. These requirements and limitations may harm the value of the land use right.

 

We may face delays or related issues if we cannot effectively transfer know-how from our U.S.-based employees to our China-based employees.

 

We have constructed a facility in China to be the sole site for our nLTO manufacturing and an additional site for our energy storage system and module assembly. The processes of manufacturing nLTO and assembling energy storage systems and modules are complex. We will need to transfer the complex know-how for the manufacturing and assembly from our U.S.-based employees to our existing or new Chinese employees. Language and cultural differences, as well as the inherent difficulty of communicating skills learned through experience, may lead to difficulties in the education and training of Chinese employees. Any failure to adequately educate and train Chinese employees in company-specific know-how may result in additional costs, delays, quality concerns, warranty costs and other issues.

 

Following the acquisition of a majority interest in the Company by EST China, we face risks associated with having a majority shareholder.

 

In July 2011, EST China acquired a majority of our outstanding shares of common stock; it may soon be sold to Gree. Having a controlling shareholder presents certain risks to us, including the following:

 

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The majority shareholder controls the appointments on the Board of Directors and may appoint persons less qualified, or more loyal to the majority shareholder, than would be appointed absent a controlling shareholder;

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The majority shareholder may be able to influence our Board of Directors to enter into transactions with related or third parties that are more favorable to such parties than would be negotiated by an independent Board of Directors;

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We may hire employees who also work for 100% owned subsidiaries of EST China, which may create conflicts of interest and concerns re protection of trade secrets

 

 

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The majority shareholder controls all matters requiring approval by the shareholders, including any determination with respect to the acquisition or disposition of assets, future issuances of a material number of securities and other major transactions; and

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This concentration of ownership may also delay, defer or prevent a change in control and otherwise prevent shareholders other than our affiliates from influencing our direction and future.

 

 

If one or more of these risks, or other risks, materializes, our business will be harmed, and it may be harmed materially.

 

Cultural, language and other differences between the U.S. and China may create inefficiencies in our management and operations.

 

Our majority shareholder, and a majority of our directors, reside in China and several of our directors exclusively speak Chinese. As we ramp up our China-based operations, we may experience conflicts or misunderstandings within our management structure that are primarily or partially rooted in language and cultural differences, particularly differences in management and communication styles. Language and cultural differences may also affect strategy formation and create inefficient and limited communication among technical and management employees located in different countries. The occurrence of any of these events may harm our growth potential, increase costs and decrease operational efficiency.

 

 

Our nLTO, battery materials and battery business is currently dependent upon several customers and potential customers, which presents various risks.

 

Our nLTO materials and battery business is dependent upon several current or potential customers. In addition, many of these customers are, or are expected to be, development partners who are subsidizing the research and development of products for which they may be the sole, or one of several, potential purchasers. As a result of the several potential customers and partners, our existing or potential customers and partners may have significant leverage on pricing terms, exclusivity terms and other economic and noneconomic terms. This may harm our attempts to sell products at prices that reflect desired gross margins. In addition, the decision by a single or potential customer to choose not to purchase or abandon the use or development of a product may significantly harm both our financial results and the development track of one or more products.

 

We depend upon several sole-source and limited-source third-party suppliers.

 

We rely on certain suppliers as the sole-source, or as a primary source, of certain services, raw materials and other components of our products. We do not yet have long-term supply or service agreements engaged with any such suppliers. As a result, the providers of such services and components could terminate or alter the terms of service or supply with little or no advance notice. If our arrangements with any sole-source supplier were terminated, or if such a supplier failed to provide essential services or deliver essential components on a timely basis, failed to meet our product specifications and/or quality standards, or introduced unacceptable price increases, our production schedule would be delayed, possibly by as long as one year. Any such delay in our production schedule would result in delayed product delivery and may also result in additional production costs, customer losses and litigation.

 

An area in which our dependence upon a limited number of sources creates significant vulnerability is the manufacturing of our nLTO cells. As of the date hereof, we have one contract manufacturing source for our nLTO cells, and we are currently working with a second manufacturer to qualify their cells.  We have had quality issues with some of our past contract manufacturers. Our nLTO battery cells are the building blocks of all of our products (other than our nLTO powder). If we were to experience quality issues with any of our suppliers, we may be unable to meet our deadlines, or quality specifications, with respect to existing or future orders.  This would harm our reputation and our ability to grow our business. 

 

 

Our operating results have fluctuated significantly in the past and will continue to fluctuate in the future, which could cause our stock price to decline.

 

Our operating results have fluctuated significantly in the past, and we believe that they will continue to fluctuate in the future, due to a number of factors, many of which are beyond our control. If in future periods our operating results do not meet the expectations of investors or analysts who choose to follow our company, the price of our shares of common stock may fall. Factors that may affect our operating results include the following:

 

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fluctuations in the size, quantity and timing of customer orders;

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timing of delivery of our services and products;

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additions of new customers or losses of existing customers;

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positive or negative business or financial developments announced by us or our key customers;

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our ability to commercialize and obtain orders for products we are developing;

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costs associated with developing our manufacturing capabilities;

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the retention of our key employees;

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new product announcements or introductions by our competitors or potential competitors;

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the effect of variations in the market price of our shares of common stock on our equity-based compensation expenses;

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disruptions in the supply of raw materials or components used in the manufacture of our products;

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the pace of adoption of regulation facilitating our ability to sell our products in our target markets;

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technology and intellectual property issues associated with our products;

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general political, social, geopolitical and economic trends and events; and

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availability of components sourced from Korea if tensions between North Korea and South Korea erupt into a greater military conflict.

 

Our patents and other protective measures may not adequately protect our proprietary intellectual property.

  

We regard our intellectual property, particularly our proprietary rights in our nLTO technology, as critical to our success. We have received various patents, and filed other patent applications, for various applications and aspects of our nLTO technology and other intellectual property. Such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:

 

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Our pending patent applications may not be granted for various reasons, including the existence of conflicting patents or defects in our applications, the existence of relevant prior art or the determination by an examiner that an invention was obvious to a person skilled in the art, whether or not there were other existing patents. Risks associated with patent applications are enhanced because patent applications of others remain confidential for a period of approximately 18 months after filing; as a result, our belief that we are the first creator of an invention or the first to patent it may prove incorrect, as information related to conflicting patents is first published or first brought to our attention;

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The patents we have been granted may be challenged, invalidated, narrowed or circumvented because of the pre-existence of similar patented or unpatented intellectual property rights or for other reasons;

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The patents we have been granted have a limited life span, and many will expired in the coming years and offer no legal protection to the technologies and processes described therein;

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The costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make aggressive enforcement cost prohibitive;

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We have not filed for patent protection in many countries in which we are currently selling product or seek to sell product; as a result, we may be unable to prevent competitors in such markets from selling infringing products;

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Even if we enforce our rights aggressively, injunctions, fines and other penalties may be insufficient to deter violations of our intellectual property rights;

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Many of our key patents begin expiring in 2020; we may be unable to protect key proprietary rights after the expiration of key patents; and

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Other persons may independently develop proprietary information and techniques that, although functionally equivalent or superior to our intellectual proprietary information and techniques, do not breach proprietary rights.

 

 

Our inability to protect our proprietary intellectual property rights or gain a competitive advantage from such rights could harm our ability to generate revenues and, as a result, our business and operations.

 

We may be involved in lawsuits to protect or enforce our patents, which could be expensive, time consuming and involve adverse publicity and adverse results.

 

 Competitors or others may infringe our patents. To counter infringement or unauthorized use, we may be required to file patent infringement claims, which can be expensive and time-consuming. Interference proceedings brought by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications. Litigation or interference proceedings may result in substantial costs and be a distraction to our management.

 

 Because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure. In addition, during the course of this litigation (even if ultimately successful), there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our shares of common stock.

 

 In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover that technology. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.

 

We may not prevail in any litigation or interference proceeding in which we are involved. Even if we do prevail, these proceedings can be expensive, result in adverse publicity and distract our management.

 

Other parties may bring intellectual property infringement claims against us, which would be time-consuming and expensive to defend, and if any of our products or processes is found to be infringing, we may not be able to procure licenses to use patents necessary to our business at reasonable terms, if at all.

 

 Our success depends in part on avoiding the infringement of other parties’ patents and proprietary rights. We may inadvertently infringe existing third-party patents or third-party patents issued on existing patent applications. Third party holders of such patents or patent applications could bring claims against us that, even if resolved in our favor, could cause us to incur substantial expenses and, if resolved against us, could cause us to pay substantial damages. Under some circumstances in the United States, these damages could be triple the actual damages the patent holder incurs.

 

If we have supplied infringing products to third parties for marketing or licensed third parties to manufacture, use or market infringing products, we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses the third parties may sustain themselves as the result of lost sales or damages paid to the patent holder. In addition, we have, and may be required to, make representations as to our right to supply and/or license intellectual property and to our compliance with laws. Such representations are usually supported by indemnification provisions requiring us to defend our customers and otherwise make them whole if we license or supply products that infringe on third party technologies or violate government regulations. Further, if a patent infringement suit were brought against us, we and our customers, development partners and licensees could be forced to stop or delay research, development, manufacturing or sales of products based on our technologies in the country or countries covered by the patent we infringe, unless we can obtain a license from the patent holder. Such a license may not be available on acceptable terms, or at all, particularly if the third party is developing or marketing a product competitive with products based on our technologies. Even if we were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property.

 

Any successful infringement action brought against us may also adversely affect marketing of products based on our technologies in other markets not covered by the infringement action. Furthermore, we may suffer adverse consequences from a successful infringement action against us even if the action is subsequently reversed on appeal, nullified through another action or resolved by settlement with the patent holder. As a result, any infringement action against us would likely harm our competitive position, be costly and require significant time and attention of our key management and technical personnel.

 

 

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

 

 We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. Trade secrets are difficult to protect, in particular with respect to a company controlled by a potential customer and competitor. We rely in part on confidentiality agreements with our employees, contractors, consultants, outside scientific collaborators and other advisors to protect our trade secrets and other proprietary information. Parties to the confidentiality agreements may have such agreements declared unenforceable or, even if the agreements are enforceable, may breach such agreements. Remedies available in connection with the breach of such agreements may not be adequate, or enforcing such agreement may be cost prohibitive. Courts outside the United States may be less willing to protect trade secrets. In addition, others may independently discover our trade secrets or independently develop processes or products that are similar or identical to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection would harm our competitive business position.

 

If we are sued on a product liability claim, our insurance policies may not be sufficient.

 

Our insurance may not cover all potential types of product liability claims to which manufacturers are exposed or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could harm our business, including our relationships with current customers and our ability to attract and retain new customers. In addition, if the liability were substantial relative to the size of our business, any uncovered liability could harm our liquidity and ability to continue as a going concern.

 

Laws regulating the manufacture or transportation of batteries have been and may be enacted which could impose additional costs that could harm our ability to be profitable.

 

International, federal, state and local laws regulate the storage, use and disposal of the component parts of our batteries in limited ways. However, laws and regulations may be enacted in the future which could impose environmental, health and safety controls on the storage, use and disposal of certain chemicals and metals used in the manufacture of lithium and lithium-ion batteries. Satisfying any future laws or regulations could require significant time and resources from our technical staff, including those related to possible redesign which may result in substantial expenditures and delays in the production of our product, all of which could harm our business and reduce our future profitability.

 

The transportation of lithium and lithium-ion batteries is regulated both domestically and internationally. Under recommendations adopted by the International Air Transport Association (“IATA”), our batteries and battery systems currently fall within the level such that they are not exempt and require a Class 9 designation for transportation. Future U.S, Chinese, international or IATA approval process and regulations could require significant time and resources from out technical staff and, if redesign were necessary, could delay the introduction of new products.

 

 

If our warranty expense estimates differ materially from our actual claims, or if we are unable to estimate future warranty expense for new products, our business and financial results could be harmed.

 

Our warranty for our products ranges from one to three years from the date of sale, depending on the type of product and its application. We expect that in the future some of our warranties may extend for longer periods. Because our supply arrangements are negotiated, the scope of our product warranties differ substantially depending upon the product, the purchaser and the intended use; however, we have granted and may grant broad warranties, addressing such issues as leakage, cycle life and decline in power. We have a limited product history on which to base our warranty estimates. Because of the limited operating history of our batteries and battery systems, our management is required to make assumptions and to apply judgment regarding a number of factors, including anticipated rate of warranty claims, the durability and reliability of our products, and service delivery costs. Our assumptions could prove to be materially different from the actual performance of our batteries and battery systems, which could cause us to incur substantial expense to repair or replace defective products in the future and may exceed expected levels against which we have reserved. If our estimates prove incorrect, we could be required to accrue additional expenses from the time we realize our estimates are incorrect and also face a significant unplanned cash burden at the time our customers make a warranty claim, which could harm our operating results.

 

 

In addition, with our new products and products that remain under development, we will be required to base our warranty estimates on historical experience of similar products, testing of our batteries under laboratory conditions and limited performance information learned during our development activities with the customer. As a result, actual warranty claims may be significantly different from our estimates and our financial results could vary significantly from period-to-period.

 

 

Product liability or other claims could cause us to incur losses or damage our reputation.

 

The risk of product liability claims and associated adverse publicity is inherent in the development, manufacturing and sale of batteries and battery systems. Certain materials we use in our batteries, as well as our battery systems, could, if used improperly, cause injuries to others. Improperly charging or discharging our batteries could cause fires, as could a puncture, collision or other event. Any accident involving our batteries or other products could decrease or even eliminate demand for our products. Because some of our batteries are designed to be used in electric and hybrid EV Buses, and because vehicle accidents can cause injury to persons and damage to property, we are subject to a risk of claims for such injuries and damages. In addition, we could be harmed by adverse publicity resulting from problems or accidents caused by third party products that incorporate our batteries. We could even be harmed by problems or accidents involving competing battery systems if the market viewed our batteries as being vulnerable to similar problems. Any such claims, loss of customers or reputation harm would harm our financial results and ability to continue as a going concern.

 

Continuing adverse economic conditions could reduce, or delay demand for our products.

 

The financial markets and general economic conditions are still relatively weak in certain geographic markets worldwide. Our products are targeted primarily at large power producers worldwide bus manufacturers and other industrial parties. Due to economic factors, companies and government agencies in some of our target markets have reduced, delayed or eliminated many research and development initiatives, including those related to energy storage. This reduction or delay in development spending by targeted key customers is hindering our development and production efforts and will continue to do so until development spending increases from current depressed levels.

 

The commercialization of many of our products is dependent upon the efforts of commercial partners and other third parties over which we have no or little control.

 

The commercialization of our principal products requires the cooperation and efforts of commercial partners and customers. For example, because completion and testing of our large-scale stationary batteries for power suppliers requires input from utilities and connection to a power network, commercialization of such batteries can only be done in conjunction with a power or utility company. The commercialization of transportation and other applications of our technology are also dependent, in part, upon the expertise, resources and efforts of our commercial partners. This presents certain risks, including the following:

 

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we may not be able to enter into development, licensing, supply and other agreements with commercial partners with appropriate resources, technology and expertise on reasonable terms or at all;

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our commercial partners may not place the same priority on a project as we do, may fail to honor contractual commitments, may not have the level of resources, expertise, market strength or other characteristics necessary for the success of the project, may dedicate only limited resources to, and/or may abandon, a development project for reasons, including reasons such as a shift in corporate focus, unrelated to its merits;

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our commercial partners may be in the early stages of development and may not have sufficient liquidity to invest in joint development projects, expand their businesses and purchase our products as expected or honor contractual commitments;

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our commercial partners may terminate joint testing, development or marketing projects on the merits of the projects for various reasons, including determinations that a project is not feasible, cost-effective or likely to lead to a marketable end product;

 

 

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our commercial partners may not protect our intellectual property adequately or they may infringe our intellectual property rights;

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at various stages in the testing, development, marketing or production process, we may have disputes with our commercial partners, which may inhibit development, lead to an abandonment of the project or have other negative consequences; and

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even if the commercialization and marketing of jointly developed products is successful, our revenue share may be limited and may not exceed our associated development and operating costs.

  

As a result of the actions or omissions of our commercial partners, or our inability to identify and enter into suitable arrangements with qualified commercial partners, we may be unable to commercialize apparently viable products on a timely and cost-effective basis, or at all.

 

Interest in our nLTO batteries is affected by energy supply and pricing, political events, popular consciousness and other factors over which we have no control.

 

Currently, our marketing and development efforts for our batteries and battery materials are focused primarily on stationary power and transportation applications. In the transportation market, batteries containing our nLTO materials are designed to replace or supplement gasoline and diesel engines. In the stationary power applications, our batteries are designed to conserve and regulate the stable supply of electricity, including from renewable source, and to displace coal, gas and diesel generators used in frequency regulation. The interest of our potential customers and business partners in our products and services is affected by a number of factors beyond our control, including:

 

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economic conditions and capital financing and liquidity constraints;

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short-term and long-term trends in the supply and price of natural gas, gasoline, diesel, coal and other fuels;

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the anticipated or actual granting or elimination by governments of tax and other financial incentives favoring electric or hybrid electric vehicles and renewable energy production;

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the ability of the various regulatory bodies to define the rules and procedures under which this new technology can be deployed into the electric grid;

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the anticipated or actual funding, or elimination of funding, for programs that support renewable energy programs and electric grid improvements;

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changes in public and investor interest for financial and/or environmental reasons, in supporting or adopting alternatives to gasoline and diesel for transportation and other purposes;

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the overall economic environment and the availability of credit to assist customers in purchasing our large battery systems;

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the expansion or contraction of private and public research and development budgets as a result of global and U.S. economic trends; and

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the speed of incorporation of renewable energy generating sources into the electric grid.

 

 

Adverse trends in one or more of these factors may inhibit our ability to commercialize our products and expand revenues from our battery materials and batteries.

 

 

Our competitors may have more resources than we do, and may be supported by more prominent partners, which may give them a competitive advantage.

 

We have limited financial, personnel and other resources and, because of our early stage of development, have limited access to capital. We compete or may compete against entities that are much larger than we are, have more extensive resources than we do and have an established reputation and operating history. In addition, certain of our competitors may be partnered with, associated with or supported by larger business or financial partners. This may increase their ability to raise capital, attract media attention, develop products and attract customers. Because of their size, resources, reputation and history (or that of their business and financial partners), certain of our competitors may be able to exploit acquisition, development and joint venture opportunities more rapidly, easily or thoroughly than we can. In addition, potential customers may choose to do business with our more established competitors, without regard to the comparative quality of our products, because of their perception that our competitors are more stable, are more likely to complete various projects, are more likely to continue as a going concern and lend greater credibility to any joint venture.

 

  

As manufacturing becomes a larger part of our operations, we will become exposed to accompanying risks and liabilities.

 

In-house and outsourced manufacturing is becoming an increasingly significant part of our business. As a result, we expect to become increasingly subject to various risks associated with the manufacturing and supply of products, including the following:

 

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If we fail to supply products in accordance with contractual terms, including terms related to time of delivery and performance specifications, we may be required to repair or replace defective products and may become liable for direct, special, consequential and other damages, even if manufacturing or delivery was outsourced;

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Raw materials used in the manufacturing process, labor and other key inputs may become scarce and expensive, causing our costs to exceed cost projections and associated revenues;

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Manufacturing processes typically involve large machinery, fuels and chemicals, any or all of which may lead to accidents involving bodily harm, destruction of facilities and environmental contamination and associated liabilities;

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As our manufacturing operations expand, we expect that a significant portion of our manufacturing will be done overseas, either by third-party contractors or in a plant owned by the Company. Any manufacturing done overseas presents risks associated with quality control, currency exchange rates, foreign laws and customs, timing and loss risks associated with overseas transportation and potential adverse changes in the political, legal and social environment in the host county; and

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We have made, and may be required to make, representations as to our right to supply and/or license intellectual property and to our compliance with laws. Such representations are usually supported by indemnification provisions requiring us to defend our customers and otherwise make them whole if we license or supply products that infringe on third-party technologies or violate government regulations.

 

Any failure to adequately manage risks associated with the manufacture and supply of materials and products could lead to losses (or smaller than anticipated gross profits) from that segment of our business and/or significant liabilities, which would harm our business, operations and financial condition.

 

 

Our past and future operations may lead to substantial environmental liability.

 

Virtually any prior or future production of our nanomaterials and titanium dioxide pigment technology is subject to federal, state and local environmental laws. Under such laws, we may be jointly and severally liable with prior property owners for the treatment, cleanup, remediation and/or removal of any hazardous substances discovered at any property we use. In addition, courts or government agencies may impose liability for, among other things, the improper release, discharge, storage, use, disposal or transportation of hazardous substances. If we incur any significant environmental liabilities, our ability to execute our business plan and our financial condition would be harmed.

 

Certain of our experts and directors reside in China and may be able to avoid civil liability.

 

A majority of our directors reside outside the United States, primarily in China. As a result, investors may be unable to effect service of process upon such persons within the United States and may be unable to enforce court judgments against such persons predicated upon civil liability provisions of the U.S. securities laws. It is uncertain whether Chinese courts would enforce judgments of U.S. courts obtained against us or such directors, officers or experts predicated upon the civil liability provisions of U.S. securities laws or impose liability in original actions against us or our directors, officers or experts predicated upon U.S. securities laws.

 

 

We are dependent on key personnel.

 

Our continued success will depend, to a significant extent, on the services of our executive management team and certain key scientists and engineers. We do not have key man insurance on any of these individuals. We have experienced, and may continue to experience, turnover in key positions, which could result in the loss of company-specific knowledge, experience and expertise. The loss or unavailability of any or all of these individuals could harm our ability to execute our business plan, maintain important business relationships and complete certain product development initiatives, which would harm our business.

 

We may issue substantial amounts of additional shares without stockholder approval. 

 

Our articles of incorporation authorize the issuance of 200 million shares of common stock that may be issued without any action or approval by our stockholders. In addition, we have various stock option plans that have potential for diluting the ownership interests of our stockholders. The issuance of any additional shares of common stock would further dilute the percentage ownership of our company held by existing stockholders.

 

The market price of our shares of common stock is highly volatile and may increase or decrease dramatically at any time.

 

The market price of our shares of common stock is highly volatile. Our stock price may change dramatically as the result of announcements of product developments, new products or innovations by us or our competitors, uncertainty regarding the viability of our technology or our product initiatives, significant customer contracts, significant litigation, regulatory or legal issues, being delisted from an exchange, our liquidity situation, revenues or losses, or other factors or events that would be expected to affect our business, financial condition, results of operations and future prospects.

 

The market price for our shares of common stock may be affected by various factors not directly related to our business or future prospects, including the following:

 

●

intentional manipulation of our stock price by existing or future shareholders or a reaction by investors to trends in our stock rather than the fundamentals of our business;

●

a single acquisition or disposition, or several related acquisitions or dispositions, of a large number of our shares, including by short sellers covering their position;

●

the interest of the market in our business sector, without regard to our financial condition, results of operations or business prospects;

●

positive or negative statements or projections about our company or our industry, by analysts, stock gurus and other persons;

●

the adoption of governmental regulations or government grant programs and similar developments in the United States or abroad that may enhance or detract from our ability to offer our products and services or affect our cost structure; and

●

economic and other external market factors, such as a general decline in market prices due to poor economic conditions, investor distrust or a financial crisis.

 

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our shares of common stock, our stock price and trading volume could decline.

 

The trading market for our shares of common stock is influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our shares of common stock adversely, or provide more favorable relative recommendations about our competitors, the price of our shares of common stock would likely decline. If any analyst who may cover us cease coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial market, which in turn could cause the price or trading volume of our shares of common stock to decline.

 

  

We have never declared a cash dividend and do not intend to declare a cash dividend in the foreseeable future.

 

We have never declared or paid cash dividends on our shares of common stock. We currently intend to retain any future earnings, if any, for use in our business and, therefore, do not anticipate paying dividends on our shares of common stock in the foreseeable future.  

 

  

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

 

ITEM 2. PROPERTIES

 

Our U.S. Corporate Headquarters is located at 204 Edison Way, Reno, Nevada 89502, in a building we purchased in August 2002 which is approximately 79,392 square feet on 6.773 acres of land. In the building we continue to use laboratory space and equipment for testing nLTO manufactured at our location in Wu’an, China to provide quality control analysis. We utilize about 21,000 square feet of space, including offices, in this building. We currently lease, to a short term tenant, approximately 10,000 square feet of warehouse space in our building at $2,500 per month.

 

On January 27, 2015, we entered into a Client NNN Lease (the “Lease”) with Flagship Enterprise Center, Inc.  Under the Lease, the Company will continue to lease the 70,000 square feet of space it currently occupies in Anderson, Indiana. The initial term of the Lease begins July 1, 2015 and expires June 30, 2017. Lease renewal options will be negotiated no less than six (6) months prior to the expiration of this lease. Annual rent under the two (2) year lease is $262,500 plus $1,680 in IT fees, plus utilities and maintenance. The majority of the space was used for the production of prototype batteries and battery systems until December 31, 2015. The rest of the space is used for office space to provide technical engineering and support services, primarily to our China entities.  Effective May 1 2016, we agreed to pay $140,000 as a payment to terminate this lease with an effective date of May 31, 2016. We have been granted use of the office space from the termination date, at no additional charge, until the landlord finds a new tenant. The landlord will give the Company thirty days notice at their discretion. The Company expects to find new office space for the current employees in the general Anderson, Indiana area at a reduced rate and space requirement by the end of the second quarter of 2017.

 

In 2012, Northern Altair acquired land use rights in Altair New Energy Industrial Park, Wu’an city, Hebei Province, China. In the New Energy Industrial Park, Northern Altair has purchased the right to use approximately 138.3 acres of land for approximately $28.12 million, consisting of five parcels of useable land use rights for a lifespan of 50 years each. In addition we have agreed to invest a minimum of $314.85 million on fixed asset investments with respect to such land use rights. We have built four factory buildings and an office building totaling a gross area of approximately 613,457 square feet. Included in the 613,457 square feet is approximately 54,820 square feet of employee housing and a new building being constructed with approximately 192,029 square feet of floor area. The factory buildings are being used for production, laboratories, testing and storage.

 

 

ITEM 3. LEGAL PROCEEDINGS

 

 

We are involved in certain legal proceedings that arise from time to time in the ordinary course of our business. Legal expenses associated with the contingency are expensed as incurred. Material legal proceedings that are currently pending are as follows:

 

In re Altair Nanotechnologies Securities Litigation, 1:14-cv-07828 (S.D.N.Y.): On September 26, 2014, a shareholder of the Company filed a putative class action against the Company and certain of its current and former officers and directors in the United States District Court for the Southern District of New York. An amended complaint was filed on July 21, 2015. The lawsuit alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based upon statements made between May 15, 2013 and September 4, 2014, inclusive, regarding the Company’s financial statements and internal controls.  Plaintiff sought unspecified monetary damages on behalf of the alleged class, as well as interest, and attorney’s fees and costs of litigation. On November 30, 2015, the parties executed a Stipulation of Settlement, without defendants admitting liability.  Pursuant to the Stipulation of Settlement, in exchange for a release from liability, defendants agreed to pay $1.5 million to be distributed among the putative class members in a manner determined by the Court.  In December 2015, the Company accrued $600,000 for the remainder of the insurance policy deductible and paid the liability in April 2016. The Court approved the settlement and dismissed the action on June 17, 2016.

 

 

In re Altair Nanotechnologies Shareholder Derivative Litigation, 1:14-cv-09418, 1:14-cv-09958 (S.D.N.Y.): In late 2014, two shareholder derivative actions were filed against certain current and former officers and directors of the Company in the United States District Court for the Southern District of New York.  Altair was named as a nominal defendant. The two cases, which were consolidated on May 15, 2015, allege violations of Section 14(a) of the Securities Exchange Act of 1934, as well as breaches of fiduciary duty and unjust enrichment based on substantially the same facts underlying the putative securities litigation. In July 2016, certain parties executed a stipulation of settlement, without defendants admitting liability, whereby Altair agreed to adopt certain governance proposals and pay an amount not exceeding $150,000 in plaintiffs’ attorneys’ fees and expenses. The court entered an order preliminarily approving the settlement on August 22, 2016, and has scheduled a settlement hearing for January 9, 2017.  If the settlement receives final approval, this action will be dismissed in its entirety.  Notice of the proposed settlement is available on Altair’s website.  A summary notice has also been published online.   

 

In the Matter of Altair Nanotechnologies, Inc. (LA-4452): In or around January 2015, SEC opened an investigation into the resignation of Crowe Horwath LLP (“Crowe”) as Altair’s independent auditor in August 2014.  As part of its investigation, the SEC issued several subpoenas to the Company and its current and former officers relating to Crowe’s resignation and a Form 8-K filed by the Company on March 13, 2015.  On May 4, 2016, the SEC sent Altair a Wells Notice identifying possible violations of Sections 13(a) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 thereunder.  On August 29, 2016, the Company made an offer of settlement to the SEC whereby it consented to the entry of an order, without admitting or denying the findings therein except as to the SEC’s jurisdiction, that the Company:  (i) cease and desist from committing or causing violations of Sections 13(a) and 13(b)(2)B) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; (ii) make certain filings with the SEC by November 15, 2016 or have the registration of its securities under the Exchange Act revoked; and (iii) pay a civil money penalty in the amount of $250,000 within 10 days of the entry of the order.  Such offer of settlement was accepted by the SEC and resulted in a Release No. 78997 dated September 29, 2016 with respect to the same. In August 2016, the Company accrued $250,000 and deposited the funds into escrow which was paid from escrow to the SEC in October 2016.

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

  

PART II

 

ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Price

 

Our shares of common stock are currently traded on the OTCBB. On September 15, 2014, we notified the Nasdaq Stock Market that the Company is withdrawing the listing of its common stock, $.001 par value, from the Nasdaq Stock Market. After this date, our stock traded on the OTCBB under the symbol "ALTI."  The following table sets forth, during the periods indicated, the high and low sales prices for our shares of common stock, as reported on our principal trading market.

 

 

 

Fiscal Year Ended December 31, 2016		Low				High
1st Quarter		$	0.50			$	0.50
2nd Quarter		$	0.15			$	0.15
3rd Quarter		$	0.13			$	0.25

 

Fiscal Year Ended December 31, 2015		Low				High
1st Quarter		$	0.52			$	0.65
2nd Quarter		$	0.90			$	0.90
3rd Quarter		$	0.20			$	0.40
4th Quarter		$	0.03			$	0.03

 

Fiscal Year Ended December 31, 2014		Low				High
1st Quarter		$	4.36			$	4.47
2nd Quarter		$	3.35			$	3.66
3rd Quarter		$	0.60			$	0.74
4th Quarter		$	1.00			$	1.20

 

Fiscal Year Ended December 31, 2013		Low				High
1st Quarter		$	2.60			$	2.84
2nd Quarter		$	2.20			$	2.40
3rd Quarter		$	2.55			$	2.60
4th Quarter		$	3.88			$	4.09

 

Fiscal Year Ended December 31, 2012		Low				High
1st Quarter		$	3.61			$	3.81
2nd Quarter		$	3.00			$	3.24
3rd Quarter		$	4.20			$	4.74
4th Quarter		$	2.03			$	2.15

 

 

Outstanding Shares and Number of Shareholders

 

As of November 15, 2016, the number of shares of common stock outstanding was 11,606,735 held by approximately 361 holders of record.  

 

Dividends

 

We do not anticipate paying dividends in the foreseeable future and currently intend to retain any future earnings to support the development and expansion of our business. The declaration and payment of dividends is subject to the discretion of our board of directors and to certain limitations imposed under Nevada statutes. The timing, amount and form of dividends, if any, will depend upon, among other things, our results of operation, financial condition, cash requirements, and other factors deemed relevant by our board of directors.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

We have stock option plans administered by the Compensation Committee of our Board of Directors that provide for the granting of options to employees, officers, directors and other service providers of the Company.  Security holders have approved all option plans.  See Note 13 to our consolidated financial statements contained elsewhere herein this Form 10-K. In addition, as of the same date, we have reserved 330,555 shares of common stock for issuance upon exercise of options that have been, or may be, granted under our employee stock option plans and 412,776 shares of common stock for issuance upon exercise of outstanding warrants.

 

 

Recent Sales of Unregistered Securities

 

Except as previously reported, we did not sell any securities in transactions that were not registered under the Securities Act during the years ended December 31, 2015, 2014 and 2013.

 

Transfer Agent and Registrar

 

The Transfer Agent and Registrar for our shares of common stock is Computershare, 8742 Lucent Boulevard, Suite 225, Highlands Ranch, CO 80129.

 

 

ITEM 6.     Selected Financial Data.

 

Smaller reporting companies are not required to provide the information required by this item.

 

 

 

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this Comprehensive Report on Form 10-K (this “Comprehensive Report”).

 

This Comprehensive Report contains various forward-looking statements. Such statements can be identified by the use of the forward-looking words “anticipate,” “estimate,” “project,” “likely,” “believe,” “intend,” “expect,” or similar words. These statements discuss future expectations, contain projections regarding future developments, operations, or financial conditions, or state other forward-looking information. When considering such forward-looking statements, you should keep in mind the risk factors noted under “Risk Factors” above under Item 1A and other cautionary statements throughout this Comprehensive Report and our other filings with the SEC. You should also keep in mind that all forward-looking statements are based on management’s existing beliefs about present and future events outside of management’s control and on assumptions that may prove to be incorrect. If one or more risks identified in this Comprehensive Report or any other applicable filings materializes, or any other underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected, or intended.

 

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.

 

Overview

 

We are a Delaware corporation that develops, manufactures and sells nano lithium titanate batteries and energy storage systems. Our nano lithium titanate battery systems offer higher power density, longer cycle life, rapid charge and discharge capabilities, a wider operating temperature range and higher levels of safety than conventional lithium-ion batteries. We target applications that effectively utilize the key attributes of our technology, and these applications can be found primarily in the electric grid, transportation (commercial vehicles), and industrial market segments.

 

In April 2012, we formed Altair Nanotechnologies (China) Co., Ltd. (“Altair China”) and Northern Altair Nanotechnologies Co., Ltd. (“Northern Altair”) in order to aggregate key elements of our supply chain and expand into the Chinese market. In January 2014, our Board of Directors approved plans to consolidate all U.S. manufacturing operations and transition manufacturing to Wu’an, China. We plan to continue to retain engineering, research and development, sales and marketing, and support capabilities in the U.S. Effective in early 2016, the majority of our principal assets and operations are now located in China.

 

 

In 2013, we transferred the production of our nLTO material to the New Energy Industrial Park in Wu’an city, Hebei province, China. We built, installed and further improved the manufacturing of our nLTO. In 2013, a 150 metric ton per year manufacturing line was completed and put into production as our phase one nLTO production line. In the same year, to meet the high demand of Lithium batteries in the China market, we completed the business process of sourcing the equipment to be procured for the phase two nLTO production line, under the joint efforts of the Altair U.S. and Altair China teams. This nLTO line was put into production in fourth quarter of 2015 and has reached an annual production capacity of 2,250 metric tons during 2016, with an expected annual capacity of 3,000 metric tons. We built a phase three nLTO production line and it was completed and installed in the fourth quarter of 2016 with an annual production capacity of 3,500 metric tons.

 

In January 2014, our Board of Directors approved plans to consolidate all U.S. manufacturing operations and transition manufacturing to Wu’an, China. We plan to continue to retain engineering, research and development, sales and marketing, and support capabilities in the U.S. The majority of our principal assets and operations are now located in China.

 

In 2014, in order to further cut the cost of our products, improve product chain management efficiencies, and effectively serve the large market in China, we built two battery module production lines with a total capacity of approximately 6,000 modules per year. In the first quarter of 2016, we transferred the U.S. module production line to China. We are expecting the three battery module production lines to reach a total capacity of 9,000 modules per year during the fourth quarter of 2016.

 

We have completed the technology and production validation of our Gen 4 modules with China produced nLTO and China made module parts. The Gen 2 modules will still be available in 2016. Both Gen 2 and Gen 4 products have passed the United Nations (“UN”), International Standards Organization (“ISO”), SAE International (“SAE”) and International Electrochemical Commission (“IEC”) testing and reports are being generated by TÜV SÜD (“TUV”). TUV, a German based company, has a test facility in China and results are generally accepted by the UN and U.S. In December 2015, our battery module production line in the U.S. was discontinued. We were able to maintain a very stable period of time overlapping production while transferring the battery module production from the U.S. to China, without any impact on customer order delivery. Our battery modules have been generally used in EV Buses, trolley buses and hoisting equipment in the Europe and the U.S markets. Our OEM cell producer’s capacity can reach 70,000 Altair format cells per year. Sometime in the near future, we expect to validate another OEM cell producer to reduce dependency on one supplier, which will provide competition between suppliers and reduce costs for Altair.

 

We plan on building and validating ALTI-ESS production capabilities in China and export them to Europe, the U.S. and to other countries of the world.

 

We now have a battery management system (“BMS”) distribution center in Europe to provide improved efficiency and timely delivery of our supply of the BMS units to our European customers. Our BMS supplier has a production base in China, which we believe will meet the demand of the China market.

 

By building manufacturing and assembly facilities in Wu’an, China for our nLTO material, battery cells and modules, and soon our energy storage systems, we have centered the whole supply chain in China. In adopting this strategy, we expect to significantly reduce costs, shorten lead times, reduce cash flow pressures, improve the quality and production management efficiency and increase our profit.

 

Critical Accounting Policies

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to inventories, financial guaranty, long term payable, refundable security deposit, income taxes, accounts receivable allowance, fair value of derivatives, stock based compensation and reserve for warranty claims. We base our estimates on historical experience, performance metrics and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates under different assumptions or conditions.

 

 

Our significant accounting policies are discussed in Note 3, Summary of Significant Accounting Policies, to the Notes to Consolidated Financial Statements included elsewhere in this Comprehensive Report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the audit committee of our board of directors.

 

Foreign Currency Translation and Transactions

 

The consolidated financial statements are presented in U.S. Dollars. The functional currency for the subsidiaries in China is the Chinese Yuan or RMB. Assets and liabilities are translated to the reporting currency at exchange rates on the balance sheet dates, revenue and expenses are translated at average exchange rates during the period, and equity accounts are translated at historical exchange rates. Any resulting translation adjustments are not included in determining net income (loss) but are included in other comprehensive income (loss). Gains or losses on transactions denominated in a currency other than the subsidiaries’ functional currency which arise as a result of changes in foreign exchange rates are recorded as foreign exchange gain or loss in the statements of operations.

 

Inventory

 

The Company values its inventories generally at the lower of cost or market price. Market price is based on estimated selling prices less any further costs expected to be incurred for completion and disposal.

 

For the U.S. operations, the cost of raw materials and finished goods is determined on a first-in, first-out method and finished goods is comprised of direct materials, direct labor and an appropriate proportion of overhead.

 

For the China operations, the cost of nLTO materials is determined on a weighted average method and finished goods is comprised of direct materials, direct labor and an appropriate proportion of overhead.

 

The allocation of fixed and variable overhead is reviewed every three months and are recorded to inventory based on normal capacity.

 

Inventory reserves are provided to cover risks arising from slow-moving items. The Company writes down the inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. Any idle facility costs or excessive spoilage are recorded as current period charges.

 

 

Long-Lived Assets

 

The Company evaluates the carrying value of its long-lived assets whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable.  The carrying value of long-lived assets are considered impaired when the total projected undiscounted cash flows expected to be generated by the asset are less than the carrying value.  The Company’s estimates of cash flows are based on the information available at the time including the following:  internal budgets; sales forecasts; customer trends; anticipated production volumes; and market conditions over an estimate of the remaining useful life of the asset which may range from 3 to 10 years for most equipment and up to 30 years for building and related building improvements.  If impairment is indicated, the asset value is written down to its estimated fair value. Events or circumstances that could indicate the existence of a possible impairment include obsolescence of the technology, an absence of market demand for the product or the assets used to produce it, a history of operating or cash flow losses and/or the partial or complete lapse of technology rights protection.

 

Included in general and administrative expenses during the year ended December 31, 2015 is an impairment charge of $0.65 million related to the write-down to fair market value for an asset that was leased to a customer under an operating lease. The asset was sold at a lower price than net book value in January 2016. No impairment was recognized for the year ended December 31, 2014, 2013, and 2012.

 

 

Property, plant and equipment

 

Property, plant and equipment held and used and held and not used are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the following useful lives: 

 

Building and improvements (years)	20	-	30
Machinery and equipment (years)	5	-	10
Furniture, office equipment and others (years)	3	-	7
Leased asset (years)		10

 

Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. Construction in progress is related to the construction or development of property (including land) and equipment that have not yet been placed in service for our intended use. Depreciation for equipment commences once it is placed in service and depreciation for buildings and leasehold improvements commences once they are ready for our intended use. Land is not depreciated. Construction in progress represents capital expenditures for direct costs of construction or acquisition and design fees incurred, and the interest expenses directly related to the construction. Capitalization of these costs ceases and the construction in progress is transferred to the appropriate category of property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. Construction in progress is not depreciated.

 

Impairment

 

During the year ended December 31, 2015, the Company incurred an impairment of $0.65 million related to the write-down to fair market value for an asset that was leased to a customer under an operating lease. The asset was sold at a lower price than net book value in January 2016. No impairment was recognized upon estimations for the years ended December 31, 2014 and 2013.

 

Patents

 

Patents are related to the Company’s nanoparticle production technology and stated at cost less accumulated amortization. Amortization is recorded using the straight-line method.

 

Land use rights

 

Land use rights are stated at cost less accumulated amortization.  Amortization is recorded using the straight-line method over their 50 year useful lives. All land in China is owned by the Chinese government. The government in China, according to law, may sell the right to use the land for a specified period of time. Thus, all of the Company’s land purchases in China are considered to be leasehold land under lease and are stated at cost less accumulated amortization and any recognized impairment loss.

 

Revenue Recognition 

 

The Company generates its revenues primarily from four sources; (1) nLTO related product sales, (2) Energy storage systems (referred to as “ESS” or by our brand name “ALTI-ESS”), (3) Collaborations and (4) License fees. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or service has been performed, the fee is fixed and determinable, and collectability is reasonably assured.

 

Revenue from nLTO related product sales, commercial collaborations and license fees is recognized upon delivery of the product, unless specific contractual terms dictate otherwise.

 

Revenue from ESS projects is recognized using the Completion Method under the long-term contract accounting. The Company recognizes the full amount of revenue from long-term contracts, defined as contracts longer than twelve months, upon completion, delivery and written acceptance received from the customer. All contract costs incurred are included in the balance sheet as deferred costs until the related revenue is recognized. At each reporting date, the Company reviews its long term contracts to determine if revenue from contracts are expected to exceed the related estimated total costs. In the cases where estimated costs will exceed revenues, the Company recognizes as an expense in cost of goods sold the full amount of the estimated costs above the contract revenue value. Cash received in advance relating to the future performance of services, deliveries of products and/or long term contracts are deferred until the performance of the service is completed, the product is shipped, and/or the contract is completed and accepted by the customer.

 

  

Grant Incentives

 

Grant incentives were obtained from the Wu’an China Government to be used for construction, purchases of equipment and other expenditures for the nLTO manufacturing facility. The amount received is included in the balance sheet as deferred income and is recognized in the statement of operations as other income over the useful life of the related assets upon placing such assets into service. In all cases, grants are recognized as other income when there is a reasonable assurance that the Company has complied with the conditions attaching to them.

 

Comprehensive Income (Loss)

 

Recognized revenue, expenses, gains and losses are included in net income or loss. Although certain changes in assets and liabilities are reported as separate components of the equity section of the consolidated balance sheet, such items, along with net income or loss, are components of comprehensive income or loss. The components of other comprehensive income or loss are consisted solely of foreign currency translation adjustments.

 

Net Loss per Common Share

 

Basic loss per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and potentially dilutive shares outstanding during the period.  Potentially dilutive shares consist of the incremental shares of common stock issuable upon the exercise of stock options and warrants.  Potentially dilutive shares are excluded from the computation if their effect is anti-dilutive. The Company had a net loss for all periods presented herein; therefore, none of the stock options and warrants outstanding during each of the periods presented were included in the computation of diluted loss per share as they were anti-dilutive. Stock options and warrants can exercise a total amount of common stock for 445,820, 455,979, 459,423 and 667,745 shares as of December 31, 2015, 2014, 2013 and 2012, respectively, were excluded from the calculations of diluted loss per share.

 

 

Income Taxes 

 

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted.

 

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and the Company’s experience with similar operations. Existing favorable contracts and the ability to sell products into established markets are additional positive evidence. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances, resulting in a future charge to establish a valuation allowance.

 

Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitation has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized. The Company is no longer subject to income tax examinations by tax authorities for years prior to 2009.

 

 

Segment reporting

 

Segment information is consistent with how chief operating decision maker reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. Transfers and sales between reportable segments, if any, are recorded at cost.

 

The Company reported financial and operating information in the following two segments as of December 31, 2012:

 

(a)	Power and Energy Group (PEG) segment — The PEG segment is the Company’s current and future focus for corporate development. The PEG segment develops, produces, and sells nLTO related battery systems & ESS systems.

 

(b)	The All Others group consists of the remaining portions of the previous Life Sciences and Performance Materials groups.

 

As of September 30, 2013, Chief Operating Decision Maker decided to combine both segments into the PEG segment because resource allocation and performance assessment would be concentrated as one operating level.

 

Litigation Matters

 

For asserted claims and assessments, liabilities are recorded when an unfavorable outcome of a matter is deemed to be probable and the loss is reasonably estimable. Management determines the likelihood of an unfavorable outcome based on many factors such as the nature of the matter, available defenses and case strategy, progress of the matter, views and opinions of legal counsel and other advisors, applicability and success of appeals processes, and the outcome of similar historical matters, among others. Once an unfavorable outcome is deemed probable, management weighs the probability of estimated losses, and the most reasonable loss estimate is recorded. If an unfavorable outcome of a matter is deemed to be reasonably possible, but not probable, then the matter is disclosed and no liability is recorded. With respect to unasserted claims or assessments, management must first determine that the probability that an assertion will be made is likely, then, a determination as to the likelihood of an unfavorable outcome and the ability to reasonably estimate the potential loss is made. Legal matters are reviewed on a continuous basis to determine if there has been a change in management’s judgment regarding the likelihood of an unfavorable outcome or the estimate of a potential loss.

 

Accrued Warranty Expense

 

The Company’s U.S operation provides a three-year limited warranty for battery packs and energy storage systems sold. While the Company’s China operation offers a limited one-year warranty on energy storage systems. A liability is recorded for estimated warranty obligations at the date products are sold.  The estimated cost of warranty coverage is based on historical experience with cell and module life cycle testing.  As additional actual historical data is collected on the new product, the estimated cost of warranty coverage will be adjusted accordingly.  The liability for estimated warranty obligations may also be adjusted based on specific warranty issues identified.  

 

Results of Operations

 

The following summarizes our revenue, operating expenses, and net loss for all periods presented below. You should read the following in conjunction with our consolidated financial statements, including quarterly information, presented elsewhere in this Comprehensive Report. The Power and Energy Group develops, produces, sells battery systems and nLTO materials.  The All Others group consists of the remaining portions of the previous Life Sciences and Performance Materials groups.  At the end of 2012, Management completed a thorough review of operations and strategies and determined that it was in the best interests of the shareholders of the Company to focus primarily on the Power and Energy Group.  As a result of this assessment resources devoted to the Performance Materials Group and Life Sciences Group were considerably reduced and no new development is being pursued in those areas by the Company.

 

 

The table below sets forth line items from the Company’s audited consolidated Statements of Operations (in thousands):

 

		Years Ended December 31,
		2015				2014				Inc. (Dec.)				Percentage Inc. (Dec.)
Revenues		$	14,278			$	6,744			$	7,534				112	%
Cost of goods sold			14,034				6,620				7,414				112	%
Gross profit			244				124				120				97	%
Operating expenses
Research and development			808				1,084				(276	)			-25	%
Sales and marketing			862				631				231				37	%
General and administrative			11,709				8,129				3,580				44	%
Depreciation and amortization			1,560				1,850				(290	)			-16	%
Loss on disposal of assets			142				92				50				54	%
Impairment expense			652				-				652				100	%
Total operating expenses			15,733				11,786				3,947				33	%
Loss from operations			(15,489	)			(11,662	)			(3,827	)			33	%
Other (expense) income
Interest (expense), net			(2,533	)			(6,142	)			3,609				-59	%
Change in fair value of warrants			5				344				(339	)			-99	%
Gain on foreign exchange			1				15				(14	)			-93	%
Other income-buses			11,419				28,275				(16,856	)			-60	%
Other expenses-buses			(13,548	)			(27,545	)			13,997				-51	%
Other income			639				764				(125	)			-16	%
Total other (expense) income			(4,017	)			(4,289	)			272				-6	%
Net loss		$	(19,506	)		$	(15,951	)		$	(3,555	)			22	%

 

 

Year Ended December 31, 2015 compared with Year Ended December 31, 2014

 

Revenues: The consolidated revenues for the year ended December 31, 2015 were $14.28 million, an increase of $7.54 million or 112% from $6.74 million for the year ended December 31, 2014. The increase was primarily related to China operations which is caused by a significant increase in sales of nLTO materials to related parties. The U.S. operation revenue increased minimally by $1.79 million due to recognition of a long term project, offset by lower sales of nLTO related product.

 

Cost of goods sold: The consolidated costs of goods sold for the year ended December 31, 2015 was $14.03 million, an increase of $7.41 million or 112% from $6.62 million for the year ended December 31, 2014. The increase was primarily related to $6.20 million increase in China operations due to the increased sales of nLTO. The cost of goods sold in the U.S. operations increased by $1.21million mainly due to the recognition of deferred costs associated with the completion of a long term project and offset by lower product costs as a result of lower product sales.

 

Research and development: The consolidated research and development costs decreased by $0.27 million, or 25%, to $0.81 million for the year ended December 31, 2015 from $1.08 million for the year ended December 31, 2014. The decrease was related mainly to lower salaries and benefits expense due to lower headcount at our U.S. facilities.

 

 

Sales and marketing: The consolidated sales and marketing expenses increased by $0.23 million, or 37%, to $0.86 million for the year ended December 31, 2015 from $0.63 million for the year ended December 31, 2014. The increase was mainly attributable to the China operations which sales and marketing expenses increased by $0.27 million. The increase was primarily caused by advertising expenses due to expansion in marketing activities during the year ended December 31, 2015. The sales and marketing expense in the U.S. operations decreased by $0.04 million due to lower headcount in the sales team as we shifted our operation focus to China.

 

General and administrative: The consolidated general and administrative expenses increased $3.58 million, or 44%, to $11.71 million for the year ended December 31, 2015 from $8.13 million for the year ended December 31, 2014. The increase was attributable to the China operations which general and administrative expenses increased by $3.63 million due to increased headcount in China and increased legal fees due to a SEC investigation and other litigations. The general and administrative expense in the U.S. operations decreased by $0.05 million due to the net effect of lower operating expenses as we shifted our operation focus to China.

 

Depreciation and amortization: The consolidated depreciation and amortization decreased by $0.29 million, or 16%, to $1.56 million in 2015 from $1.85 million in 2014. The decrease was primarily related to the portion of fixed assets that were fully depreciated and the fixed assets scrapped during the year ended December 31, 2014.

 

(Gain) loss on disposal of fixed assets: The consolidated loss on disposal of fixed assets increased by $0.05 million, or 54%, to $0.14 million in 2015 from $0.09 million in 2014. This was primarily due to less proceeds received on the fixed assets sold in the U.S. during the year ended December 31, 2015 compared to the same period in 2014.

 

Impairment: The Company incurred $0.65 million of impairment expense related to the write-down to fair market value for an asset during the year ended December 31, 2015 that was leased to a customer under an operating lease in January 2016. No impairment incurred during the year ended December 31, 2014.

 

Interest (expense), net: The consolidated interest (expense), net decreased to $2.53 million for the year ended December 31, 2015 from $6.14 million for the year ended December 31, 2014, a decrease of $3.61 million or 59%. The decrease was mainly attributable to the China operations which interest expense decreased by $3.54 million due to the aggregate payoff of $21.00 million outstanding loan and the capitalization of interest during the construction period of new fixed assets. The interest expense in the U.S. operations also decreased by $0.07 million due to lower loan balances.

 

Change in fair value of warrants: The value of warrants that were previously issued were re-measured at the end of every reporting period with the change in fair value recognized as a gain or loss in our statement of operations. During the years ended December 31, 2015 and 2014, the Company recorded a gain of $5 thousand and $344 thousand, respectively, due to the change in the fair value of the warrants.

 

Gain (loss) on foreign exchange: Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency were $1 thousand and $15 thousand during the years ended December 31, 2015 and 2014, respectively.

 

Other income - buses: Other income - buses decreased to $11.42 million in 2015 from $28.28 million in 2014, a decrease of $16.86 million or 60%. The decrease was mainly due to the number of buses sold decreased to 75 during the year ended December 31, 2015 from 153 during the same period in 2014.

 

Other expenses - buses: Other expenses - buses decreased to $13.55 million in 2015 from $27.55 million in 2014, a decrease of $14.00 million or 8%. The decrease was contributed by $9.20 million decrease in bus cost by 75 buses sold and $4.80 million decrease in other expenses related to buses during the year ended December 31, 2015 compared to same period in 2014.

 

Other income: Other income amounted to $0.64 million and $0.76 million for the years ended December 31, 2015 and 2014, respectively, a decrease of $0.12 million or 16%. The decrease was mainly due to the derecognition of an accrued liability that resulted in a gain in 2014. No similar event occurred in 2015.

 

Net loss: Net loss increased by $3.56 million, or 22%, to $19.51 million in 2015 from $15.95 million in 2014. The increase in net loss was driven by an increase of $3.95 million in total operating expenses during the year ended December 31, 2015 compared to same period in 2014.

 

 

The table below sets forth line items from the Company’s unaudited consolidated Statements of Operations (in thousands):

 

		Three Months Ended September 30,																Nine Months Ended September 30,
		2015				2014				Inc. (Dec.)				Percentage Inc. (Dec.)				2015				2014				Inc. (Dec.)				Percentage Inc. (Dec.)
Revenues		$	1,708			$	1,462			$	246				17	%		$	5,387			$	5,125			$	262				5	%
Cost of goods sold			1,481				1,754				(273	)			-16	%			4,852				5,306				(454	)			-9	%
Gross profit (loss)			227				(292	)			519				-178	%			535				(181	)			716				-396	%
Operating expenses
Research and development			218				245				(27	)			-11	%			590				904				(314	)			-35	%
Sales and marketing			294				151				143				95	%			670				387				283				73	%
General and administrative			3,064				1,850				1,214				66	%			7,755				5,558				2,197				40	%
Depreciation and amortization			370				436				(66	)			-15	%			1,186				1,436				(250	)			-17	%
Loss (gain) on disposal of assets			-				(23	)			23				-100	%			-				82				(82	)			-100	%
Total operating expenses			3,946				2,659				1,287				48	%			10,201				8,367				1,834				22	%
Loss from operations			(3,719	)			(2,951	)			(768	)			26	%			(9,666	)			(8,548	)			(1,118	)			13	%
Other (expense) income
Interest (expense), net			(290	)			(2,031	)			1,741				-86	%			(1,886	)			(4,342	)			2,456				-57	%
Change in fair value of warrants			-				208				(208	)			-100	%			5				349				(344	)			-99	%
Gain on foreign exchange			1				-				1				100	%			-				15				(15	)			-100	%
Other income-buses			1,981				3,317				(1,336	)			-40	%			11,519				3,317				8,202				247	%
Other expenses-buses			(1,847	)			(4,852	)			3,005				-62	%			(13,666	)			(4,852	)			(8,814	)			182	%
Other income			131				146				(15	)			-10	%			495				511				(16	)			-3	%
Total other expense			(24	)			(3,212	)			3,188				-99	%			(3,533	)			(5,002	)			1,469				-29	%
Net loss		$	(3,743	)		$	(6,163	)		$	2,420				-39	%		$	(13,199	)		$	(13,550	)		$	351				-3	%

 

 

Three Months Ended September 30, 2015 compared with the Three Months Ended September 30, 2014

 

Revenues: The consolidated revenues for the three months ended September 30, 2015 were $1.71 million, an increase of $0.25 million, or 17% from $1.46 million for the three months ended September 30, 2014. The increase was primarily due to the operations in China which revenues increased by $0.18 million due to an increase in sales of nLTO materials to related parties. The revenues of the U.S. operations increased by $0.07 million due to increased license fees offset by lower sales of nLTO related product during the three months ended September 30, 2015.

 

Cost of goods sold: The consolidated costs of goods sold for the three months ended September 30, 2015 was $1.48 million, a decrease of $0.27 million or 16% from $1.75 million for the three months ended September 30, 2014. The decrease of $0.14 million in the China operations is due to the lower unit cost from increased production level. The cost of goods sold in the U.S. operations decreased by $0.13 million due to reduced module sales and no cost associated with the increased portion of revenues in license fees during the three months ended September 30, 2015 as compared to the same period in prior year.

 

Research and development: The consolidated research and development costs decreased by $0.03 million, or 11%, to $0.22 million for the three months ended September 30, 2015 from $0.25 million for the three months ended September 30, 2014. The decrease was related mainly due to lower salaries and benefits due to lower headcount at our U.S. facilities.

 

 

Sales and marketing: The consolidated sales and marketing expenses increased by $0.14 million, or 95%, to $0.29 million for the three months ended September 30, 2015 from $0.15 million for the three months ended September 30, 2014. The increase was mainly attributable to the China operations which sales and marketing expenses increased by $0.14 million. The increase was primarily caused by advertising expenses due to expansion in marketing activities during the three months ended September 30, 2015. The sales and marketing expense in the U.S. operations decreased insignificantly.

 

General and administrative: The consolidated general and administrative expenses increased by $1.21 million, or 66%, to $3.06 million for the three months ended September 30, 2015 from $1.85 million for the three months ended September 30, 2014. The increase was attributable to the China operations which general and administrative expenses increased by $1.33 million due to increased headcount in China. The general and administrative expense in the U.S. operations decreased by $0.12 million mainly due to scaled back operation activities as we shifted our operation focus to China.

 

Depreciation and amortization: The consolidated depreciation and amortization decreased by $0.07 million, or 15%, to $0.37 million for the three months ended September 30, 2015, from $0.44 million for the three months ended September 30, 2014. The decrease was primarily related to the portion of fixed assets that were fully depreciated in 2014.

 

Gain on disposal of fixed assets: The consolidated gain on disposal of fixed assets decreased by $0.02 million, or 100%, to nil for the three months ended September 30, 2015 from $0.02 million for the three months ended September 30, 2014. The Company did not sell any fixed assets during the three months ended September 30, 2015 while during the same period in 2014, the Company received proceeds for the fixed assets sold.

 

Interest (expense), net: The consolidated Interest (expense), net decreased to $0.29 million for the three months ended September 30, 2015, from $2.03 million for the three months ended September 30, 2014, a decrease of $1.74 million or 86%. The decrease was mainly attributable to the China operations which interest expense decreased by $1.72 million due to most interest expenses were capitalized during the three months ended September 30, 2015 compared to same period in 2014. The interest expense in the U.S. operations also decreased by $0.02 million due to lower loan balances during the three months ended September 30, 2015 compared to same period in 2014.

 

Interest (expense), net: The consolidated Interest (expense), net decreased to $0.29 million for the three months ended September 30, 2015, from $2.03 million for the three months ended September 30, 2014, a decrease of $1.74 million or 86%. The decrease was mainly attributable to the China operations which interest expense decreased by $1.72 million due to the capitalization of most interest expense during the three months ended September 30, 2015 compared to same period in 2014. The interest expense in the U.S. operations also decreased by $0.02 million due to lower loan balances during the three months ended September 30, 2015 compared to same period in 2014.

 

Change in fair value of warrants: During the three months ended September 30, 2015, the Company did not experience a significant change in the value of warrants outstanding that were previously issued mainly due to the decrease in the stock price. During the three months ended September 30, 2014, the Company recorded a gain of $0.21 million due to the change in the fair value for warrants outstanding.

 

Gain on foreign exchange: Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency was $1 thousand and nil for the three months ended September 30, 2015 and 2014.

 

Other income - buses: Other income - buses decreased to an income of $1.98 million for the three months ended September 30, 2015 from an income of $3.32 million for the three months ended September 30, 2014, a decrease of $1.34 million or 40%. The decrease was mainly due to the type of buses sold during the three months ended September 30, 2015, which had lower selling price as compared to the buses sold in same period in prior year.

 

Other expenses - buses: Other expenses - buses decreased to $1.85 million for the three months ended September 30, 2015 from $4.85 million for the three months ended September 30, 2014, a decrease of $3.00 million or 62%. The decrease was contributed by $2.19 million of decrease in cost of the buses sold and $0.81 million decrease in other expenses during the three months ended September 30, 2015 compared to same period in 2014.

 

Other income: Other income amounted to $0.13 million and $0.15 million for the three months ended September 30, 2015 and 2014, respectively, a decrease of $0.02 million or 11% due to the derecognition of an accrued liability that resulted in a gain in 2014. No similar event occurred for the three months ended September 30, 2015.

 

Net loss: Net loss decreased by $2.42 million, or 39%, to $3.74 million for the three months ended September 30, 2015, from $6.16 million for the three months ended September 30, 2014. The decrease in net loss was driven by a decrease in other expenses of $3.19 million, or 99%, offset by an increase in gross margin of $0.52 million for the three months ended September 30, 2015 versus the same period in the prior year, resulting mainly from our expansion in China, coupled with an increase in operating expenses of $1.29 million or 48%.

 

 

Nine Months Ended September 30, 2015 compared with the Nine Months Ended September 30, 2014

 

Revenues: The consolidated revenues for the nine months ended September 30, 2015 increased $0.26 million, or 5%, to $5.39 million for the nine months ended September 30, 2015 from $5.13 million for the nine months ended September 30, 2014. The increase was primarily due to the operations in China which revenues increased by $0.53 million due to an increase in sales of nLTO materials during the nine months ended September 30, 2015 as compared to the same period in the prior year. The revenues of the U.S. operations decreased by $0.27 million due to decrease in product sales during the nine months ended September 30, 2015.

 

Cost of goods sold: The consolidated costs of goods sold for the nine months ended September 30, 2015 was $4.85 million, a decrease of $0.46 million or 9% from $5.31 million for the nine months ended September 30, 2014. The cost of goods sold in the U.S. operations decreased by $1.05 million due to lower product sales, offset by an increase of $0.59 million in the China operations due to an increase in sales of nLTO materials during the nine months ended September 30, 2015 as compared to the same period in prior year.

 

Research and development: The consolidated research and development costs decreased by $0.31 million, or 35%, to $0.59 million for the nine months ended September 30, 2015 from $0.90 million for the nine months ended September 30, 2014. The decrease was related mainly to lower salaries and benefits driven by decreased headcount in the U.S.

 

Sales and marketing: The consolidated sales and marketing expenses increased by $0.28 million, or 73%, to $0.67 million for the nine months ended September 30, 2015 from $0.39 million for the nine months ended September 30, 2014. The increase was mainly attributable to the China operations by $0.33 million which is primarily due to the advertising expenses due to expansion in marketing activities during the nine months ended September 30, 2015. The sales and marketing expenses in the U.S. operation’s decreased by $0.05 million due to lower headcount of the sales team as we shifted our operation focus to China.

 

General and administrative: The consolidated general and administrative expenses increased by $2.20 million, or 40%, to $7.76 million for the nine months ended September 30, 2015 from $5.56 million for the nine months ended September 30, 2014. The increase was attributable to the China operations which general and administrative expenses increased by $2.13 million due to increased headcount and increase legal expenses related to SEC matters and other litigations. The general and administrative expense in the U.S. operations increased by $0.07 million mainly due to due to higher professional fees related to regulatory filings and offset by decrease in other general and administrative expenses due to scaled back operation activities as we shifted our operation focus to China.

 

Depreciation and amortization: The consolidated depreciation and amortization decreased by $0.25 million, or 17%, to $1.19 million for the nine months ended September 30, 2015 from $1.44 million for the nine months ended September 30, 2014. The decrease was primarily related to the portion of fixed assets that were fully depreciated and the fixed assets sold in 2014.

 

Loss on disposal of fixed assets: The consolidated loss on disposal of fixed assets decreased by $0.08 million, or 100%, to nil from $0.08 million for the nine months ended September 30, 2015 and 2014, respectively. The Company did not sell any fixed assets sold during the nine months ended September 30, 2015 while incurring losses on the fixed assets sold during the nine months ended September 30, 2014.

 

Interest (expense), net: The consolidated interest (expense), net decreased to $1.89 million for the nine months ended September 30, 2015, from $4.34 million for the nine months ended September 30, 2014, a decrease of $2.45 million or 57%. The decrease was mainly attributable to the China operations which interest expense decreased by $2.42 million due to capitalization of most interest expenses as a result of construction being in progress during the nine months ended September 30, 2015. The interest expense in the U.S. operations also decreased by $0.03 million due to lower loan balances.

 

 

Change in fair value of warrants: During the nine months ended September 30, 2015 and 2014, the Company recorded a gain of $5 thousand and $349 thousand, respectively, due to the change in the fair value of warrants outstanding that were previously issued.

 

Gain on foreign exchange: Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency were nil for the nine months ended September 30, 2015 compared to a gain of $0.02 million for the nine months ended September 30, 2014.

 

Other income - buses: Other income - buses increased to $11.52 million from $3.32 million for the nine months ended September 30, 2015 and 2014, respectively, an increase of $8.20 million or 247%. This was due to 75 buses sold during the nine months ended September 30, 2015 compared to 20 buses sold in the same period in prior year.

 

Other expenses - buses: Other expenses - buses increased to $13.67 million from $4.85 million for the nine months ended September 30, 2015 and 2014, respectively, an increase of $8.82 million or 182%, which included an increase in cost of the buses as 55 more buses were sold and other expenses during the nine months ended September 30, 2015 compared to same period in 2014.

 

Other income: Other income amounted to $0.50 million and $0.51 million for the nine months ended September 30, 2015 and 2014, a decrease of $0.01 million or 3%. The consolidated other income mainly consisted of grant incentives received and recognized as other income during the nine months ended September 30, 2015. During the nine months ended September 31, 2014, the Company derecognized an accrued liability that resulted in gain, no similar event occurred in the same period of 2015.

 

Net loss: Net loss decreased by $0.35 million, or 3%, to $13.20 million for the nine months ended September 30, 2015, from $13.55 million for the nine months ended September 30, 2014. The decrease in net loss was driven by a decrease in other expenses of $1.47 million, or 29%, as well as by improvement in gross margin of $0.72 million during the nine months ended September 30, 2015 compared to same period in 2014. This was offset by an increase in operating expenses of $1.83 million, or 22%, for the nine months ended September 30, 2015 as compared to the same period in the prior year, resulting mainly from additional costs incurred due to our expansion in China.

 

 

The table below sets forth line items from the Company’s unaudited consolidated statements of operations (in thousands):

 

		Three Months Ended June 30,																Six Months Ended June 30,
		2015				2014				Inc. (Dec.)				Percentage Inc. (Dec.)				2015				2014				Inc. (Dec.)				Percentage Inc. (Dec.)
Revenues		$	1,832			$	1,874			$	(42	)			-2	%		$	3,679			$	3,663			$	16				0	%
Cost of goods sold			1,263				1,545				(282	)			-18	%			3,371				3,552				(181	)			-5	%
Gross profit			569				329				240				73	%			308				111				197				177	%
Operating expenses
Research and development			161				233				(72	)			-31	%			372				659				(287	)			-44	%
Sales and marketing			242				116				126				109	%			376				236				140				59	%
General and administrative			2,273				1,569				704				45	%			4,691				3,708				983				27	%
Depreciation and amortization			410				506				(96	)			-19	%			816				1,000				(184	)			-18	%
Gain on disposal of assets			-				(5	)			5				-100	%			-				105				(105	)			-100	%
Total operating expenses			3,086				2,419				667				28	%			6,255				5,708				547				10	%
Loss from operations			(2,517	)			(2,090	)			(427	)			20	%			(5,947	)			(5,597	)			(350	)			6	%
Other (expense) income
Interest (expense), net			(560	)			(1,291	)			731				-57	%			(1,596	)			(2,311	)			715				-31	%
Change in fair value of warrants			(1	)			183				(184	)			-101	%			5				141				(136	)			-96	%
Gain (loss) on foreign exchange			-				-				-				0	%			(1	)			15				(16	)			-107	%
Other income-buses			9,538				-				9,538				100	%			9,538				-				9,538				100	%
Other expenses-buses			(11,819	)			-				(11,819	)			100	%			(11,819	)			-				(11,819	)			100	%
Other income			131				162				(31	)			-19	%			364				365				(1	)			0	%
Total other expense			(2,711	)			(946	)			(1,765	)			187	%			(3,509	)			(1,790	)			(1,719	)			96	%
Net loss		$	(5,228	)		$	(3,036	)		$	(2,192	)			72	%		$	(9,456	)		$	(7,387	)		$	(2,069	)			28	%

 

 

Three Months Ended June 30, 2015 compared with the Three Months Ended June 30, 2014

 

Revenues: The consolidated revenues for the three months ended June 30, 2015 decreased $0.04 million, or 2%, to $1.83 million from $1.87 million for the three months ended June 30, 2014. The decrease was primarily due to a decrease in revenue in the U.S. operations by $0.07 million which was caused by the decrease in product sales, offset by $0.03 million of increase in revenue of the China operations which was primarily due to increased sales in nLTO materials during the three months ended June 30, 2015 compared to the same period in prior year.

 

Cost of goods sold: The consolidated costs of goods sold for the three months ended June 30, 2015 was $1.26 million, a decrease of $0.29 million or 18% from $1.55 million for the three months ended June 30, 2014. The decrease was primarily due to the U.S. operations decreased by $0.45 million due to lower product sales, offset by $0.23 million of increase in the China operations which is caused by increased sales in nLTO materials during the three months ended June 30, 2015 as compared to the same period in prior year.

 

Research and development: The consolidated research and development costs decreased by $0.07 million, or 31%, to $0.16 million for the three months ended June 30, 2015 from $0.23 million for the three months ended June 30, 2014. The decrease was mainly attributable to lower salaries and benefits expense due to lower headcount in the U.S.

 

 

Sales and marketing: The consolidated sales and marketing expenses increased by $0.12 million, or 109%, to $0.24 million for the three months ended June 30, 2015 from $0.12 million for the three months ended June 30, 2014. The increase was mainly attributable to the increase of $0.14 million in China operations due to expansion in selling and marketing activities during the three months ended June 30, 2015, offset by the sales and marketing expense in the U.S. operations decreased by $0.02 million due to lower headcount of the sales team as we shifted our operation focus to China.

 

General and administrative: The consolidated general and administrative expenses increased by $0.70 million, or 45%, to $2.27 million for the three months ended June 30, 2015 from $1.57 million for the three months ended June 30, 2014. The increase was attributable to the China operations which general and administrative expenses increased by $0.52 million due to increased headcount in China. The general and administrative expenses in the U.S. operations increased by $0.18 million mainly due to higher professional fees related to regulatory filings, offset by decrease in other general and administrative expenses due to scaled back operation activities as we shifted our operation focus to China.

 

Depreciation and amortization: The consolidated depreciation and amortization decreased by $0.10 million, or 19%, to $0.41 million during the three months ended June 30, 2015 from $0.51 million for the three months ended June 30, 2014. The decrease was primarily related to the portion of fixed assets that were fully depreciated in 2014.

 

(Gain) loss on disposal of fixed assets: The consolidated gain on disposal of fixed decreased by $5 thousand, or 100%, to nil during the three months ended June 30, 2015 from $5 thousand for the three months ended June 30, 2014. The Company did not sell any fixed assets during the three months ended June 30, 2015 and received proceeds on the fixed assets sold during the three months ended June 30, 2014.

 

Interest (expense), net: The consolidated Interest (expense), net decreased to $0.56 million for the three months ended June 30, 2015, from $1.29 million for the three months ended June 30, 2014, a decrease of $0.73 million or 57%. The decrease was mainly attributable to the China operations which interest expense decreased by $0.72 million due to the capitalization of most interest expense during the construction period of new fixed assets during the three months ended June 30, 2015. The interest expense in the U.S. operations also decreased by $0.01 million due to lower loan balances.

 

Change in fair value of warrants: During the three months ended June 30, 2015, the Company did not experience a significant change in the value of warrants outstanding that were previously issued mainly due to the decrease in the stock price. During the three months ended June 30, 2015 and 2014, the Company recorded a loss of $1 thousand and a gain of $183 thousand due to the change in the fair value for warrants outstanding, respectively.

 

Gain (loss) on foreign exchange: Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency were nil for both periods of the three months ended June 30, 2015 and 2014.

 

Other income - buses: Other income - buses amounted to $9.54 million and nil for the three months ended June 30, 2015 and 2014. The increase was mainly due to 47 buses sold during the three months ended June 30, 2015 and the fact that Company did not start bus sales until the third quarter of 2014.

 

Other expenses - buses: Other expenses - buses amounted to $11.82 million and nil during the three months ended June 30, 2015 and 2014. This was due to the cost of the 47 buses sold and other expenses during the three months ended June 30, 2015. The Company did not have bus sales until the third quarter of 2014.

 

Other income: Other income amounted to $1.31 million and $1.62 million for the three months ended June 30, 2015 and 2014, a decrease of $0.31 million or 19%. The consolidated other income mainly consisted of grant incentives received and recognized as other income during the three months ended June 30, 2015. During the same period in 2014, the Company derecognized an accrued liability that resulted in a gain. No similar event occurred during the three months ended June 30, 2015.

 

Net loss: Net loss increased by $2.19 million, or 72%, to $5.23 million for the three months ended June 30, 2015, from $3.04 million for the three months ended June 30, 2014. The increase in net loss was caused mainly by $2.28 million net other expenses related to buses in the three months ended June 30, 2015.

 

 

Six Months Ended June 30, 2015 compared with the Six Months Ended June 30, 2014

 

Revenues: Total consolidated revenues for the six months ended June 30, 2015 increased $0.02 million, or 1%, to $3.68 million for the six months ended June 30, 2015 from $3.66 million for the six months ended June 30, 2014. The increase was primarily driven by the operations in China with an increase in sales of nLTO materials to related parties during the six months ended June 30, 2015 as compared to the same period in the prior year. The revenues of the U.S. operations decreased by $0.34 million due decrease in product sales during the six months ended June 30, 2015.

 

Cost of goods sold: Total consolidated costs of goods sold for the six months ended June 30, 2015 was $3.37 million, a decrease of $0.18 million or 5% from $3.55 million for the six months ended June 30, 2014. The decrease was primarily due to $0.91 million decrease in US operations due to lower product sales, offset by the increase of $0.73 million in China operations due to the increased sales of nLTO materials during the six months ended June 30, 2015.

 

Research and development: The consolidated research and development costs decreased by $0.29 million, or 44%, to $0.37 million for the six months ended June 30, 2015 from $0.66 million for the six months ended June 30, 2014. The decrease was related mainly to lower salaries and benefits driven by decreased headcount in the U.S.

 

Sales and marketing: The consolidated sales and marketing expenses increased by $0.14 million, or 59%, to $0.38 million for the six months ended June 30, 2015 from $0.24 million for the six months ended June 30, 2014. The increase was mainly attributable to the China operations which sales and marketing expenses increased by $0.19 million. The increase was primarily due to increased traveling expenses in six months ended June 30, 2014. The sales and marketing expenses in the U.S. operation’s decreased by $0.05 million due to lower headcount of the sales team as we shifted our operation focus to China.

 

General and administrative: The consolidated general and administrative expenses increased by $0.98 million, or 27%, to $4.69 million for the six months ended June 30, 2015 from $3.71 million for the six months ended June 30, 2014. The increase was attributable to the China operations which general and administrative expenses increased by $0.79 million due to increased headcount in China. The general and administrative expenses in the U.S. operations increased by $0.19 million mainly due to higher professional fees related to regulatory filings and offset by a decrease in other general and administrative expenses due to less activity.

 

Depreciation and amortization: The consolidated depreciation and amortization decreased by $0.18 million, or 18%, to $0.82 million for the six months ended June 30, 2015, from $1.00 million for the six months ended June 30, 2014. The decrease was primarily related to the portion of fixed assets that were fully depreciated and the fixed assets sold in 2014.

 

(Gain) loss on disposal of fixed assets: The consolidated loss on disposal of fixed assets decreased by $0.11 million, or 100%, to nil for the six months ended June 30, 2015 from $0.11 million for the six months ended June 30, 2014. The Company did not sell any fixed assets during the three months ended June 30, 2015 and incurred losses for the fixed assets sold during the six months ended June 30, 2014.

 

Interest expense, net: The consolidated interest expense, net decreased to $1.60 million for the six months ended June 30, 2015, from $2.31 million for the six months ended June 30, 2014, a decrease of $0.71 million or 31%. The decrease mainly resulted from China operations leading interest expense to decrease by $0.70 million as most interest expenses were capitalized during the construction period of new fixed assets during the six months ended June 30, 2015. The interest expense in the U.S. operations also decreased by $0.01 million due to lower loan balances.

 

Change in fair value of warrants: During the six months ended June 30, 2015 and 2014, the Company recorded a gain of $0.01 million and $0.14 million, respectively, due to the change in the fair value of warrants outstanding that were previously issued.

 

Gain (loss) on foreign exchange: Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency represented a loss of $0.00 million for the six months ended June 30, 2015 compared to a gain of $0.02 million for the six months ended June 30, 2014.

 

 

Other income - buses: Other income - buses amounted to $9.54 million and nil for the six months ended June 30, 2015 and 2014. The increase was mainly due to 47 buses being sold during the six months ended June 30, 2015 as the bus sales did not start until the third quarter of 2014.

 

Other expenses - buses: Other expenses - buses consisted of $11.82 million for the six months ended June 30, 2015 which included cost of the buses and other expenses during the three months ended June 30, 2015. The Company did not have any bus sale until the third quarter of 2014.

 

Other income: Other income amounted to $0.36 million and $0.37 million for the six months ended June 30, 2015 and 2014. The consolidated other income mainly consisted of grant incentives received and recognized as other income during the six months ended June 30, 2015. During the six months ended September 31, 2014, the Company derecognized an accrued liability that resulted in gain. No similar event occurred in the same period of 2015.

 

Net loss: Net loss increased by $2.07 million, or 28%, to $9.46 million for the six months ended June 30, 2015 from $7.39 million for the six months ended June 30, 2014. The increase in net loss was driven by an increase in other expenses of $1.72 million for the six months ended June 30, 2015 compared to 2014, as well as an increase in loss from operations of $0.35 million primarily due to increased operating expenses.

 

 

The table below sets forth line items from the Company’s unaudited consolidated statements of operations (in thousands):

 

		Three Months Ended March 31,
		2015				2014				Inc. (Dec.)				Percentage Inc. (Dec.)
Revenues		$	1,847			$	1,789			$	58				3	%
Cost of goods sold			2,108				2,007				101				5	%
Gross loss			(261	)			(218	)			(43	)			-20	%
Operating expenses
Research and development			211				426				(215	)			-50	%
Sales and marketing			134				120				14				12	%
General and administrative			2,418				2,139				279				13	%
Depreciation and amortization			406				494				(88	)			-18	%
Loss on disposal of assets			-				110				(110	)			-100	%
Total operating expenses			3,169				3,289				(120	)			-4	%
Loss from operations			(3,430	)			(3,507	)			77				-2	%
Other (expense) income
Interest (expense), net			(1,036	)			(1,020	)			(16	)			2	%
Change in fair value of warrants			6				(42	)			48				-114	%
(Loss) gain on foreign exchange			(1	)			15				(16	)			-107	%
Other income			233				203				30				15	%
Total other expense			(728	)			(844	)