UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to _____
Commission
File Number
(Exact Name of Registrant as Specified in its Charter)
| (State
or Other Jurisdiction of Incorporation or Organization) |
(I.R.S.
Employer Identification No.) | |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The Stock Market LLC | ||||
| The Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class |
| N/A |
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.
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
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 was approximately $16,752,613 as of the last business day of the registrant’s most recently completed second fiscal quarter. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.
There were shares of the registrant’s common stock, $0.000001 par value per share, outstanding as of May 24, 2024.
TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements. Such forward-looking statements are based on current expectations, estimates and projections about AERWINS Technologies Inc.’s industry, management beliefs, and assumptions made by management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this Quarterly Report on Form 10-Q are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AERWINS TECHNOLOGIES INC.
BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | (audited) | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Assets of discontinued operations | ||||||||
| Total current assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities: | ||||||||
| Short-term loans payable | $ | $ | ||||||
| Accounts payable | ||||||||
| Accounts payable, related party | ||||||||
| Accrued expenses | ||||||||
| Accrued expenses, related party | ||||||||
| Notes payable | ||||||||
| Others payable | ||||||||
| Liabilities of discontinued operations | ||||||||
| Total Current Liabilities | ||||||||
| Longer-term liabilities: | ||||||||
| Long-term convertible promissory note, net | ||||||||
| Derivative liability | ||||||||
| Warrant liability | ||||||||
| Non-current liabilities of discontinued operations | ||||||||
| Total long-term liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Deficit: | ||||||||
| Common stock, par value $, shares authorized; and shares issued and outstanding, respectively in March 31, 2024 and December 31, 2023* | ||||||||
| Preferred stock, par value $, shares authorized; shares issued and outstanding* | ||||||||
| Additional Paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ||||||
| Stockholders’ Deficit | ( | ) | ( | |||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
| * | |
| * |
See Notes to financial statements.
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AERWINS TECHNOLOGIES INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For the three months ended March 31, | For the three months ended March 31, | |||||||
| 2024 | 2023 | |||||||
| Operating expenses: | ||||||||
| Selling expenses | $ | $ | ||||||
| General and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expenses): | ||||||||
| Interest expense | ( | ) | ||||||
| Amortization of debt discount | ( | ) | ||||||
| Gain on foreign currency transactions | ||||||||
| Gain on fair value adjustments of warrant | ||||||||
| Loss on fair value adjustments of derivative | ( | ) | ||||||
| Gain on debt modification | ||||||||
| Gain on deconsolidation | ||||||||
| Total other income | ||||||||
| Income (Loss) before income tax provision | ( | ) | ||||||
| Income tax expense | ||||||||
| Net income (loss) from continuing operations | ( | ) | ||||||
| Discontinued operations (Note 17) | ||||||||
| Loss from discontinued operations | ( | ) | ||||||
| Net Income (Loss) | ( | ) | ||||||
| Other Comprehensive income (loss): | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||
| Total Comprehensive income (loss) | ( | ) | ||||||
| Net earnings (loss) per common share from continuing operations | ||||||||
| Basic | ( | ) | ||||||
| Diluted | ( | ) | ||||||
| Net earnings (loss) per common share from discontinuing operations | ||||||||
| Basic | ( | ) | ||||||
| Diluted | $ | $ | ( | ) | ||||
| Weighted average common shares outstanding* | ||||||||
| Basic | ||||||||
| Effect of dilutive securities | ||||||||
| Convertible debt | ||||||||
| Conversion of option warrants | ||||||||
| Diluted | ||||||||
| * | |
| * |
See Notes to Financial Statements
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AERWINS TECHNOLOGIES INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
(Unaudited)
| Common Stock | Preferred stock | |||||||||||||||||||||||||||||||||||
400,000,000 authorized | 20,000,000 authorized | Additional | Retained | Accumulated | ||||||||||||||||||||||||||||||||
$0.000001 Par Value | $0.000001 Par Value | Paid-in (Registered) | Earnings (Accumulated | Treasury | Other Comprehensive | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit) | Stock | Income | Totals | ||||||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Issuance of common stock prior to the closing of Business Combination | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Reverse recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Issuance of common stock warrants for services | ||||||||||||||||||||||||||||||||||||
| Acquisition of treasury stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
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| Common Stock | Preferred stock | |||||||||||||||||||||||||||||||||||
| 400,000,000 authorized | 20,000,000 authorized | Additional | Retained | Accumulated | ||||||||||||||||||||||||||||||||
| $0.000001 Par Value | $0.000001 Par Value | Paid-in (Registered) | Earnings (Accumulated | Treasury | Other Comprehensive | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit) | Stock | Income | Totals | ||||||||||||||||||||||||||||
| Balances at January 1, 2024 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Issuance of common shares for services | ||||||||||||||||||||||||||||||||||||
| Issuance of common shares | ||||||||||||||||||||||||||||||||||||
| Adjustment for share consolidation | - | |||||||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | - | - | ||||||||||||||||||||||||||||||||||
| Balances at March 31, 2024 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| * | Retrospectively restated for effect of the business combination on February 6, 2023. |
| * | Retrospectively adjusted for effect of share consolidation on a basis of 1 post-consolidation share for each 100 pre-consolidation on April 2, 2024. |
See Notes to Financial Statements
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AERWINS TECHNOLOGIES INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
| For the three months ended | ||||||||
| March 31, | March 31, | |||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net loss from discontinued operations | ( | ) | ||||||
| Net income (loss) from continuing operations | ( | ) | ||||||
| Adjustments to reconcile net loss to net cash provided (used) by operating activities: | ||||||||
| Interest expense | ||||||||
| Amortization of debt discount | ||||||||
| Share-based compensation | ||||||||
| Gain on fair value adjustments of warrant | ( | ) | ( | ) | ||||
| Gain on deconsolidation | ( | ) | ||||||
| Gain on foreign currency translations | ( | ) | ||||||
| Gain on debt modification | ( | ) | ||||||
| Change in fair value of derivative liability | ||||||||
| Increase in operating assets: | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Increase (Decrease) in operating liabilities: | ||||||||
| Accounts payable | ||||||||
| Accounts payable, related party | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Accrued expenses, related party | ( | ) | ||||||
| Others payable | ||||||||
| Net cash provided by (used) continuing operations | ( | ) | ||||||
| Net cash used by discontinued operations | ( | ) | ||||||
| Net cash used by operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITY | ||||||||
| Net cash used by continuing operations | ||||||||
| Net cash used by discontinued operations | ( | ) | ||||||
| Net cash used by investing activity | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from issuance of shares | ||||||||
| Proceeds from reverse recapitalization with AERWINS Inc., net | ||||||||
| Net cash provided by continuing operations | ||||||||
| Net cash provided by discontinued operations | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Effects of exchange rates change on cash | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at beginning of period held by discontinued operation | ||||||||
| Cash and cash equivalents at ending of the period held by discontinued operation | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See Notes to Financial Statements
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AERWINS TECHNOLOGIES INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2024
(unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
AERWINS Technologies Inc., a Delaware corporation (the “Company,” “we,” “us,” or “AERWINS”) together with its wholly owned subsidiary Aerwin Development CA LLC, a California limited liability company (“Aerwin Development”), is redesigning its single-seat optionally Manned Air Vehicle (“MAV” or “Manned Air Vehicle”). Aerwin Development was incorporated under the laws of the State of California on October 18, 2023. All refences in this report on Form 10-Q to the “Company,” “we,” “us,” or “AERWINS” include both AERWINS and Aerwin Development.
Pono Capital Corp Merger
On February 3, 2023, we consummated a merger (the “Merger”) with Pono Merger Sub, Inc., a Delaware corporation (“Merger Sub”) and a wholly-owned subsidiary of the Company, then called Pono Capital Corp., a Delaware corporation (“Pono”) with and into AERWINS, Inc. (formerly named AERWINS Technologies Inc.), a Delaware corporation pursuant to an agreement and plan of merger, dated as of September 7, 2022 (as amended on January 19, 2023, the “Merger Agreement”), by and among Pono, Merger Sub, AERWINS, Mehana Equity LLC, a Delaware limited liability company (“Sponsor” or “Purchaser Representative”) in its capacity as the representative of the stockholders of Pono, and Shuhei Komatsu in his capacity as the representative of the stockholders of AERWINS, Inc. (“Seller Representative”). The Merger and other transactions contemplated thereby (collectively, the “Business Combination”) closed on February 3, 2023 when pursuant to the Merger Agreement, Merger Sub merged with and into AERWINS, Inc. with AERWINS, Inc. surviving the Merger as a wholly-owned subsidiary of Pono, and Pono changed its name to “AERWINS Technologies Inc.” and the business of the Company became the business of AERWINS, Inc., and this business section primarily includes information regarding the AERWINS’, Inc. business.
The Business Combination was accounted for as a reverse recapitalization under the accounting principles generally accepted in the United States of America (“U.S. GAAP”). AERWINS was determined to be the accounting acquirer and Pono was treated as the acquired company for financial reporting purposes. Accordingly, the financial statements of the combined company represent a continuation of the financial statements of AERWINS.
On February 2, 2023, the Company entered into a Subscription Agreement (the “Agreement”) with AERWINS, Inc., and certain investors (collectively referred to herein as the “Purchasers”). Pursuant to the Agreement, the Purchasers agreed to purchase an aggregate shares of common stock (the “Shares”) of AERWINS, Inc. which was immediately exchanged for Public Shares upon the consummation of the Business Combination in exchange for an aggregate sum of $ (the “Purchase Price”) with the Purchase Price being paid to AERWINS, Inc. prior to the closing of the Business Combination (the “Closing”). Effective immediately prior to the Closing, AERWINS, Inc. issued the Shares to the Purchasers and thereafter immediately upon the Closing, the Shares were exchanged for the Public Shares, and the Public Shares were issued as a registered issuance of securities under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an effective registration filed by the Company on Form S-4 which was declared effective by the Securities and Exchange Commission on January 13, 2023.
On
February 3, 2023, the Company received from the Business Combination with Pono net cash of $
| Cash—Pono trust and working capital cash | $ | |||
| Cash—Subscription agreement made immediately before the closing | ||||
| Less: transaction costs and advisory fees | ||||
| Total funds from the Business Combination | $ |
Regarding
the notes payable of $
On December 27, 2023, A.L.I. Technologies Inc., a Japanese corporation (“A.L.I.”) which is our wholly-owned indirect subsidiary, filed a voluntary bankruptcy petition with the Tokyo District Court, Civil Division 20, “Tokutei Kanzai Kakari” [Special Trusteeship Section], Case ID: No. 8234 of 2023 (Fu). A bankruptcy trustee was appointed on January 10, 2024, and proceedings have commenced. As a result of the filing of the Bankruptcy Proceedings and the January 10 Order, the Company concluded that it no longer controls A.L.I. for accounting purposes as of January 10, 2024, in accordance with U.S. GAAP Accounting Standards Codification 810, and, therefore, A.L.I.’s assets and liabilities have been deconsolidated from the Company’s consolidated financial statements prospectively, during the three months ended March 31, 2024.
On April 2, 2024, the Company consolidated its issued and outstanding share on the basis of one post-consolidation share for each 100 pre-consolidation common shares. All share figures and references have been retrospectively adjusted.
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NOTE 2 - GOING CONCERN
The
Company’s financial statements are prepared using generally accepted accounting principles in the United States of America applicable
to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As of and for the three months ended March 31, 2024, the Company has an accumulated deficit of $
Although the Company moved its operations to Los Angeles, California where it is planning to redesign its MAV and eventually commence production in order to generate sufficient revenue, the Company’s cash position is not sufficient to support the Company’s daily operations. Management intends to raise additional funds by way of debt, or a private or public offering. While the Company believes in the viability of its strategy to commence production of the MAV following its redesign in order to generate sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of debt, or a public or private offering. In addition, the Company may be the subject of complaints or litigation from customers, suppliers, employees, creditors of A.L.I. stemming from its bankruptcy proceedings or other third parties for various actions. The damages sought against the Company in some of these litigation proceedings could be substantial. The Company cannot assure its stockholder that the Company will always have meritorious defenses to the plaintiffs’ claims. While the ultimate effect of these legal actions cannot be predicted with certainty, the Company’s reputation and the result of operations could be negatively impacted. The proceedings the Company may be involved in from time to time, including the A.L.I. Bankruptcy proceedings, could incur substantial judgments, fines, legal fees or other costs and have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
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Further,
the Company has a significant amount of indebtedness. As of March 31, 2024 and December 31, 2023, the Company had total liabilities of
$
The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Unaudited Interim Financial Information
The accompanying interim balance sheet as of March 31, 2024, the interim statements of operations and comprehensive income (loss), statements of changes in shareholders’ equity (deficiency), and cash flows for the three months ended March 31, 2024 and 2023 and the related notes to such interim financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with U.S. GAAP. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the Company’s financial position as of March 31, 2024 and the Company’s results of operations and cash flows for the three months ended March 31, 2024 and 2023. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024.
Use of Estimates
In preparing the financial statements in conformity with U.S. GAAP, the management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for doubtful accounts, useful lives of property and equipment, the impairment of long-lived assets, and valuation allowance of deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and deposits in banks that are unrestricted as to withdrawal or use, and which have original maturities of three months or less.
Accounts Receivable, net
Accounts receivable, net represent the amounts that the Company has an unconditional right to consideration, which are stated at the original amount less an allowance for doubtful receivables. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. The Company usually determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the statements of operations and comprehensive income. Delinquent account balances are written off against the allowance for doubtful accounts after management has determined that the likelihood of collection is remote. In circumstances in which the Company receives payment for accounts receivable that have previously been written off, the Company reverses the allowance and bad debt.
Inventories
Inventories consist principally of raw materials used for rendering computing sharing services and for manufacturing hoverbikes. Work in progress represents the costs incurred to date on unfinished products or services. The costs recognized as work in progress include direct materials, direct labor, and overhead costs that are directly attributable to the production of the unfinished product or service. Inventories are stated at the lower of cost or net realizable value, cost being determined by the first-in, first-out method for merchandise. Net realizable value is calculated at estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Loss from inventories written down to net realizable value should be recognized whenever the utility of goods is impaired by damage, deterioration, obsolescence, changes in price levels, or other causes. When inventories have been written down below cost, the reduced amount is to be considered the cost for subsequent accounting purposes.
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Fixed assets
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives, as more details follow:
| Depreciation Method | Useful Life | |||
| Building and building accessories | Straight-line method | |||
| Office equipment and furniture | Straight-line method | |||
| Software | Straight-line method | |||
| Design right | Straight-line method | |||
| Patent right | Straight-line method |
Expenditures for maintenance and repairs, which do not materially extend the useful lives of the assets, are charged to expense as incurred. Expenditures for major renewals and betterments which substantially extend the useful life of assets are capitalized. The cost and related accumulated depreciation of assets retired or sold are removed from the respective accounts, and any gain or loss is recognized in the statements of operations and comprehensive income (loss).
Impairment of Long-Lived Assets
Long-lived assets with finite lives, primarily property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the estimated cash flows from the use of the asset and its eventual disposition are below the asset’s carrying value, then the asset is deemed to be impaired and written down to its fair value.
Warrant Liabilities
We account for the Warrants in accordance with the guidance contained in Accounting Standards Codification (“ASC”) 815-40 — Derivatives and Hedging — Contracts in Entity’s Own Equity (“ASC 815), under which the Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, we classify the Warrants as liabilities at their fair value and adjust the Warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statements of operations. The Placement Warrants, Public Warrants, and Debt Warrants for periods where no observable traded price was available are valued using a Black Scholes model.
Share-based Compensation
We account for the share-based compensation in accordance with the guidance contained in Accounting Standards Codification (“ASC”) 718 — “Compensation – Stock Compensation” and ASC 505, “Equity Based Payments to Non-Employees”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
Convertible Promissory Notes and Derivative Instruments
The Company accounts for the fair value of the conversion feature in accordance with the guidance contained in ASC 815, which requires the Company to bifurcate and separately account for the conversion feature as an embedded derivative contained in the Company’s convertible promissory note. Accordingly, we account for the conversion option as an embedded derivative contained in the Company’s promissory note at fair value. The derivative liability is required to be remeasured at each reporting date and the change in fair value is recognized in our statements of operations.
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Statements of Cash Flows
In accordance with FASB ASC 830-230, “Statement of Cash Flows”, cash flows from the Company’s operations are calculated based upon the functional currency. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers”.
To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value and net of a value-added tax (“Consumption Tax”). The Consumption Tax on sales is calculated at 10% of gross sales.
When another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC Topic 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent.
Cost of Revenues
Cost of revenues primarily consists of salaries and related expenses (e.g. bonuses, employee benefits, and payroll taxes) for personnel directly involved in the delivery of services and products directly to customers. Cost of revenues also includes royalty/license payments to vendors, hosting and infrastructure costs related to the delivery of the Company’s products and services, and inventory write-down.
Advertising Expenses
Advertising expenses consist primarily of costs of promotion and marketing for the Company’s image and products, and costs of direct advertising, and are included in selling expenses. The Company expenses advertising costs as incurred, in accordance with the ASC 720-35, “Advertising Costs”.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of the financial condition and payment practices of its customers to minimize collection risk on accounts receivable.
Comprehensive Income or Loss
ASC 220, “Comprehensive Income,” establishes standards for reporting and display of comprehensive income or loss, its components and accumulated balances. Comprehensive income or loss as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive loss, as presented in the accompanying statements of changes in shareholders’ deficit, consists of changes in unrealized gains and losses on foreign currency translation.
| 12 |
The Company computes basic and diluted earnings (loss) per share in accordance with ASC 260, Earnings per Share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share reflects the potential dilution that could occur if stock options and other commitments to issue common shares were exercised or equity awards vest resulting in the issuance of common shares that could share in the earnings (loss) of the Company.
Related Parties and Transactions
The Company identifies related parties, and accounts for, discloses related party transactions in accordance with ASC 850, “Related Party Disclosures” and other relevant ASC standards.
Parties, which can be an entity or individual, are considered to be related if they have the ability, directly or indirectly, to control the Company or exercise significant influence over the Company in making financial and operational decisions. Entities are also considered to be related if they are subject to common control or common significant influence.
Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.
Income Taxes
Income taxes are accounted for using an asset and liability method of accounting for income taxes in accordance with ASC 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current period and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets also include the prior years’ net operating losses carried forward. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
The Company follows ASC 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Under the provisions of ASC 740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of operations.
| 13 |
Fair Value Measurements
The Company performs fair value measurements in accordance with ASC 820. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or a liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value.
| ● | Level 1: quoted prices in active markets for identical assets or liabilities; | |
| ● | Level 2: inputs other than Level 1 that are observable, either directly or indirectly; or | |
| ● | Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities. |
Contingencies
Certain conditions may exist as of the date financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company is subject to potential liabilities generally incidental to our business arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, employment, compliance and other matters that arise in the ordinary course of business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss.
Discontinued Operations
ASC 205-20 provides guidance on discontinued operation presentation requirements. In determining whether a group should be presented as discontinued operations, the company makes a determination of whether such a group being disposed of comprises a component of the entity, or a group of components of the entity, that represents a strategic shift that has, or will have, a major effect on the company’s operations and financial results. If these determinations are made affirmatively, the results of operations of the group being disposed of are aggregated for separate presentation apart from the continuing operations of the Company for all periods presented in the financial statements.
Recent Accounting Pronouncements
We did not implement any new accounting pronouncements during 2023. However, we are evaluating the impact of the future disclosures that may arise under recent SEC and other promulgators’ recently finalized rules and outstanding proposals.
NOTE 4 – PREPAID EXPENSES
| March 31, 2024 | December 31, 2023 | |||||||
| Prepaid expenses | $ | $ | ||||||
| Total | $ | $ | ||||||
Of
the total prepaid expenses as at March 31, 2024 of $
| 14 |
NOTE 5 – LOANS PAYABLE
Notes payable
On
January 31, 2023, the Company promised to pay to Mahana Equity LLC, the principal sum of $
On
January 31, 2023, the Company promised to pay to a third party lender the principal sum of $
As
at March 31, 2024, the notes payable balance was $
The Company also received loans totaling $ from third parties. These loans bear interest of % per annum and are due 12 months from issue date. As at March 31, 2024, the loan balance including the accrued interest expense of $ is $ (December 31, 2023 - interest expense of $ is $).
NOTE 6 — RELATED PARTY TRANSACTIONS
Guarantee provided by a director of A.L.I.
For
the year ended December 31, 2023, the Company received a debt guarantee from the Representative Director of A.L.I. Daisuke Katano for
a particular building lease agreement. The transaction amount is $
Loan from a former director of Aerwins
On
February 27, 2023, the Company’s wholly owned subsidiary in Japan, A.L.I. Technologies, entered into a loan agreement with Shuhei
Komatsu, the Company’s previous Chief Executive Officer. Pursuant to the Agreement, Mr. Komatsu agreed to lend A.L.I.
The
Company recognizes $
Payable to Directors of Aerwins
During
the year ended December 31, 2023 and three months ended March 31, 2024, one of the Company’s directors, Kiran Sidhu and a former
director, Daisuke Katano, paid some payables on behalf of the Company. Mr. Sidhu paid $
| 15 |
As
at March 31, 2024, an amount of $
NOTE 7 – CONVERTIBLE PROMISSORY NOTES, NET
On
April 12, 2023, the Company entered into a Securities Purchase Agreement (the “SPA”) with Lind Global Fund II LP (the “Investor”).
On April 12, 2023, the Company issued first tranche of convertible promissory note of $
On
May 23, 2023, the Company issued second tranche of convertible promissory note of $
On January 23, 2024, the Company and Lind Global entered into an Amendment No. 2 to Senior Convertible Promissory Note First Closing Note and an Amendment No. 2 to the Senior Convertible Promissory Note Second Closing Note (collectively, the “January Note Amendments”) which amended the Closing Notes to, subject to the conditions discussed below:
| ● | reduce
the aggregate principal amount of the Closing Notes from $ | |
| ● | require
the Company to repay an aggregate of $ | |
| ● | requires
Lind Global to convert no less than an aggregate of $ |
In addition, on January 23, 2024, the Company and Lind Global entered into Amendment No. 2 to Securities Purchase Agreement, subject to the conditions discussed below:
| ● | eliminate the obligation of the Company and Lind Global to complete the third closing, | |
| ● | delete the clause obligating the Company to register the shares of common stock issuable upon conversion of the Closing Notes and exercise of the Warrants (collectively, the “Closing Securities”) or pay Lind Global any delay payments as a result of the Company’s failure to register the Closing Securities, | |
| ● | eliminate certain restrictions on the Company’s right to issue equity and debt in future transactions and | |
| ● | eliminate Lind Global’ right to participate in future offerings of the Company’s securities, other than its rights to participate in the Public Offering. |
In as much as the Company failed to complete the Public Offering by April 15, 2024, Lind Global is not obligated to fulfill the terms of the January Note Amendments. The Company plans to enter into discussions with Lind Global to extend the time period in which it is obligated to complete the Public Offering.
The modification and
default subsequent to the quarter ended March 31, 2024 was accounted for as an extinguishment of the original financial liability and
the recognition of a new financial liability as the new amended terms were considered to be substantial modification of an existing financial
liability. Accordingly, the Company recognized a decrease of $
The notes consist of the following components as of March 31, 2024 and December 31, 2023:
| Principal | $ | |||
| Debt discount | ( | ) | ||
| Interest expense | ||||
| Net Carrying Balance at December 31, 2023 | $ | |||
| Adjustments | ||||
| Interest expense | ||||
| Net Carrying Balance at March 31, 2024 | $ |
| 16 |
Debt discount is summarized as follows:
| March
31, 2024 | December 31, 2023 | |||||||
| Debt discount on convertible promissory notes | $ | $ | ||||||
| Adjustments | ( | ) | ||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Debt discount on convertible promissory notes, net | $ | $ | ||||||
NOTE 8 – DERIVATIVE LIABILITY
The
derivative liability is derived from the debt conversion option features in Note 7. They were valued using Monte Carlo simulation model
using assumptions detailed below. As of March 31, 2024, the derivative liability was $
| Volatility | % | |||
| Risk-free rate | % | |||
| Stock price (pre-consolidated) | $ | |||
| Dividend Yield | ||||
| Expected life |
Fair value of the derivative is summarized as below:
| Derivative Liability | ||||
| Balance at January 1, 2023 | $ | |||
| Additions | ||||
| Change in fair value | ( | ) | ||
| Ending Balance, December 31, 2023 | ||||
Adjustments | (452,549 | ) | ||
| Change in fair value | ||||
| Ending Balance, March 31, 2024 | $ | |||
NOTE 9 – WARRANT LIABILITY
The warrant liability is derived from warrants issued as debt warrants in Note 7, public warrants and placement warrants.
As
of March 31, 2024, the total fair value of the warrant liability was $
The following table provides a reconciliation of the warrants measured at fair value using Level 1 inputs:
| 17 |
| Public warrants | ||||
| Balance at January 1, 2023 | $ | |||
| Additions | ||||
| Transfer from Level 2 | ||||
| Change in fair value | ( | ) | ||
| Ending Balance, December 31, 2023 | $ | |||
| Change in fair value | ( | ) | ||
| Ending Balance, March 31, 2024 | $ | |||
The Black-Scholes model with the following assumptions inputs:
| Volatility | % | |||
| Risk-free rate | % | |||
| Stock price (pre-consolidated) | $ | |||
| Expected life |
The following table provides a reconciliation of the warrants measured at fair value using Level 2 inputs:
| Public warrants | Placement warrants | Debt warrants | ||||||||||
| Balance at January 1, 2023 | $ | $ | $ | |||||||||
| Additions | ||||||||||||
| Transfer to Level 1 | ( | ) | ||||||||||
| Change in fair value | ( | ) | ( | ) | ||||||||
| Ending Balance, December 31, 2023 | $ | $ | $ | |||||||||
| Change in fair value | ( | ) | ( | ) | ||||||||
| Ending Balance, March 31, 2024 | $ | $ | $ | |||||||||
The following table summarizes information regarding warrants by term, granted and exercise price for the three months ended March 31, 2024 and year ended December 31, 2023.
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining contractual life | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | - | - | |||||||||||||
| Granted | - | |||||||||||||||
| Outstanding at March 31, 2024 and December 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2024 and December 31, 2023 | $ | $ | ||||||||||||||
The intrinsic value is the amount by which the fair value of the underlying share exceeds the exercise price of the warrants. As of March 31, 2024, the share price of the Company was less than the exercise price for all outstanding warrants. Therefore, the intrinsic value for warrants outstanding was zero.
| 18 |
| March 31, 2024 | December 31, 2023 | |||||||||||||||||||
| Grant Date | Expiry Date | Number of shares | Exercise price | Number of shares | Exercise price | |||||||||||||||
| Public warrants | $ | $ | ||||||||||||||||||
| Placement warrants | ||||||||||||||||||||
| Debt warrants | ||||||||||||||||||||
| Debt warrants | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||
NOTE 10 – DECONSOLIDATION OF A.L.I.
A.L.I. Bankruptcy
On December 27, 2023, A.L.I. filed a voluntary bankruptcy petition with the Tokyo District Court, Civil Division 20, “Tokutei Kanzai Kakari” [Special Trusteeship Section], Case ID: No. 8234 of 2023 (Fu) (the “A.L.I. Bankruptcy”).
On January 10, 2024, the Court entered an order (the “January 10 Order”) confirming that bankruptcy proceedings are commenced against the debtor A.L.I., that A.L.I. is found to be insolvent, the appointment of Gaku Iida, Attorney-at-Law, of Abe, Ikubo & Katayama be appointed as the trustee in the bankruptcy proceedings (the “Trustee”) and setting the date and place of the meeting to report on the status of property, to report on calculations and hear opinions regarding the disposition of the bankruptcy proceedings on May 14, 2024, at 10:00 a.m. local time in the Court (the “Status Report Meeting”). The Trustee’s address is Fukuoka Bldg. 9F, 2-8-7 Yaesu, Chuo-ku, Tokyo. A trustee has been appointed by the Bankruptcy Court and the trustee has assumed and will continue to exercise control over all assets and liabilities of A.L.I. The assets of A.L.I. will be liquidated for distribution in accordance with the priorities established by the Bankruptcy Act. The Company expects that no distributions will be available in A.L.I’s liquidation.
As a result of the filing of the Bankruptcy Proceedings and the January 10 Order, the Company concluded that it no longer controls A.L.I. for accounting purposes as of January 10, 2024, in accordance with U.S. GAAP Accounting Standards Codification 810, and, therefore, deconsolidated all assets and liabilities of A.L.I. during the three months ended March 31, 2024 from the Company’s financial statements.
The following table provides the carrying value of assets and liabilities of A.L.I that have been deconsolidated during the three months ended March 31, 2024:
| As at | January 10, 2024 | |||
| ASSETS | ||||
| Current Assets: | ||||
| Cash and cash equivalents | $ | |||
| Total Assets | $ | |||
| LIABILITIES | ||||
| Current Liabilities: | ||||
| Short-term loans payable | $ | |||
| Accounts payable | ||||
| Accrued expenses | ||||
| Others payable | ||||
| Contract liabilities | ||||
| Current portion of long-term loans | ||||
| Finance leases liabilities-current | ||||
| Operating leases liabilities-current | ||||
| Total Current Liabilities | ||||
| Longer-term liabilities: | ||||
| Long-term loans | ||||
| Finance leases liabilities-non-current | ||||
| Operating leases liabilities-non-current | ||||
| Other long-term liabilities | ||||
| Total long-term liabilities | ||||
| Total Liabilities | $ | |||
| Net Liabilities deconsolidated | ( | ) | ||
| Accumulated other comprehensive loss | ||||
| 1,044,308 | ||||
| Gain on deconsolidation of A.L.I. | $ | |||
| 19 |
NOTE 11 – INCOME TAXES
The income tax provision for the year ended March 31, 2024 and the March 31, 2023 consists of the following:
| For the three months ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Federal | ||||||||
| Current | $ | $ | ||||||
| Deferred | ||||||||
| State | ||||||||
| Current | ||||||||
| Deferred | ||||||||
| Foreign | ||||||||
| Current | ||||||||
| Deferred | ||||||||
| Income Tax Provision | $ | $ | ||||||
The Company has not completed an Internal Revenue Code (“IRC”) Section 382 study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company’s formation.
The Company evaluates each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measures the unrecognized benefits associated with the tax positions. As of March 31, 2024 and 2023, the management considered the Company did not have any significant unrecognized uncertain tax positions. Accordingly, the Company has not incurred any interest or penalties as of the current reporting date with respect to income tax matters. There were no accrued interest and penalties associated with uncertain tax positions as of March 31, 2024.
The Company does not expect that there will be unrecognized tax benefits of a significant nature that will increase or decrease within 12 months of the reporting date.
No deferred taxes have been provided on the accumulated unremitted earnings, if any, of the Company’s foreign subsidiary that is not subject to United States income tax. The Company periodically evaluates its foreign investment opportunities and plans, as well as its foreign working capital needs, to determine the level of investment required and, accordingly, determines the level of foreign earnings that are considered indefinitely reinvested. Based upon that evaluation, earnings, if any, of the Company’s foreign subsidiary that is not otherwise subject to United States taxation are considered to be indefinitely reinvested, and accordingly, deferred taxes have not been provided. If changes occur in future investment opportunities and plans, those changes will be reflected when known and may result in providing residual United States deferred taxes on unremitted foreign earnings.
NOTE 12 – CONTINGENCIES
The Company is subject to potential liabilities generally incidental to our business arising out of present and future lawsuits and claims related to product liability, personal injury, contract, commercial, intellectual property, tax, employment, compliance and other matters that arise in the ordinary course of business. The Company accrues for potential liabilities when it is probable that future costs (including legal fees and expenses) will be incurred and such costs can be reasonably estimated.
Upon the commencement of the voluntary bankruptcy proceedings of A.L.I., all creditors’ actions are automatically stayed and any new litigation against A.L.I. is barred. In an action relating to the bankruptcy estate, a bankruptcy trustee shall stand as a plaintiff or defendant, as the case may be.
The A.L.I. Bankruptcy constitutes an event of default
pursuant to the Closing Notes in the aggregate principal amount of $
NOTE 13 – SHAREHOLDERS’ DEFICIT
Aerwins was authorized to issue shares of common shares, par value of $ per share, and shares of preferred shares, par value of $ per share. Before the Business Combination, the Company was authorized to issue shares of common stock, par value of $ per share, and shares of preferred shares, par value of $ per share.
Business combination with Pono Capital Corp
On February 3, 2023, the Company consummated the Merger with Pono. On February 2, 2023, the Company entered into a Subscription Agreement with the Purchasers. In total, the number of Public Shares increased by at the closing of the Business Combination.
Shares issued in the three months ended March 31, 2024
Recent Sale of Unregistered Securities
On
February 27, 2024 and March 22, 2024, we entered into and completed the sale to two unrelated accredited investors (the “Investors”),
of shares and unregistered shares, respectively, of our Common Stock at a price of $ per share for an aggregate of
$
| 20 |
Shares issued in the year ended December 31, 2023
Shares issued to service providers
The
Company agreed with service providers to pay the service fees by issuing common stocks subject to the closing of the business combination.
After the closing of the Business Combination, the Company issued shares of common stock with fair value of $
The
Company issued shares to consultants with fair value of $
During the year ended December 31, 2023 the Company also recognized expenses with a fair value of $ as obligation to issue shares pursuant to the terms of an engagement agreement between the Company and Boustead dated April 18, 2022, as amended on February 1, 2023 related to services provided in connection with the Business Combination. shares were issued on March 11, 2024.
The
total amount of fair value of shares issued for the year ended December 31, 2023 was $
The
Company’s outstanding shares increased by for the three months ended March 31, 2024, and recognized Common stock of $
Basic loss per share is calculated on the basis of weighted-average outstanding common shares. Diluted loss per share is computed on the basis of basic weighted-average outstanding common shares adjusted for the dilutive effect of stock options. Dilutive common shares are determined by applying the treasury stock method to the assumed conversion of share repurchase liability to common shares related to the early exercised stock options.
| For the three months ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Loss per share – basic | ||||||||
| Numerator: | ||||||||
| Net income (loss) from continuing operations | $ | $ | ( | ) | ||||
| Net income (loss) from discontinued operation | $ | $ | ( | ) | ||||
| Denominator: | ||||||||
| Weighted average number of common shares outstanding used in calculating basic earnings (loss) per share | ||||||||
| Denominator used for loss per share | ||||||||
| Earnings (Loss) per share from continuing operations (basic) | $ | $ | ( | ) | ||||
| Earnings (Loss) per share from continuing operations (anti-diluted) | $ | $ | ( | ) | ||||
| Earnings (Loss) per share from discontinued operation (basic) | $ | $ | ( | ) | ||||
| Earnings (Loss) per share from discontinued operation (anti-diluted) | $ | $ | ( | ) | ||||
Basic loss per share equals diluted loss per share because the calculation of diluted loss per share would be anti-dilutive.
On July 27, 2022, Aerwins issued stock options to certain directors of the Company which can be exercised for a total of shares of the Company’s common stock with an exercise price of $ per share and a vesting period shall commence on the first business day following the occurrence of going public (the “Trigger Date”), and thereafter (i) one third of the option shall vest on the three months anniversary of the Trigger Date, (ii) one third of the option shall vest on the fifteen month anniversary of the Trigger Date; and (iii) the remaining one third of the option shall vest on the twenty seven month anniversary of the Trigger Date. The remaining weighted average contractual life as of March 31, 2024, is years.
| Grant date | July 27, 2022 | |||
| Number of shares at grant date | ||||
| Outstanding at January 31, 2023 | ||||
| Forfeiture | ( | ) | ||
| Outstanding at March 31, 2024 and December 31, 2023 | ||||
| Exercise price | $ | |||
| Consideration paid to the Company at the grant date | $ |
The number of shares is retrospectively presented to reflect the Business Combination with Pono and share consolidation 1 post-consolidation share for each 100 pre-consolidation share.
The Company estimated the fair value of the stock-based compensation at $ using the Binomial Option Pricing Model with the following assumption inputs.
| Exercise period | years | |||
| Share price on the issuance date | $ | |||
| Volatility | % | |||
| Expected dividend rate | % | |||
| Risk-free interest rate | % |
| 21 |
NOTE 16 – FAIR VALUE MEASUREMENT
The estimated fair value of the Company’s financial instrument at March 31, 2024 and December 31, 2023 are set forth below. The following summary excludes cash and cash equivalents, accounts receivable, other receivable, short-term loans payable, accounts payable, accrued expenses, contract liability, current portion of long-term debts, current operating and finance lease liabilities and other current liabilities for which fair values approximate their carrying amounts.
Amount at Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| March 31, 2024 | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Public Warrants | $ | $ | $ | $ | ||||||||||||
| Placement Warrants | $ | $ | $ | $ | ||||||||||||
| Debt Warrants | $ | $ | $ | $ | ||||||||||||
| Subtotal: Warrant liabilities | $ | $ | $ | $ | ||||||||||||
| Derivative Liability | $ | $ | $ | $ | ||||||||||||
Amount at Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| December 31, 2023 | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Public Warrants | $ | $ | $ | $ | ||||||||||||
| Placement Warrants | $ | $ | $ | $ | ||||||||||||
| Debt Warrants | $ | $ | $ | $ | ||||||||||||
| Subtotal: Warrant liabilities | $ | $ | $ | $ | ||||||||||||
| Derivative Liability | $ | $ | $ | $ | ||||||||||||
The Public Warrants are classified as Level 1 in the fair value hierarchy because they valued using quoted market prices. The Placement Warrants, Debt Warrants, and Derivative Liability are classified as Level 2 in the fair value hierarchy. This classification is based on the availability of significant inputs used in the Black-Sholes model and Monte Carlo simulation, which are observable in the market.
Transfers to/from Levels 1, 2 and 3 are recognized at the end of the reporting period in which a change in valuation technique or methodology occurs. The estimated fair value of the Public Warrants transferred from Level 2 to Level 1 during the period from January 1, 2023 due to the increase of observable market activity.
NOTE 17 – DISCONTINUED OPERATIONS
As at June 30, 2023, to facilitate cost reduction plan, the Company has made the strategic decision to discontinue drone solution service and on December 27, 2023, the Company discontinued the remaining operations of A.L.I as part of the move of our operations to Los Angeles, California.
The carrying value of the assets and liabilities of the discontinued operations in relation to the Company’s operations in A.L.I. have been classified by the Company as discontinued operations as at March 31, 2024 and December 31, 2023 for accounting purpose and are shown below:
| As at | March 31, 2024 | December 31, 2023 | ||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current Liabilities: | ||||||||
| Short-term loans payable | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Others payable | ||||||||
| Contract liabilities | ||||||||
| Current portion of long-term loans | ||||||||
| Finance leases liabilities-current | ||||||||
| Operating leases liabilities-current | ||||||||
| Total Current Liabilities | ||||||||
| Longer-term liabilities: | ||||||||
| Long-term loans | ||||||||
| Finance leases liabilities-non-current | ||||||||
| Operating leases liabilities-non-current | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | ||||||||
| Total Liabilities | $ | $ | ||||||
| 22 |
The results of operations in relation to the Company’s operations in ALI have been classified by the Company as discontinued operations for the three months ended March 31, 2024 and 2023 for accounting purpose and are shown below:
For the three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling expenses | ||||||||
| General and administrative expenses | ||||||||
| Research and development expenses | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ||||||
| Other income (expenses): | ||||||||
| Interest expenses, net | ( | ) | ||||||
| Loss on foreign currency transaction | ( | ) | ||||||
| Loss on disposal of fixed assets | ( | ) | ||||||
| Equity in earnings of investee | ||||||||
| Other income | ||||||||
| Total other income | ||||||||
| Net loss from discontinued operations | ( | ) | ||||||
| Income tax | ||||||||
| Net loss from discontinued operations | $ | $ | ( | ) | ||||
NOTE 18 – SUBSEQUENT EVENTS
Effective as of April 2, 2024, the Company completed 100 old to 1 new share consolidation. All share figures and references have been retrospectively adjusted.
Effective
April 8, 2024, we authorized the issuance of shares to consultants with fair value of $
Subsequent
to the three months ended March 31, 2024, the Company received an aggregate of $
Subsequent to the three months ended March 31, 2024, the Company received
an aggregate of $
| 23 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in “Item 1. Financial Statements and Supplementary Data” of this Quarterly Report on Form 10-Q. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Item 1A. Risk Factors” in our Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (“Commission”) on March 31, 2024.
Overview
AERWINS Technologies Inc., a Delaware corporation (the “Company,” “we,” “us,” or “AERWINS”) through its subsidiaries is redesigning our single-seat optionally Manned Air Vehicle (“MAV” or “Manned Air Vehicle”). We aim to align this vehicle with the stringent requirements of the Federal Aviation Administration’s (“FAA”) Powered Ultra-Light Air Vehicle Category, setting a new standard for safe low-altitude manned flight. Following an evaluation of the viability of other areas of the Company’s business which AWIN considered non-core and our desire to focus solely on our core business of developing an FAA compliant MAV in the United States, we discontinued our non-core operations formerly carried out by our wholly owned indirect subsidiary, A.L.I. Technologies Inc., a Japanese corporation (“ALI”). Following the discontinuation, on December 27, 2023, ALI filed a voluntary bankruptcy petition with the Tokyo District Court, Civil Division 20, “Tokutei Kanzai Kakari” [Special Trusteeship Section], Case ID: No. 8234 of 2023 (Fu). A bankruptcy trustee was appointed on January 10, 2024, and proceedings have commenced. All references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us,” or “AERWINS” include both AERWINS and ALI, except that references to the “Company” “we,” “us,” or “Pono” in this Item 2 refer to Aerwins Technologies Inc. f/k/a Pono Capital Corp.
We were originally incorporated in Delaware on February 12, 2021 under the name “Pono Capital Corp” as a special purpose acquisition company, formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On August 13, 2021, we consummated an initial public offering. On February 3, 2023, we consummated a merger (the “Merger”) with Pono Merger Sub, Inc., a Delaware corporation (“Merger Sub”) and a wholly-owned subsidiary of the Company, then called Pono Capital Corp., a Delaware corporation (“Pono”) with and into AERWINS, Inc. (formerly named AERWINS Technologies Inc.), a Delaware corporation pursuant to an agreement and plan of merger, dated as of September 7, 2022 (as amended on January 19, 2023, the “Merger Agreement”), by and among Pono, Merger Sub, AERWINS, Mehana Equity LLC, a Delaware limited liability company (“Sponsor” or “Purchaser Representative”) in its capacity as the representative of the stockholders of Pono, and Shuhei Komatsu in his capacity as the representative of the stockholders of AERWINS, Inc. (“Seller Representative”). The Merger and other transactions contemplated thereby (collectively, the “Business Combination”) closed on February 3, 2023 when pursuant to the Merger Agreement, Merger Sub merged with and into AERWINS, Inc. with AERWINS, Inc. surviving the Merger as a wholly-owned subsidiary of Pono, and Pono changed its name to “AERWINS Technologies Inc.” and the business of the Company became the business of AERWINS, Inc. The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Pono Capital Corp was treated as the acquired company and AERWINS, Inc. was treated as the acquirer for financial statement reporting purposes.
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The Business Combination occurred during the period for which the financial information herein is presented. The financial information included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects the historical operations of the Company prior to the Business Combination and the combined operations after the Business Combination, unless otherwise noted. For additional information on the Business Combination please see the “Explanatory Note” on page 1 of this Quarterly Report on Form 10-Q. For additional information on the corporate history of our Company please see the section titled “Corporate History” on page 20 of our Annual Report.
Business Overview
We were incorporated in the State of Delaware on June 9, 2022. Through our U.S.-based subsidiary, Aerwin Development, we are redesigning our single-seat optionally Manned Air Vehicle (“MAV” or “Manned Air Vehicle”) in the United States. We aim to align this vehicle with the stringent requirements of the Federal Aviation Administration’s (“FAA”) Powered Ultra-Light Air Vehicle Category, setting a new standard for safe low-altitude manned flight. Following an evaluation of the viability of other areas of the Company’s business which AWIN considered non-core and our desire to focus solely on our core business of developing an FAA-compliant MAV in the United States, we discontinued our non-core operations formerly carried out by our wholly owned indirect subsidiary, A.L.I. Technologies Inc., a Japanese corporation (“ALI”). Following the discontinuation, on December 27, 2023, ALI filed a voluntary bankruptcy petition with the Tokyo District Court, Civil Division 20, “Tokutei Kanzai Kakari” [Special Trusteeship Section], Case ID: No. 8234 of 2023 (Fu). A bankruptcy trustee was appointed on January 10, 2024, and proceedings have commenced.
A.L.I. was established in Japan in September 2016 and was acquired by us in August, 2022. The acquisition of A.L.I. was accounted for as a recapitalization among entities under common control since the same controlling shareholders controlled all these entities before and after the transaction. The consolidation of the Company and its subsidiaries has been accounted for at historical cost and prepared on the basis as if the transaction had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements. On January 10, 2024, the Company no longer controls A.L.I. resulting in deconsolidation of A.L.I.’s assets and liabilities during the three months ended March 31, 2024.
With the mission of “Transforming society from the sky down,” we aim to realize an “Air Mobility Society” in which cars, specialized crafts, and drones can fly freely. To this end, we are redesigning our single-seat optionally Manned Air Vehicle (“MAV”). We aim to align this vehicle with the stringent requirements of the Federal Aviation Administration’s (“FAA”) Powered Ultra-Light Air Vehicle Category, setting a new standard for safe low-altitude manned flight.
To achieve this goal, we have established AERWIN Development Company LLC, a California subsidiary with offices in Los Angeles, California, and entered into the Letter of Intent with Helicopter Technology discussed above.
Discontinued Operations
As of June 30, 2023, we discontinued providing drone photography services and joint research and development services previously provided within our unmanned air mobility business.
On December 27, 2023, we discontinued the operations of A.L.I. as part of our operations, moved to Los Angeles, California, and continued the development of a line of FAA-compliant manned and unmanned crafts for low-altitude. Following the discontinuation, on December 27, 2023, A.L.I. filed a voluntary bankruptcy petition with the Tokyo District Court, Civil Division 20, “Tokutei Kanzai Kakari” [Special Trusteeship Section], Case ID: No. 8234 of 2023 (Fu). A bankruptcy trustee was appointed on January 10, 2024, and proceedings have commenced.
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ALI’s discontinued operations include the manned air mobility business, including the further development of the XTURISMO limited edition hoverbike, the air mobility platform COSMOS (Centralized Operating System for Managing Open Sky), the computing power-sharing business, drone photography business and drone and artificial intelligence research and development business.
For accounting purpose, the results of operations in relation to the Company’s Drone solution service have been classified by the Company as discontinued operations for the years ended December 31, 2023 and 2022.
Key Factors that Affect Our Results of Operations
Our business is affected by many factors which we discuss under the heading “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q. The following are a few of those key factors that may affect our financial condition and results of operations:
Our Ability to Complete Development of and Manufacture our planned Manned Air Vehicle (“MAV”)
Our results of operations rely on our ability to redesign our single-seat optionally Manned Air Vehicle (“MAV” or “Manned Air Vehicle”) and commence production pursuant to the stringent requirements of the Federal Aviation Administration’s (“FAA”) Powered Ultra-Light Air Vehicle Category, setting a new standard for safe low altitude manned flight. We plan to do this in conjunction with Helicopter Technology Company (“Helicopter Technology”) pursuant to the terms of the Letter of Intent we entered with them effective as of December 19, 2023 described elsewhere in this Form 10-Q.
Our Ability to Develop a Dealer Distribution Network and Market and Sell MAV’s in Sufficient Quantities to Achieve Profitability
Pursuant to the Letter of Intent, we have agreed to provide marketing and support services that includes marketing, sales, advertising, development of a dealer distribution network, online marketplace, and other distribution channels in order to sell sufficient quantities of the MAVs. We plan to sell our MAV’s primarily in the United States, China and Europe beginning in 2027.
Our Ability to Control Costs and Expenses and Improve Our Operating Efficiency
We are aiming to establish a highly profitable structure for a mass production of MAV’s which focuses on design and supply chain control. We plan to select subcontractors and suppliers appropriately based on cost, quality, and delivery date, and seek to build an efficient production system.
Results of Operations
Comparison of Results of Operations for the Three Months Ended March 31, 2024, and 2023
The following table summarizes our operating results as reflected in our statements of income during the three months ended March 31, 2024 and 2023, and provides information regarding the dollar and percentage increase or (decrease) during such periods.
| For the three months ended March 31, | ||||||||||||||||||||||||
| 2024 | 2023 | Variance | ||||||||||||||||||||||
| Amount | % of | Amount | % of | Amount | % of | |||||||||||||||||||
| REVENUE | $ | - | - | % | $ | - | - | % | $ | - | - | % | ||||||||||||
| COST OF REVENUE | - | - | % | - | - | % | - | - | % | |||||||||||||||
| GROSS LOSS | - | - | % | - | - | % | - | - | % | |||||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Selling expenses | - | - | % | - | - | % | - | - | % | |||||||||||||||
| General and administrative expenses | 620,380 | - | % | 3,574,882 | - | % | (2,954,502 | ) | (82.6 | )% | ||||||||||||||
| Research and development expenses | - | - | % | - | - | % | - | - | % | |||||||||||||||
| Total operating expenses | 620,380 | - | % | 3,574,882 | - | % | (2,954,502 | ) | (82.6 | )% | ||||||||||||||
| Loss from operations | (620,380 | ) | - | % | (3,574,882 | ) | - | % | 2,954,502 | 82.6 | % | |||||||||||||
| Other income | 9,546,911 | - | % | 86,251 | - | % | 9,460,660 | 10,968.8 | % | |||||||||||||||
| Income (Loss) before income tax provision | 8,926,531 | - | % | (3,488,631 | ) | % | 12,415,162 | (355.9 | )% | |||||||||||||||
| Income taxes expense | - | - | % | - | - | % | - | - | % | |||||||||||||||
| Income (Loss) from continuing operations | 8,926,531 | - | % | (3,488,631 | ) | - | % | 12,415,162 | (355.9 | )% | ||||||||||||||
| Loss from discounted operations | - | - | % | (4,312,913 | ) | - | % | 4,312,913 | (100.0 | )% | ||||||||||||||
| Net income (loss) | $ | 8,926,531 | - | % | $ | (7,801,544 | ) | - | % | $ | 16,728,075 | (214.4 | )% | |||||||||||
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Operating Expenses
The following table sets forth the breakdown of our operating expenses for the three months ended March 31, 2024 and 2023:
| For the three months ended March 31, | ||||||||||||||||||||||||
| 2024 | 2023 | Variance | ||||||||||||||||||||||
| Amount | % of | Amount | % of | Amount | % of | |||||||||||||||||||
| REVENUE | $ | - | - | % | $ | - | - | % | $ | - | - | % | ||||||||||||
| Operating expenses | ||||||||||||||||||||||||
| Selling expenses | - | - | % | - | - | % | - | - | % | |||||||||||||||
| General and administrative expenses | 620,380 | - | % | 3,574,882 | - | % | (2,954,502 | ) | (82.6 | )% | ||||||||||||||
| Research and development expenses | - | - | % | - | - | % | - | - | % | |||||||||||||||
| Total operating expenses | $ | 620,380 | - | % | $ | 3,574,882 | - | % | $ | (2,954,502 | ) | (82.6 | )% | |||||||||||
General and Administrative Expenses
Our general and administrative expenses primarily consist of employee salaries and welfare, consulting for company reorganization and going public, rental expense, and travel and entertainment expenses.
| For the three months ended March 31, | ||||||||||||||||||||||||
| 2024 | 2023 | Variance | ||||||||||||||||||||||
| Amount | % of | Amount | % of | Amount | % of | |||||||||||||||||||
| Salaries and welfare | $ | 12,840 | 2.1 | % | $ | 67,469 | 1.9 | % | $ | (54,629 | ) | (81 | )% | |||||||||||
| Consulting and professional service fees | 583,749 | 94.1 | % | 3,488,383 | 97.6 | % | (2,904,634 | ) | (83.3 | )% | ||||||||||||||
| Rent expense | - | - | % | 64 | - | % | (64 | ) | (100 | )% | ||||||||||||||
| Office, utility and other expenses | - | - | % | 18,709 | 0.5 | % | (18,709 | ) | (100 | )% | ||||||||||||||
| Commission fees expenses | 1,275 | 0.2 | % | 257 | - | % | 1,018 | 395.5 | % | |||||||||||||||
| Other expenses | 22,516 | 3.6 | % | - | - | % | 22,516 | 100 | % | |||||||||||||||
| Total general and administrative expenses | $ | 620,380 | 100 | % | $ | 3,574,882 | 100 | % | $ | (2,954,502 | ) | (82.6 | )% | |||||||||||
* Refers to the percentage of total general and administrative expenses.
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Our general and administrative expenses decreased by $2,954,502 or 82.6%, to $620,380 for the three months ended March 31, 2024 from $3,574,882 for the three months ended March 31, 2023, primarily attributable to consulting and professional service fees relating to the business combination with Pono.
Other Income, net
Our other income primarily includes gain on deconsolidation.
Total other income, net, increased by $9,460,660 or 10,968.8% from $86,251 for the three months ended March 31, 2023 to $9,546,911 of income for the three months ended March 31, 2024.
Net Income from Continuing Operations
As a result of the foregoing, we reported a net income of $8,926,531 for the three months ended March 31, 2024 representing a $12,415,162 or 355.9% increase from a net loss of $3,488,631 for the three months ended March 31, 2023. All net loss is attributable to AERWINS Technologies Inc.
Results from Discontinued Operations
As at June 30, 2023, to facilitate cost reduction plan, the Company has made the strategic decision to discontinue drone solution service and on December 27, 2023, the Company discontinued the remaining operations of A.L.I as part of the move of our operations to Los Angeles, California. The results of operations in relation to the Company’s operations in ALI have been classified by the Company as discontinued operations for the three months ended March 31, 2024 and 2023 for accounting purpose and are shown below:
For the three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues | $ | - | $ | 1,265,883 | ||||
| Cost of revenues | - | 955,071 | ||||||
| Gross profit | - | 310,812 | ||||||
| Operating expenses: | ||||||||
| Selling expenses | - | 40,382 | ||||||
| General and administrative expenses | - | 2,647,569 | ||||||
| Research and development expenses | - | 2,090,219 | ||||||
| Total operating expenses | - | 4,778,170 | ||||||
| Loss from operations | (4,467,358 | ) | ||||||
| Other income (expenses): | ||||||||
| Interest expenses, net | - | (6,847 | ) | |||||
| Loss on foreign currency transaction | - | (11,005 | ) | |||||
| Loss on disposal of fixed assets | - | (9,943 | ) | |||||
| Equity in earnings of investee | - | 6,176 | ||||||
| Other income | - | 176,064 | ||||||
| Total other income | - | 154,445 | ||||||
| Net loss from discontinued operations | - | (4,312,913 | ) | |||||
| Income tax | - | - | ||||||
| Net loss from discontinued operations | $ | - | $ | (4,312,913 | ) | |||
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Deconsolidation of A.L.I.
A.L.I. Bankruptcy
On December 27, 2023, A.L.I. filed a voluntary bankruptcy petition with the Tokyo District Court, Civil Division 20, “Tokutei Kanzai Kakari” [Special Trusteeship Section], Case ID: No. 8234 of 2023 (Fu) (the “A.L.I. Bankruptcy”).
On January 10, 2024, the Court entered an order (the “January 10 Order”) confirming that bankruptcy proceedings are commenced against the debtor A.L.I., that A.L.I. is found to be insolvent, the appointment of Gaku Iida, Attorney-at-Law, of Abe, Ikubo & Katayama be appointed as the trustee in the bankruptcy proceedings (the “Trustee”) and setting the date and place of the meeting to report on the status of property, to report on calculations and hear opinions regarding the disposition of the bankruptcy proceedings on May 14, 2024, at 10:00 a.m. local time in the Court (the “Status Report Meeting”). The Trustee’s address is Fukuoka Bldg. 9F, 2-8-7 Yaesu, Chuo-ku, Tokyo. A trustee has been appointed by the Bankruptcy Court and the trustee has assumed and will continue to exercise control over all assets and liabilities of A.L.I. The assets of A.L.I. will be liquidated for distribution in accordance with the priorities established by the Bankruptcy Act. The Company expects that no distributions will be available in A.L.I’s liquidation.
As a result of the filing of the Bankruptcy Proceedings and the January 10 Order, the Company concluded that it no longer controls A.L.I. for accounting purposes as of January 10, 2024, in accordance with U.S. GAAP Accounting Standards Codification 810, and, therefore, deconsolidated all assets and liabilities of A.L.I. during the three months ended March 31, 2024 from the Company’s financial statements.
The following table provides the carrying value of assets and liabilities of A.L.I that have been deconsolidated during the three months ended March 31, 2024:
| As at | January 10, 2024 | |||
| ASSETS | ||||
| Current Assets: | ||||
| Cash and cash equivalents | $ | 81,332 | ||
| Total Assets | $ | 81,332 | ||
| LIABILITIES | ||||
| Current Liabilities: | ||||
| Short-term loans payable | $ | 861,540 | ||
| Accounts payable | 4,403,030 | |||
| Accrued expenses | 1,254,820 | |||
| Others payable | 101,651 | |||
| Contract liabilities | 751,614 | |||
| Current portion of long-term loans | 204,584 | |||
| Finance leases liabilities-current | 116,002 | |||
| Operating leases liabilities-current | 225,874 | |||
| Total Current Liabilities | 7,919,115 | |||
| Longer-term liabilities: | ||||
| Long-term loans | 2,873,758 | |||
| Finance leases liabilities-non-current | 31,893 | |||
| Operating leases liabilities-non-current | 145,677 | |||
| Other long-term liabilities | 169,679 | |||
| Total long-term liabilities | 3,221,007 | |||
| Total Liabilities | $ | 11,140,122 | ||
| Net Liabilities deconsolidated | (11,058,790 | ) | ||
| Accumulated other comprehensive loss | 1,044,308 | |||
| 1,044,308 | ||||
| Gain on deconsolidation of A.L.I. | $ | 10,014,482 | ||
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The A.L.I. Bankruptcy constitutes an event of default pursuant to the Closing Notes in the aggregate principal amount of $4,200,000. Consequently, Lind Global may at any time, at its option, (1) demand payment of an amount equal to 120% of the outstanding principal amount of the Closing Notes and (2) exercise all other rights and remedies available to it under the Closing Notes and other agreements entered into among the Company and Lind in connection with the issuance of the Closing Notes (collectively, the “Transaction Documents”); provided, however, that (x) upon the occurrence of the event of default described above, Lind Global, in its sole and absolute discretion (without the obligation to provide notice of such event of default), may: (a) from time-to-time demand that all or a portion of the outstanding principal amount of the Closing Notes be converted into shares of the Company’s common stock at the lower of (i) the then-current Conversion Price (that price being $18.176 per share (the “Floor Price”)) and (ii) eighty-percent (80%) of the average of the three (3) lowest daily volume weighted average prices (“VWAPs”) during the 20 trading days prior to the delivery by Lind Global of the applicable notice of conversion or (b) exercise or otherwise enforce any one or more of Lind Global’s rights, powers, privileges, remedies and interests under the Closing Notes, the Transaction Documents or applicable law.
Liquidity and Capital Resources
As of March 31, 2024, we had $163,275 in cash as compared to $2,072 as of December 31, 2023. As of March 31, 2024, our working capital deficit was $4,305,916.
In assessing our liquidity, management monitors and analyzes our cash, our ability to raise funds and to generate sufficient revenue in the future, and our operating and capital expenditure commitments. We are looking for other sources, such as raising additional capital by issuing shares of stock, to meet our needs for cash. To that end, management is currently scrutinizing potential cost reductions among the operating expenses and other cost reductions to better align our expenses with expected future revenues which resulted in our discontinuance as of December 31, 2023 of our drone photography services and joint research and development services previously provided within our unmanned air mobility business and the discontinuance of our non-core operations formerly carried out by our wholly owned indirect subsidiary, A.L.I. Consequently, the projected revenues from A.L.I.’s businesses we expected when we completed the Business Combination with Aerwins, Inc. will not be achieved. Furthermore, we note that we have a history of operating losses, have not yet achieved profitable operations and expect to incur further losses. We have funded our operations primarily from equity and debt financing and shareholder loans. As of March 31, 2024, cash generated from financing activities was not sufficient to fund operations and, in particular, to fund our growth strategy in the short-term or long-term. In connection with our efforts to obtain additional working capital, we raised $542,000 in cash from the sale of our Common Stock and received various shareholder advances discussed below. See “Liquidity and Capital Resources – Recent Financing Transactions” below. The primary need for liquidity is to fund working capital and general corporate purposes, including the payment of the Mandatory Prepayment portion of the Lind Notes, the expected costs to redesign, build and commercialize our planned MAV and the personnel costs, capital expenditures and the expected costs to redesign, build and commercialize our planned MAV and the personnel costs, capital expenditures and the costs of operating as a public company. The ability to meet these needs depends on our ability to raise funds from debt and/or equity financing which is subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. There can be no assurance that additional financing will be available to us when needed or at all, or obtained on commercially reasonable terms acceptable to us.
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During the year ended December 31, 2023 and three months ended March 31, 2024, one of the Company’s directors, Kiran Sidhu and a former director, Daisuke Katano, paid some payables on behalf of the Company. Mr. Sidhu paid $341,424 in the year 2023 and $45,189 during the three month period ended March 31,2024, as of March 31, 2024, the aggregate amount outstanding is $313,428. Mr. Katano paid $215,725 in the year 2023 and $9,935 is outstanding as of December 31, 2023. The Company will pay to them at an appropriate timing in light of its lack of adequate working capital.
Subsequent to the three months ended March 31, 2024, the Company received an aggregate of $140,000 from third parties. The advance is non-interest bearing, unsecured, and due on demand.
GOING CONCERN
The Company’s financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the three months ended March 31, 2024, the Company has an accumulated deficit of $63,484,844. On December 27, 2023, the Company discontinued the operations of A.L.I. Technologies Inc., a Japanese corporation (“A.L.I.”) which is its wholly-owned indirect subsidiary and filed a voluntary bankruptcy petition with the Tokyo District Court, Civil Division 20, “Tokutei Kanzai Kakari” [Special Trusteeship Section], Case ID: No. 8234 of 2023 (Fu). These factors raise substantial doubt on the Company’s ability to continue as a going concern.
Although the Company moved its operations to Los Angeles, California where it is planning to redesign its MAV and eventually commence production in order to generate sufficient revenue, the Company’s cash position is not sufficient to support the Company’s daily operations. Management intends to raise additional funds by way of debt, or a private or public offering. While the Company believes in the viability of its strategy to commence production of the MAV following its redesign in order to generate sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of debt, or a public or private offering. In addition, the Company may be the subject of complaints or litigation from customers, suppliers, employees, creditors of A.L.I. stemming from its bankruptcy proceedings or other third parties for various actions. The damages sought against the Company in some of these litigation proceedings could be substantial. The Company cannot assure its stockholder that the Company will always have meritorious defenses to the plaintiffs’ claims. While the ultimate effect of these legal actions cannot be predicted with certainty, the Company’s reputation and the result of operations could be negatively impacted. The proceedings the Company may be involved in from time to time, including the A.L.I. Bankruptcy proceedings, could incur substantial judgments, fines, legal fees or other costs and have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
Further, the Company has a significant amount of indebtedness. As of March 31, 2024 and December 31, 2023, the Company had total liabilities of $8,966,839 and $19,547,304, respectively. In addition, A.L.I.’s December 27, 2023 bankruptcy filing constituted an event of default pursuant to the secured convertible notes in the aggregate principal amount of $4,200,000 issued by us to Lind Global on April 12, 2023 and May 23, 2023 and as amended on August 25, 2023 (the “Lind Notes”). Pursuant to the terms of the January Note Amendments and the SPA Amendment, if the Company completes a Public Offering of our securities and make the Mandatory Prepayment no later than April 15, 2024, as provided for in the January Note Amendments, Lind Global has agreed to forbear enforcement of its rights due to the event of default. Since the Company was unable to fulfill these obligations, Lind Global has, at its option, the right to (1) demand payment of an amount equal to 120% of the outstanding principal amount of the Notes and (2) exercise all other rights and remedies available to it under the Notes and other agreements entered into among the Company and Lind in connection with the issuance of the Notes, subject to the Floor Price and cash payment.
The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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Certain Effects of Future Sales of our Common Stock May Have on the Exercise of the Warrants
Sales of a substantial number of shares of our Common Stock in the public market by Lind Global and/or by our other existing securityholders, or the perception that those sales might occur, could depress the market price of our Common Stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our Common Stock. The shares of our common stock issuable upon conversion of the convertible notes held by Lind Global and upon exercise of warrants it holds would represent a substantial percentage of our total outstanding Common Stock as of the date of this report, assuming the sale of all of the Convertible Notes and exercises of all Warrants. Consequently, the sale of all securities that Lind has the right to acquire could result in a significant decline in the public trading price of our Common Stock.
In the event of the exercise of any Warrants for cash, we will receive the proceeds from such exercise. Assuming the exercise in full of all of Warrants for cash, we would receive an aggregate of approximately $2,355,516, but would not receive any proceeds from the sale of the shares of Common Stock issuable upon such exercise. To the extent any of the Warrants are exercised on a “cashless basis,” we will not receive any proceeds upon such exercise. We intend to use the proceeds received from the exercise of the Warrants, if any, for working capital and general corporate purposes, including personnel costs, capital expenditures and the costs of operating as a public company. The amounts that we actually spend for any specific purpose may vary significantly, and will depend on a number of factors including, but not limited to, market conditions. We believe the likelihood that holders of our Warrants will exercise their Warrants, and therefore the amount of cash proceeds we would receive, is dependent upon the trading price of our Common Stock, the last reported sales price for which was $12.80 per share on November 27, 2023. If the trading price of our Common Stock is less than the Warrant Exercise Prices, respectively, we expect that holders of the Warrants will not exercise them. There is no guarantee the Warrants will be in the money following the time they become exercisable and prior to their expiration, and as such, the Warrants may expire worthless and we may receive no proceeds from the exercise of Warrants. We will continue to evaluate the probability of Warrant exercises and the merit of including potential cash proceeds from the exercise of the Warrants in our future liquidity projections, but we do not currently expect to rely on the cash exercise of Warrants to fund our operations. We instead currently expect to rely on the sources of funding described below, if available on reasonable terms or at all.
Recent Financing Transactions
Lind Global Financing. On April 12, 2023, we entered into the Purchase Agreement with Lind Global pursuant to which we agreed to issue to Lind Global up to three secured convertible promissory notes (the “Convertible Notes” and each a “Convertible Note”) in the aggregate principal amount of $6,000,000 for an aggregate purchase price of $5,000,000 and warrants (the “Warrants” and each a “Warrant”) to purchase 56,016 shares of the Company’s common stock (the “Transaction”). On August 25, 2023 (the “Amendment Date”), we entered into an Amendment to Senior Convertible Promissory Note First Closing Note and an Amendment to the Senior Convertible Promissory Note Second Closing Note with Lind Global (collectively, the “Floor Note Amendments”) which amended the Conversion Price (as defined below) to include a floor price of $18.176 (the “Floor Price”). In addition to inclusion of a Floor Price, the Note Amendments also provide that at the option of Selling Securityholder, if in connection with a conversion under the Closing Notes, as amended, the Conversion Price is deemed to be the Floor Price, then in addition to issuing the Conversion Shares (as defined in the Closing Notes) at the Floor Price, we agreed to pay to Selling Securityholder a cash amount equal to (i) the number of shares of common stock that would be issued to Selling Securityholder upon a conversion determined by dividing the dollar amount to be converted being paid in shares of common stock by ninety percent (90%) of the lowest single VWAP during the twenty (20) Trading Days prior to the applicable date of conversion (notwithstanding the Floor Price) less (ii) the number of Conversion Shares issued to Selling Securityholder in connection with the conversion; and (iii) multiplying the result thereof by the VWAP on the Conversion Date.
The closings of the Transaction (the “Closings and each a “Closing”) occurred in tranches (each a “Tranche”): the Closing of the first Tranche (the “First Closing”) occurred on April 12, 2023 and consisted of the issuance and sale to Lind Global of a Convertible Note with a purchase price of $2,100,000 and a principal amount of $2,520,000 (the “First Closing Note”) and the issuance to Lind Global of a Warrant to acquire 23,527 shares of common stock and the Closing of the second Tranche (the “Second Closing) which occurred on May 23, 2023 and consisted of the issuance and sale to Lind Global of a Convertible Note with a purchase price of $1,400,000 and a principal amount of $1,680,000 (the “Second Closing Note”), and the issuance to Lind Global of a Warrant to acquire 15,685 shares of common stock. The Convertible Notes issued in the First Closing and the Second Closing are hereinafter referred to as the “Closing Notes”. As provided for in the January Note Amendments, neither party to the Purchase Agreement is obligated to complete the previously agreed on third Tranche (the “Third Closing), which would have consisted of the issuance and sale to Lind Global of a Convertible Note with a purchase price of $1,500,000 with a principal amount of $1,800,000, and the issuance to Lind Global a Warrant to acquire 16,805 shares of common stock. The Third Closing would have closed upon the effectiveness of the Registration Statement discussed below, but the Registration Statement was never declared effective by the SEC. Pursuant to the Purchase Agreement, at each Closing, the Company agreed to pay Lind Global a commitment fee in an amount equal to 2.5% of the funding amount being funded by Lind Global at the applicable Closing. Pursuant to the Purchase Agreement, at each Closing, the Company agreed to pay Lind Global a commitment fee in an amount equal to 2.5% of the funding amount being funded by Lind Global at the applicable Closing.
The Convertible Note issued in the First Closing has a maturity date of April 12, 2025 and the Convertible Note issued in the Second Closing has a maturity date of May 23, 2025 (the “Maturity Date”).
Each Convertible Note has a conversion price equal to the lesser of: (i) US$9.00 (“Fixed Price”); or (ii) 90% of the lowest single volume weighted average price during the 20 Trading Days prior to conversion of each Convertible Note (the “Conversion Price”) “), provided that in no event shall the Conversion Price be less than $18.176 (the “Floor Price”), and in the event that the calculation as set forth above would result in a Conversion Price less than the Floor Price, the “Conversion Price” shall be the Floor Price.
In addition to inclusion of a Floor Price, the Note Amendments also provide that at the option of Selling Securityholder, if in connection with a conversion under the Closing Notes, as amended, the Conversion Price is deemed to be the Floor Price, then in addition to issuing the Conversion Shares (as defined in the Closing Notes) at the Floor Price, we agreed to pay to Selling Securityholder a cash amount equal to (i) the number of shares of common stock that would be issued to Selling Securityholder upon a conversion determined by dividing the dollar amount to be converted being paid in shares of common stock by ninety percent (90%) of the lowest single VWAP during the twenty (20) Trading Days prior to the applicable date of conversion (notwithstanding the Floor Price) less (ii) the number of Conversion Shares issued to Selling Securityholder in connection with the conversion; and (iii) multiplying the result thereof by the VWAP on the Conversion Date.
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The Convertible Note will not bear interest other than in the event that if certain payments under the Convertible Note as set forth therein are not timely made, the Convertible Note will bear interest at the rate of 2% per month (prorated for partial months) until paid in full. The Company will have the right to prepay the Convertible Note under the terms set forth therein.
The Warrants were issued to Lind Global without payment of any cash consideration. Each Warrant will have an exercise period of 60 months from the date of issuance. The Exercise price of the First Closing Warrant and Second Closing Warrant is $89.26 per share and $73.16 per share, respectively, subject to adjustments as set forth in the Warrant.
In the event that there is no effective registration statement registering the shares underlying the Warrants or upon the occurrence of a Fundamental Transaction as defined in the Purchase Agreement, then the Warrants may be exercised by means of a “cashless exercise” at the holder’s option, such that the holder may use the appreciated value of the Warrants (the difference between the market price of the underlying shares of common stock and the exercise price of the underlying warrants) to exercise the warrants without the payment of any cash.
In accordance with our obligations under the Purchase Agreement, we filed a registration statement on Form S-1 on May 12, 2023 (the “May 2023 Registration Statement”) with the SEC to register under the Securities Act the resale by Lind Global of up to 112,223 shares of common stock issuable by us upon partial conversion of the Convertible Notes and exercise of the Warrants issued by us in connection with the Purchase Agreement. We plan to withdraw the May 2023 Registration Statement as permitted pursuant to the SPA Amendment No. 2 discussed below.
The Purchase Agreement contains customary registration rights, representations, warranties, conditions and indemnification obligations by each party, including our agreement to refrain from engaging in certain “Prohibited Transactions” as defined in the Purchase Agreement, to hold a special meeting of shareholders for the purpose of obtaining shareholder approval of the Transactions, certain events giving rise to a default under the Convertible Notes, obligations to use the proceeds from certain future financings to repay a portion of the principal amount of the Convertible Notes, our pledge to Lind Global of the ownership interests in our subsidiaries, a grant by us and our subsidiaries of a security interest in all of their respective assets and rights as collateral for the obligations due under the Convertible Notes, and a guaranty by our subsidiaries of our obligations under the Convertible Notes.
The A.L.I. Bankruptcy constitutes an event of default pursuant to the Closing Notes in the aggregate principal amount of $4,200,000. Consequently, Lind Global may at any time, at its option, (1) demand payment of an amount equal to 120% of the outstanding principal amount of the Closing Notes and (2) exercise all other rights and remedies available to it under the Closing Notes and other agreements entered into among the Company and Lind in connection with the issuance of the Closing Notes (collectively, the “Transaction Documents”); provided, however, that (x) upon the occurrence of the event of default described above, Lind Global, in its sole and absolute discretion (without the obligation to provide notice of such event of default), may: (a) from time-to-time demand that all or a portion of the outstanding principal amount of the Closing Notes be converted into shares of the Company’s common stock at the lower of (i) the then-current Conversion Price (that price being $18.176 per share (the “Floor Price”)) and (ii) eighty-percent (80%) of the average of the three (3) lowest daily volume weighted average prices (“VWAPs”) during the 20 trading days prior to the delivery by Lind Global of the applicable notice of conversion or (b) exercise or otherwise enforce any one or more of Lind Global’s rights, powers, privileges, remedies and interests under the Closing Notes, the Transaction Documents or applicable law.
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The Closing Notes also provide that at the option of Lind Global, if in connection with a conversion under the Closing Notes, the Conversion Price is deemed to be the Floor Price, then in addition to issuing the Conversion Shares (as defined in the Closing Notes) at the Floor Price, the Company will also pay to Lind Global a cash amount equal to (i) the number of shares of common stock that would be issued to Lind Global upon a conversion determined by dividing the dollar amount to be converted being paid in shares of common stock by ninety percent (90%) of the lowest single VWAP during the twenty (20) trading days prior to the applicable date of conversion (notwithstanding the Floor Price) less (ii) the number of shares of the Company’s common stock issued to Lind Global in connection with the conversion; and (iii) multiplying the result thereof by the VWAP on the date of conversion.
On January 23, 2024, the Company and Lind Global entered into an Amendment No. 2 to Senior Convertible Promissory Note First Closing Note and an Amendment No. 2 to the Senior Convertible Promissory Note Second Closing Note (collectively, the “January Note Amendments”) which amended the Closing Notes to, subject to the conditions discussed below, (i) reduce the aggregate principal amount of the Closing Notes from $4,200,000 to $3,500,000, (ii) require the Company to repay an aggregate of $1,750,000 of the principal amount of the Closing Notes no later than the closing date of a public offering of the Company’s common stock where it receives gross proceeds of at least $13,500,000 (the “Public Offering”) no later than April 15, 2024 and (iii) requires Lind Global to convert no less than an aggregate of $1,750,000 of the Closing Notes no later than 11 months after the closing of the Public Offering, provided that at the time of such conversion Lind Global receives shares of common stock that may be disposed of without restrictive legend at their issuance pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”) or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act (the “Mandatory Conversion Amount”).
In addition, on January 23, 2024, the Company and Lind Global entered into Amendment No. 2 to Securities Purchase Agreement (the “SPA Amendment No. 2”) to, subject to the conditions discussed below, (i) eliminate the obligation of the Company and Lind Global to complete the Third Closing discussed above, (ii) delete the clause obligating the Company to register the shares of common stock issuable upon conversion of the Closing Notes and exercise of the Warrants (collectively, the “Closing Securities”) or pay Lind Global any delay payments as a result of the Company’s failure to register the Closing Securities, (iii) eliminate certain restrictions on the Company’s right to issue equity and debt in future transactions and (iv) eliminate Lind Global’s right to participate in future offerings of the Company’s securities, other than its rights to participate in this offering.
The January Note Amendments and the SPA Amendment are subject to the Company completing a public offering of its Common Stock where it receives gross proceeds of at least $13,500,000 (the “Public Offering”) and making the Mandatory Prepayment as discussed above. In as much as the Company failed to complete the Public Offering by April 15, 2024, Lind Global is not obligated to fulfill the terms of the January Note Amendments. The Company plans to enter into discussions with Lind Global to extend the time period in which it is obligated to complete the Public Offering.
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Recent Sale of Unregistered Securities
On February 27, 2024 and March 22, 2024, we entered into and completed the sale to two unrelated accredited investors (the “Investors”), of 100,000 shares and 35,500 shares, respectively, of our unregistered Common Stock at a price of $4.00 per share for an aggregate of $542,000 in cash (the “Offerings”). The Offerings were made pursuant to the terms of a Subscription Agreement. In connection with the Offerings, the Company entered into a Piggyback Registration Rights Agreement with each Investor whereby the Company agreed to register the Common Stock acquired by the Investor in the Offering if at any time while the Investor remains the holder of such shares, the Company proposes to file any registration statement under the Securities Act of 1933, as amended (the “Securities Act”) with respect to its Common Stock for its own account or for shareholders of the Company for their account, subject to certain customary exceptions.
Cash Flows for the Three Months Ended March 31, 2024 and 2023
The following table sets forth summary of our cash flows for the periods indicated:
For the three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net cash provided by (used in) continuing operating | $ | (380,797 | ) | $ | 810,374 | |||
| Net cash used in investing activities | - | - | ||||||
| Net cash provided by financing activities | 542,000 | 1,595,831 | ||||||
| Net cash used in discontinued operations | - | (2,615,263 | ) | |||||
| Net decrease in cash and cash equivalents | 161,203 | (209,058 | ) | |||||
| Effect of exchange rate changes | - | (61,552 | ) | |||||
| Cash and cash equivalents, beginning of the year | 2,072 | 300,943 | ||||||
| Cash and cash equivalents at beginning of year held by discontinued operation | - | - | ||||||
| Cash and cash equivalents at ending of the year held by discontinued operation | - | - | ||||||
| Cash and cash equivalents, end of the year | $ | 163,275 | $ | 30,333 | ||||
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Operating Activities
Net cash used in operating activities was $380,797 for the three months ended March 31, 2024, primarily consisting of the following:
● Net income of $8,926,531 for the three months ended March 31, 2024;
● Increase in Accounts payable of $163,241.
Net cash used in operating activities was $3,230,216 for the three months ended March 31, 2023, primarily consisting of cash used in discontinued operations.
Investing Activity
Net cash used in investing activities amounted to $Nil for the three months ended March 31, 2024.
Net cash used in investing activities was $45,559 for the three months ended March 31, 2023, primarily consisting of cash used in discontinued operations.
Financing Activities
Net cash provided by financing activities amounted to $542,000, for the three months ended March 31, 2024 and primarily consisted of proceeds from issuance of shares.
Net cash used in investing activities was $3,066,717 for the three months ended March 31, 2023, primarily consisting of cash used in discontinued operations and proceeds from reverse recapitalization.
Contractual obligations
Lease commitment
The Company’s subsidiary, A. L. I. Technologies entered into 13 leases for its office space, multi-function printers and a vehicle, which were classified as operating leases. A. L. I. Technologies also entered into two leases classified as finance leases.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2024.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements. These financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenue and expenses, to disclose contingent assets and liabilities on the date of the financial statements, and to disclose the reported amounts of revenue and expenses incurred during the financial reporting period.
The most significant estimates and assumptions include the valuation of warrant liabilities and derivative liabilities, accounts receivable, advances to suppliers, useful lives of property and equipment, the recoverability of long-lived assets, provision necessary for contingent liabilities, and revenue recognition. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application.
We believe critical accounting policies as disclosed in this Form 10-Q reflect the more significant judgments and estimates used in preparation of our financial statements.
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The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our financial statements:
Use of Estimates
In preparing the financial statements in conformity U.S. GAAP, the management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements. Significant estimates required to be made by management include, but are not limited to, the allowance for doubtful accounts, useful lives of property and equipment, the impairment of long- lived assets, valuation allowance of deferred tax assets, and revenue recognition. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable, net represent the amounts that the Company has an unconditional right to consideration, which are stated at the original amount less an allowance for doubtful receivables. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. The Company usually determines the adequacy of reserves for doubtful accounts based on individual account analysis and historical collection trends. The Company establishes a provision for doubtful receivables when there is objective evidence that the Company may not be able to collect amounts due. The allowance is based on management’s best estimates of specific losses on individual exposures, as well as a provision on historical trends of collections. The provision is recorded against accounts receivables balances, with a corresponding charge recorded in the statements of operations and comprehensive income. Delinquent account balances are written off against the allowance for doubtful accounts after management has determined that the likelihood of collection is remote. In circumstances in which the Company receives payment for accounts receivable that have previously been written off, the Company reverses the allowance and bad debt.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers”.
To determine revenue recognition for contracts with customers, the Company performs the following five steps : (i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. Revenue amount represents the invoiced value and net of a value-added tax (“Consumption Tax”). The Consumption Tax on sales is calculated at 10% of gross sales.
When another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC Topic 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent.
Warrant Liabilities
We account for the Warrants in accordance with the guidance contained in Accounting Standards Codification (“ASC”) 815-40 — Derivatives and Hedging — Contracts in Entity’s Own Equity (“ASC 815), under which the Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, we classify the Warrants as liabilities at their fair value and adjust the Warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statements of operations. The Placement Warrants, Public Warrants, and Debt Warrants for periods where no observable traded price was available are valued using a Black Scholes model.
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Share-based Compensation
We account for the share-based compensation in accordance with the guidance contained in Accounting Standards Codification (“ASC”) 718 — “Compensation – Stock Compensation” and ASC 505, “Equity Based Payments to Non-Employees”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
Convertible Promissory Notes and Derivative Instruments
The Company accounts for the fair value of the conversion feature in accordance with the guidance contained in ASC 815, which requires the Company to bifurcate and separately account for the conversion feature as an embedded derivative contained in the Company’s convertible promissory note. Accordingly, we account for the conversion option as an embedded derivative contained in the Company’s promissory note at fair value. The derivative liability is required to be remeasured at each reporting date and the change in fair value is recognized in our statements of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Kiran Sidhu, our President and Chief Executive Officer, is our principal executive officer and Yinshun (Sue) He, our Chief Financial Officer, is our principal financial officer.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2024. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our principal executive officer and principal financial officer, in a manner that allowed for timely decisions regarding disclosure. Management has determined that a material weakness exists due to administrative delays and other issues stemming from the bankruptcy filing of A.L.I. and the appointment of a bankruptcy trustee.
Changes in internal control over financial reporting
Our principal executive officer and principal financial officer have also indicated that, upon evaluation, there were no changes in our internal control over financial reporting during the three months ended March 31, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Our management, including our principal executive officer and principal financial officer, does not expect that its disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control. The design of any systems of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Individual persons perform multiple tasks which normally would be allocated to separate persons and therefore extra diligence must be exercised during the period these tasks are combined.
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PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of the ultimate liability, if any, from such claims cannot be determined. As of the date hereof, other than as described below, there are no legal claims currently pending or, to our knowledge, threatened against us or any of our officers or directors in their capacity as such or against any of our properties that, in the opinion of our management, would be likely to have a material adverse effect on our financial position, results of operations or cash flows.
On December 27, 2023, A.L.I. filed a voluntary bankruptcy petition with the Tokyo District Court, Civil Division 20, “Tokutei Kanzai Kakari” [Special Trusteeship Section], Case ID: No. 8234 of 2023 (Fu) (the “A.L.I. Bankruptcy”). On January 10, 2024, the Court entered an order (the “January 10 Order”) confirming that bankruptcy proceedings are commenced against the debtor A.L.I., that A.L.I. is found to be insolvent, the appointment of Gaku Iida, Attorney-at-Law, of Abe, Ikubo & Katayama be appointed as the trustee in the bankruptcy proceedings (the “Trustee”) and setting the date and place of the meeting to report on the status of property, to report on calculations and hear opinions regarding the disposition of the bankruptcy proceedings on May 14, 2024, at 10:00 a.m. local time in the Court (the “Status Report Meeting”). The Trustee’s address is Fukuoka Bldg. 9F, 2-8-7 Yaesu, Chuo-ku, Tokyo.
The Trustee presented a report at the Status Report Meeting that summarized the circumstances leading to the commencement of the bankruptcy proceedings, the progress and current status of the bankrupt and the bankruptcy estate, status of assets, the status of liabilities, existence or non-existence of circumstances necessitating a decision on a protective action or assessment of directors’ and officers’ liabilities and future procedures. The Trustee’s report stated that there is no prospect of distribution to the general creditors at this time and that it would continue its efforts to determine ownership rights for various assets, resolve contractual issues and determine claims related to taxes, public dues and labor claims. The next creditors’ meeting has been set for Monday, September 2, 2024, from 1:30 to 3:00 p.m. local time in the Court.
As a result of the filing of the Bankruptcy Proceedings and the January 10 Order, the Company concluded that it no longer controls A.L.I. for accounting purposes as of January 10, 2024, in accordance with U.S. GAAP Accounting Standards Codification 810, and, therefore, A.L.I. was deconsolidated from the Company’s consolidated financial statements prospectively, commencing in the first quarter of 2024. See, however, “Risk Factors – We are involved in litigation from time to time and, as a result, we could incur substantial judgments, fines, legal fees or other costs.” in Item 1A of our Form 10-K for the year ended December 31, 2023.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 27, 2024 and March 22, 2024, we entered into and completed the sale to two unrelated accredited investors (the “Investors”), of 100,000 shares and 35,500 shares, respectively, of our unregistered Common Stock at a price of $4.00 per share for an aggregate of $542,000 in cash (the “Offerings”).
These shares of our Common Stock were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), or Regulation D or Regulation S promulgated thereunder since the issuance did not involve a public offering. The recipients were sophisticated investors and had access to information normally provided in a prospectus regarding the Company. In addition, the recipients were “accredited investors” as that term is defined in Rule 501(a) of Regulation D. Further, the issuance was not a “public offering” as defined in Section 4(a)(2) of the Securities Act due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of shares offered. The Company did not undertake an offering in which it sold a high number of shares to a high number of investors. In addition, the recipients had the necessary investment intent as required by Section 4(a)(2) since they agreed to allow us to include a legend on shares of Common Stock stating that such shares are restricted pursuant to Rule 144 of the Securities Act. These restrictions ensure that these shares would not be immediately redistributed into the market and therefore not be part of a “public offering.”
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The A.L.I. Bankruptcy constitutes an event of default pursuant to the Closing Notes in the aggregate principal amount of $4,200,000. Consequently, Lind Global may at any time, at its option, (1) demand payment of an amount equal to 120% of the outstanding principal amount of the Closing Notes and (2) exercise all other rights and remedies available to it under the Closing Notes and other agreements entered into among the Company and Lind in connection with the issuance of the Closing Notes (collectively, the “Transaction Documents”); provided, however, that (x) upon the occurrence of the event of default described above, Lind Global, in its sole and absolute discretion (without the obligation to provide notice of such event of default), may: (a) from time-to-time demand that all or a portion of the outstanding principal amount of the Closing Notes be converted into shares of the Company’s common stock at the lower of (i) the then-current Conversion Price (that price being $18.176 per share (the “Floor Price”)) and (ii) eighty-percent (80%) of the average of the three (3) lowest daily volume weighted average prices (“VWAPs”) during the 20 trading days prior to the delivery by Lind Global of the applicable notice of conversion or (b) exercise or otherwise enforce any one or more of Lind Global’s rights, powers, privileges, remedies and interests under the Closing Notes, the Transaction Documents or applicable law.
On January 23, 2024, the Company and Lind Global entered into the January Note Amendments which amended the Closing Notes to, subject to the conditions discussed below, (i) reduce the aggregate principal amount of the Closing Notes from $4,200,000 to $3,500,000, (ii) require the Company to repay an aggregate of $1,750,000 of the principal amount of the Closing Notes no later than the closing date of a public offering of the Company’s common stock where it receives gross proceeds of at least $13,500,000 (the “Public Offering”) by April 15, 2024 and (iii) requires Lind Global to convert no less than an aggregate of $1,750,000 of the Closing Notes no later than 11 months after the closing of the Public Offering, provided that at the time of such conversion Lind Global receives shares of common stock that may be disposed of without restrictive legend at their issuance pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”) or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act (the “Mandatory Conversion Amount”).
In addition, on January 23, 2024, the Company and Lind Global entered into the SPA Amendment No. 2 to, subject to the conditions discussed below, (i) eliminate the obligation of the Company and Lind Global to complete the Third Closing, (ii) delete the clause obligating the Company to register the shares of common stock issuable upon conversion of the Closing Notes and exercise of the Warrants (collectively, the “Closing Securities”) or pay Lind Global any delay payments as a result of the Company’s failure to register the Closing Securities, (iii) eliminate certain restrictions on the Company’s right to issue equity and debt in future transactions and (iv) eliminate Lind Global’s right to participate in future offerings of the Company’s securities, other than its rights to participate in the Public Offering.
The January Note Amendments and the SPA Amendment are subject to the Company completing the Public Offering and making the Mandatory Prepayment as discussed above. In as much as the Company failed to complete the Public Offering by April 15, 2024, Lind Global is not obligated to fulfill the terms of the January Note Amendments. The Company plans to enter into discussions with Lind Global to extend the time period in which it is obligated to complete the Public Offering.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
The information set forth in Item 3 of this Quarterly Report on Form 10-Q is incorporated by reference into this Item 5.
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ITEM 6. EXHIBITS
Exhibit No. |
Description | |
| 31.1* | Rule 13a-14(a) Certification of Principal Executive Officer. | |
| 31.2* | Rule 13a-14(a) Certification of Principal Financial Officer. | |
| 32.1* | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Principal Executive Officer and Principal Financial Officer. | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definitions Linkbase | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104* | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| * | Filed or furnished herewith. |
| + | Management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AERWINS TECHNOLOGIES INC. | ||
| Dated: May 28, 2024 | By: | /s/ Kiran Sidhu |
| Name: | Kiran Sidhu | |
| Title: | Chief Executive Officer (Principal Executive Officer) | |
| Dated: May 28, 2024 | By: | /s/ Yinshun (Sue) He |
| Name: | Yinshun (Sue) He | |
| Title: | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
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