UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

 

Commission file number: 333-150888

 

T3 Motion, Inc.

(Exact name of Company as specified in its charter)

 

 

Company’s telephone number: (714) 619-3600

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

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

 

Indicate by check mark if the Company is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the Company is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of Company’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

Number of shares of common stock outstanding as of March 31, 2010: 48,663,462.

 

 

TABLE OF CONTENTS

 

TO ANNUAL REPORT ON FORM 10-K

 

FOR YEAR ENDED DECEMBER 31, 2009

 

 

This annual report on Form 10-K contains certain statements that may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this report are forward-looking statements. When used in this report, the words “may,” “will,” “should,” “would,” “anticipate,” “estimate,” “possible,” “expect,” “plan,” “project,” “continuing,” “ongoing,” “could,” “believe,” “predict,” “potential,” “intend,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, availability of additional equity or debt financing, changes in sales or industry trends, competition, retention of senior management and other key personnel, availability of materials or components, ability to make continued product innovations, casualty or work stoppages at the Company’s facilities, adverse results of lawsuits against the Company and currency exchange rates. Forward-looking statements are based on assumptions and assessments made by the Company’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, as there can be no assurance that these forward-looking statements will prove to be accurate and speak only as of the date hereof. Management undertakes no obligation to publically release any revisions to these forward-looking statements that may reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. This cautionary statement is applicable to all forward-looking statements contained in this report.

 

In this document, the words “we,” “our,” “ours,” “us,” “it,” “T3 Motion” and the “Company” refer to T3 Motion, Inc. and our subsidiary, T3 Motion, Ltd.

 

 

Overview

 

T3 Motion, Inc. was incorporated in the State of Delaware on March 16, 2006. We are principally engaged in the design, manufacturing and marketing of personal mobility vehicles powered by electric motors.

 

Our initial product is the T3 Series, an electric stand-up vehicle (“ESV”) designed specifically for public and private security personnel that is powered by a quiet zero-gas emission electric motor. We delivered to market the first T3 Series vehicles in early 2007. In September 2009, we introduced the CT Micro Car, a four wheeled electric car categorized as a low-speed vehicle (“LSV”) and a neighborhood electric vehicle (“NEV”). We plan to continue to introduce a series of product variants based on the initial T3 Series vehicle and the modularity of the sub-systems we have created.

 

The T3 Series vehicle design has been highly recognized for professional-based applications. Its iconic look has garnered international acclaim including the Innovation Award for Best Vehicle at the 2007 International Association of Chiefs of Police (IACP) Convention in New Orleans, Louisiana. Additionally, the T3 Series was honored at the International Spark Design Awards in Pasadena, California, in 2007. The T3 Series has been featured on local, national and international television and print media being deployed by professionals from law enforcement and private security demonstrating the command presence coupled with the vehicle’s approachability by the public. In addition to being an effective performance-based patrol vehicle, it aids in public relations by enabling two-way conversations between the professional operator and the general public. This unique dynamic allows officers and personnel to more effectively fulfill Community-Oriented Policing (“COPS”) initiatives that have become prevalent since 9/11.

 

The Company is headquartered in Costa Mesa, California and has a sales office in the United Kingdom. We have sales distributors in South Korea, Canada, Mexico, Puerto Rico, Australia, the Middle East and the People’s Republic of China.

 

History and Development of the Company

 

We have assembled a veteran management team with production and branding experience headquartered in Costa Mesa, California. This team, with more than 50 years of combined experience in production, electrical motor applications and product branding experience, developed working prototypes of the T3 Series ESV. By early 2007, we launched our first ESV, the T3 Series.

 

In late 2008, we launched the CT Micro Car, an NEV. We partnered with CT&T to co-brand and develop the CT Micro Car. CT&T will continue to produce the CT, while we will be the exclusive reseller and distributor in Canada and the United States for the law enforcement, security and government markets. Shipments commenced during the fourth quarter of 2009.

 

Concurrently, management is focusing on the manufacturing process to continue to reduce production costs for the T3 Series. Management also continues to implement the sales and marketing strategy to ensure the delivery of a quality low-cost product into the market place. In 2009 and 2008, we raised $2.0 million and $6.7 million in equity capital (net of offering costs), respectively, added executives to our board of directors and management team and expanded into the government, private security, and military sectors.

 

Corporate Background

 

Vision Financing

 

On December 30, 2009, we sold $3,500,000 in debentures and warrants to Vision Opportunity Master Fund, Ltd. (“Vision”) through a private placement pursuant to a Securities Purchase Agreement (the “Purchase Agreement”). We issued to Vision, 10% Secured Convertible Debentures (“Debentures”), with an aggregate principal value of $3,500,000.

The Debentures accrue interest on the unpaid principal balance at a rate equal to 10% per annum. The maturity date is December 30, 2010. At any time after the 240^th calendar day following the issue date, the Debentures are convertible into “units” of Company securities at a conversion price of $1.00 per unit, subject to adjustment. Each “unit” consists of one share of our Series A Convertible Preferred Stock and a warrant to purchase one share of our common stock. We may redeem the Debentures in whole or part at any time after June 30, 2010 for cash in an amount equal to 120% of the principal amount plus accrued and unpaid interest and certain other amounts due in respect of the Debenture. Interest on the Debentures is payable in cash on the maturity date or, if sooner, upon conversion or redemption of the Debentures. In the event of default under the terms of the Debentures, the interest rate increases to 15% per annum.

 

The Purchase Agreement provides that during the 18 months following December 30, 2009, if we or our wholly-owned subsidiary, T3 Motion, Ltd., a company incorporated under the laws of the United Kingdom (the “Subsidiary”), issue common stock, common stock equivalents for cash consideration, indebtedness, or a combination of such securities in a subsequent financing (the “Subsequent Financing”), Vision may participate in such Subsequent Financing in up to an amount equal to Vision’s then percentage ownership of our common stock.

 

The Purchase Agreement also provides that from December 30, 2009 to the date that the Debentures are no longer outstanding, if the Company effects a Subsequent Financing, Vision may elect, in its sole discretion, to exchange some or all of the Debentures then held by Vision for any securities issued in a Subsequent Financing on a “$1.00 for $1.00” basis (the “Exchange”); provided, however, that the securities issued in a Subsequent Financing will be irrevocably convertible, exercisable, exchangeable, or resettable (or any other similar feature) based on the price equal to the lesser of (i) the conversion price, exercise price, exchange price, or reset price (or such similar price) in such Subsequent Financing and (ii) $1.00 per share of common stock. Vision is obligated to elect the Exchange on a $0.90 per $1.00 basis (not a $1.00 for $1.00 basis) if certain conditions regarding the Subsequent Financing and other matters are met.

 

Also pursuant to the Purchase Agreement, Vision received Series G Common Stock Purchase Warrants (the “Warrants”). Pursuant to the terms of Warrants, Vision is entitled to purchase up to an aggregate of 3,500,000 shares of our common stock at an exercise price of $0.70 per share, subject to adjustment. The Warrants have a term of five years after the issue date of December 30, 2009.

 

The Subsidiary entered into a Subsidiary Guarantee (“Subsidiary Guarantee”) for our benefit to guarantee to Vision the obligations due under the Debentures. We and the Subsidiary also entered into a Security Agreement (“Security Agreement”) with Vision, under which we and the Subsidiary granted to Vision a security interest in certain of our and the Subsidiary’s property to secure the prompt payment, performance, and discharge in full of all obligations under the Debentures and the Subsidiary Guarantee.

 

On December 30, 2009, we also entered into a Securities Exchange Agreement (the “Exchange Agreement”) with Vision and Vision Capital Advantage Fund, L.P. (“VCAF” and, together with Vision, the “Vision Parties”). Pursuant to Exchange Agreement, we issued to the Vision Parties an aggregate of 9,370,698 shares of Preferred Stock. 3,055,000 shares of Preferred Stock were issued in exchange for the delivery and cancellation of 10% Secured Convertible Debentures previously issued by us to the Vision Parties in the principal amount of $2,200,000 (issued December 30, 2008) and $600,000 (issued May 28, 2009) plus accrued interest of $255,000 in conjunction with the issuance of Series A Preferred Stock, we issued Class F Warrants to purchase 6,110,000 shares of Common Stock at $0.70 per share; 2,263,750 shares of Preferred Stock were issued in exchange for the delivery and cancellation of all Series A, B, C, D, E and F warrants (totalling 10,972,769 shares) previously issued by us to the Vision Parties valued at $1,155,390 (We recorded a gain of $45,835 related to the exchange of the Warrants for preferred stock); and 4,051,948 shares of Preferred Stock were issued to satisfy the Company’s obligation to issue equity to the Vision Parties pursuant to a Securities Purchase Agreement dated on March 24, 2008 and amended on May 28, 2009.

 

Under the Exchange Agreement, Ki Nam, our Chief Executive Officer and Chairman of the Board of Directors of the Company, also agreed to convert a promissory note plus the accrued interest, previously issued to him by the Company into 976,865 shares of Preferred Stock and Series G Common Stock Purchase Warrants to purchase up to 1,953,730 shares of common stock (which warrants have the same terms as the Warrants issued to Vision pursuant to the Purchase Agreement see below).

The Company, Mr. Nam and Vision Parties also entered into a Stockholders Agreement, whereby Mr. Nam agreed to vote, in the election of members of the Company’s board of directors, all of his voting shares of the Company in favor of (i) two nominees of Vision Parties so long as their ownership of common stock of the Company is 22% or more or (ii) or one nominee of Vision Parties so long as their ownership of common stock of the Company is 12% or more.

 

On May 28, 2009, the Company issued to Vision, 10% Debentures, with an aggregate principal value of $600,000. As noted above, these 10% Debentures were cancelled in connection with the December 30, 2009 financing with Vision. Additionally, Vision received Series E Common Stock Purchase Warrants to purchase up to an aggregate 300,000 shares of the Company’s common stock at an exercise price of $1.20 per share. Such Series E Common Stock Purchase Warrants were exchanged for shares of Preferred Stock in connection with the December 30, 2009 financing with Vision.

 

On December 30, 2008, the Company sold $2.2 million in debentures and warrants through a private placement to Vision pursuant to a Securities Purchase Agreement. On December 30, 2009, pursuant to the Exchange Agreement noted above, the Company issued to the Vision Parties, shares of Preferred Stock in exchange for the delivery and cancellation of these debentures and accrued interest.

 

The debt discount was allocated between the warrants and the effective BCF, of $1,278,873, and $1,840,809, respectively, for the year ended December 31, 2009, and $607,819 and $607,819, respectively, for 2008. The discount of $2,621,898 and $1,213,402 as of December 31, 2009 and 2008, respectively, related to the warrants and the BCF, is being amortized over the term of the Debentures. The Company amortized $2,571,141 and $2,236 for the years ended December 31, 2009 and 2008, respectively. The remaining unamortized warrant and beneficial conversion feature values are recorded as a discount on the Debentures on the accompanying balance sheet.

 

Market and Industry Overview

 

The professional personal mobility market has experienced growth in the past several years. Personal transportation in the United States has become a necessity with law enforcement and government agencies, university campuses, airports, shopping malls, office complexes, events/promotions, military/government, and industrial areas. Similar needs exist in the Middle East, Europe, Asia, Australia, New Zealand, and Latin America.

 

Adding to the substantial market for security in the post-9/11 world, increasing awareness of global warming is creating a rapidly growing market for clean technologies. As a zero-gas emissions electric vehicle, the T3 Series and CT Micro Car are positioned to take advantage of this trend.

 

The increase in homeland security spending since 9/11 has been substantial. We have an opportunity to capture a substantial portion of this market created by police department purchases of police cars, associated upgrades, bicycles and other security equipment purchased with funds from the U.S. Department of Homeland Security (“DHS”).

 

Below is the list of specific markets that we believe will continue to experience growth and we intend to serve.

 

Law Enforcement.  As police and sheriff’s departments nationwide continue to deploy more law enforcement personnel, the Company will continue to focus on serving this market. According to the U.S. Department of Justice, as of 2007, there were 1,017,984 full-time state and local law enforcement personnel.

 

College and University Campuses.  According to the U.S. Department of Education 2007-2008, there were more than 4,200 higher education institutions in the United States.

 

High Schools.  According to the National Center for Educational Statistics: 2008, there are 20,620 public high schools in the U.S. According to the 2004 National School Resource Officers Survey, school crimes, violence and safety offenses remain significant issues affecting our education system.

 

Military and Government Agencies.  According to the Department of Defense in 2007, there are 5,300 military bases and/or military warehouses globally. These encompass army, navy, air force, USMC and WHS institutions. The Department of Defense also manages over 577,000 physical plants worldwide located on over 32 million acres in the US and 39 foreign countries. At least 1,000 are believed to be bases and or military installations of which 823 are located worldwide that the U.S. operates or controls. With total military personnel deployed in the U.S. and U.S. overseas territories of over 1.4 million, the need to provide security and other activities, including the need to

move people within large areas is significant. The T3 Series is currently patrolling high-profile government facilities and military bases such as Andrews Air Force Base and the Smithsonian Institution. The DHS devotes a significant number of personnel to border and transportation security, emergency preparedness, science and technology and information analysis and management.

 

Airports.  According to the U.S. Department of Transportation, in 2008 there were 19,930 airports in the U.S. Of these, there were 5,202 public use airports, 14,451 private use airports and there were 550 certified airports (certified airports serve air-carriers operations with aircraft seating more than 30 passengers). The T3 Series is used for security and by airport personnel both inside and outside the terminal buildings at airports. In addition, we anticipate the need for the T3 Series for ground crew, airline personnel and customer service staff.

 

Port Security.  In the post-9/11 era, according to the DHS, February 2006 press release, funding for port security has increased more than 700%. The DHS spent over $1.6 billion in 2005 for port security. Additionally, in 2006, the DHS allocated over $168 million for the Port Security Grant Program and, in 2007, it was over $202 million with an additional $110 million in supplemental funding. In 2009, an additional $150 million was approved by the DHS. The T3 Series is deployed in the inspection of cargo including the Port of Los Angeles.

 

Private Security Companies.  According to the National Association of Security Companies (NASCO) 2006 Private Security Fact Sheet, private security contracting is an approximately $13 billion industry in the U.S. with 11,000 to 15,000 companies employing 1.2 million contract security officers. Contract security officers are increasingly protecting military bases and installations across the country and around the world, and are required to be first responders to any incident. The President’s National Strategy for Homeland Security estimates that these private security officers protect 85% of the country’s infrastructure, which, according to the NASCO, makes private security companies a top funding priority for the federal government. The T3 Series and a CT Micro Cars is deployed as a security solutions for the major security companies.

 

Manufacturing and Industrial Firms.  According to the 2007 U.S. Census Bureau report there are 293,919 manufacturing establishments in the U.S. that have more 13.3 million employees. We believe that the need for transportation of people, parts, or products within or around these establishments is an ideal application for the T3 Series. Currently we believe that maintenance and warehousing personnel use golf carts and bicycles. Most large manufacturing and industrial facilities use utility vehicles, golf carts and bicycles for transportation, maintenance and warehousing. We expect some of these vehicles could be replaced with our products.

 

Shopping Malls and Parking Patrol.  According to the CoStar National Research Bureau Shopping Center Database and Statistical Model 2005, there are approximately 48,000 shopping malls in the U.S. covering more than six billion square feet of space. The malls are patrolled by private security companies. In addition to malls, there are numerous parking structures throughout the U.S. that are regularly patrolled. Due to its clean energy electric power, the T3 Series can patrol both indoors and outdoors, making it an ideal cost-effective multi-purpose patrol vehicle for mall and parking operations. The CT Micro Car is deployed as a parking enforcement solution.

 

Our Operations

 

Our principal executive offices and operations facility is located in Costa Mesa, California. Our main corporate headquarters facility located at 2990 Airway Avenue, Suite A is an approximate 34,000 square foot facility that is home to the executive staff and sales staff and is our main operational and manufacturing location. The facility is equipped with multiple production lines capable of producing up to 750 T3 vehicles per month. Located directly across the street at 2975 Airway is our 14,000 square feet warehouse and R&D center that is fully equipped with all of the necessary machines and equipment needed to design and build development products.

 

We manufacture our T3 Series at our headquarters. Our raw materials are sourced from various suppliers, both national and international. Currently, our electronics and wire harness assembly manufacturing, embedded digital processing application development and electronics hardware and software development occur at our headquarters and operations center. Final assembly, testing, warehousing, quality control and shipping take place at our U.S. operations center. We are, however, developing a multi-source supply chain that we anticipate will provide a low-cost labor structure and sub-assembly infrastructure supporting final assembly in the U.S. The supply chain will include materials sourcing and subassembly operations from sources in China, South Korea and Mexico. These components will be shipped to our operations facility in Costa Mesa for final assembly, test, inspection, and

shipments to our customers. We have established and will continue to expand this multiple source supplier base to will allow us to utilize both current U.S. based suppliers and newly acquired global suppliers to reduce the risks of our existing single sourced components and reduce product costs.

 

Our sales and marketing is located at our headquarters and currently targets opportunities in the Western, Central and Eastern United States. The sales and marketing team is beginning to expand globally into Canada, Mexico, Australia, Europe, Asia and the Middle East. We have agreements with numerous U.S. regional distributors and manufacturing representative companies giving the distributors and manufactures representatives the exclusive rights to sell the T3 Series and CT Micro Car in specified geographic regions. Each agreement has a 30 day cancellation clause.

 

The T3 Motion, Inc. Product Line

 

T3 Series ESV

 

The T3 Series is a three-wheel, front wheel drive, stand-up, electric personal mobility vehicle with a zero-gas emission electric motor. The T3 Series has hydraulic disk brakes on both rear wheels that are matched with 17-inch low profile motorcycle tires for long treadwear and demanding performance. The vehicle is equipped with an LCD control panel display and utilizes high intensity LED lighting for its vertically adjustable headlights and taillights. It also features emergency lights, as well as a siren on the law enforcement model. The T3 Series enables the operator to respond rapidly to calls with low physical exertion. The elevated riding platform allows 360 degrees visibility while the ergonomic riding position reduces fatigue. The T3 Series’ zero degree turning radius makes it highly maneuverable. The T3 Series comes standard with a lockable storage compartment for equipment and supplies. An image of the T3 Series vehicle is shown below:

 

 

Power Modules

 

The T3 Series has replaceable power modules that allow continuous vehicle operation without recharging downtime. The T3 Series offers a variety of battery technology options in its power modules. The power modules and charger can be sold separately from the vehicle allowing different pricing models and leasing options.

 

Accessories

 

Each T3 Series now features a reversible rear tires which enables customers to determine whether to set up their T3 Series in a wide stance (36” wide) or a narrow stance (32” wide), depending on their needs.

An optional Side-mount External Storage Pack allows the operator to carry additional items on the vehicle. An optional Front-mount External Storage Case enables the T3 Series to distribute parcels, documents, and cargo in indoor and outdoor narrow space environments.

 

An optional Sun Shade provides the operator protection from elements like the sun or rain.

 

An optional front and rear turn indicator system is available for international deployments and domestic up-fitting opportunities.

 

An optional on-board video camera system and digital video recorder is available for patrol tracking and incident response data.

 

Available accessories include an external shotgun mount, a fitted vehicle cover, a parcel delivery trailer, and a multi-function trailer option.

 

Additional accessories are currently being designed and field tested.

 

The Company leveraged the modularity of the T3 Series system to enter the international market with the T3i Series, a scaled down version of the professional T3 Series. The T3i Series features integrated LED headlights, brakelights, running lights, and emergency lights. The speed range is 12 km/h to 25 km/h with a 175 kg cargo capacity.

 

Camera System

 

We offer multiple CCTV and camera systems including the 360-IP DN Camera, a stand-alone 360-degree camera and DVR and the TVS-4050WK, a fully wireless IP four-camera system targeted at facilities, warehouse, business districts, and campuses. We are a certified re-seller of Immersive Media Corp.’s various security camera models. These camera system offer the option of up to a 360 degree view of the areas patrolled. They also offer the option of GPS positioning, real-time surveillance or DVR recording options.

 

CT Micro Car

 

The CT Micro Car, is a low-speed four-wheel electric car. Leveraging the market penetration from the introduction of the T3 Series professional mobility vehicles, we are using existing and developed sales channels in the law enforcement, security, government, and military sectors. We are re-designing, branding, marketing and distributing the CT Micro Car to increase market share, to create additional lines of products and expand overall brand awareness through our exclusive distribution agreement with manufacturing partner CT&T. The distribution agreement, dated November 24, 2008, gives us the exclusive territories of Canada and the United States and the exclusive professional markets of all U.S. government, law enforcement and security markets. The distribution

agreement has a three-year term with automatic one-year renewals unless terminated 90 days prior to the end of any term. An image of the CT Micro Car vehicle is shown below:

 

 

Future Products

 

We plan to introduce a series of product variants based on the initial T3 Series and CT Micro Car vehicles and the modularity of the sub-systems we have created. While both the initial T3 Series and the CT Micro Car vehicles are targeted at law enforcement, security and enterprise markets, we intend to expand our base of T3 Series and CT Micro car vehicle variants by utilizing the modularity of the sub-systems to configure vehicles for personnel transport and personal mobility specific market uses. As with all new developmental products, we cannot guarantee that the products will ever make it to market and if released to market, whether they will be successful. The following are the products currently in development:

 

 

Growth Strategies and Marketing

 

Growth Strategies

 

The core value of our brand and mission is to become the leader in enabling efficient, clean, personal, professional mobility electric stand-up vehicles and to continue providing products that are economical, functional, safe, dependable and meet the needs of the professional end user. We believe we have an experienced management team with extensive experience in product design, development, innovation, operations, sales and marketing to execute the following growth strategies:

 

 

 

In order to meet our growth objectives, we are taking the following measures:

 

 

 

 

Marketing and Distribution

 

We market and sell our products through our direct sales force located at our headquarters in Costa Mesa, California. In 2007, our marketing and sales targets were focused primarily on opportunities in the Western, Central and Eastern United States. In 2008, we began expanding our markets globally into Europe, Asia and the Middle East. We have agreements with numerous U.S. regional distributors and manufacturing representative companies, adding substantially to our direct sales force. We also attend and provide exhibits at two trade shows per geographic market per year and advertise quarterly in trade journals. In 2009, we continued our global expansion into the Middle East, Europe and Australia, by developing distribution channels.

 

Early high profile and priority sales are made by initiating field trials that typically utilized one or two vehicles and lasted from one to two weeks. These field trials usually lead to initial product orders within 60 to 90 days. We benefit from sales on both regional outreach and a referral basis, which has a significant multiplicative effect on sales. Additionally, private security organizations are now placing orders based on the endorsement of the law enforcement community. Typical initial orders have ranged in size from a single unit to ten units and, for larger customers, have often led to larger subsequent orders within three to six months. Our marketing efforts and the interest our products have generated have led to numerous media pieces on a regional, national and international scale, ranging from news articles to television spots on television networks such as ABC, CBS, Fox, NBC, CNN, the BBC, Sky News and other local television stations.

 

We value our customer input as we are a customer-driven company. Entering into any negotiation we follow a fundamental approach using the following core customer interests:

 

 

We have a procedure for establishing distribution channels for each geographic region. Among other things, distributors should have sales experience to law enforcement agencies and security providers. Each distributor must have service capability for the T3 Series.

 

Sources and Availability of Raw Materials; Principal Suppliers

 

Today over 70% of our T3 Series suppliers are local suppliers who provide products and services to low volume early stage development companies. As the vehicle design has become stable and sales volumes have increased we have begun our transition to incorporate a global supply chain. We have made significant progress in

establishing relationships with suppliers who service volume production stage companies. In addition, investments are being made in production tooling that will yield consistent high quality and lower cost parts designed to our specifications. We plan to implement our multi-source supply chain strategy in working directly with established factories within the automotive and motorcycle industry. The supply chain will include materials sourcing and subassembly operations from sources in China, South Korea and Mexico. These components will be shipped to our operations facility in Costa Mesa, California for final assembly, test, inspection, and shipments to our customers. We will continue to expand this multiple source supplier base in 2010 to allow us to utilize both current U.S. based suppliers and newly acquired global suppliers to reduce the risks of our existing single sourced components and reduce product costs.

 

We do not manufacture the CT Micro Car. Fully-built versions are delivered to us from the developer, CT&T. We outfit the CT Micro Car with our power management and battery technology.

 

Operating and Manufacturing Strategy

 

Our management and engineering teams have extensive experience working with off-shore manufacturers. They have become acutely aware of the advantages of partnering with reputable suppliers to immediately leverage manufacturing practices at minimal cost. Our staff continuously seeks out new qualified suppliers and evaluates them for the maximum benefit that can be quickly realized. All suppliers must have a well established history of supplying quality products within their respective industries so that we can immediately benefit from multiple manufacturing locations with a trained and experienced technical work force, state of the art facilities and knowledge of all aspects of supply chain management, operational execution, global logistics and reverse logistics.

 

Competition

 

To management’s knowledge, there are at least eight leading companies engaged in personal mobility vehicle design, manufacturing and marketing including, without limitation, Segway, California Motors-Ride Vehicles and Gorilla Vehicles.

 

Some of our competitors are larger than we are and may have significantly greater name recognition and financial, sales and marketing, technical, manufacturing and other resources. These competitors may also be able to respond rapidly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products. Our competitors may enter our existing or future markets with products that may provide additional features or that may be introduced earlier than our products.

 

We attempt to differentiate ourselves from our competitors by working to provide superior customer service and developing products with appealing functions targeted to our core markets of professional end users in law enforcement, private security, and government.

 

Intellectual Property

 

The following table describes the intellectual property owned by the Company:

 

We also have a patent license agreement from Evolutionary Electric Vehicles to us granting a perpetual, fully paid, transferable exclusive license to make, have made, use, improve and sell an over 10 Horsepower Brushless DC Motor for Traction (U.S. Patent #4,882,524) with respect to products in the world. This patent covers a motor technology that we plan on fully developing and using in our products. Currently, we do not use the motors covered by this patent; however, this patented technology will be utilized in future motors that we intend to use on future products. It is still too early in the developmental phase to determine when the motor technology and products will be available for the market.

 

On March 21, 2008, we filed a United States Patent Application for Batteries and Battery Monitoring and Charging System. The intellectual property covered in this multi-claim patent is our proprietary power management system that is currently used on all T3 Series products.

 

On March 31, 2008, we purchased a license to resell data in the Immersive Media Corp. mapping database. We were granted the right to map and, in partnership with Immersive Media Corp., to produce and distribute the mapped content of South Korea with the opportunity to continue into Asia Pacific. We anticipated that Asia Pacific would be an emerging market for this technology, as the geographic area is advanced in their requirements for viewing live, interactive data. We will be paid a licensing fee for the usage of any data that it has mapped and will have the opportunity to add to the content and will be compensated for any usage of the content that has been added to the Immersive Media Corp. database. On March 16, 2009, we revised the terms of the agreement to revise the start of the two-year license to begin upon the completion and approval of the post-production data. The revision includes automatic one-year renewals unless either party cancels within 60 days of the end of the contract. During 2009, we wrote off the remaining $625,000 value of the license due to management’s decision not to incur the costs to map the data.

 

On September 17, 2008, we filed a United States Patent Application for the Battery Powered Vehicle Control Systems and Methods. The intellectual property covered in this multi-claim patent is our proprietary control system that is currently used on all T3 Series products.

 

On July 27, 2009, we filed a United States Patent Application for Dual Tires on a Single Wheel (Provisional). The intellectual property covered in this patent offers enhanced stability, reduces rolling and aerodynamic resistance and increases rider safety.

 

On September 30, 2009, we filed a United States Patent Application for Vehicle Hood, Fenders, and Bumper (Design). Our unique design showcases custom built parts that are task specific and visually appealing.

 

On December 7, 2009, we filed a United States Patent Application for Rechargeable Battery Systems and Methods (Provisional). The claim covers a battery charging management system that we will deploy in our electric CT-Series and GT3 vehicle in the future. While utilizing modular technology was already used in the T3 Series vehicle , this new battery and charger system will provide more efficiency and no downtime.

 

Government Approvals and Regulation

 

On September 17, 2008, T3 Motion completed and passed its third party lab testing to obtain its CE certification for the T3i Series product, battery, and charging system. CE is the governing regulatory body and standard for electrical products meant to be exported to the European Union, Africa, Australia, Middle East and other foreign countries.

 

 

Employees

 

As of December 31, 2009, we have a total of 53 employees, all of which are full-time employees. We have not experienced a work stoppage. Management believes that our relations with our employees are good.

 

Corporate Information

 

Our principal executive office is located at 2990 Airway Avenue, Suite A, Costa Mesa, California 92626 and our telephone number is (714) 619-3600. Our website is www.T3motion.com. Information provided on our website, however, is not part of this report and is not incorporated herein.

 

 

Risks Related to Our Company and Our Industry

 

Our limited operating history may not serve as an adequate basis to judge our future prospects and results of operations.

 

We have a limited operating history. We developed our first personal mobility product in late 2006. Our limited operating history and the unpredictability of our industry make it difficult to evaluate our business and future operating results. An investor in our securities must consider the risks, uncertainties and difficulties frequently encountered by companies in new and rapidly evolving markets. The risks and difficulties we face include challenges in accurate financial planning as a result of limited historical data and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to older companies with longer operating histories.

 

The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and all delays frequently encountered in connection with the formation of a nascent business, the commencement of operations and the competitive environment in which we operate. Our ability to implement our business plan remains unproven and no assurance can be given that we will ever generate sufficient revenues to sustain our business or make a profit.

 

As a recently formed corporation, we have had very limited operations to date and expect to incur losses in the near future. We will require additional financing to sustain our operations and without it we may not be able to continue our operations.

 

We are a newly formed corporation and, as such, we have little revenue and anticipate that we will continue to incur losses and negative cash flow for the foreseeable future. Since we recently commenced operations, we may not foresee all developments and problems that may occur and the amount of time and capital required to become profitable and cash flow positive. We will need additional funds to continue our operations, and such additional funds may not be available when required, or that such funding, if available, will be obtained on terms favorable to or affordable by us.

 

To date, we have financed our operations through equity and debt financing. Our ability to arrange future financing from third parties will depend upon our perceived performance and market conditions. Our inability to raise additional working capital at all or to raise it in a timely manner would negatively impact our ability to fund our operations, to generate revenues and to otherwise execute our business plan, leading to the reduction or suspension of our operations and ultimately forcing us to go out of business. Should this occur, the value of our common stock could be materially adversely affected.

 

If we are unable to continue as a going concern, our securities will have little or no value.

 

Our independent registered public accounting firm has noted in its report concerning our consolidated financial statements as of December 31, 2009, that we have incurred recurring losses from operations and have an accumulated deficit and working capital deficit of approximately $33.0 million and $11.0 million, respectively, as of December 31, 2009. These factors, among others, raise substantial doubt about our ability to continue as a going

concern. We have incurred losses from operations of $8.8 million, $11.6 million and $8.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.

 

As of December 31, 2009, we had $2.6 million in cash and cash equivalents to use for working capital, regulatory filing requirements, debt service, research and development and capital requirements. We will incur legal, accounting and other costs associated with being a public company. We used $5.4 million, $8.8 million and $6.7 million in cash for operating activities for the years ended December 31, 2009, 2008 and 2007, respectively. We continue to use cash in excess of operating requirements; however, management has been and is continuing to implement our cost reduction strategy for material, production and service costs. We will require additional capital to meet our working capital requirements, debt service, research and development, capital requirements and compliance requirements. We will continue to raise additional equity and/or financing to meet our working capital requirements. Management believes that the achievement of our cost reduction strategy in 2010, may allow us to meet our working capital requirements with our anticipated cash inflows from operations. However, we cannot guarantee that we will be able to meet operating cash requirements with operating cash inflows.

 

Management believes that our current sources of funds and current liquid assets will allow us to continue as a going concern through at least June 30, 2010. The Company started selling its vehicles in 2007 and has obtained equity financing, net of offering costs, from third parties of $2.0 million, received proceeds of $4.5 million from related-party loans and converted related-party notes of $4.0 million to preferred shares during 2009. The Company plans to raise additional debt and/or equity capital to finance future activities.

 

We cannot assure you that we will achieve operating profits in the future. If we fail as a going concern, our shares of common stock will hold little or no value.

 

Adverse conditions in the global economy and disruption in financial markets could impair our revenues.

 

As widely reported, financial markets in the United States, North America, Europe and Asia have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. These conditions have impaired our ability to access credit markets and finance operations already. There can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies. We are impacted by these economic developments, both domestically and globally, in that the current tightening of credit in financial markets adversely affects the ability of our customers and suppliers to obtain financing for significant purchases and operations, and could result in a decrease in orders for our products and services. These economic conditions may negatively impact us as some of our customers defer purchasing decisions, thereby lengthening our sales cycles. In addition, certain of our customers’ budgets may be constrained and they may be unable to purchase our products at the same level. Our customers’ ability to pay for our products and services may also be impaired, which may lead to an increase in our allowance for doubtful accounts and write-offs of accounts receivable. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries. Should these economic conditions result in us not meeting our revenue objectives, our operating results and financial condition could be adversely affected.

 

Our markets are highly competitive, and if we are unable to compete effectively, we will be adversely affected.

 

The industries in which we operate include competitors who are larger, better financed and better known than we are and may compete more effectively than we can. In order to stay competitive in our industry, we must keep pace with changing technologies and customer preferences. If we are unable to differentiate our products from those of our competitors, our revenues may decline. In addition, our competitors have established relationships among themselves or with third parties to increase their ability to address customer needs. As a result, new competitors or alliances among competitors may emerge and compete more effectively than we can.

Our failure to further refine our technology and develop and introduce new personal mobility products could render our products uncompetitive or obsolete, and reduce our sales and market share.

 

The personal mobility industry is characterized by rapid increases in the diversity and complexity of technologies, products and services. We will need to invest significant financial resources in research and development to keep pace with technological advances in the personal mobility industry, evolving industry standards and changing customer requirements. However, research and development activities are inherently uncertain, and we might encounter practical difficulties in commercializing our research results. Our significant expenditures on research and development may not reap corresponding benefits. A variety of competing personal mobility technologies that other companies may develop could prove to be more cost-effective and have better performance than our products. Therefore, our development efforts may be rendered obsolete by the technological advances of others. Our failure to further refine our technology and develop and introduce new personal mobility products could render our products uncompetitive or obsolete, and result in a decline in our market share and revenue.

 

We face risks associated with the marketing, distribution and sale of our personal mobility products internationally, and if we are unable to effectively manage these risks, they could impair our ability to expand our business abroad.

 

We have plans to expand our marketing, distribution, and sales efforts to the European, Asia, Australia, South America, Central America, and Middle Eastern markets. This exposes us to a number of risks, including:

 

 

Our business depends substantially on the continuing efforts of our executive officers and our ability to maintain a skilled labor force, and our business may be severely disrupted if we lose their services.

 

Our future success depends substantially on the continued services of our executive officers, especially Ki Nam, our Chief Executive Officer and the Chairman of our Board of Directors. We do not maintain key man life insurance on any of our executive officers. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers. For instance, we have recently had to adjust to the voluntary termination by Jason Kim, our former Chief Operating Officer, and Brian Buccella, our former Vice President, Sales. In addition, if any of our executives joins a competitor or forms a competing company, as these two officers did, we may face more direct competition for our customers.

 

The products we sell are inherently risky and could give rise to product liability, product warranty claims and other loss contingencies, which could adversely affect our business and financial results.

 

The products that we manufacture are typically used in situations that may involve high levels of risk of personal injury. Failure to use our products for their intended purposes, failure to use or care for them properly, or their malfunction, or, in some limited circumstances, even correct use of our products, could result in serious bodily injury. Given this potential risk of injury, proper maintenance of our products is critical.

While our products are rigorously tested for quality, our products nevertheless may fail to meet customer expectations from time-to-time. Also, not all defects are immediately detectible. Failures could result from faulty design or problems in manufacturing. In either case, we could incur significant costs to repair and/or replace defective products under warranty. Customers may sue us if any of our products sold to them injure the user. Liability claims could require us to spend significant time and money in litigation and pay significant damages. As a result, any of these claims, whether or not valid or successfully prosecuted, could have a substantial, adverse effect on our business and financial results. In addition, although we currently have product liability insurance, the amount of damages awarded against us in such a lawsuit may exceed the policy limits of such insurance. Further, in some cases, product redesigns and/or rework may be required to correct a defect and such occurrences could adversely impact future business with affected customers. Our business, financial condition, results of operations and liquidity could be materially and adversely affected by any unexpected significant warranty costs.

 

Our prospects for sales growth and profitability will be adversely affected if we have product replacement issues, or if we otherwise fail to maintain product quality and product performance at an acceptable cost.

 

We will be able to expand our net sales and to achieve, sustain and enhance profitable operations only if we succeed in maintaining the quality and performance of our products. If we should not be able to produce high-quality products at standard manufacturing rates and yields, unit costs may be higher. In recent periods, we have occasionally had to replace components of existing products. For instance we are voluntarily replacing external chargers due to the fact that the chargers could fail over time. This may adversely affect our reputation with potential customers. We have increased our warranty reserve accordingly. Because the establishment of reserves is an inherently uncertain process involving estimates of the number of future claims and the cost to settle claims, our ultimate losses may exceed our warranty reserve. Future increases to the warranty reserve would have an adverse effect on our profitability in the periods in which we make such increases. Additional product replacement issues could materially affect our business as it could increase cost of sales as a result of increased warranty service costs, reduce customer confidence on our products, reduce sales revenue, or increase product liability claims.

 

The failure to achieve acceptable manufacturing yields could adversely affect our business.

 

We may have difficulty achieving acceptable yields in the manufacture of our products which could lead to higher costs, a loss of customers or delay in market acceptance of our products. Slight impurities or defects can cause significant difficulties, particularly in connection with the production of a new product, the adoption of a new manufacturing process or any expansion of our manufacturing capacity and related transitions. Yields below our target levels can negatively impact our gross profit.

 

From time to time we engage in related party transactions. There are no assurances that these transactions are fair to our company.

 

From time to time we enter into transactions with related parties which include the purchase from or sale to of products and services from related parties, and advancing these related parties significant sums as prepayments for future goods or services and working capital, among other transactions. We have in place policies and procedures which require the pre-approval of loans between these related parties. Notwithstanding these policies, we cannot assure you that in every instance the terms of the transactions with these various related parties are on terms as fair as we might receive from or extend to third parties. In addition, related party transactions in general have a higher potential for conflicts of interest than third-party transactions, could result in significant losses to our company and may impair investor confidence, which could adversely affect our business and our stock price.

 

We are dependent on a few single sourced third party manufacturers. Any interruption in our relationships with these parties may adversely affect our business.

 

Most components used in our products are purchased from outside sources. Certain components are purchased from single sourced suppliers. These single source suppliers provide components used on our products and include domestic suppliers such as American Made, Performance Composites, Imperial Electric and Santa Fe Mold. These suppliers provide the frame, fiberglass body, electric motor, and various small plastic parts, respectively. The failure of any such supplier to meet its commitment on schedule could have a material adverse effect on our business,

operating results and financial condition. If a sole-source supplier were to go out of business or otherwise become unable to meet its supply commitments, the process of locating and qualifying alternate sources could require up to several months, during which time our production could be delayed. Such delays could have a material adverse effect on our business, operating results and financial condition.

 

Our dependence on third party suppliers for key components of our devices could delay shipment of our products and reduce our sales.

 

We depend on certain domestic and foreign suppliers for the delivery of components used in the assembly of our products. Our reliance on third-party suppliers creates risks related to our potential inability to obtain an adequate supply of components or subassemblies and reduced control over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on suppliers of batteries and battery components and other miscellaneous customer parts for our products. We also do not have long-term agreements with any of our suppliers and there is no guarantee that supply will not be interrupted. Any interruption of supply for any material components of our products and failure to find a suitable alternate supplier in a timely manner could significantly delay the shipment of our products and have a material adverse effect on our revenues, profitability and financial condition.

 

Many of our customers have fluctuating budgets, which may cause substantial fluctuations in our results of operations.

 

Customers for our products include, and may include in the future, federal, state, municipal, foreign and military, law enforcement and other governmental agencies. Government, state and local tax revenues and budgetary constraints, which fluctuate from time to time, can affect budgetary allocations for these customers. Many domestic and foreign government agencies have in the past experienced budget deficits that have led to decreased spending in defense, law enforcement and other military and security areas. Our results of operations may be subject to substantial period-to-period fluctuations because of these and other factors affecting military, law enforcement and other governmental spending. A reduction of funding for federal, state, municipal, foreign and other governmental agencies could have a material adverse effect on sales of our products and our business, financial condition, results of operations and liquidity.

 

Our resources may be insufficient to manage the demands imposed by our growth.

 

We have rapidly expanded our operations, and this growth has placed significant demands on our management, administrative, operating and financial resources. The continued growth of our customer base and the geographic markets served can be expected to continue to place a significant strain on our resources. In addition, we cannot easily identify and hire personnel qualified both in the provision and marketing of our products. Our future performance and profitability will depend in large part on our ability to attract and retain additional management and other key personnel, and our ability to implement successful enhancements to our management, marketing and sales team and technology personnel.

 

Decreased demand for electric vehicles could cause our products to become obsolete or lose popularity.

 

The electric vehicle industry is in its infancy and has experienced substantial change in the last few years. To date, demand and interest in electric vehicles has grown. However, continued growth in the electric vehicle industry depends on many factors, including:

 

 

We cannot assure you that growth in the electric vehicle industry will continue. Our business of providing personal mobility vehicles powered by electric motors may suffer if the electric vehicle industry does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.

 

The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.

 

We rely on a small group of suppliers to provide us with our custom design components for our products; some of these are located outside of the United States. If these suppliers become unwilling or unable to provide components, delays could be caused as there are a limited number of alternative suppliers who could provide them on demand. Changes in business conditions, wars, governmental changes and other factors beyond our control or which we do not presently anticipate could affect our ability to receive components from our suppliers in a timely manner. Further, it could be difficult to find replacement components if our current suppliers of custom parts fail to provide the parts needed for these products. A failure by these suppliers to provide the components could severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion.

 

Our success is heavily dependent on protecting our intellectual property rights.

 

We rely on a combination of patent, copyright, trademark and trade secret protections to protect our proprietary technology. Our success will, in part, depend on our ability to obtain trademarks and patents. We license seven patents and hold three trademarks registered with the United States Patent and Trademark Office. We cannot assure you that these trademarks and patents will not be challenged, invalidated, or circumvented, or that the rights granted under those registrations will provide competitive advantages to us.

 

We also rely on trade secrets and new technologies to maintain our competitive position, but we cannot be certain that others will not gain access to these trade secrets. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

 

We may be exposed to liability for infringing intellectual property rights of other companies.

 

Our success will, in part, depend on our ability to operate without infringing on the proprietary rights of others. Although we have conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not occur. We could incur substantial costs, in addition to the great amount of time lost, in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party.

 

Our officers and directors own a substantial portion of our outstanding common stock, which will enable them to influence many significant corporate actions and in certain circumstances may prevent a change in control that would otherwise be beneficial to our shareholders.

 

Our directors and executive officers control at least 65% of our outstanding shares of stock that are entitled to vote on all corporate actions. In particular, our controlling stockholder, Chairman and Chief Executive Officer, Ki Nam, together with his children, owns 65% of the outstanding shares. Mr. Nam could have a substantial impact on matters requiring the vote of the shareholders, including the election of our directors and most of our corporate actions. This control could delay, defer, or prevent others from initiating a potential merger, takeover, or other change in our control, even if these actions would benefit our shareholders and us. This control could adversely affect the voting and other rights of our other shareholders and could depress the market price of our common stock.

Risks Relating Ownership of Our Securities

 

If a public market for our common stock develops, we expect to experience volatility in the price of our common stock. This may result in substantial losses to investors if they are unable to sell their shares at or above their purchase price.

 

If a public market for our common stock develops, we expect the market price of our common stock to fluctuate substantially for the indefinite future due to a number of factors, including:

 

 

In addition, the financial markets have experienced extreme price and volume fluctuations. The market prices of the securities of technology companies, particularly companies like ours without consistent revenues and earnings, have been highly volatile and may continue to be highly volatile in the future, some of which may be unrelated to the operating performance of particular companies. The sale or attempted sale of a large amount of common stock into the market may also have a significant impact on the trading price of our common stock. Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Whether or not meritorious, litigation brought against us could result in substantial costs, divert management’s attention and resources and harm our financial condition and results of operations.

 

We do not anticipate paying any cash dividends in the foreseeable future, which may reduce your return on an investment in our common stock.

 

We plan to use all of our earnings; to the extent we have earnings, to fund our operations. We do not plan to pay any cash dividends in the foreseeable future. We cannot guarantee that we will, at any time, generate sufficient surplus cash that would be available for distribution as a dividend to the holders of our common stock. Therefore, any return on your investment would derive from an increase in the price of our stock, which may or may not occur.

 

Substantial future sales of our common stock in the public market may depress our stock price.

 

As of December 31, 2009, 44,663,462 shares of common stock, and warrants for the purchase of 5,453,730, 4,000,000, 697,639, 120,000 and 474,774 shares of common stock at an exercise price of $0.70, $0.90, $1.081, $1.54 and $2.00 per share, respectively, were outstanding. In addition, as of December 31, 2009, there were 9 million shares of common stock underlying conversion of outstanding notes and approximately 24.7 million shares of common stock underlying conversion of Series A Preferred Stock.

 

In addition, we intend to file a registration statement on Form S-8 under the Securities Act of 1933, as amended, to register approximately 7,450,000 shares of our common stock underlying options granted or to be granted to our officers, directors, employees and consultants. These shares, if issued in accordance with these plans, will be eligible for immediate sale in the public market, subject to volume limitations. As of December 31, 2009, there were 6,033,188 options outstanding, of which 4,543,442 were vested.

 

If our stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales may occur, the market price of our common stock could fall. The sale of a large number of shares could impair our ability to raise needed capital by depressing the price at which we could sell our common stock.

We may raise additional capital through a securities offering that could dilute your ownership interest and voting rights.

 

Our certificate of incorporation currently authorizes our board of directors to issue up to 150,000,000 shares of common stock and 20,000,000 shares of preferred stock. As of December 31, 2009, after taking into consideration our outstanding common shares and common stock equivalents, our board of directors will be entitled to issue up to 47,140,397 additional shares. The power of the board of directors to issue shares of common stock or warrants or options to purchase shares of our stock is generally not subject to shareholder approval.

 

We require substantial working capital to fund our business. If we raise additional funds through the issuance of equity, equity-related or convertible debt securities, these securities may have rights, preferences or privileges senior to those of the holders of our common stock. The issuance of additional common stock or securities convertible into common stock by our board of directors will also have the effect of diluting the proportionate equity interest and voting power of holders of our common stock.

 

Our incorporation documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of your stock, which may inhibit an attempt by our stockholders to change our direction or management.

 

Our certificate of incorporation and bylaws will contain provisions that could delay or prevent a change in control of our company. Some of these provisions:

 

 

In addition, we are governed by the provisions of Section 203 of Delaware General Corporate Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us, which may prevent or frustrate any attempt by our stockholders to change our management or the direction in which we are heading. These and other provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

 

We will be subject to the penny stock rules, which may adversely affect trading in our common stock.

 

We expect that our common stock will be a “low-priced” security under the “penny stock” rules promulgated under the Securities Exchange Act of 1934. In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer’s duties in selling the stock, the customer’s rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer obtain specific written consent from the customer and provide monthly account statements to the customer. The effect of these restrictions will probably decrease the willingness of broker-dealers to make a market in our common stock, decrease liquidity of our common stock and increase transaction costs for sales and purchases of our common stock as compared to other securities.

Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.

 

We will incur increased costs and compliance risks as a result of becoming a public company.

 

We are a public company and we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements. We also anticipate that we will incur costs associated with recently adopted corporate governance requirements, including certain requirements under the Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC and the Financial Industry Regulatory Authority (“FINRA”). We expect these rules and regulations, in particular Section 404 of the Sarbanes-Oxley Act of 2002, to significantly increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Like many smaller public companies, we face a significant impact from required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management of public companies to evaluate the effectiveness of internal control over financial reporting and the independent registered public accounting firm to attest to the effectiveness of such internal controls. The SEC has adopted rules implementing Section 404 for public companies as well as disclosure requirements. The Public Company Accounting Oversight Board, or PCAOB, has adopted documentation and attestation standards that the independent registered public accounting firm must follow in conducting its attestation under Section 404. We are currently preparing for compliance with Section 404; however, there can be no assurance that we will be able to effectively meet all of the requirements of Section 404 as currently known to us in the currently mandated timeframe. Any failure to implement effectively new or improved internal controls, or to resolve difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet reporting obligations or result in management being required to give a qualified assessment of our internal controls over financial reporting or our independent registered public accounting firm providing an adverse opinion regarding our controls over financial reporting. Any such result could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.

 

We also expect these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

Our shares are traded on the OTC Bulletin Board, and may be thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

 

Our Common Stock trades on the OCT Bulletin Board under the ticker symbol, “TMMM.” Through the listing process on the OTC Bulletin Board (“Listing”), we essentially went public without the typical initial public offering procedures which usually include a large selling group of broker-dealers who may provide market support after going public. Thus, we must undertake efforts to develop market recognition for us and support for our shares of Common Stock in the public market. The price and volume for our Common Stock that will develop after the Registration and Listing cannot be assured. The numbers of persons interested in purchasing our Common Stock at or near ask prices at

any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days, weeks or months when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our Common Stock will develop or be sustained, or that current trading levels will be sustained or not diminish. Our intention is to apply for trading on either the NASDAQ market or the American Stock Exchange at such time that we meet the requirements for listing on those exchanges. There can be no assurance as to when we will qualify for any of these exchanges or that we will ever qualify for these exchanges. While we are trading on the OTC Bulletin Board, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in OTC Bulletin Board stocks and certain major brokerage firms restrict their brokers from recommending OTC Bulletin Board stocks because they are considered speculative, volatile and thinly traded.

 

The market price for our Common Stock may be particularly volatile given our status as a relatively unknown company with a small and thinly traded public float, limited operating history and lack of profits which could lead to wide fluctuations in our share price.

 

In addition, the market price of our Common Stock could be subject to wide fluctuations in response to:

 

 

The stock markets in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.

 

Our operating results may fluctuate significantly, and these fluctuations may cause our Common Stock price to fall.

 

Our quarterly operating results may fluctuate significantly in the future due to a variety of factors that could affect our revenues or our expenses in any particular quarter. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. Factors that may affect our quarterly results include:

 

 

Shares eligible for future sale may adversely affect the market.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders

may sell freely after six months subject only to the current public information requirement (which disappears after one year).

 

Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements. Any substantial sale of our Common Stock pursuant to Rule 144 or pursuant to any resale prospectus (including sales by investors of securities acquired in connection with this Offering) may have a material adverse effect on the market price of our Common Stock.

 

Investors who purchased units of our securities, consisting of common stock and warrants to purchase common stock in December 2009, have anti-dilution rights with respect to the shares of common stock issued in the unit offering. These rights are not available to other holders of our common stock. If future issuances of our common stock trigger these anti-dilution rights, holders of our common stock would have their investments diluted.

 

Certain security holders who have purchased “units” consisting of shares of our common stock and warrants to purchase shares of our common stock have anti-dilution rights. In the event that we sell common stock for less than $0.50 per share or issue securities convertible into or exercisable for common stock at a conversion price or exercise price less than $0.50 per share (a “Dilutive Issuance”), then we are required to issue a number of additional shares of common stock to each such unit purchaser, without additional consideration. The number of additional shares to be issued to such each such unit purchaser will be equal to the product of such purchaser’s prior subscription amount multiplied by a fraction, (i) the numerator of which is the number of shares of common stock sold and issued at the closing of the Dilutive Issuance plus the number of shares which the aggregate offering price of the total number of shares of common stock sold and issued at the closing of the Dilutive Issuance would purchase at $0.50 per share, and (ii) the denominator of which is the number of shares of common stock issued and outstanding on the date of the Dilutive Issuance plus the number of additional shares of common stock sold and issued at the closing of the Dilutive Issuance. As such, any Dilutive Issuance will result in dilution to our stockholders who do not have such anti-dilution rights.

 

Investors who purchased units of our securities, consisting of preferred stock and warrants to purchase common stock, in December 2009, have anti-dilution rights with respect to the underlying shares of common stock issued in the unit offering. These rights are not available to other holders of our common stock. If future issuances of our securities trigger these anti-dilution rights, holders of our common stock would have their investments diluted.

 

Certain security holders who have purchased “units” consisting of shares of our convertible preferred stock and warrants to purchase shares of our preferred stock have anti-dilution rights. In the event that we sell common stock for less than $0.50 per share or issue securities convertible into or exercisable for common stock at a conversion price or exercise price less than $0.50 per share (a “Dilutive Issuance”), then we are required to issue a number of additional shares of common stock to each such unit purchaser, without additional consideration. The number of additional shares to be issued to such each such unit purchaser will be equal to the product of the such purchaser’s prior subscription amount multiplied by a fraction, (i) the numerator of which is the number of shares of preferred stock sold and issued at the closing of the Dilutive Issuance plus the number of shares which the aggregate offering price of the total number of shares of preferred stock sold and issued at the closing of the Dilutive Issuance would purchase at $0.50 per share, and (ii) the denominator of which is the number of shares of preferred stock issued and outstanding on the date of the Dilutive Issuance plus the number of additional shares of preferred stock sold and issued at the closing of the Dilutive Issuance. As such, any Dilutive Issuance will result in dilution to our stockholders who do not have such anti-dilution rights.

 

Holders of our 10% Bridge Financing have anti-dilution rights that are triggered by a disposition of our common stock at a price per share that is lower than the conversion price of such notes. These rights are not available to the holders of our common stock. If future issuances of our common stock trigger the anti-dilution rights, an investment in our common stock would be diluted to the extent such convertible notes are converted.

 

Holders of $3,500,000 in aggregate principal amount of our 10% Bridge Financing may convert the outstanding principal amount and accrued interest thereon into equity securities upon the closing of our next

equity financing. They have agreed that they will convert into preferred stock if our next equity financing is a convertible preferred stock financing of at least $5.0 million before August 27, 2010. If all of our 10% Bridge Financing were converted into preferred stock at $1.00 per share and convert each share of preferred into two shares of common, we would be required to issue an additional 3,500,000 shares of preferred stock. If, during the time that any of our 10% Bridge Financing are outstanding, we sell or grant any option to purchase (other than options issued to our employees, officers, directors and consultants), or sell or grant any right to reprice our securities, or otherwise dispose of or issue any common stock or common stock equivalents entitling any person to acquire shares of our common stock or common stock equivalents at a price per share that is lower than the conversion price of these notes, $0.50, then the conversion price of the debentures will be reduced accordingly. A reduction in the conversion price resulting from the foregoing would allow the holders of our 10% Bridge Financing to ultimately receive more shares of common stock than they would otherwise be entitled to receive. In that case, other holders of our common stock would be diluted to a greater extent than they would be if no adjustment to the conversion price were required.

 

At any time after August 27, 2010, the 10% Bridge Financing is convertible into units of securities consisting of one share of Series A Convertible Preferred Stock of the Company (“Preferred Stock”) and a warrant to purchase one share of common stock of the company, at a conversion price of $1.00 per unit, subject to adjustment. The 10% Bridge Financing may also be redeemed by the company in whole or part at any time after the 6-month anniversary of the Issue Date for cash in an amount equal to 120% of the principal amount plus accrued and unpaid interest and certain other amounts due in respect of the 10% Bridge Financing. Interest on the financing is payable in cash on the maturity date or, if sooner, upon conversion or redemption of the financing. In the event of default under the terms of the 10% Bridge Financing, the interest rate increases to 15% per annum.

 

We are responsible for the indemnification of our officers and directors, which could result in substantial expenditures.

 

Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.

 

 

Our main office and manufacturing facility is located in Costa Mesa, California. The table below provides a general description of our properties:

 

 

We lease our main office and factory premises under a property lease agreements that expires in 2012, with an option to renew the lease. Minimum future commitments under the lease agreements payable as of December 31, 2009 are as follows:

 

 

Rental expense was approximately $435,000, $447,000, and $407,000 for the years ended December 31, 2009, 2008 and 2007, respectively. We believe that our existing facilities are well maintained and in good operating condition.

 

Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim (Orange County Superior Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (“Plaintiff”) filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki Nam, the Company’s CEO, and Jason Kim, the Company’s former COO, (“Defendants”) for breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed between Plaintiff and T3 Motion, Inc. On August 24, 2009, Defendants filed a Demurrer to the Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against Defendants for breach of contract, fraud and common counts, seeking compensatory damages of $470,598, attorney’s fees, punitive damages, interest and costs. Defendants have disputed Plaintiff’s claims and intend to vigorously defend against them. Indeed, on October 27, 2009, Defendants filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court overruled the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an Answer to the First Amended Complaint. The trial in this matter is set for July 30, 2010.

 

In the ordinary course of business, the Company may face various claims brought by third parties in addition to the claim described above and may from time to time, make claims or take legal actions to assert the Company’s rights, including intellectual property rights as well as claims relating to employment and the safety or efficacy of the Company’s products. Any of these claims could subject us to costly litigation and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, the insurance carriers may deny coverage or the policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of such awards could have a material adverse effect on the consolidated operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage the Company’s reputation and business. Management believes the outcome of currently pending claims and lawsuits will not likely have a material effect on the consolidated operations or financial position.

 

Other than as indicated above, we know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation, nor are we aware of any proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial holder of more than 5% of our voting securities, or any associate of such persons, is an adverse party or has a material interest adverse to us.

 

 

On June 9, 2009, the Company held its 2009 Annual Meeting of Stockholders. At the Annual Meeting, the stockholders re-elected all directors to serve as members of the Board of Directors for a one-year term.

 

There were present at the Annual Meeting, in person or by proxy, stockholders of the Company who were holders of record on May 11, 2009 of 33,670,171 shares of common stock or 75.62% of the total shares of the outstanding common stock of the Company, which constituted a quorum. Of the 33,670,171 shares entitled to vote in such election, the votes cast were as follows:

 

 

At the same meeting, a proposal for the ratification of the selection of KMJ Corbin & Company as independent registered public accounting firm of the Company was submitted to the stockholders, and the votes cast were as follows:

 

On August 25, 2009, holders of a majority of outstanding voting securities executed a written consent to increase the authorized number of shares of capital stock to 170,000,000, including 150,000,000 shares of common stock and 20,000,000 shares of preferred stock.

 

The written consent also empowered the Board of Directors to establish series of preferred stock, each with its own rights, privileges, designations and preferences.

 

 

Market Information

 

The Company’s common shares trade on the Over the Counter Bulletin Board (ticker symbol TMMM). The approximate number of record holders of common shares on March 30, 2010, was 66.

 

The Company received its ticker symbol in September 2009 and began trading in December 2009. Prior to December 2009, there is no stock price activity. There have been no dividends declared or paid for the years ended December 31, 2009 and 2008.

 

High and low stock prices were as follows:

 

 

Holders

 

As of December 31, 2009, there were 66 shareholders of record of our common stock based upon the shareholder list provided by our transfer agent. Our transfer agent is Signature Stock Transfer located at 2632 Coachlight Court, Plano, Texas 75093, and their telephone number is (972) 612-4120.

 

Dividends

 

We have not declared any dividends on our common stock since our inception. Our current policy is to retain any earnings in order to finance the expansion of our operations. Our board of directors will determine future declaration and payment of dividends, if any, in light of the then-current conditions they deem relevant and in accordance with applicable corporate law. There are no dividend restrictions that limit our ability to pay dividends on our common stock in our Certificates of Incorporation or Bylaws.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table sets forth, as of December 31, 2009, certain information related to our compensation plans under which shares of our common stock are authorized for issuance.

 

Equity Incentive Plan

 

On August 15, 2007, we adopted the Equity Incentive Plan (the “Plan”), under which direct stock awards or options to acquire shares of our common stock may be granted to employees and nonemployees of the Company. The Plan is administered by our Board of Directors. The Plan permitted the issuance of up to 7,450,000 shares of our common stock. Options granted under the Plan vest 25% per year over four years and expire 10 years from the date of grant.

 

Warrants

 

From time to time, we issue warrants to purchase shares of the Company’s common stock to investors, note holders and to non-employees for services rendered or to be rendered in the future. Such warrants are issued outside of the Plan.

 

Sales of Unregistered Securities

 

There were no unregistered sales of securities during the period covered by this report that were not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

 

 

The following summary of our selected financial information for the years ended December 31, 2009, 2008 and 2007, respectively, and the period from March 16, 2006 (date of inception) through December 31, 2006 have been derived from, and should be read in conjunction with, our consolidated financial statements included elsewhere in this report.

 

 

Balance Sheet Data:

 

Going Concern

 

The Company’s consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has sustained operating losses since its inception (March 16, 2006) and has used substantial amounts of working capital in its operations. Management has been and is continuing to implement our cost reduction strategy for material, production and service costs. Until management achieves our cost reduction strategy over the next year, and sufficiently increases Cash flow from operations we will require additional capital to meet our working capital requirements, debt service, research and development, capital requirements and compliance requirements. Further, at December 31, 2009 accumulated deficit of approximately $33 million and a working capital deficit of approximately $11 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time.

 

Management believes that its current sources of funds and current liquid assets will allow the Company to continue as a going concern through at least June 30, 2010. The Company started selling its vehicles in 2007 and has obtained equity financing, net of offering costs, from third parties of $2.0 million, received proceeds from related-party notes of $4.5 million, and converted related-party notes of $4.0 million to preferred shares during 2009 (see Notes 8 and 10) and plans to raise additional debt and/or equity capital to finance future activities. Additionally, the Company plans to refinance the outstanding balance of $1.0 million related to the Immersive note due March 31, 2010.

 

In light of these plans, management is confident in the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

The following discussion and analysis of our results of operations and financial condition for the years ended December 31, 2009, 2008 and 2007 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K. All statements, other than statements of historical facts, included in this report are forward-looking statements. When used in this report, the words “may,” “will,” “should,” “would,” “anticipate,” “estimate,” “possible,” “expect,” “plan,” “project,” “continuing,” “ongoing,” “could,” “believe,” “predict,” “potential,” “intend,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, availability of additional equity or debt financing, changes in sales or industry trends, competition, retention of senior management and other key personnel, availability of materials or components, ability to make continued product innovations, casualty or work stoppages at the Company’s facilities, adverse results of lawsuits against the Company and currency exchange rates. Forward-looking statements are based on assumptions and assessments made by the Company’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, as there can be no assurance that these forward-looking statements will prove to be accurate and speak only as of the date hereof. Management undertakes no obligation to publicly release any revisions to these forward-looking statements that may reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. This cautionary statement is applicable to all forward-looking statements contained in this report.

 

Overview

 

T3 Motion, Inc. (the “Company”, “we” or “us”) was organized on March 16, 2006, under the laws of the state of Delaware. We develop and manufacture the T3 Series which are electric three-wheel stand-up vehicles that are directly targeted to the public safety and private security markets. T3 Series have been designed to tackle a host of daily professional functions, from community policing to patrolling of airports, military bases, campuses, malls,

public event venues and other high-density areas. In September 2009, we launched our second product, the CT Micro Car. The Micro Car is another product line to sell to our potential and existing customers.

 

Going Concern

 

The Company’s consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has sustained operating losses since its inception (March 16, 2006) and has used substantial amounts of working capital in its operations. Management has been and is continuing to implement our cost reduction strategy for material, production and service costs. Until management achieves our cost reduction strategy over the next year and sufficiently increases cash flow from operations, we will require additional capital to meet our working capital requirements, debt service, research and development, capital requirements and compliance requirements. Further, at December 31, 2009 accumulated deficit amounted to $33,062,174 and a working capital deficit of $11,008,404. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. As a result, our independent registered public accounting firm has modified its report to highlight this uncertainty.

 

Management believes that its current sources of funds and current liquid assets will allow the Company to continue as a going concern through at least June 30, 2010. The Company started selling its vehicles in 2007 and has obtained equity financing, net of offering costs, from third parties of $2.0 million, received proceeds from related-party loans of $4.5 million, and converted related-party notes of $4.0 million to preferred shares during 2009 (see Notes 8 and 10) and plans to raise additional debt and/or equity capital to finance future activities. Additionally, the Company plans to refinance the outstanding balance of $1.0 million related to the Immersive note due March 31, 2010.

 

In light of these plans, management is confident in the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Critical Accounting Policies and Estimates

 

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

 

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:

 

Concentrations of Credit Risk

 

Cash

 

We maintain our cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. From time to time, our cash balances exceed the amount insured by the FDIC. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk related to these deposits. At December 31, 2009 we had cash deposits in excess of the FDIC limit of $2.7 million.

Receivables

 

We perform periodic evaluations of our customers and maintain allowances for potential credit losses as deemed necessary. We generally do not require collateral to secure our accounts receivable. We estimate credit losses based on management’s evaluation of historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. At December 31, 2009 and 2008, we have allowance for doubtful accounts of $37,000 and $27,000, respectively. Although we expect to collect amounts due, actual collections may differ from the estimated amounts.

 

Cash and Cash Equivalents

 

We consider cash equivalents to be all short-term investments that have an initial maturity of 90 days or less and are not restricted. We invest our cash in short-term money market accounts.

 

Concentration of Risk

 

As of December 31, 2009 and 2008, two customers accounted for more than 10% of total accounts receivable and no customers accounted for 10% of total accounts receivable, respectively. No customer accounted for more than 10% of net revenues for the years ended December 31, 2009, 2008 and 2007.

 

As of December 31, 2009 and 2008, one vendor accounted for more than 10% of total accounts payable and no vendor accounted for 10% of total accounts payable, respectively. No one customer accounted for more than 10% of purchases for the years ended December 31, 2009, 2008 and 2007.

 

Inventories

 

Inventories, which consist of raw materials, finished goods and work-in-process, are stated at the lower of cost or net realizable value, with cost being determined by the average-cost method, which approximates the first-in, first-out method. At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation primarily includes an analysis of forecasted demand in relation to the inventory on hand, among consideration of other factors. Based upon the evaluation, provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the respective inventories.

 

Property and Equipment

 

Property and equipment are stated at cost, and are being depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are recorded at cost and amortized on a straight-line basis over the shorter of their estimated lives or the remaining lease term. Significant renewals and betterments are capitalized. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed. At the time property and equipment are retired or otherwise disposed of, the cost and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are reflected in the consolidated statement of operations.

 

Intangible Asset

 

Intangible asset consists of a data license agreement and is amortized on a straight-line basis over the life of the license. All identified intangible assets are classified within other long-term assets on the consolidated balance sheets. We will perform an annual review of our identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, we assess the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.

Impairment of Long-Lived Assets

 

We account for our long-lived assets in accordance with the accounting standards which require that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. We assess recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value. As of December 31, 2009, we performed an annual review of our identified intangible asset related to the GeoImmersive license agreement to assess potential impairment. At December 31, 2009, management deemed the intangible asset to be fully impaired, as management has decided to allocate the resources required to map the data elsewhere. As a result, the remaining value was fully amortized as of December 31, 2009. As of December 31, 2009 we do not believe there has been any other impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products will continue, which could result in impairment of long-lived assets in the future.

 

Fair Value of Financial Instruments

 

Our financial instruments consist of cash, accounts receivable, related party receivable, accounts payable, accrued expenses, related party payables and related party note payable. The carrying value for all such instruments, except related party payable, approximates fair value due to the short-term nature of the instruments. We cannot determine the fair value of our related party notes payable due to the related party nature and instruments similar to the notes payable could be found.

 

Revenue Recognition

 

We recognize revenues in accordance with the accounting standards. Under the accounting standards, we recognize revenues when there is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed or determinable and collectability of the resulting receivable is reasonably assured.

 

For all sales, we use a binding purchase order as evidence of an arrangement. Delivery occurs when goods are shipped for customers with FOB Shipping Point or Destination terms. Shipping documents are used to verify delivery and customer acceptance. For FOB Destination, we record revenue when proof of delivery is confirmed by the shipping company. We assess whether the sales price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund. We offer a standard product warranty to our customers for defects in materials and workmanship for a period of one year or 2,500 miles, whichever comes first, and have no other post-shipment obligations. We assess collectibility based on the creditworthiness of the customer as determined by evaluations and the customer’s payment history.

 

All amounts billed to customers related to shipping and handling are classified as net revenues, while all costs incurred by us for shipping and handling are classified as cost of revenues.

 

We do not enter into contracts that require fixed pricing beyond the term of the purchase order. All sales via distributor agreements are accompanied by a purchase order. Further, we do not allow returns of unsold items.

 

We have executed various distribution agreements whereby the distributors agreed to purchase T3 Series packages (one T3 Series, two power modules, and one charger per package). The terms of the agreements require minimum re-order amounts for the vehicles to be sold through the distributors in specified geographic regions. Under the terms of the agreements, the distributor takes ownership of the vehicles and we deem the items sold at delivery to the distributor.

 

Share Based Compensation

 

We maintain a stock option plan and record expenses attributable to our stock option plan. We elected to amortize stock-based compensation for awards granted on or after March 16, 2006 (date of inception) on a straight-line basis over the requisite service (vesting) period for the entire award.

We account for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with the accounting standards. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

 

In accordance with the accounting standards, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, we record the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expense in our consolidated balance sheet.

 

Income Taxes

 

We account for income taxes under the provisions of the accounting standards. Under the accounting standard, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. A valuation allowance is provided for significant deferred tax assets when it is more likely than not, that such asset will not be realized through future operations.

 

Derivative Liability

 

Effective January 1, 2009, the Company adopted the accounting standards that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

 

As a result of the adoption of the accounting standard, 4,562,769 of our issued and outstanding common stock purchase warrants and embedded conversion features previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. These warrants had exercise prices ranging from $1.08 to $2.00 and expire between December 2012 and December 2014. Effective January 1, 2009, the Company reclassified the fair value of these common stock purchase warrants and embedded conversion features, all of which have exercise price reset features and price protection clauses, from equity to liability status as if these warrants and conversion features were treated as derivative liabilities since their date of original issuance ranging from March 2008 through December 2008.

 

On January 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, approximately $4.0 million to a derivative liability to recognize the fair value of such warrants and embedded conversion features, at the original issuance date and reclassified from retained earnings, as a cumulative effect adjustment, approximately $2.0 million to recognize the change in the fair value from original issuance through December 31, 2008, and recorded additional debt discounts of approximately $0.9 million related to the fair value of warrants issued with related party notes outstanding at December 31, 2008.

 

During 2009, the Company issued 9,928,504 of additional warrants related to convertible debt. The Company estimated the fair value of the warrants at the dates of issuance and a debt discount and derivative liability of $3,510,751 was recorded and will be amortized over the remaining life of the debt.

 

During 2009, the Company issued 5,953,730 of additional warrants related to preferred stock. The Company estimated the fair value of the warrants of $1,740,578, at the dates of issuance and recorded a discount on the issuance of the equity and a corresponding derivative liability. The discount will be recorded as a deemed dividend with a reduction to retained earnings. The change in fair value of the derivative will be recorded through earnings at each reporting date.

During 2009, the Company recorded a discount on the issuance of preferred stock and derivative liability of $7,314,273 related to the anti-dilution provision of the preferred stock issued. The discount will be recorded as a deemed dividend with a reduction to retained earnings during the 24-month period that the anti-dilution provision is outstanding. The change in fair value of the derivative will be recorded through earnings at each reporting date.

 

The Company has contingent warrants for up to 50,000 shares of common stock, $0.001 par value per share, at $0.70 per share. The warrants are contingent upon a future event. The Company did not recognize the fair value of the total amount of the contingent warrants at the dates of the note agreements as the actual issuance of these warrants is directly contingent upon repayment status of the note to Immersive. The Company will recognize the fair value of the contingent warrants as a debt discount when the contingency is resolved and the related warrants are issued, if any. The debt discount will be amortized to interest expense over the remaining terms of the note agreement.

 

The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not trade in an active securities market, and as such, the Company estimates the fair value of these warrants and embedded conversion features using the Black-Scholes-Merton option pricing model.

 

Beneficial Conversion Features and Debt Discounts

 

The convertible features of convertible notes provides for a rate of conversion that is below market value. Such feature is normally characterized as a “beneficial conversion feature” (“BCF”). The relative fair values of the BCF’s have been recorded as discounts from the face amount of the respective debt instrument. We are amortizing the discount using the effective interest method through maturity of such instruments. We will record the corresponding unamortized debt discount related to the BCF as interest expense when the related instrument is converted into the Company’s common stock.

 

Loss Per Share

 

Basic loss per share is computed by dividing loss available to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted earnings per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional common shares were dilutive. Options, warrants and shares associated with the conversion of debt and preferred stock to purchase approximately 50.5 million, 13.8 million and 6.6 million shares of common stock were outstanding at December 31, 2009, 2008 and 2007, respectively, but were excluded from the computation of diluted earnings per share due to the net losses for the period.

 

 

Research and Development

 

We expense research and development costs as incurred.

Advertising

 

Advertising expenses are charged against operations when incurred. Advertising expenses for the years ended December 31, 2009, 2008 and 2007 were $4,226, $28,539 and $73,839, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

 

Commitments and Contingencies

 

On June 25, 2008, we elected to upgrade or replace approximately 500 external chargers (revision D or older) that were produced due to a chance that the chargers could fail over time. A failed charger could result in degrading the life of the batteries or cause the batteries to be permanently inoperable, or in extreme conditions result in thermal runaway of the batteries. The chargers were placed in service between January 2007 and 2008. We notified customers informing them of the need for an upgrade and began sending out new and/or upgraded chargers (revision E) in July of 2008 to replace all existing revision D or older chargers that are in the field. After all the upgrades are complete, any remaining returned chargers will be upgraded to revision E and resold as refurbished units. We did not include any potential revenue from re-sales in the estimate. The total costs of upgrading or replacing these chargers are estimated to be approximately $78,000. We anticipate that all of the chargers will be upgraded or replaced by December 2010.

 

Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim (Orange County Superior Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (“Plaintiff”) filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki Nam, the Company’s CEO, and Jason Kim, the Company’s former COO, (“Defendants”) for breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed between Plaintiff and T3 Motion, Inc. On August 24, 2009, Defendants filed a Demurrer to the Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended Complaint against Defendants for breach of contract, fraud and common counts, seeking compensatory damages of $470,598, attorney’s fees, punitive damages, interest and costs. Defendants have disputed Plaintiff’s claims and intend to vigorously defend against them. Indeed, on October 27, 2009, Defendants filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court overruled the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an Answer to the First Amended Complaint. The trial in this matter is set for July 30, 2010.

 

In the ordinary course of business, the Company may face various claims brought by third parties in addition to the claim described above and may from time to time, make claims or take legal actions to assert the Company’s rights, including intellectual property rights as well as claims relating to employment and the safety or efficacy of the Company’s products. Any of these claims could subject us to costly litigation and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, the insurance carriers may deny coverage or the policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of such awards could have a material adverse effect on the consolidated operations, cash flows and financial position. Additionally, any such claims, whether or not successful, could damage the Company’s reputation and business. Management believes the outcome of currently pending claims and lawsuits will not likely have a material effect on the consolidated operations or financial position.

 

Recent Accounting Pronouncements

 

New Accounting Standard.  In the third quarter of 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (the “Codification”). The Codification is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with GAAP. All accounting guidance that is not included in the Codification will be considered to be non-authoritative. The FASB will issue Accounting Standard Updates (“ASUs”), which will serve only to update the Codification, provide background information about the guidance and provide the basis for conclusions on changes in the Codification. ASUs are not authoritative in their own right. The Codification does not change GAAP and did not have an affect on the Company’s financial position or results of operations.

In January 2010, the FASB issued ASU 2010-6, Fair Value Measurements and Disclosures:Improving Disclosures About Fair Value Measurement (“ASU 2010-6”), which affects the disclosures made about recurring and non-recurring fair value measurements. ASU 2010-6 is effective for the Company’s fiscal year beginning January 1, 2010, and for annual and interim periods thereafter. The Company is currently evaluating the impact that ASU 2010-6 will have on its consolidated financial statements.

 

Business Segments

 

We currently only have one reportable business segment due to the fact that we primarily derive our revenue from one product. The CT Micro Car is not included in a separate business segment due to nominal net revenues for the year ended December 31, 2009. The net revenues from domestic sales are listed below.

 

 

Recent Events

 

On December 30, 2009, we sold $3,500,000 in debentures and warrants to Vision Opportunity Master Fund, Ltd. (“Vision”) through a private placement pursuant to a Securities Purchase Agreement (the “Purchase Agreement”). We issued to Vision, 10% Secured Convertible Debentures (“Debentures”), with an aggregate principal value of $3,500,000.

 

The Debentures accrue interest on the unpaid principal balance at a rate equal to 10% per annum. The maturity date is December 30, 2010. At any time after the 240th calendar day following the issue date, the Debentures are convertible into “units” of Company securities at a conversion price of $1.00 per unit, subject to adjustment. Each “unit” consists of one share of our Series A Convertible Preferred Stock and a warrant to purchase one share of our common stock. We may redeem the Debentures in whole or part at any time after June 30, 2010 for cash in an amount equal to 120% of the principal amount plus accrued and unpaid interest and certain other amounts due in respect of the Debenture. Interest on the Debentures is payable in cash on the maturity date or, if sooner, upon conversion or redemption of the Debentures. In the event of default under the terms of the Debentures, the interest rate increases to 15% per annum.

 

The Purchase Agreement provides that during the 18 months following December 30, 2009, if we or our wholly-owned subsidiary, T3 Motion, Ltd., a company incorporated under the laws of the United Kingdom (the “Subsidiary”), issue common stock, common stock equivalents for cash consideration, indebtedness, or a combination of such securities in a subsequent financing (the “Subsequent Financing”), Vision may participate in such Subsequent Financing in up to an amount equal to Vision’s then percentage ownership of our common stock.

 

The Purchase Agreement also provides that from December 30, 2009 to the date that the Debentures are no longer outstanding, if the Company effects a Subsequent Financing, Vision may elect, in its sole discretion, to exchange some or all of the Debentures then held by Vision for any securities issued in a Subsequent Financing on a “$1.00 for $1.00” basis (the “Exchange”); provided, however, that the securities issued in a Subsequent Financing will be irrevocably convertible, exercisable, exchangeable, or resettable (or any other similar feature) based on the price equal to the lesser of (i) the conversion price, exercise price, exchange price, or reset price (or such similar price) in such Subsequent Financing and (ii) $1.00 per share of common stock. Vision is obligated to elect the Exchange on a $0.90 per $1.00 basis (not a $1.00 for $1.00 basis) if certain conditions regarding the Subsequent financing and other matters are met.

 

Also pursuant to the Purchase Agreement, Vision received Series G Common Stock Purchase Warrants (the “Warrants”). Pursuant to the terms of Warrants, Vision is entitled to purchase up to an aggregate of 3,500,000 shares

of our common stock at an exercise price of $0.70 per share, subject to adjustment. The Warrants have a term of five years after the issue date of December 30, 2009.

 

The Subsidiary entered into a Subsidiary Guarantee (“Subsidiary Guarantee”) for our benefit to guarantee to Vision the obligations due under the Debentures. We and the Subsidiary also entered into a Security Agreement (“Security Agreement”) with Vision, under which we and the Subsidiary granted to Vision a security interest in certain of our and the Subsidiary’s property to secure the prompt payment, performance, and discharge in full of all obligations under the Debentures and the Subsidiary Guarantee.

 

On December 30, 2009, we also entered into a Securities Exchange Agreement (the “Exchange Agreement”) with Vision and Vision Capital Advantage Fund, L.P. (“VCAF” and, together with Vision, the “Vision Parties”). Pursuant to Exchange Agreement, we issued to the Vision Parties an aggregate of 9,370,698 shares of Preferred Stock. 3,055,000 shares of Preferred Stock were issued in exchange for the delivery and cancellation of 10% Secured Convertible Debentures previously issued by us to the Vision Parties in the principal amount of $2,200,000 (issued December 30, 2008) and $600,000 (issued May 28, 2009) plus accrued interest of $255,000 (in conjunction with the issuance of Series A Preferred Stock, we issued Class F warrants to purchase 6,110,000 shares of Common Stock at $0.70 per share); 2,263,750 shares of Preferred Stock were issued in exchange for the delivery and cancellation of all Series A, B, C, D, E and F warrants (totalling 10,972,769 shares) previously issued by us to the Vision Parties valued at $1,155,390, the Company recorded a gain of $45,835 related to the exchange of the warrants for preferred stock; and 4,051,948 shares of Preferred Stock were issued to satisfy the Company’s obligation to issue equity to the Vision Parties pursuant to a Securities Purchase Agreement dated on March 24, 2008 and amended on May 28, 2009.

 

Under the Exchange Agreement, Ki Nam, our Chief Executive Officer and Chairman of the Board of Directors of the Company, also agreed to convert a promissory note plus the accrued interest, previously issued to him by the Company into 976,865 shares of Preferred Stock and Series G Common Stock Purchase Warrants to purchase up to 1,953,730 shares of common stock (which warrants have the same terms as the Warrants issued to Vision pursuant to the Purchase Agreement).

 

We, Ki Nam and Vision Parties also entered into a Stockholders Agreement, whereby Mr. Nam agreed to vote, in the election of members of the Company’s board of directors, all of his voting shares of the Company in favor of (i) two nominees of Vision Parties so long as their ownership of common stock of the Company is 22% or more or (ii) or one nominee of Vision Parties so long as their ownership of common stock of the Company is 12% or more.

 

On May 28, 2009, the Company issued to Vision, 10% Debentures, with an aggregate principal value of $600,000. As noted above, these 10% Debentures were cancelled in connection with the December 30, 2009 financing with Vision. Additionally, Vision received Series E Common Stock Purchase Warrants to purchase up to an aggregate 300,000 shares of the Company’s common stock at an exercise price of $1.20 per share. Such Series E Common Stock Purchase Warrants were exchanged for shares of Preferred Stock in connection with the December 30, 2009 financing with Vision.

 

On December 30, 2008, the Company sold $2.2 million in debentures and warrants through a private placement to Vision pursuant to a Securities Purchase Agreement. On December 30, 2009, pursuant to the Exchange Agreement noted above, the Company issued to the Vision Parties, shares of Preferred Stock in exchange for the delivery and cancellation of these debentures and accrued interest. The December 30, 2008 Securities Purchase Agreement further provided that the exercise price of any Series B Common Stock Purchase Warrant and Series C Common Stock Purchase Warrant of the Company held by Vision would be reduced to $1.65 per share. These warrants were later exchanged for Preferred Stock on December 30, 2009.

 

The Company has accounted for all debentures issued to Vision according to the accounting standard for derivative liabilities and convertible securities with beneficial conversion features.

 

The debt discount issued to Vision was allocated between the warrants and the effective BCF, of $1,278,873 and $1,840,809, respectively, for the year ended December 31, 2009, and $607,819 and $607,819, respectively, for 2008. The discount of $2,629,898 and $1,213,402 as of December 31, 2009 and 2008, respectively, related to the warrants and the BCF, is being amortized over the term of the Debentures. The Company amortized $2,571,141 and $2,236 for the years

ended December 31, 2009 and 2008, respectively. The remaining unamortized warrant and beneficial conversion feature value is recorded as a discount on the Debentures on the accompanying balance sheet.

 

Results of Operations

 

The following table sets forth the results of our operations for the years ended December 31, 2009, 2008 and 2007:

 

 

Revenues.  Revenues are primarily from sales of the T3 Series, CT Micro Car, power modules, chargers and related accessories. Revenues decreased $2,945,243, or 38.8%, to $4,644,022 for the year ended December 31, 2009, compared to the same period of the prior year. The decrease is primarily due to adverse conditions in the global economy and disruption in the financial markets. Due to the current economic conditions, our customers have deferred purchasing decisions, thereby lengthening our sales cycles, offset in part by increased service revenue and the introduction of the CT Micro Car. Revenue increased $5,766,996, or 317%, to $7,589,265 for the year ended December 31, 2008, compared to the same period of the prior year. The increase in revenue was attributable to the conclusion of the prototype development of the T3 series in 2006 and commencement of the sales of the T3 Series in 2007 along with the implementation of our sales and marketing strategy and the results of the T3 brand recognition in 2008.

 

Cost of revenues.  Cost of revenues consisted of materials, labor to produce vehicles and accessories, warranty and service costs and applicable overhead allocations. Cost of revenues decreased $4,304,758, or 46.3%, to $4,988,118 for the year ended December 31, 2009, compared to the same period of the prior year. This decrease in cost of revenues is attributable to reductions in sales activities related to adverse economic conditions as well as management’s cost

reduction strategy. Cost of revenues increased $5,364,351, or 137%, to $9,292,876 for the year ended December 31, 2008, compared to the same period of the prior year. The increase in cost of revenues was attributable to the increase in revenue, offset by the continued efforts to reduce materials and production costs. Further contributing to the increase was $78,000 related to an upgrade to our chargers. The cost reduction strategy will continue as volume increases and we are able to achieve volume discounts on our materials along with production efficiencies.

 

Gross loss.  During 2009, management has continued to source lower product costs as well as production efficiencies. Management has and will continue to evaluate the processes and materials to reduce the costs of revenue over the next year. As a result of the commencement of production, there were cost overruns and inefficiencies in the production process in 2009, 2008 and 2007. Gross loss margin was (7.4%), (22.4%) and (115.6%), respectively, for the years ended December 31, 2009, 2008 and 2007.

 

Sales and marketing.  Sales and marketing decreased by $362,429 or 15.8%, to $1,927,824 for the year ended December 31, 2009, compared to the same period of the prior year. The decrease in sales and marketing expense is attributable to reduction in salaries and commissions due to decreased sales and repairs to the demo fleet. Sales and marketing increased by $565,474 or 32.8%, to $2,290,253 for the year ended December 31, 2008, compared to the same period of the prior year. The increase is attributable to the hiring of sales and marketing staff, travel and trade show expenses, and other sales and marketing related expenses to support the commencement of sales of the T3 Series and accessories to customers in the first quarter of 2007.

 

Research and development.  Research and development costs includes development expenses such as salaries, consultant fees, cost of supplies and materials for samples, as well as outside services costs. Research and development expense was $1,395,309 for the year ended December 31, 2009, and consistent with $1,376,226 for the year ended December 31, 2008. Research and development expense increased to $1,376,226 or 10.7%, from $1,243,430 for the year ended December 31, 2008, compared to the same period of the prior year and is primarily due to continued design efforts to produce a lower cost vehicle along with continued efforts to design additional products and technology to assist with the cost reduction efforts.

 

General and administrative.  General and administrative expenses decreased $1,123,831, or 18.0%, to $5,126,801, for the year ended December 31, 2009 compared to the same period of the prior year. The decrease was primarily due to decreased legal and accounting compliance costs, offset in part by increased amortization and staffing to support the business infrastructure. General and administrative expenses increased $2,796,136, or 80.9%, to $6,250,632, for the year ended December 31, 2008 compared to the same period of the prior year. The increase was primarily due to increased wages from the addition of staff, increased depreciation and amortization, increased stock option expense and increased professional fees to support the public company filing requirements as well as infrastructure support to aid with the our continued growth.

 

Other income (expense).  Other income (expense) increased $5,639,652 to $5,565,869 for the year ended December 31, 2009 primarily due to the change in the fair value of the derivative liabilities due to the adoption of the accounting standard in 2009 when compared to the same period of the prior year. Other income (expense) decreased $86,209 to ($73,783) for the year ended December 31, 2008 compared to the same period of the prior year primarily due to the write-off of obsolete demo vehicles.

 

Interest Expense.  Interest expense increased $2,814,859 to $3,472,442 for the year ended December 31, 2009 due to increased interest expense from the related party loans and the debt discount associated with the loans compared to the same period of the prior year. Interest expense increased $594,447 to $657,583 for the year ended December 31, 2008 compared to the same period of the prior year primarily due to increased interest expense from the related party payables and the debt discounts associated with such debt.

 

Net loss.  Net loss for the year ended December 31, 2009, was $(6,698,893), or $(0.15) per basic and diluted share compared to $(12,297,797), or $(0.29) per basic and diluted share, for the same period of the prior year. Net loss was $(8,577,232), or $(0.24) per basic and diluted share, for the year ended December 31, 2007.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our principal capital requirements are to fund working capital requirements, invest in research and development and capital equipment, to make debt service payments and the continued costs of public company filing

requirements. We will continue to raise equity and/or secure additional debt to meet our working capital requirements. For the year ended December 31, 2009, our independent registered public accounting firm noted in its report that we have incurred losses from operations and have an accumulated deficit and working capital deficit of approximately $33.0 million and $11.0 million, respectively, as of December 31, 2009, which raises substantial doubt about our ability to continue as a going concern. Management believes that our current and potential sources of funds and current liquid assets will allow us to continue as a going concern through at least June 30, 2010. The Company started selling its vehicles in 2007 and has obtained equity financing, net of offering costs, from third parties of $2.0 million, received proceeds from related party loans of $4.5 million and converted related-party notes of $4.0 million to preferred shares during 2009 (see Notes 8 and 10) and plans to raise additional debt and/or equity capital to finance future activities. In light of these plans, management is confident in the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Until Management achieves our cost reduction strategy over the next year and sufficiently increases cash flow from operations, we will require additional capital to meet our working capital requirements, research and development and capital requirements. We will continue to raise additional equity and/or financing to meet our working capital requirements.

 

Our principal sources of liquidity are cash and receivables. As of December 31, 2009, cash and cash equivalents were $2,580,798, or 42.6% of total assets compared to $1,682,741, or 21.3% of total assets as of December 31, 2008. The increase in cash and cash equivalents was primarily attributable to equity financing from sale of stock and issuance of related party debt, offset by net cash used in operating and investing activities.

 

Cash Flows

 

For the Years Ended December 31, 2009, 2008 and 2007

 

Net cash flows used in operating activities for the years ended December 31, 2009, 2008 and 2007, were $5,356,936, $8,775,598 and $6,655,226, respectively. For the year ended December 31, 2009, cash flows used in operating activities related primarily to the net loss of $6,698,893, offset by net non-cash reconciling items of $295,988. Further contributing to the decrease were decreases in accounts payable of $719,720. Net cash flows used were offset in part by decreases in accounts receivable, inventories, and other current assets of $689,343, $645,253, and $450,798, respectively.

 

For the year ended December 31, 2008, cash flows used in operating activities related primarily to the net loss of $12,297,797, offset by net non-cash reconciling items of $4,476,408. Further contributing to the decrease were increases in accounts receivable, inventories, and other current assets of $1,107,819, $595,375 and $474,328, respectively. Net cash flows used were offset in part by increases in accounts payable of $1,105,489.

 

For the year ended December 31, 2007, cash flows used in operating activities were primarily due to the net loss of $8,577,232 offset by net non-cash reconciling items of $2,560,409. Further contributing to the decrease were increases in accounts receivable, inventories, and security deposits of $372,185, $929,387 and $44,782, respectively. Net cash flows used were offset in part by increases in accounts payable of $688,606.

 

Net cash used in investing activities was $38,450, $2,063,768 and $780,867 for the years ended December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2009, cash flows used in investing activities related primarily to purchases of property and equipment of $36,040. For the year ended December 31, 2008, cash flows used in investing activities related primarily to deposits for fixed assets of $444,054, purchases of property and equipment of $619,929, and the purchase of the data license from Immersive for $1,000,000. For the year ended December 31, 2007, cash flows used in financing activities related primarily to purchases of property and equipment of $756,304.

 

Net cash provided by financing activities was $6,294,075, $7,584,401 and $12,362,554 for the years ended December 31, 2009, 2008 and 2007, respectively. For the year ended December 31, 2009, cash flows provided by financing activities related primarily to proceeds received from related party notes of $4,514,962, proceeds from the sale of stock of $1,978,942, offset in part by repayment of notes payable of $199,829.

For the year ended December 31, 2008, cash flows provided by financing activities related primarily to proceeds received from related party notes of $2,200,000, proceeds from related party loan advances of $715,000, equity financing from the sale of stock of $6,669,163, offset in part by repayment of related party loans and advances of $1,999,762.

 

For the year ended December 31, 2007, cash flows provided by financing activities related primarily to proceeds received from related party note receivable of $2,300,000, proceeds received from related party notes of $2,000,000, proceeds from related party loan advances of $4,236,778, equity financing from the sale of stock of $7,388,000, offset in part by repayment of related party loans and advances of $3,562,224.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

Contractual Obligations

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our financial position, results of operations, and cash flows.

 

The following table summarizes our contractual obligations as of December 31, 2009, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

 

 

Off-Balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Warrants

 

From time to time, we issue warrants to purchase shares of the Company’s common stock to investor, note holders and to non-employees for services rendered or to be rendered in the future. Warrants issued in conjunction with equity, are recorded to equity as exercised.

 

As of December 31, 2009, there were outstanding warrants to purchase 697,639 shares of our common stock at an exercise price of $1.081 per share. The warrants are immediately exercisable. The warrants expire on December 31, 2012. There were 120,000 warrants exercisable at the exercise price of $1.54 per warrant. These warrants expire on March 31, 2013. There were 474,774 warrants exercisable at the exercise price of $2.00 per warrant that expire on March 31, 2014. There were 5,453,730 warrants exercisable at the exercise price of $0.70 per warrant that expire on December 30, 2014. There were 4,000,000 warrants exercisable at the exercise price of $0.90 per warrant that expire on December 30, 2014.

 

The exercise price and the number of shares issuable upon exercise of the warrants will be adjusted upon the occurrence of certain events, including reclassifications, reorganizations or combinations of the common stock. At

all times that the warrants are outstanding, we will authorize and reserve at least that number of shares of common stock equal to the number of shares of common stock issuable upon exercise of all outstanding warrants.

 

 

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Financial instruments consist of cash and cash equivalents, trade accounts receivable, related-party receivables, accounts payable, accrued liabilities and related-party payables. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents.

 

Interest Rates.  Exposure to market risk for changes in interest rates relates primarily to short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. At December 31, 2009, 2008 and 2007, we have $2,580,798, $1,682,741 and $4,932,272, respectively, in cash and cash equivalents. A hypothetical 0.5% increase or decrease in interest rates would not have a material impact on earnings or loss, or the fair market value or cash flows of these instruments.

 

 

The financial statements are listed in the Index to Financial Statements on page F-1.

 

 

None

 

 

Disclosure Controls and Procedures

 

Regulations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), require public companies to maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.

 

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2009, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

 

We performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with GAAP. Accordingly, we believe that the consolidated financial statements included in this Annual Report fairly present, in all material aspects, our financial condition for the periods presented.

Internal Control over Financial Reporting

 

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

 

 

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.

 

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 5) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following five material weaknesses which have caused management to conclude that, as of December 31, 2009, our disclosure controls and procedures were not effective at the reasonable assurance level:

 

1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act and will be applicable to us for the year ending December 31, 2010. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

3. We did not maintain sufficient accounting resources with adequate training in the application of GAAP commensurate with our financial reporting requirements and the complexity of our operations and transactions, specifically related to the accounting and reporting of debt and equity transactions, including derivative instruments.

4. We do not have sufficient policies and procedures to approve changes to shipping terms of sales agreements to ensure appropriate revenue recognition of sales transactions.

 

5. We have had, and continue to have, a significant number of audit adjustments. Audit adjustments are the result of a failure of the internal controls to prevent or detect misstatements of accounting information. The failure could be due to inadequate design of the internal controls or to a misapplication or override of controls. Management evaluated the impact of our significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.

 

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

 

We are attempting to remediate the material weaknesses in our disclosure controls and procedures and internal controls over financial reporting identified above by refining our internal procedures (see below).

 

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

 

 

The following change in our internal control over financial reporting occurred during the year ended December 31, 2009, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting:

 

 

We have initiated the following corrective actions, which management believes are reasonably likely to materially affect over our financial reporting as they are designed to remediate the material weaknesses as described above:

 

 

We do not expect to have fully remediated these significant deficiencies until management has tested those internal controls and found them to have been remediated. We expect to complete this process during our annual testing for fiscal 2010.

 

 

 

Preproduction Plastics, Inc. v. T3 Motion., Inc. Ki Nam and Jason Kim (Orange County Superior Court Case No. 30.2009-00125358): On June 30, 2009, Preproduction Plastics, Inc. (“Plaintiff”) filed suit in Orange County Superior Court, alleging causes of actions against T3 Motion, Inc., Ki Nam, the Company’s CEO, and Jason Kim, the Company’s former COO, (“Defendants”) for breach of contract, conspiracy, fraud and common counts, arising out of a purchase order allegedly executed between Plaintiff and T3 Motion, Inc. On August 24, 2009, Defendants filed a Demurrer to the Complaint. Prior to the hearing on the Demurrer, Plaintiff filed a First Amended

Complaint against Defendants for breach of contract, fraud and common counts, seeking compensatory damages of $470,598, attorney’s fees, punitive damages, interest and costs. Defendants have disputed Plaintiff’s claims and intend to vigorously defend against them. Indeed, on October 27, 2009, Defendants filed a Demurrer, challenging various causes of action in the First Amended Complaint. The Court overruled the Demurrer on December 4, 2009. On December 21, 2009, Defendants filed an Answer to the First Amended Complaint. The trial in this matter is set for July 30, 2010.

 

Other than the description above, there have been no material developments during the year ended December 31, 2009 in any material pending legal proceedings to which the Company is a party or of which any of our property is the subject.

 

 

Executive Officers and Directors

 

The following table sets forth the names and ages of our current directors and executive officers. Also provided herein are a brief description of the business experience of each director, executive officer and significant employee during the past ten years and an indication of directorships held by each director in other companies subject to the reporting requirements under the federal securities laws. All of the directors will serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal.

 

 

 

 

Director Independence

 

Four of our directors, Steven Healy, David Snowden, Robert Thomson, and Mary Schott are independent directors as that term is defined under Nasdaq’s Marketplace Rule 4200. All of the members of our audit committee, compensation committee and nominating committee are independent.

 

Biographical Information

 

Ki Nam, Chief Executive Officer, has extensive experience as an entrepreneur developing cutting-edge products. Mr. Nam has served as Chief Executive Officer of T3 Motion since March 16, 2006. Mr. Nam founded Paradigm Wireless Company in 1999, a supplier of quality wireless equipment to the telecom industry, and Aircept founded in 2000, a leading developer, manufacturer, and service provider in the Global Positioning System (GPS) marketplace. In 2001, Mr. Nam founded Evolutionary Electric Vehicles (EEV) to provide high performance motor-controller packages to the emerging hybrid and electric vehicle market. Prior to founding his own companies, Mr. Nam worked at Powerwave Technologies, Inc. (Nasdaq: PWAV), where he helped guide the company to number five in Business Week’s list of Hot Growth Companies in 2000.

Kelly J. Anderson, has been the Executive Vice President, Chief Financial Officer since March 2008 and was appointed as a director in January 2009. From 2006 until 2008, Ms. Anderson was Vice President at Experian, a leading credit report agency. From 2004 until 2006, Ms. Anderson was Chief Accounting Officer for TripleNet Properties, G REIT, Inc., T REIT, Inc., NNN 2002 Value Fund, LLC, and Chief Financial Officer of NNN 2003 Value Fund, LLC and A REIT, Inc., these entities were real estate investment funds managed by TripleNet Properties. From 1996 to 2004, Ms. Anderson held senior financial positions with The First American Corp (NYSE: FAF) a Fortune 500 title insurance company.

 

Jason Kim, Chief Operations Officer, served as Chief Operations Officer of T3 Motion from June 2006 to January 2010. From 2005 to 2006, Mr. Kim served as the Vice President of Engineering and Operations for CalAmp Corporation’s M2M Products Division (Nasdaq: CAMP). From 2004 to 2005, Mr. Kim served as the Chief Operating Officer for Skybility, a wireless data transceiver module design and manufacturing company. Prior to his employment with CalAmp, Mr. Kim held senior management positions with various wireless infrastructure companies including Remec Communications (Nasdaq: REMC) and computer hardware and data network communications companies.

 

David Snowden, Director, has over 40 years of professional experience including holding positions as Chief of Police for Beverly Hills (current), Costa Mesa (1986-2003), and Baldwin Park (1980-1986). Chief Snowden has held numerous Presidential positions including Los Angeles Police Chief’s Association, California Police Chief’s Association, Police Chief’s Department of the League of Cities (1993), Orange County Chief’s and Sheriff’s Association (1990) and was Chairman of the Airbourne Law Enforcement (ABLE). Chief Snowden was inducted to the Costa Mesa Hall of Fame in 2003 and was voted top 103 most influential persons on the Orange Coast for 12 years running.

 

Mary S. Schott, Director, has over 25 years experience in the accounting finance functions with extensive experience in finance and accounting compliance and systems including Sarbanes-Oxley applications. Ms. Schott has been the Chief Financial Officer of San Manuel Band of Serrano Mission Indians since 2008. A CPA and MBA, Ms. Schott served as Chief Accounting Officer of First American Title Insurance Company, a division of First American Corporation (NYSE:FAF) for three years and held various finance and accounting functions for the previous 17 years at First American. Ms. Schott was the President and Treasurer of the First American Credit Union for eight years.

 

Steven J. Healy, Director, is a managing partner of Margolis, Healy & Associates, a professional services firm providing campus safety and security consulting services to colleges and universities around the country. Steve was the Director of Public Safety at Princeton University from 2003 — June 2009. He was the President of the International Association of Campus Law Enforcement Administrators (IACLEA) from June 2006 until June 2007. In the aftermath of the tragic rampage shooting incident at Virginia Tech, Mr. Healy testified before the U.S. Senate Committee on Homeland Security and Governmental Affairs on the topic of “Security on America’s College Campuses” in April 2007. He also testified before the U.S. House of Representatives Committee on Education and Labor on the topic of “Best Practices for Making College Campuses Safe” on May 15, 2007. In 2007, Security Magazine named him one of the “Most Influential People in the Security Profession.” He has served as a member of the IACLEA Government Relations Committee for the past 10 years and is considered a national expert the Clery Act. Steven was appointed by the Governor of New Jersey to serve on the state’s Campus Security Task Force. Prior to his position at Princeton University, Mr. Healy was the Chief of Police at Wellesley College in Wellesley, MA. He also served as Director of Operations at the Department of Public Safety at Syracuse University. During his tenure at Wellesley College, Mr. Healy was the IACLEA North Atlantic Regional Director and President of the Massachusetts Association of Campus Law Enforcement Administrators. Mr. Healy is a 1984 graduate of the United States Air Force Academy and served on active duty with the Air Force from 1984 until 2005.

 

Robert Thomson, Director, has been a Director at Vision Capital Advisors, LLC since 2007, a New York based private equity manager, where he oversees the firm’s growth equity investments in consumer retail, industrials, and homeland defense and security companies. Vision Capital Advisors LLC is the manager of two funds that hold debt and equity securities of the Company — Vision Opportunity Master Fund, Ltd. and Vision Capital Advantage Funds LP. At Vision, Mr. Thomson manages investment opportunities for the funds and works closely with its portfolio companies in executing their growth plans. He currently sits on the Board of Directors for Juma Technology Corp., a converged network integrator and software developer based in New York that trades on the OTC Bulletin Board (OTCBB: JUMT) and Microblend Technologies, Inc., a private company that is a developer of automatic paint

creation systems for retailers. From 2005 to 2007, Mr. Thomson was the Managing Director of The Arkin Group, LLC in charge of operations, financial management and growth strategies for this international business intelligence firm. Mr. Thomson has an MBA from the Harvard Business School and a BA from Haverford College. He has studied Chinese language and history at Nankai University in China and Tunghai University in Taiwan. Mr. Thomson is also a term member at the Council on Foreign Relations.

 

Family Relationships

 

There are no family relationships among our directors and executive officers.

 

Involvement in Certain Legal Proceedings

 

Except as provided below, none of our directors or executive officers has, during the past five years:

 

(a) Has had a petition under the federal bankruptcy laws or any state insolvency law filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

 

(b) Been convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

(c) Been the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

 

i. Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

 

ii. Engaging in any type of business practice; or

 

iii. Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;

 

(d) Been the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph I(i) above, or to be associated with persons engaged in any such activity;

 

(e) Been found by a court of competent jurisdiction in a civil action or by the Commission to have violated any federal or state securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated; or

 

(f) Been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated.

 

(g) Been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

 

i. Any federal or state securities or commodities law or regulation; or

ii. Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

 

iii. Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity.

 

(h) Been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Compliance with Section 16(a) of the Exchange Act

 

Not applicable

 

Code of Ethics

 

We have not adopted a code of ethics, but we plan on adopting a code of ethics that applies to all directors, officers, and employees, including our Chief Executive Officer and Chief Financial Officer, and members of the board of directors in the near future.

 

Material Changes to the Procedures by which Security Holders May Recommend Nominees to the Board of Directors

 

There have been no material changes to the procedures by which security holders may recommend nominees to the Board of Directors.

 

Audit Committee; Audit Committee Financial Expert

 

Our Board of Directors approved the charter for an audit committee of the Board on January 16, 2009, and formed such committee on February 20, 2009. The members of our audit committee are Mary S. Schott (chairperson) and David Snowden. The Board of Directors has determined that Ms. Schott is an “audit committee financial expert” as defined by SEC rules, and she is an independent member of the Board as defined by the SEC and the Nasdaq Capital Market.

 

 

Compensation Discussion and Analysis

 

The following Compensation Discussion and Analysis describes the material elements of compensation for our executive officers identified under the “Executive Compensation — Summary Compensation Table” (the “Named Executive Officers”). As more fully described below, the Compensation Committee of our Board (the “Compensation Committee”) reviews and makes all decisions for our executive compensation program, including: establishing salaries and reviewing benefit programs for the Chief Executive Officer (“CEO”) and each of our other Named Executive Officers; reviewing, approving, recommending and administering our annual incentive compensation and stock option plans for employees and other compensation plans; and advising our Board of Directors and making recommendations with respect to plans that require Board approval. Additionally, the Compensation Committee reviews and coordinates annually with the Nominating/Corporate Governance Committee of our Board of Directors with respect to the compensation of our directors.

 

Compensation Committee

 

Committee Members and Independence

 

Our Board of Directors approved the charter for a Compensation Committee of the Board on January 16, 2009, and formed such committee on February 20, 2009. The members of our Compensation Committee are Mary S.

Schott (chairperson) and Steven Healy, both of whom are independent members of the Board as defined by the SEC and the Nasdaq Capital Market.

 

Role of the Compensation Committee in Establishing Compensation

 

The Compensation Committee establishes and maintains our executive compensation program through internal evaluations of performance, consultation with various executive compensation consultants and analysis of compensation practices in industries where we compete for experienced senior management. The Compensation Committee reviews our compensation programs and philosophy regularly, particularly in connection with its evaluation and approval of changes in the compensation structure for a given year. Since the Compensation Committee was not formed until after 2008, items were approved by written consent of the entire Board during 2008 regarding Board matters.

 

Executive Compensation Program

 

Our executive compensation program is designed to attract, retain, incentivize and reward talented senior management who can contribute to our growth and success and thereby build value for our stockholders over the long-term. We believe that an effective executive compensation program is critical to our long-term success. By having an executive compensation program that is competitive with the marketplace and focused on driving sustained superior performance, we believe we can align the interests of our executive officers with the interests of shareholders and reward our executive officers for successfully improving shareholder returns. We have developed compensation programs with the following objectives:

 

 

The elements of our executive compensation program are as follows:

 

 

Base Salary.  Base salaries provide a fixed form of compensation designed to reward our executive officer’s core competence in his or her role. The Compensation Committee determines base salaries by taking into consideration such factors as competitive industry salaries; the nature of the position; the contribution and experience of the officers; and the length of service. The CEO makes salary recommendations for executive officers other than him and reviews such recommendations with the Compensation Committee.

 

Annual Incentive Compensation.  Discretionary annual incentive compensation is provided to incentivize our executive officers, in any particular year, to pursue particular objectives that the Compensation Committee believes are consistent with the overall goals and long-term strategic direction that the our Board has set for the Company.

 

Equity Compensation.  On May 15, 2007, the Board of Directors adopted the 2007 Stock Incentive Plan (the “2007 Plan”) effective August 15, 2007. The purpose of the 2007 Plan was to promote the interests of us and our shareholders by enabling selected key employees to participate in our long-term growth by receiving the opportunity to acquire shares of our common stock and to provide for additional compensation based on appreciation in our common stock. The 2007 Plan provides for the grant of stock options to key employees, directors and consultants, including the executive officers who provide services to the Company or any of its parents or subsidiaries. Under the 2007 Plan, stock options will vest over a specified period of time (typically four years) contingent solely upon the awardees’ continued employment with us. The 2007 Plan includes certain forfeiture provisions upon an awardees’ separation from service with us. The Compensation Committee determines whether to grant options and the exercise price of the options granted.

The Committee has broad discretion in determining the terms, restrictions and conditions of each award granted under the 2007 Plan and no option may be exercisable after ten years from the date of grant. All option awards granted under the 2007 Plan will have an exercise price equal to the fair market value of our common stock on the date of grant. Fair market value is defined under the 2007 Plan to be the closing market price of a share of our common stock on the date of grant or if no market price is available, the amount as determined by the Board of Directors subject to confirmation by an outside appraiser. The Compensation Committee retains the discretion to make awards at any time in connection with the initial hiring of a new employee, for retention purposes, or otherwise. We do not have any program, plan or practice to time annual or ad hoc grants of stock options or other equity-based awards in coordination with the release of material non-public information or otherwise. Any or all administrative functions may be delegated by the Board to a committee of the Board. The 2007 Plan provides that in the event of a merger of the Company with or into another corporation or of a “change in control” of the Company, including the sale of all or substantially all of our assets, and certain other events, the Board of Directors may, in its discretion, provide for the assumption or substitution of, or adjustment to, each outstanding award and accelerate the vesting of options.

 

The 2007 Plan will terminate on the earlier of (i) May 15, 2017, (ii) the date on which all 7,450,000 shares available for issuance under the 2007 Plan is issued, or (iii) the termination of all outstanding options in connection with a merger with or into another corporation or a “change in control” of the Company.

 

The Board of Directors may generally amend or terminate the 2007 Plan as determined to be advisable. No such amendment or modification, however, may adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the 2007 Plan unless the optionee or the participant consents to such amendment or modification. Also, certain amendments may require shareholder approval pursuant to applicable laws and regulations.

 

The above-referenced stock option grants were issued without registration in reliance upon the exemption afforded by Section 4(2) and Rule 701 of the Act based on certain representations made to us by the recipients.

 

The 2007 Plan may be amended or terminated by the Board, at any time. However, an amendment that would impair the rights of a recipient of any outstanding award will not be valid with respect to such award without the recipient’s consent. A total of 7,450,000 shares of our common stock are authorized for issuance under the 2007 Plan. As of December 31, 2009, there were 6,033,188 options outstanding under the 2007 Plan.

 

Perquisites.  We provide perquisites to our executive officers that we believe are reasonable and consistent with the perquisites that would be available to them at companies with whom we compete for experienced senior management. Perquisites include automobile allowances.

 

Other Benefits.  Other benefits to the executive officers include a 401(k) plan. We maintain a 401(k) plan for our employees, including our named executive officers, because we wish to encourage our employees to save some percentage of their cash compensation, through voluntary deferrals, for their eventual retirement. We do not offer employer matching with our 401(k) plan.

 

Executive Compensation

 

The following summary compensation table indicates the cash and non-cash compensation earned during the years ended December 31, 2009, 2008 and 2007 by our Chief Executive Officer (principal executive officer), (ii) our Chief Financial Officer (principal financial officer), (iii) the three most highly compensated executive officers other than our CEO and CFO who were serving as executive officers at the end of our last completed fiscal year, whose total compensation exceeded $100,000 during such fiscal year ends, and (iv) up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at the end of our last completed fiscal year, whose total compensation exceeded $100,000 during such fiscal year ends.

Executive Compensation — Summary Compensation Table:

 

 

 

 

Employment Agreements

 

We have no formal employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officer’s responsibilities following a change-in-control.

 

Plan-Based Awards

 

The following table sets forth certain information with respect to grants of plan-based awards made to the Named Executive Officers under our equity incentive plans.

 

 

 

 

The following table summarizes the amount of our executive officers’ equity-based compensation outstanding at the fiscal year ended December 31, 2009:

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

 

 

 

Option Exercises and Stock Vested

 

The following table sets forth certain information regarding exercises of stock options and stock vested held by the Named Executive Officers during the year ended December 31, 2009:

 

 

 

 

Director Compensation

 

The following table reflects all compensation awarded to, earned by or paid to the directors below for the year ended December 31, 2009. The persons listed below received the following compensation in exchange for their services as members of the Board of Directors of the Company for the year ended December 31, 2009. Ki Nam, our Chief Executive Officer, received no additional compensation as a director of the Company.

 

 

 

 

 

Securities Authorized for Issuance under Equity Compensation Plans or Individual Compensation Arrangements

 

Please see the section titled “Securities Authorized for Issuance under Equity Compensation Plans” under Item 5 above.

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth information as to each person who is known to us to be the beneficial owner of more than 5% of our outstanding common stock and Series A Preferred Stock and as to the security and percentage ownership of each executive officer and director of the Company and all officers and directors of the Company as a group as of March 8, 2010.

 

We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. Except as otherwise indicated, we believe that the beneficial owners listed below, based on the information furnished by these owners, have sole investment and voting power with respect to the securities indicated as beneficially owned by them, subject to applicable community property laws.

 

Unless otherwise indicated, the address of each beneficial owner listed below is 2990 Airway Ave., Suite A., Costa Mesa, California 92626.