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EX-31.2 - EX-31.2 - T3M INC.a56153exv31w2.htm
EX-32.2 - EX-32.2 - T3M INC.a56153exv32w2.htm
EX-32.1 - EX-32.1 - T3M INC.a56153exv32w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From                      To                     
Commission File Number 333-150888
T3 MOTION, INC.
(Exact name of registrant as specified in its charter)
     
Delaware   20-4987549
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
2990 Airway Avenue, Suite A   92626
Costa Mesa, California   (Zip Code)
(Address of principal executive offices)    
(714) 619-3600
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES 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 (§232.405 of this chapter) 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 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):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company þ
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o   NO þ
     As of May 17, 2010, the number of shares outstanding of the Registrant’s Common Stock, par value $0.001 per share was 48,538,462.
 
 

 


 

T3 MOTION, INC.
INDEX TO FORM 10-Q
March 31, 2010
         
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 EX-10.1
 EX-10.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
T3 MOTION, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    March 31,     December 31,  
    2010     2009  
    (unaudited)      
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 937,888     $ 2,580,798  
Accounts receivable, net of reserves of $37,000 and $37,000, respectively
    937,140       747,661  
Related party receivable
    35,790       35,658  
Inventories
    1,288,957       1,169,216  
Prepaid expenses and other current assets
    553,486       161,997  
 
           
Total current assets
    3,753,261       4,695,330  
Property and equipment, net
    803,148       868,343  
Deposits
    495,596       495,648  
 
           
Total assets
  $ 5,052,005     $ 6,059,321  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
Current liabilities:
               
Accounts payable
  $ 877,747     $ 872,783  
Accrued expenses
    840,308       1,064,707  
Related party payables
          104,931  
Derivative liabilities
    11,584,128       11,824,476  
Related party notes payable, net of debt discounts
    2,157,704       1,836,837  
 
           
Total liabilities
    15,459,887       15,703,734  
 
               
Commitments and contingencies
               
Stockholders’ deficit:
               
Series A convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; 11,502,563 and 12,347,563 shares issued and outstanding, respectively
    11,503       12,348  
Common stock, $0.001 par value; 150,000,000 shares authorized; 48,538,462 and 44,663,462 shares issued and outstanding, respectively
    48,538       44,664  
Additional paid-in capital
    25,944,642       23,356,724  
Accumulated deficit
    (36,416,795 )     (33,062,174 )
Accumulated other comprehensive income
    4,230       4,025  
 
           
Total stockholders’ deficit
    (10,407,882 )     (9,644,413 )
 
           
Total liabilities and stockholders’ deficit
  $ 5,052,005     $ 6,059,321  
 
           
See accompanying notes to condensed consolidated financial statements

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T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS (UNAUDITED)
                 
    Three Months Ended March 31,  
    2010     2009  
Net revenues
  $ 1,149,426     $ 1,205,037  
Cost of revenues
    1,127,449       1,466,267  
 
           
Gross profit (loss)
    21,977       (261,230 )
 
           
 
               
Operating Expenses:
               
Sales and marketing
    427,654       546,404  
Research and development
    320,506       301,448  
General and administrative
    1,029,413       1,241,520  
 
           
Total operating expenses
    1,777,573       2,089,372  
 
           
Loss from operations
    (1,755,596 )     (2,350,602 )
 
           
 
               
Other income (expense):
               
Interest income
    903       1,615  
Other income, net
    755,555       165,809  
Interest expense
    (681,801 )     (512,612 )
 
           
Total other income (expense), net
    74,657       (345,188 )
 
           
Loss before provision for income taxes
    (1,680,939 )     (2,695,790 )
Provision for income taxes
    800       800  
 
           
Net loss
    (1,681,739 )     (2,696,590 )
 
               
Deemed dividend to preferred stockholders
    (1,672,882 )      
 
           
Net loss attributable to common stockholders
  $ (3,354,621 )   $ (2,696,590 )
 
           
 
               
Other comprehensive loss:
               
Foreign currency translation income (loss)
    205       (19,941 )
 
           
Comprehensive loss
  $ (1,681,534 )   $ (2,716,531 )
 
           
 
               
Net loss per share:
               
Basic
  $ (0.07 )   $ (0.06 )
 
           
Diluted
  $ (0.07 )   $ (0.06 )
 
           
 
               
Weighted average number of common shares outstanding:
               
Basic
    45,050,960       44,022,097  
 
           
Diluted
    45,050,960       44,022,097  
 
           
See accompanying notes to condensed consolidated financial statements

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T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Three Months Ended March 31,  
    2010     2009  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net loss
  $ (1,681,739 )   $ (2,696,590 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    91,841       91,205  
Warranty expense
    13,229       39,423  
Share-based compensation expense
    292,461       409,743  
Change in fair value of derivative liabilities
    (753,727 )     (165,797 )
Investor relations expense
          80,000  
Amortization of debt discounts
    554,851       390,218  
Change in operating assets and liabilities:
               
Accounts and other receivables
    (189,477 )     400,320  
Inventories
    (119,741 )     (253,322 )
Prepaid expenses and other current assets
    (391,490 )     244,436  
Security deposits
    51       (3,784 )
Accounts payable and accrued expenses
    (232,665 )     (29,368 )
Related party payable
    (104,931 )     12,463  
 
           
Net cash used in operating activities
    (2,521,337 )     (1,481,053 )
 
           
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Loans/advances to related parties
    (1,607 )      
Purchases of property and equipment
    (26,646 )     (1,578 )
Repayment of loans/advances to related parties
    1,475       4,346  
 
           
Net cash (used in) provided by investing activities
    (26,778 )     2,768  
 
           
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Rescission of common stock
    (250,000 )      
Proceeds from the sale of preferred stock
    1,155,000        
 
           
Net cash provided by financing activities
    905,000        
 
           
Effect of exchange rate on cash
    205       (19,941 )
 
           
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (1,642,910 )     (1,498,226 )
CASH AND CASH EQUIVALENTS — beginning of period
    2,580,798       1,682,741  
 
           
CASH AND CASH EQUIVALENTS — end of period
  $ 937,888     $ 184,515  
 
           
See accompanying notes to condensed consolidated financial statements

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T3 MOTION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) —
Continued
                 
    Three Months Ended March 31,  
    2010     2009  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
  $ 6,494     $  
 
           
Income taxes
  $ 800     $  
 
           
Supplemental disclosure of non cash activities:
               
Issuance of common stock for related party payables
  $     $ 1,536,206  
 
           
Conversion of related party payable to related party notes payable
  $     $ 498,528  
 
           
Cumulative effect to retained earnings due to adoption of accounting standard
  $     $ 1,981,338  
 
           
Cumulative effect to additional paid-in capital due to adoption of accounting standard
  $     $ 4,013,085  
 
           
Cumulative effect to debt discount due to adoption of accounting standard
  $     $ 859,955  
 
           
Conversion option of preferred stock and warrants issued with preferred stock recorded as derivative liabilities
  $ 1,401,360     $  
 
           
Reclassification of derivative liability to equity due to conversion of preferred stock to common stock
  $ 1,121,965     $  
 
           
Debt discount and warrant liability recorded upon issuance of warrants
  $ 233,984     $ 245,592  
 
           
Amortization of preferred stock discount related to conversion feature and warrants
  $ 1,672,882     $  
 
           
Conversion of preferred stock to common
  $ 4,000     $  
 
           
See accompanying notes to condensed consolidated financial statements

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T3 MOTION, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 — DESCRIPTION OF BUSINESS
     T3 Motion, Inc. (the “Company”) was organized on March 16, 2006, under the laws of the state of Delaware. The Company develops and manufactures T3 Series vehicles, 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 introduced the CT Micro Car, the (L.S.V./N.E.V.) four-wheeled electric car.
Interim Unaudited Condensed Consolidated Financial Statements
     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with SEC regulations for interim financial information. The principles for condensed interim financial information do not require the inclusion of all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair presentation of the consolidated results for the interim periods. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the entire fiscal year.
     The Company has evaluated subsequent events through the filing date of this quarterly report on Form 10-Q, and determined that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other than as disclosed in the accompanying notes.
Going Concern
     The Company’s condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with 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 its cost reduction strategy for material, production and service costs. Until management achieves its cost reduction strategy over the next year and sufficiently increases cash flow from operations, the Company will require additional capital to meet its working capital requirements, debt service, research and development, capital requirements and compliance requirements. Further, at March 31, 2010, the Company has an accumulated deficit of $36,416,795 and a working capital deficit of $11,706,626. 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. During 2010, the Company has obtained equity financing from third parties of approximately $1,155,000 and refinanced the outstanding balance of $1.0 million related to the note to Immersive Media Corporation (“Immersive”). The Company 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

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ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Reclassification
     Certain amounts in the 2009 financial statements have been reclassified to conform with the current year presentation.
Use of Estimates
     The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to; collectibility of receivables, recoverability of long-lived assets, realizability of inventories, warranty accruals, valuation of stock-based transactions, valuation of derivative liabilities and realizability of deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Cash and Cash Equivalents
     Cash and cash equivalents consist of all highly liquid investments with original maturities of three months or less. Included in the cash equivalents balance at March 31, 2010 is $105,000 related to proceeds from the sale of preferred stock that is held in an escrow account.
Concentrations of Credit Risk
     As of March 31, 2010 and December 31, 2009, one customer accounted for 13% of total accounts receivable and two customers accounted for more than 10% of total accounts receivable, respectively. One customer accounted for 12% of net revenues for the three months ended March 31, 2010. For the three months ended March 31, 2009, two customers accounted for approximately 22% of total revenues.
     As of March 31, 2010 and December 31, 2009, one vendor accounted for approximately 12% of total accounts payable and one vendor accounted for more than 10% of total accounts payable, respectively. Two vendors accounted for approximately 22% and 57% of purchases for the three months ended March 31, 2010 and 2009, respectively.
Fair Value of Financial Instruments
     The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, related party receivables, accounts payable, accrued expenses, related party payables and related party notes payable. The carrying value for all such instruments except related party notes payable approximates fair value due to the short-term nature of the instruments. The Company cannot determine the fair value of its related party notes payable due to the related party nature and instruments similar to the notes payable could not be found.
Revenue Recognition
     The Company recognizes revenues when there is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed or determinable and collectibility of the resulting receivable is reasonably assured.
     For all sales, the Company uses a binding purchase order as evidence of an arrangement. Delivery occurs when goods are shipped for customers. The Company ships with either FOB Shipping Point or Destination terms. Shipping documents are used to verify delivery and customer acceptance. For FOB Destination, the Company records revenue when proof of delivery is confirmed by the shipping company. The Company assesses 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. The Company offers a standard product warranty to its customers for defects in materials

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and workmanship for a period of one year or 2,500 miles, whichever comes first (see Note 8), and has no other post-shipment obligations. The Company assesses 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 the Company for shipping and handling are classified as cost of revenues.
     The Company does 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, the Company does not allow returns of unsold items.
     The Company has 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 the Company deems the items sold at delivery to the distributor.
Share Based Compensation
     The Company maintains a stock option plan (see Note 7) and records expenses attributable to the stock option plan. The Company 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.
     The Company accounts 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, the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expense in its consolidated balance sheet.
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 have been recorded as discounts from the face amount of the respective debt instrument. The Company is amortizing the discount using the effective interest method through maturity of such instruments. The Company 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 applicable to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted loss 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

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stock to purchase approximately 49.4 million and 14.4 million shares of common stock were outstanding at March 31, 2010 and 2009, respectively, but were excluded from the computation of diluted earnings per share due to the net losses for the periods.
Net loss per basic share is computed as follows:
                 
    Three Months Ended March 31,  
    2010     2009  
    (unaudited)  
Net loss
  $ (1,681,739 )   $ (2,696,590 )
Deemed preferred stock dividend
    (1,672,882 )      
 
           
Net loss applicable to common stockholders
  $ (3,354,621 )   $ (2,696,590 )
 
           
Weighted average number of common shares outstanding:
               
Basic and diluted
    45,050,960       44,022,097  
Net loss per share:
               
Basic and diluted
  $ (0.07 )   $ (0.06 )
 
           
Business Segments
     The Company currently only has one reportable business segment due to the fact that the Company derives its revenue primarily from one product. The CT Micro Car is not included in a separate business segment due to nominal net revenues during the three months ended March 31, 2010. The revenue from domestic and international sales are shown below:
                 
    For the Three Months  
    Ended March 31,  
    2010     2009  
    (unaudited)  
Net revenues:
               
T3 Domestic
  $ 1,066,579     $ 675,029  
T3 International
    61,697       530,008  
CT Domestic
    21,150        
 
           
Total net revenues
  $ 1,149,426     $ 1,205,037  
 
           

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NOTE 2 — INVENTORIES
     Inventories consist of the following:
                 
    March 31,     December 31,  
    2010     2009  
    (unaudited)          
Raw materials
  $ 930,350     $ 959,909  
Work-in-process
    218,505       91,013  
Finished goods
    140,102       118,294  
 
           
 
  $ 1,288,957     $ 1,169,216  
 
           
NOTE 3 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
     Prepaid expenses and other current assets consist of the following:
                 
    March 31,     December 31,  
    2010     2009  
    (unaudited)          
Prepaid inventory
  $ 15,364     $ 64,744  
Vendor Deposits
    424,109       47,946  
Prepaid expenses and other current assets
    114,013       49,307  
 
           
 
  $ 553,486     $ 161,997  
 
           

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NOTE 4 — RELATED PARTY NOTES PAYABLE
     Related party notes payable, net of discounts consisted of the following:
                 
    March 31,     December 31,  
    2010     2009  
    (unaudited)          
Note payable to Immersive Media Corp., 12% interest rate, net of discount of $218,709 and $41,265, respectively
  $ 781,291     $ 958,735  
Note payable to Vision Opportunity Master Fund, Ltd., 10% interest rate, net of discount of $2,123,587 and $2,621,898, respectively
    1,376,413       878,102  
 
           
 
  $ 2,157,704     $ 1,836,837  
 
           
Immersive Note
     On December 31, 2007, the Company issued a 12% secured promissory note in the principal amount of $2,000,000 to Immersive, one of the Company’s shareholders. On March 31, 2008, the Company repaid $1,000,000 of the principal amount. The note was due December 31, 2008 and is secured by all of the Company’s assets.
     In connection with the issuance of the promissory note, the Company issued a warrant to Immersive for the purchase of 697,639 shares of the Company’s common stock at an exercise price of $1.08 per share. The warrants are immediately exercisable. The Company recorded a debt discount of $485,897 related to the fair value of the warrants, which was calculated using the Black-Scholes Merton option pricing model. The debt discount was amortized to interest expense over the original term of the promissory note.
     On December 19, 2008, the Company amended the terms of the promissory note with Immersive to, among other things, extend the maturity date of the outstanding balance of $1,000,000 from December 31, 2008 to March 31, 2010. In the event the Company issues common stock or common stock equivalents for cash consideration in a subsequent financing at an effective price per share less than the original conversion price, the conversion price will reset.
     In December 2009, the Company issued 2,000,000 shares of its Series A Convertible Preferred Stock in connection with an equity offering (see Note 6). As a result of the December 2009 equity offering, the Company recorded the estimated fair value of the conversion feature of $1,802 as a debt discount and amortized such amount to interest expense through the maturity of the note on March 31, 2010. The Company recorded the corresponding amount as a derivative liability and any change in fair value of the conversion feature was recorded through earnings.
     As of March 31, 2010, the debt discount related to the fair value of the warrants issued and the derivative liability related to the conversion feature were fully amortized.
     As consideration for extending the terms of the promissory note in December 2008, the Company agreed to issue warrants to Immersive for the purchase of up to 250,000 shares of the Company’s common stock exercisable at $2.00, subject to adjustment. During the three months ended March 31, 2010, the Company issued 50,000 warrants under the agreement. The Company recorded a debt discount of $15,274 during the three months ended March 31, 2010 and a total debt discount of $155,938 based on the estimated fair value of the warrants issued, and amortized approximately $56,540 and $9,950 of the discount to interest expense during the three months ended March 31,

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2010 and 2009, respectively. As a result of the December 2009 equity offering, the exercise price of the warrants was adjusted to $0.50 per share (see Note 5 for a discussion on derivative liabilities).
     On March 31, 2010, Immersive agreed to extend the note to April 30, 2010. As consideration for extending the note, the Company agreed to exchange Immersive’s Class A warrants to purchase up to 697,639 shares of the Company’s common stock at an exercise price of $1.08 per share and its Class D warrants to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $2.00 per share, for Class G Warrants to purchase up to 697,639 and 250,000 shares of the Company’s common stock, respectively, each with an exercise price of $0.70 per share. The Company recorded a debt discount and derivative liability of $1,898 based on the incremental increase in the estimated fair value of the re-pricing of the 250,000 warrants. The Company recorded an additional debt discount and derivative liability in the amount of $216,811 based on the estimated fair value of the 697,639 warrants issued. No amounts were amortized during the three months ended March 31, 2010. The debt discount was amortized in April 2010.
     The note and accrued interest were not repaid in full by April 30, 2010. Per the agreement, the maturity date was extended to March 31, 2011 and the Company will issue Class G Warrants to purchase up to 1,040,000 shares of the Company’s common stock at an exercise price of $0.70 per share. The interest rate compounded annually was amended to 15%. The terms of the Class G Warrants are substantially similar to prior Class G warrants issued by the Company.
Vision Opportunity Master Fund, Ltd. Bridge Financing
     On December 30, 2009, the Company 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”). The Company 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 the Company’s Series A Convertible Preferred Stock and a warrant to purchase one share of the common stock. The Company 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 the Company or its 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 its 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

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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 its benefit to guarantee to Vision the obligations due under the Debentures. The Company and the Subsidiary also entered into a Security Agreement (“Security Agreement”) with Vision, under which it 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.
     The debt discount was allocated between the warrants and the effective beneficial conversion feature, of $1,077,651 and $1,549,482, respectively, for the year ended December 31, 2009. The discount is being amortized over the term of the Debentures. The Company amortized $498,311 and $0 for the three months ended March 31, 2010 and 2009, respectively. The remaining unamortized warrant and beneficial conversion feature values are recorded as a discount on the Debentures in the accompanying condensed consolidated balance sheets.
     During the three months ended March 31, 2009, the Company amortized $366,621 of interest expense related to a debt discount on a different note to Vision that was ultimately exchanged for shares of the Company’s Preferred Stock.
Lock-Up Agreement
     In connection with the Vision financing, Ki Nam, the Chief Executive Officer and Chairman of the Board of Directors of the Company agreed not to transfer, sell, assign, pledge, hypothecate, give, create a security interest in or lien on, place in trust (voting trust or otherwise), or in any other way encumber or dispose of, directly or indirectly and whether or not voluntarily, without express prior written consent of Vision, any of our common stock equivalents of the Company until August 27, 2010; provided, however, that commencing on August 27, 2010, he may sell up to 1/24th of the shares of common stock of the Company in each calendar month through February 28, 2011.
NOTE 5 — DERIVATIVE LIABILITIES
     During the three months ended March 31, 2010, the Company issued 2,310,000 of warrants related to the issuance of preferred stock (see Note 6). The Company estimated the fair value of the warrants of $716,236 at the dates of issuance and recorded a reduction in additional paid-in capital and a derivative liability. The change in fair value of the derivative will be recorded through earnings at each reporting date.
     During 2010, the Company recorded a discount on the issuance of preferred stock and derivative liability of $685,124 related to the anti-dilution provision of the conversion feature 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 is recorded through earnings at each reporting date.
      During the three months March 31, 2010, the Company recorded additional debt discount and derivative liability in the amount of $218,709 related to the Immersive transaction (see Note 4).
     For the three months ended March 31, 2010, the amortization of the discount related to the preferred stock anti-dilution provision was $573,140, which was recorded as a deemed dividend.
     On March 22, 2010, one of the Company’s preferred shareholders exercised their option to convert their 2,000,000 preferred shares into 4,000,000 shares of common stock (see Note 6). As a result of the conversion, the Company reclassified the balance of the derivative liability of $1,121,965 to additional paid-in capital and the balance of the discount of $1,099,742, as a deemed dividend.
     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

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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 using the following assumptions:
         
    March 31,  
    2010  
    (unaudited)  
Annual dividend yield
     
Expected life (years)
    0.75-5  
Risk-free interest rate
    0.41%-2.55 %
Expected volatility
    85%-117 %
     During the three months ended March 31, 2010 and 2009, the Company recorded other income of $753,727 and $165,797, respectively, related to the change in fair value of the warrants and embedded conversion options and is included in other income in the accompanying condensed consolidated statements of operations.
     The Company determines the fair value of its financial instruments based on a three-level hierarchy for fair value measurements under which these assets and liabilities must be grouped, based on significant levels of observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These two types of inputs have created the following fair-value hierarchy:
     Level 1 — Valuations based on unadjusted quoted market prices in active markets for identical securities. Currently the Company does not have any items classified as Level 1.
     Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. Currently the Company does not have any items classified as Level 2.
     Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. The Company used the Black-Scholes-Merton option pricing model to determine the fair value of the instruments.
     If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial security’s hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.
     The following table presents the Company’s warrants and embedded conversion options measured at fair value on a recurring basis.

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    Level 3     Level 3  
    Carrying Value     Carrying Value  
    March 31,     December 31,  
    2010     2009  
      (unaudited)  
Embedded conversion options
  $ 7,655,913     $ 8,853,893  
Warrants
    3,928,215       2,970,583  
 
           
 
  $ 11,584,128     $ 11,824,476  
 
           
Decrease in fair value
  $ 753,727          
 
             

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     The following table provides a reconciliation of the beginning and ending balances for the Company’s liabilities measured at fair value using Level 3 inputs (unaudited):
         
Balance at January 1, 2010
  $ 11,824,476  
Issuance of warrants and conversion option
    1,635,344  
Reclassification to equity due to conversion of preferred stock
    (1,121,965 )
Change in fair value
    (753,727 )
 
     
Balance at March 31, 2010
  $ 11,584,128  
 
     
NOTE 6 — EQUITY
Series A Convertible Preferred Stock
     The Company’s Board of Directors has authorized 20,000,000 shares of preferred stock. Except as otherwise provided in the Series A Certificate or by law, each holder of shares of Series A Preferred shall have no voting rights. As long as any shares of Series A Preferred are outstanding, however, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series A Preferred, (a) alter or change adversely the powers, preferences, or rights given to the Series A Preferred or alter or amend the Series A Certificate, (b) authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to or otherwise pari passu with the Series A Preferred, (c) amend its certificate of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Series A Preferred, (d) increase the number of authorized shares of Series A Preferred, or (e) enter into any agreement with respect to any of the foregoing.
     Each share of Series A Preferred is convertible at any time and from time to time after the issue date at the holder’s option into two shares of the Company’s common stock (subject to beneficial ownership limitations determined by dividing the Stated Value of such share of Series A Preferred by the Conversion Price (each as defined below).
     Holders of our Series A Preferred are restricted from converting their shares of Series A Preferred to Common Stock if the number of shares of Common Stock to be issued pursuant to such conversion would cause the number of shares of Common Stock beneficially owned by such holder, together with its affiliates, at such time to exceed 4.99% of the then issued and outstanding shares of Common Stock; provided, however, that such holder may waive this limitation upon 61 days’ notice to the Company. The Company has not received any such notice. There are no redemption rights.
     The Conversion Price shall be proportionately reduced for a stock dividend, stock split, subdivision, combination or similar arrangements. The Conversion Price will also be reduced for any sale of common stock (or options, warrants or convertible debt or other derivative securities) at a purchase price per share less than the Conversion Price, subject to certain excepted issuances. The Conversion Price will be reduced to such purchase price if such issuance occurs within the first 12 months of the original issuance date. The Conversion Price will be reduced to a price derived using a weighted-average formula if the issuance occurs after the first 12 months but before the 24 month anniversary of the original issuance date.
     If, at any time while the Series A Preferred is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another person, (B) the Company effects any sale of all or substantially all of its assets in one transaction or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another person) is completed pursuant to which holders of common stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the common stock or any compulsory share exchange pursuant to which the common stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a “Fundamental Transaction”), then, upon any subsequent conversion of Series A Preferred, the holders shall have the right to receive, for each Conversion Share (as defined in Section 1 of the Series A Certificate) that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the same kind and amount of securities, cash

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or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of common stock.
     On March 22, 2010, one of the Company’s preferred shareholders exercised their option to convert their 2,000,000 preferred shares into 4,000,000 shares of common stock.
     During the three months ended March 31, 2010, under the terms of the Offering, the Company issued and sold 1,155,000 shares of preferred stock through an equity financing transaction. In connection with the financing, the Company granted warrants to purchase 2,310,000 shares of common stock, exercisable at $0.70 per share. The warrants are exercisable for five years (See Note 5 for additional discussion).
Common Stock
     In September 2008, the Company sold to Piedmont Select Equity Fund (“Piedmont”) 125,000 shares of its common stock at $2.00 per share for an aggregate price of $250,000. In December 2008, the Company entered into a rescission agreement with Piedmont in which it agreed to rescind the Piedmont’s stock purchase so long as affiliates of Piedmont were to purchase at least $250,000 of Company equity securities. In March 2010, two investors affiliated with Piedmont purchased an aggregate of 250,000 shares of the Company’s Series A Preferred Stock at $1.00 per share and warrants to purchase 500,000 shares of Company common stock for an aggregate purchase price of $250,000. Each Series A Preferred Stock may be converted into two shares of Company common stock. Concurrent with the closing of such offering, the Company rescinded the purchase of the 125,000 shares of common stock. Piedmont delivered the stock certificate for 125,000 shares to the Company and the Company returned the original purchase price of $250,000 to Piedmont.
NOTE 7 — STOCK OPTIONS AND WARRANTS
Common Stock Options
     The following table sets forth the share-based compensation expense (unaudited):
                 
    The Three Months Ended  
    March 31,  
    2010     2009  
Stock compensation expense — cost of revenue
  $ 25,310       32,963  
Stock compensation expense — sales and marketing
    45,833       86,456  
Stock compensation expense — research and development
    45,831       51,242  
Stock compensation expense — general and administrative
    175,487       239,082  
 
           
Total stock compensation expense
  $ 292,461     $ 409,743  
 
           
     A summary of common stock option activity under the Plan for the three months ended March 31, 2010 is presented below (unaudited):

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                    Weighted-        
            Weighted-     Average        
            Average     Remaining     Aggregate  
    Number of     Exercise     Contractual     Intrinsic  
    Shares     Price     Life     Value  
Options outstanding — January 1, 2010
    6,033,188       0.77                  
Options granted
                           
Options exercised
                           
Options forfeited
    (349,060 )     0.88                  
Options cancelled
                           
 
                           
Total options outstanding — March 31, 2010
    5,684,128     $ 0.76       7.85     $  
 
                       
Options exercisable — March 31, 2010
    4,944,502     $ 0.71       7.79     $  
 
                       
Options vested and expected to vest — March 31, 2010
    5,664,727     $ 0.76       7.85     $  
 
                       
Options available for grant under the Plan at March 31, 2010
    1,765,872                          
 
                             
     The following table summarizes information about stock options outstanding and exercisable at March 31, 2010 (unaudited):
                                         
    Options Outstanding     Options Exercisable  
            Weighted Average     Weighted                
            Remaining     Average                
          Contractual     Exercise             Weighted Average  
Exercise Prices   Number of Shares     Life     Price     Number of Shares     Exercise Price  
    (In years)                          
$0.60
    3,770,335       7.71     $ 0.60       3,490,249     $ 0.60  
$0.77
    1,000,000       7.70     $ 0.77       1,000,000     $ 0.77  
$1.40
    854,418       8.61     $ 1.40       426,128     $ 1.40  
$1.70
    59,375       8.43     $ 1.70       28,125     $ 1.70  
 
                             
 
    5,684,128       7.85     $ 0.76       4,944,502     $ 0.71  
 
                             

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     At March 31, 2010, the amount of unearned stock-based compensation currently estimated to be expensed from fiscal 2010 through 2012 related to unvested common stock options is approximately $1.3 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 1.5 years. If there are any modifications or cancellations of the underlying unvested common stock options, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional common stock options or other equity awards.
Warrants
     From time to time, the Company issues 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 (See Notes 4 and 6). Such warrants are issued outside of the Plan. A summary of the warrant activity for the three months ended March 31, 2010 is presented below (unaudited):
                                 
            Weighted-     Weighted-Average        
            Exercise     Contractual     Aggregate Intrinsic  
    Number of Shares     Price     Life     Value  
            (In years)          
Warrants outstanding — January 1, 2010
    10,746,143     $ 0.87       4.89          
Warrants granted (See Notes 4 and 6)
    3,307,639     $ 0.70                  
Warrants exercised
                           
Warrants cancelled
    (947,639 )   $ 0.93                  
 
                           
Warrants outstanding and exercisable-March 31, 2010
    13,106,143     $ 0.80       4.54     $  
 
                       
NOTE 8 — COMMITMENTS AND CONTINGENCIES
Warranties
     The Company’s warranty policy generally provides coverage for components of the vehicle, power modules, and charger system that the Company produces. Typically, the coverage period is the shorter of one calendar year or 2,500 miles, from the date of sale. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using estimated information on the nature, frequency, and average cost of claims. Revision to the reserves for estimated product warranties is made when necessary, based on changes in these factors. Management actively studies trends of claims and takes action to improve vehicle quality and minimize claims.
     The T3 Series vehicle is a front wheel drive all electric vehicle and as such the front fork assembly is the main vehicle drive system. In late 2007, the Company made significant improvements to this drive system by implementing into production a new belt drive system. The system offers greater efficiency and minimizes the need for routine maintenance while improving the overall quality of the vehicle. The belt drive system is standard on new 2008 models and is reverse compatible with all older year models. The Company has agreed to retro-fit existing vehicles that are in service with the new system.

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     On June 25, 2008, the Company 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 charges were placed in service between January 2007 and April 2008. The Company is notifying customers informing them of the need for an upgrade and will begin sending out new and/or upgraded chargers (revision E) 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. The Company 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. The Company anticipates that all of the chargers will be upgraded or replaced by December 2010.
     The following table presents the changes in the product warranty accrual for the three months ended March 31 (unaudited):
                 
    2010     2009  
Beginning balance, January 1,
  $ 235,898     $ 362,469  
Charged to cost of revenues
    13,229       39,423  
Usage
    (33,978 )     (116,447 )
 
           
Ending balance, March 31
  $ 215,149     $ 285,445  
 
           
Legal Contingency
     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.

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Indemnities and Guarantees
     During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the Company’s officers under which the Company may be required to indemnify such person for liabilities arising out of their employment relationship. In connection with its facility leases, the Company has indemnified its lessors for certain claims arising from the use of the facilities. The duration of these indemnities and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company would be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations and no liability has been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.
NOTE 9 — RELATED PARTY TRANSACTIONS
     The following reflects the activity of the related party transactions as of the respective periods.
Accounts Receivable
     The Company advanced $28,902 to Graphion Technology USA LLC (“Graphion”) to be used for their operating requirements. Graphion was established by the Company’s Chief Executive Officer and is under common ownership. The advance is non-interest bearing and due upon demand.
     As of March 31, 2010 and December 31, 2009, there were outstanding related party receivables of $6,888 and $6,756, respectively, which primarily related to receivables due from Mr. Nam for rent at the facility.
Related Party Payables
     The Company purchases batteries and research and development parts from Graphion. During the three months ended March 31, 2010 and 2009, the Company purchased $0 and $513,179, respectively, of parts and had an outstanding accounts payable balance of $0 and $104,931 at March 31, 2010 and December 31, 2009, respectively.
Notes Payable — see Note 4

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
     This quarterly report on Form 10-Q contains certain statements that may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this report are forward-looking statements. When used in this report, the words “may,” “will,” “should,” “would,” “anticipate,” “estimate,” “expect,” “plan,” “project,” “continuing,” “ongoing,” “could,” “believe,” “predict,” “potential,” “intend,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, changes in sales or industry trends, competition, retention of senior management and other key personnel, availability of materials or components, ability to make continued product innovations, casualty or work stoppages at the Company’s facilities, adverse results of lawsuits against the Company and currency exchange rates. Forward-looking statements are based on assumptions and assessments made by the Company’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, as there can be no assurance that these forward-looking statements will prove to be accurate. Management undertakes no obligation to update any forward-looking statements. This cautionary statement is applicable to all forward-looking statements contained in this report. Readers should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including the recently filed Annual Report on Form 10-K for the year ended December 31, 2009.
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.
Critical Accounting Policies and Estimates
     Our management’s discussion and analysis of our financial condition and results of operations are based on unaudited condensed 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.
     A summary of these policies can be found in the Management’s Discussion and Analysis section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The following is an update to the critical accounting policies and estimates.
     Going Concern
     The Company’s condensed consolidated financial statements are prepared using the accrual method of accounting in accordance with 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 its cost reduction strategy for material, production and service costs. Until management achieves its cost reduction strategy over the next year and sufficiently increases cash flow from operations, the Company will require additional capital to meet its working capital requirements, debt service, research and development, capital requirements and compliance requirements. Further, at March 31, 2010, the Company has an accumulated deficit of $36,416,795 and a working capital deficit of $11,706,626. 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. During 2010, the Company has obtained equity financing from third parties of approximately $1,155,000 and refinanced the outstanding balance of $1.0 million related to the note to Immersive Media Corporation (“Immersive”). The Company 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

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ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Cash and Cash Equivalents
     Cash and cash equivalents consist of all highly liquid investments with original maturities of three months or less. Included in the cash equivalents balance at March 31, 2010 is $105,000 related to proceeds from the sale of preferred stock that is held in an escrow account.
Concentrations of Credit Risk
     As of March 31, 2010 and December 31, 2009, one customer accounted for 13% of total accounts receivable and two customers accounted for more than 10% of total accounts receivable, respectively. One customer accounted for more than 12% of net revenues for the three months ended March 31, 2010. For the three months ended March 31, 2009, two customers accounted for approximately 22% of total revenues.
     As of March 31, 2010 and December 31, 2009, one vendor accounted for approximately 12% of total accounts payable and one vendor accounted for more than 10% of total accounts payable, respectively. Two vendors accounted for approximately 22% and 57% of purchases for the three months ended March 31, 2010 and 2009, respectively.
Fair Value of Financial Instruments
     The Company’s financial instruments consist of cash, accounts receivable, related party receivables, accounts payable, accrued expenses, related party payables and related party notes payable. The carrying value for all such instruments except related notes payable approximates fair value due to the short-term nature of the instruments. The Company cannot determine the fair value of its related party notes payable due to the related party nature and instruments similar to the notes payable could not be found.
Revenue Recognition
     The Company recognizes revenues when there is persuasive evidence of an arrangement, product delivery and acceptance have occurred, the sales price is fixed or determinable and collectibility of the resulting receivable is reasonably assured.
     For all sales, the Company uses a binding purchase order as evidence of an arrangement. Delivery occurs when goods are shipped for customers. The Company ships with either FOB Shipping Point or Destination terms.

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Shipping documents are used to verify delivery and customer acceptance. For FOB Destination, the Company records revenue when proof of delivery is confirmed by the shipping company. The Company assesses 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. The Company offers a standard product warranty to its customers for defects in materials and workmanship for a period of one year or 2,500 miles, whichever comes first, and has no other post-shipment obligations. The Company assesses 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 the Company for shipping and handling are classified as cost of revenues.
     The Company does 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, the Company does not allow returns of unsold items.
     The Company has 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 the Company deems the items sold at delivery to the distributor.
Business Segments
     The Company currently only has one reportable business segment due to the fact that the Company derives its revenue primarily from one product. The CT Micro Car is not included in a separate business segment due to nominal net revenues during the three months ended March 31, 2010. The revenue from domestic and international sales are shown below:
                 
    For the Three Months  
    Ended March 31,  
    2010     2009  
    (unaudited)  
Net revenues:
               
T3 Domestic
  $ 1,066,579     $ 675,029  
T3 International
    61,697       530,008  
CT Domestic
    21,150        
 
           
Total net revenues
  $ 1,149,426     $ 1,205,037  
 
           
Derivative Liability
     During the three months ended March 31, 2010, the Company issued 2,310,000 of warrants related to the issuance of preferred stock (see Note 6). The Company estimated the fair value of the warrants of $716,236 at the dates of issuance and recorded a derivative liability. The change in fair value of the derivative will be recorded through earnings at each reporting date.
     During 2010, the Company recorded a discount on the issuance of preferred stock and derivative liability of $685,124 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 is recorded through earnings at each reporting date.
     During the three months ended March 31, 2010, the Company recorded additional debt discount and derivative liability in the amount of $218,709 related to the Immersive transaction (see Note 4.)
     For the three months ended March 31, 2010, the amortization of the discount related to the preferred stock anti-dilution provision was $573,140, which was recorded as a deemed dividend.
     On March 22, 2010, one of the Company’s preferred shareholders exercised their option to convert their 2,000,000 preferred shares into 4,000,000 shares of common stock (see Note 6). As a result of the conversion, the Company reclassified the balance of the derivative liability of $1,121,965 to additional paid in capital and the balance of the discount of $1,099,742, as a deemed dividend.
     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.

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Loss Per Share
     Basic loss per share is computed by dividing loss applicable to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted loss 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 49.4 million and 14.4 million shares of common stock were outstanding at March 31, 2010 and 2009, respectively, but were excluded from the computation of diluted earnings per share due to the net losses for the periods.
Net loss per basic share is computed as follows:
                 
    Three Months Ended March 31,  
    2010     2009  
    (unaudited)  
Net loss
  $ (1,681,739 )   $ (2,696,590 )
Deemed preferred stock dividend
    (1,672,882 )      
 
           
Net loss applicable to common stockholders
  $ (3,354,621 )   $ (2,696,590 )
 
           
Weighted average number of common shares outstanding:
               
Basic and diluted
    45,050,960       44,022,097  
Net loss per share:
               
Basic and diluted
  $ (0.07 )   $ (0.06 )
 
           
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.

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     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.

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Result of Operations
     The following table sets forth the results of our operations for the three months ended March 31, 2010 and 2009
                 
    Three Months Ended March 31,  
    2010     2009  
    (unaudited)  
Net revenues
  $ 1,149,426     $ 1,205,037  
Cost of revenues
    1,127,449       1,466,267  
 
           
Gross profit (loss)
    21,977       (261,230 )
 
           
 
               
Operating Expenses:
               
Sales and marketing
    427,654       546,404  
Research and development
    320,506       301,448  
General and administrative
    1,029,413       1,241,520  
 
           
Total operating expenses
    1,777,573       2,089,372  
 
           
Loss from operations
    (1,755,596 )     (2,350,602 )
 
           
 
               
Other income (expense):
               
Interest income
    903       1,615  
Other income, net
    755,555       165,809  
Interest expense
    (681,801 )     (512,612 )
 
           
Total other income (expense), net
    74,657       (345,188 )
 
           
Loss before provision for income taxes
    (1,680,939 )     (2,695,790 )
Provision for income taxes
    800       800  
 
           
Net loss
    (1,681,739 )     (2,696,590 )
 
               
Deemed dividend to preferred stockholders
    (1,672,882 )      
 
           
Net loss attributable to common stockholders
  $ (3,354,621 )   $ (2,696,590 )
 
           
 
               
Other comprehensive loss:
               
Foreign currency translation income (loss)
    205       (19,941 )
 
           
Comprehensive loss
  $ 1,681,534     $ (2,716,531 )
 
           
 
               
Net loss per share:
               
Basic
  $ (0.07 )   $ (0.06 )
 
           
Diluted
  $ (0.07 )   $ (0.06 )
 
           
 
               
Weighted average number of common shares outstanding:
               
Basic
    45,050,960       44,022,097  
 
           
Diluted
    45,050,960       44,022,097  
 
           

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     Net revenues. Revenues are primarily from sales of the T3 Series, CT Micro Car, power modules, chargers and related accessories. Revenues decreased $55,611, or 4.6%, to $1,149,426 for the three months ended March 31, 2010, 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.
     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 $338,818, or 23.1%, to $1,127,449 for the three months ended March 31, 2010, compared to the same period of the prior year. This decrease in cost of revenues is primarily attributable to management’s cost reduction strategy.
     Gross income (loss). During 2010, management has continued to source lower product costs, increase production efficiencies, and achieving lower warranty experience rates resulting in gross profit of $21,977 for the three months ended March 31, 2010, compared to a gross loss of ($261,230) for the same period of the prior year. Management has and will continue to evaluate the processes and materials to reduce the costs of revenues over the next year. Gross income (loss) margin was 1.9% and (21.7%), respectively, for the three months ended March 31, 2010 and 2009.
     Sales and marketing. Sales and marketing decreased by $118,750 or 21.7%, to $427,654 for the three months ended March 31, 2010, compared to the same period of the prior year. The decrease in sales and marketing expense is attributable to reduction in salaries and commissions and decreases in trade show and travel expenses.
     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 increased by $19,058 or 6.3%, to $320,506 for the three months ended March 31, 2010, compared to the same period of the prior year.
     General and administrative. General and administrative expenses decreased $212,107, or 17.1%, to $1,029,413, for the three months ended March 31, 2010 compared to the same period of the prior year. The decrease was primarily due to decreases in salaries, legal, and accounting compliance costs.
     Other income (expense). Other income increased $589,746, or 355.7% to $755,555 for the three months ended March 31, 2010 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.
     Interest expense. Interest expense increased $169,189, or 33.0% to $681,801 for the three months ended March 31, 2010 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.
     Net loss. Net loss for the three months ended March 31, 2010, was $1,681,739 or $(0.07) per basic and diluted share compared to $2,696,590, or $(0.06) per basic and diluted share, for the same period of the prior year.

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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. During 2010, the Company has obtained equity financing from third parties of approximately $1,155,000 and refinanced the outstanding balance of $1.0 million related to the note to Immersive Media Corporation (“Immersive”). The Company 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 condensed 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 March 31, 2010, cash and cash equivalents were $937,888, or 18.6% of total assets compared to $2,580,798, or 42.6% of total assets as of December 31, 2009. The decrease in cash and cash equivalents was primarily attributable to net cash used in operating activities.
Cash Flows
For the three months ended March 31, 2010 and 2009
     Net cash flows used in operating activities for the three months ended March 31, 2010 and 2009, were $2,521,337 and $1,481,053, respectively. For the three months ended March 31, 2010, cash flows used in operating activities related primarily to the net loss of $1,681,739, offset by net non-cash reconciling items of $198,655. Net cash flows used were due in part by increases in accounts receivables, inventories, and other current assets of $189,477, $119,741 and $391,490, respectively, and decreases in accounts payable and related party payables of $232,665 and $104,931, respectively.
     For the three months ended March 31, 2009, cash flows used in operating activities related primarily to the net loss of $2,696,590, offset by net non-cash reconciling items of $844,792. Further contributing to the decrease were increases in inventories and security deposits of $253,322 and $3,784, respectively, and decreases in accounts payable of $29,368. Net cash flows used were offset in part by decreases in accounts receivables and other current assets of $400,320 and $244,436, respectively and increases in related party payables of $12,463.
     Net cash used in investing activities of $26,778 for the three months ended March 31, 2010 related primarily to purchases of property and equipment of $26,646 and loans to related parties of $1,607, offset by repayment of loans to related parties of $1,475.
     Net cash provided by investing activities of $2,768 for the three months ended March 31, 2009 related to repayment of loans from related parties of $4,346, offset by purchases of property and equipment of $1,578.
     Net cash provided by financing activities was $905,000 and $0 for the three months ended March 31, 2010 and 2009, respectively. For the three months ended March 31, 2010, cash flows provided by financing activities related to proceeds from the sale of preferred stock of $1,155,000, offset by a common stock rescission of $250,000.

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     For the three months ended March 31, 2009, there were no cash flows provided by financing activities.
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 March 31, 2010, there were outstanding warrants to purchase 697,639 shares of our common stock at an exercise price of $0.70 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 274,774 warrants exercisable at the exercise price of $2.00 per warrant that expire on March 31, 2014. There were 5,703,730 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 $0.70 per warrant that expire on December 30, 2014. There were 1,600,000 warrants exercisable at the exercise price of $0.70 per warrant that expire on February 2, 2015. There were 710,000 warrants exercisable at the exercise price of $0.70 per warrant that expire on March 22, 2015.
     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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
Item 4T. Controls and Procedures.
Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
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, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of March 31, 2010, 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 March 31, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
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 four material weaknesses which have caused management to conclude that, as of March 31, 2010, 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

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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 generally accepted accounting principles (“GAAP”) commensurate with our financial reporting requirements and the complexity of our operations and transactions.
     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.
Remediation of Material Weaknesses
We are attempting to remediate the material weaknesses in our disclosure controls and procedures identified above by refining our internal procedures (see below).
Changes in Internal Control over Financial Reporting
The following change in our internal control over financial reporting was completed during the quarter ended March 31, 2010, and has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting:
    We have hired additional professional accounting resources to assist with the review of accounting policies and procedures and financial reporting with knowledge, experience and training in the application of GAAP.
We have also initiated the following corrective actions, which management believes are reasonably likely to materially affect our controls and procedures as they are designed to remediate the material weaknesses as described above:
    We are in the process of further enhancing, the supervisory procedures that will include additional levels of analysis and quality control reviews within the accounting and financial reporting functions.
 
    We are in the process of strengthening our internal policies and enhancing our processes for ensuring consistent treatment and recording of reserve estimates and that validation of our conclusions regarding significant accounting policies and their application to our business transactions are carried out by personnel with an appropriate level of accounting knowledge, experience and training.
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.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
     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 three months ended March 31, 2010 in any material pending legal proceedings to which the Company is a party or of which any of our property is the subject.
Item 1A. Risk Factors
Risks Related to Our Company and Our Industry
There were no material changes from the risk factors previously disclosed in our 2009 Annual Report on Form 10-K, as filed with the Unites States Securities and Exchange Commission, or the SEC, on March 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
     In September 2008, the Company sold Piedmont Select Equity Fund (“Piedmont”) 125,000 shares of its common stock at $2.00 per share for an aggregate price of $250,000.
     In December 2008, the Company entered into a rescission agreement with Piedmont in which it agreed to rescind the Piedmont’s stock purchase so long as affiliates of Piedmont were to purchase at least $250,000 of Company equity securities.
     In March 2010, two investors affiliated with Piedmont purchased an aggregate of 250,000 shares of the Company’s Series A Preferred Stock at $1.00 per share and warrants to purchase 500,000 shares of Company common stock for an aggregate purchase price of $250,000. Each Series A Preferred Stock may be converted into two shares of Company common stock. Concurrent with the closing of such offering, the Company rescinded the purchase of the 125,000 shares of common stock. Piedmont delivered the stock certificate for 125,000 shares to the Company and the Company returned the original purchase price of $250,000 to Piedmont.
     During the three months ended March 31, 2010, under the terms of the Offering, the Company raised $905,000 through an equity financing transaction. The Company issued and sold 905,000 shares of preferred stock. In connection with the financing, the Company granted warrants to purchase 1,810,000 shares of common stock, exercisable at $0.70 per share. The warrants are exercisable for five years.
     On March 31, 2010, Immersive agreed to extend the note to April 30, 2010. As consideration for extending the note, the Company agreed to exchange Immersive’s Class A warrants to purchase up to 697,639 shares of the Company’s common stock at an exercise price of $1.08 per share and its Class D warrants to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $2.00 per share, for Class G Warrants to purchase up to 697,639 and 250,000 shares of the Company’s common stock, respectively, each with an exercise price of $0.70 per share.
     The note and accrued interest were not repaid in full by April 30, 2010. Per the agreement, the maturity date was extended to March 31, 2011 and the Company will issue Class G Warrants to purchase up to 1,040,000 shares of the Company’s common stock at an exercise price of $0.70 per share. The interest rate compounded annually was amended to 15%. The terms of the Class G Warrants are substantially similar to prior Class G warrants issued by the Company.
Item 3. Defaults Upon Senior Securities.
     None
Item 5. Other Information.
     As described under Item 2, on March 31, 2010, the Company agreed to exchange Immersive’s Class A warrants to purchase up to 697,639 shares of the Company’s common stock at an exercise price of $1.08 per share and its Class D warrants to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $2.00 per share, at an exercise price of $2.00 per share, for Class G Warrants to purchase up to 697,639 and 250,000 shares of the Company’s common stock, respectively, each with an exercise price of $0.70 per share. On April 30, 2010, the Company issued additional Class G Warrants to purchase up to 1,040,000 shares of the Company’s common stock at an exercise price of $0.70 per share, to Immersive.

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Employment Agreement
The Company entered into a written employment agreement with Ms. Kelly Anderson (“Executive”) on April 17, 2010 in which it agree to employ Executive during the term hereof as its Chief Financial Officer. Executive’s term of employment shall continue until December 30, 2011. The Agreement shall automatically renew, annually, upon the terms and conditions set forth herein unless terminated by either party by written notice 60 days prior to the expiration of the then term.
For the period of one year commencing on April 30 2010, the Company shall pay Executive a base salary of $190,000 per annum. During the her employment and any renewal or extension period thereafter, the Executive shall be entitled to receive, on March 15 of each calendar year, an annual bonus based upon an approved budget by the Company’s Board of Directors and/or its Compensation Committee.
If Board determines that the Company does not have sufficient cash available to make the above described cash obligations, the Board shall have the right to make such payments in stock, but at no time shall the cash payment due under the cash obligation fall below one third of the payment obligation.
Executive shall be eligible to participate in any Compensation Plan or Program (401(k) Plan and Stock Option Plan) maintained by the Company in which other Executives or employees of the Company participate, on similar terms. The Company shall provide to the Executive and her family, during the employment with coverage under all employee medical, dental and vision benefit programs, plans or practices adopted by the Company and made available to all employees of the Company. The Executive shall be entitled to four (4) weeks paid vacation in each calendar year (but no more than ten 10 consecutive business days at any given time).
The Company may terminate Executive’s employment at any time for any reason. If Executive’s employment is terminated by the Company other than for Cause (as defined in such agreement), Executive shall receive a severance payment equal to six (6) months’ Base Salary and six (6) months’ benefits, and any earned and/or accrued Bonus, as in effect immediately prior to such termination, payable in accordance with the ordinary payroll practices of the Company, but not less frequently than semi-monthly following such termination of employment.
In the event that Executive’s employment is terminated (i) by the Company for Cause; (ii) by the Executive on a voluntary basis; (iii) as a result of the Executive’s Permanent Disability; or (iv) by the Executive’s death, then Executive or her Estate shall only be entitled to receive Base Salary and Bonuses already earned and accrued through the Termination Date.
In the event of termination by the Executive’s death or Permanent Disability, all such benefits identified herein shall be maintained and in effect for six (6) additional months by the Company. Any and all such unvested benefits (i.e. 401(k), restricted stock or stock options) shall immediately vest.
If Executive’s employment with the Company is terminated by the Company (other than upon the expiration of the Employment terms, for Cause, or by reason of Disability, or upon Executive’s death) at any time within ninety (90) days before, or within twelve (12) months after, a Change in Control, or if the Executive’s employment with the Company is terminated by the Executive for Good Reason (as defined in the Employment Agreement) within six (6) months after a change in control, or if the Executive’s employment with the Company is terminated by the Executive for any reason, including without Good Reason, during the period commencing six (6) months after a Change in Control and ending twelve (12) months after a Change in Control, then the Company shall pay to the Executive: (i) any accrued, unpaid base salary payable as in effect on the Date of Termination, (ii) any unreimbursed business expenses and (iii) a severance benefit, in a lump sum cash payment, in an amount equal to: (A) the Executive’s annual rate of base salary, as in effect as of the Date of Termination, plus the Executive’s Target Bonus for the fiscal year of the Company in which the Date of Termination occurs.
In the event the Executive is entitled to the severance benefits, each stock option exercisable for shares of Company Common Stock granted under the Company’s stock incentive plan that is held by the Executive, if then outstanding, shall become immediately vested and exercisable with respect to all of the shares of Company Common Stock subject thereto on the Date of Termination and shall be exercisable in accordance with the provisions of the Company’s stock incentive plan and option agreement pursuant to which such option was granted. In addition, in the event the Executive is entitled to severance benefits, a restricted stock award and restricted shares of the Company Common Stock granted under the Company’s stock incentive plan that is held by the Executive that is subject to a forfeiture, reacquisition or repurchase option held by the Company shall become fully vested, nonforfeitable and no longer subject to reacquisition or repurchase by the Company or other restrictions on the Date of Termination.
The Executive shall not, without the prior written consent of the Company, use or make accessible to any other Person, any Confidential Information pertaining to the business or affairs of the Company, except (i) while employed by the Company, in the business of and for the benefit of the Company, or (ii) when required to do so by applicable law.
The Executive hereby covenants that, during the period commencing on the date hereof and ending on the two (2) year anniversary of the Termination Date (the “Restricted Period”), the Executive and her affiliates shall not directly or indirectly, through any other Person, (i) employ, solicit or induce any individual who is, or was at any time during the one (1) year period prior to the Termination Date, an employee or consultant of the Company, (ii) cause such individual to terminate or refrain from renewing or extending her or her employment by or consulting relationship with the Company, or (iii) cause such individual to become employed by or enter into a consulting relationship with the Company and its affiliates or any other individual, Person or entity.
The Executive and her affiliates shall not solicit, persuade or induce any customer to terminate, reduce or refrain from renewing or extending its contractual or other relationship with the Company in regard to the purchase of products or services, performed, manufactured, marketed or sold by the Company or any other Person. The Executive and her affiliates shall not solicit, persuade or induce any supplier to terminate, reduce or refrain from renewing or extending her, her or its contractual or other relationship with the Company. During the term of her employment, the Executive shall not engage or assist others to engage in a competing business.

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Item 6. Exhibits.
INDEX TO EXHIBITS
     
Exhibit    
Number   Description
3.1
  Amended and Restated Certificate of Incorporation, as currently in effect(1)
 
3.2
  Bylaws(1)
 
3.3
  Amendment to Bylaws, dated January 16, 2009(2)
 
3.4
  Amendment to Certificate of Incorporation(3)
 
3.5
  Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock(3)
 
10.1
  Amendment No. 2 to Immersive Media Promissory Note*
 
10.2
  Employment agreement with Kelly Anderson May 17, 2010 (Portions of the exhibit has been omitted pursuant to the request for confidential treatment)*
 
31.1
  Section 302 Certificate of Chief Executive Officer*
 
31.2
  Section 302 Certificate of Chief Financial Officer*
 
32.1
  Section 906 Certificate of Chief Executive Officer*
 
32.2
  Section 906 Certificate of Chief Financial Officer*
 
*   Filed herewith.
 
(1)   Filed with the Company’s Registration Statement on Form S-1 filed on May 13, 2008.
 
(2)   Filed with the Company’s Current Report on Form 8-K filed on January 20, 2009.
 
(3)   Filed with the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 and filed on November 16, 2009.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
Date: May 17, 2010 T3 MOTION, INC.
(Registrant)
 
 
  By:   /s/ Ki Nam    
    Ki Nam   
    Chairman of the Board and Chief Executive
Officer 
 
 
Date: May 17, 2010 T3 MOTION, INC.
(Registrant)
 
 
  By:   /s/ Kelly Anderson    
    Kelly Anderson   
    Executive Vice President and Chief
Financial Officer 
 
 

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