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EX-32 - ECOTALITY, INC.v194079_ex32.htm
EX-31.1 - ECOTALITY, INC.v194079_ex31-1.htm
EX-31.2 - ECOTALITY, INC.v194079_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2010

Or

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

  Commission File Number: 000-50983
 
ECOTALITY, INC.
 (Exact name of registrant as specified in its charter)
 
Nevada
68-0515422
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
Four Embarcadero Center, Suite 3720
San Francisco, CA
94111
(Address of principal executive offices)
(Zip Code)
 
(415) 992-3000

 (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 x    No ¨

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 ¨    No x

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 ¨
 
Accelerated filer ¨
 
Non-accelerated filer ¨ 
 (Do not check of 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 ¨    No x
 
There were 9,348,734 shares of common stock outstanding at August 9, 2010.
 

 
 
 

 
 

Table of Contents

PART I - FINANCIAL INFORMATION
 
3
     
Financial Statements
   
     
Condensed Consolidated Statements of Operations
 
3
     
Condensed Consolidated Balance Sheet
 
4
     
Condensed Consolidated Statements of Cash Flows
 
5
     
Notes to Condensed Consolidated Financial Statements
 
6
     
Management’s Discussion and Analysis of Financial Condition and Results  of Operation
 
27
     
Quantitative and Qualitative Disclosures about Market Risk
 
35
     
Controls and Procedures
 
35
     
PART II - OTHER INFORMATION
 
36
     
Legal Proceedings
 
36
     
Risk Factors
 
36
     
Unregistered Sales of Equity Securities and use of Proceeds
 
36
     
Defaults Upon Senior Securities
 
36
     
Submission of Matters to a Vote of Security Holders
 
36
     
Exhibits
 
37
     
SIGNATURES
 
38
 
 
2

 
 
 
ECOtality, Inc.
Condensed Consolidated Statement of Operations
Unaudited
   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenue
  $ 3,411,589     $ 1,747,085     $ 6,111,674     $ 4,217,284  
Cost of goods sold
    3,061,504       819,630       5,453,028       2,213,922  
                                 
Gross profit
    350,085       927,455       658,646       2,003,362  
                                 
Expenses:
                               
Depreciation
    149,107       111,337       290,711       250,307  
General and administrative expenses
    7,768,923       1,543,850       10,008,477       2,886,361  
Research and development
    51,493       695       64,327       12,162  
Total expenses
    7,969,520       1,655,880       10,363,513       3,148,830  
                                 
Operating loss
    (7,619,438 )     (728,427 )     (9,704,869 )     (1,145,468 )
                                 
Other income:
                               
Interest income
    8,734       -       23,943       -  
Gain on Disposal of Assets
    (12,201 )     -       (12,201 )     9,760  
Other Income
    317,824       -       317,825       -  
Total other income
    314,357       -       329,567       9,760  
                                 
Other expenses:
                               
Interest expense
    (322,751 )     2,872,418       6,043       3,488,695  
Other Expense
    -       -       -       -  
Total other expenses
    (322,751 )     2,872,418       6,043       3,488,695  
                                 
Loss from operations before income taxes
    (6,982,330 )     (3,600,845 )     (9,381,345 )     (4,624,403 )
                                 
Provision for income taxes
    -       -       -       -  
                                 
Net (loss)
  $ (6,982,330 )   $ (3,600,845 )   $ (9,381,345 )   $ (4,624,403 )
                                 
Weighted average number of
                               
common shares outstanding - basic and fully diluted
    8,960,550       2,522,375       8,629,023       2,610,441  
                                 
Net (loss) per share-basic and fully diluted
  $ (0.78 )   $ (1.43 )   $ (1.09 )   $ (1.77 )
 
The accompanying notes are an integral part of these financial statements
 
 
3

 
 
Condensed Consolidated Balance Sheets

   
June 30, 2010
   
Decenber 31, 2009
 
 
 
(Unaudited)
   
(Audited)
 
Assets
           
Current assets:
           
Cash and Cash Equivalents
  $ 13,565,314     $ 11,824,605  
Restricted Cash
    672,868       -  
Receivables, net of allowance for bad debt of  $83,988 and $92,494 as of 6/30/10 and  12/31/09 respectively
    1,336,554       1,296,696  
Inventory, net of allowance for obsolescence of $292,896 and $335,864  as of 06/30/10 and 12/31/08 respectively
    1,166,390       749,492  
Prepaid expenses and other current assets
    335,906       387,327  
Total current assets
    17,077,032       14,258,120  
                 
Fixed assets, net accumulated depreciation of $4,270,095, and   $4,124,431 as of 06/30/10 and 12/31/09 respectively
    1,837,812       1,872,347  
                 
Goodwill
    3,495,878       3,495,878  
                 
Total assets
  $ 22,410,724     $ 19,626,344  
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities:
               
Accounts payable
  $ 802,919     $ 372,982  
Accrued liabilities
    3,075,203       1,438,177  
Total current liabilities
    3,878,122       1,811,159  
                 
Total LT Debt
    287,500       287,500  
Stockholders’ equity:
               
Preferred stock, $0.001 par value, 200,000,000 shares authorized, 8,416,881 and 8,597,299 shares issued and outstanding as of  06/30/10 and 12/31/09 respectively
    8,417       8,597  
Common stock, $0.001 par value, 1,300,000,000 shares authorized, 8,994,065  and 6,713,285 shares issued and outstanding as of 06/30/10 and 12/31/09, respectively
    8,993       6,712  
Common stock owed but not issued; 0 and 2,079,061 shares at 06/30/10 and 12/31/09 respectively
    -       2,079  
Additional paid-in capital
    93,519,127       88,411,074  
Subscription receivable
    -       (5,000,000 )
Retained deficit
    (75,226,712 )     (65,845,368 )
Accumulated Foreign Currency Translation Adjustments
    (64,721 )     (55,409 )
Total stockholders' equity
    18,245,103       17,527,685  
                 
Total liabilities and stockholders' equity
  $ 22,410,724     $ 19,626,344  
  
The accompanying notes are an integral part of these financial statements
  
 
4

 

ECOtality, Inc.
Condensed Consolidated Statement of Cash Flows
Unaudited

   
For the 6 Months Ended June 30,
 
   
2010
   
2009
 
             
Cash flows from operating activities
           
Net Income (loss)
  $ (9,381,345 )   $ (4,624,403 )
Adjustments to reconcile:
               
Stock and options issued for services and compensation
    5,096,076       95,175  
Depreciation
    326,164       250,307  
Amortization of stock issued for services
    -       117,206  
Amortization of discount on notes payable
    -       765,050  
Amortization of Financing Costs
    -       2,302,811  
Issuance of Letters of Credit
    (672,868 )        
Gain on disposal of assets
    12,201       (9,760 )
Changes in operating assets and liabilities:
               
    Certificate of Deposit
    -       28,044  
Accounts Receivable
    (39,859 )     1,035,426  
Inventory
    (416,877 )     130,330  
Prepaid expenses and other
    51,416       72,744  
Accounts Payable
    429,937       (498,612 )
Accrued Liabilities
    1,637,026       605,875  
Net cash provided (used) by operating activities
    (2,958,129 )     270,193  
                 
Cash flows from investing activities
               
Purchase of fixed assets
    (335,347 )     (113,882 )
Proceeds from sales of fixed assets
    31,500       9,761  
Net cash provided (used) by investing activities
    (303,847 )     (104,121 )
                 
Cash flows from financing activities
               
                 
Proceeds from Warrant Exercise
    11,999       -  
Proceeds from Subscription Receivable
    5,000,000       -  
Net cash provided (used) by financing activities
    5,011,999       -  
                 
Effects of exchange rate changes
    (9,312 )     (9,403 )
                 
Net increase (decrease) in cash
    1,740,710       156,669  
Cash – beginning
    11,824,605       327,332  
Cash – ending
  $ 13,565,314     $ 484,002  
                 
Supplemental disclosures:
               
Interest paid
  $ 9,703     $ -  
Income Taxes paid
  $ -     $ -  
Non-cash transactions:
               
Stock and options issued for services
  $ 5,096,074     $ 95,175  
Number of options Issued
    945,833          
Number of warrants Issued
    9,999          
Shares of stock issued
    1,183       19,167  
                 
Stock issued for acquisition
  $ -     $ 1,880,000  
Shares of stock issued
    -       522,222  
                 
Amortization of stock issued for services
  $ -     $ 117,206  
                 
Amortization of discount on notes payable
  $ -     $ 765,050  
 
The accompanying notes are an integral part of these financial statements
 
5

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
 Note 1 – History and organization of the company
 
The Company was incorporated April 21, 1999 under the laws of the State of Nevada, as Alchemy Enterprises, Ltd.  The Company was initially authorized to issue 25,000 shares of its no par value common stock.
 
On October 29, 2002, the Company amended its articles of incorporation to increase its authorized capital to 25,000,000 shares with a par value of $0.001.  On January 26, 2005, the Company amended its articles of incorporation again, increasing authorized capital to 100,000,000 shares of common stock with a par value of $0.001.  On March 1, 2006, the Company amended its articles of incorporation, increasing authorized capital to 300,000,000 shares of common stock, each with a par value of $0.001, and 200,000,000 shares of preferred stock, each with a par value of $0.001.
 
On November 26, 2006, the Company amended its articles of incorporation to change its name from Alchemy Enterprises, Ltd. to ECOtality, Inc to better reflect its renewable energy strategy.
 
The former business of the Company was to market a private-label biodegradable product line.  During the year ended December 31, 2006, the Board of Directors changed the Company’s focus toward developing an electric power cell technology.
 
On June 11, 2007, the Company acquired the assets of the FuelCellStore.com, a small web based seller of educational fuel cell products. The FuelCellStore.com product line includes demonstration kits, educational materials, fuel cell systems and component parts.  It also offers consulting services on establishing educational programs for all levels of educational institutions.  FuelCellStore.com now operates as a wholly owned subsidiary called ECOtality Stores, Inc.  See note 4 for further information.
 
On October 1, 2007, the Company purchased certain assets of Innergy Power Corporation and its wholly owned subsidiary, Portable Energy De Mexico, S.A. DE C.V.  Innergy Power Corporation designs and manufactures standard and custom solar-power and integrated solar-battery solutions for government, industrial and consumer applications.  See note 4 for further information.
 
On November 6, 2007, the Company acquired all the outstanding capital stock of Electric Transportation Engineering Corporation, as well as its affiliated company The Clarity Group (collectively referred to as ECOtality North America).  ECOtality North America designs fast-charge systems for material handling and airport ground support applications.  ECOtality North America also tests and develops plug-in hybrids, advanced battery systems and hydrogen ICE conversions.  See note 4 for further information.
 
On December 6, 2007, the Company acquired through ECOtality North America the Minit-Charger business of Edison Enterprises. Minit-Charger makes products that enable fast charging of lift trucks using revolutionary technologies.  See note 4 for further information.

On August 26, 2009, ECOtality Inc. management met with the shareholders at its annual shareholders' meeting.  At this meeting the shareholders approved an increase to the authorized number of common shares to 1,300,000,000 shares.
 
On November 24, 2009 the Company effected a reverse split of 1:60 of its $0.001 par value common stock and the ticker symbol was changed from "ETLY" to "ETLE".  All shares in these financial statements have been retroactively adjusted and presented for this reverse split.

On January 7, 2010 the Company established a new, wholly owned subsidiary, ECOtality Australia Pty Ltd., headquartered in Brisbane, Queensland.  This subsidiary will market and distribute battery charging equipment to support on-road vehicles (EV), industrial equipment, and electric airport ground support equipment (GSE).

On May 20, 2010 the Company was listed on the NASDAQ and the ticker symbol was changed from “ETLE” to “ECTY”

The consolidated financial statements as of June 30, 2010 include the accounts of ECOtality Inc., ECOtality Stores, Innergy Power Corporation, ECOtality North America and ECOtality Australia Pty Ltd.  All significant inter-company balances and transactions have been eliminated.  ECOtality and its subsidiaries will collectively be referred to herein as the “Company”.

Note 2 — Summary of Significant Accounting Policies

Use of estimates
Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of the valuation allowance relating to deferred tax assets and future cash flows associated with long-lived assets. Actual results could differ from those estimates.

 
6

 

Cash and cash equivalents
For financial statement presentation purposes, the Company considers short-term, highly liquid investments with original maturities of three months or less to be cash and cash equivalents.

Interest income is credited to cash balances as earned.  For the six months ended June 30, 2010 and 2009 interest income was $23,943 and $0 respectively.

Credit risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits.  The Company maintains cash and cash equivalent balances at financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000.  Deposits with these banks may exceed the amount of insurance provided on such deposits.  At June 30, 2010 and 2009, the Company had approximately $13.3 million and $0.1 million in excess of FDIC insured limits, respectively.

Accounts receivable at June 30, 2010 was $1,336,554, and at June 30, 2009 was $927,646.  At June 30, 2010, we had one customer that represented in excess of 10% of our receivable balance.  This customer had a balance of $182,860. The Company has not experienced material losses in the past from this or any other significant customer and continues to monitor its exposures to minimize potential credit losses. The allowance for doubtful accounts was $83,988 and $114,019 as of June 30, 2010 and 2009, respectively.

Impairment of long-lived assets and intangible assets
Management regularly reviews property, equipment, intangibles and other long-lived assets for possible impairment. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, then management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. Management believes that the accounting estimate related to impairment of its property and equipment, is a “critical accounting estimate” because: (1) it is highly susceptible to change from period to period because it requires management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on our balance sheet, as well as net income, could be material. Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so. During the six months ended June 30, 2010 and 2009, the Company had no impairment expense.

Revenue recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104 and Accounting Research Bulletin (ARB) 45. Revenue is recognized when a formal arrangement exists, the price is fixed or determinable, all obligations have been performed pursuant to the terms of the formal arrangement and collectability is reasonably assured.  

Sales related to long-term contracts for services (such as engineering, product development and testing) extending over several years are accounted for under the percentage-of-completion method of accounting.  Sales and earnings under these contracts are recorded based on the ratio of actual costs incurred to total estimated costs expected to be incurred related to the contract under the cost-to-cost method based budgeted milestones or tasks as designated per each contract. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable.

For all other sales of product or services the Company recognizes revenues based on the terms of the customer agreement.  The customer agreement takes the form of either a contract or a customer purchase order and each provides information with respect to the product or service being sold and the sales price.  If the customer agreement does not have specific delivery or customer acceptance terms, revenue is recognized at the time of shipment of the product to the customer.

Management periodically reviews all product returns and evaluates the need for establishing either a reserve for product returns.  As of June 30, 2010 and 2009, management has concluded that no reserve is required for product returns.

The Company warrants a limited number of ECOtality North America products against defects for periods up to 120 months. The estimate of warranty liability is based on historical product data and anticipated future costs. Should actual failure rates differ significantly from our estimates, we record the impact of these unforeseen costs or cost reductions in subsequent periods and update our assumptions and forecasting models accordingly. At June 30, 2010 and 2009 the warranty reserve was $232,723 and $111,692 respectively.  The increase to the reserve was made in response to lengthening the warranty period on several items.

Accounts receivable
Accounts receivable are carried on a gross basis, with no discounting, less the allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing economic conditions, the financial conditions of the customers, and the amount and the age of past due accounts.  Receivables are considered past due if full payment is not received by the contractual due date.  Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted.  There is no collateral held by the Company for accounts receivable.  The allowance for doubtful accounts was $83,988 and $114,019 as of June 30, 2010 and 2009, respectively.

 
7

 
 
ECOTALITY, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Inventory
Inventory is valued at the lower of cost, determined on a first-in, first-out basis, or market.  Inventory includes material, labor, and factory overhead required in the production of our products.  Inventory obsolescence is examined on a regular basis.  The allowance for obsolescence as of June 30, 2010 and 2009 was $292,896 and $182,487 respectively.

Advertising costs
The Company expenses all costs of advertising as incurred.  There were advertising costs of $0 and $21,298 included in general and administrative expenses for the six months ended June 30, 2010 and 2009, respectively.

Research and development costs
Research and development costs are charged to expense when incurred.  For the six months ended June 30, 2010 and 2009, research and development costs were $64,327 and $12,162, respectively.

Contingencies
The Company is not currently a party to any pending or threatened legal proceedings.  Based on information currently available, management is not aware of any matters that would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable approximate their fair values based on their short-term nature. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2010 and 2009.  The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values.  

Loss per Common Share
Net loss per share is provided in accordance with ASC Subtopic 260-10. We present basic loss per share (“EPS”) and diluted EPS on the face of statements of operations.  Basic EPS is computed by dividing reported losses by the weighted average shares outstanding.  Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share has been computed assuming the conversion of the convertible long-term debt and the elimination of the related interest expense, and the exercise of stock warrants. Loss per common share has been computed using the weighted average number of common shares outstanding during the year. For the quarter ended June 30, 2010 and 2009, the assumed conversion of convertible long-term debt and the exercise of stock warrants are anti-dilutive due to the Company’s net losses and are excluded in determining diluted loss per share.

Foreign Currency Translation
For the six months ended June 30, 2010, two Company subsidiaries, Portable Energy De Mexico, and ECOtality Australia Pty. were operating outside the United States of America.   For both entities their local currency is their functional currency. The functional currency is translated into U.S. dollars for balance sheet accounts using the period end rates in effect as of the balance sheet date and the average exchange rate is used for revenue and expense accounts for each respective period. The resulting translation adjustments are deferred as a separate component of stockholders' equity, within other comprehensive loss, net of tax where applicable.

Stock-Based Compensation
The Company records stock-based compensation in accordance with ASC topic 718-20 using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” using the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 
8

 

ECOTALITY, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property and Equipment
Property and equipment are recorded at historical cost.  Minor additions and renewals are expensed in the year incurred.  Major additions and renewals are capitalized and depreciated over their estimated useful lives.  When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.  The Company uses other depreciation methods (generally accelerated) for tax purposes where appropriate.  The estimated useful lives for significant property and equipment categories are as follows:

Equipment
5-7 years
Buildings
39 years

Income Taxes
The Company has adopted the provisions of ASC subtopic 740-10 which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  A valuation allowance is provided for those deferred tax assets for which the related benefits will likely not be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next twelve months. As of June 30, 2010, no income tax expense has been incurred.
 
Dividends
The Company has not yet adopted any policy regarding payment of dividends.  No dividends have been paid or declared since inception.  For the foreseeable future, the Company intends to retain any earnings to finance the development and expansion of its business and it does not anticipate paying any cash dividends on its common stock.  Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent upon then existing conditions, including the Company’s financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that the board of directors considers relevant.

Segment reporting
Generally accepted accounting procedures require disclosures related to components of a company for which separate financial information is available that is evaluated regularly by a company’s chief operating decision maker in deciding the allocation of resources and assessing performance.  In this manner the Company has concluded it has three reportable segments; ECOtality Stores, Innergy Power segment and ECOtality North America segment (which includes ECOtality Australia). The ECOtality Stores segment is the online marketplace for fuel cell-related products and technologies with online distribution sites in the U.S., Japan, Russia, Italy and Portugal. The Innergy Power segment is comprised of the sale of solar batteries and other solar and battery powered devices to end-users. The ECOtality North America segment includes our ECOtality Australia operations and relates to sale of fast-charge systems for material handling and airport ground support applications to the testing and development of plug-in hybrids, advanced battery systems and hydrogen ICE conversions and consulting revenues. This segment also includes the Minit-Charger business which relates to the research, development and testing of advanced transportation and energy systems with a focus on alternative-fuel, hybrid and electric vehicles and infrastructures.  ECOtality North America holds exclusive patent rights to the ECOtality North America SuperCharge™ and Minit-Charger systems - battery fast charge systems that allow for faster charging with less heat generation and longer battery life than conventional chargers. The Company has aggregated these subsidiaries into three reportable segments: ECOtality/Fuel Cell Store, ECOtality North America and Innergy.

While management is currently assessing how it evaluates segment performance, we currently utilize income (loss) from operations, excluding depreciation of corporate assets. We also exclude goodwill from segment assets. For the six months ended June 30, 2010 and 2009 inter-segment sales were $339,373 and $28,723 respectively.  All inter-segment sales have been eliminated during the consolidation process.

 
9

 

Recent Accounting Pronouncements

The FASB issued ASC subtopic 855-10 (formerly SFAS 165 “Subsequent Events”), incorporating guidance on subsequent events into authoritative accounting literature and clarifying the time following the balance sheet date which management reviewed for events and transactions that may require disclosure in the financial statements.  The Company has adopted this standard.  The standard increased our disclosure by requiring disclosure reviewing subsequent events.  ASC 855-10 is included in the “Subsequent Events” accounting guidance.
 
In April 2009, the FASB issued ASC subtopic 820-10 (formerly Staff Position No. FAS 157-4, Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”)  . ASC 820-10 provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset/liability has significantly decreased. FSP 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. In addition, FSP 157-4 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. The Company determined that adoption of FSP 157-4 did not have a material impact on its results of operations and financial position. 

In July 2006, the FASB issued ASC subtopic 740-10 (formerly Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes ”). ASC 740-10 sets forth a recognition threshold and valuation method to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not,” based upon its technical merits, be sustained upon examination by the appropriate taxing authority. The second step requires the tax position to be measured at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would no longer be recognized. The application of this Interpretation will be considered a change in accounting principle with the cumulative effect of the change recorded to the opening balance of retained earnings in the period of adoption. Adoption of this new standard did not have a material impact on our financial position, results of operations or cash flows.

In April 2008, the FASB issued ASC 815-40 (formerly Emerging Issues Task Force (“EITF”) 07-05, "Determining whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock "). ASC815-40 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. ASC 815-40 is effective for financial statements issued for fiscal years beginning after December 15, 2008.  The adoption of this pronouncement did not have a material impact on its financial position, results of operations or cash flows.

 In June 2009, the FASB issued ASC 105 Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification TM (the “Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”). All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. Rules and interpretive releases of the SEC issued under the authority of federal securities laws, however, will continue to be the source of authoritative generally accepted accounting principles for SEC registrants. Effective September 30, 2009, all references made to GAAP in our consolidated financial statements will include references to the new Codification. The Codification does not change or alter existing GAAP and, therefore, will not have an impact on our financial position, results of operations or cash flows.

In June 2009, the FASB issued changes to the consolidation guidance applicable to a variable interest entity (VIE). FASB ASC Topic 810, "Consolidation," amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity's economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. FASB ASC 810 also requires enhanced disclosures about an enterprise's involvement with a VIE. Topic 810 is effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009. This will not have an impact on the Company’s financial position, results of operations or cash flows.

In June 2009, the FASB issued Financial Accounting Standards Codification No. 860 - Transfers and Servicing. FASB ASC No. 860 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. FASB ASC No. 860 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The adoption of FASB ASC No. 860 will not have an impact on the Company’s financial statements.

International Financial Reporting Standards
In November 2008, the Securities and Exchange Commission (“SEC”) issued for comment a proposed roadmap regarding potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Under the proposed roadmap, the Company would be required to prepare financial statements in accordance with IFRS in fiscal year 2014, including comparative information also prepared under IFRS for fiscal 2013 and 2012. The Company is currently assessing the potential impact of IFRS on its financial statements and will continue to follow the proposed roadmap for future developments.

 
10

 

Reclassifications
Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation.  These reclassifications had no effect on previously reported results of operations or retained earnings.

Year end
The Company has adopted December 31 as its fiscal year end.

Note 3 – Fair Value Measurements

The Company adopted ASC Topic 820-10 at the beginning of 2009 to measure the fair value of certain of its financial assets required to be measured on a recurring basis.  The adoption of ASC Topic 820-10 did not impact the Company’s financial condition or results of operations.  ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date.  A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability.  The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.

Level 2 – Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3 – Valuations based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of June 30, 2010:
 
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
 
Cash and CDs
 
$
13,565,314
   
$
-
   
$
-
   
$
13,565,314
 
Accounts receivable
   
-
     
1,336,554
     
-
     
1,336,554
 
Accounts payable
   
-
     
802,919
     
-
     
802,919
 
Accrued liabilities
   
-
     
3,075,203
     
-
     
3,075,203
 
Notes payable
   
-
     
287,500
     
-
     
287,500
 
Total
 
$
13,565,314
   
$
5,502,176
   
$
-
   
$
19,067,490
 

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of December 31, 2009:

   
Level 1
   
Level 2
   
Level 3
   
Fair Value
 
Cash and CDs
 
$
11,824,605
   
$
-
   
$
-
   
$
11,824,605
 
Accounts receivable
   
-
     
1,296,696
     
-
     
1,296,696
 
Accounts payable
   
-
     
372,982
     
-
     
372,982
 
Accrued liabilities
   
-
     
1,438,177
     
-
     
1,438,177
 
Notes payable
   
-
     
287,500
     
-
     
287,500
 
Total
 
$
11,824,605
   
$
3,395,355
   
$
-
   
$
15,219,960
 

 Note 4 - Acquisitions and Goodwill
 
FuelCellStore.com acquisition
On June 11, 2007, the Company acquired the assets of the FuelCellStore.com, a small web based seller of educational fuel cell products. The FuelCellStore.com product line includes demonstration kits, educational materials, fuel cell systems and component parts.  It also offers consulting services on establishing educational programs for all levels of educational institutions. FuelCellStore.com now operates as a wholly owned subsidiary called ECOtality Stores, Inc. Our consolidated financial statements for the six months ended June 30, 2010 and 2009 include the financial results of ECOtality Stores, Inc.

Innergy Power Corporation acquisition
On October 1, 2007, the Company acquired certain assets of the Innergy Power Corporation and its wholly owned subsidiary, Portable Energy De Mexico, S.A. DE C.V. Innergy Power Corporation designs and manufactures standard and custom solar-power and integrated solar-battery solutions for government, industrial and consumer applications. Our consolidated financial statements for the the six months ended June 30, 2010 and 2009  include the financial results of Innergy Power Corporation and its subsidiary.

 
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ECOtality North America acquisition
On November 6, 2007, the Company acquired all the outstanding capital stock of Electric Transportation Engineering Corporation, as well as its affiliated company The Clarity Group (collectively referred to as ECOtality North America). ECOtality North America develops and provides fast-charge systems designed for electric vehicle (EVs and PHEVs), mobile material handling, airport ground support, and marine and transit applications. ECOtality North America also tests and develops plug-in hybrids, advanced battery systems and hydrogen ICE conversions. Our consolidated financial statements for the six months ended June 30, 2010 and 2009 include the financial results of ECOtality North America.

The fair market value of the transaction was $5,437,193. The Company paid $2,500,000 in cash, issued a $500,000 note payable, and issued 108,333 shares of the company’s common stock for the acquisition, which was valued at $1,820,000 based on the closing market price on the date of the agreement.  The total value of the transaction also included $217,193 in direct acquisition costs and the subsequent Net Working Capital Adjustment discussed below.

The $500,00 was initially payable in monthly installments of $50,000 beginning December of 2007.  The balance remaining at December 31, 2008 was $235,253 and payment of this amount was made on December 11, 2009.

Included in the purchase agreement was a Net Working Capital Adjustment which called for an adjustment to the purchase price to be made via a post-Closing payment from the Sellers to the Buyers or the Buyers to the Seller to the extent that the actual Net Working Capital as of the Closing Date was more or less than the agreed Net Working Capital Target. A reconciliation of actual vs. target net working capital was presented by the Sellers in August 2008 and a TrueUp Payment of $400,000 from the Buyers to the Sellers was agreed to in full satisfaction of this purchase agreement requirement. The true up obligation was an adjustment to the purchase price.  Full payment was made on December 11, 2009 and has been recorded as an increase to Goodwill of $400,000.

The aggregate purchase price was allocated to the assets acquired and liabilities assumed on their preliminary estimated fair values at the date of the acquisition.  The excess of purchase price over the fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill. The following table summarizes the fair value of assets as part of the acquisition with eTec:

Tangible assets acquired, net of liabilities assumed
 
$
1,941,315
 
Goodwill
   
3,495,878
 
   
$
5,437,193
 
 
The Company reviewed the goodwill for impairment performing the necessary testing for recoverability of the asset and measuring its fair value.   This testing revealed current, historic, and future (projected) positive cash flows supporting the full amount of goodwill.  As a result of this testing in 2008, no impairment was taken in the year ended December 31, 2008.  In December 2009 and at June 30, 2010, the Company reviewed the goodwill for impairment performing the necessary testing for recoverability of the asset and measuring its fair value.   This testing again revealed current, historic, and future (projected) positive cash flows supporting the full amount of goodwill.  As a result of this testing no impairment was taken in the six months ended June 30, 2010 nor in the year ending December 31, 2009.
 
Minit-Charger acquisition
On December 6, 2007 the Company acquired through eTec the Minit-Charger business of Edison Enterprises. Minit-Charger makes products that enable fast charging of mobile material handling equipment using revolutionary proprietary technologies.

Note 5 – Fixed assets

Fixed assets as of June 30, 2010 and at December 31, 2009 consisted of the following:

   
At June 30, 2010
   
At December 31, 2009
 
Equipment
  $ 3,239,044     $ 3,200,649  
Buildings
    575,615       575,615  
Vehicles
    1,191,937       1,282,577  
Furniture & Fixtures
    168,474       100,883  
Leasehold improvements
    731,936       704,911  
Computer Software
    200,901       132,144  
      6,107,907       5,996,778  
Less: accumulated depreciation
    (4,270,095 )     (4,124,431 )
      1,837,812       1,872,347  
 
 
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Depreciation expense totaled $290,711 and $250,307, for the six months ended June 30, 2010 and 2009 respectively.

Note 6 – Notes payable

 On January 16, 2007, the Company purchased an office building for an aggregate price of $575,615.  $287,959 in cash was paid and the remaining balance of $287,500 was structured as an interest-only loan.  The loan bears an interest rate of 6.75% calculated annually, with monthly interest-only payments due beginning on February 16, 2007.  The entire principal balance is due on or before January 16, 2012 and is recorded as a long-term note payable on the consolidated financial statements.

During 2007, the Company incurred a $500,000 note payable to the previous owners of eTec through the acquisition of eTec. As of December 31, 2008, $ 235,253 was owed and recorded as an accrued liability for purchase price on the consolidated financial statements.  This balance was paid in full on December 11, 2009 and $0 was reflected in the financial statements on June 30, 2010.
 
NOVEMBER AND DECEMBER 2007 DEBENTURES & SUBSEQUENT AMENDMENTS

In November and December of 2007, the Company received gross proceeds of $5,000,000 in exchange for a note payable of $5,882,356 as part of a private offering of 8% Secured Convertible Debentures (the “Debentures”).  The debentures were convertible into common stock at $18 per share. Debenture principal payments were due beginning in May and June of 2008 (1/24th of the outstanding amount is due each month thereafter). In connection with these debentures, the Company issued debenture holders warrants (“the Warrants”) to purchase up to 163,399 shares of the Company’s common stock with an exercise price of $19.20. The warrants were exercisable immediately upon issue. The Warrants were to expire five years from the date of issue.  The aggregate fair value of the Warrants equaled $2,272,942 based on the Black-Scholes pricing model using the following assumptions: 3.39%-3.99% risk free rate, 162.69% volatility, and strike price of $19.20, market price of $13.20-$19.20, no yield, and an expected life of 912 days. The gross proceeds received were bifurcated between the note payable and the warrants issued and a discount of $3,876,256 was recorded. The discount was being amortized over the loan term.  As of December 31, 2009 the total discount was fully amortized and recorded as interest expense.  $0 was remaining at June 30, 2010.
 
AUGUST 2008 AMENDMENT TO THE DEBENTURES
On August 29, 2008 the Company signed an Amendment to the Debenture agreements deferring the payments indicated above. The purpose of the agreement was to provide the Company time to fund its working capital requirements internally through organic growth as well as to obtain both short and long term funding through equity financing and other sources of capital.

AUGUST 2008 WAIVER PROVISIONS:
The waiver, deferment agreement aligns with the Company’s short term working capital plan and provides time to achieve company objectives in this regard. In exchange for the Amendment to the Debentures, the Company agreed to:

 
A. 
Waiver of interest payments due between May-December 2008

 
B. 
Deferment of monthly redemptions for the period May-December 2008.

 
C. 
Increase to the outstanding principal amount plus accrued interest though December 31, 2008 for the debentures by 120% as of the effective date of the agreement.

 
D. 
Reset of the common stock conversion rate from $18.00 to $9.00.

 
E. 
Commencement of principal payments starting January 1, 2009 with no change to the redemption period (May 2010)
 
F. 
Commencement of interest payments @ 8% per year April 1, 2009 (first payment due).
 
G. 
Inclusion of make whole provisions to reset common stock warrant conversion prices to the value used to “true-up” both the Innergy Power Company and Minit-Charger (Edison) acquisitions when both “true-ups” are completed. For both of these acquisitions the Sellers were issued shares which the Company guaranteed would be worth $60.00 per share for the thirty days prior to the anniversary date of the purchase. This guarantee requires the issuance of additional shares or payment in cash for the difference in the share price on the respective anniversary dates. In the case of Innergy, the number of required “true up” shares is capped at 66,666.

 
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H. 
Inclusion of further make whole provisions to issue additional warrants adequate to maintain the pro rata debenture ownership % when fully diluted as per schedule 13 in the waiver agreement.

 
I. 
Compliance with covenants per quarterly public reports issued for the periods ending June 30,
 
September 30, and December 31, 2008 for the following:
 
 
1. 
Net cash used

 
2. 
Current ratio adjusted for non-cash liabilities

 
3. 
Corporate Headquarters accounts payable amount

IMPACT OF THE AUGUST 2008 WAIVER PROVISIONS ON THE FINANCIAL STATEMENTS
During the period ended September 30, 2008 the impact to the financial statements for the provisions of the waiver noted above were estimated, the portion attributable to the period ending September 30, 2008 was charged to interest expense, and the remainder was capitalized as prepaid financing charges (see details in #1 through #3 below).  During the last three months of the waiver period, October to December 31, 2008, the remainder of the capitalized prepaid financing charges of $2,378,672 were charged to interest expense.  At December 31, 2008 all costs of the initial waiver had been fully expensed.

 
1. 
The increase to principal of $1,559,859 (see letter “C” above) was added to the long term note, $1,157,315 was capitalized in prepaid financing charges and the portion of the increase attributable to the nine month period ending September 30, 2008 of $402,544, less previously accrued interest (now incorporated in the principal) of $191,438 was charged to interest expense. The capitalized remainder of $1,157,315 was charged to interest expense in the year ended December 31, 2008.

 
2. 
The estimated change in value of the original 163,399 debenture warrants related to the pending reset of the exercise price (see letter “G” above) was calculated by using the Volume Weighted Average Price (VWAP) for the most recent 30 days prior to September 30, 2008 of $4.80 as the estimated new exercise price following the reset and the warrants were valued first at their current exercise price then at the estimated new price using the Black Scholes Model using the following assumptions: Strike Price $19.20 (old) and $4.80 (new), Stock Price $6.00 (price on date of agreement), time 780 days for November Warrants and 795 for December Warrants, Volatility 146.39%, Risk Free Interest Rate 3.83%. The increase in value calculated totaled $207,941.  Of the total, $154,279 was capitalized as prepaid financing costs and was amortized over the waiver period ending December 31, 2008.

 
3. 
The estimated number of additional warrants required to be issued to true up to the original aggregate exercise price for the November and December Warrants (see letter “G” above) following the reset of the exercise price was calculated using the difference between the current aggregate exercise price of $3,137,256 (163,399 total warrants at original exercise price $19.20), and the new aggregate exercise price of $784,314 following the reset of the exercise price to $4.80. This difference totaled $2,352,942 requiring the issuance of an estimated 490,196 warrants (at $4.80) to maintain the previous aggregate exercise price. The new warrants were valued at $1,438,235 using the Black Scholes Model with the following assumptions: Strike Price $4.80, Stock Price $4.20 (price at September 30, 2008), time 753 days, Volatility 146.39%, Risk Free Rate 3.83%. Of the total, $1,067,077 was capitalized as prepaid financing costs and was amortized over the waiver period ending December 31, 2008.

IMPACT OF OCTOBER 2008 TRUE-UP (REQUIRED BY THE AUGUST 2008 WAIVER) TO THE FINANCIAL STATEMENTS
On October 17, 2008, a purchase price true up with Innergy was completed, whereby we satisfied our purchase price obligation to Innergy in the form of a share issuance (please see Note 4 for details).  This share issuance triggered the make whole provision in the debenture waiver (letter “G” above) which required us to immediately reset their warrant exercise price of $9.00 to the VWAP in place at the time of the Innergy True up of $3.60, as well as to change their debt conversion rate from the previous $9.00 to $3.60.  This true up also required the issuance of new warrants to allow the denture holders to maintain their previous aggregate exercise price following the update.  The calculation for this change to our debenture debt is outlined below.  All related charges were immediately charged to interest expense.

 
1. 
The estimated change in value of the restated  debenture warrants related to the reset of the exercise price (see letter “G” above) was calculated by using the stock price employed for the Innergy true up calculation of $3.60 as the new exercise price following the reset and the warrants were valued first at their current exercise price then at the estimated new price using the Black Scholes Model using the following assumptions: Strike Price $4.80 (old) and $3.60  (new), Stock Price $6.00 (price on date of agreement), time 780 days for November Warrants and 795 for December Warrants, Volatility 146.39%, Risk Free Interest Rate 3.83%. The increase in value calculated totaled $35,001 and was charged to interest expense.

 
14

 

 
2. 
The estimated number of additional warrants required to be issued to true up to the previous aggregate exercise price for the November and December Warrants (see letter “G” above) following the reset of the exercise price was calculated using the difference between the previous aggregate exercise price of $4.80 and the new aggregate exercise price following the reset to $3.60. This change required the issuance of an additional 139,191 warrants (at $3.60) to maintain the previous aggregate exercise price. The change in value of the old vs. the  new increased number of warrants was ($445,061) using the Black Scholes Model with the following assumptions: Strike Price $3.60, Stock Price $2.40 (price at December 31, 2008), time 753 days, Volatility 146.39%, Risk Free Rate 3.83%. The reduction in value (due to the lower stock price) was charged to interest expense.

On January 30, 2009 a purchase price true up with Edison was completed, whereby we satisfied our purchase price obligation to Edison in the form of a share issuance (please see Note 4 for details).  This share issuance triggered the make whole provision in the debenture waiver (letter “G” above) which required the issuance of new warrants to allow the debenture holders to maintain their previous aggregate exercise price following the update.   This calculation resulted in the issuance of an additional 4,720,408 warrants (at $0.06) to maintain the previous aggregate exercise price. The change in value of the old vs. the new increased number of warrants was $124,147 using the Black Scholes Model consistent with the Innergy true up.  The cost of the increased warrants of $124,147 was charged to interest expense in the quarter ended March 31, 2009.

MARCH 2009 AMENDMENT TO THE DEBENTURES
 On March 5, 2009 we entered in to an Agreement entitled “Amendment to Debentures and Warrants, Agreement and Waiver” (the “Agreement”) restructuring our equity with the institutional debt holders of the our Original Issue Discount 8% Senior Secured Convertible Debentures, dated November 6, 2007 (the “November 2007 Debentures”)  (aggregate principal amount equal to $4,117,649) and with our debt holder of our Original Issue Discount 8% Secured Convertible Debentures, dated December 6, 2007 (the “December 2007 Debenture”)  (aggregate principle amount equal to $1,764,707).  The November and December 2007 Debentures are held by Enable Growth Partners LP (“EGP”), Enable Opportunity Partners LP (“EOP”), Pierce Diversified Strategy Master Fund LLC, Ena (“Pierce”), and BridgePointe Master Find Ltd. (“BridgePointe”)(individually referred to as “Holder” and collectively as the “Holders”). The Agreement’s effective date is January 1, 2009.

MARCH 2009 WAIVER PROVISIONS:
In exchange for signing an Amendment to Debentures and Warrants, Agreement and Waiver which deferred  interest payments due for the first quarter 2009 until May 1, 2009 and payment of monthly principal redemptions until May 1, 2009, we agreed to the following:

 
A. 
Adjust the conversion price of the November 2007 Debentures and December 2007 Debenture s to $3.60.

 
B. 
The Holders collectively shall maintain an equity position in the Company, in fully diluted shares, of 50.4 %. Should the Holders’ equity position collectively become less than the 50.4%, the Company shall issue warrants to each Holder, pro-ratably to bring Holders’ equity position back to 50.4%.

 
C. 
Additional covenants related to not exceeding $2,000,000 accounts payable amount or payment of other liabilities while the debentures are outstanding.

 
D. 
The right to recommend for placement on the Company 's Board of Directors, a nominee by either BridgePointe or BridgePointe’s investment manager Roswell Capital Partners LLC. Such a recommendation shall meet the Company’s requirements as set forth in the Company’s Bylaws and all applicable federal and state law. The nominee shall serve until such time as the Company has redeemed the debentures.

 
E. 
All outstanding Warrants (defined in the Securities Purchase Agreements dated November 6, 2007 and December 6, 2007 ), and all Warrants issued to Holders as consideration for the current or prior Amendments to the November 2007 Debentures and the December 2007 Debentures shall be amended t o have an exercise price of $3.60 (to the extent that such exercise price was previously above $3.60), and the expiration dates shall be extended to May 1, 2014.

 
F. 
Use best efforts to obtain stockholder approval of an increase in the authorized number of shares of common stock of the Company. The proposal shall increase the number of authorized common shares from 300,000,000 to 500,000,000.

 
G. 
In addition, the Securities Agreement, dated November 6, 2007 and all UCC-1 filings made as required thereof, shall be amended to include each of the Company’s current and future Patents and Trademarks. In addition the Company shall file notice of the Assignment for Security of the Company’s current and any future Patents and Trademarks with the United States Patent and Trademark Office and other foreign countries as appropriate.

 
15

 

IMPACT OF THE MARCH 2009 WAIVER PROVISIONS ON THE FINANCIAL STATEMENTS:
There was no financial impact of the March 2009 waiver as the warrants mentioned were reset to $3.60 at the time of the October 2008 true up.

The current portion of the debentures was recorded, net of a $1,530,101 discount, at $4,448,837 at March 31, 2009.  The long-term portion of the debentures was recorded, net of a $166,211 discount, at $1,029,577 as of March 31, 2009.

Included in accrued liabilities was $104,753 of accrued interest relating to the debentures at March 31, 2009, and $0 at June 30, 2010.

MAY 2009 AMENDMENT TO THE DEBENTURES
Despite the current tenuous economic situation, the financial opportunities specifically in the Stimulus projects related to electric transportation, were deemed material to the Company’s future, thus on May 15, 2009, the Company and the Debenture Holders entered into an agreement entitled “Amendment to Debentures and Warrants, Agreement and Waiver” (the “Agreement”) restructuring the Company’s equity as well as establishing an inducement for additional working capital for the Company.  The Agreement’s effective date was May 1, 2009.

MAY 2009 WAIVER PROVISIONS:
        The Company agreed to the following:

 
1. 
Defer payment of interest until November 1, 2009. Interest to be paid monthly from that date.  Interest accrued though September 30, 2009 will be added to principal.

 
2. 
Commence redemption of principal on January 1, 2010 in 10 equal payments.

 
3. 
Consent to obtaining additional working capital for specified uses not to exceed $2,500,000 in the same form and rights of debentures pari pasu in seniority both as to security interest priority and right of payment with the debenture held by the existing holders.

 
4. 
Segregation of payment of the Karner bridge note, reaffirmed Karner and Morrow employment agreements, identifies specific contract carve outs should the Company fail to achieve certain target objectives, and provide for a bonus should the target be achieved.

 
5. 
Maintain the conversion price of the November 2007 Debentures and December 2007 Debentures at $.06.

 
6. 
Additional covenants related to not exceeding $2,500,000 accounts payable amount or payment of other liabilities while the debentures are outstanding. Other covenants include maintaining minimum cash flow amounts. Allowing for inspection of financial records, and achieving Stimulus contract target objectives.

 
7. 
The right to recommend for placement on the Company's Board of Directors, two (2)  nominees by either BridgePointe or BridgePointe’s investment manager Roswell Capital Partners LLC or other debenture holders. Such a recommendation will meet the Company’s requirements as set forth in the Company’s Bylaws and all applicable federal and state law. The nominees may serve until such time as the Company has redeemed the debentures.

 
8. 
The existing Holders collectively will maintain an equity position in the Company, in fully diluted shares, of 80%. Should the existing holders Holders’ equity position collectively become less than the 80%, the Company will issue warrants to each existing Holder, pro-ratably to bring Holders’ equity position back to 80%. However, there are provisions (when additional capital is raised (not to exceed $2,500,000)) to bring the fully diluted position to 70% for the existing Holders as well as those Holders of new capital debentures.  There are provisions to further reduce the debenture holders to 65% should management achieve certain specified performance targets.

 
9. 
All outstanding Warrants (defined in the Securities Purchase Agreements dated November 6, 2007 and December 6, 2007), and all Warrants issued to Holders as consideration for the current or prior Amendments to the November 2007 Debentures and the December 2007 Debentures will be amended to have an exercise price of $0.60 (to the extent that such exercise price was previously above $3.60), and the termination dates for the makeup warrants will be five (5) years from date of issuance.
 
 
10. 
Use best efforts to obtain stockholder approval of an increase in the authorized number of shares of common stock of the Company.  The proposal shall increase the number of authorized common shares from 300,000,000 to 1,300,000,000.

 
16

 

 
11. 
Agreed to specific provisions relating to disclosure of material nonpublic information by debenture holder board members, or at other times when complying with the provisions of the debenture waive agreement..

IMPACT OF THE MAY 2009 WAIVER PROVISIONS ON THE FINANCIAL STATEMENTS:
In the quarter ended June 30, 2009, the financial impact of the May waiver was calculated and fully amortized as noted below, over the waiver period of May 15, 2009 through December 31, 2009.
 
1. 
The change in value of the restated debenture warrants related to the reset of the exercise price (see #9 above) was calculated using the Black Scholes Model using the following assumptions: Strike Price $0.06 (old) and $0.01 (new), Stock Price $0.11 (price on date of agreement), time 162.34 days Volatility 162.34%, Risk Free Interest Rate 3.10%. The increase in value calculated totaled $887,843.  This amount was added to additional paid in capital, and a contra-equity account for “Unamortized Financing Charges” was established as the offset.  The portion of the Unamortized Financing Charges” that was charged to interest expense through September 30, 2009 was $532,706.  The remaining $355,137 was expensed over the remainder of the waiver period (October through December 2009).

2. 
The number of additional warrants  to be issued to support the requirement of an 80% equity position as described in #8 above was calculated as follows:  Total Debenture warrants outstanding prior to the waiver = 871,460 + shares available on debenture conversion 2,046,125 = 2,917,585 Total Fully Diluted Debenture Holder Ownership Pre-Waiver.  Total Company Fully Diluted Shares at May 15, 2009 of 14,347,848 was used as the base on which to calculate the 80% ownership target of 11,478,278 shares.  To determine the warrants to be issued the 80% target figure of 11,478,278 less total Debenture Holder Ownership of 2,917,585 resulted in 8,560,692 (additional warrants to be issued).  To value the new warrants we used the market cap at the date of the issuance calculated as shares outstanding at May 15, 2009 of 2,698,436 multiplied by the closing share price of  $6.60 = $17,809,681.  To get the portion of the market cap  attributable to the new warrants (vs. those already held by the debenture holders ) we divided the # of new warrants (8,560,692) by the total 80% ownership target number of shares for the debenture holders (11,478,278)  to get (75%).  The 75% was multiplied by 80% total ownership %, and the resulting 60% was then multiplied by the total market cap to get the portion of the market cap attributable to the new issuance of  $10,626,208. This amount was added to additional paid in capital, and a contra-equity account for “Unamortized Financing Charges” was used as the offset.
 
All Unamortized Financing Charges were amortized and charged to charged to interest expense over the waiver period in the year ending December 31, 2009.

JUNE 2009 Amendment to the MAY Amendment to the Debentures
The debenture holders and the Company signed a First Amendment to Amendment to Debentures and Warrants, Agreement and Waiver dated June 30, 2009.  This amendment modified the May 15, 2009 Amendment by:

 
a. 
Increasing approval authority for specified transactions for the November and December 2007 and July 2009 Debenture Holders to 85% from 75% of outstanding principal amount.
 
b. 
Clarifying whom has Board of Director member rights

 
c. 
Clarifying the June 30, 2009 warrant true-up calculation, per the May 15, 2009 Amendment.

IMPACT OF THE PROVISIONS OF THE JUNE AMENDMENT TO THE FINANCIAL STATEMENTS:
There was no impact to the financial statements related to the June amendment to the May 15, 2009 amendment.
 
JULY 2009 NEW DEBENTURE ISSUANCE

To support ECOtality’s expansion and current working capital needs, the Company received a direct investment of $2,5000,000 in 8% Secured Convertible Debentures due October 1, 2010, of which Shenzhen Goch Investment Ltd was issued $2,000,000 in debentures, Enable Growth Partners (current debenture holder) was issued $250,000 in debentures, and BridgePointe Master Fund (current debenture holder) was issued $250,000 in debentures. The debentures have an exercise price or $3.60 per share of ECOtality common stock.  The July 2009 Debentures:

 
a. 
Are consistent with the initial debentures issued in November and December 2007 except this series is secured, convertible rather than original issue discount debentures.

 
17

 

 
b. 
Update the original Security Purchase Agreements, Securities Agreements, Registration Rights Agreements, Subsidiary Guarantees, and related disclosure schedules.

 
c. 
Provide for issuance of warrants to Shenzhen Goch Investment Ltd for their capital investment and adjusting the warrants held by Enable and BridgePointe subject to the June 30, 2009 true up as defined in the May 15, 2009 Amendment.

 
d. 
Restate the agreement to increase the number of the Company’s authorized common shares from 300,000,000 to 1,300,000,000.
 
 
 
e. 
Restate the covenants established in the May 15, 2009 Amendment and the Karner “carve-out” should certain “Stimulus” contract targets not be achieved. In accordance with the terms of the May 15 Amendment, the Company and Karner agreed that if Karner continues to remain a full-time employee, and The Company (with Karner’s assistance) fail to secure executed Stimulus Contracts (as defined in the May 15 Amendment) having an aggregate total contract value of $20,000,000 or more during the period from May 15, 2009 through October 1, 2009, then The Company  must, on or prior to October 9, 2009, transfer ownership of all stock and assets of The Clarity Group, Inc. to Karner.

OCTOBER 2009 SECURITIES EXCHANGE AGREEMENT

On October 31, 2009, ECOtality, Inc. (“ECOtality” or the “Company”) signed a Securities Exchange Agreement with all holders of its convertible debentures and holders of certain warrants to convert all outstanding amounts ($9,111,170) under these debentures and all related warrants into an aggregate of 8,597,299  shares of Series A Convertible Preferred Stock (while not impacted by the current common stock split discussed herein, it could be subject to adjustment for future forward and reverse stock splits, stock dividends, recapitalizations and the like). The Series A Convertible Preferred Stock has no redemption or preferential dividend rights, but may be converted into shares of the Company’s common stock (the “Common Stock”) at a 1:1 ratio. 

As of June 30, 2010  a liability had been accrued of  $641,409 in anticipation of  a potential penalty related to the registration rights agreement as included in the October 31 Securities Purchase Agreement (SPA).  This agreement’s provisions called for the filing of a registration statement within 45 days of the SPA being signed.  For reasons largely outside Management’s control, this filing was delayed.   In recognition of this circumstance, a waiver of all penalties was signed by the affected investors and the accrued penalty was reversed in the quarter ended June 30, 2010.  This reversal was recorded as a reduction of interest expense for the portion of the penalty accrued and expensed to interest in 2010 ($323,910), and the portion of the penalty accrued and expensed in 2009 ($317,499) was recorded as “other income”.

IMPACT OF THE PROVISIONS OF THE SECURITIES EXCHANGE AGREEMENT ON THE FINANCIAL STATEMENTS:
 The outstanding principal and unpaid interest on the date of the agreement was $9,111,170.  The outstanding debenture liability was relieved in full and a credit was recorded to additional paid in capital in the amount of  9,102,573 and preferred stock was credited at par value of $0.001 multiplied by the 8,597,299 shares that were issued, for a credit of $8,597.  The unamortized discount on the convertible debentures was $676,244 immediately prior to the transaction.  This amount was charged in full to interest expense in the year ended December 31, 2009.

The balance of the debenture debt at June 30, 2010 was $0.
 
On August 29, 2008, Mr. Donald Karner, a director of the Company, and Kathryn Forbes agreed to provide the Company a line of credit for up to $650,000. This Line was secured by a second position on receivables (junior to previously issued debentures). During the year ended December 31, 2008, $450,000 was advanced by Mr. Karner and Ms. Forbes. Further advances above $450,000 were contingent on the Company securing additional financing as agreed by October 26, 2008. This line carries a loan fee of $45,000 payable when the line expires.  The line was originally scheduled to expire December 15, 2008, but was extended to April 20, 2009 by the Lenders.  In consideration of the extension, an interest fee of $50,000 was paid to the Lenders in December 2008.  No other interest payments or fees are required under the agreement. The fee of $45,000 was expensed in full as of December 31, 2008.  All amounts advanced under the Line were due and payable in full on April 20, 2009. The balance of the note payable was $450,000 at December 31, 2008.  This balance was paid in full on December 11, 2009.
 
Interest expense totaled ($322,751) for the quarter and $6,043 for the six months ended June 30, 2010.  The negative interest expense in the quarter reflects the reversal of the portion of a penalty for a delayed filing of our S-1 that was accrued and expensed in 2010.  This penalty was related to the October 2009 Securities Exchange agreement and called for the filing of an S-1 within 45 days of the signing of that document.  This filing was delayed largely due to circumstances outside management’s control.  For this reason, the affected shareholders waived the penalty and the total associated accrued liability of $641,409 ($317,499 accrued in 2009 and $323,910 in 2010) has been reversed.  The 2009 portion of the accrual ($317,499) was recorded as other income.

Note 7 – Stockholders’ equity

The Company is authorized to issue 1,300,000,000 shares of its $0.001 par value common stock and 200,000,000 shares of $0.001 par value preferred stock.

 
18

 
 
Common Stock

On August 8, 2008 the Company entered into a contract for services with vendor that called for the issuance of 6,500 shares of the Company’s $0.001 common stock.  These shares were valued at $54,900 and were expensed over the life of the contract.  At December 31, 2008 $22,750 had been expensed leaving a balance of $31,850 in prepaid services.  In the nine months ended September 30, 2009 the remaining $31,850 was expensed leaving a balance of $0 in prepaid services at December 31, 2009.

There were 2,157,048 shares of common stock issued and outstanding at December 31, 2008.

On December 6, 2007 the Company acquired through ECOtality North America the Minit-Charger business of Edison Enterprises. The fair market value of the transaction was $3,000,000. The company paid $1,000,000 in cash and issued 33,333 shares of the company’s common stock for the acquisition.  The company guaranteed to the sellers that the shares would be worth $60 each ($2,000,000) by the tenth day following the first anniversary date of the transaction. If the shares are not worth $2,000,000, the company would be required to either issue additional shares such that the total shares are worth $2,000,000 at that time or pay cash to the seller so that the aggregate value of the 2,000,000 shares plus the cash given would equal $2,000,000.  This purchase price obligation was settled in full on January 30, 2009 with the issuance of 522,222 shares of ECOtality’s $0.001 par value common stock.

In March 2009 the Company issued 17,917 shares of the Company’s $0.001 common stock in satisfaction of $90,000 in accounts payable owed to two service vendors.

On April 13, 2009 1,250 shares of common stock owed in 2008 were issued to an employee in accordance with an employment agreement.

For the year ended December 31, 2009, 16,667 shares of common stock valued at $260,000 were issued and 16,667 were owed in return for professional services.

19,895 shares were issued to Corporate Headquarter employees as compensation.  These awards were valued at $128,987 and approved by the Board and were issued in recognition of performance during the year ended December 31, 2009.

On October 31, 2009, ECOtality signed a Securities Purchase Agreement and a Registration Rights Agreement with certain accredited investors (the “Investors”) pursuant to which the Investors agreed to purchase shares of the Company's Common Stock at a purchase price of $7.20 per share.  $20,500,000 was raised pursuant to the Purchase Agreement in the year ended December 31, 2009.   Total fees to brokers associated with the capital raise were $1,204,935 in cash as per their contracted fee agreements.  $15,500,000 was received in the year ended December 31, 2009.  1,458,330 Shares were issued in 2009 in satisfaction of $10,500,000 of the investment received.  The the remaining $5,000,000 received in 2009 and an additional $5,000,000 subscribed in 2009 were related to a single investor.  To capture the partial receipt and outstanding commitment, a subscription receivable of $5,000,000 and 1,388,889 shares owed but not issued were recorded at December 31, 2009 and were subsequently issued upon receipt of the second half of the investor's total $10,000,000 investment in January of 2010.  At June 30, 2010 all related shares were issued and outstanding.  In addition to the shares and fees described above, the purchase agreement called for the issuance of 2,847,222 warrants to the new investors and 163,194 warrants to the brokers involved in the capital raise, as part of the contractual fee agreements.  These are five year warrants with an exercise price of $9.00 and were issued November 10, 2009.
 
On September 30, 2009, triggering conditions were met under the management incentive plan (established as part of the May 15, 2009 amendment to the debentures) resulting in the grant of an equity award to Mr. Jonathan Read valued at $8.1 million. This award, originally stated in terms of warrants was never issued, was subsequently revised and reduced, with final grant and award of 673,505 shares of the Company’s $0.001 par value common stock being granted to Mr. Read on January 15, 2010, with final issuance of the shares on January 27, 2010. The value of the final award was calculated at the time of the issuance of the shares on January 27, 2010. The share price on that date was $5.50 for total compensation of $3,704,278. At December 31, 2009 the full amount of the original award of $8.1 million was recorded in additional paid in capital and the shares were shown as owed but not issued. At June 30, 2010 the 673,505 shares are issued and outstanding.  The award amount booked to additional paid in capital was not reduced from the original $8.1 million estimate to the $3.7 million final award value in compliance with GAAP.
 
For the year ended December 31, 2009, 2,118,723 shares were issued on the cashless conversion of 2,256,656 debenture warrants with an exercise price of $0.60 as follows. Enable Growth exercised 970,353 warrants in exchange for 913,805 shares,  Enable Opportunity exercised 114,159 warrants in exchange for 107,506 shares, Pierce Diversified Master Fund exercised 57,079 warrants in exchange for 53,753 shares,  BridgePointe Master Fund exercised 1,080,210 warrants in exchange for 1,010,324 shares and Glenwood Capital, LLC (recipient of assigned warrants) exercised 34,854 warrants in exchange for 33,333 shares

For the year ended December 31, 2009, 98,610 shares were issued on the cashless conversion of 105,306 Brookstreet Investor warrants at $0.60 exercise price.

 For the year ended December 31, 2009, 302,778 shares on the Company's $0.001 par value common stock  were issued for conversion of debenture debt in the amount of  $1,090,000 at a rate of $3.60 as follows:  Pierce Diversified Master Fund converted $42,000 in debt for 11,667 shares, Enable Growth converted $714,000 in debt for 198,333 shares, Enable Opportunity converted $84,000 in debt for 23,333 shares and BridgePointe Master Fund converted $250,000 in debt for 69,444 shares.

 
19

 

There were 6,713,285 shares of Common Stock outstanding and 2,079,061 shares owed but not issued at December 31, 2009.

Shares owed but not issued at December 31, 2009 (as described in detail above) were subsequently issued in the quarter ended March 31, 2010 as follows:  673,505 shares were issued to Jonathan Read, 16,666 shares were issued to a consultant and 1,388,888 shares were issued to new investors.

19,998 shares of Common Stock were issued in the quarter ended March 31, 2010 relating to the exercise of warrants with an exercise price of $0.60.  The warrants were exercised in the following increments:  9,999 on January 11, 2010, 3,333 on January 15, 2010, 3,333 on January 19, 2010 and 3,333 on March 22, 2010.  These warrants were exercised for cash.

On March 3, 2010 60,000 shares were issued to BridgePointe Master Fund on the conversion of the same number of preferred shares.

130 previously outstanding fractional shares of Common Stock (resulting from the November 2009 reverse stock split) were bought back and cancelled by the Company reducing the total outstanding shares by that amount.

There were 8,872,474 shares of Common Stock outstanding and 0 shares were owed but not issued at March 31, 2010.

On April 7, 2010, 83 shares were issued to an employee in accordance with an employment agreement.

On April 8, 2010, 1,100 shares were issued to a consultant in accordance with a contractual agreement.

On April 21, 20,418 shares of preferred stock were converted in exchange for the issuance of 20,418 shares of common stock.

On April 27, 2010 100,000 shares of preferred stock were converted in exchange for the issuance of 100,000 shares of common stock.

10 previously outstanding fractional shares of Common Stock (resulting from the November 2009 reverse stock split) were bought back and cancelled by the Company reducing the total outstanding shares by that amount.


There were 8,994,065 shares of Common Stock outstanding and 0 shares were owed but not issued at June 30, 2010.

Preferred Shares 

On October 31, 2009, ECOtality, Inc. (“ECOtality” or the “Company”) signed a Securities Exchange Agreement with all holders of its convertible debentures and holders of certain warrants to convert all outstanding amounts ($9,111,170) under these debentures and all 6,455,083 related warrants into an aggregate of 8,597,299  shares of Series A Convertible Preferred Stock (while not impacted by the current common stock split discussed herein, it could be subject to adjustment for future forward and reverse stock splits, stock dividends, recapitalizations and the like). The Series A Convertible Preferred Stock has no redemption or preferential dividend rights, but may be converted into shares of the Company’s common stock (the “Common Stock”) at a 1:1 ratio

There were 8,597,299 shares of Series A Convertible Preferred Stock outstanding at December 31, 2009.

On March 3, 2010 BridgePointe Master Fund converted 60,000 shares of their Preferred Stock into 60,000 shares of Common Stock.

There were 8,537,299 shares of Series A Convertible Preferred Stock outstanding at March 31, 2010.

On April 21, 2010 Glenwood Capital converted 20,418 shares of their Preferred Stock into 20,418 shares of Common Stock.

On April 27, 2010 BridgePointe Master Fund converted 100,000 shares of their Preferred Stock into 100,000 shares of Common Stock.

There were 8,416,881 shares of Series A Convertible Preferred Stock outstanding at June 30, 2010.

Note 8 – Options and Warrants

At December 31, 2008, there were 914,812 warrants outstanding.

A third reset of the November and December debenture warrants occurred in January 2009 due to the Edison True up outlined in Note 6.  This reset led to the issuance of an additional 78,673 warrants attributable to the November and December Warrants with an exercise price of $3.60.

On May 15, 2009 the November and December debentures were amended as outlined in Note 6.  As a result, the existing warrants were reset from $3.60 to $0.60 exercise price and an additional 8,560,692 true up warrants were also issued to provide for an 80% equity position agreed to as part of this amendment.

In conjunction with the new July 2 debentures discussed more fully in Note 6, the November and December 2007 debenture holders surrendered 720,128 warrants in compliance with the June 30th True Up requirement contained in the May 15, 2009 debenture waiver.

 
20

 

For the year ended December 31, 2009, 2,118,723 shares were issued on the cashless conversion of 2,256,656 debenture warrants with an exercise price of $0.60 as follows. Enable Growth exercised 970,353 warrants in exchange for 913,805 shares, Enable Opportunity exercised 114,159 warrants in exchange for 107,506 shares, Pierce Diversified Master Fund exercised 57,079 warrants in exchange for 53,753 shares, BridgePointe Master Fund exercised 1,080,210 warrants in exchange for 1,010,324 shares and Glenwood Capital, LLC (recipient of assigned warrants) exercised 34,854 warrants in exchange for 33,333 shares

In accordance with our October 2009 Securities Purchase Agreement, new investors would secure 1 share of common stock per $7.20 invested plus one warrant to purchase one share of common stock for a price of $9.00.  In return for total equity investments received of $15.5 million in addition to a subscription receivable of an additional $5 million, 2,847,222 five year warrants were issued on November 10, 2009 with an exercise price of $9.00 to 13 new investors.  In addition, 163,194 five year warrants with an exercise price of $9.00 were issued to brokers involved in the capital raise activities in accordance with their contractual agreements.

During the year ended December 31, 2009: 26,665 five year warrants with an exercise price of $0.60 were issued to two consultants in accordance with their contractual agreements, 17,615 five year warrants with an exercise price of $0.60 were issued to Brookstreet Investors in satisfaction of anti-dilution provisions as outlined in their Securities Purchase Agreements, and 105,693 warrants with an exercise price of $0.60 were cashless exercised by Brookstreet Investors in return for 98,610 shares of common stock.

On October 31, 2009, ECOtality, Inc. (“ECOtality” or the “Company”) signed a Securities Exchange Agreement with all holders of its convertible debentures and holders of certain warrants to convert all outstanding amounts ($9,111,170) under these debentures and all 6,455,083 related warrants into an aggregate of 8,597,299 shares of Series A Convertible Preferred Stock.

In the six months ended June 30, 2010, 18,332, 5 year warrants with an exercise price of $0.60 were issued to a consultant in accordance with contract terms (valued at $51,036 using the Black Scholes Model) and 19,998 warrants with an exercise price of $0.60 were exercised by consultants for cash.
 
The following is a summary of the status of the Company’s stock warrants*:

*This table previously contained both warrants and employee options.  The options have been removed from the table to be disclosed separately going forward, resulting in a reduction in the outstanding number of shares in the warrant table by 49,167 starting in December of 2008.

   
Number Of Shares
   
Weighted-Average
Exercise Price
 
Outstanding at December 31, 2008
    914,812     $ 8.40  
Granted
    11,694,061     $ 2.76  
Exercised
    (8,817,722 )   $ 0.60  
Cancelled
    (720,128 )   $ 0.60  
Outstanding at December 31, 2009
    3,071,023     $ 9.71  
Granted
    9,999     $ 0.60  
Exercised
    (19,998 )   $ 0.60  
Cancelled
    -     $ 0.60  
Outstanding at June 30, 2010
    3,061,024     $ 9.71  

   
STOCK WARRANTS OUTSTANDING
Range of
Exercise Price
 
Number of
Shares
Outstanding
   
Weighted-Average
Remaining
Contractual
Life in Years
   
Weighted-Average
Exercise Price
 
$74.40-$85.20
   
31,665
     
1.17
   
$
81.66
 
$21.00
   
2,281
     
1.33
   
$
21.00
 
$9.00
   
3,010,412
     
4.36
   
$
9.00
 
     
3,061,024
     
4.32
   
$
9.71
 
 
         
STOCK WARRANTS EXERCISABLE
Range of
Exercise Price
 
Number of
Shares
Outstanding
   
Weighted-Average
Remaining
Contractual
Life in Years
   
Weighted-Average
Exercise Price
 
$74.40-$85.20
   
31,665
     
1.17
   
$
81.66
 
$21.00
   
2,281
     
1.33
   
$
21.00
 
$9.00
   
3,010,412
     
4.36
   
$
9.00
 
     
3,061,024
     
4.32
   
$
9.71
 
 
 
21

 

Options:

At December 31, 2008, there were 49,164 options outstanding.

On April 16, 2010 the Company’s outside directors received a total of 70,500 10 year options to purchase Common Stock at a $4.60 exercise price (the closing market price on that date).  These options were valued at $321,974 using the Black Scholes Model (time 1,825 days, volatility 237.55%, risk free rate 3.83%). These options were issued in accordance with a Director’s Compensation package implemented in the first quarter of 2010.

On April 26, 2010, Management and Employees were awarded a total of 767,000 ten year options to purchase Common Stock at a $5.39 exercise price (the closing market price on that date).  These options were valued at $4,103,834 using the Black Scholes Model (time 1,825 days, volatility 236.92%, risk free rate 3.83%). These options were issued at the direction of the Board of Directors in an employment compensation plan approved by our Board Compensation Committee in conjunction with an independent compensation consultant.

On June 14, 2010 an additional 100,000 10 year options were issued to Management and Employees to purchase Common Stock at a $6.19 exercise price (the closing market price on that date).  These options were valued at $613,570 using the Black Scholes Model (time 1,825 days, volatility 232.85%, risk free rate 2.07%). These options were issued at the direction of the Board of Directors as outlined in the employment compensation plan approved by our Board Compensation Committee in conjunction with an independent compensation consultant.

At June 30, 2010, there were 986,664 options outstanding with a weighted average exercise price of $5.61 and weighted average remaining life of 8.79 years.

NOTE 9 – Income taxes

The Company follows ASC subtopic 740-10 (formerly Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes”) for recording the provision for income taxes.  ASC 740-10 requires the use of the asset and liability method of accounting for income taxes.  Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.  Deferred income tax expenses or benefits are based on the changes in the asset or liability each period.  If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.  Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.  Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate.  Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.

The Company’s effective income tax rate is higher than would be expected if the federal statutory rate were applied to income before tax, primarily because of expenses deductible for financial reporting purposes that are not deductible for tax purposes during the year ended December 31, 2009 and 2008.

The Company’s operations for the year ended December 31, 2009 and 2008 resulted in losses, thus no income taxes have been reflected in the accompanying statements of operations.

As of December 31, 2009 and 2008, the Company has net operating loss carry-forwards which may or may not be used to reduce future income taxes payable. Current Federal Tax Law limits the amount of loss available to offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.  A valuation allowance has been recorded to reduce the net benefit recorded in the financial statements related to this deferred asset. The valuation allowance is deemed necessary as a result of the uncertainty associated with the ultimate realization of these deferred tax assets.

The provision for income taxes consist of the following:

   
As of December 31,
 
   
2009
   
2008
 
Current tax
 
$
-
   
$
-
 
Benefits of operating loss carry forward
   
3,295,000
     
3,780,000
 
Change in valuation allowance
   
(3,295,000
)
   
(3,780,000
)
Provision for income tax
 
$
-
   
$
-
 
 
 
22

 

Below is a summary of deferred tax asset calculations as of December 31, 2009 based on a 34% income tax rate. Currently there is no reasonable assurance that the Company will be able to take advantage of a deferred tax asset. Thus, an offsetting allowance has been established for the deferred asset.

   
Deferred tax
asset
   
34% tax rate
 
Net operating loss
 
$
27,730,124
   
$
9,425,000
 
Reserves and allowances
   
8,859,582
     
1,025,000
 
Goodwill, net of amort.
   
3,027,045
     
3,010,000
 
             
13,460,000
 
Valuation allowance
           
(13,460,000
)
Deferred tax asset
         
$
-
 

For financial reporting purposes, the Company has incurred a loss since inception to December 31, 2009.  Based on the available objective evidence, including the Company’s history of its loss, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at December 31, 2009. Further, management does not believe it has taken the position in the deductibility of its expenses that creates a more likely than not potential for future liability under the guidance of FIN 48.

A reconciliation between the amount of income tax benefit determined by applying the applicable U.S. and State statutory income tax rate to pre-tax loss is as follows:

   
Year ended December 31,
 
   
2009
   
2008
 
Federal and state statutory rate
   
34
%
   
34
%
Non-deductible items in net loss
   
(23
)%
   
13
%
Change in valuation allowance
   
(11
)%
   
(47
)%
     
-
     
-
 
 
 
23

 

For financial reporting purposes, the Company has incurred a loss since inception to June 30, 2010.  Based on the available objective evidence, including the Company’s history of losses, management believes it is more likely than not that the deferred tax asset will not be fully realized and has therefore provided a valuation allowance for the full amount of the deferred tax assets.

The federal and state statutory income tax rate of 34% has been fully offset by the change in the valuation allowance during the quarters ended June 30, 2010 and 2009.  The effective income tax rate of the Company over these years is 0%.

Note 10– Commitments and contingencies
 
As of June 30, 2010, the Company has eleven leases in effect for operating space.  Future obligations under these commitments are $194,540 for the remainder of 2010, $396,238 for 2011, $404,240 for 2012, $190,589 for 2013, $129,159 for 2014, $109,175 for 2015.

In June of 2006, the Company entered into a License Agreement with California Institute of Technology, whereby the Company obtained certain exclusive and non-exclusive intellectual property licenses pertaining to the development of an electronic fuel cell technology.  The License Agreement carries an annual maintenance fee of $50,000, with the first payment due on or about June 12, 2009 and the second June 12, 2010, both of which have been accrued (total of $39,267 net allowable reductions) through the six months ended June 30, 2010.   The License Agreement carries a perpetual term, subject to default, infringement, expiration, revocation or unenforceability of the License Agreement and the licenses granted thereby.

Note 11 – Segment Reporting

Generally accepted accounting procedures  require disclosures related to components of a company for which separate financial information is available that is evaluated regularly by a company’s chief operating decision maker in deciding the allocation of resources and assessing performance.  In this manner the Company has concluded it has three reportable segments; ECOtality Stores, Innergy Power segment and ECOtality North America segment (which includes ECOtality Australia). The ECOtality Stores segment is the online marketplace for fuel cell-related products and technologies with online distribution sites in the U.S., Japan, Russia, Italy and Portugal. The Innergy Power segment is comprised of the sale of solar batteries and other solar and battery powered devices to end-users. The ECOtality North America segment includes our ECOtality Australia operations and relates to sale of fast-charge systems for material handling and airport ground support applications to the testing and development of plug-in hybrids, advanced battery systems and hydrogen ICE conversions and consulting revenues. This segment also includes the Minit-Charger business which relates to the research, development and testing of advanced transportation and energy systems with a focus on alternative-fuel, hybrid and electric vehicles and infrastructures.  ECOtality North America holds exclusive patent rights to the ECOtality North America SuperCharge™ and Minit-Charger systems - battery fast charge systems that allow for faster charging with less heat generation and longer battery life than conventional chargers. The Company has aggregated these subsidiaries into three reportable segments: ECOtality/Fuel Cell Store, ECOtality North America and Innergy.

While management is currently assessing how it evaluates segment performance, we currently utilize income (loss) from operations, excluding depreciation of corporate assets. We also exclude goodwill from segment assets. For the six months ended June 30, 2010 and 2009 inter-segment sales were $339,373 and $28,723 respectively.  All inter-segment sales have been eliminated during the consolidation process.

Summarized financial information concerning the Company’s reportable segments for the quarter and the six months ended June 30, 2010 and 2009 is as follows:

 
24

 
 
THREE MONTHS ENDED JUNE 30, 2010
 
   
ECOTALITY
                   
   
NORTH
         
FUEL CELL
       
   
AMERICA
   
INNERGY
   
STORE
   
TOTAL
 
Total net operating revenues
  $ 2,925,941     $ 291,654     $ 193,994     $ 3,411,589  
Depreciation and amortization
  $ 109,638     $ 1,012     $ 890     $ 111,540  
Operating income (loss)
  $ (4,178,933 )   $ (108,819 )   $ 53,683     $ (4,234,069 )
Interest Income (expense)
  $ (74 )   $ -     $ -     $ (74 )
Gain / (Loss) on disposal of assets
  $ (12,201 )   $ -     $ -     $ (12,201 )
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (4,191,208 )   $ (108,819 )   $ 53,683     $ (4,246,344 )
Corporate Overhead Allocation
  $ (2,314,293 )   $ (230,686 )   $ (153,441 )   $ (2,698,419 )
Segment Income / (Loss)
  $ (6,505,501 )   $ (339,505 )   $ (99,758 )   $ (6,944,764 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 37,567  
Reported Net income after tax
                          $ (6,982,330 )
Capital Expenditures
  $ 114,651     $ -     $ -     $ 114,651  
                                 
Total segment assets - excluding intercompany receivables
  $ 4,711,355     $ 367,447     $ 273,535     $ 5,352,337  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 13,562,508  
Total Reported Assets
                          $ 22,410,724  

THREE MONTHS ENDED JUNE 30, 2009
 
   
ECOTALITY
                   
   
NORTH
         
FUEL CELL
       
   
AMERICA
   
INNERGY
   
STORE
   
TOTAL
 
Total net operating revenues
  $ 1,020,473     $ 572,008     $ 154,604     $ 1,747,085  
Depreciation and amortization
  $ 75,845     $ 1,471     $ 889     $ 78,205  
Operating income (loss)
  $ (142,339 )   $ 128,710     $ 13,696     $ 67  
Interest Income (expense)
  $ -     $ -     $ -     $ -  
Gain / (Loss) on disposal of assets
  $ -     $ -     $ -     $ -  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (142,339 )   $ 128,710     $ 13,696     $ 67  
Corporate Overhead Allocation
  $ 2,083,942     $ 1,168,117     $ 315,722     $ 3,567,781  
Segment Income / (Loss)
  $ (2,226,281 )   $ (1,039,407 )   $ (302,026 )   $ (3,567,713 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 33,132  
Reported Net income after tax
                          $ (3,600,845 )
Capital Expenditures
  $ 109,725     $ -     $ -     $ 109,725  
                                 
Total segment assets - excluding intercompany receivables
  $ 2,448,983     $ 585,398     $ 195,742     $ 3,230,123  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 844,638  
Total Reported Assets
                          $ 7,570,639  
 
 
25

 
 
SIX MONTHS ENDED JUNE 30, 2010
 
   
ECOTALITY
                   
   
NORTH
         
FUEL CELL
       
   
AMERICA
   
INNERGY
   
STORE
   
TOTAL
 
Total net operating revenues
  $ 5,074,693     $ 639,109     $ 397,873     $ 6,111,674  
Depreciation and amortization
  $ 214,739     $ 1,981     $ 1,779     $ 218,499  
Operating income (loss)
  $ (5,167,729 )   $ (58,387 )   $ 100,617     $ (5,125,500 )
Interest Income (expense)
  $ (106 )   $ -     $ -     $ (106 )
Gain / (Loss) on disposal of assets
  $ (12,201 )   $ -     $ -     $ (12,201 )
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (5,180,036 )   $ (58,387 )   $ 100,617     $ (5,137,807 )
Corporate Overhead Allocation
  $ (3,463,568 )   $ (436,203 )   $ (271,555 )   $ (4,171,327 )
Segment Income / (Loss)
  $ (8,643,605 )   $ (494,590 )   $ (170,939 )   $ (9,309,134 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 72,212  
Reported Net income after tax
                          $ (9,381,345 )
Capital Expenditures
  $ 335,347     $ -     $ -     $ 335,347  
                                 
Total segment assets - excluding intercompany receivables
  $ 4,711,355     $ 367,447     $ 273,535     $ 5,352,337  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 13,562,508  
Total Reported Assets
                          $ 22,410,724  

SIX MONTHS ENDED JUNE 30, 2009
 
               
FUEL CELL
       
   
ETEC
   
INNERGY
   
STORE
   
TOTAL
 
Total net operating revenues
  $ 2,795,559     $ 1,050,822     $ 370,903     $ 4,217,284  
Depreciation and amortization
  $ 179,355     $ 2,926     $ 1,780     $ 184,061  
Operating income (loss)
  $ (193,319 )   $ 265,070     $ 61,344     $ 133,095  
Interest Income (expense)
  $ -     $ -     $ -     $ -  
Gain / (Loss) on disposal of assets
  $ 9,760     $ -     $ -     $ 9,760  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (183,559 )   $ 265,070     $ 61,344     $ 142,855  
Corporate Overhead Allocation
  $ 2,898,282     $ 1,387,778     $ 414,952     $ 4,701,012  
Segment Income / (Loss)
  $ (3,081,841 )   $ (1,122,708 )   $ (353,608 )   $ (4,558,157 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 66,246  
Reported Net income after tax
                          $ (4,624,403 )
Capital Expenditures
  $ 113,882     $ -     $ -     $ 113,882  
                                 
Total segment assets - excluding intercompany receivables
  $ 2,448,983     $ 585,398     $ 195,742     $ 3,230,123  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 844,638  
Total Reported Assets
                          $ 7,570,639  

NOTE 12 – Related Party Transactions

On August 29, 2008, Mr. Donald Karner, a director of the Company, and Kathryn Forbes agreed to provide the Company a line of credit for up to $650,000. This Line is secured by a second position on receivables (junior to previously issued debentures). During the nine months ended September 30, 2008, $300,000 was advanced by Mr. Karner and Ms. Forbes. This line carried a loan fee of $45,000 payable when the line expired on December 15, 2008. No other interest payments or fees were required under the agreement. The fee of $45,000 was expensed over the life of the Line. Imputed interest of $1,425 and financing charges of $6,962 were expensed in the nine month period ending September 30, 2008.  The balance of the note payable of $450,000 was paid July 9, 2009.

Please refer to Note 7 and 8 for information on equity awards to employees and directors.

 
26

 
 
Note 13 – Subsequent Events

The Company has evaluated all subsequent events through the date the financial statements were issued, and determined that there are no subsequent events to record, and the following subsequent events to disclose:
 
On July 7, 2010 a Preferred Shareholder converted 116,472 Preferred Shares into 116,472 shares of Common Stock.

On July 23, 2010 a Preferred Shareholder converted 31,328 Preferred Shares into 31,238 shares of Common Stock.

On July 31, 2010 Preferred Shareholders converted 206,984 Preferred Shares into 206,984 shares of Common Stock.


The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes thereto.

 Forward-Looking Statements

This Quarterly Report contains forward-looking statements about our business, financial condition and prospects that reflect management’s assumptions and beliefs based on information currently available.  We can give no assurance that the expectations indicated by such forward-looking statements will be realized.  If any of our management’s assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, ECOtality’s actual results may differ materially from those indicated by the forward-looking statements.

The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, acceptance of our services, our ability to expand our customer base, managements’ ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.

 There may be other risks and circumstances that management may be unable to predict.  When used in this Quarterly Report, words such as, “believes,” “expects,” “intends,” “plans,” ”anticipates,” “estimates” and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.

GENERAL

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the related notes thereto, contained elsewhere in this Form 10-Q.

Business Development and Summary

ECOtality is a leader in clean electric transportation and storage technologies The primary focus of the Company is to facilitate and establish a robust  electric vehicle (“EV”) charging infrastructure throughout the world in anticipation of the broad commercialization of plug-in hybrid electric vehicles (“PHEVs”) and battery electric vehicles (“BEVs”) .  With nearly two-decades of industry expertise in EV technologies, the U.S. Department of Energy (“DOE”) awarded ECOtality’s wholly-owned subsidiary, ECOtality North America (formerly known as Electric Transportation Engineering Corporation or “eTec”), approximately $114.8 million in matching grants to undertake the largest deployment of electric vehicles and charging infrastructure in U.S. history.  As the sole project manager of the total $230 million public-private initiative known as “The EV Project,” the Company believes it is uniquely positioned to capture a significant share of the market for electric vehicles and charging solutions.

Through The EV Project, ECOtality is leading the first large-scale deployment of smart EV chargers for grid-tied electric vehicles.  This smart infrastructure will feature real time connectivity, programmable charging time and a robust media interface model that gives consumers added control of their charging beyond “on” or “off” and allows for interaction with utilities’ demand response initiatives and smart meter roll outs. The charging network is expected to support the initial launch of over 5,700Nissan Leaf batter electric vehicles (BEVs) and 2,600 Chevrolet Volt range extended electric vehicles (REEVs) and will deploy approximately  15,000 charging stations in sixteen U.S. cities across six states and the District of Columbia beginning in the fourth quarter of 2010.  The goal of The EV Project is to develop, implement and study techniques for optimizing the deployment of charging infrastructure to support widespread deployment of electric vehicles in the U.S. and internationally as well as to identify commercially viable business models to create a sustainable EV charging industry.  The Company believes that leading the world’s largest EV infrastructure project gives the Company unparalleled and distinct competitive advantages that will support our global business development initiatives into the future.  Operationally, The EV Project enables ECOtality to further develop its industry leading smart charging technologies and should serve as a platform to establish future revenue opportunities through commercial relationships with national retailers and partners throughout the electric vehicle value chain.  Beginning in late 2010 as part of The EV Project, our charging infrastructure is expected to be deployed in major metropolitan areas including Phoenix and Tucson, Arizona, Los Angeles and San Diego, California, Dallas, Fort Worth and Houston, Texas, Seattle, Washington, Portland, Eugene, Salem, and Corvallis, Oregon, Nashville, Knoxville and Chattanooga, Tennessee and Washington, DC.

 
27

 

ECOtality plans to deploy its newly launched “Blink” brand of electric vehicle smart chargers for both Level 2 charging (240V)  and Level 3 DC Fast Charging (480V), through The EV Project beginning in late 2010.  Blink chargers are currently available in two models, an in-home residential wall-mounted unit and a commercial stand-alone charger that can be easily installed at various points of interest, such as in a retailer’s parking lot.  ECOtality intends to introduce the Blink Level 3 model which can deliver a full charge in under 30 minutes (depending upon the battery size), or four to six times faster than can be achieved with conventional chargers, with battery life that is equal to or longer than those using traditional battery charging methods.  Blink can be optimized to fast-charge on-road batteries of all chemistries, while controlling battery temperature and avoiding the negative effects of overcharging.  Blink is programmable to charge the vehicle when electricity rates are lowest, providing energy and cost efficiencies, and can be formatted to link directly to participating public utilities for monitoring and billing.  Blink can also be controlled remotely through web and smart-phone applications. The Blink system is fully interactive with color touch screens delivering information, third-party media and connectivity to network headquarters. Through its ability to operate a national network, as well as enterprise networks, Blink should provide an array of applications for the monetization of the charging space for hosts and network operators. Blink Level 2 chargers for commercial and residential use are expected to be available for retail in the late 4th quarter of 2010 and the Blink DC Fast Charger will be available for retail in the first half of 2011.

While we are currently focused on successfully leading The EV Project in the United States, we are also pursuing EV charging infrastructure opportunities around the world, particularly in China, Australia and Europe.  We recently announced two strategic joint ventures with China-based Shenzhen Goch Investment Limited to manufacture, assemble and sell EV charging equipment in China.  These joint ventures make us the first EV charging solutions provider in China, representing an enormous growth opportunity for the Company as China is expected to lead the world in purchases of electric vehicles.

In addition to on-road applications, ECOtality specializes in providing EV smart chargers for airport ground support vehicles and material handling equipment. ECOtality offers DC Fast Charging systems, which have been installed at over 6,000 charging stations and powering electric ground support equipment at airports across North America and electric material handling equipment at warehouses and shipping facilities of industry-leading companies such as including Costco, ConAgra Foods, Kimberly-Clark, The Home Depot, Pepsi and Toyota.

ECOtality is also involved in the development, manufacture, assembly and sale of specialty solar products, advanced battery systems, and hydrogen and fuel cell systems.  Through ECOtality subsidiary, Innergy Power Systems, we manufacture patented ThinLine sealed lead rechargeable batteries and fiberglass reinforced panel solar modules.  Innergy’s product line is focused on solar energy products for off-grid power in a broad range of applications for emergency preparedness and recreation.  Through the ECOtality Stores subsidiary, we operate an e-commerce marketplace that offers a range of educational and small commercial fuel cell products and consulting services.

ECOtality’s technology portfolio is linked through our ability to deliver a broad set of alternative energy solutions to a variety of energy consumers.  We operate with a commercial “electro-centric” strategy and plan to continue to pursue additional technologies and companies focused on the creation, storage, and/or delivery of clean or renewable electric power.  ECOtality’s technologically diverse, multi-product platform should enable us to effectively mitigate the uncertainty of clean technology demands and regulatory changes.
 
While we are positioned favorably to meet our obligations in the early stages of the DOE contract, we have a requirement for additional capital that we have publically disclosed.  We intend to seek the necessary capital prior to the end of 2010 that will allow us to complete our obligations related to the DOE contract.  It has not been determined whether this requirement will be met through debt or an equity raise.

 
Status of any announced new product or service

On January 8, 2009 ECOtality announced its EV Microclimate Program. It is an integrated turnkey program that provides a blueprint for a comprehensive Electric Vehicle infrastructure system.  As part of this program ECOtality works with all relevant stakeholders to ensure an area is prepared for consumer adoption of electric transportation.  The implementation of an EV Micro-Climate includes physical charge infrastructure installations at residential, commercial and public locations, as well as comprehensive regulatory, public awareness and marketing programs to support the various value chains associated with a n EV Micro-Climate.  As part of the process, ECOtality will assist the automotive manufactures with the  installation of home charging systems in car owners’ homes (or in public areas) in advance of vehicle delivery, as well as install fast charging systems in strategic locations (ie fuel stations, grocery stores, shopping areas)

On July 27, 2010, ECOtality launched the new Blink brand of electric vehicle smart chargers for both Level 2 charging (240V) and Level 3 DC Fast Charging (480V), which will be brought to market through The EV Project beginning in late 2010.  Blink Level 2 chargers are currently available in two models, an in-home residential wall-mounted unit and a commercial stand-alone charger that can be easily installed at various points of interest, such as in a retailer’s parking lot. ECOtaloity intends to introduce the Blink Level 3 model which can deliver a full charge in under 30 minutes (depending upon the battery size), or four to six times faster than can be achieved with conventional chargers, with battery life that is equal to or longer than those using traditional battery charging methods.  Blink can be optimized to fast-charge on-road batteries of all chemistries, while controlling battery temperature and avoiding the negative effects of overcharging.  Blink is programmable to charge the vehicle when electricity rates are lowest, providing energy and cost efficiencies, and can be formatted to link directly to participating public utilities for monitoring and billing.  Blink can also be controlled remotely through web and smart-phone applications. The Blink system is fully interactive with color touch screens delivering information, third-party media and connectivity to network headquarters. Through its ability to operate a national network, as well as enterprise networks, Blink should provide an array of applications for the monetization of the charging space for hosts and network operators. Blink Level 2 chargers for commercial and residential use are expected to be available for retail in the late 4th quarter of 2010 and the Blink DC Fast Charger will be available for retail in the first half of 2011.

 
28

 

Segment Information

Generally accepted accounting procedures require disclosures related to components of a company for which separate financial information is available that is evaluated regularly by a company’s chief operating decision maker in deciding the allocation of resources and assessing performance.  In this manner the Company has concluded it has three reportable segments; ECOtality Stores, Innergy Power segment and ECOtality North America segment (which includes ECOtality Australia). The ECOtality Stores segment is the online marketplace for fuel cell-related products and technologies with online distribution sites in the U.S., Japan, Russia, Italy and Portugal. The Innergy Power segment is comprised of the sale of solar batteries and other solar and battery powered devices to end-users. The ECOtality North America segment includes our ECOtality Australia operations and relates to sale of fast-charge systems for material handling and airport ground support applications to the testing and development of plug-in hybrids, advanced battery systems and hydrogen ICE conversions and consulting revenues. This segment also includes the Minit-Charger business which relates to the research, development and testing of advanced transportation and energy systems with a focus on alternative-fuel, hybrid and electric vehicles and infrastructures.  ECOtality North America holds exclusive patent rights to the ECOtality North America SuperCharge™ and Minit-Charger systems - battery fast charge systems that allow for faster charging with less heat generation and longer battery life than conventional chargers. The Company has aggregated these subsidiaries into three reportable segments: ECOtality/Fuel Cell Store, ECOtality North America and Innergy.

While management is currently assessing how it evaluates segment performance, we currently utilize income (loss) from operations, excluding depreciation of corporate assets. We also exclude goodwill from segment assets. For the six months ended June 30, 2010 and 2009 inter-segment sales were $339,373 and $28,723 respectively.  All inter-segment sales have been eliminated during the consolidation process.

Summarized financial information concerning the Company’s reportable segments for the quarter and six months ended June 30, 2010 is as follows:

THREE MONTHS ENDED JUNE 30, 2010
 
   
ECOTALITY
                   
   
NORTH
         
FUEL CELL
       
   
AMERICA
   
INNERGY
   
STORE
   
TOTAL
 
Total net operating revenues
  $ 2,925,941     $ 291,654     $ 193,994     $ 3,411,589  
Depreciation and amortization
  $ 109,638     $ 1,012     $ 890     $ 111,540  
Operating income (loss)
  $ (4,178,933 )   $ (108,819 )   $ 53,683     $ (4,234,069 )
Interest Income (expense)
  $ (74 )   $ -     $ -     $ (74 )
Gain / (Loss) on disposal of assets
  $ (12,201 )   $ -     $ -     $ (12,201 )
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (4,191,208 )   $ (108,819 )   $ 53,683     $ (4,246,344 )
Corporate Overhead Allocation
  $ (2,314,293 )   $ (230,686 )   $ (153,441 )   $ (2,698,419 )
Segment Income / (Loss)
  $ (6,505,501 )   $ (339,505 )   $ (99,758 )   $ (6,944,764 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 37,567  
Reported Net income after tax
                          $ (6,982,330 )
Capital Expenditures
  $ 114,651     $ -     $ -     $ 114,651  
                                 
Total segment assets - excluding intercompany receivables
  $ 4,711,355     $ 367,447     $ 273,535     $ 5,352,337  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 13,562,508  
Total Reported Assets
                          $ 22,410,724  
 
 
29

 
 
THREE MONTHS ENDED JUNE 30, 2009
 
   
ECOTALITY
                   
   
NORTH
         
FUEL CELL
       
   
AMERICA
   
INNERGY
   
STORE
   
TOTAL
 
Total net operating revenues
  $ 1,020,473     $ 572,008     $ 154,604     $ 1,747,085  
Depreciation and amortization
  $ 75,845     $ 1,471     $ 889     $ 78,205  
Operating income (loss)
  $ (142,339 )   $ 128,710     $ 13,696     $ 67  
Interest Income (expense)
  $ -     $ -     $ -     $ -  
Gain / (Loss) on disposal of assets
  $ -     $ -     $ -     $ -  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (142,339 )   $ 128,710     $ 13,696     $ 67  
Corporate Overhead Allocation
  $ 2,083,942     $ 1,168,117     $ 315,722     $ 3,567,781  
Segment Income / (Loss)
  $ (2,226,281 )   $ (1,039,407 )   $ (302,026 )   $ (3,567,713 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 33,132  
Reported Net income after tax
                          $ (3,600,845 )
Capital Expenditures
  $ 109,725     $ -     $ -     $ 109,725  
                                 
Total segment assets - excluding intercompany receivables
  $ 2,448,983     $ 585,398     $ 195,742     $ 3,230,123  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 844,638  
Total Reported Assets
                          $ 7,570,639  

SIX MONTHS ENDED JUNE 30, 2010
 
   
ECOTALITY
                   
   
NORTH
         
FUEL CELL
       
   
AMERICA
   
INNERGY
   
STORE
   
TO TAL
 
Total net operating revenues
  $ 5,074,693     $ 639,109     $ 397,873     $ 6,111,674  
Depreciation and amortization
  $ 214,739     $ 1,981     $ 1,779     $ 218,499  
Operating income (loss)
  $ (5,167,729 )   $ (58,387 )   $ 100,617     $ (5,125,500 )
Interest Income (expense)
  $ (106 )   $ -     $ -     $ (106 )
Gain / (Loss) on disposal of assets
  $ (12,201 )   $ -     $ -     $ (12,201 )
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (5,180,036 )   $ (58,387 )   $ 100,617     $ (5,137,807 )
Corporate Overhead Allocation
  $ (3,463,568 )   $ (436,203 )   $ (271,555 )   $ (4,171,327 )
Segment Income / (Loss)
  $ (8,643,605 )   $ (494,590 )   $ (170,939 )   $ (9,309,134 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 72,212  
Reported Net income after tax
                          $ (9,381,345 )
Capital Expenditures
  $ 335,347     $ -     $ -     $ 335,347  
                                 
Total segment assets - excluding intercompany receivables
  $ 4,711,355     $ 367,447     $ 273,535     $ 5,352,337  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 13,562,508  
Total Reported Assets
                          $ 22,410,724  
 
 
30

 

 
SIX MONTHS ENDED JUNE 30, 2009
 
               
FUEL CELL
       
   
ETEC
   
INNERGY
   
STORE
   
TO TAL
 
Total net operating revenues
  $ 2,795,559     $ 1,050,822     $ 370,903     $ 4,217,284  
Depreciation and amortization
  $ 179,355     $ 2,926     $ 1,780     $ 184,061  
Operating income (loss)
  $ (193,319 )   $ 265,070     $ 61,344     $ 133,095  
Interest Income (expense)
  $ -     $ -     $ -     $ -  
Gain / (Loss) on disposal of assets
  $ 9,760     $ -     $ -     $ 9,760  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (183,559 )   $ 265,070     $ 61,344     $ 142,855  
Corporate Overhead Allocation
  $ 2,898,282     $ 1,387,778     $ 414,952     $ 4,701,012  
Segment Income / (Loss)
  $ (3,081,841 )   $ (1,122,708 )   $ (353,608 )   $ (4,558,157 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 66,246  
Reported Net income after tax
                          $ (4,624,403 )
Capital Expenditures
  $ 113,882     $ -     $ -     $ 113,882  
                                 
Total segment assets - excluding intercompany receivables
  $ 2,448,983     $ 585,398     $ 195,742     $ 3,230,123  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 844,638  
Total Reported Assets
                          $ 7,570,639  

Employees

As of June 30, 2010 we had 98 employees, including 12 in manufacturing and the rest in research and development, sales and marketing, and general and administration positions. None of our employees is represented by a labor union or is covered by a collective bargaining agreement other than our employees in our wholly owned subsidiary in Mexico. As we expand domestically and internationally, however, we may encounter employees who desire union representation. We believe that relations with our employees are good.

We anticipate the need to add significant numbers of full- or part- time employees over the next 12 months per the award of the Stimulus Department of Energy related contracts.  We plan to outsource the research and development and production of our products when cost effective to do so.

Results of Operations

QUARTER ENDED JUNE 30, 2010, COMPARED WITH QUARTER ENDED JUNE 30, 2009

CONSOLIDATED RESULTS

Since January 1, 2008, we have been transitioning from being a development stage company to a growth oriented renewable energy company with a focus toward electric vehicle infrastructure. Beginning January 2009, we initiated additional efforts to strengthen our financial viability including steps to reduce or eliminate our debt structure, obtain additional working capital, establish strong partnerships and secure federal stimulus contracts. Thus, the variations reflected in our results of operations when comparing the quarter ended June 30, 2010 to the quarter ended June 30, 2009 and described below reflect these steps as well as this transformation and the impact of the global economic slowdown.

In the quarter ended June 30, 2010, we had revenues of $3,411,589 compared to the quarter ended June 30, 2009 of $1,747,085.  The increase in revenue is largely related to the effect of our ramp up of work on our recently awarded contract with the US Department of Energy (DOE).  The cost of goods sold percentage for the quarter ending June 30, 2010 was 90% leaving us with a gross profit of $350,085. Our gross margin was down 43% from the same period prior year of 53%.  This reduction is directly related to the nature of our cost reimbursement contract with the DOE.  This contract provides for a cost match of 50%, which is expected to continue to reduce our gross margin in the early stages of the contract pending the launch of electric vehicles in 4 th quarter 2010.

Total operating expenses during the three months ended June 30, 2010 were $7,969,520 compared to $1,655,880 for the three months ended June 30, 2009, a 79% increase over prior year.  This increase reflects costs associated with our recent listing on the NASDAQ stock exchange and our S-1 (Registration Statement) and proxy filing as well as continued staffing and other start up expenses to service the contract with the DOE.  These costs include but are not limited to expanding office space, recruiting and hiring new employees and related administrative efforts at both our ECOtality North America subsidiary and our corporate headquarters. We incurred expenses in the form of increased staffing for the new offices established in the EV Project cities in line with our budget projections that will in accordance with our DOE contract be reimbursed in subsequent fiscal quarters.  In addition, the Board Compensation Committee implemented an employee equity incentive program for 2010 to ensure continuity in key leadership and line staff positions critical to our execution of the contract.  The Board also adopted a new compensation program for independent directors comparable to companies of like size.  Both of these programs took effect in the quarter ending June 30, 2010. General and administrative expenses were $7,768,923 or 97% of total operating expenses for the three months ended June 30, 2010 compared with $1,543,850 or 93% for the three months ended June 30, 2009. Details around the changes in these expenses are described below:

 
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Professional fees were $242,106 for the three months ended June 30, 2009 compared with $14,225 for the three months ended June 30, 2009.  This increase is attributable to the costs to be listed on NASDAQ and to secure services from an outside consulting firm to advise the board compensation committee on the appropriate compensation plans for employees and outside directors.  It also includes other outsourced human resource activities to support our growing employee base and IT costs to facilitate strong communications between our new and existing office locations. New media, marketing, advertising and investor and public relations expenses were $141,860 for the three months ended June 30, 2009 compared with $17,211 for the three months ended June 30, 2009.  The spend in 2010 is related to outsourced branding identification efforts to establish our base brand from which all our on-road (electric vehicle related) products will extend.  Legal fees were $184,418 for the quarter ended June 30, 2010 compared with $159,645 for the quarter ended June 30, 2009.  While legal spend in both years has been substantial, each of these figures were driven by different business issues.  In 2009 much of our legal fees were attributable to managing our debt.  In contrast, for the quarter ending June 30, 2010 our legal fees are related to efforts around registering shares for the investors who supported us in our recent capital raise and continuing to establish and protect our Intellectual Property (IP) including the expansion of these IP protections into targeted international markets. Accounting fees were $48,500 for the quarter ended June 30, 2010, and for the quarter ended June 30, 2009.  Accounting fees in both periods are attributable to our financial statement audits which were negotiated to be flat for those periods.  Executive compensation was $3,046,661 for the three months ended June 30, 2010 compared with $201,126 for the three months ended June 30, 2009. The increase is directly attributable to equity based (in the form of stock options vs. cash based) compensation for our employees.  This compensation plan is directly related to recommendations by an outside consulting firm and our Board Compensation Committee who were engaged to ensure our employee incentive plans are on par with similarly situated companies and that they clearly align rewards for executive and non-executive management and staff with the expectations of our shareholders.  Depreciation expense was $149,107 for the quarter ended June 30, 2010 compared to $111,337 for the quarter ended June 30, 2009.  All other general and administrative (G&A) spending totaled $4,105,378 for the three months ended June 30, 2010 compared to $1,103,143 for the three months ended June 30, 2009.  The increase in all other G&A is primarily driven by the extension of the equity incentive plan discussed above to executive and non-executive management and line staff employees to ensure engagement and continuity of the workforce responsible for the effective execution of our business plan and the fulfillment of our DOE contract obligations.

Expenses for research and development totaled $51,493 for the three months ended June 30, 2010 compared to $695 for the three months ended June 30, 2009.   Expenses for R&D, while higher than previous year, are anticipated to remain relatively low.  Since one of our primary objectives continues to be the commercial advancement of clean electric technologies that reduce our dependence upon carbon based fuels, we have retained a focus on research and development activities, and expect to continue to incur additional research and development costs, although at a low rate, for the foreseeable future.

Our operating loss was $7,619,438 for the quarter ended June 30, 2010 compared with a loss of $728,427 for the quarter ended June 30, 2009.  Unlike 2009, the loss in the second quarter of 2010 is influenced primarily by our investment in our business and workforce, vs. the significant costs of debt service that we experienced in 2009.

For the quarter ended June 30, 2010, we earned interest income in the amount of $8,734 compared with $0 for the quarter ended June 30, 2009.

Interest expense was ($322,751) for the three months ended June 30, 2010 compared to $2,872,418 for the three months ended June 30, 2009.  The amount in second quarter 2009 was driven by the interest on the convertible debentures we issued in November and December of 2007.  For second quarter 2010 the amount is attributable to the reversal of a penalty associated with our obligation to file an S-1 within a short time frame following our capital raise in October. Due to circumstances largely outside our control we were unable to meet the filing deadline.  Management was able to successfully secure a waiver agreement due to these extenuating circumstances resulting in the total penalty being waived prior to this filing.  This waiver also accounts for the 317,824 of other income.  This amount is the portion of the penalty expensed and accrued in 2009.  We had a gain on disposal of assets of 12,201 in the three months ended June 30, 2010, there were no assets disposed of in the quarter ended June 30, 2009.

Our net loss after other income and expenses was $6,982,330 for the quarter ended June 30, 2010 compared to a loss of $3,600,845 for the quarter ended June 30, 2009.

SIX MONTHS ENDED JUNE 30, 2010, COMPARED WITH SIX MONTHS ENDED JUNE 30, 2009

It is difficult to compare the six months ended June 2010 results to the same period in 2009 as during the six months ended June 30, 2010 we have been wholly engaged in ramping up the organization to service our new DOE contract, to successfully become listed on a national stock exchange (NASDAQ), and to refocus the business, now free from debenture debt, on pursuing new opportunities to capitalize on our strong position as a leader in electric vehicle charging and infrastructure development.  This, in contrast to the same period in 2009, which was spent largely on managing onerous debt service obligations, overcoming limited growth due to the precipitous economic downturn, and attempting to secure investment in an adverse capital market.  Thus, the variations reflected in our results of operations described below are based upon these factors.

 
32

 

In the six months ended June 30, 2010, we had revenues of $6,111,674 compared to the six months ended June 30, 2009 of $4,217,284. The cost of goods sold percentage for the six months ending June 30, 2010 was 89% leaving us with a gross profit of $656,646. The increase in revenues in 2010 as compared to 2009 is driven by the early stages of our new US Department of Energy (DOE) contract.  The increased cost of goods sold percentage is directly related to the nature of our cost reimbursement contract with the DOE.  This contract provides for a cost match of 50%, which is expected to continue to reduce our gross margin in the early stages of the contract pending the launch of electric vehicles in 4 th quarter 2010.

Total operating expenses during the six months ended June 30, 2010 were $10,363,513 compared to $3,148,830 for six months ended June 30, 2009. General and administrative expenses were $10,008,477 for the six months ended June 30, 2010 compared with $2,886,361 for the six months ended June 30, 2009. This increase in general and administrative expenses is in line with our budget for the period and reflects our investments in our business and employees, as well as our ramp up to service the DOE contract in the first half of 2010.  Details of these expenses are outlined below.

Professional fees were $386,511 for the six months ended June 30, 2010 compared with $27,804 for the six months ended June 30, 2009. The increase in 2010 reflects the costs of listing on the NASDAQ exchange as well as ramping up our use of cost effective outsourced recruiting and human resource firms to staff as required by our DOE contract, as well as to design appropriate compensation plans for employees and our outside directors. New media, marketing, advertising and investor and public relations expenses of $251,518 for the six months ended June 30, 2010 is up substantially from prior year of $21,298 for the six months ended June 30, 2009.  This increase is directly attributable to significant investment in the “Blink” branding of our electric vehicle charging product line in 2010. Legal fees were $410,343 for the six months ended June 30, 2010 compared with $216,481 for the six months ended June 30, 2009.  This increase is commensurate with our investments in securing and protecting our IP (Intellectual Property) rights both in the US and abroad, as well as filing a registration statement, our proxy and other key activities focused on future growth.  Accounting fees were $113,750 for the six months ended June 30, 2010 compared with $113,322 for the six months ended June 30, 2009. Executive compensation was $3,339,552 for the six months ended June 30, 2010 compared with $394,502 for the six months ended June 30, 2009. The increase in compensation is related to the equity compensation plan introduced by the Board Compensation Committee in April of 2010. Depreciation expense was $290,177 for the six months ended June 30, 2010 compared to $250,307 for the six months ended June 30, 2009.  All other general and administrative spending totaled $5,506,802 for the six months ended June 30, 2010 compared to $2,112,652 for the six months ended June 30, 2009.  The increase in other spending in 2010 is attributable to our roll out of our 2010 compensation plan to executive, non-executive and line staff personnel critical to our successful execution of the DOE contract and our future growth.

Expenses for research and development totaled $64,237 for the six months ended June 30, 2010 compared to $12,162 for the six months ended June 30, 2009. Since a primary objective of the Company continues to be the commercial advancement of clean electric technologies that reduce our dependence upon carbon based fuels, we have retained a strong focus on research and development activities, and expect to continue to incur additional research and development costs, although at a low rate, for the foreseeable future.
 
Our operating loss of $9,704,869 for the six months ended June 30, 2010 compared with the loss of $1,145,468 for the six months ended June 30, 2009 is directly attributable to our investment in the business and workforce in 2010, as well as our increased resource deployment required to service the DOE contract.

For the six months ended June 30, 2010, we earned interest income in the amount of $23,943 compared with $0 for the six months ended June 30, 2009.

Interest expense was $6,043 for the six months ended June 30, 2010 compared to $3,448,695 for the six months ended June 30, 2009. The significantly higher amount for 2009 was driven by the interest on the convertible debentures we issued in November and December of 2007 and the related non-cash consideration for waivers granted by our debenture holders in extending additional time to make required principal and interest payments.

Liquidity and Capital Resources

As of June 30, 2010, we had $13,565,314 of cash on hand compared to a June 30, 2009 balance of $484,002 of cash on hand.  This increase is due to our successful capital raise efforts in the fourth quarter of 2009, and our continued tight management of the funds received.

We had a use of cash for operating activities for the six months ended June 30, 2010 in the amount of $(2,958,129) compared to a generation of cash for the six months ended June 30, 2009 of $270,193   In addition, cash utilized in investing activities was $303,847 for the three months ended June 30, 2010 compared to a use of cash of 104,121 for the same period in 2009.  The use of cash in the six months ended June 30, 2010 is in line with our budget for the DOE cost match contract.

Cash generated by financing activities was $5,011,999 for the six months ended June 30, 2010 compared cash generated of $0 in 2009.  The cash in 2010 represented the collection of a subscription receivable in January 2010 related to our October 2009 capital raise.

 
33

 

It is important to understand our complex financing transactions from January 1, 2009 through June 30, 2010 as we have endeavored to become a leader in the renewable energy sector during a period largely characterized by a lack of capital markets in a down economy. These activities are described in detail below:

On March 5, 2009 we entered in to an Agreement entitled “Amendment to Debentures and Warrants, Agreement and Waiver” (the March “Agreement”) restructuring our equity with the institutional debt holders of the Original Issue Discount 8% Senior Secured Convertible Debentures, dated November 6, 2007 (the “November 2007 Debentures”).   This agreement arranged a deferral of interest payments until May 1, 2009 subject to conditions that were subsequently amended on May 15, 2009.

 On May 15, 2009, despite the current tenuous economic environment, the financial opportunities offered specifically in the American Reinvestment and Recovery Act (ARRA) projects related to electric transportation, were deemed material to the Company’s  future, thus the Company and the November and December 2007 Debenture Holders entered into an agreement entitled “Amendment to Debentures and Warrants, Agreement and Waiver” (the “Agreement”) restructuring the Company’s  equity as well as establishing an inducement for additional working capital. The Agreement’s effective date was May 1, 2009.   The Agreement signed on May 15, 2009 provided for $2,000,000 in new capital as well as additional capital (up to $500,000) to be invested by the November and December 2007 Debenture Holders.

On July 2, 2009 the Company completed two amendments to the May 15, 2009 Amendment to Debentures and Warrants, Agreement and Waiver, and issued $2,500,000 in 8% Secured Convertible Debentures that were important to the Company’s future and tied together the series of November and December 2007 Debenture documents that were amended three times since the initial issuing of the debentures  in November and December 2007.  The transactions/agreements that have been consummated include:

On October 31, 2009, the Company signed a Securities Exchange Agreement with all holders of its convertible debentures and holders of certain warrants to convert all outstanding amounts ($9,111,170) under these debentures and all related warrants into an aggregate of 8,597,299  shares of Series A Convertible Preferred Stock (while not impacted by the current common stock split discussed herein, it could be subject to adjustment for future forward and reverse stock splits, stock dividends, recapitalizations and the like). The Series A Convertible Preferred Stock has no redemption or preferential dividend rights, but may be converted into shares of the Company’s common stock.

Concurrent with the signing of the Securities Exchange Agreement, the ECOtality Board of Directors approved a 1:60 reverse stock split (the “Reverse Split”) of its common stock and authorized Company management to affect the Reverse Split after providing the required notice to the Financial Industry Regulatory Authority (FINRA).  The Reverse Stock split was effective November 24, 2009.

On October 31, 2009, ECOtality signed a Securities Purchase Agreement and a Registration Rights Agreement with accredited investors (the “Investors”) in the amount of $20.5 million pursuant to which the Investors agreed to purchase shares of the Common Stock at a purchase price of $7.20 per share.  The funds from the private placement will be utilized as working capital to support the initial requirements of the contract signed with the Department of Energy on September 30, 2009.

On January 7, 2010 we received the final commitment of $5 million from the Securities Purchase Agreements signed on October 31, 2009.

The culmination of all the activities noted above have resulted in a strong working capital position, the elimination of our debenture debt and related interest obligations and have positioned us favorably to meet our obligations in the early stages of the DOE contract.  In line with the requirement for additional capital for the DOE contract, we have publically disclosed that we intend to seek this capital prior to the end of 2010 in order to complete our obligations related to the DOE contract.  It has not been determined whether this requirement will be met through debt or an equity raise.

Management’s Plan of Operation

Our long term plan of operation calls for sustained organic growth. We believed that the acquisitions we completed during 2007 would provide us with a base to support this objective and this growth had been reflected in our budget and business plans for 2009. However, growth consistent with our plans did not occur during 2009.  Sales, consulting services and manufacturing levels remained at lower levels.
 
However, with the signing of the DOE contract on September 30, 2009 and the Securities Exchange Agreements with our debenture holders and Securities Purchase Agreements with current and new investors on October 31, 2009, we have taken the following actions to significantly strengthen our financial viability which has continued through the June 30, 2010:
 
 
·
Raised $20.5 million for working capital in equity financing from original investors/debt holders ($15 million) and new investors ($5.5 million).
 
o
This has resulted in positive shareholder equity on our balance sheet and will allow us to secure working capital to invest in the later stages of the DOE contract awarded to our Ecotality North America Subsidiary.

 
·
Converted $9.08 million of debt on balance sheet to equity (preferred shares).

 
34

 

Working Capital

Net working capital is an important measure of our ability to finance our operations.  Our net working capital at June 30, 2010 was positive by $13,198,910.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Commitments and Long Term Liabilities

On June 12, 2006, the Company entered into a License Agreement with California Institute of Technology, whereby the Company obtained certain exclusive and non-exclusive intellectual property licenses pertaining to the development of an electronic fuel cell technology.  The License Agreement carries an annual maintenance fee of $50,000, with the first payment due on or about June 12, 2009.  The License Agreement carries a perpetual term, subject to default, infringement, expiration, revocation or unenforceability of the License Agreement and the licenses granted thereby.

On January 19, 2007 we purchased a small (1,750 square feet) stand alone office building at a cost of $575,615.  A total of $287,959 has been paid and a tax credit has been recorded in the amount of $156.  The remaining balance of $287,500 is structured as an interest-only loan from a non affiliated third-party, bears an interest rate of 6.75% calculated annually, with monthly payments in the amount of $1,617 due beginning on February 16, 2007. The entire principal balance is due on or before January 16, 2012.

As of June 30, 2010, the Company has eleven leases in effect for operating space.  Future obligations under these commitments are $194,540 for the remainder of 2010, $396,238 for 2011, $404,240 for 2012, $190,589 for 2013, $129,159 for 2014, $109,175 for 2015.


Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms.  Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  We carried out an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. As a result of this evaluation, our Chief Executive Officer  and Chief Financial Officer concluded that our disclosure controls and procedures were effective for the period ended June 30, 2010.

Changes in Internal Control

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgment inherent in the preparation of financial statements is reasonable.

Our management does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Management conducted its evaluation of the effectiveness of our internal controls over financial reporting based on the framework and criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organization’s of the Treadway Commission (COSO). Based on this evaluation, we concluded that our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) were effective for six months ended June 30, 2010.

 
35

 


Legal Proceedings

We are not a party to any pending legal proceedings.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment and new risks emerge from time to time. Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our business or to the extent to which any factor or combination of factors may impact our business. There have not been any material changes during the quarter ended June 30, 2010 from the risk factors disclosed in the above-mentioned Form 10-K for the year ended December 31, 2009.

Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered securities for the period covered by this report.


There were no defaults upon senior securities in the six months ended June 30, 2010.

Submission of Matters to a Vote of Security Holders

None.

 
36

 
 
Exhibit Number
 
Name and/or Identification of Exhibit
     
3.1
 
Amended and Restated Articles of Incorporation  (Note 2)
     
3.2
 
Amended and Restated Bylaws (Note 1)
     
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of CEO
     
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of CFO
     
32
 
Certification under Section 906 of the Sarbanes-Oxley Act (18 U.S.C. Section 1350)


Notes:

(1)
Incorporated by reference herein to the Form 8-K, previously filed with the SEC on November 2, 2007.

(2)
Incorporated by reference herein to the Form 8-K, previously filed with the SEC on September 2, 2009.
 
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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

ECOTALITY, INC.

Signature
 
Title
 
Date
         
/s/ Jonathan R. Read
 
Chief Executive Officer
 
August 16, 2010
Jonathan R. Read
       

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

ECOTALITY, INC.

Signature
 
Title
 
Date
         
/s/ Jonathan R. Read
 
Chief Executive Officer,
 
August 16, 2010
Jonathan R. Read
 
President and Director
   
         
/s/ Barry S. Baer
 
Chief Financial Officer
 
August 16, 2010
Barry S. Baer
 
Principal Accounting Officer and Director
   

 
38